<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE) QUARTERLY REPORT / X / OR TRANSITION REPORT / /
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended
October 31, 1998 Commission File No. 1-5865
GERBER SCIENTIFIC, INC.
---------------------------------
(Exact name of Registrant as
specified in its charter)
CONNECTICUT 06-0640743
------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
83 Gerber Road West, South Windsor, Connecticut 06074
- ------------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area (860) 644-1551
code ---------------
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 / /.
At October 31, 1998, 22,828,723 shares of common stock of the
Registrant were outstanding.
<PAGE 1>
GERBER SCIENTIFIC, INC.
AND SUBSIDIARIES
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
Quarter Ended October 31, 1998
PAGE
Part I - Financial Information
Item 1. Consolidated Financial Statements:
Statement of Earnings for the three months
ended October 31, 1998 and 1997 2
Statement of Earnings for the six months
ended October 31, 1998 and 1997 3
Balance Sheet at October 31, 1998 and
April 30, 1998 4-5
Statement of Cash Flows for the six months
ended October 31, 1998 and 1997 6
Notes to Financial Statements 7
Independent Accountants' Report 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
Exhibit Index 23
<PAGE 2>
GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
- ------------------------------------------------------------
In thousands
(except per share amounts)
- ------------------------------------------------------------
Three Months Ended October 31, 1998 1997
- ------------------------------------------------------------
Revenue:
Product sales $137,992 $94,734
Service 12,598 11,658
------- -------
150,590 106,392
------- -------
Costs and Expenses:
Cost of product sales 81,269 51,792
Cost of service 7,333 7,563
Selling, general and administrative 39,593 31,764
Research and development expenses 7,645 7,765
------- -------
135,840 98,884
------- -------
Operating income 14,750 7,508
Other income 937 670
Interest expense (3,352) (82)
------- -------
Earnings before income taxes 12,335 8,096
Provision for income taxes 4,600 2,600
------- -------
Net earnings $ 7,735 $ 5,496
======= =======
Per share of common stock:
Basic $ .34 $ .24
Diluted $ .33 $ .24
Dividends $ .08 $ .08
Average shares outstanding:
Basic 22,789 22,679
Diluted 23,487 23,325
See Accompanying Notes
<PAGE 3>
GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
- ------------------------------------------------------------
In thousands
(except per share amounts)
- ------------------------------------------------------------
Six Months Ended October 31, 1998 1997
- ------------------------------------------------------------
Revenue:
Product sales $280,158 $182,144
Service 24,091 23,209
------- -------
304,249 205,353
------- -------
Costs and Expenses:
Cost of product sales 165,137 99,880
Cost of service 14,020 15,380
Selling, general and administrative 81,349 62,707
Research and development expenses 15,273 15,353
------- -------
275,779 193,320
------- -------
Operating income 28,470 12,033
Other income 1,197 3,010
Interest expense (6,510) (176)
------- -------
Earnings before income taxes 23,157 14,867
Provision for income taxes 8,700 4,800
------- -------
Net earnings $ 14,457 $ 10,067
======= =======
Per share of common stock:
Basic $ .64 $ .44
Diluted $ .62 $ .43
Dividends $ .16 $ .16
Average shares outstanding:
Basic 22,731 23,001
Diluted 23,500 23,518
See Accompanying Notes
<PAGE 4-5>
GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
In thousands
--------------------------------------------------------------
October 31, April 30,
1998 1998
--------------------------------------------------------------
Assets
Current Assets:
Cash and short-term cash investments $ 21,780 $ 27,007
Accounts receivable 116,170 79,114
Inventories 80,073 61,111
Prepaid expenses 9,404 18,227
-------- --------
227,427 185,459
-------- --------
Property, Plant and Equipment 144,204 117,334
Less accumulated depreciation 60,603 57,335
-------- --------
83,601 59,999
-------- --------
Intangible Assets 240,538 99,463
Less accumulated amortization 13,365 8,208
-------- --------
227,173 91,255
-------- --------
Other Assets 1,388 2,054
-------- --------
$539,589 $338,767
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Notes payable $ -- $ 326
Current maturities of long-term debt 193 193
Accounts payable 42,860 30,462
Accrued compensation and benefits 18,229 17,253
Other accrued liabilities 40,356 30,347
Deferred revenue 6,872 6,619
Advances on sales contracts 6,367 5,498
-------- --------
114,877 90,698
-------- --------
Noncurrent Liabilities:
Deferred income taxes 10,208 10,202
Long-term debt 172,653 6,953
-------- --------
182,861 17,155
-------- --------
Contingencies and Commitments
Shareholders' Equity:
Preferred stock, no par value;
authorized 10,000,000 shares; no
shares issued -- --
Common stock, $1.00 par value;
authorized 65,000,000 shares; issued
23,638,723 and 23,436,523 shares 23,639 23,437
Paid-in capital 39,928 37,779
Retained earnings 198,806 187,981
Accumulated other comprehensive loss
(foreign currency translation
adjustment) (3,668) (1,833)
Unamortized value of restricted stock
grants (204) --
Treasury stock, at cost (810,000 and
800,000 shares) (16,650) (16,450)
-------- --------
241,851 230,914
-------- --------
$539,589 $338,767
======== ========
See Accompanying Notes
<PAGE 6>
GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
In thousands
- ---------------------------------------------------------------------
Six Months Ended October 31, 1998 1997
- ---------------------------------------------------------------------
CASH PROVIDED BY (USED FOR):
Operating Activities
Net earnings $ 14,457 $ 10,067
Adjustments to reconcile net earnings to
cash provided by operating activities:
Depreciation and amortization 10,729 6,604
Deferred income taxes (210) 70
Other non-cash items 122 --
Changes in operating accounts, net of
effects of business acquisitions:
Receivables (13,738) (2,073)
Inventories 8,162 (5,876)
Prepaid expenses 11,096 1,293
Accounts payable and accrued expenses (2,836) 16,300
-------- --------
Provided by Operating Activities 27,782 26,385
-------- --------
Financing Activities
Purchase of common stock (12) (16,400)
Additions of long-term debt 181,686 --
Repayments of long-term debt (19,648) (95)
Net short-term financing (11,963) --
Debt issue costs (800) --
Exercise of stock options 2,037 638
Dividends on common stock (3,632) (3,670)
-------- --------
Provided by (Used for) Financing Activities 147,668 (19,527)
-------- --------
Investing Activities
Maturities of long-term debt securities -- 9,878
Additions to property, plant and equipment (7,010) (9,715)
Business acquisitions (175,952) --
Intangible and other assets 362 (81)
Other, net 1,923 (1,124)
-------- --------
(Used for) Investing Activities (180,677) (1,042)
-------- --------
Increase (Decrease) in Cash and Short-Term
Cash Investments (5,227) 5,816
Cash and Short-Term Cash Investments,
Beginning of Period 27,007 9,503
-------- --------
Cash and Short-Term Cash Investments, $ 21,780 $ 15,319
End of Period ======== ========
See Accompanying Notes
<PAGE 7>
GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
The consolidated balance sheet at October 31, 1998, the
consolidated statements of earnings for the three- and six-month
periods ended October 31, 1998 and 1997, and the consolidated
statement of cash flows for the six-month periods ended October
31, 1998 and 1997 are unaudited but, in the opinion of the
Company, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair statement of the results
for the interim periods. The results of operations for the six-
month period ended October 31, 1998 are not necessarily
indicative of the results to be expected for the full fiscal
year.
NOTE 2
The classification of inventories was as follows (in thousands):
October 31, 1998 April 30, 1998
---------------- ---------------
Raw materials and
purchased parts $46,957 $37,329
Work in process 33,116 23,782
------- -------
$80,073 $61,111
======= =======
NOTE 3
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," effective for financial statements for both
annual and interim periods ending after December 15, 1997. SFAS
No. 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is similar to
the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented,
and where necessary restated, to conform to the SFAS No. 128
requirements. This restatement had an immaterial impact on the
prior period earnings per share amounts under the previous
method.
<PAGE 8>
The following table sets forth the computation of basic and
diluted earnings per share:
Three Months Six Months
Ended October 31, Ended October 31,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Numerator:
Net income $ 7,735,000 $ 5,496,000 $ 14,457,000 $10,067,000
========= ========= ========== ==========
Denominators:
Denominators for
basic earnings per
share--weighted-
average shares
outstanding 22,789,437 22,679,135 22,731,381 23,001,000
Effect of dilutive
securities:
Employee stock
options 697,116 645,571 769,047 516,597
---------- ---------- ---------- ----------
Denominator for
diluted earnings
per share--
adjusted
weighted-average
shares
outstanding 23,486,553 23,324,706 23,500,428 23,517,597
========== ========== ========== ==========
Basic earnings per
share $ .34 $ .24 $ .64 $ .44
========== ========== ========== ==========
Diluted earnings per
share $ .33 $ .24 $ .62 $ .43
========== ========== ========== ==========
NOTE 4
Beginning in the first quarter of FY 1999, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income," which established
standards for reporting and displaying comprehensive income and
its components in an annual financial statement with the same
prominence as other financial statements. This statement also
requires that an entity report a total for comprehensive income
in condensed financial statements of interim periods.
The Company's total comprehensive income was as follows (in
thousands):
<PAGE 9>
Three Months Ended Six Months Ended
October 31, October 31,
1998 1997 1998 1997
------- ------- ------- -------
Net income $7,735 $5,496 $14,457 $10,067
Other comprehensive
income (loss):
Foreign currency
translation
adjustments (2,445) (133) (1,835) (1,124)
------ ------ ------ -------
Total comprehensive
income $5,290 $5,363 $12,622 $ 8,943
====== ====== ======= =======
NOTE 5
In June of 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which must be adopted by January 1, 2000. The
Company is evaluating the impact of the new requirement. At
this time, management does not expect implementation will result
in a material impact on the Company's financial position,
results of operations, or cash flows.
Effective May 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." This standard changes the criteria used to
determine the segments for which SEC registrants must report
information. As permitted by the standard, the Company will
provide the required disclosures for its segments in its Form 10-
K for the year ending April 30, 1999.
Effective May 1, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post Retirement
Benefits." This statement requires additional disclosure on
changes in the benefit obligations and fair values of plan assets
during the year. As permitted by the standard, the Company will
provide the required disclosures for its benefit plans in its
Form 10-K for the year ending April 30, 1999.
NOTE 6
Included in other income for the six-month period ended
October 31, 1997 was a gain resulting from the final settlement
of the Company's UK patent litigation with Lectra Systemes, S.A.
of France, which added $1,563,000 to earnings before income taxes
and approximately $1,000,000, or $.04 per diluted share, to net
income.
<PAGE 10>
NOTE 7
On February 27, 1998, Gerber Optical, Inc., a wholly owned
subsidiary of the Company, acquired the outstanding stock of
Coburn Optical Industries, Inc. (Coburn) of Muskogee, Oklahoma,
and subsequently merged with Coburn. The company was renamed
Gerber Coburn Optical, Inc. (GC). The purchase price, including
the costs of acquisition and the repayment of Coburn's
outstanding debt, was approximately $63,000,000. Coburn was a
leading manufacturer and international distributor of a broad
range of ophthalmic lens processing equipment and related
supplies used in the production of eyeglass lenses. GC has
continued to develop, manufacture, market, and support the Coburn
product lines.
On May 5, 1998, the Company announced the successful completion
of its cash tender offer for the outstanding capital stock of
Spandex PLC (Spandex) of Bristol, UK. Spandex was the largest
distributor of equipment and related materials to the sign making
industry in Europe and North America. The offer valued Spandex at
approximately $173,000,000. In addition, Spandex had
approximately $11,600,000 in outstanding debt that was assumed.
Each acquisition was accounted for as a purchase and the results
of operations of the acquired companies have been included in the
Company's consolidated statements of earnings from the respective
dates of acquisition. The acquisition costs were allocated to
the assets and liabilities acquired based upon their fair values.
The excess of acquisition costs over the fair values of the net
assets acquired was included in intangible assets as goodwill and
is being amortized on a straight-line basis over 25 years from
the date of acquisition.
The following pro forma combined results of operations for the
three- and six-month periods ended October 31, 1997 have been
prepared as if the Coburn and Spandex acquisitions occurred at
May 1, 1997 and give effect to estimated purchase accounting and
other adjustments resulting from the acquisitions. The pro forma
information is presented on the assumption that the acquisition
costs would have been the same at May 1, 1997. The pro forma
financial information is not necessarily indicative of the
results of operations that would have been achieved had the
acquisitions of Coburn and Spandex actually been effective as of
May 1, 1997 or of future results of the combined companies.
<PAGE 11>
(Unaudited) (Unaudited)
--------------- -------------
Three Months Ended Six Months Ended
October 31, October 31,
------------------ -------------------
In thousands
(except per share
amounts) 1997 1997
- -------------------- ------------------ -------------------
Sales $164,042 $319,021
Net earnings 6,066 10,886
Net earnings per
common share-basic .27 .47
Net earnings per
common share-diluted .26 .46
<PAGE 12>
GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
With respect to the unaudited consolidated financial statements
of Gerber Scientific, Inc. and subsidiaries at October 31, 1998
and for the three- and six-month periods ended October 31, 1998
and 1997, KPMG Peat Marwick LLP has made a review (based on
procedures adopted by the American Institute of Certified Public
Accountants) and not an audit, as set forth in their separate
report dated November 18, 1998 appearing on page 13. That report
does not express an opinion on the interim unaudited consolidated
financial information. KPMG Peat Marwick LLP has not carried out
any significant or additional audit tests beyond those which
would have been necessary if their report had not been included.
Accordingly, such report is not a "report" or "part of the
Registration Statement" within the meaning of Sections 7 and 11
of the Securities Act of 1933 and the liability provisions of
Section 11 of such Act do not apply.
<PAGE 13>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Gerber Scientific, Inc.
We have made a review of the consolidated statements of earnings
of Gerber Scientific, Inc. and subsidiaries for the three- and
six-month periods ended October 31, 1998 and 1997, the
consolidated statement of cash flows for the six-month periods
ended October 31, 1998 and 1997, and the consolidated balance
sheet as of October 31, 1998 in accordance with standards
established by the American Institute of Certified Public
Accountants. We have previously audited, in accordance with
generally accepted auditing standards, and expressed our
unqualified opinion dated May 21, 1998 on the consolidated
financial statements for the year ended April 30, 1998 (not
presented herein). The aforementioned financial statements are
the responsibility of the Company's management.
A review of interim financial information consists principally of
applying analytical review procedures to financial data and
making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
examination in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying
consolidated statements of earnings for the three- and six-month
periods ended October 31, 1998 and 1997, the consolidated
statement of cash flows for the six-month periods ended October
31, 1998 and 1997, or the consolidated balance sheet as of
October 31, 1998 for them to be in conformity with generally
accepted accounting principles. Also, in our opinion the
information in the accompanying consolidated balance sheet as of
April 30, 1998 is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
/s/ KPMG PEAT MARWICK LLP
Hartford, Connecticut
November 18, 1998
<PAGE 14>
GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In May 1998, the Company acquired the outstanding stock of
Spandex PLC (Spandex). Accordingly, Spandex was included in the
Company's consolidated balance sheet at October 31, 1998, in the
Company's results from operations for the three- and six-month
periods ended October 31, 1998, and in the Company's cash flows
for the six-month period ended October 31, 1998.
In February 1998, the Company acquired the outstanding stock of
Coburn Optical Industries, Inc. (Coburn). Coburn was included in
the Company's consolidated balance sheet at April 30, 1998, in
the Company's results from operations for the three- and six-
month periods ended October 31, 1998, and in the Company's cash
flows for the six-month period ended October 31, 1998.
In March 1998, the Company sold its Gerber Systems unit, which
comprised the Company's imaging and inspection systems product
class. As a result, the Company's April 30, 1998 consolidated
balance sheet and the FY 1999 consolidated financial statements
do not include any Gerber Systems activity.
FINANCIAL CONDITION
The Company's ratio of current assets to current liabilities was
2.0 to 1 at October 31, 1998 and April 30, 1998. Net working
capital at October 31, 1998 was $112.5 million, an increase of
$17.8 million from the beginning of the current fiscal year and
largely attributable to the Spandex acquisition. The Company's
cash and investments totaled $21.8 million at October 31, 1998
compared with $27 million at the end of the prior fiscal year.
Operating activities provided $27.8 million in cash for the six-
month period ended October 31, 1998 compared with $26.4 million
provided by operating activities for the same period last year.
Cash in this year's first six months was generated by earnings
and the non-cash charges for depreciation and amortization, lower
inventory balances, and a tax refund resulting from the sale of
the Company's imaging and inspection systems product class. Cash
generated from operations was somewhat offset by higher accounts
receivable balances caused by the higher volume of business.
The principal non-operating use of cash in the six months ended
October 31, 1998 was for the purchase of Spandex for $187.6
million, which included the repayment of its debt. The financing
for the acquisition was provided primarily by a five-year $235
million revolving multi-currency credit facility the Company
entered into with a group of major U.S., European, and Asian
commercial banks. Other non-operating uses of cash in the six
<PAGE 15>
months ended October 31, 1998 were repayments of long-term debt
of $19.6 million, additions to property, plant, and equipment of
$7.0 million, and payment of dividends of $3.6 million. The
Company anticipates that capital expenditures for the current
fiscal year will be in the range of $20-$22 million and expects
to fund these with cash on hand and cash from operations.
The Company's total debt at October 31, 1998 was $172.8 million,
which was up substantially from the April 30, 1998 balance of
$7.5 million and caused by the acquisition of Spandex. Net debt
(total debt less cash and investments) was $151.1 million at
October 31, 1998 versus a net cash position of $19.5 million at
April 30, 1998. The ratio of net debt to total capital was 38.4
percent at October 31, 1998.
RESULTS OF OPERATIONS
Combined sales and service revenue for the three- and six-month
periods ended October 31, 1998 increased $44.2 million (41.5
percent) and $98.9 million (48.2 percent), respectively, from the
same periods last year. The increase reflected higher product
sales, predominantly from the acquisitions of Spandex (increases
of $39.0 million and $81.8 million in sales for three- and six-
month periods ended October 31, 1998, net of intercompany
eliminations, respectively) and Coburn (increases of $16.4
million and $33.6 million in sales for the three- and six-month
periods ended October 31, 1998, respectively). The sale of the
Company's imaging and inspection system product class in last
year's fourth quarter was an offsetting factor ($13.3 million and
$22.8 million in sales in the three- and six-month periods ended
October 31, 1997). In addition, there was internal sales growth
in the Company's core operations, which came predominantly from
higher sales of the Company's optical lens manufacturing systems.
Service revenue also increased $2.7 million (27.3 percent)and
$4.1 million (20.2 percent) from the prior year's three- and six-
month periods ended October 31, 1997, respectively, after
adjusting for the elimination of the service revenue from the
imaging and inspection systems products. These increases were
caused predominantly by the acquisitions of Spandex and Coburn
and also from growth in the Company's continuing service
operations.
The consolidated gross profit margin in this year's first six
months was 41.1 percent, which was lower than the prior year
margin of 43.9 percent. Gross profit margins on product sales
were lower, while service margins were higher. The decrease in
product gross profit margins was caused predominantly by the
inclusion of Spandex in the Company's financial statements in FY
1999. As a distributor, Spandex has gross profit margins
substantially lower than the Company's. However, Spandex's
historical operating margins are incrementally higher than the
Company's recent operating margins, owing in part to the absence
of R&D spending. Also reducing the product gross profit margin
in this year's second quarter and first six months was the
<PAGE 16>
inclusion of Coburn. A larger percentage of Coburn's product mix
comes from sales of aftermarket products (e.g., consumables),
which have gross profit margins lower than equipment sales.
Service gross profit margins were higher in this year's second
quarter and first six months than in the prior year's comparable
periods. The increases were caused primarily by the elimination
of the low service margins of the Company's imaging and
inspection systems product class, which were included in last
year's results. Also affecting the increases were higher sales of
service contracts for production data management systems and
single-ply cutters, both in the apparel and flexible goods
industries.
Selling, general, and administrative expenses in this year's
second quarter and first six months rose by $7.8 million and
$18.6 million from last year but declined as a percentage of
revenue to 26.3 percent and 26.7 percent this year from 29.9
percent and 30.5 percent last year. The Spandex and Coburn
acquisitions were the principal reasons for the dollar increase,
while the sale of the imaging and inspection system product class
was an offsetting factor. The amortization of Spandex and Coburn
acquisition goodwill ($1.9 million and $3.8 million in this
year's second quarter and first six months, respectively) was
also a factor contributing to the overall dollar increase.
The Company continued to commit significant resources to research
and the development of new products. However, the ratio of R&D
to revenue declined significantly this year. R&D expense of $7.6
million in this year's second quarter and $15.3 million in the
first six months was roughly the same as the prior year, while
the ratio of R&D to revenue declined to 5.1 percent and 5
percent, respectively, in the second quarter and first six months
this year from 7.3 percent and 7.5 percent last year. The lower
current year ratio was caused by the significantly higher revenue
base from the Spandex acquisition without commensurate R&D
expense as Spandex is predominantly a distribution company. In
addition to the incremental R&D expenses of Coburn, R&D dollar
increases for the three- and six-month periods ended October 31,
1998 were also related to the development of new sign making
plotters and output devices ($0.2 million and $0.8 million,
respectively), ophthalmic lens manufacturing systems ($0.7
million and $1.4 million, respectively), and automated cutting
systems ($0.5 million and $0.7 million, respectively). These
increases were offset by the elimination of the Company's imaging
and inspection system product class. Management anticipates that
this lower ratio of R&D expense to revenue will continue for the
balance of the current year.
Compared to the prior year, other income in this year's second
quarter was slightly higher, while lower for the six months ended
October 31, 1998. The year-to-year decrease related predominantly
to a prior year gain of approximately $1.6 million ($.04 per
<PAGE 17>
diluted share) from the final settlement of outstanding patent
litigation.
Interest expense increased $3.3 million and $6.3 million in the
three- and six-month periods ended October 31, 1998 compared with
the prior year periods. These increases were caused by
significantly higher debt balances for cash borrowed to finance
the acquisition of Spandex. The majority of these borrowings
were against a five-year $235 million revolving multi-currency
credit facility. The interest rate on these borrowings is
variable and is based on the London Interbank Offered Rate
(LIBOR) for the relevant currency and term, plus a margin based
on the relationship of the Company's consolidated total debt to
EBITDA (earnings before interest, taxes, depreciation, and
amortization).
The provision rate for income taxes was 37.3 percent for the
second quarter and 37.6 percent for the six months ended October
31, 1998 compared with 32.1 percent and 32.3 percent in the
comparable prior year periods. The higher tax rate this year was
primarily the result of the goodwill amortization related to the
acquisitions of Spandex and Coburn, which is not deductible for
Federal and state income tax purposes. The year-to-year increase
in the provision rate also reflects the higher marginal income
tax rates associated with higher levels of pre-tax earnings in
the current year and the liquidation of the Company's investments
in tax-exempt municipal securities.
As a result of the above, net earnings increased in this year's
second quarter to $7.7 million or $.33 diluted earnings per share
from $5.5 million or $.24 diluted earnings per share in last
year's second quarter. For the first six months, net earnings
this year increased to $14.5 million or $.62 per diluted share
compared with $10.1 million or $.43 per diluted share last year.
Earnings per share in last year's first quarter included $.04 per
diluted share from the patent litigation settlement.
YEAR 2000
The Company recognizes the business risks posed by the Year 2000
computer date issue. The Company continues to make this issue a
top business priority and is actively working to control the
associated risks. Each Gerber Scientific business unit has
project teams to address the impact of the Year 2000 on their
products and facilities, internal systems, and key suppliers and
customers. These project teams are responsible for Year 2000
awareness, assessment, remediation, testing, and contingency
planning. These project teams report to business unit senior
management. In addition, the Company has a Year 2000 Corporate
Oversight Committee that reports to Executive Management and to
the Board of Directors.
The Company has completed its Year 2000 awareness phase and has
substantially completed the assessment phase. The Company is in
<PAGE 18>
the process of carrying out the remediation and testing phases,
which are expected to be substantially completed by May 1, 1999.
Testing of manufactured products, including internally developed
software, has been completed for most of the business units. The
results of this testing are being communicated to customers
through the Company's web sites.
Some of the Company's internal systems are third party packages
that were implemented without modification. In these instances,
only software upgrades were required for Year 2000 remediation,
which are now being tested. Additionally, the Company is
implementing an enterprise resource planning system across each
of its businesses. Although this system implementation is a
direct result of a key management initiative to install improved
business processes, it also enables the remediation of certain
legacy systems that are not Year 2000 compliant in one business
unit.
The Company is also taking steps to understand the Year 2000
risks of its significant suppliers and customers. As part of
that process, the Company is sending questionnaires to those
third parties and analyzing the responses. Further analysis,
including site visits, will be conducted as necessary. The
Company intends to work directly with its key suppliers and
customers to avoid any business interruptions. As issues arise
in this analysis, contingency plans will be developed. Despite
these efforts, the Company can provide no assurance that supplier
and customer Year 2000 plans will be successfully completed in a
timely manner.
Year 2000 expenditures, which are expected to be immaterial, are
planned to be incurred by April 30, 1999 and funded through
operating cash flows. The schedule for completion and the
estimated associated costs are based on management's estimates,
which include assumptions of future events. There can be no
assurance that the Company and its suppliers and customers will
be fully Year 2000 compliant by January 1, 2000. The Company,
therefore, could be adversely impacted by such things as loss of
revenue, production delays, lack of third party readiness, and
other business interruptions. Accordingly, the Company has begun
developing contingency plans to address potential issues, which
include identification of alternate suppliers. The ultimate
effects on the Company or its suppliers or customers of not being
fully Year 2000 compliant is not reasonably estimable. However,
the Company believes its Year 2000 remediation efforts, together
with the diverse nature of its businesses, help reduce the
potential impact of noncompliance to levels that will not have a
material adverse impact on its financial position, results of
operations, or cash flows.
<PAGE 19>
EURO CONVERSION
On January 1, 1999, certain member countries of the European
Union are scheduled to establish fixed conversion rates between
their existing currencies and the European Union's common
currency (Euro). The transition period for the introduction of
the Euro will be between January 1, 1999 and January 2, 2002.
The Company has begun to identify and ensure that all Euro
conversion compliance issues are addressed. At this time, the
Company cannot predict the impact of the Euro conversion because
of numerous associated uncertainties, such as the effect on the
Company of noncompliance by third parties.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements that describe the
Company's business prospects. Readers should keep in mind
factors that could have an adverse impact on those prospects.
These include political, economic, or other conditions, such as
recessionary or expansive trends, inflation rates, currency
exchange rates, taxes, regulations and laws affecting the
business, as well as product competition, pricing, the degree of
acceptance of new products in the marketplace, and the difficulty
of forecasting sales at various times in various markets.
<PAGE 20>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On September 25, 1998, the Company held its annual meeting of
shareholders. The holders of 87 percent of the shares of common
stock entitled to vote at this meeting were present either in
person or by proxy. The following were the voting results for
the meeting:
- the shareholders approved the Annual Incentive Bonus Plan
for Fiscal Years 1999 through 2001 with 18,692,723 votes in
favor, 998,833 votes against, and 72,539 abstentions. Votes not
cast totaled 203.
- the shareholders approved the Amended/Restated 1992 Employee
Stock Plan with 13,494,665 votes in favor, 4,387,540 votes
against, and 81,068 abstentions. Votes not cast totaled
1,801,025.
- the shareholders approved the Amended/Restated 1992 Non-
Employee Director Stock Option Plan with 16,434,228 votes in
favor, 3,237,885 votes against, and 92,184 abstentions. One vote
was not cast.
- the shareholders elected Directors to hold office until the
annual meeting to be held in the year 2001 with the following
votes:
For Withheld
Donald P. Aiken 18,371,548 1,392,750
George M. Gentile 18,210,348 1,553,950
David J. Gerber 18,210,448 1,553,850
The terms of office of the other Directors, Michael J.
Cheshire, Edward E. Hood, David J. Logan, Carole F.
St. Mark, A. Robert Towbin, and W. Jerome Vereen,
continued after the meeting.
Item 5. Other Information
On June 1, 1998, the Company issued a press release reporting the
retirement of George M. Gentile, Chairman and Chief Executive
Officer of Gerber Scientific, Inc. Effective June 1, 1998, Mr.
Gentile stepped down from his position as Chief Executive
Officer. The Company's Board of Directors appointed Michael J.
Cheshire, who was President and Chief Operating Officer of the
Company, as President and Chief Executive Officer. At the
Company's Annual Meeting of Shareholders on September 25, 1998,
Mr. Gentile retired as Chairman of the Board of Directors. Mr.
Cheshire also succeeded Mr. Gentile as Chairman on September 25,
1998.
<PAGE 21>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(15) Letter regarding unaudited interim financial
information.
(27) Financial data schedule.
(b) Reports on Form 8-K
No Form 8-K was filed during the quarter for which this
report is filed.
<PAGE 22>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GERBER SCIENTIFIC, INC.
------------------------
(Registrant)
Date: December 14, 1998 By: / s / Gary K. Bennett
------------------ --------------------------------
Gary K. Bennett
Senior Vice President, Finance
and Principal Financial Officer
<PAGE 23>
EXHIBIT INDEX
Exhibit Index
Number Exhibit Page
- ------------- ------- ----
15 Letter Regarding Unaudited Interim
Financial Information.*
27 Financial Data Schedule.*
*Filed herewith.
EXHIBIT NO. 15
To the Board of Directors and Shareholders of
Gerber Scientific, Inc.
Re: Registration Statements on Form S-8,
File No. 2-93695, No. 33-58668,
No. 333-261777, and No. 333-42879
Registration Statement on Form S-3,
File No. 33-58670
With respect to the subject Registration Statements, we
acknowledge our awareness of the use therein of our report dated
November 18, 1998 related to our review of interim financial
information.
Pursuant to Rule 436(c) under the Securities Act, such reports
are not considered a part of a Registration Statement prepared or
certified by an accountant or a report prepared or certified by
an accountant within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Hartford, Connecticut
November 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of earnings of Gerber Scientific,
Inc. as of and for the six-month periods ended October 31, 1998 and 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> APR-30-1999 APR-30-1998
<PERIOD-END> OCT-31-1998 OCT-31-1997
<CASH> 21,780 15,319
<SECURITIES> 0 0
<RECEIVABLES> 116,170 94,562
<ALLOWANCES> 0 0
<INVENTORY> 80,073 68,097
<CURRENT-ASSETS> 227,427 190,387
<PP&E> 144,204 126,497
<DEPRECIATION> 60,603 59,842
<TOTAL-ASSETS> 539,589 331,001
<CURRENT-LIABILITIES> 114,877 75,156
<BONDS> 172,653 7,050
0 0
0 0
<COMMON> 23,639 23,364
<OTHER-SE> 218,212 214,168
<TOTAL-LIABILITY-AND-EQUITY> 539,589 331,001
<SALES> 304,249 205,353
<TOTAL-REVENUES> 304,249 205,353
<CGS> 179,157 115,260
<TOTAL-COSTS> 275,779 193,320
<OTHER-EXPENSES> (1,197) (3,010)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,510 176
<INCOME-PRETAX> 23,157 14,867
<INCOME-TAX> 8,700 4,800
<INCOME-CONTINUING> 14,457 10,067
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 14,457 10,067
<EPS-PRIMARY> .64 .44<F1>
<EPS-DILUTED> .62 .43
<FN>
<F1>RESTATED TO COMPLY WITH SFAS 128.
</FN>
</TABLE>
