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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q/A
AMENDMENT NO. 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 1, 2005
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)
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 whether the registrant is an accelerated filer: Yes
[ ] No [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act. [ ] Yes [X] No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. Common stock, par
value $0.01 per share, 826,948 shares outstanding as of August 15, 2005.
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1
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 5
Statements of Operations 6
Statements of Cash Flows 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 3. Quantitative and Qualitative Disclosure About Market Risk 27
Item 4. Controls and Procedures 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits 29
* No response to this item is included herein for the reason that it is
inapplicable.
2
EXPLANATORY NOTE
This Amendment No. 1 to The GSI Group Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended July 1, 2005 is to correct formatting errors
which occurred in the original filing.
3
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by the use of terms such as "believes," "anticipates," "intends," or
"expects." Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from future
results expressed or implied by such statements, and such statements should not
be regarded as a representation that the stated objectives will be achieved.
4
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SUCCESSOR PREDECESSOR
--------- -----------
(UNAUDITED) RESTATED
JULY 1, DECEMBER 31,
ASSETS 2005 2004
--------------------------------------------------------------------------------------- ---------- --------------
Current Assets:
Cash and cash equivalents $3,107 $2,304
Accounts receivable (net of reserve for bad debts of $3,103 in 2005
And $3,402 in 2004) 39,309 24,656
Inventories(net of reserve for obsolescence of $2,820 in 2005 and $2,333 in 2004) 53,219 48,653
Prepaid expenses 1,499 3,489
Deferred tax current asset 8,197 --
Other 312 3,416
---------- --------------
Total current assets 105,643 82,518
---------- --------------
Property, Plant and Equipment (net of accumulated depreciation of $755
In 2005 and $53,258 in 2004) 33,557 32,548
---------- --------------
Other Assets:
Goodwill 40,067 10,264
Other intangible assets(net of amortization of $963 in 2005 and $7,114 in 2004) 56,817 1,494
Deferred tax asset -- 1,309
Deferred financing costs 5,284 2,449
Other 140 95
---------- --------------
Total other assets 102,308 15,611
---------- --------------
Total assets $241,508 $130,677
========== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
---------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,229 $ 16,629
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,777 1,708
Payroll and payroll related expenses. . . . . . . . . . . . . . . . . . . . . . . . . 8,380 4,652
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551 --
Accrued warranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,209 2,764
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,707 4,173
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,831 7,090
Current maturities of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . 157 5,167
---------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,841 42,183
Long-Term Debt, less current maturities . . . . . . . . . . . . . . . . . . . . . . . . 134,789 133,963
Deferred Tax Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,401 -
Minority Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,305 1,366
Stockholders' Equity (Deficit):
Common stock, $.01 par value (authorized 6,900,000 shares; issued
6,633,652 shares; outstanding 626,948 shares) . . . . . . . . . . . . . . . . . . . 16 16
Common stock, $.01 par value, nonvoting (authorized 1,100,000 shares;
issued 1,059,316 shares; outstanding 200,000 shares). . . . . . . . . . . . . . . . 2 2
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,881 5,821
Accumulated other comprehensive loss (cumulative currency translation adjustment) 584 (10,124)
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,248 (991)
Treasury stock, at cost, voting (6,006,704 shares). . . . . . . . . . . . . . . . . . (41,550) (41,550)
Treasury stock, at cost, nonvoting (859,316 shares) . . . . . . . . . . . . . . . . . (9) (9)
---------- --------------
Total stockholders' equity (deficit). . . . . . . . . . . . . . . . . . . . . . . 60,172 (46,835)
---------- --------------
Total liabilities and stockholders' equity (deficit). . . . . . . . . . . . . . . $ 241,508 $ 130,677
========== ==============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
SUCCESSOR PREDECESSOR
--------- ----------------------------------------------
MAY 17, APRIL 2, RESTATED JANUARY 1, RESTATED
2005 2005 THREE 2005 SIX FISCAL
THROUGH THROUGH FISCAL THROUGH MONTHS
JULY 1, MAY 16, MONTHS MAY 16, ENDED
2005 2005 ENDED 2005 JULY 2,
JULY 2, 2004
2004
Sales $ 48,178 $ 41,961 $ 79,623 $114,635 $ 138,067
Cost of sales 40,282 28,389 63,808 83,733 108,578
--------- --------- ----------- --------- -----------
Gross profit. . . . . . . . . . . . . . . . . 7,896 13,572 15,815 30,902 29,489
Selling, general and administrative expenses. . . 6,885 15,575 11,048 25,049 21,126
Amortization expense. . . . . . . . . . . . . . . 962 4 162 166 324
--------- --------- ----------- --------- -----------
Total operating expenses. . . . . . . . . . . . 7,847 15,579 11,210 25,215 21,450
--------- --------- ----------- --------- -----------
Operating income (loss) . . . . . . . . . . . . . 49 (2,007) 4,605 5,687 8,039
Other income (expense):
Interest expense. . . . . . . . . . . . . . . . (1,975) (1,657) (3,438) (5,238) (6,513)
Other, net. . . . . . . . . . . . . . . . . . . 87 178 (317) 707 (578)
--------- --------- ----------- --------- -----------
Income (loss) from continuing operations before
income tax expense and minority interest. . . . . (1,839) (3,486) 850 1,156 948
Minority interest in net income of subsidiary . . (55) (50) (23) (105) (46)
Income tax expense (benefit). . . . . . . . . . . (5,142) 501 221 1,115 320
--------- --------- ----------- --------- -----------
Income (loss) from continuing operations. . . . . 3,248 (4,037) 606 (64) 582
Gain from discontinued operations, net of income
tax expense taxes. . . . . . . . . . . . . . . . -- -- 26 -- 155
--------- --------- ----------- --------- -----------
Net income (loss) . . . . . . . . . . . . . . . . $ 3,248 $ (4,037) $ 632 $ (64) $ 737
========= ========= =========== ========= ===========
Basic and diluted earnings (loss) per share . . . $ 3.93 $ (4.88) $ 0.36 $ (0.08) $ 0.42
--------- --------- ----------- --------- -----------
Weighted average common shares outstanding. . . . 826,948 826,948 1,775,000 826,948 1,775,000
========= ========= =========== ========= ===========
COMPREHENSIVE INCOME
Net income (loss) . . . . . . . . . . . . . . . $ 3,248 $ (4,037) $ 632 $ (64) $ 737
Cumulative currency translation adjustment. . . 584 1,086 (1,244) 536 (1,642)
--------- --------- ----------- --------- -----------
Comprehensive income (loss) . . . . . . . . . . $ 3,832 $ (2,951) $ (612) $ 472 $ (905)
========= ========= =========== ========= ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SUCCESSOR PREDECESSOR
----------- --------------------------
MAY17, JANUARY 1, RESTATED
2005 2005 SIX MONTHS
THROUGH THROUGH ENDED
JULY 1, MAY 16, JULY 2,
2005 2005 2004
----------- ------------- ------------
Cash Flows From Operating Activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ 3,248 $ (64) $ 737
Adjustments to reconcile net income (loss) to cash provided
By operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 1,616 2,070 2,645
Amortization of deferred financing costs and debt discount . . 94 572 481
(Gain)loss on sale of property and equipment . . . . . . . . . (23) (84) 331
Non-cash charges related to inventory fair value adjustment. . 2,644 -- --
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . (5,642) (69) (257)
Minority interest in net income of subsidiaries. . . . . . . . 55 105 46
Minority interest compensation expense . . . . . . . . . . . . -- 779 312
Stock-based compensation . . . . . . . . . . . . . . . . . . . -- 2,842 1,120
Changes in:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . (3,265) (11,388) (8,437)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 5,047 (6,968) (3,637)
Other current assets . . . . . . . . . . . . . . . . . . . . 669 5,159 2,126
Accounts payable . . . . . . . . . . . . . . . . . . . . . . (1,788) 5,388 7,916
Accrued expenses and payroll and payroll related expenses. . 4,100 3,130 2,206
Customer deposits. . . . . . . . . . . . . . . . . . . . . . (810) (1,449) (2,335)
----------- ------------- ------------
Net cash flows provided by operating activities. . . . . . 5,945 23 3,254
----------- ------------- ------------
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (647) (2,046) (1,682)
Proceeds from sale of property and equipment . . . . . . . . . . . 47 268 434
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (48) (46)
----------- ------------- ------------
Net cash flows used in investing activities. . . . . . . . (592) (1,826) (1,294)
----------- ------------- ------------
Cash Flows From Financing Activities:
Proceeds from stockholder loan . . . . . . . . . . . . . . . . . . -- 12 1,645
Payments on stockholder loan . . . . . . . . . . . . . . . . . . . (5,012) -- (963)
Proceeds from issuance of long-term debt . . . . . . . . . . . . . 110,000 -- 1,850
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . (100,000) (90) --
Proceeds under line of credit agreement. . . . . . . . . . . . . . 29,530 10,369 (3,081)
Payments under line of credit agreement. . . . . . . . . . . . . . (49,786) -- --
Net proceeds of equity contributed . . . . . . . . . . . . . . . . 15,326 -- --
Payment of deferred financing costs. . . . . . . . . . . . . . . . (5,378) (485) (201)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . -- (7,913) (463)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 670 50 (1,215)
----------- ------------- ------------
Net cash flows provided by (used in) financing activities. (4,650) 1,943 (2,428)
----------- ------------- ------------
Effect of Exchange Rate Changes on Cash. . . . . . . . . . . . . . . (33) (7) (59)
Increase (decrease) In Cash and Cash Equivalents . . . . . . . . . . $ 670 $ 133 $ (527)
Cash and Cash Equivalents, beginning of period . . . . . . . . . . . 2,437 2,304 3,439
----------- ------------- ------------
Cash and Cash Equivalents, end of period . . . . . . . . . . . . . . $ 3,107 $ 2,437 $ 2,912
=========== ============= ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
7
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared by The GSI Group, Inc.
(the "Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
not misleading. The condensed and restated consolidated balance sheet of the
Company as of December 31, 2004 has been derived from the audited restated
consolidated balance sheet of the Company as of that date. Certain information
and note disclosures normally included in the Company's annual financial
statements in accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements should be read in conjunction
with the financial statements and related notes contained in the Company's
December 31, 2004 Form 10-K/A as filed with the Securities and Exchange
Commission. Other than as indicated herein, there have been no significant
changes from the data presented in the Company's 2004 Form 10-K/A.
In the opinion of management, the financial statements contain all
adjustments necessary to present fairly the financial position of the Company as
of July 1, 2005 and the results of operations and cash flows for the successor
period of May 17 through July 1, 2005 and the predecessor periods of April 2
through May 16, 2005, three months ended July 2, 2004, January 1 through May 16,
2005 and six months ended July 2, 2004. Those adjustments consist only of
normal recurring adjustments.
The results of operations for the successor period of May 17 through July
1, 2005 and the predecessor periods of April 2 through May 16, 2005, three
months ended July 2, 2004, January 1 through May 16, 2005 and six months ended
July 2, 2004 are not necessarily indicative of the operating results for the
full year.
The accompanying combined financial statements are presented under two
different ("Predecessor" and "Successor") bases of accounting. The predecessor
and successor financial statements are consolidated and include all of the
accounts of GSI Group, Inc. and its subsidiaries. All intercompany transactions
and balances have been eliminated.
2. ACQUISITION AND FINANCING TRANSACTIONS (THE TRANSACTION)
The Acquisition
On April 6, 2005, all of the Company's stockholders entered into a stock
purchase agreement with GSI Holdings, Inc. ("GSI Holdings"), a newly formed
holding company owned primarily by entities affiliated with Charlesbank Equity
Fund V, Limited Partnership, pursuant to which GSI Holdings purchased for cash
all of the issued and outstanding shares of the Company's common stock. On May
16, 2005, under the "successor" basis of accounting, the closing of that stock
purchase ("the Acquisition") occurred. Upon the closing of that stock purchase,
the Company became a direct, wholly owned subsidiary of GSI Holdings. The cash
costs of the Acquisition together with the fees and expenses necessary to
consummate the transaction were financed by equity contributions of $56,340,000,
issuance of $110,000,000 million of senior subordinated notes (the "Notes") due
May 15, 2013, and a five year $60,000,000 revolving credit facility.
Immediately following the closing, the Company converted from a subchapter
"S" corporation to a subchapter "C" corporation, which means that it became a
taxable entity for federal and state income tax purposes. For the portion of the
2005 fiscal year preceding the closing date, the Company made tax distributions
to its selling stockholders at the closing in an amount sufficient to allow them
to pay income taxes relating to such period.
The Acquisition of the Company has been accounted for in accordance with
SFAS No. 141 "Business Combinations" and reflects the "push down" of GSI
Holdings' basis into our financial statements. The purchase price is being
allocated to the assets acquired and the liabilities assumed based on the
estimates of respective fair values at the date of acquisition. The fair values
are being determined by management estimates and by independent third party
valuations.
8
The following table summarizes the estimated fair value of the assets
acquired and of the liabilities assumed at the date of the Acquisition. The
Company is in the process of finalizing the third party valuations of the assets
acquired and liabilities assumed; accordingly the preliminary allocation of the
purchase price is likely to change.
Cash. . . . . . . . . . . . . . . . . $ 2.4
Accounts receivable, net. . . . . . . 36.0
Inventories, net. . . . . . . . . . . 60.9
Property, plant and equipment . . . . 33.4
Other intangible assets . . . . . . . 57.8
Goodwill. . . . . . . . . . . . . . . 40.0
Other assets. . . . . . . . . . . . . 2.8
------
Total assets acquired . . . . . . . . 233.3
Accounts payable and accrued expenses 38.0
Customer deposits . . . . . . . . . . 5.6
Long-term debt. . . . . . . . . . . . 150.0
Minority interest . . . . . . . . . . 2.2
Deferred income taxes . . . . . . . . 0.2
------
Total liabilities assumed . . . . . . 196.0
------
Purchase price. . . . . . . . . . . . $ 37.3
======
ACQUISITION AND FINANCING MAY 17, 2005
-----------------------------------------------------
Cash paid upon acquisition. . . . . . . . . . . . . . $ 34,934
Repay old indebtedness. . . . . . . . . . . . . . . . 149,864
Bond repayment penalty. . . . . . . . . . . . . . . . 1,729
Repayment of interest . . . . . . . . . . . . . . . . 1,252
Estimate of acquisition expenses. . . . . . . . . . . 2,371
----------------
Acquisition Consideration . . . . . . . . . . . . . . $ 190,150
Historical net book value of tangible assets acquired 86,678
----------------
Excess purchase price to be allocated . . . . . . . . 103,472
Inventory step-up . . . . . . . . . . . . . . . . . . (5,288)
Property, plant and equipment step-up . . . . . . . . (561)
Other intangibles . . . . . . . . . . . . . . . . . . (57,780)
Deferred tax liability. . . . . . . . . . . . . . . . 224
Goodwill. . . . . . . . . . . . . . . . . . . . . . . (40,067)
----------------
$ 0
================
The aggregate amortization expense for the period May 17, 2005 through July
1, 2005 for the identified intangible assets was $1.0 million. The identified
intangible assets are being amortized on a straight-line basis over their
individual estimated useful lives.
9
The carrying value of inventory was increased by approximately $5.3 million
to reflect the inventory fair value at May 16, 2005. The effect of the fair
value adjustment is to increase the cost of goods sold and thereby reduce gross
profit in future periods when this inventory is sold. The Company expects to
sell most of that inventory by the end of September and sell all of that
inventory by the end of the year. During the period May 17, 2005 through July 1,
2005, cost of goods sold included $2.6 million of this fair value adjustment.
The carrying value of property, plant and equipment was increased by
approximately $0.6 million to reflect the fair value at May 16, 2005. The effect
of the fair value adjustment is to increase costs and expenses for additional
depreciation in future periods over the useful lives of the assets.
The following schedule explains the changes in Stockholder's Equity as a
result of the purchase:
Common Common Paid-in Other Retained Treasury Treasury
Voting Non- Capital Compre Earnings Voting Non- Total
Voting hensive Voting
Predecessor as of
December 31,
2004 as restated. . $ 16 $ 2 $ 5,821 $(10,124) $ (991) $ (41,550) $ (9) $(46,835)
Predecessor
Income (loss)
Jan 1-May 16,
2005 536 (64) 472
Change in Equity
due to Acquisition
On May 16, 2005 . . 92,060 9,588 1,055 102,703
Successor Income. . 584 3,248 3,832
------- -------- --------- --------- --------- --------- --------- ---------
Successor Equity
at July 1, 2005 . . $ 16 $ 2 $ 97,881 $ 584 $ 3,248 $ (41,550) $ (9) $ 60,172
======= ======== ========= ========= ========== ========== ========== =========
The Financing Transactions
In connection with the closing of the Acquisition on May 16, 2005, the
Company entered into the following financing transactions, each of which
occurred prior to or concurrently with the closing of the Acquisition:
- the closing of the issuance of the Notes;
- the closing of our refinanced senior secured credit facility, consisting
of a $60.0 million revolving credit facility. Approximately $29.5 million was
drawn on the revolving credit facility on the closing date, with additional
availability of approximately $22.5 million under the revolving credit facility
on the closing date;
- the call for redemption of all of our existing 10 1/4% senior subordinated
notes due 2007, the deposit of all amounts necessary to redeem those notes with
the trustee, and the subsequent retirement of all of those notes upon completion
of the redemption;
- the repayment in full of all amounts outstanding under our existing credit
facility;
- the repayment in full of all amounts outstanding under loans made to us by
our founder and selling majority stockholder; and
- the cash equity contribution to GSI Holdings by our equity sponsor,
Charlesbank Equity Fund V, Limited Partnership (a small amount of which was made
by nonaffiliated funds) of $56.3 million, of which approximately $43.8 million
(less certain expenses and other amounts) was paid to our selling stockholders,
and approximately $12.5 million was contributed to our common equity.
10
Pro Forma Information
The unaudited, supplemental pro forma information reflects the Transaction
as if it had occurred on January 1, 2004. Included in these pro forma
adjustments are the consideration of the fair value of the property, plant and
equipment; intangibles; fair value assigned to inventory; amortization of the
deferred financing fees and the interest expense related to the new debt.
Three months Three months Six months Six months
Ended July 1, Ended July 2, Ended July 1, Ended July 2,
2005 2004 2005 2004
Pro Forma Net Sales . . . . $ 90,139 $ 79,623 $ 162,813 $ 138,067
Pro Forma Net Income (Loss) $ 832 $ (368) $ (1,625) $ (1,158)
Earnings (loss) per share . $ 1.01 $ (0.21) $ (1.97) $ (0.65)
3. RESTATEMENTS
First Restatement
During the Company's 2004 year-end closing process, the Company discovered
unintentional accounting errors in prior years' financial statements. The
errors were corrected in the 2004 financial statements. A description of the
errors and related impact of each on the financial statements follows. Amounts
are stated in whole dollars.
At the end of 2001, the Company began the process of shutting down its
Mason City, Iowa plant, which served as the headquarters for its DMC subsidiary.
As the Company began the revenue cycle process at its corporate headquarters,
cost of sales estimates were understated during 2002, while cost accounting
records were being developed for the products previously handled by the Mason
City employees, which caused the remaining inherited inventory costs to be
overstated by approximately $6,470,000. The Company became aware of the
overstatement in early 2003, but erroneously assigned the overstated value to
inventory that would flow through the cost of sales over the next few years.
This erroneous correction reduced the stated value of the inventory by
approximately $2,206,000 in 2003 and $4,264,000 in 2004. During the 2004
year-end closing process, this issue was re-examined, and the Company determined
that it would be appropriate to restate the 2002 cost of sales and year-end
inventory, the period when the overstatement occurred. This adjustment
increased the previously reported net income by $534,000 in the second quarter
of 2004 and $894,000 for the first six months of 2004.
In 1997, the Company's majority stockholder began selling non-voting shares
to certain employees. The Company's majority stockholder helped finance each
employee's purchase with a loan to each employee with the shares as the only
collateral for the notes. APB Opinion 25 and its interpretations require that
these transactions be imputed to the Company's financial statements and be
accounted for as variable stock awards, which practice the Company had not
previously followed. Treatment of the transaction as a variable stock award
requires the Company to recognize as compensation expense the extent to which
the fair market value of the underlying shares exceeds the original purchase
price for such shares. The fair value of the underlying shares first exceeded
the price paid for the shares in 2002. The effect of recording the resulting
compensation expense reduced previously reported net income by $709,000 in the
second quarter of 2004 and $1,157,000 for the first six months of 2004.
In 2002, the Company entered into an agreement with the manager of its
Brazilian subsidiary whereby the Company agreed to issue him shares of the
Brazilian subsidiary's stock primarily based on the financial performance of the
Brazilian subsidiary. This agreement constitutes a stock compensation
arrangement for which the Company did not previously recognize compensation
expense. The effect of recording compensation expense related to this
arrangement reduced previously reported net income by $187,000 in the second
quarter of 2004 and $312,000 for the first six months of 2004.
11
Prior to the 2004 closing process, the Company had been using Mexican Pesos
as the functional currency of its Mexican subsidiary. During the 2004 closing
process, the Company determined that the correct functional currency of its
Mexican subsidiary should be U.S. Dollars rather than Mexican Pesos. The effect
of this change reduced previously reported net income by $10,000 in the second
quarter of 2004 and $16,000 for the first six months of 2004.
The Company changed from a stop-loss workers' compensation insurance policy
to a high-deductible self-insured policy in 2000 and did not subsequently accrue
a liability for claims incurred but not reported. The effect of accruing for
such claims in 2004 reduced previously reported net income by $82,000 in the
second quarter of 2004 and $137,000 for the first six months of 2004.
The Company also made adjustments in 2004 to correct previous reporting of
overhead adjustments in overseas inventories and gain on inter-company sales.
Second Restatement
Subsequent to the sale of all of the stock of the Company on May 16, 2005,
the new management appointed by the new owner of the Company discovered
additional accounting errors in prior years' financial statements. The errors
have been corrected in the accompanying 2005 and 2004 financial statements. A
description of the errors and related impact on each of the financial statements
follows. Amounts are stated in whole dollars.
The Company made adjustments in the first fiscal quarter of 2005 and the first
and second fiscal quarters of 2004 to correct its allowance for obsolete
inventory to conform to the Company's historical policy. The effect of these
changes reduced net income by $243,000 in the first six months of 2005 and
$140,000 and $280,000 in the second fiscal quarter and first six months of 2004,
respectively.
The Company made adjustments in 2004 to expense warranty and research and
development costs, which were erroneously included in inventory. The effect of
these changes increased quarterly net income by $164,000 in the second fiscal
quarter of 2004 and $327,000 in the first six months of 2004. The Company
reclassified warranty and research and development costs out of cost of sales
and into operating expenses for 2005 and 2004, which had no effect on net
income.
The Company made adjustments in 2005 and 2004 to correct the amount of
overhead that was included in inventory. The previous inventory included an
excessive amount of overhead. The effect of these changes reduced net income by
$998,000 in the first six months of 2005 and increased net income by $547,000
and $1,094,000 in the second fiscal quarter and first six months of 2004,
respectively.
The combined effect of these changes reduced net income by $1,241,000 in
the first six months of 2005 and increased net income by $570,000 and $1,140,000
in the second fiscal quarter and first six months of 2004, respectively.
The impact of the above noted adjustments on the Company's financial
statements for the first six months of 2005 and 2004 and for the second fiscal
quarter of 2004 are summarized in the table below. Amounts are stated in
thousands of dollars except for per share line items.
AS
PREVIOUSLY FIRST AS SECOND AS
REPORTED RESTATEMENT RESTATED RESTATEMENT RESTATED
FIRST SIX MONTHS OF 2005
Consolidated Balance Sheet:
Inventory . . . . . . . . . . . $ 58,608 $ 58,608 $ (5,389) $ 53,219
Retained earnings . . . . . . . 8,637 8,637 (5,389) 3,248
Consolidated Statement of Income:
Cost of sales . . . . . . . . . 124,283 124,283 (268) 124,015
Warranty and R&D expenses . . . -- -- 1,508 1,508
Operating income. . . . . . . . 6,976 6,976 (1,240) 5,736
Net income (loss) . . . . . . . 451 451 (1,240) (789)
Basic and diluted income (loss)
per share . . . . . . . . . . . $ 0.55 $ 0.55 $ (1.50) $ (0.95)
12
AS
PREVIOUSLY FIRST AS SECOND AS
REPORTED RESTATEMENT RESTATED RESTATEMENT RESTATED
FIRST SIX MONTHS OF 2004
Consolidated Balance Sheet:
Inventory . . . . . . . . . . . . $ 55,986 $ 55,986 $ (2,466) $ 53,520
Retained earnings . . . . . . . . 12,437 12,437 (2,466) 9,971
Consolidated Statement of Income:
Cost of sales . . . . . . . . . . 113,339 (884) 112,455 (3,877) 108,578
Selling, general and
administrative expenses . . . . . 17,053 1,336 18,389 -- 18,389
Warranty and R&D expenses . . . . -- -- -- 2,737 2,737
Operating income. . . . . . . . . 7,773 (874) 6,899 1,140 8,039
Other, net. . . . . . . . . . . . (509) (189) (698)
Net income (loss) . . . . . . . . 406 (809) (403) 1,140 737
Basic and diluted loss per share. $ 0.23 $ (0.46) $ (0.23) $ 0.65 $ 0.42
AS
PREVIOUSLY FIRST AS SECOND AS
REPORTED RESTATEMENT RESTATED RESTATEMENT RESTATED
SECOND FISCAL QUARTER OF 2004
Consolidated Balance Sheet:
Inventory . . . . . . . . . . . . $ 55,986 $ 55,986 $ (2,466) $ 53,520
Retained earnings . . . . . . . . 12,437 12,437 (2,466) 9,971
Consolidated Statement of Income:
Cost of sales . . . . . . . . . . 66,235 (493) 65,742 (1,934) 63,808
Selling, general and
administrative expenses . . . . . 8,892 792 9,684
Warranty and R&D expenses . . . . -- -- -- 1,364 1,364
Operating income. . . . . . . . . 4,566 (531) 4,035 570 4,605
Other, net. . . . . . . . . . . . (330) (279) (609)
Net income (loss) . . . . . . . . 565 (503) 62 570 632
Basic and diluted loss per share. $ 0.32 $ (0.29) $ 0.03 $ 0.33 $ 0.36
4. DETAIL OF CERTAIN ASSETS
SUCCESSOR PREDECESSOR
(UNAUDITED) (RESTATED)
JULY 1, DEC. 31,
2005 2004
------------ -------------
(IN THOUSANDS)
Inventories
Raw materials. . $ 19,563 $ 21,396
Work-in-process. 9,517 8,049
Finished goods . 24,139 19,208
------------ -------------
Total . . . $ 53,219 $ 48,653
============ =============
Inventory at July 1, 2005 contains $2,645 of the fair value step-up
recorded at the date the Company was purchased by GSI Holdings.
13
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $0.2 million, , $6.0 million and $6.1
million in interest during the successor period of May 17 through July 1, 2005
and the predecessor periods of January 1 through May 16, 2005 and six months
ended July 2, 2004, respectively. The Company paid $0.0 million, $0.2 million
and $0.0 million in income taxes during the successor period of May 17 through
July 1, 2005 and the predecessor periods of January 1 through May 16, 2005 and
six months ended July 2, 2004, respectively.
6. DEBT
REVOLVING CREDIT FACILITY
On May 16, 2005, concurrently with the issuance of $110,000,000 of 12%
Senior Notes due 2013 and the closing of the acquisition of The GSI Group, Inc.
(the "Company") by GSI Holdings Corp. ("GSI Holdings"), an affiliate of
Charlesbank Equity Fund V, Limited Partnership, the Company refinanced its
existing credit facility with a five-year asset-backed revolving credit facility
provided by lenders led by Wachovia Capital Finance Corporation (Central)
("Wachovia"), as the agent. The maximum amount of revolving credit available
under the Company's refinanced credit facility (the "Credit Facility") is $60.0
million and the Company has the option to increase the facility in increments of
$5.0 million up to a maximum of $75.0 million (subject to compliance with the
covenants in the indenture). Up to $15 million of the facility is available for
issuances of letters of credit.
The Credit Facility provides floating rate revolving loans bearing interest
at a rate equal to 0.0% to 0.5% over Wachovia's prime rate or 1.50% to 2.00%
over LIBOR, in each case based on the excess availability under the borrowing
base from time to time.
The Company's obligations under its Credit Facility are secured by a first
priority lien on, and pledge of, substantially all of its and any subsidiary
guarantors' current and future assets. In addition, GSI Holdings pledged all of
its shares of the Company's common stock, as well as any rights that it may have
under the stock purchase agreement with the Company's selling stockholders, as
additional collateral security.
The Credit Facility contains certain covenants that are substantially
similar to, but generally no more restrictive than, the covenants under the
Company's existing credit facility. The Company's ability to make borrowings
under the Credit Facility is subject to customary representations, warranties
and covenants. The Credit Facility also contains various customary events of
default.
SENIOR NOTES DUE 2013
On May 16, 2005, concurrently with the refinancing of its existing
revolving credit facility with Wachovia Capital Finance Corporation and the
closing of the acquisition of The GSI Group, Inc. (the "Company") by GSI
Holdings Corp. ("GSI Holdings"), an affiliate of Charlesbank Equity Fund V,
Limited Partnership, the Company issued and sold $110,000,000 aggregate
principal amount of Senior Notes due 2013 (the "Notes"). Payment on the Notes is
guaranteed on an unsecured basis by GSI Holdings and by all of the Company's
domestic material subsidiaries. None of the Company's domestic subsidiaries are
currently material subsidiaries. The Notes were issued under an Indenture among
the Company, the Guarantors and U.S. Bank National Association, as trustee (the
"Indenture").
The Notes have a fixed annual interest rate of 12%, which will be paid
semiannually in arrears on May 15 and November 15, commencing on November 15,
2005.
Prior to May 15, 2008, the Company may redeem up to 35% of the Notes at a
redemption price of 112.000% of the principal amount, plus accrued and unpaid
interest from the proceeds of certain equity offerings; provided that: (i) at
least 65% of the aggregate principal amount of Notes originally issued under the
Indenture (excluding Notes held by the Company and its subsidiaries) remains
outstanding immediately after the occurrence of such redemption and (ii) the
redemption occurs within 90 days of the date of the closing of such equity
offering. Except pursuant to the preceding sentence, the Notes will not be
redeemable at the Company's option prior to May 15, 2009.
14
On or after May 15, 2009, the Company may redeem all or a part of the Notes
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) listed below plus accrued and
unpaid interest and liquidated damages, if any, on the Notes redeemed, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on May 15 of the years indicated below, subject to the rights of holders of
Notes on the relevant record date to receive interest on the relevant interest
payment date: 2009 at a redemption price of 106.000%; 2010 at a redemption price
of 103.000%; and 2011 and thereafter at a redemption price of 100.000%.
Upon a change of control, as defined in the Indenture, the Company is
required to offer to purchase all of the Notes then outstanding for cash at 101%
of the aggregate principal amount thereof plus accrued and unpaid interest and
liquidated damages, if any, on the Notes repurchased to the date of purchase,
subject to the rights of holders of Notes on the relevant record date to receive
interest due on the relevant interest payment date.
Also on May 16, 2005, the Company issued a call for redemption for all $100
million principal amount of its existing 10-1/4% senior subordinated notes due
2007 at a price of 101.729% plus accrued interest from May 1, 2005 to the date
of redemption. These notes were redeemed on June 15, 2005.
7. INCOME TAXES
Upon conversion from a subchapter "S" corporation to a subchapter "C"
corporation, the Company recorded a net deferred tax asset of $4,560 on May 17,
2005. The following table represents the successor and predecessor income taxes
for the first six months of 2005 and the first six months of 2004.
SUCCESSOR PREDECESSOR
May 17,2005 - July 1,2005 Jan 1,2005 - May16,2005 Six months as of July 2,2004
--------------------------- ------------------------- ------------------------------
Income/(Loss) Income Tax Income/(Loss) Income Tax Income/(Loss) Income Tax
Before Expense/ Before Expense/ Before Expense/
Income Taxes (Benefit) Income Taxes (Benefit) Income Taxes (Benefit)
U.S. . . . . . . . . . . . . $ (2,811) $ (689) $ (564) $ 495 $ (1,531) $ (175)
Brazil . . . . . . . . . . . 493 143 1,051 336 1,617 423
Malaysia . . . . . . . . . . 132 1 (317) (10) 606 57
Mexico . . . . . . . . . . . 218 -- 432 256 171 15
China. . . . . . . . . . . . 19 -- 242 -- (42) --
Poland . . . . . . . . . . . (12) -- (2) -- (429) --
South Africa . . . . . . . . 67 (37) 209 38 510 --
---------- ------------- --------- ------------ ------------ ------------
Total. . . . . . . . . . . . $ (1,894) $ (582) $ 1,051 $ 1,115 $ 902 $ 320
========== ============== ======== ============ ============ ============
Current income taxes . . . . $ 500 $ 1,184 $ 577
Deferred income taxes. . . . (5,642) (69) (257)
--------------------------- ------------------------- ------------------------------
Total. . . . . . . . . . . . $ (5,142) $ 1,115 $ 320
=========================== ========================= ==============================
Successor Predecessor
May 17,2005 - July 1,2005. Jan 1,2005 - May16,2005 As of July 2,2004
Income taxes at U.S.
statutory rate $ (663) $ 368 $ 316
Effect of conversion to a
"C: corporation. . . . . . . (4,560) -- --
State income taxes . . . . . (138) 77 66
Foreign rate differential
and other. . . . . . . . . . 219 670 (62)
--------------------------- ------------------------- ------------------------------
Total. . . . . . . . . . . . $ (5,142) $ 1,115 $ 320
=========================== ========================= ==============================
15
The following table represents the successor and predecessor income taxes
for the second quarter of 2005 and the second quarter of 2004.
SUCCESSOR PREDECESSOR
Three months ended as of July 2,
May 17, 2005 - July 1, 2005 April 2, 2005 - May16, 2005 2004
------------------------------ ----------------------------- --------------------------------
Income/(Loss) Income Tax Income/(Loss) Income Tax Income/(Loss) Income Tax
Before Expense/ Before Expense/ Before Expense/
Income Taxes (Benefit) Income Taxes (Benefit) Income Taxes (Benefit)
U.S. . . . . . . . . . . . . . $ (2,811) $ (689) $ (3,953) $ 255 $ (234) $ (4)
Brazil . . . . . . . . . . . . 493 143 220 55 524 188
Malaysia . . . . . . . . . . . 132 1 (196) (30) 316 26
Mexico . . . . . . . . . . . . 218 -- 310 183 50 11
China. . . . . . . . . . . . . 19 -- 240 -- 2 --
Poland . . . . . . . . . . . . (12) -- 29 -- (238) --
South Africa . . . . . . . . . 67 (37) (186) 38 407 --
--------------- ------------- ------------ -------------- ------------- -------------
Total. . . . . . . . . . . . . $ (1,894) $ (582) $ (3,536) $ 501 $ 827 $ 221
=============== ============= ============ ============== =========== ==============
Current income taxes . . . . . $ 500 $ 625 $ 155
Deferred income taxes. . . . . (5,642) (124) 66
----------------------------- ------------------- ------------
Total. . . . . . . . . . . . . $ (5,142) $ 501 $ 221
============================= =================== ============
Successor Predecessor
May 17,2005 - July 1,2005. . Jan 1,2005 - May16,2005 As of July 2,2004
Income taxes at U.S.
statutory rate . $ (663) $ (1,238) $ 289
Effect of conversion to a
"C" corporation. . . . . . . . (4,560) -- --
State income taxes . . . . . . (138) (258) 60
Foreign rate differential
and other. . . . . . . . . . . 219 1,997 (129)
--------------------------- ------------------- ------------
Total. . . . . . . . . . . . . $ (5,142) $ 501 $ 221
=========================== =================== ============
8. COMMITMENTS AND CONTINGENCIES
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain drying and handling equipment in the
summer and fall in conjunction with the harvesting season, and swine and poultry
producers purchasing equipment during prime construction periods in the spring,
summer and fall. The Company's sales and net income have historically been
lower during the first and fourth fiscal quarters as compared to the second and
third quarters.
16
9. BUSINESS SEGMENT
The Company has no separately reportable segments in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosure About
Segments of an Enterprise and Related Information." Under the enterprise wide
disclosure requirements of SFAS 131, the Company reports sales by each product
line. Amounts for the first six months of 2005 and 2004, based on the
aggregation of historical and successor accounting, are as shown in the table
below (in thousands).
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (RESTATED)
SUCCESSOR PREDECESSOR
---------------------------------------------------
THREE SIX
MONTHS MONTHS
MAY 17 - APRIL 2 - ENDED JAN 1, - ENDED
JULY 1, MAY 16, JULY 2, MAY 16, JULY 2,
2005 2005 2004 2005 2004
------------ ------------- ------------ ------------ -----------
Grain product line. . . $ 29,027 $ 24,320 $ 54,411 $ 67,234 $ 86,875
Swine product line. . . 9,411 7,929 11,500 20,789 21,424
Poultry product line. . 9,740 9,712 13,944 26,612 30,190
Discontinued operations -- -- (232) -- (422)
------------ ------------- ------------ ------------ -----------
Sales. . . . . . . $ 48,178 $ 41,961 $ 79,623 $ 114,635 $ 138,067
============ ============= ============ ============ ===========
For the first six months of 2005 and 2004, sales in Brazil were $17.0
million and $13.8 million, respectively. Long-lived assets in Brazil were $5.4
million at July 1, 2005.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the notes included in Item 1 hereof.
GENERAL
The Company is a major worldwide manufacturer of agricultural equipment.
The Company's grain, swine and poultry products are used by producers and
purchasers of grain, and by producers of swine and poultry. Demand for our
agricultural equipment is driven by the overall level of grain, swine and
poultry production, the level of net farm income, agricultural real estate
values and producers' increasing focus on improving productivity in their
operations. In addition, fluctuations in grain and feed prices affect our sales,
with sustained increases in grain and feed prices increasing demand for our
grain equipment and decreasing demand for our swine and poultry equipment. We
believe that our diversified product offerings mitigate the effects of
fluctuations in the price of grain. Sales of our swine and poultry equipment are
also affected by long-term trends in consumer demand for pork and poultry both
domestically and internationally.
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain conditioning and handling equipment in
the summer and fall in conjunction with the harvesting season, and swine and
poultry producers purchasing equipment during prime construction periods in the
spring, summer and fall. The Company's sales, operating income and net income
have historically been lower during the first and fourth fiscal quarters as
compared to the second and third quarters. Traditionally, this has caused the
Company to have increased working capital needs during the second and third
quarters as material is purchased and converted to inventory during the year.
Although the Company's sales are primarily denominated in U.S. dollars and
are not generally affected by currency fluctuations (except for transactions
from the Company's Brazilian operation), the production costs, profit margins
and competitive position are affected by the strength of the U.S. dollar
relative to the strength of the currencies in countries where its products are
sold.
The Company's international sales have historically comprised a significant
portion of our total sales. In the first six months of 2005 and 2004, the
Company's international sales accounted for 26% and 27% of total sales,
respectively. International operations generally are subject to various risks
that are not present in domestic operations, including restrictions on
dividends, restrictions on repatriation of funds, unexpected changes in tariffs
and other trade barriers, difficulties in staffing and managing foreign
operations, political instability, fluctuations in currency exchange rates,
reduced protection for intellectual property rights in some countries, seasonal
reductions in business activity and potentially adverse tax consequences, any of
which could adversely impact our international operations.
The primary raw materials we use to manufacture our products are steel and
polymers. Fluctuations in the prices of steel and, to a lesser extent, polymer
materials can impact our cost of sales.
On May 16, 2005, in connection with the closing of the purchase of all of
the issued and outstanding shares of the Company's common stock by GSI Holdings
Corp., the Company was converted from a subchapter "S" corporation to a
subchapter "C" corporation, which means that it will now be a taxable entity for
federal and state income tax purposes. For the portion of the Company's fiscal
year preceding that date, the Company has made a tax distribution to its
stockholders in an amount sufficient to allow them to pay their resulting income
taxes for such period.
ITEMS AFFECTING COMPARABILITY
On April 6, 2005, all of the Company's stockholders entered into a stock
purchase agreement with GSI Holdings, Inc. (GSI Holdings), a newly formed
holding company owned primarily by an affiliate of Charlesbank Equity Fund V,
Limited Partnership, pursuant to which GSI Holdings purchased for cash all of
the issued and outstanding shares of the Company's common stock. On May 16,
2005, under the "successor" basis of accounting, the closing of the Acquisition
occurred. Consequently, our financial statements shown in Item 1 of this 10Q
have been presented under two different bases of accounting, with all historical
Company activity up to and including May 16, 2005 under the predecessor basis,
and all Company activity from May 17, 2005 to July 1, 2005 under the successor
basis. The following discussion and analysis is based upon the aggregation of
these two bases of accounting for the 3 months and six months ended July 1,
2005, and our review of the business and operations during such periods as
compared to the same periods of 2004.
18
As a result of the Acquisition, our assets and liabilities have been
adjusted to their fair value as of the closing date. Depreciation and
amortization expenses are higher in successor accounting due to the fair value
assessments resulting in increases to the carrying value of our property, plant
and equipment and intangible assets. The financial statements for the 3 months
and six months ended July 1, 2005 include the following expenses related to
purchase accounting: cost of goods sold includes $2.6 million non-cash purchase
accounting charges related to inventory fair value adjustments. Approximately
$1.8 million of inventory fair value adjustments will be charged to cost of
sales in the third quarter of 2005.
We believe the discussion and analysis of The GSI Group, Inc.'s financial
condition and combined results of operations set forth below are not indicative
nor should they be relied upon as an indicator of our future performance.
Senior management appointed by the board of directors of the purchaser in the
Acquisition is relatively new to the Company, and is still engaged in an ongoing
analysis of trends and operating indicators as they relate to future
performance. Please refer to the footnotes to the Financial Statements included
in Item 1 of this report, including "Summary of Significant Accounting
Policies-Basis of Statement Presentation" for important additional information
concerning the basis of presentation of financial information included in this
report.
RESTATEMENTS
First Restatement
During the Company's 2004 year-end closing process, the Company discovered
unintentional accounting errors in prior years' financial statements. The
errors were corrected in the 2004 financial statements. A description of the
errors and related impact of each on the financial statements follows. Amounts
are stated in whole dollars.
At the end of 2001, the Company began the process of shutting down its
Mason City, Iowa plant, which served as the headquarters for its DMC subsidiary.
As the Company began the revenue cycle process at its corporate headquarters,
cost of sales estimates were understated during 2002, while cost accounting
records were being developed for the products previously handled by the Mason
City employees, which caused the remaining inherited inventory costs to be
overstated by approximately $6,470,000. The Company became aware of the
overstatement in early 2003, but erroneously assigned the overstated value to
inventory that would flow through the cost of sales over the next few years.
This erroneous correction reduced the stated value of the inventory by
approximately $2,206,000 in 2003 and $4,264,000 in 2004. During the 2004
year-end closing process, this issue was re-examined, and the Company determined
that it would be appropriate to restate the 2002 cost of sales and year-end
inventory, the period when the overstatement occurred. This adjustment
increased the previously reported net income by $534,000 in the second quarter
of 2004 and $894,000 for the first six months of 2004.
In 1997, the Company's majority stockholder began selling non-voting shares
to certain employees. The Company's majority stockholder helped finance each
employee's purchase with a loan to each employee with the shares as the only
collateral for the notes. APB Opinion 25 and its interpretations require that
these transactions be imputed to the Company's financial statements and be
accounted for as variable stock awards, which practice the Company had not
previously followed. Treatment of the transaction as a variable stock award
requires the Company to recognize as compensation expense the extent to which
the fair market value of the underlying shares exceeds the original purchase
price for such shares. The fair value of the underlying shares first exceeded
the price paid for the shares in 2002. The effect of recording the resulting
compensation expense reduced previously reported net income by $709,000 in the
second quarter of 2004 and $1,157,000 for the first six months of 2004.
In 2002, the Company entered into an agreement with the manager of its
Brazilian subsidiary whereby the Company agreed to issue him shares of the
Brazilian subsidiary's stock primarily based on the financial performance of the
Brazilian subsidiary. This agreement constitutes a stock compensation
arrangement for which the Company did not previously recognize compensation
expense. The effect of recording compensation expense related to this
arrangement reduced previously reported net income by $187,000 in the second
quarter of 2004 and $312,000 for the first six months of 2004.
19
Prior to the 2004 closing process, the Company had been using Mexican Pesos
as the functional currency of its Mexican subsidiary. During the 2004 closing
process, the Company determined that the correct functional currency of its
Mexican subsidiary should be U.S. Dollars rather than Mexican Pesos. The effect
of this change reduced previously reported net income by $10,000 in the second
quarter of 2004 and $16,000 for the first six months of 2004.
The Company changed from a stop-loss workers' compensation insurance policy
to a high-deductible self-insured policy in 2000 and did not subsequently accrue
a liability for claims incurred but not reported. The effect of accruing for
such claims in 2004 reduced previously reported net income by $82,000 in the
second quarter of 2004 and $137,000 for the first six months of 2004.
The Company also made adjustments in 2004 to correct previous reporting of
overhead adjustments in overseas inventories and gain on inter-company sales.
The impact of the above noted adjustments on the Company's financial
statements for the first fiscal quarter of 2004 is summarized in the table
below. Amounts are stated in thousands of dollars except for per share line
items.
Second Restatement
Subsequent to the sale of all of the stock of the Company on May 16, 2005,
the new management appointed by the new owner of the Company discovered
additional accounting errors in prior years' financial statements. The errors
have been corrected in the accompanying 2005 and 2004 financial statements. A
description of the errors and related impact on each of the financial statements
follows. Amounts are stated in whole dollars.
The Company made adjustments in the first fiscal quarter of 2005 and the first
and second fiscal quarters of 2004 to correct its allowance for obsolete
inventory to conform to the Company's historical policy. The effect of these
changes reduced net income by $243,000 in the first six months of 2005 and
$140,000 and $280,000 in the second fiscal quarter and first six months of 2004,
respectively.
The Company made adjustments in 2004 to expense warranty and research and
development costs, which were erroneously included in inventory. The effect of
these changes increased quarterly net income by $164,000 in the second fiscal
quarter of 2004 and $327,000 in the first six months of 2004. The Company
reclassified warranty and research and development costs out of cost of sales
and into operating expenses for 2005 and 2004, which had no effect on net
income.
The Company made adjustments in 2005 and 2004 to correct the amount of
overhead that was included in inventory. The previous inventory included an
excessive amount of overhead. The effect of these changes reduced net income by
$998,000 in the first six months of 2005 and increased net income by $547,000
and $1,094,000 in the second fiscal quarter and first six months of 2004,
respectively.
The combined effect of these changes reduced net income by $1,241,000 in
the first six months of 2005 and increased net income by $570,000 and $1,140,000
in the second fiscal quarter and first six months of 2004, respectively.
The impact of the above noted adjustments on the Company's financial
statements for the first fiscal quarter of 2005 and 2004 are summarized in the
table below. Amounts are stated in thousands of dollars except for per share
line items.
20
AS
PREVIOUSLY FIRST AS SECOND AS
REPORTED RESTATEMENT RESTATED RESTATEMENT RESTATED
FIRST SIX MONTHS OF 2005
Consolidated Balance Sheet:
Inventory . . . . . . . . . . . $ 58,608 $ 58,608 $ (5,389) $ 53,219
Retained earnings . . . . . . . 8,637 8,637 (5,389) 3,248
Consolidated Statement of Income:
Cost of sales . . . . . . . . . 124,283 124,283 (268) 124,015
Warranty and R&D expenses . . . -- -- 1,508 1,508
Operating income. . . . . . . . 6,976 6,976 (1,240) 5,736
Net income (loss) . . . . . . . 451 451 (1,240) (789)
Basic and diluted income (loss)
per share . . . . . . . . . . . $ 0.55 $ 0.55 $ (1.50) $ (0.95)
AS
PREVIOUSLY FIRST AS SECOND AS
REPORTED RESTATEMENT RESTATED RESTATEMENT RESTATED
FIRST SIX MONTHS OF 2004
Consolidated Balance Sheet:
Inventory . . . . . . . . . . . . $ 55,986 $ 55,986 $ (2,466) $ 53,520
Retained earnings . . . . . . . . 12,437 12,437 (2,466) 9,971
Consolidated Statement of Income:
Cost of sales . . . . . . . . . . 113,339 (884) 112,455 (3,877) 108,578
Selling, general and
administrative expenses . . . . . 17,053 1,336 18,389 -- 18,389
Warranty and R&D expenses . . . . -- -- -- 2,737 2,737
Operating income. . . . . . . . . 7,773 (874) 6,899 1,140 8,039
Other, net. . . . . . . . . . . . (509) (189) (698)
Net income (loss) . . . . . . . . 406 (809) (403) 1,140 737
Basic and diluted loss per share. $ 0.23 $ (0.46) $ (0.23) $ 0.65 $ 0.42
AS
PREVIOUSLY FIRST AS SECOND AS
REPORTED RESTATEMENT RESTATED RESTATEMENT RESTATED
SECOND FISCAL QUARTER OF 2004
Consolidated Balance Sheet:
Inventory . . . . . . . . . . . . $ 55,986 $ 55,986 $ (2,466) $ 53,520
Retained earnings . . . . . . . . 12,437 12,437 (2,466) 9,971
Consolidated Statement of Income:
Cost of sales . . . . . . . . . . 66,235 (493) 65,742 (1,934) 63,808
Selling, general and
administrative expenses . . . . . 8,892 792 9,684
Warranty and R&D expenses . . . . -- -- -- 1,364 1,364
Operating income. . . . . . . . . 4,566 (531) 4,035 570 4,605
Other, net. . . . . . . . . . . . (330) (279) (609)
Net income (loss) . . . . . . . . 565 (503) 62 570 632
Basic and diluted loss per share. $ 0.32 $ (0.29) $ 0.03 $ 0.33 $ 0.36
21
HISTORICAL PERFORMANCE
Our financial statements shown in Item 1 of this 10Q have been presented
under two different bases of accounting, with all historical Company activity up
to and including May 16, 2005 under the predecessor basis, and all Company
activity from May 17, 2005 to July 1, 2005 under the successor basis. The
following discussion and analysis is based upon the aggregation of these two
bases of accounting for the 3 months and six months ended July 1, 2005, and our
review of the business and operations during such periods as compared to the
same periods of 2004.
RESULTS OF OPERATIONS (AFTER SECOND RESTATEMENT)
The following table sets forth a summary of the Company's operations and
their percentages of total revenue for the periods indicated based on the
aggregation of historical predecessor and successor accounting (dollars in
thousands):
THREE MONTHS ENDED, SIX MONTHS ENDED
-------------------------- ----------------------------
RESTATED RESTATED
JULY 1, 2005 JULY 2, 2004 JULY 1, 2005 JULY 2, 2004
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ -------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ---- -------- ---- ------ ----- --------- ------
Sales. . . . . . . . . . . . . . . . . . . $90,139 100.0 $79,623 100.0 $162,813 100.0 $138,067 100.0
Cost of sales. . . . . . . . . . . . . . . 68,671 76.2 63,808 80.1 124,015 76.2 108,578 78.6
------- ------- --------- --------
Gross profit. . . . . . . . . . . . . . 21,468 23.8 15,815 19.9 38,798 23.8 29,489 21.4
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . 21,599 24.0 9,684 12.2 30,426 18.7 18,389 13.3
Amortization expense . . . . . . . . . . . 966 1.1 162 0.2 1,128 0.7 324 0.2
Warranty expense . . . . . . . . . . . . . 21 0.0 483 0.6 (177) (0.1) 979 0.7
R&D expense. . . . . . . . . . . . . . . . 840 0.9 881 1.1 1,685 1.0 1,758 1.3
------- ------- --------- ------
Total operating expenses. . . . . . . . . 23,426 26.0 11,210 14.1 33,062 20.3 21,450 15.5
Operating income (loss). . . . . . . . . . (1,958) (2.2) 4,605 5.8 5,736 3.5 8,039 5.8
Other income (expense):
Interest expense. . . . . . . . . . . . . (3,632) (4.0) (3,438) (4.3) (7,213) (4.4) (6,513) (4.7)
Other, net. . . . . . . . . . . . . . . . 265 0.3 (317) (0.4) 794 0.5 (578) (0.4)
-------- ------- --------- --------
Income (loss) before income tax expense
and minority interest. . . . . . . . . . . (5,325) (5.9) 850 1.1 (683) (0.4) 948 0.7
Minority interest in net income of
subsidiary . . . . . . . . . . . . . . . . (105) (0.1) (23) 0.0 (160) (0.1) (46) 0.0
Income tax provision(benefit). . . . . . . (4,641) (5.1) 221 0.3 (4,027) (2.5) 320 0.2
-------- ------- --------- --------
Income (loss) before discontinued
operations . . . . . . . . . . . . . . . . (789) (0.9) 606 0.8 3,184 2.0 582 0.5
Gain (loss) from discontinued operations,
net of income taxes. . . . . . . . . . . . -- 0.0 26 0.0 -- 0.0 155 0.1
------- ------ --------- --------
Net income (loss). . . . . . . . . . . . . $ (789) (0.9) $ 632 0.8 $ 3,184 2.0 $ 737 0.5
======== ====== ========= =======
Basic and diluted earnings (loss) per
share. . . . . . . . . . . . . . . . . . . $ (0.95) $ 0.36 $ 3.85 $ 0.42
Weighted average common shares
Outstanding. . . . . . . . . . . . . . . . 826,948 1,775,000 826,948 1,775,000
Three Months Ended July 1, 2005 Compared to Three Months Ended July 2, 2004
Sales increased 13.2% or $10.5 million to $90.1 million in the second
quarter of 2005 compared to $79.6 million in the second quarter of 2004. Grain
equipment dollar sales decreased by 0.2% during the second quarter of 2005 as
compared to the second quarter 2004 driven by lower volume offset by higher
pricing. Swine equipment sales increased 50.8% to $17.3 million in the second
quarter of 2005 compared to $11.5 million in the second quarter of 2004 due to
an improved swine production market that allows producers to upgrade equipment.
Poultry equipment sales increased 39.5% to $19.5 million in the second quarter
of 2005 compared to $13.9 million in the second quarter of 2004 primarily due to
increased volume in Brazil and South Africa.
22
Cost of goods sold increased 7.6% or $4.9 million to $68.7 million or 76.2%
of sales in the second quarter of 2005 compared to $63.8 million or 80.1% of
sales in the second quarter of 2004. This increase is due in part to the
amortization of the inventory step up of fair value of $2.6 million. The
improvement in margins is due to increased pricing and better product mix offset
by higher material costs.
Gross profit increased to $21.5 million in the second quarter of 2005 or
23.8% of sales from $15.8 million or 19.9% of sales in the same period of 2004.
This increase was primarily due to the reasons cited above.
Operating expenses increased 109.0% or $12.2 million to $23.4 million in
the second quarter of 2005 from $11.2 million in the same period of 2004. The
table below outlines the significant increases in operating expenses
AMOUNT OF
INCREASE
Selling expenses . . . . . . . . . . . $ 911
Non-cash compensation expense. . . . . 4,294
Minority interest compensation expense 585
Seller transaction expenses. . . . . . 3,966
Bad debt expense for YCII. . . . . . . 627
Amortization . . . . . . . . . . . . . $ 804
The increase in selling expenses related to the increased revenue. The
non-cash compensation expense relates to the dividends paid to non-voting
stockholders and the change in the market value of the non-voting shares for the
stock that was sold to members of management and is treated as a variable stock
award. According to APB Opinion 25, this increase in market value must be
recorded as compensation expense. The minority interest compensation expense is
the market value of the portion of Brazil that is owned by a member of
management. The seller transaction expenses relate to the sale of the Company
on May 16, 2005 to GSI Holdings. All of the expenses so recorded related only to
the predecessor period ending May 16, 2005.
Operating income decreased to a loss of $2.0 million in the second quarter
of 2005 from income of $4.6 million in the second quarter of 2004. Operating
income margins decreased to (2.2)% of sales in 2005 from 5.8% in 2004.
Interest expense increased $0.2 million in the second quarter of 2005 as
compared to the second quarter of 2004 due to higher borrowing costs.
Upon conversion from a subchapter "S" corporation to a subchapter "C"
corporation the Company recorded a net deferred tax asset of $4.6 million. The
conversion of tax status significantly impacted net income for the second
quarter of 2005
Net income decreased by $1.4 million to a loss of $0.8 million for the
second quarter of 2005 from income of $0.6 million in the same period of 2004.
Six Months Ended July 1, 2005 Compared to Six Months Ended July 2, 2004
Sales increased 17.9% or $24.7 million to $162.8 million in the first six
months of 2005 compared to $138.1 million in the first six months of 2004.
Grain sales increased 10.8% in the first six months of 2005 to $96.3 million
primarily as a result of pricing increases in grain storage products and market
share penetration of new products such as grain transportation equipment offset
by lower volumes in grain storage. Strong sales of grain equipment in our
Brazilian subsidiary also contributed to the increase. Swine equipment sales
increased 41% due to an improved swine production market that allows producers
to upgrade equipment. Poultry equipment sales increased 39.5% primarily due to
increased volume in Brazil and South Africa.
Cost of goods sold increased 14.2% or $15.4 million to $124.0 million or
76.2% of sales in the first six months of 2005 compared to $108.6 million or
78.6% of sales in the first six months of 2004. This increase is due in part to
the amortization of the inventory step up of fair value of $2.6 million. The
improvement in margins is due to increased pricing and better product mix offset
by higher material costs.
23
Gross profit increased to $38.8 million in the first six months of 2005 or
23.8% of sales from $29.5 million or 21.4% of sales in the same period of 2004.
This increase was primarily due to the reasons cited above
Operating expenses increased 54.1% or $11.6 million to $33.1 million in the
first six months of 2005 from $21.5 million in the same period of 2004. The
table below outlines the significant increases in operating expenses.
AMOUNT OF
INCREASE
Selling expenses . . . . . . . . . . . $ 1,181
Non-cash compensation expense. . . . . 4,756
Minority interest compensation expense 690
Seller transaction expenses. . . . . . 3,966
Bad debt reserve for YCII. . . . . . . 627
Amortization . . . . . . . . . . . . . $ 804
The increase in selling expenses related to the increased revenue. The
non-cash compensation expense relates to the dividends paid to non-voting
stockholders and the change in the market value of the non-voting shares for the
stock that was sold to members of management and is treated as a variable stock
award. According to APB Opinion 25, this increase in market value must be
recorded as compensation expense. The minority interest compensation expense is
the market value of the portion of Brazil that is owned by a member of
management. The seller transaction expenses relate to the sale of the Company
on May 16, 2005 to GSI Holdings. All of the expenses so recorded related only to
the predecessor period ending May 16, 2005.
Operating income decreased to $5.7 million in the first six months of 2005
from $8.0 million in the first six months of 2004. Operating income margins
decreased to 3.5% of sales in 2005 from 5.8% in 2004.
Interest expense increased $0.7 million in the first six months of 2005 as
compared to the first six months of 2004 due to higher borrowing costs.
Upon conversion from a subchapter "S" corporation to a subchapter "C"
corporation the Company recorded a net deferred tax asset of $4.6 million. The
conversion of tax status significantly impacted net income for the first six
months of 2005
Net income increased by $2.5 million to $3.2 million for the first six
months of 2005 from $ 0.7 million in the same period of 2004.
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 the Company's
credit facility and the sale of the Company's notes.
The Company's working capital requirements for its operations are seasonal,
with investments in working capital typically building in the second and third
quarters and then declining in the first and fourth quarters. The Company
defines working capital as current assets less current liabilities. As of July
1, 2005, the Company had $62.8 million of working capital, an increase of $22.5
million from working capital as of December 31, 2004. The increase in working
capital was primarily due to increases in accounts receivable, inventory and
deferred taxes of $27.4 million, partially offset by decreases in prepaids and
other current assets of $5.1 million.
Operating activities provided $6.0 million and $3.2 million in cash flow in
the first six months of 2005 and 2004, respectively. This $2.8 million increase
in cash flow was primarily the result of increase in net income, depreciation
and amortization, non-cash charges related to inventory fair value, stock based
compensation, minority interest compensation, accrued expenses, inventory and
other current assets of $18.8 million, partially offset by decreases in deferred
taxes, accounts receivable and accounts payable of $16.0 million compared to the
first six months of 2004.
24
Investing activities used $2.4 million and $1.3 million in cash flow in the
first six months of 2005 and 2004, respectively. The cash was used primarily
for the purchase of property, plant and equipment.
Financing activities used $2.7 million and $2.4 million in cash flow in the
first six months of 2005 and 2004, respectively. The cash was used primarily to
pay down debt.
The Company believes that existing cash, cash flow from operations and
available borrowings under its refinanced revolving credit facility will be
sufficient to support its working capital, capital expenditures and debt service
requirements for the foreseeable future.
REVOLVING CREDIT FACILITY
On May 16, 2005, concurrently with the issuance of $110,000,000 of 12%
Senior Notes due 2013 and the closing of the acquisition of The GSI Group, Inc.
(the "Company") by GSI Holdings Corp. ("GSI Holdings"), an affiliate of
Charlesbank Equity Fund V, Limited Partnership, the Company refinanced its
existing credit facility with a five-year asset-backed revolving credit facility
provided by lenders led by Wachovia Capital Finance Corporation (Central)
("Wachovia"), as the agent. The maximum amount of revolving credit available
under the Company's refinanced credit facility (the "Credit Facility") is $60.0
million and the Company has the option to increase the facility in increments of
$5.0 million up to a maximum of $75.0 million (subject to compliance with the
covenants in the indenture). Up to $15 million of the facility is available for
issuances of letters of credit.
The Credit Facility provides floating rate revolving loans bearing interest
at a rate equal to 0.0% to 0.5% over Wachovia's prime rate or 1.50% to 2.00%
over LIBOR, in each case based on the excess availability under the borrowing
base from time to time.
The Company's obligations under its Credit Facility are secured by a first
priority lien on, and pledge of, substantially all of its and any subsidiary
guarantors' current and future assets. In addition, GSI Holdings pledged all of
its shares of the Company's common stock, as well as any rights that it may have
under the stock purchase agreement with the Company's selling stockholders, as
additional collateral security.
The Credit Facility contains certain covenants that are substantially
similar to, but generally no more restrictive than, the covenants under the
Company's existing credit facility. The Company's ability to make borrowings
under the Credit Facility is subject to customary representations, warranties
and covenants. The Credit Facility also contains various customary events of
default.
SENIOR NOTES DUE 2013
On May 16, 2005, concurrently with the refinancing of its existing
revolving credit facility with Wachovia Capital Finance Corporation and the
closing of the acquisition of The GSI Group, Inc. (the "Company") by GSI
Holdings Corp. ("GSI Holdings"), an affiliate of Charlesbank Equity Fund V,
Limited Partnership, the Company issued and sold $110,000,000 aggregate
principal amount of Senior Notes due 2013 (the "Notes"). Payment on the Notes is
guaranteed on an unsecured basis by GSI Holdings and by all of the Company's
domestic material subsidiaries. None of the Company's domestic subsidiaries are
currently material subsidiaries. The Notes were issued under an Indenture among
the Company, the Guarantors and U.S. Bank National Association, as trustee (the
"Indenture").
The Notes have a fixed annual interest rate of 12%, which will be paid
semiannually in arrears on May 15 and November 15, commencing on November 15,
2005.
Prior to May 15, 2008, the Company may redeem up to 35% of the Notes at a
redemption price of 112.000% of the principal amount, plus accrued and unpaid
interest from the proceeds of certain equity offerings; provided that: (i) at
least 65% of the aggregate principal amount of Notes originally issued under the
Indenture (excluding Notes held by the Company and its subsidiaries) remains
outstanding immediately after the occurrence of such redemption and (ii) the
redemption occurs within 90 days of the date of the closing of such equity
offering. Except pursuant to the preceding sentence, the Notes will not be
redeemable at the Company's option prior to May 15, 2009.
25
On or after May 15, 2009, the Company may redeem all or a part of the Notes
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) listed below plus accrued and
unpaid interest and liquidated damages, if any, on the Notes redeemed, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on May 15 of the years indicated below, subject to the rights of holders of
Notes on the relevant record date to receive interest on the relevant interest
payment date: 2009 at a redemption price of 106.000%; 2010 at a redemption price
of 103.000%; and 2011 and thereafter at a redemption price of 100.000%.
Upon a change of control, as defined in the Indenture, the Company is
required to offer to purchase all of the Notes then outstanding for cash at 101%
of the aggregate principal amount thereof plus accrued and unpaid interest and
liquidated damages, if any, on the Notes repurchased to the date of purchase,
subject to the rights of holders of Notes on the relevant record date to receive
interest due on the relevant interest payment date.
Also on May 16, 2005, the Company issued a call for redemption for all $100
million principal amount of its existing 10-1/4% senior subordinated notes due
2007 at a price of 101.729% plus accrued interest from May 1, 2005 to the date
of redemption.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during recent periods.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the critical accounting policies
since December 31, 2004.
26
ITEM 3. 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 July 1, 2005,
principal exposed to interest rate risk was limited to $24.9 million in variable
rate debt. The interest rates on the Company's various debt instruments range
from 4.5% to 12.0%. 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. A 1% change in interest rates would have a
$0.2 million impact on the Company's results of operations.
At July 1, 2005, approximately 12.1% of sales were derived from
international operations with exposure to foreign currency exchange rate risk.
The Company mitigates its foreign currency exchange rate risk principally by
establishing local production facilities in the markets it serves and by
invoicing customers in the same currency as the source of the products. The
Company also monitors its foreign currency exposure in each country and
implements strategies to respond to changing economic and political
environments. The Company's exposure to foreign currency exchange rate risk
relates primarily to the financial position and the results of operations of its
Brazilian and South African subsidiaries. The Company's exposure to such
exchange rate risk as it relates to the Company's financial position and results
of operations would be adversely impacted by devaluation of the Brazilian Real
per U.S. dollar and the South African Rand per U.S. dollar. These amounts are
difficult to accurately estimate due to factors such as the inherent fluctuation
of inter-company account balances, balance sheet accounts and the existing
economic uncertainty and future economic conditions in the international
marketplace.
ITEM 4. CONTROLS AND PROCEDURES
OVERVIEW
In connection with the preparation of its Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, the Company's management identified
material weaknesses in the Company's internal controls over financial reporting.
As defined by the Public Company Accounting Oversight Board ("PCAOB") in
Auditing Standard No. 2, a material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
The identified material weaknesses in the Company's internal controls over
financial reporting have resulted in insufficient controls relating to inventory
accounting, the treatment of foreign currency matters, accounting matters
relating to differences between U.S. and foreign accounting principles and
practices, accounting for non-operating expenses, the accounting treatment of
purchases and sales of the Company's debt securities, executive salary accrual
methodology, the identification and treatment of relevant workers' compensation
reserves and minority interest reserves and the treatment of stock based
compensation expense issues. In addition, the Company has determined that the
Company's control environment at December 31, 2004 lacked certain controls
related to the prevention of improper accounting entries. These material
weaknesses resulted in restatements being recorded in the Company's financial
statements for the fiscal quarters ended July 2, 2004 and July 1, 2005. The
Company's management has discussed the material weaknesses with its independent
registered public accounting firm, BKD LLP, and the Company's Board of
Directors, and more recently the Audit Committee of the Board of Directors,
which was recently created. BKD LLP issued a "material weakness" letter in
connection with its audit of the Company's financial statements for the fiscal
year ended December 31, 2004.
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the reports it files or
submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including the Company's Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
disclosure. The Company's management, with the participation of its Chief
Executive Officer and Chief Financial Officer, has performed an evaluation of
the Company's disclosure controls and procedures as of July 1, 2005, the end of
the period covered by this Quarterly Report on Form 10-Q/A. Based on that
evaluation, which included a review of the matters discussed above, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were not effective as of the end of
the period covered by this Quarterly Report on Form 10-Q/A, but they are working
diligently to improve them.
27
CHANGES IN INTERNAL CONTROLS
During the period April 2, 2005 through May 16, 2005 there were no changes
made to the Company's internal controls. On May 16, 2005, the Company was
acquired by GSI Holdings, Inc. ("GSI Holdings"), a newly formed holding company
owned primarily by entities affiliated with Charlesbank Equity Fund V, Limited
Partnership. Subsequent to this acquisition, and during the period May 16, 2005
through July 1, 2005, the following changes were made to the Company's internal
controls:
a) The Company employed a number of financial advisors to aid in financial
statement preparation and the recording of unusual financial transactions.
b) The Company employed a number of operational advisors, primarily to aid
in implementing operation efficiencies, but secondarily, to report to the
Company's management any disclosable conditions in Company operations.
c) The Company's new management forced the adherence to Company accounting
policy particularly in the area of inventory accounting.
d) The Company instituted an informal program of low-level management
reporting to new top-level management.
e) The board of directors of the Company was in the process of appointing an
audit committee, which will have improvement of the Company's internal controls
as one of its primary goals.
In addition, the Company believes that the material weaknesses identified
above resulted in part from inadequate staffing and training within the
Company's finance and accounting group. The Company's new management continues
in the process of reviewing whether additional accounting and financial
management staff should be retained, and continues to review the question of
whether it should utilize additional, or different, outside resources. Although
the Company believes that progress has been made in addressing the material
weaknesses in its internal controls as discussed above, the Company's management
believes that significant weaknesses remain and intends to continue to work to
improve its internal controls.
28
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company, which, in the
opinion of management, would have a material adverse affect on the Company's
business, financial position or results of operations.
ITEM 6. EXHIBITS.
(a) EXHIBITS:
A list of the exhibits included as part of this Form 10-Q/A is set forth
in the Index to Exhibits that immediately precedes such exhibits, which is
incorporated herein by reference.
29
SIGNATURES
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.
The GSI Group, Inc.
By:/s/ Randall Paulfus
---------------------
Interim Chief Financial Officer
DATE: AUGUST 22, 2005
30
EXHIBIT 31.1
CERTIFICATIONS
I, William Branch, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A of The GSI Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) [Paragraph omitted pursuant to SEC Release nos. 33-8392 and 34-49313.]
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 22, 2005
/s/ William Branch
--------------------
Interim Chief Executive Officer, Chairman of the Board and President.
31
EXHIBIT 31.2
CERTIFICATIONS
I, Randall Paulfus, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A of The GSI Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) [Paragraph omitted pursuant to SEC Release nos. 33-8392 and 34-49313.]
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 22, 2005
/s/ Randall Paulfus
---------------------
Interim Chief Financial Officer
32
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Form 10-Q/A of The
GSI Group, Inc., a Delaware corporation (the "Company"), for the quarter ended
July 1, 2005, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), and pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, William Branch, as
Interim Chief Executive Officer of the Company, and Randall Paulfus, as Interim
Chief Financial Officer of the Company, hereby certify that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: August 22, 2005
/s/ WILLIAM BRANCH
--------------------
William Branch
Interim Chief Executive Officer, Chairman of the Board and President.
/s/ RANDALL PAULFUS
---------------------
Randall Paulfus
Interim Chief Financial Officer
This certification shall not be deemed "filed" by the Company for purposes
of Section 18 of the Securities Exchange Act of 1934. In addition, this
certification shall not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
A signed original of this written statement required by Section 906 of the
Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.
33
INDEX TO EXHIBITS
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- -----------------------------------------------------------------------------------------------------------
3.1* Amended and Restated Articles of Incorporation of The GSI Group, Inc., as amended as of October 23, 1997.
3.2* By-Laws of The GSI Group, Inc, as adopted on September 4, 2001.
31.1 Certification of Interim Chief Executive Officer, Chairman of the Board and President.
31.2 Certification of Chief Financial Officer.
32.1 Section 906 Certification.
____________
* 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.
34