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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
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]
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, 2,000,000 shares outstanding as of February 18, 2000.
Documents Incorporated by Reference: None
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TABLE OF CONTENTS
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PART I
Item 1. Business...................................................................... 3
Item 2. Properties.................................................................... 9
Item 3. Legal Proceedings............................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders........................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters....................................................................... 11
Item 6. Selected Financial Data....................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 13
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..................... 19
Item 8. Financial Statements and Supplementary Data................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 46
Item 11. Executive Compensation........................................................ 47
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 49
Item 13. Certain Relationships and Related Transactions................................ 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 51
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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. 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." These forward-looking statements relate
to the plans, objectives and expectations of The GSI Group, Inc. (the "Company")
for future operations. In light of the risks and uncertainties inherent in all
future projections, 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 objectives, plans or expectations of the Company will be achieved. The
Company's objectives, plans and expectations are difficult to forecast and could
differ materially from those projected 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, nesting, egg-handling and
hatching systems. The Company markets its agricultural products in approximately
75 countries through a network of over 2,000 independent dealers to grain, swine
and poultry producers primarily under its GSI(R), AP(TM) and Cumberland(R) 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 Smithfield Foods, Perdue Farms Incorporated and Tyson Foods, Inc.
Because swine and poultry growers are partially compensated by integrators based
on the efficiency with which they convert feed to meat (the "feed-to-meat
ratio"), they seek to purchase systems which 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 population
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 to a lesser extent, 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 product.
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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, nesting, egg-handling and hatching
systems.
Provider of Fully-Integrated Systems. The Company offers a broad range of
products that permits 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(R), AP(TM) and Cumberland(R) 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 2,000 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 625,000 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 efficiency.
Company Operated and Owned by Experienced Management Team. The Company is
led by an experienced management team, the members of which have each worked in
the agricultural products industry for an aggregate of 154 years. Craig Sloan, a
founder and the Chief Executive Officer of the Company, and each of the other
members of the Company's senior management team have invested in the Company and
together own the majority of its voting common stock. The Company believes that
the agricultural expertise of its management team, coupled with the corporate
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culture promoted by a management-owned company, 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:
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.
Reduction of Expenses and Improvement of Profitability. The Company
intends to focus 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 swine, poultry and beef. 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 and population
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, to a lesser extent, pork, as these meats provide more
cost-effective sources of animal protein than beef. The recent economic weakness
experienced by many international markets and the impact of environmental
regulations in the U.S. has led to a dramatic decrease in the demand for the
Company's hog equipment.
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
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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, nesting, egg-handling and hatching 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.
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 650,000 bushels. The Company markets its bins to both farm
and commercial end users under its GSI(R) brand name. The Company's grain
storage bins are manufactured using high-yield, high tensile, galvanized steel
and are assembled with high strength, galvanized bolts and anchor brackets. The
Company's grain storage bins offer efficient design enhancements, including
patented walk-in doors and a roof design that provides specialized vents for
increased efficiency, extruded lips for protection against leakage, large and
accessible eave and peak openings for ease of access, and reinforced supportive
bends to increase rigidity. The Company believes that its grain storage bins are
the most reliable and durable 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(R), DMC(R) and Airstream(R) brand names. The Company's drying equipment,
which includes fans, heaters, top dryers, portable dryers, stack dryers and
tower 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(R) and Grain King(R) 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(TM) brand name. The Company designs and implements custom
swine feeding systems to fit both the general industry needs of the different
types of swine producers and the specialized needs of individual swine
producers. The Company's swine feeding systems generally consist of a feed
storage bin located outside of the swine building and a feed delivery system,
which conveys the feed to and through the building to drop feed dispensers
suspended within the building. The drop feed dispensers provide individualized
feeding through automatic times. The Company's swine feed storage bins are
manufactured with precision die-cut, high tensile corrugated steel and assembled
with an exclusive water tight sealing system and specially die-formed eaves, and
include the Auto-Lok(TM) access system, which allows for efficient systems
monitoring. The Company's swine feed delivery systems consist of the Flex-
Flo(TM) System and the Chain Disk System. The Flex-Flo(TM) System uses high-
quality tensile steel augers and precision control devices to reach all drop
feeders within a system. The Chain Disk System handles high capacities of feed
at long distances with multiple turns. The Company believes that its swine drop
feeders are superior to its
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competitors' products due to their ease of installation and maintenance, ability
to handle high volumes of feed, accurate eye-level scales and strong, durable
all-plastic construction that eliminates corrosion.
Ventilation Systems. The Company manufactures and markets ventilation
systems for swine buildings under its AP(TM) and Airstream(R) 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.
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(R) 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 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(R) 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 other
birds.
Watering Systems. The Company manufactures and markets nipple watering
systems for poultry producers under its Cumberland(R) 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(R) brand name. Equipment
utilized in such systems include fiberglass and galvanized fans, the Komfort
Kooler evaporative cooling systems, manual and automated curtain coolers,
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.
Nesting and Egg-Handling Systems. The Company manufactures and markets
nesting and egg-handling systems for poultry producers under its Cumberland(R)
brand name. These systems consist of mechanical nests and egg collection tables.
The Company's nesting and egg-handling 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 and egg-handling systems are among the most reliable and cost-
effective in the poultry industry.
Hatching Systems. The Company manufactures and markets commercial
incubation systems for the poultry industry, with capacities of up to 115,200
eggs, under its Cumberland(R) brand name. The Company provides incubation
systems for producers that grow each of the following types of poultry: breeders
(chickens grown to lay
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eggs); broilers (chickens grown for human consumption); and turkeys. The Company
believes that its incubation products are distinguished by their efficient use
of space, reliable control panels, effective airflow mechanisms, versatility and
durability, ease of access and sophistication of tracking devices.
In 1999, 1998 and 1997, no single class of the Company's products accounted
for 10% or more of the Company's net 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 turn-over 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.
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.
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. The Company believes that only one of its competitors, CTB
International Corp., offers products across most of the Company's product lines.
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 $2.1 million, $2.7 million
and $1.6 million for the years ended December 31, 1999, 1998 and 1997,
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.
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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, 1999 was $27.1 million compared to $24.6
million at December 31, 1998. The Company believes that all such backlog will be
filled by the end of 2000.
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, 1999, the Company had 1,355 permanent employees. 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 principle properties of The GSI Group as of February 18, 2000, were as
follows:
Location Description of Property
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Assumption, Illinois.................. Manufacturing/Sales
DuQuoin, Illinois..................... Manufacturing/Assembly
Paris, Illinois....................... Manufacturing/Assembly
Newton, Illinois...................... Manufacturing/Assembly
Mason City, Iowa...................... Manufacturing/Sales
Sioux City, Iowa...................... Sales/Warehouse
Geneva, Indiana....................... Sales/Warehouse
Watertown, South Dakota............... Sales/Warehouse
Garrett, Indiana...................... Sales/Warehouse
Oakland, Illinois..................... Sales/Warehouse
West Memphis, Arkansas................ Sales/Warehouse
Hampton, Nebraska..................... Sales/Warehouse
Hendersen, Nebraska................... Sales/Product Development
Omaha, Nebraska....................... Sales/Product Development
Waverly, Kansas....................... Sales/Product Development
Marau, Brazil......................... Manufacturing/Sales
Penang, Malaysia...................... Manufacturing/Sales/Warehouse
Queretero, Mexico..................... Sales/Warehouse
Fourways, South Africa................ Sales/Warehouse
Sambeek, The Netherlands.............. Sales/Warehouse
Shanghai, China....................... Sales/Warehouse
The corporate headquarters for the Company is located in Assumption,
Illinois.
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The Company closed its Vandalia, Illinois, Nova Odessa, Brazil, Lenni,
Pennsylvania and two of its Paris, Illinois facilities in 1999 as a result of a
reduced need for manufacturing capacity.
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.
There are no material 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 if determined
adversely.
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, 1999.
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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 February 18, 2000, the Company had 16 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 year ended December 31, 1999, the Company
declared no dividends and during the year ended December 31, 1998, the Company
declared dividends totaling $1.1 million. The Company is subject to certain
restrictions on the payment of dividends contained in the indenture governing
the Company's 10 1/4 % Senior Subordinated Notes due 2007 (the "Notes") and in
the Company's credit facility with LaSalle National Bank (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.
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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, 1995, 1996, 1997,
1998 and 1999. The selected historical consolidated financial data for the years
indicated were derived from the consolidated financial statements of the
Company, which were audited by Arthur Andersen LLP. 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.
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Years Ended December 31,
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1995 1996 1997 1998 1999
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Income Statement:
Net sales.......................................... $141,191 $178,537 $220,758 $259,998 $221,199
Cost of sales...................................... 115,004 135,696 164,607 197,907 170,916
-------- -------- -------- -------- --------
Gross profit....................................... 26,187 42,841 56,151 62,091 50,283
Selling, general and administrative expenses....... 22,176 28,787 35,189 50,245 38,669
-------- -------- -------- -------- --------
Operating income................................... 4,011 14,054 20,962 11,846 11,614
Interest expense................................... (2,894) (3,590) (6,174) (12,946) (14,768)
Write-off of affiliate receivable (1).............. (3,423) -- -- -- --
Other income (expense), net........................ 548 674 943 1,117 477
-------- -------- -------- -------- --------
Income (loss) from continuing operations........... (1,758) 11,138 15,731 17 (2,677)
Income (loss) from discontinued operations......... 280 (482) -- -- --
Extraordinary gain (loss) on extinguishment
of debt.......................................... -- -- 2,119 -- --
Provision for income taxes......................... -- (157) (288) 260 336
-------- -------- -------- -------- --------
Net income (loss)................................ $ (1,478) $ 10,499 $ 17,562 $ 277 $ (2,341)
======== ======== ======== ======== ========
Basic and Diluted Earnings Per Share:
Continuing operations.............................. $ (0.98) $ 5.78 $ 7.72 $ 0.14 $ (1.17)
Discontinued operations............................ 0.16 (0.25) -- -- --
Extraordinary item................................. -- -- 1.06 -- --
-------- -------- -------- -------- --------
Net income (loss).............................. $ (0.82) $ 5.53 $ 8.78 $ 0.14 $ (1.17)
======== ======== ======== ======== ========
</TABLE>
____________________
(1) The write-off of the affiliate receivable resulted from a significant
customer, who is an affiliate of the Company, ceasing distribution
operations and selling its only division in December 1995. The write-off of
the affiliate receivable represents the portion of the remaining receivable
due that was not collectible. See Note 14 to Consolidated Financial
Statements included in Item 8 hereof.
12
<PAGE>
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 has
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. However,
the Company believes that low swine prices and environmental regulations will
for the foreseeable future continue to effect negatively the sales of its swine
equipment, and, therefore, its overall results of operations and financial
condition.
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 generally affected by currency fluctuations (except for the Company's
Brazilian operation), 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 net sales. In 1999, 1998 and 1997, the Company's international sales
accounted for 29.6%, 32.8% and 26.4% 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 1998, the Company
acquired a manufacturer and supplier of poultry feeding equipment in Brazil. In
1999, the Company opened a sales warehouse in China.
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.
During the first quarter of 1999, the Company recorded a restructuring
charge of approximately $1.0 million related to cost-cutting measures, including
primarily work force reductions and facility closures. During the second quarter
of 1999, the Company changed its restructuring plan to allow its Nova Odessa,
Brazil facility to remain open for one more quarter. This change resulted in a
reduction of the restructuring charge of approximately $0.1 million. The charges
associated with the reduction in work force include severance costs for
approximately 155 employees, of whom 52% affected cost of goods sold and 48%
affected operating expenses. The charges associated with facility closures
consist of remaining lease obligations and related expenses for the Company's
facility in Lenni, Pennsylvania, which was closed during the first quarter of
1999. The charges associated with this lease obligation and related expenses
totaling $48,000 had been included in cost of goods sold and were utilized
during the second quarter of 1999. Of the $0.9 million charge, $0.7 million was
utilized in the second quarter and $0.2 million was
13
<PAGE>
utilized in the third quarter. As of December 31, 1999, the Company has
terminated 155 employees who were paid severance of $0.6 million in the second
quarter and $0.2 million in the third quarter.
In June 1999, the employment of John Funk, the Company's General Counsel
and Chief Financial Officer, was terminated. Based on subsequent discussions, it
appears Mr. Funk may maintain that the Company has a contractual obligation to
repurchase his stock if and when the Company meets certain financial performance
criteria. Management believes that the Company has meritorious defenses against
this and any other claims that Mr. Funk may make in the future, and management
will defend these positions vigorously. However, if Mr. Funk were to prevail on
any of the claims he may make, the Company's liability could be substantial. On
October 27, 1999, Messrs. Sloan, Andrade and Buffett executed an agreement
clarifying that none of them can claim that the Company has a contractual
obligation to purchase their shares. Management is uncertain at this time of the
amount of any potential liabilities resulting from this matter. No liability
relating thereto has been recorded as of the date of this report.
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 three quarters of 1999, the Company continued to benefit from modest price
decreases in steel and polymers. At the end of 1999, both of these materials
experienced modest price increases. There can be no assurances that prices for
these materials will not increase in the future.
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
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales decreased 14.9% or $38.8 million to $221.2 million in 1999
compared to $260.0 million in 1998. The decrease was primarily driven by the
reduced demand for swine equipment, which was caused by low swine prices and
environmental regulations.
Gross profit decreased to $50.3 million in 1999 or 22.7% of net sales from
$62.1 million or 23.9% of net sales in 1998. This decrease in the gross profit
percentage of net sales was caused by overhead expenses that were not eliminated
in anticipation of lower revenues and capacity needs.
Selling, general and administrative expenses decreased 23% or $11.6 million
to $38.7 million in 1999 from $50.2 million in 1998. This decrease resulted from
savings from the restructuring program that was implemented toward the end of
the first quarter of 1999. As a percentage of net sales, selling, general and
administrative expenses decreased to 17.5% in 1999 from 19.3% in 1998.
Operating income decreased to $11.6 million in 1999 from $11.8 million in
1998. Operating income margins increased to 5.3% of net sales in 1999 from 4.6%
in 1998. This increase was attributable to the decreased selling, general and
administrative expenses primarily offset by lower sales volume and reduced
margins.
Interest expense increased $1.8 million for 1999. This increase was
primarily due to the interest expense on the term note portion of the credit
facility issued to finance, among other things, the acquisition of the Company's
Brazilian operation.
Net income decreased from $0.3 million in 1998 to a net loss of $2.3
million in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales increased 17.8% or $39.2 million to $260.0 million in 1998
compared to $220.8 million in 1997. The increase resulted from the acquisition
of David Manufacturing Company ("DMC") and Avemarau Equipamentos Agricolas Ltda.
("Avemarau") and increased sales of grain storage products, offset by lost sales
from the shut down of the Company's North Carolina retail stores and the reduced
demand for swine equipment caused by historically
14
<PAGE>
low swine prices and environmental regulations. The acquisitions of DMC and
Avemarau increased sales by $24.5 million and $13.8 million, respectively.
International sales increased $27.0 million to $85.2 million in 1998 from $58.2
million in 1997.
Gross profit increased to $62.1 million in 1998 or 23.9% of net sales from
$56.2 million or 25.4% of net sales in 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 and an increase in fixed overhead
costs.
Selling, general and administrative expenses increased 42.8% or $15.1
million to $50.2 million in 1998 from $35.2 million in 1997. This increase
resulted from the acquisition of DMC and Avemarau and increases in international
operations staffing. As a percentage of net sales, selling, general and
administrative expenses increased to 19.3% in 1998 from 15.9% in 1997.
Operating income decreased to $11.8 million in 1998 from $21.0 million in
1997. Operating income margins decreased to 4.6% of net sales in 1998 from 9.5%
in 1997. This decrease was attributable to the increased selling, general and
administrative expenses and reduced margins. 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 $6.8 million for 1998. This increase was
primarily due to interest expense on the Notes issued in November 1997.
Net income decreased 98.4% or $17.3 million to $0.3 million for 1998 from
$17.6 million in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales increased 23.6% or $42.2 million to $220.8 million in 1997
compared to $178.5 million 1996. Of this 23.6% increase, 5.5% was a result of
increased sales of grain storage products resulting primarily from historically
high domestic grain prices in 1996 and 13.0% was a result of increased domestic
sales of swine and poultry equipment attributable to continuing strong
construction demand for larger swine facilities. International sales of $58.2
million in 1997 were essentially flat compared to sales of $55.5 million in
1996. Sales in Europe and Canada increased by $6.5 million and $3.7 million,
respectively, due to stronger market penetration. These increases were offset by
decreased Mideastern and Asian sales of $4.5 million and $5.0 million,
respectively, primarily due to the completion of turn-key grain storage projects
in 1996.
Gross profit increased to $56.2 million in 1997 or 25.4% of net sales
compared to $42.8 million or 24.0% of net sales in 1996. This increase reflected
the impact of increased sales, as well as the benefit of price increases in the
grain drying and farm storage equipment product lines. These positive impacts
were offset by a change in sales mix towards lower margin products within the
swine product line.
Selling, general and administrative expenses increased 22.2% or $6.4
million to $35.2 million in 1997 from $28.8 million in 1996. This increase was
primarily due to a $4.3 million increase in selling, general and administrative
compensation attributable to increased staffing and an increase in bad debt
reserve of $1.2 million. As a percentage of net sales, selling, general and
administrative expenses decreased to 15.9% in 1997 compared to 16.1% in 1996.
Operating income increased 49.2% or $6.9 million to $21.0 million in 1997
compared to $14.1 million in 1996. Operating income margins increased to 9.5%
of net sales in 1997 from 7.9% in 1996. These increases were attributable to
the 23.6% increase in sales and were offset by increased selling, general and
administrative expenses.
Interest expense increased $2.6 million for 1997, reflecting borrowings
used to fund the Company's redemption of certain shares of its voting common
stock in June 1996 as well as interest expense on the Notes. See Item 13,
"Certain Relationships and Related Transactions-Management Buyout."
Net income increased 67.3% or $7.1 million to $17.6 million for 1997
compared to $10.5 million in 1996. This increase was due to increased net sales
and gross profit margin partially offset by increased interest expense.
15
<PAGE>
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 Company's Notes.
The Brazilian Real experienced a 50% devaluation during 1999, from 1.21
Reals/U.S. Dollar at December 31, 1998 to 1.81 Reals/U.S. Dollar at December 31,
1999. The impact of this devaluation on the balance sheet was to decrease the
Company's assets by approximately $9.1 million and decrease liabilities by
approximately $4.3 million, resulting in an approximate $4.8 million decrease in
stockholders' equity.
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 December
31, 1999, the Company had $46.0 million of working capital, a decrease of $3.3
million from working capital as of December 31, 1998. This decrease in working
capital was primarily due to decreased accounts receivable of $10.5 million
primarily due to reduced sales in the last quarter of 1999 versus 1998. This
decrease was partially offset by decreases in accounts payable.
Operating activities generated $9.0 million and $3.4 million in cash in
1999 and 1998, respectively, and used $3.6 million in cash in 1997. The increase
in cash flow from operating activities from 1998 to 1999 of $5.6 million was
primarily the result of a decrease in accounts receivable of $21.2 million
offset by decreases of accrued expenses and net income of $13.0 million and an
increase in other current assets of $3.0 million, compared to 1998. The increase
in cash flow from operating activities from 1997 to 1998 of $7.0 million was
primarily the result of a decrease in inventories and other current assets of
$32.0 million, offset by decreases of net income of $17.3 million and increases
of accounts receivable of $11.6 million, compared to 1997.
The Company's capital expenditures totaled $7.7 million, $18.0 million and
$9.7 million in 1999, 1998 and 1997, respectively. Capital expenditures have
primarily been for machinery and equipment and the purchase and expansion of
facilities. In 1999, approximately $5.5 million was primarily for the purchase
of machinery and equipment and $2.2 million was the impact of the Brazilian Real
devaluation on property, plant and equipment. The decrease in capital
expenditures in 1999 reflects the Company's return to maintenance level capital
spending. The increase in 1998 and 1997 reflects the Company's continued
expansion and the conversion of leased to purchased assets. In 1998, other
investing activity that resulted in significant cash used was the acquisition of
Avemarau and the related non-compete agreement for $12.8 million. In 1997,
other investing activity that resulted in significant cash used was the
acquisition of DMC for $17.9 million, net of $0.2 million cash acquired.
Cash used by financing activities in 1999 consisted of $5.0 million of
payments on long-term debt offset by $3.4 million of borrowings under the Credit
Facility and additional long-term debt and $0.5 million of contributed capital.
Cash provided by financing activities in 1998 consisted primarily of $35.0
million from the term note with LaSalle National Bank (see Item 8, "Financial
Statements and Supplementary Data, Notes to Consolidated Financial Statements-
Note 9) partially offset by $18.7 million in repayment of former shareholder
loans and long term-debt and $6.4 million of dividends. Cash provided by
financing activities in 1997 consisted primarily of $94.8 million from the
offering of the Notes partially offset by $29.3 million in repayment of long-
term debt and borrowing under a line of credit and $16.3 million of dividends.
During the first quarter of 1999, the Credit Facility was amended to
provide for a $27.5 million revolving loan facility and a $32.5 million term
loan. As a part of this amendment, the financial covenants were eased and the
amortization of the term loan was reduced from $5.0 million per year to $2.4
million per year. LaSalle Bank N.A. and the Company further amended the Credit
Facility to modify certain covenants for the remainder of 1999 and for the year
2000 as well as to provide a seasonal over-advance facility for the third and
fourth quarters of 1999. The Company was in compliance with all covenants under
the Credit Facility as of December 31, 1999. For a more detailed description of
the Credit Facility, see Note 9 to the Consolidated Financial Statements
included in Item 8 hereof.
The Company believes that existing cash, cash flow from operations and
available borrowings under the amended Credit Facility will be sufficient to
support its working capital, capital expenditures and debt service requirements
for the foreseeable future.
16
<PAGE>
The following is a condensed cash flow statement that isolates the
cumulative translation adjustment impact from the other components of cash flow.
This presentation is not in compliance with generally accepted accounting
principles; however, management desires to include this information because
management believes this presentation of cash flow information segregates the
effect of the foreign translation adjustments from the operating results of the
Company.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net cash flows provided by (used in) operating activities.............. 10,950 5,732
------- --------
Cash Flows From Investing Activities:
Capital expenditures...................................................... (5,538) (18,707)
Proceeds from sale of fixed assets........................................ 801 1,837
Payments received on notes receivable..................................... 1,025 --
Acquisition of Avemarau Equipamentos Agricolas Ltda. stock, net
of cash acquired....................................................... -- (5,220)
Payment for noncompete agreement with former stockholders of
Avemarau Equipamentos Agricolas Ltda................................... -- (7,590)
Other..................................................................... 298 (754)
------- --------
Net cash flows provided by (used in) investing activities.............. (3,414) (30,434)
------- --------
Cash Flows From Financing Activities:
Payments on former shareholder loans...................................... -- (14,312)
Proceeds from issuance of long-term debt.................................. 643 35,495
Payments on long-term debt................................................ (5,075) (4,388)
Deferred financing costs.................................................. (28) (762)
Net borrowings (payments) under line-of-credit agreement.................. 2,800 (1,125)
Contributed capital....................................................... 466 --
Dividends................................................................. -- (6,426)
Other..................................................................... 499 149
------- --------
Net cash flows provided by (used in) financing activities.............. (695) 8,631
------- --------
Cumulative translation adjustment impact.................................... (4,793) (1,309)
------- --------
Increase (Decrease) In Cash and Cash Equivalents............................ $ 2,048 $(17,380)
Cash and Cash Equivalents, beginning of period.............................. 1,192 18,572
------- --------
Cash and Cash Equivalents, end of period.................................... $ 3,240 $ 1,192
======= ========
</TABLE>
Year 2000 Issues
The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Such software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations leading to disruptions in the Company's
operations (the "year 2000" or "Y2K" issue). If the Company or its significant
suppliers or customers fail to make necessary modifications, conversions and
contingency plans on a timely basis, the year 2000 issue could have a material
adverse effect on the Company's business, operations, cash flow and financial
condition. However, the effect cannot be quantified at this time because the
Company cannot accurately estimate the magnitude, duration or ultimate impact of
noncompliance by suppliers, customers and third parties that have no direct
relationship to the Company. The Company believes that its competitors face a
similar risk.
Currently, the Company's IT and non-IT software and systems are compliant.
The Company experienced no significant problems either internally or with
suppliers and customers related to the Y2K issue.
17
<PAGE>
In 1997, the Company began identifying non-compliant software and
identified three categories of software and systems that require attention:
(1) information technology ("IT") systems, such as mainframes, PCs,
networks and production control systems
(2) non-IT systems, such as equipment, machinery, climate control and
security systems, which may contain microcontrollers with embedded
technology, and
(3) supplier and customer IT and non-IT systems
The Company fixed or replaced non-compliant IT and non-IT software and
systems. The failure to address these systems issues on a timely basis would
have resulted in a disruption of the manufacturing process and the Company's
ability to efficiently conduct business. The cost associated with these
compliance projects totaled approximately $0.3 million.
The Company also assessed the compliance of its major customers and
suppliers. The Company conducted formal communications with its significant
suppliers and customers to determine the extent to which it may be affected by
those third parties' Y2K compliance plans. The Company believes that customers
and suppliers present the area of greatest risk in part because of the Company's
limited ability to influence actions of third parties and in part because of the
Company's inability to estimate the level and impact of noncompliance by these
third parties. Issues with a significant portion of the Company's customers in
processing and paying invoices could impact the Company's cash flows and
financial liquidity. A prolonged interruption in the supply of essential
services or products could adversely effect the Company's operations and ability
to generate revenues. In the event that the Company experiences problems with a
service provider or supplier, it will attempt to obtain services and products
from other available sources.
Finally, the Company developed contingency plans that assume some estimated
level of noncompliance by, or business disruption to, suppliers and customers.
The contingency plans include development of the capabilities to process
critical transactions manually. The Company finalized the contingency plans
during the fourth quarter of 1999.
Inflation
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during recent periods.
18
<PAGE>
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,
1999, principle exposed to interest rate risk was limited to $32.5 million in
variable rate debt. 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.
At December 31, 1999, approximately 13.8% of net 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 is serves and by
invoicing customers in the same currency as the source of the products. The
Company also monitors its foreign currency exposure in each country and
implements strategies to respond to changing economic and political
environments. The Company's exposure to foreign currency exchange rate risk
relates primarily to the financial position and the results of operations of its
Brazilian subsidiary. The Company's exposure to such exchange rate risk as it
relates to the Company's financial position and results of operations would be
adversely impacted by further devaluation of the Brazilian Real per U.S. dollar.
These amounts are difficult to accurately estimate due to factors such as the
inherent fluctuations of intercompany account balances, balance sheet accounts
and the existing economic uncertainty and future economic conditions in the
international marketplace.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF THE GSI GROUP, INC. AND
SUBSIDIARIES
<TABLE>
<CAPTION>
Page
------------
<S> <C>
Report of Independent Public Accountants............................................................ 21
Consolidated Balance Sheets as of December 31, 1999 and 1998........................................ 22
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.......... 23
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and
1999............................................................................................. 24
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......... 25
Notes to Consolidated Financial Statements.......................................................... 26
</TABLE>
20
<PAGE>
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, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 16, 2000
21
<PAGE>
PART I - FINANCIAL INFORMATION
THE GSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Assets 1999 1998
------ ---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents...................................................... $ 3,240 $ 1,192
Accounts receivable, net....................................................... 26,433 36,969
Inventories, net............................................................... 47,156 49,219
Prepaids....................................................................... 3,370 2,820
Other.......................................................................... 2,795 4,773
-------- --------
Total current assets.......................................................... 82,994 94,973
-------- --------
Notes Receivable................................................................. 59 1,084
-------- --------
Long-Term Retainage.............................................................. 4,187 3,570
-------- --------
Property, Plant and Equipment, net............................................... 48,808 50,257
-------- --------
Other Assets:
Goodwill, net................................................................... 11,219 12,646
Other intangible assets, net.................................................... 6,567 7,541
Deferred financing costs, net................................................... 3,340 4,063
Other........................................................................... 876 514
-------- --------
Total other assets............................................................ 22,002 24,764
-------- --------
Total assets.................................................................. $158,050 $174,648
======== ========
Liabilities and Stockholders' Equity
-------------------------------------
Current Liabilities:
Accounts payable................................................................ $ 11,012 $ 14,459
Payroll and payroll related expenses............................................ 2,942 4,950
Deferred income taxes........................................................... 1,011 1,049
Billings in excess of costs..................................................... 2,676 4,983
Accrued warranty................................................................ 2,385 2,527
Other accrued expenses.......................................................... 5,984 7,549
Customer deposits............................................................... 6,667 5,631
Current maturities of long-term debt............................................ 4,305 4,572
-------- --------
Total current liabilities..................................................... 36,982 45,720
-------- --------
Long-Term Debt, less current maturities.......................................... 133,315 134,216
-------- --------
Deferred Income Taxes............................................................ 1,387 1,678
-------- --------
Commitments and Contingencies
Stockholders' 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................................................................. 2,939 2,473
Accumulated other comprehensive loss............................................ (6,996) (2,203)
Retained earnings............................................................... 15,936 18,277
Treasury stock, at cost, voting (4,833,652 shares).............................. (25,524) (25,524)
Treasury stock, at cost, nonvoting (859,316 shares)............................. (9) (9)
-------- --------
Total stockholders' deficit................................................... $(13,634) $ (6,966)
-------- --------
Total liabilities and stockholders' equity.................................... $158,050 $174,648
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
22
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Sales............................................................. $ 221,199 $ 259,998 $ 220,758
Cost of Sales......................................................... 170,668 197,907 164,607
Cost of Sales - restructuring charges................................. 248 -- --
---------- ---------- ----------
Total cost of sales.............................................. 170,916 197,907 164,607
---------- ---------- ----------
Gross profit................................................... 50,283 62,091 56,151
Selling, General and Administrative Expenses.......................... 36,411 49,366 34,904
Amortization Expense.................................................. 1,589 879 285
Restructuring Charges................................................. 669 -- --
---------- ---------- ----------
Total operating expenses......................................... 38,669 50,245 35,189
---------- ---------- ----------
Operating income............................................... 11,614 11,846 20,962
Other Income (Expense):
Interest expense................................................. (14,768) (12,946) (6,174)
Interest income.................................................. 147 409 654
Gain on sale of fixed assets..................................... 232 384 17
Foreign currency exchange gain (loss)............................ 42 203 (132)
Other, net....................................................... 56 121 404
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item....... (2,677) 17 15,731
---------- ---------- ----------
Income Tax Expense (Benefit).......................................... (336) (260) 288
---------- ---------- ----------
Income (loss) before extraordinary item........................ (2,341) 277 15,443
---------- ---------- ----------
Extraordinary Item:
Gain on early extinguishment of debt............................. -- -- 2,119
---------- ---------- ----------
Net income (loss).............................................. $ (2,341) $ 277 $ 17,562
---------- ---------- ----------
Basic and Diluted Earnings Per Share:
Continuing operations............................................ $ (1.17) $ 0.14 $ 7.72
Extraordinary item............................................... -- -- 1.06
---------- ---------- ----------
Net income (loss)................................................ $ (1.17) $ 0.14 $ 8.78
---------- ---------- ----------
Weighted Average Common Shares Outstanding............................ 2,000,000 2,000,000 2,000,000
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
23
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1998 and 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------------------------
Voting Nonvoting Accumulated
----------------------------- -----------------------------
Other
Additional Comprehensive
Shares Shares Paid-In Income
Outstanding Amount Outstanding Amount Capital (Loss)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.......... 1,800,000 $ 18 200,000 $ 2 $ 2,473 $ -
Net income......................... - - - - - -
Other comprehensive - - - - - -
income (loss) - foreign currency
translation adjustments.......... - - - - - (869)
Dividends.......................... - - - - - -
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 1997.......... 1,800,000 18 200,000 2 2,473 (869)
Net income......................... - - - - - -
Other comprehensive
income (loss) - foreign currency
translation adjustments.......... - - - - - (1,334)
Dividends.......................... - - - - - -
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 1998.......... 1,800,000 18 200,000 2 2,473 (2,203)
Net income......................... - - - - - -
Capital contributions.............. - - - - 466 -
Other comprehensive
income (loss) - foreign
currency translation
adjustments...................... - - - - - (4,793)
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 1999.......... 1,800,000 $ 18 200,000 $ 2 $ 2,939 $ (6,996)
============= ============= ============= ============= ============= =============
<CAPTION>
Treasury Stock
-------------------------------------------------
Voting Nonvoting
----------------------- -----------------------
Total Comprehensive
Retained Stockholders' Income
Earnings Shares Amount Shares Amount Equity (Loss)
---------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.......... $ 17,659 4,833,652 $ (25,524) 859,316 $ (9) $ (5,381)
Net income......................... 17,562 - - - - 17,562 17,562
Other comprehensive
income (loss) - foreign
currency translation
adjustments...................... - - - - - (869) (869)
-------------
Comprehensive income............... $ 16,693
=============
Dividends.......................... (16,096) - - - - (16,096)
---------- ---------- ---------- ---------- ---------- -------------
Balance, December 31, 1997.......... 19,125 4,833,652 (25,524) 859,316 (9) (4,784)
Net income......................... 277 - - - - 277 277
Other comprehensive
income (loss) - foreign
currency translation
adjustments...................... - - - - - (1,334) (1,334)
-------------
Comprehensive loss................. $ (1,057)
=============
Dividends.......................... (1,125) - - - - (1,125)
---------- ---------- ---------- ---------- ---------- -------------
Balance, December 31, 1998.......... $ 18,277 4,833,652 $ (25,524) 859,316 $ (9) $ (6,966)
Net income......................... (2,341) - - - - (2,341) (2,341)
Capital contributions.............. - - - - - 466
Other comprehensive
income (loss) - foreign
currency translation
adjustments...................... - - - - - (4,793) (4,793)
-------------
Comprehensive loss................. $ (7,134)
---------- ---------- ---------- ---------- ---------- ------------- =============
Balance, December 31, 1999.......... $ 15,936 4,833,652 $ (25,524) 859,316 $ (9) $ (13,634)
========== ========== ========== ========== ========== =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
24
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)...................................................... $(2,341) $ 277 $ 17,562
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation and amortization........................................ 8,160 5,944 3,499
Amortization of deferred financing costs............................. 715 623 137
Gain on sale of assets............................................... (232) (384) (17)
Gain on early retirement of debt - noncash portion................... -- -- (2,299)
Deferred taxes....................................................... (329) (594) --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net........................................... 7,689 (13,489) (1,893)
Inventories, net................................................... 500 303 (19,429)
Other current assets............................................... 1,124 4,139 (8,091)
Accounts payable................................................... (1,345) 838 3,120
Accrued expenses and payroll and payroll related expenses.......... (5,375) 5,036 2,925
Customer deposits.................................................. 389 748 --
Other.............................................................. -- -- 908
------- -------- --------
Net cash flows provided by (used in) operating activities....... 8,955 3,441 (3,578)
------- -------- --------
Cash Flows From Investing Activities:
Capital expenditures................................................... (7,728) (17,964) (9,655)
Proceeds from sale of fixed assets..................................... 801 1,837 --
Payments received on notes receivable.................................. 1,025 -- 261
Acquisition of Clark Products, Inc., net of cash acquired.............. -- -- (866)
Acquisition of David Manufacturing Co., net of cash acquired........... -- -- (17,684)
Acquisition of Avemarau Equipamentos Agricolas Ltda., net of
cash acquired........................................................ -- (5,220) --
Payment for noncompete agreement with former stockholders of
Avemarau Equipamentos Agricolas Ltda................................. -- (7,590) --
Other.................................................................. (310) (754) (145)
------- -------- --------
Net cash flows (used in) investing activities................... (6,212) (29,691) (28,089)
------- -------- --------
Cash Flows From Financing Activities:
Payments on former shareholder loans................................... -- (14,312) --
Proceeds from issuance of long-term debt............................... 643 35,495 99,231
Payments on long-term debt............................................. (5,075) (4,388) (13,019)
Deferred financing costs............................................... (28) (762) (4,458)
Net borrowings (payments) under line-of-credit agreement............... 2,800 (1,125) (16,299)
Contributed capital.................................................... 466 -- --
Dividends.............................................................. -- (6,426) (16,322)
Other.................................................................. 499 388 (384)
------- -------- --------
Net cash flows provided by financing activities................. (695) 8,870 48,749
------- -------- --------
Increase (Decrease) In Cash and Cash Equivalents.......................... $ 2,048 $(17,380) $ 17,082
Cash and Cash Equivalents, beginning of period............................ 1,192 18,572 1,490
------- -------- --------
Cash and Cash Equivalents, end of period.................................. $ 3,240 $ 1,192 $ 18,572
======= ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements
25
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
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, hatchery and watering
systems. The Company's headquarters and main manufacturing facility is in
Assumption, Illinois, with other manufacturing facilities in Illinois and Iowa.
In addition, the Company has manufacturing and assembly operations in Brazil,
Malaysia and Canada and selling and distribution operations in South Africa, The
Netherlands, Mexico and China.
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 carrying value for current assets and current liabilities
reasonably approximates fair value due to the short maturity of these items.
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 market 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.
Inventories
Inventories are stated at the lower of cost or market. Cost includes
the cost of materials, labor and factory overhead. The cost of domestic
inventories was determined using the last-in, first-out link-chain method and
the
26
<PAGE>
cost of international inventories was determined using the first-in, first-out
method. Had the domestic inventories been determined using the first-in, first-
out method at December 31, 1999 and 1998, the reported value of such inventories
would have been increased by approximately $0.3 million and $1.3 million,
respectively. Inventories and cost of sales are based in part on accounting
estimates relating to differences resulting from periodic physical inventories.
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 market 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 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.
Research and Development
Costs associated with research and development are expensed as
incurred. Such costs incurred were $2.1 million, $2.7 million and $1.6 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
Intangible Assets
The excess of purchase costs over amounts allocated to identifiable
assets and liabilities of businesses acquired ("goodwill") is amortized on the
straight-line basis over periods ranging from 15 to 40 years. Goodwill is
recorded net of accumulated amortization. Should events or circumstances occur
subsequent to the acquisition of a business which bring into question the
realizable value or impairment of the related goodwill, the Company will
evaluate the remaining useful life and balance of goodwill and make appropriate
adjustments. The Company's principal considerations in determining impairment
include the strategic benefit to the Company of the particular business as
measured by undiscounted current and expected future operating cash flows of
that particular business' cash flows. Should an impairment be identified, a loss
would be reported to the extent that the carrying value of the related goodwill
exceeds the fair value. Other intangible assets, which consist of patents and
non-compete agreements, are recorded net of accumulated amortization and are
being amortized on a straight-line basis over periods ranging from 3 to 17
years.
Deferred Financing Costs
Costs incurred in connection with obtaining financing are capitalized
and amortized over the maturity period of the debt.
Revenue Recognition
Revenue is recorded when products are shipped. Provisions are made at that
time, when applicable, for installation and 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 without reference to the
percentage of completion. Retainages are included as current and noncurrent
assets in the accompanying consolidated balance sheets. Revenue earned in
excess of billings is comprised of revenue
27
<PAGE>
recognized on certain contracts in excess of contractual billings on such
contracts. Billings in excess of costs are classified as a current liability.
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.
Reclassification
Certain reclassifications have been made to prior-year amounts to
conform to the current-year presentation.
Financial Information About Industry Segments
The Company operates in primarily one industry segment, which includes
the design, manufacture and sale of agricultural equipment.
Comprehensive Income
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, as part of the Consolidated
Statements of Stockholders' Equity.
Thirteen Week Fiscal Periods
Beginning with the first quarter of 1998, the Company adopted thirteen
week fiscal quarter periods for operational and financial reporting purposes.
The Company's year end will continue to be December 31.
3. Restructuring Charges
During the first quarter of 1999, the Company recorded a restructuring
charge of approximately $1.0 million related to cost-cutting measures, including
primarily work force reductions and facility closures. During the second quarter
of 1999, the Company changed its restructuring plan to allow its Nova Odessa,
Brazil facility to remain open for one more quarter. This change resulted in a
reduction of the restructuring charge of approximately $0.1 million. The charges
associated with the reduction in work force include severance costs for 155
employees, of whom 52% affected cost of goods sold and 48% affected operating
expenses. The charges associated with facility closures consisted of remaining
lease obligations and related expenses for the Company's facility in Lenni,
Pennsylvania, which was closed during the first quarter of 1999. The charges
associated with the lease obligation and related expenses totaling $48,000 have
been included in cost of goods sold and were paid out during the second quarter
of 1999. Of the $0.9 million charge, $0.7 million was paid out in the second
quarter and $0.2 million was paid out in the third quarter. As of December 31,
1999, the Company has terminated 155 employees who were paid severance of $0.6
million in the second quarter and $0.2 million in the third quarter.
The following summarizes the restructuring reserve activity for the year
ended December 31, 1999 (in thousands):
Amount
------
December 31, 1998...................... --
Increase to operating expense..... 917
Charge to allowance............... (917)
------
December 31, 1999...................... $ --
======
28
<PAGE>
4. Trade Receivables Allowance
The following summarizes trade receivables allowance activity for the
years ended December 31, 1997, 1998 and 1999 (in thousands):
Amount
------
December 31, 1996........................... 643
Increase to operating expense.......... 1,712
Charge to allowance.................... (519)
------
December 31, 1997........................... 1,836
Increase to operating expense.......... 601
Charge to allowance.................... (642)
------
December 31, 1998........................... 1,795
Increase to operating expense.......... 466
Charge to allowance.................... (761)
------
December 31, 1999........................... $1,500
======
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 SAFS 131, the Company reports net
sales, in thousands, by each group of product lines. Amounts for the years
ended December 31, 1999, 1998 and 1997 are as shown in the table below (in
thousands).
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Grain product line $124,922 $131,230 $ 88,555
Swine product line 40,921 75,102 88,511
Poultry product line 55,356 53,666 43,692
-------- -------- --------
Net sales $221,199 $259,998 $220,758
======== ======== ========
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, sales in Brazil
were $17.8, $15.9 and $0.1 million and net losses in Brazil were $3.6, $3.1 and
$0.6 million, respectively. Long-lived assets in Brazil were $4.4 and $4.6
million at December 31, 1999 and 1998, respectively.
6. Risks and Uncertainties
The Company believes that historically low swine prices will affect
negatively the sales of its swine equipment, and, therefore, its results of
operations and financial condition.
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.
During 1999 the Brazilian Real experienced a devaluation (1.2098
Brazilian Reals/U.S. Dollar at December 31, 1998 as compared to 1.8064 Brazilian
Reals/ U.S. Dollar at December 31, 1999). Any further deterioration in Brazil's
economy could have an adverse effect on the Company's results of operations and
financial conditions.
29
<PAGE>
7. Detail of Certain Assets
<TABLE>
<CAPTION>
As of December 31,
------------------
1999 1998
---- ----
Accounts Receivable (In thousands)
--------------
<S> <C> <C>
Trade receivables.......................... $ 27,933 $ 38,764
Allowance for doubtful accounts............ (1,500) (1,795)
------------- --------------
Total...................................... $ 26,433 $ 36,969
============= ==============
Inventories
Raw materials.............................. $ 18,751 $ 11,817
Work-in-process............................ 10,500 14,330
Finished goods............................. 17,905 23,072
------------- --------------
Total...................................... $ 47,156 $ 49,219
============= ==============
Property, Plant and Equipment
Land....................................... $ 926 $ 865
Buildings and improvements................. 22,260 18,866
Machinery and equipment.................... 48,271 41,237
Office equipment and furniture............. 6,883 5,322
Construction-in-progress................... 2,688 10,104
------------- --------------
81,028 76,394
Accumulated depreciation................... (32,220) (26,137)
------------- --------------
Property, plant and equipment, net......... $ 48,808 $ 50,257
============= ==============
Intangible Assets
Goodwill................................... $ 12,597 $ 13,286
Accumulated amortization................... (1,378) (640)
------------- --------------
Total...................................... $ 11,219 $ 12,646
============= ==============
Non-compete agreements..................... $ 8,227 $ 8,227
Accumulated amortization................... (1,892) (991)
------------- --------------
Total...................................... $ 6,335 $ 7,236
============= ==============
Patents and other intangible assets........ $ 333 $ 453
Accumulated amortization................... (101) (148)
------------- --------------
Total...................................... $ 232 $ 305
============= ==============
Deferred Financing Costs
Deferred financing costs................... $ 4,440 $ 4,612
Accumulated amortization................... (1,100) (549)
------------- --------------
Total...................................... $ 3,340 $ 4,063
============= ==============
</TABLE>
8. Supplemental Cash Flow Information
The Company paid approximately $13.5, $13.0 and $5.2 million in
interest during the years ended December 31, 1999, 1998 and 1997, respectively.
The Company paid income taxes of $64,343, $1,340,358 and $237,745 during the
years ended December 31, 1999, 1998 and 1997, respectively. In connection with
the purchase of Avemarau Equipamentos Agricolas Ltda., a note of $7.0 million
was issued and cash of $12.8 million was paid in exchange for the purchase of
stock and non-compete agreements.
30
<PAGE>
9. Long-Term Debt
Long-term debt at December 31, 1999 and 1998 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Citizens National Bank IRB with variable interest at 6.5% until March, 2000,
at which time rate is subject to periodic adjustments based on U.S. Treasury
Note rates, due $14 monthly plus interest with unpaid principal balance due
April, 2010, secured by certain real estate and improvements in Paris, Illinois.. $ 1,709 $ 1,875
Various noncompete, license and patent agreement payable, noninterest-bearing
and payable in varying amounts through 2003...................................... 52 65
LaSalle Bank N. A. revolving line of credit........................................ 2,800 --
LaSalle Bank N. A. term note....................................................... 29,700 32,500
Clark Products, Inc. promissory note bearing interest at 10%; due $14 monthly
through June, 2001, secured by certain equipment and intangibles................. 233 429
10.25% senior subordinated notes payable, principal due November, 2007, net of
unamortized debt discounts of $1,302 and $1,467 as of December 31, 1999 and
1998, respectively; amortization of debt discounts was $165 and $159 for the
years ended December 31, 1999 and 1998, respectively; interest is payable
semi-annually in May and November................................................ 98,698 98,533
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; interest imputed at 8%, face
amount of note is 8.0 million Brazilian Reals.................................... 3,704 3,900
Various notes payable, bearing interest at rates ranging from 14.63% to 19.63%
and payable in varying amounts through 2002...................................... 326 991
City of Assumption promissory note bearing interest at 5%; due $9 monthly through
December, 2003, secured by a $495 letter of credit............................... 398 495
-------- --------
Total.................................................................... 137,620 138,788
Less -
Current maturities............................................................ (4,305) (4,572)
-------- --------
Total long-term debt..................................................... $133,315 $134,216
======== ========
</TABLE>
Maturities of long-term debt during the next five years and thereafter are
as follows (in thousands):
2000.................... 4,305
2001.................... 3,834
2002.................... 29,357
2003.................... 284
2004.................... 267
Thereafter.............. 99,573
--------
Total.............. $137,620
========
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. During 1999, the Company and all of its
voting stockholders except John Funk entered into an agreement concerning
certain provisions of the Stockholder Agreements described in Note 14 below.
Giving effect to that agreement, the Company was in compliance with the
covenants contained in the Indenture as of December 31, 1999.
In October 1997, the former stockholders and the Company entered into an
agreement to modify the terms of the former stockholder debt. Accordingly,
during the fourth quarter of 1997, the Company recorded an
31
<PAGE>
extraordinary gain of approximately $2.1 million related to the early
extinguishment of debt. The extraordinary gain resulted primarily from a
discount on the notes.
On August 19, 1998, LaSalle National Bank amended its existing credit facility
by providing for revolving credit borrowings up to a maximum of $55 million
(limited based on a borrowing base which includes accounts receivable and
inventory) and a $35 million term loan. Borrowings 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. At December 31, 1998,
the term loan and revolving line of credit bore interest at rates ranging from
7.06% to 7.19%. The term loan was payable in quarterly principal installments
of $1.3 million plus interest over five years with a seven year amortization
schedule. The amended credit facility required the Company to maintain certain
financial covenants including debt to EBITDA ratio, debt service coverage ratio
and certain levels of EBITDA. Borrowings under the facility are secured by
substantially all of the assets of the Company including the capital stock of
any existing or future subsidiaries. The overall level of borrowings available
under the revolving line of credit are reduced by outstanding letters of credit,
DMC revolving credit loans outstanding and debt of FarmPRO, Inc. guaranteed by
the Company. On October 30, 1998, LaSalle and the Company amended the credit
facility to reduce the maximum borrowing under the revolving line to $25
million. At December 31, 1998, the Company had $5.8 million of standby letters
of credit, no DMC revolving credit loans and $6.0 million of guaranteed
available FarmPRO debt reducing the overall availability of the line to $13.2
million.
On February 4, 1999, LaSalle National Bank amended the existing credit
facility to provide for revolving loans up to a maximum of $27.5 million
(limited based on a borrowing base which includes accounts receivable, inventory
and principal reductions of the LaSalle National Bank term loan) and a $32.5
million term loan. The borrowings bear interest at a floating rate per annum
equal to (at the Company's option) 1.75% to 3.00% over LIBOR or 0.25% to 0.50%
over the banks floating rate based on the Senior Debt to EBITDA ratio of the
Company. The term loan is payable in quarterly principal installments of $0.6
million plus interest over three years and matures on February 1, 2002. As the
principal amount outstanding on the term loan is reduced, the availability on
the revolving loans is increased maintaining a total commitment of $60.0 million
under this facility. The credit facility expires on February 1, 2002. The
amended credit facility agreement requires the Company to maintain a certain
Senior Debt to EBITDA ratio, Tangible Net Worth and certain levels of EBITDA and
capital expenditures. These covenants are retroactive and were reset in February
1999 to December 31, 1998. Borrowings under the amended facility are secured by
substantially all of the assets of the Company including the capital stock of
any existing or future subsidiaries. On July 6, 1999, LaSalle Bank N. A. and
the Company amended the credit facility to modify the EBITDA and the Senior Debt
to EBITDA covenants for the remainder of 1999 and the year 2000 as well as to
provide for a seasonal over-advance facility of up to $5 million for the third
and fourth quarters of 1999. This amendment also modified the rates at which
interest is charged to (at the Company's option) 1.5% to 3.5% over LIBOR or
0.25% to 0.75% over the bank's floating rate based on the Senior Debt to EBITDA
ratio of the Company.
At December 31, 1999, the Company's credit facility with LaSalle had a
revolving line of credit with a maximum borrowing level of $30.3 million and a
$29.7 million term loan. The term loan and revolving line of credit bore
interest at rates ranging from 8.13% to 8.94% at December 31, 1999. The Company
had $2.8 million revolving loans outstanding, $7.3 million of standby letters of
credit and $5.0 million of guaranteed available FarmPRO debt reducing the
overall availability of the line to $10.8 million as of December 31, 1999. The
Company was in compliance with all covenants under the Credit Facility as of
December 31, 1999.
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.
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 the
first quarter of 1999 and all of 1998, the Company provided a 25% matching
contribution up to 1% of the employees' compensation. Contributions to the plan
were temporarily suspended for the last three quarters of 1999. Employer
contributions to this plan were $59,425, $205,183 and $79,000 during 1999, 1998
and 1997, respectively.
32
<PAGE>
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, 1999, 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. A wholly
owned subsidiary of GSI, 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.
The income tax provision 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, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
U.S. Federal statutory rate.................................. $ (910) $ 6 $ 5,349
Increase (decrease) in income taxes resulting from:
Non-taxable S Corporation (income) losses.................. 879 10 (5,833)
Foreign rate differences and losses with no tax
benefits.................................................. -- -- 426
Tax differences resulting from acquisition of DMC.......... (279) (609) --
Nondeductible goodwill amortization........................ 33 37 --
Effective tax rate differences............................. 11 (5) --
State and other income taxes............................... (70) 301 346
------ ------ --------
$ (336) $ (260) $ 288
====== ====== ========
</TABLE>
The following is a summary of the Company's provision for income taxes (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current
Federal.............................. $ 4 $ 10 $ --
State and local...................... (11) 324 288
-------- -------- --------
(7) 334 288
-------- -------- --------
Deferred
Federal.............................. (224) (405) --
State and local...................... (105) (189) --
-------- -------- --------
(329) (594) --
-------- -------- --------
Total provision.................... $ (336) $ (260) $ 288
-------- -------- --------
</TABLE>
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards 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.
33
<PAGE>
The components of deferred tax assets and liabilities at December 31, 1999 and
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
Deferred tax assets:
<S> <C> <C>
Tax loss carryforwards............................................................ $ 40 $ 52
Allowance for doubtful accounts................................................... 24 11
Inventory reserves................................................................ 9 6
Cash discount reserves............................................................ 30 --
Estimated product liability....................................................... 20 22
Accrued vacations................................................................. 45 38
------- ------
$ 168 $ 129
======= ======
Deferred tax liabilities:
Property and equipment............................................................ 1,381 1,671
Inventory......................................................................... 1,185 1,185
------- ------
$ 2,566 $2,856
------- ------
Net Deferred tax liability.......................................................... $ 2,398 $2,727
======= ======
</TABLE>
DMC has tax loss carryforwards of $184, which begin to expire in the year
2018. These deferred tax assets and liabilities relate primarily to the book
and tax differences pertaining to DMC, which was acquired during 1997.
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.
In June 1999, the employment of John Funk, the Company's General Counsel and
Chief Financial Officer, was terminated. Based on subsequent discussions, it
appears Mr. Funk may maintain that the Company has a contractual obligation to
repurchase his stock if and when the Company meets certain financial performance
criteria. Management believes that the Company has meritorious defenses against
this and any other claims that Mr. Funk may make in the future, and management
will defend these positions vigorously. However, if Mr. Funk were to prevail on
any of the claims he may make, the Company's liability could be substantial. On
October 27, 1999, Messrs. Sloan, Andrade and Buffett executed an agreement
clarifying that none of them can claim that the Company has a contractual
obligation to purchase their shares. Management is uncertain at this time of the
amount of any potential liabilities resulting from this matter. No liability
relating thereto has been recorded as of the date of this filing.
The Company has month to month leases for several buildings and paid rentals
in 1999, 1998 and 1997 of $742,189, $852,634 and $811,245, 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, 1999, 1998 and 1997 was $1.5 million, $2.0 million and $2.7
million, respectively.
Operating lease commitments for the next five years are as follows (in
thousands):
<TABLE>
<S> <C>
2000................................. $ 1,210
2001................................. 1,090
2002................................. 958
2003................................. 763
2004................................. 328
-------
Total................................ $ 4,349
=======
</TABLE>
The Company has an operating lease agreement that requires the Company to
maintain a certain senior debt to EBITDA ratio, tangible net worth and certain
levels of capital expenditures and EBITDA. The Company was in compliance with
these covenants under the operating lease agreement as of December 31, 1999.
Certain lease agreements are collateralized by a letter of credit of $2.0
million that expires on October 15, 2000.
34
<PAGE>
The Company has two contracts with the Syrian government and one with the
Yemen Company for Industrial Development to manufacture and supervise the
assembly of grain handling systems. Other current and long-term assets include
$5.4 million and $5.9 million as of December 31, 1999 and 1998 respectively, of
retainage withheld until completion of the projects and the meeting of certain
performance criteria. These assets are secured by letters of credit totaling
$5.4 million and are expected to be collected by the year 2001. At December 31,
1999, the Company anticipated that certain contracts would result in losses that
were estimated to be $0.3 million. These losses have been accrued for in the
accompanying financial statements.
The Company has entered into employment agreements with certain executives
that provide for minimum aggregate annual payments of $715,000. The agreements
terminate as of the earliest of : (i) June 6, 2001; (ii) the last day of the
month in which the executive's death occurs; or (iii) ninety days after the date
the Company gives the executive notice of termination. If employment is
terminated due to permanent disability, the executives will continue to receive
annual salary and other benefits until such time that the executive sells his
stock. If employment is terminated without cause after December 6, 1999, the
executive will at a minimum, immediately upon such termination, receive a
severance payment equal to the greater of: (i) eighteen months of salary at the
executive's then current rate or (ii) in the case of certain stockholders, a
range from $375,000 to $594,682. There is no provision for severance payments
if the executive is terminated without cause prior to December 6, 1999.
In December 1997, the Company entered into a Cooperative Agreement
("Agreement") with Usina Mecanica Carioca S.A. ("Usimeca") which provides for
Usimeca to transfer to the Company (i) all Usimeca's rights, title and interest
in and to a certain technology, (ii) a non-exclusive license to use this
technology in Brazil and (iii) Usimeca's distribution network and customer base.
Payments due to Usimeca are as follows: (i) $200,000 due on closing of the
agreement, (ii) $50,000 minimum royalty payment per year for five years, and
(iii) a royalty payment of 2.5% of annual gross sales, as defined, in excess of
$2 million for five years. The Agreement provides for a limit on aggregate
royalty payments of $1.0 million. The term of the Agreement is five years. If
the Company decides to cease its activities in Brazil before the end of the
initial term, the Company shall pay Usimeca the difference between the total
amount of royalties already paid and a guaranteed minimum of $450,000. The
Agreement also provides for Usimeca to provide marketing and technical
assistance (management services) to the Company for a six-month period, which is
then renewable on a month-to-month basis. The fee for these management services
is $10,000 per month. The Company did not renew these services subsequent to
the initial six-month period. In addition, the Agreement provides for Usimeca
to supply its products, as defined, to the Company for a period of two years at
a firm price, as defined. During 1999 the Agreement was amended to provide for
a prepayment of all the Company's obligations described above. As of December
31, 1999, the Company has recorded a prepaid asset of $0.7 million and expects
to have fully expensed this asset by the end of the second quarter of 2000.
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, hatchery, watering and confinement 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.
Net sales by each major geographic region are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
United States.................. $ 145.4 $ 174.8 $ 162.6
Asia........................... 11.4 4.3 13.7
Canada......................... 18.4 19.2 16.9
Latin America.................. 31.1 31.5 10.9
Mideast........................ 6.3 21.7 5.7
Europe......................... 6.2 7.0 9.0
All other...................... 2.4 1.5 2.0
------- ------- -------
$ 221.2 $ 260.0 $ 220.8
======= ======= =======
</TABLE>
35
<PAGE>
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 certain
family members of a shareholder of the Company. Such transactions generally
consist of sales of grain equipment and amounted to $133,895, $131,495 and
$173,192 for 1999, 1998 and 1997, respectively.
The Company makes sales in the ordinary course of business to Larry Sloan who
is a family member of a certain shareholder of the Company. Such transactions
generally consist of sales of grain equipment and amounted to $56,967, $117,478
and $30,503 for 1999, 1998 and 1997, respectively.
A significant customer and an affiliate of the Company, Carolina Agri-
Systems, Inc. ("CASI"), ceased distribution operations in North Carolina and
sold its only other operation, Farmer Boy Ag, Inc. ("FBA") in December 1995.
In connection with this transaction, the Company entered into an agreement to
lease two facilities that were owned by CASI. Lease payments to CASI during
1997 were $153,000. During 1997, the Company purchased these leased facilities
for $1.5 million. The Company believes this transaction was negotiated at
arm's-length in the normal course of business. CASI was dissolved in January
1998.
After the sale of FBA noted above, FBA's name was changed to FarmPRO, Inc.
("FarmPRO"). As part of the proceeds of the sale, CASI received a note of $1.4
million from the purchasers of FarmPRO, which was subsequently assigned to the
Company. The note receivable is a 10 year note with quarterly interest payments
calculated at a rate of 9%. The note provides for principal payments equal to
5% of the outstanding principal amount commencing on the last day of the first
calendar quarter in which the balance sheet deficit of FarmPRO is reduced to
zero. This note was paid off during 1999. The balance of this note receivable
and accounts receivable from FarmPRO was $1.9 million as of December 31, 1998
and the balance of accounts receivable from FarmPRO was $0.5 million as of
December 31, 1999. Also in 1995, the Company and FarmPRO entered into a long-
term supply agreement pursuant to which FarmPRO agreed to purchase 90% of its
equipment requirements from the Company. During 1997, the long-term supply
agreement was amended. As a result of this amendment the Company agreed to (i)
guarantee FarmPRO borrowings under a line of credit agreement limited to amounts
borrowed up to $6.0 million and (ii) provide administrative services to FarmPRO
for two years at no charge. 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 amount of the
guaranteed borrowings at December 31, 1999 and 1998 were $2.5 million and $2.5
million, respectively. Sales to FarmPRO were $3.4 million, $8.1 million and
$16.5 million in 1999, 1998 and 1997, respectively.
The Company and its stockholders entered into certain agreements relating to
the rights of the stockholders with respect to their ownership of the Company's
shares (the "Stockholder Agreements"). These agreements generally (i) provide
that the holders of a majority of the stock may sell all of their shares at any
time if the other stockholders are entitled to participate in such sale on the
same terms and conditions, and that the holders of a majority of the stock may
require the other stockholders to sell all their stock at the same time on the
same terms and conditions, (ii) establish that the stockholders are restricted
in their ability to sell, pledge or transfer such shares, (iii) grant rights of
first refusal, first to the Company and then to all non-transferring
stockholders, with respect to the transfer of any share, (iv) require that an
affirmative vote by a majority of the Company's voting stockholders is required
to approve certain corporate matters and (v) establish procedures for the
optional purchase of shares by the Company (subject to compliance with the terms
of the Indenture) or any remaining voting stockholders upon the death, permanent
disability or termination of employment of any stockholder. Each of the
stockholders is covered by life insurance policies, the proceeds of which
generally will be used to fund the purchase of shares from the estate of a
deceased stockholder. The Stockholder Agreements also (i) provide that the
holders of a majority of the Company's shares may cause the Company to register
their shares in an underwritten public offering and (ii) grant piggy-back
registration rights to the stockholders in the event of an underwritten public
offering.
36
<PAGE>
15. Unaudited Quarterly Information
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands, except per share date)
<S> <C> <C> <C> <C>
1999:
Net sales................................... $ 44,751 $ 58,248 $ 77,050 $ 41,150
Gross profit................................ 8,216 12,641 17,999 11,427
Net income (loss)........................... (6,944) 1,128 5,002 (1,527)
Basic and diluted net income (loss)
per share................................ (3.47) .56 2.50 (.76)
======== ======== ======== ========
1998:
Net sales................................... $ 52,161 $ 64,386 $ 86,043 $ 57,408
Gross profit................................ 12,007 15,351 19,090 15,643
Net income (loss)........................... (921) 1,479 1,584 (1,865)
Basic and diluted net income (loss)
per share................................ (.46) .74 .79 (.93)
======== ======== ======== ========
1997:
Net sales................................... $ 33,603 $ 58,558 $ 79,804 $ 48,793
Gross profit................................ 7,006 15,344 19,648 14,153
Net income (loss)........................... (985) 5,674 8,435 4,438
Basic and diluted net income (loss)
per share................................ (.49) 2.84 4.21 2.22
======== ======== ======== ========
</TABLE>
16. Acquisitions
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 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 (Note denominated in Brazilian Real).
The stock purchase agreement also calls for aggregate contingent payments to the
former stockholders of up to $5.3 million (based on net profit as defined),
however, management believes the probability of any contingent payments 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 commences on the employees' termination date. The
Company also agreed to provide a minimum of $5.2 million for capital equipment
over the next four years. 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 $6.9 million which is being
amortized over 15 years. The results of operations have been included in the
Company's consolidated results of operations since the date of acquisition.
On May 1, 1998, the Company entered into a joint venture with Resintech
Engineering SDN BHD ("RE") to form Resintech-GSI International, SDN BHD
("Resintech"), a partnership, to sell, fabricate structural steel systems for
and install grain storage projects in Southeast Asia. The Company made an
initial capital contribution of $491,283 resulting in 40% ownership and, as
required, made a $150,000 payment to RE during 1999. The Company is also
required to pay 20% of Resintech's after-tax profit each year beginning in 1998
and until a total of $400,000 is paid. As of December 31, 1999 and 1998,
$641,283 and $491,283, respectively have been recorded as an investment in a
joint venture and is included in Other Assets in the Company's consolidated
balance sheets. The Company accounts for its investment in Resintech under the
equity method. Concurrent with the formation of the joint venture, the Company
entered into an Asset Purchase Agreement ("Asset Agreement") with Resintech and
RE and a Supply Agreement with Resintech. The Asset Agreement calls for the
purchase of RE's assets, as defined, by Resintech. The Supply Agreement is
between the Company and Resintech and provides that Resintech will purchase
directly from the Company 100% of Resintech's equipment requirements at a
specified price, as defined. The term of the Supply Agreement is from the date
of the formation of the joint venture through the effective date of the
termination and dissolution of Resintech, as defined.
37
<PAGE>
17. Guarantor Subsidiaries
The Company's payment obligation 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., GSI/Cumberland BV, GSI/Cumberland SA (Pty) Ltd., GSI/Cumberland
Sdn. Bhd. and Agromarau Industria E Comercio 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 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.
38
<PAGE>
17. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 215 $ 3,025 $ -- $ 3,240
Accounts receivable, net................... 25,526 10,023 (9,116) 26,433
Inventories, net .......................... 31,619 18,199 (2,662) 47,156
Other current assets ...................... 2,883 3,282 -- 6,165
------------ ------------ ------------ ------------
Total current assets ...................... 60,243 34,529 (11,778) 82,994
Property, plant and equipment, net............ 36,228 12,580 -- 48,808
Goodwill...................................... 5,104 16,022 -- 21,126
Investment in and advances to/from
subsidiaries .............................. 51,704 (14,448) (37,256) --
Other long-term assets ....................... 5,019 103 -- 5,122
------------ ------------ ------------ ------------
Total assets .............................. $ 158,298 $ 48,786 $ (49,034) $ 158,050
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......... $ 3,493 $ 812 $ -- $ 4,305
Accounts payable .......................... 7,775 8,300 (5,063) 11,012
Accrued liabilities ....................... 16,582 5,083 -- 21,665
------------ ------------ ------------ ------------
Total current liabilities.................. 27,850 14,195 (5,063) 36,982
Long-term debt ............................... 130,716 16,371 (13,772) 133,315
Other long-term liabilities................... -- 1,387 -- 1,387
------------ ------------ ------------ ------------
Total liabilities ......................... 158,566 31,953 (18,835) 171,684
Stockholders' equity:
Common stock .............................. 20 23,248 (23,248) 20
Additional paid-in capital................. 2,939 311 (311) 2,939
Accumulated other comprehensive income..... -- (6,996) -- (6,996)
Retained earnings (deficit)................ 22,306 270 (6,640) 15,936
Treasury stock, at cost.................... (25,533) -- -- (25,533)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit)....... (268) 16,833 (30,199) (13,634)
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity.... $ 158,298 $ 48,786 $ (49,034) $ 158,050
============ ============ ============ ============
</TABLE>
39
<PAGE>
17. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 379 $ 813 $ -- $ 1,192
Accounts receivable, net................... 34,208 11,017 (8,256) 36,969
Inventories, net .......................... 29,285 20,934 (1,000) 49,219
Other current assets ...................... 8,102 2,021 (2,530) 7,593
------------ ------------ ------------ ------------
Total current assets ...................... 71,974 34,785 (11,786) 94,973
Property, plant and equipment, net............ 36,387 13,870 -- 50,257
Goodwill ..................................... 1,625 11,021 -- 12,646
Investment in and advances to/from
Subsidiaries .............................. 48,969 (17,645) (31,324) --
Other long-term assets ....................... 9,192 7,580 -- 16,772
------------ ------------ ------------ ------------
Total assets .............................. $ 168,147 $ 49,611 $ (43,110) $ 174,648
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......... $ 2,840 $ 1,732 $ -- $ 4,572
Accounts payable .......................... 9,713 20,300 (15,554) 14,459
Accrued liabilities ....................... 23,669 3,020 -- 26,689
------------ ------------ ------------ ------------
Total current liabilities.................. 36,222 25,052 (15,554) 45,720
Long-term debt ............................... 129,602 4,614 -- 134,216
Other long-term liabilities................... -- 1,678 -- 1,678
------------ ------------ ------------ ------------
Total liabilities ......................... 165,824 31,344 (15,554) 181,614
Stockholders' equity:
Common stock .............................. 20 15,922 (15,922) 20
Additional paid-in capital................. 2,473 -- -- 2,473
Accumulated other comprehensive income..... -- (2,203) -- (2,203)
Retained earnings (deficit)................ 25,363 4,548 (11,634) 18,277
Treasury stock, at cost.................... (25,533) -- -- (25,533)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit)....... 2,323 18,267 (27,556) (6,966)
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity.... $ 168,147 $ 49,611 $ (43,110) $ 174,648
============ ============ ============ ============
</TABLE>
40
<PAGE>
17. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 180,108 $ 54,512 $ (13,421) $ 221,199
Cost of sales .................................... 137,891 43,594 (10,569) 170,916
--------- --------- --------- ---------
Gross profit .............................. 42,217 10,918 (2,852) 50,283
Selling, general and administrative expenses...... 23,571 15,098 -- 38,669
--------- --------- --------- ---------
Operating income (loss).................... 18,646 (4,180) (2,852) 11,614
Interest expense ................................. (14,378) (390) -- (14,768)
Other income (expense) ........................... 494 (17) -- 477
--------- --------- --------- ---------
Income (loss) before income taxes................. 4,762 (4,587) (2,852) (2,677)
Provision (benefit) for income taxes.............. (27) (309) -- (336)
--------- --------- --------- ---------
Income (loss) before equity in income of
consolidated subsidiaries.................. 4,789 (4,278) (2,852) (2,341)
Equity in income of consolidated subsidiaries..... (4,278) -- 4,278 --
--------- --------- --------- ---------
Net income (loss) ................................ $ 511 $ (4,278) $ 1,426 $ (2,341)
========= ========= ========= =========
</TABLE>
41
<PAGE>
17. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .......................................... $ 222,057 $ 48,121 $ (10,180) $ 259,998
Cost of sales ...................................... 166,985 38,978 (8,056) 197,907
--------- -------- --------- ---------
Gross profit ................................ 55,072 9,143 (2,124) 62,091
Selling, general and administrative expenses........ 36,086 14,159 -- 50,245
--------- -------- --------- ---------
Operating income (loss)...................... 18,986 (5,016) (2,124) 11,846
Interest expense ................................... (11,371) (1,575) -- (12,946)
Other income (expense) ............................. 1,054 63 -- 1,117
--------- -------- --------- ---------
Income (loss) before income taxes................... 8,669 (6,528) (2,124) 17
Provision (benefit) for income taxes................ 280 (540) -- (260)
--------- -------- --------- ---------
Income (loss) before equity in income of
Consolidated subsidiaries.................... 8,389 (5,988) (2,124) 277
Equity in income of consolidated subsidiaries....... (5,988) -- 5,988 --
--------- -------- --------- ---------
Net income (loss) .................................. $ 2,401 $ (5,988) $ 3,864 $ 277
========= ======== ========= =========
</TABLE>
42
<PAGE>
17. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities............ $ 10,570 $ (1,615) $ -- $ 8,995
------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures......................... (7,728) -- -- (7,728)
Other........................................ (217) 334 -- 117
------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities................................... (7,945) 334 -- (7,611)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Advances (to) from affiliates................ (4,354) 4,354 -- --
Net borrowings (payments) on debt............ (472) (1,160) -- (1,632)
Other........................................ 2,037 299 -- 2,336
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities................................... (2,789) 3,493 -- 704
------------ ------------ ------------ ------------
Change in cash and cash equivalents............. (164) 2,212 -- 2,048
Cash and cash equivalents, beginning of period.. 379 813 -- 1,192
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period........ $ 215 $ 3,025 -- $ 3,240
============ ============ ============ ============
</TABLE>
43
<PAGE>
17. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities.............. $ 6,493 $ (3,052) $ -- $ 3,441
------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures........................... (12,974) (4,990) -- (17,964)
Other.......................................... 1,682 (13,409) -- (11,727)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities..................................... (11,292) (18,399) -- (29,691)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Advances (to) from affiliates.................. (24,531) 24,531 -- --
Net borrowings (payments) on debt.............. 18,332 (2,662) -- 15,670
Dividends...................................... (6,426) -- -- (6,426)
Other.......................................... (374) -- -- (374)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities..................................... (12,999) 21,869 -- 8,870
------------ ------------ ------------ ------------
Change in cash and cash equivalents............... (17,798) 418 -- (17,380)
Cash and cash equivalents, beginning of period.... 18,177 395 -- 18,572
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period.......... $ 379 $ 813 $ -- $ 1,192
============ ============ ============ ============
</TABLE>
44
<PAGE>
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:
<TABLE>
<CAPTION>
Name Age Office
---- --- ------
<S> <C> <C>
Craig Sloan........................... 48 Chief Executive Officer and Director
Jorge Andrade......................... 47 President, Chief Operating Officer and Director
Howard G. Buffett..................... 45 Chairman of the Board of Directors
Russell C. Mello...................... 38 Senior Vice President, Finance, Secretary and
Treasurer
Eugene A. Wiseman..................... 50 President of GSI Division
Allen A. Deutsch...................... 49 President of AP Division
Christopher V. van Rossem............. 44 President of Cumberland Division
John W. Funk.......................... 40 Director
</TABLE>
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.
Jorge Andrade joined the Company in April 1993. Mr. Andrade has been Chief
Operating Officer since January 1995. Mr. Andrade also has been President since
April 1996. From April 1993 to December 1994, he served as President of the
Cumberland Division. From March 1987 to March 1993, he served as Executive Vice
President of Chick Master Incubator Company, an international manufacturer of
high-capacity incubators for poultry. Mr. Andrade has been a Director of the
Company since April 1996.
Howard G. Buffett joined the Company in September 1995. Mr. Buffett has
been Chairman of the Board since June 1996. From September 1995 to June 1996, he
served as President of International Operations. From February 1992 to July
1995, he served as Corporate Vice President and Assistant to the Chairman of the
Archer-Daniels-Midland Company, a processor of agricultural products. Mr.
Buffett has been a Director of the Company since September 1995. Mr. Buffett is
also a Director of Berkshire Hathaway, Inc., Coca-Cola Enterprises, Inc. and
Lindsay Manufacturing Company.
Russell C. Mello joined the Company in March 1995. Mr. Mello has been
Senior Vice President, Finance and Secretary and Treasurer since June 1999. From
September 1996 to June 1999, he served as Vice President, Finance and Assistant
Secretary and Assistant Treasurer. From March 1995 to September
45
<PAGE>
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.
Eugene A. Wiseman joined the Company in October 1978. Mr. Wiseman has been
President of the GSI Division since December 1996. From December 1994 to
December 1996, he served as Vice President of the GSI Division. From March 1990
to December 1994, he served as Division Manager of the GSI Division. Prior
thereto, Mr. Wiseman held various sales and management positions.
Allen A. Deutsch joined the Company in January 1993. Mr. Deutsch has been
President of the AP Division since June 1996. 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.
Christopher V. van Rossem joined the Company in October 1993 and has been
President of the Cumberland Division since that time. Mr. van Rossem also serves
as director of Corporate international operations. From June 1989 to October
1993, he served as Sales Manager of Chick Master Incubator Co., an international
manufacturer of high-capacity incubators for poultry, where he managed the
company's United States and Canadian sales department.
John W. Funk has been a Director of the Company since April 1996.
The Company's bylaws provide that the number of directors shall be four.
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, 1999 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
<TABLE>
<CAPTION>
All Other
Name & Principal Position Year Annual Compensation Compensation(1)
------------------------- ---- ------------------------- ---------------
Salary Bonus
-------- -------
<S> <C> <C> <C> <C>
Craig Sloan......................................... 1999 $170,000 $ -- $14,784
Chief Executive Officer and Director
Jorge Andrade....................................... 1999 $205,000 $ -- $ 6,513
President, Chief Operating Officer and Director
Howard G. Buffett................................... 1999 $300,000 $ -- $ 4,832
Chairman of the Board
Allen A. Deutsch.................................... 1999 $130,000 $23,812 $ --
President of AP Division
Christopher van Rossem.............................. 1999 $130,000 $ 3,812 $ --
President of Cumberland Division
</TABLE>
_______________
(1) Consists of matching contributions by the Company to Company sponsored
401(k) plans, group insurance and other miscellaneous benefits.
46
<PAGE>
Employment Agreements
The Company has entered into employment agreements with Messrs. Sloan,
Andrade and Buffett (each, and "Executive"). The terms of each Executive's
employment agreement are substantially the same. Each agreement provides for a
specified minimum annual base salary, subject to increases determined by the
Company's Board of Directors, and participation in any profit sharing,
retirement, insurance or other benefit plans maintained by the Company.
The employment agreement of each Executive will terminate as of the
earliest of: (i) June 6, 2001; (ii) the last day of the month in which the
Executive's death occurs; or (iii) ninety days after the date the Company gives
the Executive's notice of termination if such termination is for "cause", due to
the Executive being "permanently disabled" (as such terms are defined in the
employment agreement). The Company may not terminate an Executive, with or
without cause, unless such termination has been authorized by a resolution
adopted by the Board at a meeting duly called and held, and where the Executive
is given prior written notice of the basis for his termination and an
opportunity to be heard by the Board at such meeting. In addition, the Executive
may not be terminated for cause unless: (i) the Company has followed the
foregoing procedures and (ii) the Executive is given an opportunity to cure any
of the actions or omissions which form the basis for his termination within 30
days of the adoption of the Board resolution described above. If employment is
terminated due to permanent disability, the Executive will continue to receive
an annual salary (less any benefits paid during the period of his disability,
under the Company's disability insurance programs) and other benefits until such
time that the Executive sells his stock to the Company pursuant to the terms of
certain stockholder agreements among the holders of the Company's voting stock.
See "Certain Relationships and Related Transactions-Management Buyout-
Stockholder Agreements." If employment is terminated without cause after
December 6, 1999, the Executive will receive at a minimum, immediately upon such
termination, a severance payment equal to the greater of: (i) eighteen months
salary at the Executive's then current rate; or (ii) in the case of Mr. Sloan,
$594,682; and in the case of Messrs. Andrade and Buffett, $450,000. There is no
provision for severance payments if employment is terminated without cause prior
to December 6, 1999.
Each employment agreement also provides that during the Executive's
employment with the Company, and for two years thereafter, the Executive will
not be employed by or otherwise engage in any business that is in competition
with the Company, except that the Executive may; (i) invest in such business
where the stock of such business is traded on a national securities exchange and
the Executive owns less that 1% of the equity of such business; (ii) serve on
the board of directors of any corporation on which the Executive is serving as
of the date of his termination. If the Executive is terminated by the Company
without cause, the foregoing covenant not to compete is null and void.
Compensation Committee Interlocks and Insider Participation
The Company did not have a Compensation Committee during 1999. All members
of the Company's Board of Directors participated in deliberations regarding
executive officer compensation during 1999. See "Certain Relationships and
Related Transactions." During 1999, 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 1999.
Director Compensation
Each director of the Company receives an annual fee of $10,000 plus a fee
or $5,000 for each Board of Directors meeting attended, with such attendance
fees being capped at $40,000, in the aggregate, per year. The Directors agreed
to waive these fees in 1999.
47
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of February 18, 2000
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 that 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.
<TABLE>
<CAPTION>
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
------------------------------------ ------ ------ ------ ----------
<S> <C> <C> <C> <C>
Craig Sloan (1)....................................... 1,175,000 65.28% 58,044 29.02%
Jorge Andrade (1)..................................... 300,000 16.67% -- --
John W. Funk (1)...................................... 225,000 12.50% -- --
Howard G. Buffet (1)(3)............................... 100,000 5.55% -- --
Christopher van Rossem (1)............................ -- -- 15,773 7.89%
Directors and executive officers as a group
(8 persons in group)............................... 1,800,000 100.00% 117,193 58.60%
</TABLE>
(1) The address of each stockholder is c/o The GSI Group, Inc., 1004 East
Illinois Street, Assumption, Illinois 62510, (217) 226-4421.
(2) The Company has 200,000 shares of non-voting common stock outstanding.
(3) Includes 10,000 shares held by a trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company and the holders of the Company's voting common stock ("voting
stockholders") have entered into a Stock Restriction and Buy-Sell Agreement and
the stockholders have entered into a Stock Restriction and Cross Purchase
Agreement (the "Stockholder Agreements"). The Stockholder Agreements define the
rights of the voting stockholders with respect to their ownership of the
Company's shares. These agreements generally (i) provide that the holders of a
majority of the stock may sell all of their shares at any time if the other
stockholders are entitled to participate in such sale on the same terms and
conditions, and that the holders of a majority of the stock may require the
other voting Stockholders to sell all their stock at the same time on the same
terms and conditions, (ii) establish that the voting Stockholders are restricted
in their ability to sell, pledge or transfer such shares, (iii) grant rights of
first refusal, first to the Company and then to all non-transferring
stockholders, with respect to the transfer of any shares, (iv) require that an
affirmative vote by a majority of the Company's voting stock is required to
approve certain corporate matters and (v) establish procedures for the optional
purchase of shares by the Company (subject to compliance with the terms of the
Indenture) or any remaining voting Stockholders upon the death, permanent
disability or termination of employment of any voting Stockholder. Each of the
voting Stockholders is covered by life insurance policies, the proceeds of which
generally will be used to fund the purchase of shares from the estate of a
deceased voting Stockholder. The Stockholder Agreements also (i) provide that
the holders of a majority of the Company's shares may cause the Company to
register their shares in an underwritten public offering and (ii) grant piggy-
back registration rights to the voting Stockholders in the event of an
underwritten public offering.
In addition, the Company, the voting Stockholders 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)
48
<PAGE>
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, first to Craig Sloan and then to the other voting Stockholders,
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, the other voting Stockholders 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
certain family members of Craig Sloan. Such transactions generally consist of
sales of grain equipment and amounted to $133,895 for 1999. The Company believes
that these transactions were, and future transactions with Sloan Implement
Company, Inc. 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.
49
<PAGE>
PART IV
ITEM 14. 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. and
Subsidiaries" 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:
The GSI Group, Inc. did not file any Current Reports on Form 8-K
during its fiscal quarter ended December 31, 1999.
50
<PAGE>
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
February 18, 2000.
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 February 18, 2000.
Signature Title
--------- -----
/s/ Craig Sloan Director and Chief Executive Officer
- --------------------------------
Craig Sloan (Principal Executive Officer)
/s/ Jorge Andrade Director and Chief Operating Officer
- --------------------------------
Jorge Andrade
/s/ Howard G. Buffett Chairman of the Board of Directors
- --------------------------------
Howard G. Buffett
/s/ Russell C. Mello Senior Vice President, Finance, Secretary and
- --------------------------------
Russell C. Mello Treasurer (Principal Financial Officer)
51
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Document Description
- --------- --------------------
<S> <C>
2.1** Stock Purchase Agreement, dated June 30, 1998, by and among Cumberland do Brasil Ltda.,
Avemarau Equipamentos Agricolas Ltda. And the stockholders of Avemarau Equipamentos Agricolas
Ltda.
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.
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.
10.1*** Fourth Amended and Restated Loan and Security Agreement, dated February 4, 1999, between The
GSI Group, Inc., as borrower, and LaSalle National Bank, as lender.
10.10++ First Amendment to Fourth Amended and Restated Loan and Security Agreement dated as of July 6,
1999 by and among The GSI Group, Inc. and LaSalle Bank National Association.
10.11+ Amended and Restated Employment Agreement, dated as of March 18, 1999, between The GSI Group,
Inc. and John C. Sloan.
10.12+ Amended and Restated Employment Agreement, dated as March 18, 1999, between The GSI Group, Inc.
and Jorge Andrade.
10.13+ Amended and Restated Employment Agreement, dated as of March 18, 1999, between The GSI Group,
Inc. and John Funk.
10.14+ Amended and Restated Employment Agreement, dated as of March 18, 1999, between The GSI Group,
Inc. and Howard Buffett.
10.15+ Amended and Restated Stock Restriction and Buy-Sell Agreement, dated March 18, 1999, by and
among Jorge Andrade, Howard Buffett, John Funk, John C. Sloan and The GSI Group, Inc.
10.16+ Stockholder Agreement dated March 18, 1999 between The GSI Group, Inc., Jorge Andrade, Howard
Buffett, John Funk and John C. Sloan.
10.17+ Amended and Restated Stock Restriction and Buy Sell Agreement - Non Voting dated as of March
31, 1999 by and among The GSI Group, Inc., Jorge Andrade, Howard Buffett, John Funk, John C.
Sloan and the nonvoting shareholders of The GSI Group, Inc.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document Description
- --------- --------------------
<S> <C>
10.18* Stock Restriction and Cross-Purchase Agreement, dated Jun 6, 1996, among John C. Sloan, Jorge
Andrade, John Funk and Howard Buffett.
10.19* Guaranty, dated November 26, 1997, executed by The GSI Group, Inc. in favor of Mercantile Bank
National Association.
10.2* First Amendment to Stock Restriction and Cross-Purchase Agreement, dated July 15, 1996, among
John C. Sloan, Jorge Andrade, John Funk and Howard Buffett.
10.3* Second Amendment to Stock Restriction and Cross-Purchase Agreement, dated as of October 2,
1997, among John C. Sloan, Jorge Andrade, John Funk and Howard Buffett.
10.4+++ Letter Agreement dated as of October 27, 1999 among John C. Sloan, Jorge Andrade and Howard
Buffett
10.5+++ Amendment to Addendum dated September 30, 1999 by and between The GSI Group and Fleet Capital
Corporation relating to a certain Master Lease Agreement for machinery and equipment.
10.6+++ Letter of Credit Amendment to the Master Lease Agreement by and between The GSI Group, Inc. and
Fleet Capital Corporation.
10.7* Lease with Option to Purchase, dated July 12, 1996, between The GSI Group, Inc. and Edgar
County Bank & Trust Company, as Trustee for Trust No. 455-232 relating to property located in
Paris, Illinois.
10.8* Letter, dated September 15, 1997, from Luis F. Pacheco of Trench, Rossi e Watanabe, attorneys
at law, to Ricardo S. Santana of Cumberland do Brasil Ltda. summarizing the terms of the lease,
dated September 1, 1997, between Cumberland do Brasil Ltda. and Cruzeiro do Sul relating to
property leased by The GSI Group, Inc. in Nova Odessa, Brazil.
10.9* Agreement, dated April 9, 1997, between GSI/Cmberland Sdn. Bhd. and Ban Leng Fibre Sdn. Bhd.
relating to property located in Penang, Malaysia.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 List of Subsidiaries of The GSI Group, Inc.
27.1 Financial Data Schedule
</TABLE>
____________
* 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-K filed with the
Commission on March 31, 1999 pursuant to the Securities Act of 1934.
+ Incorporated by reference from the Company's Form 10-Q filed with the
Commission on May 17, 1999 pursuant to the Securities Act of 1934.
++ Incorporated by reference from the Company's Form 10-Q filed with the
Commission on August 11, 1999 pursuant to the Securities Act of 1934.
+++ Incorporated by reference from the Company's Form 10-Q filed with the
Commission on November 12, 1999 pursuant to the Securities Act of 1934.
53
<PAGE>
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 1999.
54
<PAGE>
Exhibit 12.1
THE GSI GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------
1995(1) 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income (Loss) from continuing
operations........................ $ (1,758) $ 10,981 $ 15,731 $ 17 $ (2,677)
=========== =========== =========== =========== ===========
Add Fixed Charges:
Interest expense on borrowings and
amortization of deferred
financing costs................... 2,894 3,590 6,174 12,946 14,768
Interest portion of rent expense..... 531 432 1,164 955 750
----------- ----------- ----------- ----------- -----------
3,425 4,022 7,338 13,901 15,518
=========== =========== =========== =========== ===========
Adjusted Earnings.................... 1,667 15,003 23,069 13,918 12,841
=========== =========== =========== =========== ===========
Ratio of Earnings to Fixed
Charges........................... (2) 3.73x 3.14x 1.00x 0.83x
</TABLE>
(1) In December 1995, the Company signed an agreement to sell the working
capital and fixed assets of its Heritage Vinyl Division. In January 1996,
the sale was closed. The Company's 1994 and prior year financial statements
were restated to reflect this discontinued operation.
(2) The ratio of earnings to fixed charges is expressed as the ratio of fixed
charges plus pretax earnings to fixed charges. Fixed charges include
interest on borrowings, amortization of deferred financing costs and the
interest portion of rent expense. Earnings were insufficient to cover fixed
charges for the year ended December 31, 1995 by $1.8 million.
55
<PAGE>
Exhibit 21.1
The GSI Group, Inc.
List of Subsidiaries
--------------------
Company Name Location Type of Entity
- ------------ -------- --------------
GSI/Cumberland Malaysia SDN, BHD
GSI/Cumberland South Africa SA Prop Limited
GSI/Cumberland Netherlands BV
GSI/Cumberland Mexico Limitada
The GSI Group (Canada) Inc. Canada Corporation
DMC USA - Iowa C-Corporation
Cumberland-USIMECA Brazil Limited Liab. Co.
Agromarau Industria
E Comercio Ltda. Brazil Limited Liab. Co.
GSI Agricultural Equipment
Shanghai Co. Ltd. China Limited Liab. Co.
56
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,240
<SECURITIES> 0
<RECEIVABLES> 27,933
<ALLOWANCES> 1,500
<INVENTORY> 47,156
<CURRENT-ASSETS> 6,165
<PP&E> 81,028
<DEPRECIATION> 32,220
<TOTAL-ASSETS> 158,050
<CURRENT-LIABILITIES> 36,982
<BONDS> 133,315
0
0
<COMMON> 20
<OTHER-SE> (13,654)
<TOTAL-LIABILITY-AND-EQUITY> 158,050
<SALES> 221,199
<TOTAL-REVENUES> 221,199
<CGS> 170,916
<TOTAL-COSTS> 170,916
<OTHER-EXPENSES> 38,669
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,768
<INCOME-PRETAX> (2,677)
<INCOME-TAX> (336)
<INCOME-CONTINUING> (2,341)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,341)
<EPS-BASIC> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
