<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1998
REGISTRATION NO. 333-43057
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HK SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
WISCONSIN 8911 39-1766857
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
2855 S. JAMES DRIVE
NEW BERLIN, WISCONSIN 53151
(414) 860-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOHN W. SPLUDE
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
HK SYSTEMS, INC.
2855 S. JAMES DRIVE
NEW BERLIN, WISCONSIN 53005
(414) 860-7000 FACSIMILE: (414) 860-7010
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JOHN R. KUHNMUENCH, JR. PATRICK G. QUICK JAMES J. JUNEWICZ
HK SYSTEMS, INC. FOLEY & LARDNER MAYER, BROWN & PLATT
2855 S. JAMES DRIVE 777 EAST WISCONSIN AVENUE 190 SOUTH LASALLE STREET
NEW BERLIN, WISCONSIN MILWAUKEE, WISCONSIN CHICAGO, ILLINOIS 60606
53151 53202 (312) 782-0600
(414) 860-7000 (414) 271-2400 FACSIMILE: (312) 701-7711
FACSIMILE: (414) 860-7010 FACSIMILE: (414) 297-4900
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated March 10, 1998
PROSPECTUS
5,400,000 SHARES
LOGO
COMMON STOCK
-------------
Of the 5,400,000 shares of Common Stock offered hereby (the "Offering"),
3,460,000 are being sold by HK Systems, Inc. (the "Company") and 1,940,000 are
being sold by Selling Shareholders. See "Principal and Selling Shareholders."
The Company will not receive any of the proceeds from the sale of Common Stock
by the Selling Shareholders.
Prior to the Offering, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price will be
between $13.00 and $15.00 per share. See "Underwriting" for a list of the
factors to be considered in determining the initial public offering price. The
Common Stock has been approved for listing on the New York Stock Exchange under
the symbol "HKS," subject to notice of issuance.
-------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
- -------------------------------------------------------------------------------
Total(3).................... $ $ $ $
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</TABLE>
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $750,000.
(3) The Selling Shareholders and the Company have granted the Underwriters a
30-day option to purchase up to 810,000 additional shares of Common Stock
on the same terms and conditions as set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Shareholders will be $ , $ , $ and
$ , respectively. The Company will not receive any of the proceeds
from the sale of Common Stock by the Selling Shareholders. See
"Underwriting" and "Principal and Selling Shareholders."
-------------
The Common Stock offered by this Prospectus is offered by the Underwriters,
subject to prior sale, to withdrawal, cancellation or modification of the offer
without notice, to delivery to and acceptance by the Underwriters and to
certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1998.
-------------
LEHMAN BROTHERS
ROBERT W. BAIRD & CO.
INCORPORATED
FURMAN SELZ
, 1998
<PAGE>
A SUCCESSFUL COMBINATION
AUTOMATED MATERIAL HANDLING & SUPPLY CHAIN MANAGEMENT SOLUTIONS
WORKING TOGETHER IN THREE TARGETED MARKETS
[picture illustrating Integrated Systems services and products with the
following text:]
INTEGRATED SYSTEMS
Integrated Systems provides complex material handling solutions to a wide
array of businesses and industries. These solutions include the design,
development, implementation and integration of customized software,
manufactured and purchased material handling equipment and services, and
purchased components, such as microprocessor and PLC controls and optical
scanning and laser positioning devices.
[picture illustrating Customer Services services and products with the
following text:]
CUSTOMER SERVICES
Customer Services provides comprehensive aftermarket support for HK Systems'
large installed base of automated material handling systems, as well as the
installed systems of competitors. Customer Services includes modernization of
system software, controls and equipment; replacement parts support;
maintenance outsourcing; and 24-hour customer support.
[picture illustrating Logistics and Software Systems services and products
with the following text:]
LOGISTICS AND SOFTWARE SYSTEMS
Logistics and Software Systems provides advanced supply chain management
software solutions including warehouse management systems ("WMS") and
equipment management systems ("EMS") software for both Windows/NT and UNIX
operating systems that allow customers to manage the planning, scheduling,
tracking and related logistics of the manufacturing and warehousing process,
and also provides customized software for specific supply chain applications.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK OR THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
HK SYSTEMS, STOCKMASTER and VON GAL are registered trademarks of the
Company. This Prospectus also refers to additional trademarks of the Company
and trademarks of corporations other than the Company. See "Business--
Intellectual Property and Other Proprietary Rights." [logo]
2
<PAGE>
INTEGRATING SUPPLY CHAIN SOLUTIONS
FROM INITIAL CONCEPT THROUGH LIFE CYCLE SUPPORT
[cutaway drawing of a combined manufacturing/warehouse/distribution facility,
with different areas of the drawing representing or illustrating the Company's
various services and products and the following narrative descriptions keyed
to correspond to the appropriate portions of the drawing:]
From initial concept and design to system implementation and ongoing customer
support, HK Systems integrates automated material handling systems, provides
related aftermarket support and develops and implements advanced supply chain
management software to provide solutions that enable its customers to improve
product quality, reduce inventory, reduce delivery time and lower the overall
costs of manufacturing and distribution.
1. STOCKMASTER(R)/WMS software provides full warehouse management
functionality to improve inventory control, increase efficiency and
reduce delivery time.
2. STOCKMASTER(R)/LMS (Load Management Systems) software configures pallet
and truck loads to maximize space utilization and reduce shipping
costs.
3. HK Systems' high performance Automated Storage and Retrieval Machines
(Unitload, Miniload, Microload and Powermast(R)) store and retrieve
loads ranging from 12 to 100,000 pounds with accuracy, control and
speed.
4. With its state-of-the-art wireless inertial guidance systems, Eagle
Technology(TM) Automated Guided Vehicles transport loads up to 8,000
pounds at speeds of up to 200 feet per minute.
5. Automated Electrified Monorail Systems efficiently transport materials
ranging in size from compact discs to automobile bodies.
6. Case and Pallet Conveyors are economical and reliable.
7. Customized, high-speed Conveyor Sortation Systems sort even the most
hard-to-handle products quickly, efficiently and reliably.
8. Versatile von Gal(R) Palletizers automatically stack a wide variety of
packages on pallets according to customer specifications.
9. Self-contained Totestacker(TM) Systems place small parts at the point-
of-use, maximizing operator productivity and accuracy.
10. STOCKMASTER(R)/EMS software provides effective management and control
of all material handling equipment.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and related notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information
contained in this Prospectus: (i) assumes no exercise of the over-allotment
option granted to the Underwriters and (ii) is based on an assumed initial
offering price of $14.00 per share. All references herein to (a) "Common Stock"
refer to the common stock, $.01 par value, of the Company and (b) "fiscal
year," "year" and "fiscal" refer to the 52-week or 53-week period ending on the
Saturday closest to October 31, unless the context otherwise requires. The
terms "automated material handling systems," "integration services," "supply
chain," "supply chain management," "supply chain solutions" and "warehouse
management systems" are used herein as defined under "Business--Glossary."
THE COMPANY
HK Systems, Inc. ("HK Systems" or the "Company") is a leading provider of
supply chain solutions. The Company develops, implements and supports
integrated solutions to the complex material handling and supply chain needs of
a wide array of industries. The Company's solutions enable its customers to
implement advanced supply chain strategies to improve product quality, reduce
inventory and delivery time and lower overall costs of manufacturing and
distribution.
The Company delivers its supply chain solutions through three principal
activities. First, the Company designs, installs and integrates automated
material handling systems that include customized software, manufactured
equipment, and purchased components such as microprocessor and PLC controls and
optical scanning and laser positioning devices. The Company is a leading
supplier of integration services for automated material handling systems in
North America. Second, the Company provides aftermarket services for owners of
systems and equipment the Company has installed and for other customers. The
Company's installed base of equipment and software systems, which numbers over
3,000, presents significant opportunities to expand its aftermarket business.
Third, the Company develops and implements advanced supply chain management
("SCM") software systems, including warehouse management systems ("WMS") for
Windows/NT and UNIX operating environments and customized software for specific
supply chain applications. The Company believes it is one of the leading WMS
software providers in North America.
The Company's commitment to customer satisfaction, from the initial design of
a system through implementation to ongoing support and maintenance, has enabled
the Company to create strong customer relationships with leading U.S.
corporations. The Company's customers include manufacturers, distributors,
processors and retailers whose needs are as diverse as the warehousing of
semiconductors and the temporary storage and retrieval of automobile bodies for
an assembly line. These customers include a diverse base of Fortune 500
companies and industry leaders, including American Airlines, Anheuser-Busch,
Ball Foster Glass, Boeing, Caterpillar, Chrysler, The Coca-Cola Company, Coca-
Cola Enterprises, Estee Lauder, Ford, Frito-Lay, Gillette, Hewlett-Packard,
IBM, Kimberly-Clark, Lucent Technologies, Motorola, The New York Times, J.C.
Penney, Philip Morris, Procter & Gamble, Sara Lee, Sony and United Airlines.
The Company's services and products address the needs of large and growing
markets for industrial technology. The Company believes sales of automated
material handling systems, integration services and related aftermarket support
in North America by all suppliers should exceed $2.0 billion in 1998 and will
grow by 7% to 10% annually through the year 2000. The Company also estimates
that the North American market for supply chain management ("SCM") software
will be approximately $1.9 billion in 1998 and is currently growing at
approximately 45% annually. The Company believes the growth of these markets
will be driven by two principal trends. First, to respond to increasing
customer demands for faster, more efficient and customized product delivery,
more businesses are implementing practices that will increase the demand for
integrated supply chain
3
<PAGE>
solutions. Such practices include demand-pull manufacturing systems (which rely
on real-time sales information to coordinate and control manufacturing and
distribution across the entire supply chain) as well as third-party
distribution, mixed-load shipments and more frequent, smaller quantity
deliveries. Second, as competition in many industries makes it increasingly
difficult to achieve revenue growth, businesses are focusing more on reducing
supply chain costs as a means of increasing profits. Companies are increasingly
finding that, through the implementation of automated material handling and SCM
software systems and outsourcing of system maintenance, they can achieve
improvements in through-put, reduce inventory and manpower levels, and
rationalize supplier relationships.
Services and products of HK Systems include (i) systems integration services
that include both systems engineering (to conceptualize, design, computer
simulate and implement automated material handling systems) and advanced
software and controls (which automate equipment operation and provide real-time
feedback with respect to equipment performance and materials processing); (ii)
a broad range of automated material handling equipment such as automated
storage and retrieval systems ("AS/RS"), automated guided vehicle systems
("AGVS"), automated electrified monorail systems ("AEMS"), palletizers,
conveyors and sortation equipment; (iii) aftermarket services, including
modernization and upgrades for automated material handling systems, replacement
parts and maintenance outsourcing; and (iv) advanced SCM software systems,
including WMS and customized software for specific supply chain applications.
STRATEGY
HK Systems intends to build upon its position as a market leader by
capitalizing on its competitive strengths, which include (i) extensive internal
resources, including a large and experienced engineering staff and diverse
automated material handling equipment product line; (ii) proven project
management and implementation skills that enable the Company to deliver turnkey
integrated supply chain solutions on time, within specifications and budget;
(iii) a large, diverse blue chip customer base that provides the Company with a
source of recurring revenue; (iv) a large installed base and demonstrated
aftermarket expertise that position the Company to further build its higher
margin aftermarket business; and (v) a solid foundation from which to expand
the Company's supply chain services and products.
From its base of competitive strengths, HK Systems has developed a business
strategy that includes the following elements:
. Leverage the Company's large installed base and extensive customer
relationships to grow SCM software and aftermarket services revenues;
. Maintain its focus on providing fully integrated supply chain solutions
for complex material handling needs;
. Expand supply chain services and products offerings through selective
acquisitions and internal development; and
. Continue to improve profitability of acquired businesses.
HISTORY
The Company was formed in October 1993 when its senior management team
("Management") led the acquisition of Harnischfeger Engineers, Inc., the
systems integration business that Harnischfeger Industries, Inc. began in 1969
(the "HEI Acquisition"). Management's objective was to develop the preeminent,
single-source provider of automated material handling systems and WMS software.
In February 1995, the Company purchased the business of Eaton-Kenway, Inc., a
wholly-owned subsidiary of Eaton Corporation, gaining advanced AGVS technology
and equipment and replacement parts manufacturing capability (the "Eaton-Kenway
Acquisition"). In November 1996, the Company acquired the Material Handling
Systems and VantageWare software divisions
4
<PAGE>
of Western Atlas Inc., formerly a part of the Litton Industrial Automation
Group of Litton Industries, providing it with recognized conveyor, palletizer
and sortation equipment product lines (the "Western Atlas Acquisition").
Through these acquisitions, the Company assembled an installed base of
integrated, automated material handling systems that the Company believes is
one of the largest in North America. The Company also achieved a higher level
of control over the marketing, design and implementation of the critical supply
chain solutions it was already providing to its customers and, in the process,
added qualified and experienced engineering, project management and other
personnel.
The Company's principal executive offices are located at 2855 S. James Drive,
New Berlin, Wisconsin 53151 and its telephone number is (414) 860-7000.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company... 3,460,000 shares(1)
Common Stock offered by Selling
Shareholders......................... 1,940,000 shares(1)
Total Common Stock offered............ 5,400,000 shares(1)
Common Stock outstanding immediately
after the Offering................... 11,692,000 shares(2)
Use of Proceeds....................... To repay indebtedness and to pay accrued
dividends on and redeem preferred stock.
Proposed New York Stock Exchange
Symbol............................... HKS
</TABLE>
- --------
(1) Assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriting."
(2) Excludes (i) Common Stock issuable upon the exercise of options outstanding
under the HK Systems, Inc. 1993 Executive Stock Option Plan (the "1993
Plan") which as of January 31, 1998 aggregated 1,123,800 shares issuable at
a weighted average exercise price of approximately $2.41 per share; (ii) an
aggregate of 25,000 shares of Common Stock reserved for future grants or
purchases pursuant to the HK Systems, Inc. 1997 Stock Plan for Outside
Directors (the "Directors Plan"); and (iii) outstanding warrants to
purchase approximately 124,223 shares of Common Stock at 115% of the
initial public offering price ($16.10 per share assuming an initial public
offering price of $14.00). See "Management--Stock Option Plan" and
"Description of Capital Stock--Warrants." Includes 329,770 shares of Common
Stock held by the HK Systems, Inc. Employee Stock Ownership Plan ("ESOP")
that are not considered outstanding for financial reporting purposes.
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is certain summary historical and pro forma consolidated
financial data for the periods and as of the dates indicated. The historical
data is derived from, and should be read in conjunction with, the Company's
Consolidated Financial Statements and related notes thereto and "Management's
Discussion of Results of Operations and Financial Condition" appearing
elsewhere in this Prospectus. The pro forma financial data has been derived
from the Unaudited Pro Forma Consolidated Financial Statements included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
--------------------------- --------------------
1995 (1) 1996 1997 (1) 1997 (1) 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues:
Integrated systems............ $ 70,689 $ 87,150 $163,472 $47,003 $ 28,098
Customer services............. 40,501 49,792 65,200 15,626 17,371
Logistics and software
systems...................... 15,413 13,143 17,478 4,092 3,021
-------- -------- -------- ------- --------
Total net revenues.......... 126,603 150,085 246,150 66,721 48,490
Gross profit.................. 18,077 26,731 52,504 12,689 11,365
Selling, general &
administrative expenses....... 13,492 16,255 31,724 7,137 7,685
Amortization of goodwill....... 1,033 1,225 3,979 2,701(2) 427
Income from operations........ 3,552 9,251 16,801 2,851 3,253
Interest expense............... 3,108 3,545 5,570 1,365 1,315
Income before income taxes..... 622 5,715 11,311 1,426 1,938
Net income (loss) applicable
to common shareholders....... (1,094) 2,115 5,841 561 876
Basic net income (loss) per
share of common stock........ (0.40) 0.70 1.94 0.19 0.32
Diluted net income (loss) per
share of common stock........ (0.40) 0.37 0.77 0.10 0.13
PRO FORMA DATA (3):
Net income applicable to common
shareholders.................. NA NA 8,679 1,270 1,595
Basic net income per share of
common stock.................. NA NA 1.34 0.20 0.26
Diluted net income per share of
common stock.................. NA NA 0.69 0.10 0.13
OTHER DATA:
Capital expenditures........... 1,429 3,145 4,086 554 1,407
Depreciation................... 2,851 3,852 5,224 1,308 1,160
EBITDA (4)..................... 9,271 15,994 27,044 7,023 5,056
Backlog (at end of periods).... 89,871 97,218 85,654 113,888 143,894
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER
31, AS OF JANUARY 31, 1998
----------------- ---------------------------------
PRO FORMA
PRO AS
1996 1997 HISTORICAL FORMA (3) ADJUSTED (3)
------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Total assets... $90,789 $131,361 $139,546 $139,546 $139,546
Total debt..... 28,000 51,960 68,170 68,170 28,892
Redeemable
preferred
stock......... 16,948 18,068 18,348 4,348 --
Common stock
with put
rights........ 633 633 633 -- --
Total
shareholders'
(deficit)
equity........ (2,952) 2,889 (7,493) 7,140 51,439
</TABLE>
- --------
6
<PAGE>
(1) On February 13, 1995, the Company consummated the Eaton-Kenway Acquisition.
On November 15, 1996, the Company consummated the Western Atlas
Acquisition. Operating results of the acquired businesses are included in
the Company's consolidated operations from the respective dates of
acquisition.
(2) During the first quarter of 1997, the Company decided to abandon one of its
software product lines. Amortization includes a write-off of $2,295 of
unamortized software costs related to this decision.
(3) The pro forma statement of income data give effect to (i) the conversion of
the Company's Class B Cumulative Convertible Preferred Stock ("Class B
Preferred Stock") into common stock of the Company, the reclassification of
all common stock with put rights of the Company into Common Stock and the
termination of certain management common stock "put" rights simultaneous
with the Offering (the "Recapitalization"); (ii) the establishment of the
ESOP and stock repurchases and other transactions in connection with the
establishment of the ESOP in December 1997 and January 1998 (the "ESOP
Transactions"); and (iii) the Offering and the application of the Company's
net Offering proceeds to repay certain indebtedness and to pay accrued
dividends on and redeem the Company's Class D Cumulative Preferred Stock
("Class D Preferred Stock"). The pro forma balance sheet data give effect
to the Recapitalization. The pro forma as adjusted balance sheet data give
effect to the application of the net Offering proceeds. See "Unaudited Pro
Forma Consolidated Financial Statements."
(4) EBITDA is defined as income (loss) before taxes plus fixed charges. Fixed
charges consist of interest, depreciation and amortization. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to net income as
a measure of performance nor as an alternative to cash flow as a measure of
liquidity. EBITDA is a performance measure in the Company's primary debt
financing instrument.
7
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Common Stock offered hereby. This Prospectus contains certain forward-looking
statements that involve substantial risks and uncertainties. These forward-
looking statements can generally be identified as such because the context of
the statement includes words such as the Company "believes," "anticipates,"
"expects," "estimates," "intends" or other words of similar import. Similarly,
statements that describe the Company's future plans, objectives and goals are
also forward-looking statements. The Company's actual results, performance or
achievements could differ materially from those expressed or implied in these
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this Prospectus.
Fluctuations in Operating Results; Potential Risks Associated with Large
Contracts. The revenues associated with an individual contract for certain of
the Company's services and products can exceed several million dollars.
Therefore, a relatively small number of contracts can represent a significant
percentage of the Company's revenues and profits in any one period, and a
relatively small reduction in the number of large contracts can have a
material adverse effect on the Company's revenues and profits in any one
quarter or fiscal year. As a result, the Company's operating results can vary
significantly from quarter to quarter due to the uncertain timing associated
with customers' awards of contracts to the Company and other factors out of
the Company's control. For example, revenues for the three months ended
January 31, 1998 were lower than for the comparable period in 1997 due largely
to the delay in the award of two large contracts until the end of the period.
In addition, due to the nature of the Company's contracts, and the fact that
such contracts account for a substantial portion of the Company's revenues,
the Company must continually rebuild its revenue base by adding significant
new contracts. Further, cost overruns or other difficulties in implementing a
single large contract could have a material adverse effect on the Company's
revenues and profits in any particular period.
Historically, single customers or a small group of customers have
represented a large percentage of the Company's revenues for a particular
fiscal year due to the revenues that are associated with large contracts with
those customers. This group of customers typically changes from year to year.
For example, for fiscal 1997, the Company had two customers, Ford Motor
Company and Philip Morris, who accounted for 13% and 10% of the Company's
total revenues, respectively, pursuant to seven principal contracts. For
fiscal 1996, the Company had two customers, Ford Motor Company and Imperial
Wall Coverings, who accounted for 15% and 9% of the Company's total revenues,
respectively, pursuant to five principal contracts. The loss of any large
customer could have a material adverse effect on the Company's business,
operating results or financial condition. In addition, there can be no
assurance that the Company will continue to be able to attract such customers
in future years.
Risks Associated with Fixed Price Contracts. A substantial portion of the
Company's projects are performed on a fixed price basis, and contracts related
to these projects generally have performance requirements that the Company
must satisfy. The cost of satisfying the performance requirements of any
particular contract may vary from the amount the Company originally estimated
due to a variety of factors, including unforeseen events, changes in job
conditions and variations in labor and equipment productivity over the term of
the contract. As a result, the revenue and profit realized on a fixed price
contract can vary from estimated amounts. Such variations can be material and
may result in the Company experiencing losses on projects, which in turn could
have a material adverse effect on the Company's business, operating results or
financial condition in any quarter or fiscal year.
Competition. Certain of the Company's markets are highly competitive. The
Company faces competition from a number of different companies, especially in
the SCM software market. Certain of the Company's competitors are large and
have significant financial, marketing and technical resources. In addition,
the Company may encounter competition from new market entrants. There can be
no assurance that the Company will be able to continue to compete successfully
in its markets in the future.
8
<PAGE>
Acquisition Risks. While the Company has no potential acquisitions pending
that are probable of being consummated, the Company regularly evaluates such
opportunities and may make acquisitions in the future. The Company believes
the consummation of one or more acquisitions is essential for the Company to
achieve its strategic goals, especially in the area of SCM software. Future
acquisitions may be large, and there can be no assurance that the Company will
be able to locate or acquire suitable acquisition candidates on acceptable
terms or that the Company will effectively and profitably integrate into the
Company any business it may acquire in the future. Moreover, additional
indebtedness incurred to pay for such acquisitions could adversely effect the
Company's liquidity and financial stability, and Common Stock issued to effect
acquisitions could result in dilution to the Company's shareholders.
Risks Associated With Rapid Technological Change and New Product
Introduction. The markets for the Company's software products are
characterized by rapidly changing technologies, evolving industry standards,
changes in customer requirements and frequent new product introductions,
applications and enhancements. The introduction by competitors of products
embodying new technologies and the emergence of new industry standards could
adversely affect the Company's ability to sell its software applications. By
continually developing enhancements for their software products, competitors
have developed, or are in the process of developing, products that may offer
features similar or superior to the Company's current software products. The
Company expects that the continued development of software products by
competitors will require that the Company develop new and/or enhanced
applications on an ongoing basis to meet the demands of these markets.
However, there can be no assurance that the Company will be able to continue
to develop and introduce new and/or enhanced products or to respond otherwise
appropriately to changing customer needs.
Risks Associated with Percentage of Completion Accounting. As required by
generally accepted accounting principles, the Company uses the percentage of
completion method of accounting under which it recognizes contract revenues
generally based on the percentage that costs to date bear to total estimated
costs and recognizes estimated contract losses in full when determined. This
method is subjective, as revenue and profit recognition are dependent on the
use of management estimates of a project's total costs and its ongoing
progress towards completion. The Company reviews its contract estimates as
work progresses and makes any necessary adjustments on a current basis, which
may result in a reduction or elimination of previously reported contract
profits. Thus, depending on the size of a project, variations from estimated
contract performance could have a material adverse effect on the Company's
operating results for any quarter or fiscal year.
Dependence on Key Personnel. The Company's future success will depend in
large part upon the continued service of its highly qualified and experienced
engineering, sales and senior management personnel. The loss of any of the
Company's key senior management or its key engineering and sales personnel
could have a material adverse effect on the Company's business, operating
results or financial condition. The Company currently maintains a limited
amount of life insurance on its CEO. The Company actively recruits qualified
personnel with industry experience as well as advanced engineering degrees
displaying a potential to contribute to the future development of software,
controls and equipment. Competition for such personnel is intense; therefore,
there can be no assurance that the Company will experience continued success
in the recruitment or retention of qualified engineering, sales and managerial
personnel in the future.
Liability Associated with Services and Products. Inherent in the sale of the
Company's services and products is the potential for the Company to be liable
for consequential or incidental damages that a customer incurs as a result of
the failure of the Company's product to perform as required. An award of
consequential or incidental damages could have a material adverse effect on
the Company's business, operating results or financial condition. The Company
attempts to limit its exposure to liability for such consequential or
incidental damages through terms and conditions contained in warranties and
customer contracts. However, these limitations may be modified or limited
based on individual customer requirements, and there can be no assurance that
such terms or conditions may be enforceable in each state or other
jurisdiction in which the Company does business.
9
<PAGE>
Litigation Relating to Assumed Eaton-Kenway Contract. As part of the
February 13, 1995 Eaton-Kenway Acquisition, the Company assumed a contract
dated July 1, 1992 between Eaton-Kenway, Inc. ("Eaton-Kenway") and the Federal
Reserve Bank of San Francisco (the "SF Fed") relating to the installation of a
material handling system in two existing bank vaults (the "Fed Contract"). On
April 7, 1995, the SF Fed filed a lawsuit (the "Fed Suit") against the
Company, Eaton Corporation ("Eaton") and Eaton-Kenway, which remains a
subsidiary of Eaton, alleging, among other things, a breach of the Fed
Contract and seeking not less than $3.55 million as restitution for the
consideration it paid under the Fed Contract, not less than $6.4 million for
incidental and consequential damages and not less than $46.7 million to cover
the costs of constructing two new bank vaults. In 1995, the court granted
partial summary judgment on the issue of liability in favor of the SF Fed and
against the Company and the other defendants on the breach of contract and
recission and restitution counts of the SF Fed's complaint. On January 30,
1998, the court granted partial summary judgment in favor of the Company and
the other defendants, holding that the SF Fed cannot recover the cost of
constructing two new bank vaults or litigation expenses. However, the SF Fed
may continue to seek damages in excess of $10 million against the Company
based on claims that have not been dismissed. The court's orders granting
partial summary judgment are subject to appeal after the entry of final
judgment in the action, and there can be no assurance that the results of any
appeal would be favorable to the Company. It is anticipated that a jury trial
on the remaining damage issues on the contract claim against the Company and
Eaton-Kenway, if not all the remaining claims against all the parties, will be
held in 1998. While the Company believes it has meritorious defenses in the
Fed Suit, the Fed Suit could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business--Legal
Proceedings."
Risks Associated with Intellectual Property. The Company relies primarily on
a combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect its proprietary rights. The
Company believes the foregoing measures afford only limited protection.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information the Company regards as proprietary. The Company may
increasingly be subject to claims of intellectual property infringement as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps.
Although the Company is not aware that any of its products infringes upon
proprietary rights of third parties, there can be no assurance third parties
will not claim infringement by the Company with respect to current or future
products. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all, which could have a material adverse effect upon the
Company's business, operating results or financial condition.
The Company resells certain software that it licenses from third parties.
There can be no assurance that these third party software licenses will
continue to be available on commercially reasonable terms. The loss of or
inability to maintain or obtain any of these software licenses could result in
delays or reductions in product implementation until equivalent software could
be identified, licensed and integrated or independently developed by the
Company, which could adversely affect the Company's business, operating
results or financial condition.
Risk of Software Defects. Implementing the Company's systems and software
for automated material handling systems and its SCM software systems involves
varying degrees of customization to meet each customer's specific needs. While
the Company performs extensive testing of such customized systems and
software, they may nonetheless be more prone to error than systems and
software designed for general applications and previously implemented at other
sites. Undetected errors may cause the Company to incur substantial costs to
modify or repair a system and could have a material adverse effect on the
Company's business, operating results or financial condition. In addition, the
Company's software applications, like software products in general, may
contain undetected errors or "bugs" when current or enhanced versions are
released which may cause delays in product introduction or contract
performance, require design modifications or result in a loss of the product
or substantial maintenance costs, any of which could adversely affect the
Company's business, operating results or financial condition.
10
<PAGE>
Year 2000 Issues. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field. To
distinguish 21st century dates from 20th century dates, these date code fields
must be able to accept four digit entries. As a result, computer systems and
software programs used by many companies, including the Company and companies
to whom the Company has provided its services and products, may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists concerning the potential effects associated with such compliance, and
Year 2000 issues could have a material adverse effect on the Company's
business, operating results or financial condition due, among other things, to
the following: (i) the Company has warranted, and may in the future warrant,
to certain customers that its products will be Year 2000 compliant, and the
Company may be obligated under fixed price software service contracts to
address any Year 2000 issues associated with covered products, and the failure
of such products to be Year 2000 compliant could materially adversely affect
the Company; (ii) because the Company relies on outside vendors to provide
computer hardware components that the Company in turn sells to customers, and
many of the Company's products and services are integrated or interface with
other software systems of a customer at the time of initial installation or
thereafter, to some degree Year 2000 compliance is beyond the Company's
control; and (iii) the possibility that it will be more costly than
anticipated to ensure that the products the Company uses in internal
operations are Year 2000 compliant.
Risk of Environmental Liabilities. The Company is subject to various
federal, state and local environmental laws, including, but not limited to,
those governing air emissions, water discharges and the storage, handling,
disposal and remediation of petroleum and hazardous substances. The Company
may in the future incur material expenditures to ensure compliance with
environmental laws. Moreover, certain of the Company's facilities have been in
operation for many years, and over such time, predecessor operators of such
facilities may have generated and disposed of wastes that are or may be
considered hazardous. Accordingly, it is possible that future environmental
requirements or facts not currently known will require unanticipated efforts
and expenditures that would have a material adverse effect on the Company's
business, operating results or financial condition.
Economic Factors Affecting the Industry. The Company's business is likely to
be affected by the state of the U.S. economy in general and by the varying
cyclicality of the industries in which its customers participate. A downturn
in the U.S. economy in general or in any industry the Company serves could
have a material adverse effect on the Company's business, operating results or
financial condition.
Anti-Takeover Provisions; Company Control. The Company's Amended and
Restated Articles of Incorporation and By-laws contain provisions that, among
other things, establish staggered terms for members of the Company's Board of
Directors, place certain restrictions on the removal of directors, authorize
the Board of Directors to issue preferred stock in one or more series without
shareholder approval, impose procedural requirements in connection with the
calling of special meetings of shareholders, require advance notice for
director nominations and certain other matters to be considered at meetings of
shareholders, impose supermajority voting requirements on amendments to the
By-laws and impose supermajority voting and "fair price" requirements on
certain transactions. These provisions and the prohibition against certain
business combinations and other provisions contained in the Wisconsin Business
Corporation Law (the "WBCL") could have the effect of delaying, deferring or
preventing a change in control or the removal of existing management of the
Company.
Upon the consummation of the Offering, Management and two institutional
investors will in the aggregate own approximately 50.4% of the outstanding
Common Stock (approximately 44.7% if the Underwriters' over-allotment option
is exercised in full). Accordingly, if they act collectively, then Management
and such investors may have the practical ability to elect the entire Board of
Directors of the Company and to determine the outcome of certain other matters
submitted to the Company's shareholders for approval. See "Principal and
Selling Shareholders" and "Description of Capital Stock."
11
<PAGE>
Shares Eligible for Future Sales. Future sales of Common Stock by the
Company or its existing shareholders could adversely affect the prevailing
market price of the Common Stock. The Company and its officers, directors and
shareholders have entered into "lock-up" agreements with Lehman Brothers Inc.
("Lehman Brothers") whereby the Company and such officers, directors and
shareholders have agreed not to sell any Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock for 180 days
following the date of this Prospectus without the consent of Lehman Brothers,
except in the case of the Company for shares delivered under certain
compensation plans. After the expiration of such 180-day period, or earlier
with the written consent of Lehman Brothers, approximately 5,888,947 shares of
Common Stock will be eligible for sale by existing shareholders subject to
Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), all of which have been held in excess of requisite holding
period under Rule 144 but are subject to resale volume limitations imposed
under Rule 144. Although holders of options to purchase 1,123,800 additional
shares of Common Stock (as of January 31, 1998) that will become exercisable
upon consummation of the Offering generally will not execute such lock-up
agreements, it is the Company's current intent not to file a registration
statement under the Securities Act with respect to such shares until the
expiration of at least 180 days after the date of this Prospectus. Assuming
the Company files a registration statement, such shares will be eligible for
sale commencing immediately after an option is exercised. In addition, the
ESOP holds 403,053 shares of Common Stock, approximately 73,282 of which have
been allocated to employee accounts and the remainder of which are held for
future allocation to employee accounts. The ESOP will distribute shares from
time to time to ESOP participants, but currently only following their
retirement or other termination of employment. Shares that the ESOP
distributes may be freely traded without restriction under the Securities Act.
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales may occur, could have a material adverse effect on
the market price of the Common Stock. See "Shares Eligible for Future Sale"
and "Description of Capital Stock."
Absence of a Prior Public Market for the Common Stock and Possible
Volatility of Stock Prices. Prior to the Offering, there has been no public
market for the Common Stock. The Common Stock has been approved for listing on
the New York Stock Exchange under the symbol "HKS," subject to notice of
issuance; however, there can be no assurance that an active trading market
will develop or be sustained. The initial public offering price of the Common
Stock will be determined by negotiations among the Company, the Underwriters,
the Selling Shareholders and their representatives, and there can be no
assurance that the market price of the Common Stock after the Offering will
not fall below the initial public offering price. The market price of the
Common Stock may be highly volatile depending on a number of factors. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
Dilution. The initial public offering price will be substantially higher
than the book value per share of Common Stock. Investors purchasing Common
Stock in the Offering will therefore incur immediate and substantial dilution
of $12.93 per share in net tangible book value of their purchased Common
Stock. See "Dilution."
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock. The Company
currently anticipates that it will retain its future earnings for use in the
expansion and operation of its business and does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. In addition, the
Company is essentially prohibited by the current terms of its revolving credit
facility from declaring or paying any dividends on or making any other
distributions on any class or series of its capital stock other than dividends
payable solely in its capital stock. The Company may in the future enter into
loan or other agreements or issue debt securities or preferred stock that
restrict the payment of cash dividends on its capital stock. Any future
determination to pay cash dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, the Company's
results of operations, financial condition, contractual restrictions and such
other factors deemed relevant by the Board of Directors.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock being offered
by the Company in the Offering are estimated to be approximately $44 million
based on the assumed public offering price $14.00 per share after deducting
the underwriting discounts and commissions and estimated offering expenses.
The net proceeds to the Company of the Offering will be used to repay certain
indebtedness and to make certain payments to Selling Shareholders in respect
of Class D Preferred Stock, all as described below.
The Company will use a portion of its net proceeds to pay dividends accrued
on Class D Preferred Stock through the consummation of the Offering and to
redeem Class D Preferred Stock outstanding immediately prior to the
consummation of the Offering. The aggregate of such payments calculated as of
January 31, 1998 was approximately $5.0 million, and this amount will increase
at a rate of approximately $94,000 per month until the consummation of the
Offering. Such payments will be made to Selling Shareholders. See "Certain
Transactions; Relationships with Selling Shareholders; Compensation Committee
Interlocks and Insider Participation."
The Company intends to repay all of the amounts the Company owes on a
subordinated promissory note due in 2003, with a principal amount of $8.0
million that bears interest at a rate of 10% per annum through November 15,
1998, that the Company issued in 1996 to Western Atlas Inc. ("Western Atlas")
in connection with the Western Atlas Acquisition. The Company intends to use
the remainder of its net proceeds, approximately $30.9 million after the
payments relating to the Class D Preferred Stock and the Western Atlas note,
to repay a portion of the amount the Company owes to its banks pursuant to the
Company's revolving credit facility. As of January 31, 1998, the Company owed
approximately $44.8 million under this facility bearing interest at rates
ranging from 7.1% to 8.5% per annum. In December 1997 and January 1998, the
Company incurred indebtedness under this facility in connection with the ESOP
Transactions as follows: (i) the Company borrowed approximately $6.5 million
to repurchase 420,000 shares of common stock of the Company from a former
employee to liquidate his interest after the employee exercised contractual
"put" rights, of which the Company contributed 36,641 shares to the ESOP; (ii)
the Company obtained a $6.0 million term loan (which bears interest at rates
comparable to those under the revolving credit facility) to obtain funds to
make a loan of approximately $6.0 million to the ESOP, which matures on
October 31, 2006 and bears interest at a fixed rate of 8%, the proceeds of
which the ESOP used to purchase shares of common stock of the Company from
Management shareholders; and (iii) the Company borrowed approximately $0.6
million under the revolving credit facility to contribute to the ESOP to
enable the ESOP to make the first scheduled principal payment under its term
loan, the effect of which contribution and principal payment was to transform
$0.6 million of term debt of the Company into revolving debt. See "Certain
Transactions; Relationships with Selling Shareholders; Compensation Committee
Interlocks and Insider Participation."
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders.
13
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as of
January 31, 1998 (i) on a historical basis, (ii) on a pro forma basis to
reflect the Recapitalization and the related changes in the Company's
authorized capital and (iii) as adjusted to reflect the sale of 3,460,000
shares of Common Stock offered by the Company hereby (at an assumed public
offering price of $14.00 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses) and the application
of the Company's net Offering proceeds to repay certain indebtedness and pay
accrued dividends on and redeem preferred stock. See "Summary Pro Forma
Consolidated Financial Data," "Certain Transactions; Relationships with
Selling Shareholders; Compensation Committee Interlocks and Insider
Participation" and "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1998
-------------------------------------------
PRO FORMA AFTER AS ADJUSTED FOR
HISTORICAL RECAPITALIZATION THE OFFERING
---------- ---------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
Revolving line of credit......... $44,770 $44,770 $13,492
Subordinated Promissory Note due
2003............................ 8,000 8,000 --
Subordinated Promissory Note due
2005............................ 10,000 10,000 10,000
Term Note relating to ESOP due
2002............................ 5,400 5,400 5,400
------- ------- -------
Total long-term debt........... 68,170 68,170 28,892
------- ------- -------
Common stock with put rights....... 633 -- --
Redeemable Preferred Stock:
Class D Cumulative Preferred
Stock (2,000,000 shares
designated; 1,739,000 shares
issued and outstanding after
Recapitalization; no shares
issued and outstanding after
Offering)....................... 18,348 4,348 --
Shareholders' equity:
Preferred Stock, par value $.01
per share; 10,000,000 shares
authorized; no shares issued and
outstanding..................... -- -- --
Common Stock, par value $.01 per
share; 40,000,000 shares
authorized; 8,615,360 shares
issued and 7,902,230 shares
outstanding after
Recapitalization; 12,075,358
shares issued and 11,362,230
outstanding after Offering (1).. -- 86 121
Additional paid-in capital....... -- 14,547 58,811
Treasury stock, at cost, 383,358
shares of Common Stock.......... (5,858) (5,858) (5,858)
Unearned compensation--ESOP...... (5,400) (5,400) (5,400)
Retained earnings................ 3,765 3,765 3,765
------- ------- -------
Total shareholders' equity..... (7,493) 7,140 51,439
------- ------- -------
Total capitalization........... $79,658 $79,658 $80,331
======= ======= =======
</TABLE>
- --------
(1) Does not include (i) outstanding options to purchase 1,123,800 shares of
Common Stock and (ii) outstanding warrants to purchase shares of Common
Stock. Outstanding shares on a pro forma basis after Recapitalization and
as adjusted for the Offering exclude 329,770 shares held by the ESOP that
have not been allocated to ESOP participants' accounts and are not
considered outstanding for financial reporting purposes.
14
<PAGE>
DILUTION
The net tangible book value of the Company as of January 31, 1998 was
$(31.8) million, or $(3.86) per outstanding share of Common Stock after giving
effect to the Recapitalization. Net tangible book value per share represents
the amount of the Company's tangible net worth (total tangible assets less
total liabilities) divided by the total number of shares of Common Stock
outstanding after giving effect to the Recapitalization. After giving effect
to the sale of 3,460,000 shares of Common Stock in the Offering at an assumed
initial public offering price of $14.00 per share and the application of the
net proceeds therefrom (after deduction of estimated offering expenses), the
pro forma net tangible book value as of January 31, 1998 would have been $12.5
million or $1.07 per share. This represents an immediate increase in net
tangible book value of $4.93 per share to existing shareholders and an
immediate dilution of $12.93 per share to new investors purchasing shares in
the Offering.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.................... $14.00
Net tangible book value per share before the Offering...... (3.86)
Increase per share attributable to new investors........... 4.93
-----
Pro forma net tangible book value per common share after
the Offering.............................................. 1.07
------
Dilution per share to new investors........................ $12.93
======
</TABLE>
The following table sets forth, on an adjusted basis as of January 31, 1998,
the differences in the number and percentage of shares of stock purchased, the
amount and percentage of consideration paid and the average price per share
that the Company's existing shareholders paid to the Company and that new
investors purchasing shares in the Offering will pay at an assumed initial
public offering price of $14.00 per share (before deducting the underwriting
discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
NUMBER OF PERCENT AVERAGE
SHARES OF SHARES PRICE
PURCHASED PURCHASED AMOUNT PAID PERCENT PER SHARE
---------- --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 8,232,000 70.4% $15,149,000 23.8% $ 1.84
New investors........... 3,460,000 29.6% 48,440,000 76.2% 14.00
---------- ------ ----------- ------
Total............... 11,692,000 100.0% $63,589,000 100.0%
========== ====== =========== ======
</TABLE>
The above assumes no exercise of any stock options outstanding as of January
31, 1998 under the 1993 Plan. As of that date, there were options outstanding
to purchase a total of 1,123,800 shares of Common Stock at an average exercise
price of $2.41 per share. See "Management--Stock Option Plans." If all options
outstanding as of that date had been exercised as of such date, then the
dilution per share to new investors in the Offering would be $12.81. The
foregoing tables also exclude shares reserved for future grants or purchases
pursuant to the Directors Plan. See "Management--Director Compensation" and
"Management--Stock Option Plan." New investors may experience further dilution
to the extent that options are granted and exercised, or shares are otherwise
issued under these plans, at a price that does not exceed the initial public
offering price.
15
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain selected historical consolidated
financial and other data for the Company and Predecessor as of and for each of
the five years ended October 31, 1997 and for the three months ended January
31, 1997 and 1998. The historical consolidated financial and other data as of
and for the four years ended October 31, 1997 were derived from the
Consolidated Financial Statements of the Company, which were audited by Arthur
Andersen LLP, independent public accountants. The historical consolidated
financial and other data as of and for the year ended October 31, 1993 and for
the three months ended January 31, 1997 and 1998 have not been audited. In the
opinion of the Company, the historical consolidated financial and other data
of the Company as of and for the year ended October 31, 1993 and for the three
months ended January 31, 1997 and 1998 include all adjusting entries necessary
to present fairly the information set forth therein.
The following selected historical consolidated financial data should be read
in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and the Company's Consolidated Financial
Statements and related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR (1) COMPANY (1)
---------------------- ---------------------------------------------------------------
THREE MONTHS
ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
YEAR ENDED OCTOBER 31, --------------------------------------- --------------------
1993 1994 1995 (2) 1996 1997 (3) 1997 (3) 1998
---------------------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net revenues:
Integrated systems..... $ 93,404 $67,886 $ 70,689 $ 87,150 $163,472 $ 47,003 $ 28,098
Customer services...... 9,965 13,171 40,501 49,792 65,200 15,626 17,371
Logistics and software
systems............... 4,522 6,674 15,413 13,143 17,478 4,092 3,021
-------- ------- -------- -------- -------- -------- --------
Total net revenues... 107,891 87,731 126,603 150,085 246,150 66,721 48,490
Cost of sales........... 97,330 76,600 108,526 123,354 193,646 54,032 37,125
-------- ------- -------- -------- -------- -------- --------
Gross profit........... 10,561 11,131 18,077 26,731 52,504 12,689 11,365
Selling expenses........ 6,469 5,700 8,907 9,981 19,682 4,431 5,090
General & administrative
expenses............... 5,053(4) 3,279 4,585 6,274 12,042 2,706 2,595
Amortization of
goodwill............... -- 4,753(5) 1,033 1,225 3,979(6) 2,701(6) 427
-------- ------- -------- -------- -------- -------- --------
Income (loss) from
operations............ (961) (2,601) 3,552 9,251 16,801 2,851 3,253
Interest expense........ 641(7) 1,683 3,108 3,545 5,570 1,365 1,315
Other, net.............. -- (109) (178) (9) (80) 60 --
-------- ------- -------- -------- -------- -------- --------
Income (loss) before
income taxes.......... (1,602) (4,175) 622 5,715 11,311 1,426 1,938
Provision (credit) for
income taxes........... (467) (1,646) 398 2,288 4,051 511 698
-------- ------- -------- -------- -------- -------- --------
Net income (loss)
before minority
interest.............. (1,135) (2,529) 224 3,427 7,260 915 1,240
Minority interest
expense (8)............ -- 620 187 -- -- -- --
-------- ------- -------- -------- -------- -------- --------
Net income (loss)
before dividends on
preferred stock....... (1,135) (3,149) 37 3,427 7,260 915 1,240
Dividends on preferred
stock.................. -- 824 1,131 1,312 1,419 354 364
-------- ------- -------- -------- -------- -------- --------
Net income (loss)
applicable to common
shareholders.......... $ (1,135) $(3,973) $ (1,094) $ 2,115 $ 5,841 $ 561 $ 876
======== ======= ======== ======== ======== ======== ========
Basic net income (loss)
per share of common
stock.................. NA $ (1.84) $ (0.40) $ 0.70 $ 1.94 $ 0.19 $ 0.32
======== ======= ======== ======== ======== ======== ========
Diluted net income
(loss) per share of
common stock........... NA $ (1.84) $ (0.40) $ 0.37 $ 0.77 $ 0.10 $ 0.13
======== ======= ======== ======== ======== ======== ========
OTHER DATA:
Capital expenditures.... $ 969 $ 657 $ 1,429 $ 3,145 $ 4,086 $ 554 $ 1,407
Depreciation............ 1,124 1,657 2,851 3,852 5,224 1,308 1,160
EBITDA (9).............. 163 5,575 9,271 15,994 27,044 7,023 5,056
Backlog (at end of
periods)............... 53,577 41,903 89,871 97,218 85,654 113,888 143,894
<CAPTION>
AS OF OCTOBER 31, AS OF JANUARY 31,
AS OF OCTOBER 31, --------------------------------------- --------------------
1993 1994 1995 (2) 1996 1997 (3) 1997 (3) 1998
---------------------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $ 50,491 $53,381 $ 89,996 $ 90,789 $131,361 $164,373 $139,546
Total debt.............. -- 14,000 34,000 28,000 51,960 64,000 68,170
Minority interest (8)... -- 10,600 -- -- -- -- --
Redeemable preferred
stock.................. -- 10,800 15,828 16,948 18,068 17,228 18,348
Common stock with put
rights................. -- 461 633 633 633 633 633
Total shareholders'
(deficit) equity....... 18,987 (3,973) (5,067) (2,952) 2,889 (2,298) (7,493)
</TABLE>
16
<PAGE>
- --------
(1) On October 29, 1993, the Company consummated the HEI Acquisition. All
financial data as of and for the year prior to acquisition are reflected
exclusive of any purchase accounting adjustments.
(2) On February 13, 1995, the Company consummated the Eaton-Kenway
Acquisition. Operating results of the acquired business are included in
the Company's consolidated operations from the date of acquisition.
(3) On November 15, 1996, the Company consummated the Western Atlas
Acquisition. Operating results of the acquired businesses are included in
the Company's consolidated operations from the date of acquisition.
(4) Included in general & administrative expenses is a management fee charged
by Harnischfeger Industries, Inc. ("Harnischfeger") for services performed
by Harnischfeger on behalf of the Company. Such fees equaled two percent
of revenues.
(5) Included in amortization of goodwill is $4,186 of purchased in-process
software and development costs which resulted in a charge to income in the
period of the HEI Acquisition. See Note 3 to the Company's Consolidated
Financial Statements.
(6) During the first quarter of 1997, the Company decided to abandon one of
its software product lines. Amortization includes a write-off of $2,295 of
unamortized software costs related to this decision.
(7) Balance represents a charge by Harnischfeger on intercompany equity
advances.
(8) During 1994, the Company recognized as a minority interest certain Class A
preferred stock of Harnischfeger Engineers, Inc. ("HEI") totaling $10,000
and Class C preferred stock of HEI totaling $600 held by Harnischfeger.
During 1995, the Class A preferred stock was converted into a subordinated
promissory note, and the Class C preferred stock was redeemed.
(9) EBITDA is defined as income (loss) before taxes plus fixed charges. Fixed
charges consist of interest, depreciation and amortization. EBITDA is not
a measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to net income as
a measure of performance nor as an alternative to cash flow as a measure
of liquidity. EBITDA is a performance measure in the Company's primary
debt financing instrument.
17
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is certain unaudited summary pro forma consolidated
financial data for the periods ended and as of the dates indicated. This
information is derived from, and should be read in conjunction with, the
Unaudited Pro Forma Consolidated Financial Statements appearing elsewhere in
this Prospectus. The summary pro forma consolidated statement of income data
for the year ended October 31, 1997 and the three months ended January 31,
1997 and 1998 reflects the effects on the historical results of operations of
the Company of the following transactions as if these transactions had
occurred on November 1, 1996: (i) the Recapitalization; (ii) the ESOP
Transactions; and (iii) the Offering and the application of the proceeds to
the Company from the Offering to repay certain indebtedness and to pay accrued
dividends on and redeem preferred stock. The summary pro forma consolidated
balance sheet data as of January 31, 1998 reflects the effects of the
Recapitalization and the Offering transactions as if they had occurred on
January 31, 1998. The summary pro forma consolidated financial data does not
purport to represent what the Company's results of operations would actually
have been if such transactions in fact occurred as of such dates or results
that may be attained in the future.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------- --------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
YEAR ENDED JANUARY 31, YEAR ENDED JANUARY 31,
OCTOBER 31, --------------- OCTOBER 31, ------------------
1997 1997 1998 1997 1997 1998
----------- ------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF
INCOME DATA:
Net revenues............ $246,150 $66,721 $48,490 $246,150 $66,721 $48,490
Gross profit............ 52,504 12,689 11,365 52,504 12,689 11,365
Selling, general &
administrative
expenses............... 31,724 7,137 7,685 31,724 7,137 7,685
Amortization of
goodwill............... 3,979 2,701 427 3,979 2,701 427
Income from operations. 16,801 2,851 3,253 16,801 2,851 3,253
Interest expense........ 5,570 1,365 1,315 3,353(1) 811(1) 761(1)
Income before income
taxes.................. 11,311 1,426 1,938 13,528 1,980 2,492
Provision for income
taxes.................. 4,051 511 698 4,849(2) 710(2) 897(2)
Net income before
dividends on preferred
stock................. 7,260 915 1,240 8,679 1,270 1,595
Dividends on preferred
stock.................. 1,419 354 364 -- (3) -- (3) -- (3)
Net income applicable
to common
shareholders.......... 5,841 561 876 8,679 1,270 1,595
Basic net income per
share of common stock. 1.94 0.19 0.32 1.34 0.20 0.26
Diluted net income per
share
of common stock....... 0.77 0.10 0.13 0.69 0.10 0.13
</TABLE>
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1998
------------------------------------
PRO
PRO FORMA BALANCE SHEET HISTORICAL ADJUSTMENTS FORMA
DATA: ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Total assets........... $139,546 -- $139,546
Accrued liabilities.... 9,330 (673)(4) 8,657
Total current
liabilities........... 56,389 (673) 55,716
Other liabilities...... 3,499 -- 3,499
Long-term debt......... 68,170 (8,000)(1) 28,892
(31,278)(1)
Mandatory redeemable
preferred stock....... 18,348 (14,000)(5) --
(4,348)(4)
Common stock with put
rights................ 633 (633)(5) --
Common stock........... -- 121 (5)(6) 121
Additional paid-in
capital............... -- 44,264 (6) 58,811
14,547 (5)
Treasury stock......... (5,858) -- (5,858)
Unearned compensation--
ESOP.................. (5,400) -- (5,400)
Retained earnings...... 3,765 -- 3,765
Total shareholders'
equity................ (7,493) 60,383 51,439
Total liabilities and
shareholders' equity.. 139,546 -- 139,546
</TABLE>
18
<PAGE>
- --------
(1) Adjusted to reflect (i) a reduction in debt and interest expense in
connection with the repayment from the proceeds of the Offering of (A) the
$8,000 subordinated promissory note due to Western Atlas at an interest
rate of 10.0% and (B) $31,278 outstanding on the revolving credit facility
at an average interest rate of 7.3% from the proceeds of the Offering and
(ii) an increase in debt and interest expense on indebtedness incurred as
follows: (A) $6,458 ($600 of which was repaid in January 1998) under the
Company's revolving credit facility to repurchase 420,000 shares of common
stock of the Company and (B) $6,000 under a term loan provided by its bank
lenders which it subsequently loaned to the ESOP. The pro forma interest
expense savings are $2,217, $554 and $554 for the twelve months ending
October 31, 1997 and the three months ending January 31, 1997 and January
31, 1998, respectively.
(2) Adjusted to reflect the above pro forma adjustments utilizing a combined
federal and state tax rate of 36.0%.
(3) Adjusted to reflect the elimination of dividends on Class B Preferred
Stock and Class D Preferred Stock, which accrue at an 8.0% rate, in
connection with the Recapitalization and the Offering.
(4) Represents the payment of $673 in accrued dividends and the redemption of
Class D Preferred Stock of $4,348 using the proceeds of the Offering.
(5) Represents (i) the conversion of 5,600,000 shares of Class B Preferred
Stock with a stated amount of $14,000 to 5,600,000 shares of Common Stock
at a par value of $0.01 per share and (ii) the termination of certain
management "put" rights with respect to 3,015,360 shares of common stock
with a stated amount of $633 and a par value of $0.01.
(6) Represents the $44,385 in net proceeds associated with the sale of
3,460,000 shares of Common Stock with a par value of $0.01 offered by the
Company.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
OVERVIEW
The Company operates through three business units: (i) Integrated Systems
designs, installs and integrates automated material handling systems and
manufactures related automated material handling equipment; (ii) Customer
Services provides aftermarket customer support, including modernization,
service and parts; and (iii) Logistics and Software Systems develops and
implements advanced software systems. Historically, the Company has grown
through a combination of acquisitions and internal growth. The Company expects
future internal growth to occur predominantly in the higher margin customer
service and logistics and software systems businesses. Additionally, the
Company will seek selective strategic acquisitions to enable the Company's
logistics and software systems business to provide a broader range of SCM
software solutions.
Background. The Company originated as an engineering division of
Harnischfeger in 1969, and Management led the acquisition of the Company in
October 1993 for a total purchase price of $45.0 million. In February 1995,
the Company completed the Eaton-Kenway Acquisition for a total purchase price
of $12.3 million. The acquired business contributed revenues of approximately
$40.7 million in fiscal 1995. In November 1996, the Company consummated the
Western Atlas Acquisition for a total purchase price of $42.6 million. The
Western Atlas Acquisition contributed revenues of approximately $84.4 million
in fiscal 1997. Each of these acquisitions was partially financed by the
seller.
Through the Eaton-Kenway and Western Atlas Acquisitions, the Company
obtained, among other things, captive automated material handling equipment
and replacement parts manufacturing capabilities, which ensure adequate levels
of supply and enhance quality assurance, and significantly increased its
installed base. While manufacturing is not the Company's primary focus, the
Company believes it is a critical factor to maintain its systems integration
leadership position and expand its customer service business.
With each acquisition, the Company has incurred expenses to integrate the
acquired business and focus it on the Company's strategies. In each case, the
Company has downsized the acquired business, with a resulting decline from its
previous revenue levels, to focus on higher margin business. During fiscal
1997, the Company discontinued unprofitable product lines and rationalized
manufacturing capacity by closing two former Western Atlas plants. The Company
recently expanded a former Eaton-Kenway plant (completed September 1997) and
is in the process of expanding a former Western Atlas plant (expected
completion in March 1998) to accommodate increased workload. The Company
continues to evaluate and remediate issues related to various Eaton-Kenway and
Western Atlas projects, but has established reserves for potential losses that
the Company believes are adequate.
Revenue Recognition. Integrated Systems revenues are derived from the sale
of automated material handling systems integration services and related
equipment, software and controls. Customer Services revenues are derived from
customer support and services, including modernization, service and
replacement parts and maintenance outsourcing. Contracts for both units are
typically fixed price with a duration of three months to two years. The
Company recognizes revenues from these contracts on the percentage of
completion accounting method, with the exception of spare parts, which are
recognized upon shipment. Under this method, percentage of completion is
determined by reference to the extent of contract performance, future
performance risk and cost incurrence. Any revisions in the estimated total
costs of the contracts during the course of the work are reflected when the
facts that require the revisions become known. Losses, if any, are recognized
in full as soon as identified. Generally, more than half of the revenues
derived on a contract for an integration or modernization project occur during
the second half of the project, as many of the outside equipment suppliers
fabricate and deliver components to the job site and integration commences.
20
<PAGE>
Logistics and Software Systems revenues are derived from software license
fees, modification and implementation fees, and services and maintenance fees;
however, in many cases contracts also include cost for related hardware (such
as computers and radio frequency telecommunications equipment) and
implementation assistance. These contracts have a typical duration of three
months to one year. Software license fee revenue is recorded, on a pro-rata
basis, when the software has been delivered (which is generally considered to
be at the completion of the first installation), the license agreement with
the customer has been executed, and collection of the resulting receivable is
deemed probable. Revenues for customization and modification of licensed
software and for implementation services are recorded using the percentage-of-
completion method of accounting. Logistics and Software Systems revenues tend
to be equally spread over the life of the contract because of their higher
service content.
Costs. Direct costs including material and other manufacturing-related costs
and outside vendor costs for subcontracted equipment comprise the largest
portion of the Company's cost of sales. Other direct costs consist primarily
of compensation, related fringe benefits, other overhead costs and warranty
support. Research and development and software development costs are expensed
as incurred.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenues represented by certain line items from the Company's consolidated
statements of income:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
--------------------------- ---------------
1995 1996 1997 1997 1998
---- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues:
Integrated systems.......... 56% 58% 66% 70% 58%
Customer services........... 32 33 26 23 36
Logistics and software
systems.................... 12 9 8 7 6
------- ------- ------- ------ ------
Total net revenues........ 100 100 100 100 100
Cost of sales................. 86 82 79 81 77
------- ------- ------- ------ ------
Gross profit................ 14 18 21 19 23
Selling expenses.............. 7 7 8 7 10
General & administrative
expenses..................... 3 4 4 4 5
Amortization of goodwill...... 1 1 2 4 1
------- ------- ------- ------ ------
Income from operations.... 3% 6% 7% 4% 7%
======= ======= ======= ====== ======
</TABLE>
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED JANUARY
31, 1997
Revenues. Total revenues decreased 27.3% to $48.5 million in the three
months ended January 31, 1998 from $66.7 million in the three months ended
January 31, 1997. This decline was primarily due to the delay in the award of
two large contracts in the Integrated Systems business unit (which contracts
were awarded near the end of the period) and a planned reduction in lower-
margin revenues associated with the Western Atlas Acquisition.
Logistics and Software Systems revenues declined 26.2% to $3.0 million in
the three months ended January 31, 1998 from $4.1 million in the three months
ended January 31, 1997. Most of this decrease was due to revenues associated
with a product the Company no longer markets. The Company released version 4.0
of STOCKMASTER/WMS in October 1997, which includes Yard and Dock management
and standard interface to Oracle's enterprise resource planning software,
Applications version 10.7. This and other products of the STOCKMASTER/SCM
suite generated orders of $8.1 million in the three months ended January 31,
1998.
21
<PAGE>
Backlog. The Company's backlog as of January 31, 1998 increased 26.3%
compared to January 31, 1997 and increased 68.0% compared to the year ended
October 31, 1997. This increase was due to record bookings of $109.0 million
resulting from new order inflow in all three business units in addition to the
award of contracts in the Integrated Systems unit that the Company had
expected to receive in 1997. The backlog of the Company at January 31, 1998 by
business unit was comprised of Integrated Systems--$95.9 million, Customer
Services--$30.6 million and Logistics and Software Systems--$17.3 million.
Gross Margin. Gross margin declined from $12.7 million in the three months
ended January 31, 1997 to $11.4 million in the comparable 1998 period, but
increased as a percentage of revenues from 19.0% to 23.4%. Integrated Systems'
gross margin improved due to the favorable completion of contracts below
budgeted costs and a planned reduction of lower-margin revenues associated
with the Western Atlas Acquisition. Customer Services gross margin improved
due to a higher content of spare parts sales. Logistics and Software Systems
gross margin decreased due to a lower license fee content in the revenue mix
due to lower bookings in the fourth quarter of 1997.
Operating Income. Operating income increased to $3.3 million in the three
months ended January 31, 1998 from $2.9 million in the 1997 period. Selling
expenses increased 14.9% to $5.1 million primarily due to increased proposal
and salesperson expenditures. General and administrative expenses decreased
4.1% due to lower professional fees. Amortization expense declined 84.2% from
$2.7 million in the three months ended January 31, 1997 to $0.4 million in the
comparable period of 1998. Included in the 1997 amortization expense is a non-
recurring charge of $2.3 million related to the abandonment of a software
product line.
Interest Expense. Interest expense declined 3.6% to $1.3 million due to the
impact of lower outstanding borrowings and lower interest rates. Borrowings in
the first quarter of 1997 were higher due to the Western Atlas Acquisition.
Income Taxes. The Company's effective income tax rate of 36.0% in the three
months ended January 31, 1998 approximated the 35.8% in the comparable 1997
period.
Net Income. As a result of the foregoing factors, the Company's net income
before preferred dividends increased to $1.2 million in the first three months
of fiscal 1998, from $0.9 million in the comparable period in 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. Total revenues increased 64.0% to $246.2 million in fiscal 1997
from $150.1 million in fiscal 1996. Excluding the effect of the Western Atlas
Acquisition, total revenues increased 7.8% to $161.7 million in fiscal 1997.
Integrated Systems revenues increased 87.6%, or $76.3 million, in fiscal
1997 from fiscal 1996. Exclusive of the effects of the Western Atlas
Acquisition, total Integrated Systems revenues decreased 5.2% to $82.6 million
in fiscal 1997, from $87.2 million in fiscal 1996, due to delays in the
awarding of certain contracts.
Customer Services revenues increased 30.9%, or $15.4 million, to $65.2
million in fiscal 1997. Excluding the effects of the Western Atlas
Acquisition, total Customer Services revenues increased 27.9% to $63.7 million
in fiscal 1997 from $49.8 million in fiscal 1996. This increase was due to a
36.8% increase in new contract awards during fiscal 1997 as compared to fiscal
1996. These new contract awards included a number of large AGVS replacement
projects with relatively short schedules.
Logistics and Software Systems revenues increased 33.0% to $17.5 million in
fiscal 1997, compared to $13.1 million in fiscal 1996. Excluding the effects
of the Western Atlas Acquisition, Logistics and Software Systems revenues
increased 17.4% to $15.4 million in fiscal 1997. In early fiscal 1997, the
Company introduced a new, NT-based version of its STOCKMASTER/WMS software, as
the successor product to the original STOCKMASTER/WMS, a UNIX-based WMS
software application originally introduced in 1989. New bookings for the new
version were slow early in the year as the Company refocused its marketing and
engineering resources to the new product.
22
<PAGE>
Backlog. The backlog of the Company at October 31, 1997 was $85.7 million
compared to $97.2 million at October 31, 1996. The backlog by business unit
was comprised of Integrated Systems--$46.1 million, Customer Services--$24.8
million and Logistics and Software Systems--$14.8 million at October 31, 1997
compared to Integrated Systems--$59.5 million, Customer Services --$23.8
million and Logistics and Software Systems--$13.9 million at October 31, 1996.
Gross Margin. Cost of sales increased to $193.6 million in fiscal 1997, from
$123.4 million in fiscal 1996, but declined as a percentage of revenues to
78.7% from 82.2%, respectively. Integrated Systems gross margin improved due
to higher margins on contracts in progress and increased utilization of the
Company's manufacturing facilities. Customer Services gross margin improved
primarily from increased outsourcing contracts and greater parts revenues in
the sales mix. Logistics and Software Systems gross margin decreased primarily
as a result of a contract cancellation during the third quarter of fiscal
1997. Excluding the effect of this contract cancellation, gross margin would
have improved.
Operating Income. Operating income increased $7.6 million, or 81.6%, in
fiscal 1997, from $9.3 million in fiscal 1996. Selling expenses increased
$12.0 million, or 120.2%, in fiscal 1997, and increased as a percentage of
revenues to 8.9% in fiscal 1997 from 6.7% in fiscal 1996. This increase was
due primarily to the inclusion of the operations acquired in the Western Atlas
Acquisition, which historically incurred higher selling expenses as a
percentage of revenues. Additionally, HK Systems implemented a Company-wide
marketing effort to further establish the HK Systems name following the
Western Atlas Acquisition.
General and administrative expenses increased $5.8 million, or 91.9%, in
fiscal 1997 from fiscal 1996, and from 4.2% to 4.9% as a percentage of
revenues. This increase was primarily due to increased costs related to the
Western Atlas Acquisition of $1.6 million including human resources, contract
and accounting personnel, and to increased research and development
expenditures. Research and development costs increased $3.0 million, or
149.9%, to $5.0 million, in fiscal 1997 over fiscal 1996, and as a percentage
of revenues to 2.0% from 1.3%, respectively. Currently, the Company is
engineering several new software development programs, including the
implementation of a multi-year plan for functionality enhancements for the
STOCKMASTER/WMS product. The Company decided to accelerate these enhancements
in early fiscal 1997 and released a new version in October 1997. See
"Business--Services and Products--Logistics and Software Systems."
Additionally, the Company developed a standard baseline control system for
automated material handling systems applications, which the Company introduced
in 1997. The Company anticipates a continual increase in research and
development expenditures over the next three years.
Excluding the non-recurring charge of $2.3 million related to the
abandonment of a software product line, amortization of goodwill increased
$0.5 million, or 37.5%, in fiscal 1997 from fiscal 1996. This increase was
primarily due to increased goodwill amortization related to the Western Atlas
Acquisition.
Interest Expense. Interest expense increased $2.0 million, or 57.1%, to $5.6
million, in fiscal 1997 from $3.6 million in fiscal 1996 due to additional
borrowings required to finance the Western Atlas Acquisition and subsequent
operations of the acquired business.
Income Taxes. The Company's effective income tax rate was 40.0% and 35.8%
for fiscal 1996 and fiscal 1997, respectively. The difference was due
primarily to state taxes.
Net Income. As a result of the foregoing factors the Company had net income
before preferred dividends of $7.3 million in fiscal 1997 compared to net
income before preferred dividends of $3.4 million in fiscal 1996.
23
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. Total revenues increased 18.5% to $150.1 million in fiscal 1996
from $126.6 million in fiscal 1995. The increase in revenues was primarily
attributable to a $22.6 million increase in revenue related to a series of
projects with an automotive customer. In addition, the fiscal 1996 revenues
included a full year's effect of the Eaton-Kenway Acquisition.
Integrated Systems revenues increased 23.3% to $87.2 million in fiscal 1996
compared to $70.7 million in fiscal 1995, primarily due to increased contract
volume with an automotive customer.
Customer Services revenues increased 22.9%, or $9.3 million, to $49.8
million in fiscal 1996 primarily due to a series of projects with a single
customer ($6.5 million) and a 61.0% increase in replacement parts sales as a
result of the Company's focus on the Eaton-Kenway installed base.
Logistics and Software Systems revenues declined 14.7% in fiscal 1996 to
$13.1 million due to a reduced hardware content in the sales mix. The Company
deemphasized hardware content in its Logistics and Software Systems contracts
beginning in fiscal 1996. Hardware and other direct costs as a percentage of
revenues declined to 12.2% in fiscal 1996 from 40.9% in fiscal 1995.
Gross Margin. Cost of sales increased to $123.4 million in fiscal 1996, from
$108.5 million in the previous year, but declined as a percentage of revenues
to 82.2% from 85.7%, respectively. Integrated Systems gross margin improved
due to the completion of more profitable projects and increased utilization of
the Company's manufacturing facilities. Customer Services gross margin
improved due to increased parts sales, which carry higher margins, and the
completion of less profitable projects assumed in the Eaton-Kenway Acquisition
in fiscal 1995. Logistics and Software Systems gross margin increased due to a
reduction in lower margin hardware sales and corresponding higher license fee
composition in the sales mix.
Operating Income. Operating income increased to $9.3 million in fiscal 1996
from $3.6 million in fiscal 1995. Selling expenses increased 12.1% to $10.0
million in fiscal 1996 as additional sales representatives were added in the
Customer Services and Logistics and Software Systems businesses. General and
administrative expenses increased to $6.3 million, or 36.8%, in fiscal 1996
due to an increase in training costs associated with an increased employee
base. Research and development expense increased $0.7 million, or 50.2%, in
fiscal 1996 primarily due to functionality enhancements to the STOCKMASTER/WMS
system.
Interest Expense. Interest expense increased $0.4 million, or 14.1%, to $3.6
million in fiscal 1996, due to a higher average outstanding debt level in
fiscal 1996 issued to support increased sales levels and finance capital
expenditures.
Income Taxes. The Company's effective income tax rate was 64.0% and 40.0% in
fiscal 1995 and fiscal 1996, respectively. The difference was due primarily to
state taxes.
Net Income. As a result of the foregoing factors, the Company's net income
before preferred dividends increased to $3.4 million in fiscal 1996, from
$0.04 million in fiscal 1995.
24
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly financial
information for the Company for each of the twelve most recent quarters in the
period ended October 31, 1997 and for the quarter ended January 31, 1998. In
the opinion of the Company, this information is prepared on the same basis as
the financial statements appearing elsewhere in this Prospectus and reflects
all the adjustments necessary for a fair presentation of results of operations
for those periods. This quarterly financial data should be read in conjunction
with the Company's Consolidated Financial Statements and related notes thereto
appearing elsewhere in this Prospectus. The operating results for any quarter
are not necessarily indicative of the results of any future period.
<TABLE>
<CAPTION>
FISCAL 1995
-------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net revenues:
Integrated systems............ $15,491 $17,126 $17,605 $20,467
Customer services............. 2,526 9,497 14,521 13,957
Logistics and software
systems...................... 3,299 3,902 4,440 3,772
------- ------- ------- -------
Total net revenues.......... 21,316 30,525 36,566 38,196
Cost of sales................... 18,652 26,597 32,224 31,053
------- ------- ------- -------
Gross profit.................. 2,664 3,928 4,342 7,143
Selling, general &
administrative expenses........ 2,317 3,503 3,572 4,100
Amortization of goodwill........ 143 297 297 296
------- ------- ------- -------
Income from operations...... $ 204 $ 128 $ 473 $ 2,747
======= ======= ======= =======
<CAPTION>
FISCAL 1996
-------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net revenues:
Integrated systems............ $17,641 $21,743 $21,859 $25,907
Customer services............. 11,305 11,424 13,631 13,432
Logistics and software
systems...................... 4,266 2,321 4,194 2,362
------- ------- ------- -------
Total net revenues.......... 33,212 35,488 39,684 41,701
Cost of sales................... 27,357 29,033 33,146 33,818
------- ------- ------- -------
Gross profit.................. 5,855 6,455 6,538 7,883
Selling general & administrative
expenses....................... 4,138 3,768 3,859 4,490
Amortization of goodwill........ 306 306 307 306
------- ------- ------- -------
Income from operations...... $ 1,411 $ 2,381 $ 2,372 $ 3,087
======= ======= ======= =======
<CAPTION>
FISCAL 1997 FISCAL 1998
------------------------------- -----------
Q1 Q2 Q3 Q4 Q1
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues:
Integrated systems............ $47,003 $47,258 $40,373 $28,838 $28,098
Customer services............. 15,626 14,417 15,092 20,065 17,371
Logistics and software
systems...................... 4,092 4,975 4,256 4,155 3,021
------- ------- ------- ------- -------
Total net revenues.......... 66,721 66,650 59,721 53,058 48,490
Cost of sales................... 54,032 53,342 48,208 38,064 37,125
------- ------- ------- ------- -------
Gross profit.................. 12,689 13,308 11,513 14,994 11,365
Selling general & administrative
expenses....................... 7,137 8,157 7,093 9,337 7,685
Amortization of goodwill........ 2,701 426 426 426 427
------- ------- ------- ------- -------
Income from operations...... $ 2,851 $ 4,725 $ 3,994 $ 5,231 $ 3,253
======= ======= ======= ======= =======
</TABLE>
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The Company's quarterly revenues and operating results have varied in the
past, and are likely to vary from quarter to quarter in the future, depending
upon a number of factors, including but not limited to the concentration of
its customers in any given period; size and timing of customer orders;
commencement, completion, cancellation or delay of contracts; progress of
ongoing projects; cost overruns; competitive industry conditions; the
Company's ability to develop, introduce and market new products and product
enhancements; software life cycles; changes in the level of operating expenses
and the Company's ability to control costs; and general economic conditions.
The Company's future operating results may fluctuate as a result of these
and other factors, which could have a material adverse effect on the Company's
business, result of operations and financial condition. See "Risk Factors."
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations and capital expenditures
with cash flow from operations supplemented by its revolving line of credit.
The Company has funded acquisitions through a combination of debt provided by
the selling company and bank financing and, in the Eaton-Kenway Acquisition,
$4.2 million of additional equity capital provided by the Company's original
institutional investors and Management. As of January 31, 1998, the Company
had $0.1 million in cash and temporary investments and working capital of
$18.6 million.
Net cash (used) provided by operating activities was $(2.5) million and
$10.8 million for the three months ended January 31, 1998 and the three months
ended January 31, 1997, respectively. The primary reasons for the decrease in
cash flow from operations for the three months ended January 31, 1998 as
compared to the three months ended January 31, 1997 were (i) a $10.9 million
decrease in cash flow from working capital items due to increases in
receivables and inventory, and decreased billings in excess of costs as a
result of payment terms contained within the contract mix and (ii) decreases
in non-cash charges, from $4.2 million to $1.8 million. Net cash provided by
operating activities was $22.7, $9.3 and $1.8 million in fiscal 1997, 1996 and
1995, respectively. Both investing and financing activities for fiscal 1997
relate primarily to the Western Atlas Acquisition.
Given the Company's recent history of debt financed acquisitions, the
Company emphasizes the generation of cash flow, as measured by earnings before
interest, tax, depreciation and amortization ("EBITDA"). EBITDA decreased to
$5.1 million from $7.0 million, or 28.0%, for the three months ended January
31, 1998 compared to the three months ended January 31, 1997 mainly as a
result of a decrease in revenues due primarily to the timing of the award of
two large contracts. Additionally, EBITDA increased 69.1% to $27.0 million in
fiscal 1997, as compared to $16.0 million in fiscal 1996.
The Company's revolving line of credit provides for borrowings of up to
$80.0 million, bearing interest at 7.06% to 8.50%. The agreement contains
various restrictive financial covenants that, among other things, place limits
on the amount of additional long-term debt the Company may issue and on the
amount of capital expenditures in any year and restrictions on the payment of
dividends; require maintenance of minimum current, leverage and interest
coverage ratios; and require minimum total capitalization and billed
receivable balances, as defined. The line of credit is collateralized by the
assets of the Company and expires in December 2002. Outstanding amounts under
the line of credit aggregated $44.8 million, $34.0 million and $18.0 million
at January 31, 1998, October 31, 1997 and October 31, 1996, respectively. At
January 31, 1998, the Company had available an additional $35.2 million under
its line of credit. The Company intends to repay outstanding indebtedness to
Western Atlas and a portion of the line of credit with a portion of the
proceeds of this Offering. See "Use of Proceeds."
Capital expenditures of the Company for the three months ended January 31,
1998 were $1.4 million. For the years ended October 31, 1997 and 1996, capital
expenditures were $4.1 million and $3.2 million, respectively. The Company
anticipates capital expenditures to be $4 million to $6 million per year in
fiscal 1998
26
<PAGE>
and 1999, including amounts for plant expansion, computer system upgrades and
construction of a new capabilities and demonstration center that the Company
currently contemplates. The center will be located at the Company's
headquarters and will enable the Company to demonstrate the Company's supply
chain solutions capabilities to potential customers.
The Company believes (i) the net proceeds from the sale of Common Stock by
the Company in the Offering; (ii) cash flow from operations; and (iii) amounts
available under its line of credit will be sufficient to meet the Company's
currently anticipated working capital and software development requirements
through fiscal 1998. However, depending upon its rate of growth and
profitability, the Company may require additional equity or debt financing to
meet its working capital requirements or capital expenditure needs or to fund
future acquisitions. There can be no assurance that additional financing, if
needed, will be available when required or, if available, on terms
satisfactory to the Company.
OTHER MATTERS
The Company recognizes the need to identify and address "Year 2000" issues.
First, the Company has included in its capital expenditure plans discussed
above substantial amounts for fiscal 1998 and 1999 for computer system
upgrades and enhancements that, among other things, will address all potential
internal Year 2000 problems. All such enhancements are scheduled to be
completed by the third quarter of fiscal 1999. Second, the Company is
currently conducting a survey of its key vendors and suppliers to determine
whether any of them anticipate Year 2000 problems. Third, the Company believes
all SCM software and virtually all automated material handling equipment and
systems that it currently sells are Year 2000 compliant. Further, the Company
provides no express Year 2000 warranty on any products that it sells unless it
has first conducted an audit to verify that the product is Year 2000
compliant, and all such warranties expressly exclude product provided by
anyone other than the Company. Fourth, the Company currently estimates that
only ten percent of its installed base of automated material handling systems
may experience significant Year 2000 problems. The Company expects that
virtually all Year 2000 work that it may provide on its installed base will be
done on a funded basis and will not have a material effect on the Company.
Fifth, the Company has agreements to provide maintenance support for
approximately 30 of its installed SCM software systems, and the Company is
currently conducting an audit to determine if any of those systems poses a
potential Year 2000 problem. The Company does not believe any obligation that
it may have to remedy Year 2000 problems under these maintenance support
agreements will have a material effect on the Company.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise
and Related Information" which is effective for fiscal years beginning after
December 15, 1997. SFAS 131 establishes standards for the way public companies
report information about operating segments in both interim and annual
financial statements, including related disclosures about products and
services, geographic areas and major customers. The Company's initial analysis
indicates that the Company operates in one business segment according to the
requirements of SFAS 131. However, the Company will continue to evaluate the
potential impact of the requirements of SFAS 131 prior to the time the Company
adopts it.
In February 1997, the FASB issued Statement No. 128 ("SFAS 128"), "Earnings
per Share," which is effective for periods ending after December 15, 1997,
including interim periods. SFAS 128 establishes standards for computing and
presenting earnings per share ("EPS") by replacing primary EPS with the
presentation of basic EPS and requiring dual presentation of basic and diluted
EPS on the face of the income statement. The Company adopted SFAS 128 for the
three month period ended January 31, 1998. All EPS computations have been
applied retroactively to all periods to conform with the provisions of SFAS
128.
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<PAGE>
BUSINESS
BACKGROUND
HK Systems is a leading provider of supply chain solutions. The Company
develops, implements and supports integrated solutions to the complex material
handling and supply chain needs of a wide array of industries. The Company's
solutions enable its customers to implement advanced supply chain strategies
to improve product quality, reduce inventory and delivery time and lower
overall costs of manufacturing and distribution.
The Company delivers its supply chain solutions through three principal
activities. First, the Company designs, installs and integrates automated
material handling systems that include customized software, manufactured
equipment, and purchased components such as microprocessor and PLC controls
and optical scanning and laser positioning devices. The Company is a leading
supplier of integration services for automated material handling systems in
North America. Second, the Company provides aftermarket services for owners of
systems and equipment the Company has installed and for other customers. The
Company's installed base of equipment and software systems, which numbers over
3,000, presents significant opportunities to expand its supply chain
aftermarket business. Third, the Company develops and implements advanced SCM
software systems, including WMS for Windows/NT and UNIX operating environments
and customized software for specific supply chain applications. The Company
believes it is one of the leading WMS software providers in North America.
The Company's commitment to customer satisfaction, from the initial design
of a system through implementation to ongoing support and maintenance, has
enabled the Company to create strong customer relationships with leading U.S.
corporations. The Company's customers include manufacturers, distributors,
processors and retailers whose needs are as diverse as the warehousing of
semi-conductors and the temporary storage and retrieval of automobile bodies
for an assembly line. These customers include a diverse base of Fortune 500
companies and industry leaders, including American Airlines, Anheuser-Busch,
Ball Foster Glass, Boeing, Caterpillar, Chrysler, The Coca-Cola Company, Coca-
Cola Enterprises, Estee Lauder, Ford, Frito-Lay, Gillette, Hewlett-Packard,
IBM, Kimberly-Clark, Lucent Technologies, Motorola, The New York Times, J.C.
Penney, Philip Morris, Procter & Gamble, Sara Lee, Sony and United Airlines.
The Company originated in 1969 as an engineering division of the Overhead
Crane Group of Harnischfeger to position Harnischfeger in the automated
systems business to facilitate the sale of storage and retrieval equipment. In
October 1993, Management led the acquisition of the Company, then known as
Harnischfeger Engineers, as the first step toward the objective of developing
the preeminent single-source provider of automated material handling systems
and WMS software. In February 1995, the Company purchased the business of
Eaton-Kenway, a wholly owned subsidiary of Eaton. Through the Eaton-Kenway
Acquisition, the Company acquired advanced AGVS technology; experienced
employees; and access to Eaton-Kenway's significant customer base. In November
1996, the Company acquired the Material Handling Systems division and
VantageWare software division of Western Atlas (formerly a part of the Litton
Industrial Automation Group of Litton Industries). In the Western Atlas
Acquisition, the Company acquired additional manufacturing capability; several
recognized automated material handling product lines (including conveyors,
sortation equipment and von Gal palletizers); an expanded customer base,
especially within the retail distribution industry; additional software
engineering capability; experienced employees; and access to the market for
the sale of stand-alone conveyors, palletizers and sortation equipment.
Through these acquisitions, the Company assembled an installed base of
integrated automated material handling systems that the Company believes is
one of the largest in North America, taking into account systems that include
as a component AS/RS, AGVS or AEMS and at least one other automated material
handling technology. In addition, the Company was able to achieve a higher
level of control over the marketing, design and implementation of the critical
supply chain solutions it was already providing to its customers. The Company
also acquired the ability to source system components internally and to
produce and inventory component parts, which are important tools to enable the
Company to compete in the replacement parts market.
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<PAGE>
RECENT CUSTOMER CASE STUDIES
The following case studies illustrate the Company's ability to provide
automated material handling systems integration and supply chain solutions
that address a wide range of customers' needs:
THE NEW YORK TIMES
The Challenge: The New York Times ("The Times"), one of the world's leading
newspaper publishers with a total circulation of one million on weekdays and
two million each Sunday, wanted to expand capacity and add significant
flexibility to its production capability. As a result, The Times needed to
design and construct a new production facility, including its material
handling systems, that would enable it to extend newsroom deadlines, add color
printing, and offer more sectioning and feature sections.
The HK Systems Solution: The Times chose the Company as a partner in the
design and implementation process of the new facility. The Company's
engineering and consulting team joined The Times' own project team, worked on-
site to develop plant-wide information systems and electrical control
strategies and used computer simulations to ensure necessary capacities. HK
Systems also designed and integrated the major automated material handling
systems in the plant, including automated newsprint storage and delivery to
press, provided the controls and integration software for the plant and
supplied The Times with seven of the Company's OMNIWRAP palletizers.
The Result: The Company integrated an automated material handling system
that represents a state-of-the-art solution for the newspaper publishing
industry. In addition to achieving significant reductions in operating costs,
the facility has helped The Times extend newsroom deadlines by up to three
hours allowing fresher copy for each daily edition; use color in each daily
edition; increase sectioning to capture a broader advertising revenue base;
and cut waste and lost time.
ESTEE LAUDER
The Challenge: Estee Lauder ("Lauder"), a premier, worldwide provider of
high quality perfumes and cosmetics for women, was experiencing high
distribution costs and generating unreliable inventory and shipping records at
its 13 distribution sites worldwide. Lauder wanted to standardize and control
all elements of finished goods inventory management and develop automated
material handling systems for its finished goods.
The HK Systems Solution: Lauder chose the Company to be its partner in this
standardization initiative due to the Company's strong reputation and the
Company's complete solution capabilities demonstrated in part through its
providing Lauder with modernization services on AS/RS equipment a competitor
had installed. HK Systems customized and implemented the Company's WMS
software, modernized and augmented automated material handling equipment and
integrated the software and equipment at an initial site.
The Result: The Company's solution enabled Lauder to achieve its goals of
accurately receiving, storing, picking, shipping and controlling the movement
of finished goods within its warehousing and production facilities through an
integrated system. Lauder increased security, increased inventory accuracy to
99%, improved productivity and increased lot control. As an additional
benefit, the Company's system is compatible with Lauder's other business
systems and enables Lauder to generate more reliable shipping records. Based
upon these results at the initial site, Lauder decided to implement the
solution at 11 additional sites, of which the Company has completed seven to
date.
AMERICAN AIRLINES
The Challenge: In response to increased demand for air travel, American
Airlines ("AA") doubled the number of its gates at Dallas/Fort Worth
International Airport. As a result, AA needed to significantly increase hangar
space and expand its parts service from two to four hangars and provide
around-the-clock parts service to the terminal stations. The project required
a system that would deliver parts quickly to the four hangars and facilitate
the prompt delivery of parts to aircraft waiting to depart with passengers on
board.
29
<PAGE>
The HK Systems Solution: AA selected HK Systems to design and implement a
material handling system for the numerous maintenance parts required on short
notice. The Company used several integrated material handling and control
strategies to meet AA's stringent operational requirements. The system
receives and stores spare parts inventory and, upon demand, locates, retrieves
and delivers parts to any of four repair hangars within 10 minutes.
The Result: This system achieved AA's goals of reduced delivery time,
increased inventory accuracy, decreased indirect labor costs and reduced parts
handling in the maintenance area. Recognizing the Company's capabilities as
well as the critical nature of that system, AA subsequently outsourced to the
Company the maintenance of this system and similar systems at two other AA
facilities. After five years of operation, the system continues to achieve
over 99% up time.
INDUSTRY OVERVIEW
The Company's services and products address the needs of large and growing
markets. The Company believes sales of automated material handling systems,
integration services and related aftermarket support in North America should
exceed $2.0 billion in 1998 and will grow by 7% to 10% annually through the
year 2000. The Company also estimates that the North American market for
supply chain management software will be approximately $1.9 billion in 1998
and is currently growing at approximately 45% annually. This market is
considerably more fragmented than other segments of the industry, with
numerous small, single product companies competing to provide SCM software
products and services.
Two principal trends require businesses to devote greater attention and
resources to more efficiently manage and control the flow of materials,
inventory and finished goods along their respective supply chains. First, the
changing global buying culture is increasing customer demands for faster, more
accurate and customized product delivery. In response, many businesses are
implementing practices that will increase the demand for supply chain
solutions. Such practices include demand-pull manufacturing systems (which
rely on real-time information to coordinate and control manufacturing and
distribution across the entire supply chain) as well as third-party
distribution, mixed-load shipments and more frequent, smaller quantity
deliveries. Precise inventory management results in greater reliance on
sortation equipment, palletizers and load planning software to provide mixed-
load shipments, mixed-pallet shipments, more packaging options and greater
accuracy in the delivery of supplies and inventories. Additionally, these
factors are forcing businesses to regionalize warehouse facilities and
implement cross-docking operations, creating even further awareness of the
need for real-time, accurate inventory control.
The second major trend elevating the importance of efficient material
handling and supply chain solutions is the need for companies to enhance
profitability through operating cost reductions. The intense competitive
environment in which most businesses operate often makes it difficult to
generate revenue growth, particularly through price increases. This
environment has forced companies to reduce costs in part by integrating
material handling systems and outsourcing certain non-core functions.
Consequently, businesses are increasingly turning to, and becoming dependent
upon, automated material handling systems integrators to design, build,
install and service these cost-saving systems. Furthermore, cost-related
factors generally favor the upgrading of existing facilities rather than the
building of new facilities, increasing the need for advanced systems
integration.
The Company believes as more businesses respond to these trends they will
become increasingly sensitive to the importance of efficiently managing their
entire supply chain. Providing complete supply chain solutions entails
simultaneously managing internal constraints (such as production capacity,
human resource availability and inventories) and external constraints (such as
supplier lead times and customer demand requirements) to reduce inventories
and improve order response times and accuracy. The Company believes
coordinating operations through the entire supply chain requires effective
inventory management and control, since managing the supply chain involves
highly specialized demand planning, forecasting and deployment planning, which
all require accurate and manageable enterprise-wide inventory control. Because
of this, the Company believes businesses will increasingly call upon providers
of integrated supply chain solutions, who are experienced in inventory
management and capable of integrating systems through all points in the supply
chain, to provide and implement solutions to their complex supply chain needs.
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<PAGE>
BUSINESS STRENGTHS
The Company intends to build upon its position as a market leader by
capitalizing on its competitive strengths, which include the following:
Extensive Internal Resources to Provide Automated Solutions for Complex
Material Handling Needs
Of the Company's 1,150 employees, approximately 500 have engineering
backgrounds, and approximately 220 are software engineers. Many HK Systems
engineers have performed a wide variety of engineering functions within the
Company and, as a result, have experience in a variety of engineering areas
crucial to the successful design and implementation of automated material
handling systems, including concept and planning, manufacturing and research
and development. The Company believes employing experienced engineers
encourages information flow across all of the Company's business units and
allows the Company to maximize the use of its engineering resources.
In addition, as a result of strategic acquisitions and internal growth, HK
Systems offers a diverse product line that enables it to offer its customers
automated material handling equipment of known reliability. The Company's
manufacturing expertise also allows it to critically evaluate the quality of
other suppliers' products to determine which products best meet its customers'
needs. Additionally, to complement its broad product offerings and to support
installed automated material handling systems, the Company has developed a
proven aftermarket customer service capability.
Proven Project Management and Implementation Skills
Through extensive industry experience and personnel resources dedicated to
project implementation, HK Systems has developed project management and
implementation skills that it believes allow it to consistently deliver
turnkey automated material handling systems solutions on time, within
specifications and budget. The Company believes this strength is one of the
reasons its margins have increased in recent years. The Company focuses on
providing superior customer solutions while achieving targeted project
profitability by utilizing multi-disciplinary project teams. These teams
encourage Company-wide cooperation, while effectively leveraging the systems
design and implementation capabilities, skills and knowledge of all the
Company's business units.
Large, Diverse Blue Chip Customer Base
HK Systems has provided solutions to the complex supply chain needs of a
large number of Fortune 500 companies within a variety of industries including
aircraft, automotive, banking, distribution, food and beverage, light and
heavy manufacturing, newspapers and publishing, parcel handling, textiles and
transportation. Regardless of industry, these customers typically engaged the
Company to provide a supply chain solution to meet the increasingly
challenging market demands of their own customers. For fiscal 1997,
approximately 88% of the Company's revenues were derived from customers who
previously retained the Company to provide supply chain solutions. The
Company's success in meeting the complex needs of these demanding customers
serves as a strong confirmation of the Company's abilities and critical
marketing advantage in generating new business.
Strong Position to Further Build its Higher Margin Aftermarket Business
The Company's large and growing installed base of systems and equipment,
which numbers over 3,000, has provided recurring revenue opportunities as
systems age and require modernization, replacement parts and customer service
support. To meet this ongoing demand, HK Systems has established Customer
Services to provide aftermarket service and support, including equipment and
software modernizations, for the Company's installed base as well as the
installed base of many of its competitors. The Company has a customer service
hotline staffed by Company employees 24 hours a day, 7 days a week and
supported by a nationwide mobile service technical staff. This commitment to
customer service has resulted in a reputation for providing high quality
aftermarket service that positions the Company to continue to meet the growing
demands of its customers. Revenues from aftermarket service and support have
grown from $10.0 million in fiscal 1993 to $65.2 million in
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<PAGE>
fiscal 1997, and the Company believes the current trend toward outsourcing of
the maintenance, repair and upgrading of complex manufacturing and
distribution systems will accelerate in the near term.
Solid Foundation from which to Expand Supply Chain Management Software
Offerings
The Company's existing WMS software applications, significant customer base,
practical experience and skills in providing automated material handling
solutions, and extensive technical resources position the Company to provide
integrated supply chain solutions. The Company believes it is one of the
leading WMS software providers in North America. HK Systems' current WMS
software solutions have been well accepted in various industries and are
employed by a significant base of customers.
BUSINESS STRATEGY
From its base of competitive strengths, HK Systems has developed a business
strategy that includes the following elements:
Leverage the Company's Large Installed Base and Extensive Customer
Relationships
Through historical operations and recent acquisitions, HK Systems has
greatly increased its installed base of equipment and software systems. The
Company intends to leverage this extensive customer base by (i) promoting
long-term "Strategic Customer Partnerships"; (ii) cross-selling the Company's
SCM software products; (iii) expanding customer service and maintenance
outsourcing; (iv) designing improvements to its existing technology to
increase the inter-connectivity of its core products and improve the delivery
of aftermarket services; and (v) following multinational customers into
foreign markets.
Strategic Customer Partnerships are intended to be long-term relationships
with customers that include a "partnering" method of project implementation.
Strategic Customer Partnerships allow the Company to compete more on value and
less on price and enhance opportunities for repeat business because the
partnerships lead to greater customer satisfaction. By offering the customer
dedicated project management resources, the Company believes a Strategic
Customer Partnership gives a customer a number of benefits, including (i) an
optimal, customer-specific system design; (ii) clear, precise project
specifications; (iii) reduced time from design to implementation; (iv) lower
overall system costs than comparable competitive bid projects; and (v) reduced
risk to the customer because of the Company's higher level of accountability.
Currently, Strategic Customer Partnerships comprise approximately 78% of the
Company's revenues from large integrated automated material handling systems
contracts.
Maintain Focus on Providing Fully Integrated, Turnkey, Supply Chain Solutions
for Material Handling Needs
The Company's extensive internal resources (including its large engineering
staff and diverse product line) and its highly regarded project management and
implementation skills position HK Systems to maintain its leadership position
as a provider of fully integrated, turnkey, supply chain solutions for
material handling needs. Companies in nearly all industries are increasingly
devoting greater attention and resources to more efficiently controlling and
managing the flow of their materials, inventory and finished goods, driven by
the desire to meet market demands, lower operating costs and increase
throughput. The Company believes, given its leadership position and record of
performance, that it can continue to satisfy this desire to maximize cost
savings and efficiencies by providing its turnkey solutions to new and
existing customers.
Expand SCM Software Offerings Through Selective Acquisitions and Internal
Development
The Company intends to expand its SCM software systems offerings through
selective acquisitions and internal software development. In doing so, HK
Systems will capitalize on the consolidation trend in the SCM
32
<PAGE>
software industry, which is expected to continue as customers seek scale and
reliability in their SCM software vendors. New product offerings may include
demand planning and forecasting software, additional deployment planning and
transportation management software (complementing the Company's LoadBuilder
application), and additional inventory and warehouse management programs.
These offerings could be integrated into a customers' current warehouse
management, inventory control and automated material handling systems,
eliminating inefficiencies between independent supply and demand points and
allowing maintenance of supplies and inventory at optimal levels.
Continue to Improve Profitability of Acquired Businesses
HK Systems will continue to improve the profitability of the businesses
acquired in the Eaton-Kenway Acquisition and the Western Atlas Acquisition by
(i) maintaining the focus on profitable revenues; (ii) re-establishing the von
Gal palletizer product line as a leader in palletizer technology; (iii)
completing a standardization program for its conveyor and sortation product
lines; and (iv) improving inventory management. Recently, the Company
completed a restructuring program resulting in the closure of two
manufacturing plants. Overall, these actions have lowered overhead costs and
improved operating efficiencies.
SERVICES AND PRODUCTS
The Company is organized into three business units: Integrated Systems,
Customer Services and Logistics and Software Systems.
INTEGRATED SYSTEMS
Automated material handling systems are comprised of automated material
handling equipment and related software and controls that allow manufacturers,
retailers, warehouses and distributors to quickly and automatically store,
sequence and retrieve raw material, work-in-process and finished goods. The
principal historical business of the Company, and the current focus of
Integrated Systems, is to provide both services and products used in and
related to automated material handling systems and systems integration for a
wide variety of industries including aircraft, automotive, banking,
distribution, food and beverage, light and heavy manufacturing, newspapers and
publishing, parcel handling, textiles and transportation.
Integrated Systems contributed $28.1 million, $163.5 million, $87.2 million
and $70.7 million to the Company's total revenues in the three months ended
January 31, 1998 and in fiscal 1997, 1996 and 1995, respectively.
Services
Integrated Systems performs integration services for customers including the
design, development, installation and integration of the equipment, controls,
software, information and processes that comprise new automated material
handling systems. These systems can include large or complex software control
systems, AS/RS, AGVS and/or AEMS that typically require extensive project
management and quality control. Integrated Systems also provides sortation
equipment, conveyors and palletizer integration services for projects
requiring only such types of equipment, which projects usually involve complex
sortation requirements and high speed, precise product delivery. Integrated
Systems is often responsible for selecting and managing subcontractors that
provide general building construction and equipment installation services.
The Company's integration services contracts generally range from $1 million
to $25 million in value, with an average value of approximately $7 million.
Approximately 30% of the total contract value is typically paid to outside
vendors in connection with the construction of infrastructure and externally-
sourced equipment, with internally-sourced equipment accounting for
approximately 20-25% and additional software, controls and services accounting
for the remaining 45-50%.
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<PAGE>
Services of Integrated Systems include providing customers with the
software, controls, optical scanning and laser positioning devices necessary
to start-up, operate, control, maintain, and perform diagnostic functions
related to the various components of automated material handling systems.
Integrated Systems offers support software products that monitor and control
automation equipment with programmable logic controllers (PLCs) and provide
mechanization control, load tracking, diagnostic functions and communication
interface with conveyor and AEMS. Integrated Systems has adopted
STOCKMASTER/EMS, a Logistics and Software Systems product introduced in 1997,
as its baseline equipment control system. This software system will provide a
common integration baseline for all of the Company's automated material
handling systems and product lines.
Integrated Systems provides integration services for customer projects
obtained either through Strategic Customer Partnerships or through competitive
bidding. With Strategic Customer Partnerships, the Company is involved in
every phase of system implementation from design to installation. With
competitively bid projects, the customer typically presents the specifications
for a system that an outside consultant has prepared for which the Company may
perform all or specific parts of the system implementation.
Strategic Customer Partnerships
The Company pursues strong working, or "partnering," relationships with
select customers that the Company refers to as "Strategic Customer
Partnerships." In the context of an individual project involving a Strategic
Customer Partnership, the Company has a comprehensive role in identifying and
executing solutions, as discussed below. In the context of a longer-term
relationship that extends beyond an individual project, a Strategic Customer
Partnership generally involves an understanding between the Company and its
customer, which may be oral or written, that the customer will look to the
Company as its preferred or exclusive provider of supply chain solutions, in
general or for a specific type of need, on an ongoing basis. Typically, the
Company pursues Strategic Customer Partnerships with customers or potential
customers who, because of their size and business, are likely to have a
recurring need for the Company's services and products.
Integrated Systems' function is most comprehensive in projects for which the
Company has a Strategic Customer Partnership. Strategic Customer Partnership
projects generally begin with the Company consulting with the customer
regarding its unique automated material handling systems needs and problem
areas. Integrated Systems then designs detailed system specifications
responsive to the customer's particular needs, including automated material
handling equipment and associated software and controls, as well as process
software to manage inventory or supplies. The Company simulates, tests and
demonstrates the designed system and alternatives through computer simulations
prior to time consuming and expensive field installation. Equipment and
software is tested following installation on the customer site. All subsystems
are then integrated and the system is commissioned. Integrated Systems uses an
established project management approach to Strategic Customer Partnerships,
utilizing project teams led by a project manager who has overall
responsibility for cost, scheduling, technical matters and customer
satisfaction. In many cases throughout the process, Integrated Systems acts as
the catalyst for interaction across all of the Company's business units,
drawing on the services and products of the Company as a whole to provide
automated solutions for the customer's material handling needs.
The Company believes a Strategic Customer Partnership project gives a
customer a number of benefits, including (i) an optimal, customer-specific
system design, because the Company uses its extensive integration experience
and industry knowledge and works in close partnership with the customer from
the outset to design, install, integrate and service an automated system
customized to address the customer's unique material handling needs; (ii)
clear, precise project specifications because the Company both defines them
and, together with subcontractors, is responsible for meeting them; (iii)
reduced time from design to implementation because the Company's involvement
in the design process reduces the risk of delays in design and implementation
and allows for simultaneous performance of important process tasks; and (iv)
lower overall system costs than comparable competitive bid projects, since
Strategic Customer Partnerships allow faster implementation and precise
systems specifications while retaining the ability to use competitive bidding
for subsystem components.
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<PAGE>
Strategic Customer Partnership projects also afford the Company with
numerous advantages including the opportunity to establish "sole-source"
automated material handling systems relationships with customers that involve
the Company in every phase of systems development and service. Additionally,
Strategic Customer Partnerships provide the Company with projects on
acceptable terms and at lower risk, since the Company is familiar at every
stage with the design, function and service requirements of components,
controls and software.
Products
In addition to providing integration services, Integrated Systems designs,
manufactures, markets, installs and services many of the products that
automate the loading, unloading, sorting and transporting of materials. Such
products include (i) AS/RS, which are machines that store and retrieve
objects, using racks or similar structures, with weight capacities from 12
pounds to 100,000 pounds and that employ laser positioning, servo drivetrains
and Windows-based diagnostics technology; (ii) AGVS, which are automated
vehicle systems that transport objects within a facility using wireless
inertial guidance systems; (iii) AEMS, which are monorails for horizontal
(typically overhead) transportation; (iv) sortation equipment, which directs
the flow of boxes, cases or other products from single or multiple lines onto
high speed sortation conveyors designed to operate at various speeds and
lengths; (v) von Gal palletizers, which receive packaged products (including
cases, cartons, crates and bundles) from conveyors and arrange them into
stable patterns that can be wrapped and stacked onto a pallet for distribution
or storage; and (vi) von Gal de-palletizers, which unload palletized products
for further handling and distribution.
The Company generally sells AS/RS, AGVS and AEMS only in connection with
automated material handling systems for which the Company also provides
integration services. It sells conveyors, palletizers and sortation equipment
in connection with systems for which the Company provides integration services
as well as on an independent basis, and generally sells through distributors
directly to end-users. Contracts for the sale of conveyors, palletizers and
sortation equipment on an independent basis generally range in size from
$25,000 to $10 million. Since the Western Atlas Acquisition, approximately 20%
of conveyors, palletizers and sortation equipment have been sold as components
of larger automated material handling systems.
CUSTOMER SERVICES
Customer Services provides modernization services, control and software
systems upgrades, parts support, and maintenance outsourcing. The Company has
provided aftermarket support for most other brands of automated material
handling systems for over a decade. The Company believes it has developed a
reputation for quality and commitment to customer service that assists in
generating new business for all of the Company's business units. The Company
also provides maintenance and support to customers on an outsourcing basis,
and the Company has recently increased its focus on expanding this business.
The Company uses its broad in-house engineering resources to perform customer
upgrade projects or service customer systems and uses new technologies that
the Company's research and development team has developed. Customer Services
modernization projects and service contracts typically range from $0.2 million
to $5 million in revenue.
Customer Services contributed $17.4 million, $65.2 million, $49.8 million
and $40.5 million to the Company's total revenues in the three months ended
January 31, 1998 and in fiscal 1997, 1996 and 1995, respectively. Customer
Services provides services that can be classified in five general areas:
modernizations, maintenance outsourcing, replacement parts, Year 2000 software
initiatives and customer emergency service.
Modernization and retrofit of automated material handling systems
components, controls and software account for approximately 60-70% of Customer
Services' total revenues. Approximately 75% of the unit's modernization
projects involve upgrades of customers' computer and software systems and
electrical controls systems. Software systems are typically upgraded either
through replacement of existing software systems with contemporary turnkey
systems or by adopting and enhancing existing systems to more modern and
efficient standards. Customer Services performs electrical controls
modernization for AS/RS, conveyor, AEMS and AGVS controllers. Other
modernization services the unit performs include subsystem replacement of
AS/RS,
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AGVS or horizontal transportation components, and mechanical and structural
modernization, including equipment overhaul and rebuild, and structural
inspection and repair.
Systems outsourcing services typically involve providing full-time, on-site
preventative hardware maintenance of both Company and vendor manufactured
automated material handling systems components, as well as replacement part
management and software support services. Outsourcing services are also
provided to a lesser extent (i) on an "on-call" basis through emergency
standby engineering support, pager support, or remote monitoring and
diagnostics and (ii) on a planned basis through software service contracts,
periodic remedial and preventative maintenance. Outsourcing services,
particularly when conducted on-site, allow customers to be more efficient as a
result of fewer systems interruptions. From the Company's perspective, the
presence of Company personnel can generate leads for new business.
Customer Services also sells and installs Company and outside vendor
manufactured replacement parts for automated material handling equipment.
Replacement part sales consist of both initial replacement parts ordered at
the time of system installation as well as system life-cycle parts.
Replacement parts sales accounted for approximately $11.4 million of total
revenue in fiscal 1997.
Many customers' automated material handling systems and warehouse and
inventory management software systems may experience malfunctions and downtime
associated with the arrival of the year 2000. Customer Services provides
software consulting services to identify upgrades and solutions to allow
automated material handling systems to operate beyond Year 2000 constraints.
As of October 31, 1997, the Company generated 84 proposals for customers
regarding audits or retrofits of current software systems to address Year 2000
concerns.
Customer Services is also responsible for the Company's warranty support
services. The Company maintains a service hotline specifically for warranty
and other issues that is staffed around-the-clock by Company employees.
While the Company provides aftermarket services on products manufactured by
other vendors, its share of the market for those products is relatively small.
The Company estimates that it provides only a small percentage of all
aftermarket services related to products and systems of outside vendors while
providing a large percentage of aftermarket services related to products and
services of the Company.
LOGISTICS AND SOFTWARE SYSTEMS
Through Logistics and Software Systems, the Company provides SCM software
that allows its customers to manage the planning, scheduling, tracking and
related logistics of manufacturing, warehousing, distribution and
transportation. Logistics and Software Systems has 107 employees,
approximately 70 of whom are software engineers (as of October 31, 1997). The
Company's suite of SCM software, STOCKMASTER/SCM, is dedicated to the
management and deployment of inventory and associated resources across an
enterprise. The software suite enables customers to compress delivery
schedules, reduce inventory levels, increase customer service, improve
execution of operations and provide an accurate and timely view of inventory.
The Company believes it is one of the leading WMS software providers in North
America. The Company also provides software extensions to its STOCKMASTER/SCM
suite of applications to address customer specific requirements.
STOCKMASTER/SCM is a client/server (Client: Windows 95 or NT; Server:
Windows NT or UNIX) suite of applications that utilizes a graphical user
interface, providing an intuitive user interface. STOCKMASTER/SCM consists of
WMS for warehouse management; YMS for yard and dock management; EMS for
material handling equipment management; DMS, which is under development and
will be an enterprise wide inventory deployment management system; LMS, a
container, pallet and trailer configuration management system (Windows only);
and TMS for transportation management. The STOCKMASTER/SCM suite architecture
easily supports the integration of complementary third party software systems
such as Oracle and SAP enterprise resource planning ("ERP") systems and
manufacturing execution systems through its Common Object Resource Broker
Architecture (CORBA) capabilities.
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<PAGE>
STOCKMASTER/WMS, introduced in 1989, provides full warehouse management
functionality from the moment a facility receives a shipment or material from
production through the time the facility ships the product, including
receiving, put-a-way, quality control, lot and serial number control,
ownership, cycle counting, replenishment, picking, value added processing,
packing, shipping, and supervisory functions. STOCKMASTER/WMS provides real
time inventory control and employee management through radio frequency (RF)-
based hand-held and vehicle-mounted terminals. Employees using RF terminals
are instructed to perform tasks (such as put-a-way, pick or move), the
employee verifies each task is completed by scanning a bar code associated
with the task (such as location, quantity and lot), and as each task is
completed and verified a new task is dispatched to the employee. Bar code
verification and real-time inventory tracking provide up-to-the-minute views
of inventory (including on hold, available and committed) and customer orders
(such as picked or shipped). The Company released version 4.0 of
STOCKMASTER/WMS in October 1997, which includes Yard and Dock management and
standard interface to Oracle's ERP software, ApplicationsTM version 10.7.
STOCKMASTER/YMS, introduced in 1997, is a yard and dock management system
providing features for appointment scheduling, trailer check in/check out,
yard location management, trailer management (including cycle counting, seal
numbers, temperature control and refueling) and dock door management.
STOCKMASTER/YMS provides management with views into inventory in the yard and
expected inventory not yet arrived, giving management the opportunity to
improve customer service. In the event of a warehouse inventory stock-out,
customer orders may be filled with inventories in the yard. STOCKMASTER/YMS
can be integrated with STOCKMASTER/WMS or implemented in a stand-alone
environment.
STOCKMASTER/EMS, introduced in 1997, is an automated material handling
equipment management system product providing startup and shut down, equipment
synchronization, load balancing and alarm management for automated material
handling systems. STOCKMASTER/EMS incorporates standardized Application
Programmable Interface (API) to HK's complete line of material handling
equipment and third party equipment. The STOCKMASTER/EMS product is scalable,
providing a range of control functions for a single piece of equipment or a
complex multi-system installation. STOCKMASTER/EMS may be integrated with
STOCKMASTER/WMS to provide a hybrid warehousing solution or be implemented in
a stand-alone environment.
STOCKMASTER/LMS is a product the Company acquired in the Western Atlas
Acquisition under the name LoadBuilder. STOCKMASTER/LMS is a load planning
application that determines efficient ways to combine, stack and arrange
products to maximize the available space within a given container.
STOCKMASTER/LMS was introduced in 1994 and has approximately 500 customers.
STOCKMASTER/LMS may be interfaced with other systems such as WMS and TMS or be
implemented in a stand-alone environment.
The Company recently began offering STOCKMASTER/TMS, an integrated
transportation management product, in cooperation with InterTrans Logistics
Solutions, Inc. STOCKMASTER/TMS includes the InterTrans Logistics Solutions
Freight Management and Freight Optimizer products. Freight management provides
fully integrated, multi-modal, transportation management across a single
enterprise or in a multi-enterprise environment. STOCKMASTER/TMS may be
integrated with WMS and YMS to provide a complete comprehensive solution or be
implemented in a stand-alone environment.
STOCKMASTER/DMS, under development with initial release planned for early
1999, is a comprehensive deployment management software product that will
enable a customer to make real-time inventory deployment decisions across the
enterprise.
Logistics and Software Systems contributed $3.0 million, $17.5 million,
$13.1 million and $15.4 million to the Company's total revenues in the three
months ended January 31, 1998 and in fiscal 1997, 1996 and 1995, respectively.
The unit generated software revenue through license fees, installation,
modification, maintenance and software support agreements.
To leverage its software to address a wider spectrum of supply chain
management functions, the Company has begun forming alliances with other
software vendors. In 1996, the Company became part of the Oracle Cooperative
Application Initiative (CAI) program, which focuses on pre-integrating
software with Oracle's applications. In 1997, the Company entered the SAP
Complementary Software Partner (CSP) program. This
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program is designed to provide SAP customers with third-party software
solutions that extend the capabilities of SAP's R/3TM product. Additionally, in
1997 the Company entered into a letter of intent with InterTrans Logistics
Solutions to form a joint marketing alliance. The Company intends to pursue
additional alliances with ERP and transportation planning vendors to widen
appeal of its SCM software products.
CUSTOMERS
The Company's industry leadership has resulted in sales to a diverse industry
and customer base that includes many of the largest corporations in the United
States. To illustrate the variety of industries that the Company serves, the
following table sets forth a list of selected customers of the Company by
industry group that have done business with two or more of the Company's
business units over the last five years:
AEROSPACE FOOD/BEVERAGE/TOBACCO (CONTINUED)
Boeing The Coca-Cola Company
Northrup Grumman Coca-Cola Enterprises
AUTOMOTIVE/CAPITAL GOODS Dannon Yogurt
Robert Bosch Frito-Lay
Caterpillar Mrs. Smith's Bakeries/Flowers
Chrysler Industries
Ford Ocean Spray
General Electric PepsiCo
General Motors Philip Morris
Tower Automotive Ralston Purina
CHEMICAL/PETROLEUM RJR Nabisco
Dow Chemical Seagram Co./Tropicana
DuPont PAPER/PACKAGING
Mobil Chemical Appleton Papers
Mobil Oil Ball Foster Glass
Shell Oil Consolidated Papers
Texaco Kimberly-Clark
CONSUMER PRODUCTS Mead Paper
Eastman Kodak Western States Envelope
Estee Lauder PHARMACEUTICALS
Gillette Abbott Labs
Procter & Gamble Medco
Revlon Novartis
DISTRIBUTION/RETAIL PRIMARY METAL
Canadian Tire Alcoa
Dillards Department Stores Alumax
W.W. Grainger Kaiser Aluminum
The Limited O'Neal Steel
J.C. Penney PUBLISHING/PRINTING
ELECTRONICS/COMMUNICATIONS R.R. Donnelley
AT&T The New York Times
Hewlett-Packard The Washington Post
IBM TEXTILES
Lucent Technologies Collins & Aikman
Motorola Mt. Vernon Mills
Rockwell International Russell Corporation
Sony Sara Lee Knit Products
U.S. West TRANSPORTATION
FOOD/BEVERAGE/TOBACCO American Airlines
Anheuser-Busch Delta Airlines
Brown & Williamson GATX
United Airlines
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For fiscal 1997, the Company had two customers, Ford Motor Company and
Philip Morris, who accounted for 13% and 10% of the Company's total revenues,
respectively, pursuant to seven principal contracts. For fiscal 1996, the
Company had two customers, Ford Motor Company and Imperial Wall Coverings, who
accounted for 15% and 9% of the Company's total revenues, respectively,
pursuant to five principal contracts. For the same periods, the Company's
largest ten customers accounted for 42% and 53% of the Company's total
revenues, respectively.
SALES AND DISTRIBUTION
The Company sells automated material handling systems services and products
through separate sales forces in each of its three business units.
The Integrated Systems sales force utilizes different sales channels
depending on the size of a particular project and the automated material
handling systems components required. The Company has implemented a
distributor program designed to partner the Company with skilled material
handling distributors throughout North America for the sale of smaller
automated material handling systems which consist of mainly conveyors and
sortation equipment (typically through non-exclusive arrangements with the
various participating distributors). Distributors provide the Company with
leads for additional sales opportunities, and also provide customers with
services including project concepting, layout and design, installation,
warranty and aftermarket services. Automated material handling systems
comprised of mainly conveyors and sortation equipment are also sold directly
by the Company through three regional field offices in Bridgewater, New
Jersey; Naperville, Illinois; and Atlanta, Georgia. These sales offices are
also responsible for the sale of palletizer/depalletizer equipment on an
independent basis. Larger, more complex automated material handling systems
and systems integration solutions, typically over $3 million in value and
consisting of more sophisticated and complex integration requirements, are
sold direct by the Integrated Systems sales force located throughout North
America.
The Company competes for systems integration solutions projects on either a
competitive bidding or a Strategic Customer Partnership basis. Competitive
bidding involves the Company bidding to manufacture and install automated
material handling systems designed by outside parties. A substantial amount of
the Company's projects with first-time customers are awarded through the
competitive bid process, with repeat customers' projects often conducted on a
Strategic Customer Partnership basis. In fiscal 1997, competitive bid projects
represented only approximately 22% of the Company's automated material
handling systems integration solutions projects. Strategic Customer
Partnerships accounted for the remaining 78%. See "Business--Services and
Products--Integrated Systems."
The Integrated Systems sales force generates over 60% of the Company's
automated material handling systems and systems integration solutions business
from repeat customers and referrals from current or past customers,
demonstrating a high level of customer satisfaction. The Company obtains other
business by virtue of its strong reputation in the industry and through
referrals from consultants retained by businesses to design automated material
handling systems solutions which then refer those businesses to the Company
for implementation of the designed solutions. The Company also benefits from
arrangements with a number of outside vendors which are incentivized to
provide the Company with sales leads. The Integrated Systems sales force
targets certain businesses and industries through proactive selling efforts,
including presentations and consultations with those potential customers. The
Company participates in material handling trade shows, as well as trade shows
and users' conferences related to specific industries, for purposes of
marketing and business generation.
The Integrated Systems sales force evaluates potential projects using a
"proposal team" approach. Proposal teams are headed by Business Development
Managers ("BDMs") who are allocated customer projects based on the particular
customer's industry, the BDMs' past account experience and, to a lesser
extent, by geographical considerations. Proposal teams generally include
account managers and engineering support personnel with expertise in the
specific requirements of each potential project. The members of the proposal
teams work together
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<PAGE>
to prepare cost estimates for entering into the bidding process or competing
for the design of potential projects that the Company proposes to undertake.
Integrated Systems employs over 20 BDMs (as of October 31, 1997) throughout
North America.
Customer Services employs eight regional BDMs (as of October 31, 1997) with
specific geographic and major account responsibility. They are charged with
maintaining consistent contact with Company customers to assess their needs
for aftermarket services and actively seeking business from companies with
automated material handling systems components not designed or installed by
the Company. These BDMs lead proposal teams which include account managers and
technical support personnel to evaluate potential long-term customer support
relationships. Customer Services actively promotes the Company's aftermarket
services at various trade shows and user conferences across the country,
including the customer user conference the Company sponsors every September
during which over 300 customers attend seminars and listen to industry experts
address current issues in the material handling and SCM software industries.
Customer Services generates over 70% of its business from service and
modernizations of equipment installed by the Company, and also generates
business leads through industry contacts and competitive bidding.
Additionally, Customer Services is responsible for selling and implementing
smaller (less than $3 million) material handling systems.
Logistics and Software Systems generates business from several major sources
including (i) referrals from outside consultants hired by businesses to
evaluate re-engineering issues; (ii) referrals from automated material
handling systems market analysts, which are often consulted by businesses with
material handling questions and needs; (iii) referrals from radio frequency
equipment vendors, enterprise resource planning vendors and other SCM software
vendors, which employ WMS software products in the systems they sell; (iv) the
sales efforts of various "Value Added Resellers" ("VARs") working jointly with
the Company to promote and sell the Company's WMS software offerings,
including a worldwide VAR relationship with Motorola (whereby Motorola
promotes the sale and use of Company WMS software products to its own
locations worldwide and to its over 800 suppliers worldwide) and ten VAR
relationships worldwide for the sale of the Company's Loadbuilder software
product; and (v) the Company's participation in strategic alliances with other
software vendors, including its participation in the Cooperative Applications
Initiative of Oracle, which focuses on pre-integrating software with Oracle
applications and utilizes the Oracle sales force to generate new WMS software
business for the Company. Additionally, the Logistics and Software Systems
sales force advertises in trade periodicals and attends trade shows and user
conferences in the software and supply chain industries.
Logistics and Software Systems employees include five BDMs and various
account managers to coordinate sales of SCM software systems (as of October
31, 1997). The BDMs cover regional territories throughout the United States
and Canada. BDMs, account managers and support personnel comprise the unit's
proposal teams, which examine the needs of various proposed projects and
evaluate those potential opportunities.
An important component of the Company's future sales and marketing efforts
includes continued expansion into various international markets. Currently,
the Company's international sales efforts are concentrated in the Pacific Rim,
where it sells approximately 30-50 automated machines annually. The Company
believes European and South American automated material handling systems
markets will undergo expansion similar to that seen in North America. The
Company recently entered into a strategic alliance with a Brazilian
manufacturer and integrator of automated material handling systems to
undertake a joint sales effort in that country. The Company has a right of
first refusal to include its products in any automated material handling
system sale and/or integration project undertaken by the alliance in Brazil.
The Company has also entered into non-exclusive sales representative and/or
distributor agreements to cover many countries in Central and South America.
EMPLOYEES
As of October 31, 1997, the Company had approximately 1,150 employees,
consisting of approximately 144 employees in the areas of concept and planning
(including consulting and simulation engineers, account managers and network
development personnel); 534 employees in project implementation (including
control, software and systems engineers, project managers and project
analysts); 396 in manufacturing (including product
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engineers and hourly plant employees); and 76 in administration and marketing
(including BDMs, management personnel and assistants). As of October 31, 1997,
the number of the Company's employees with engineering backgrounds by
specialty and business unit were as indicated in the following table:
<TABLE>
<CAPTION>
INTEGRATED CUSTOMER LOGISTICS AND
ENGINEER CATEGORIES SYSTEMS SERVICES SOFTWARE SYSTEMS
------------------- ---------- -------- ----------------
<S> <C> <C> <C>
Software............................ 51 67 98
Electrical.......................... 92 56 4
Mechanical.......................... 84 15 0
Systems............................. 24 1 7
--- --- ---
Total........................... 251 139 109
=== === ===
</TABLE>
The Company is not subject to any collective bargaining agreements with
respect to any of its employees, has not experienced any work stoppages
related to labor matters and considers its employee relations to be excellent.
The Company believes high levels of employee support, participation and
satisfaction significantly contribute to the Company's business success. To
further this belief, and to maintain a working environment that encourages
professional and technical development, advancement and equal opportunity for
all employees, the Company provides an employee benefits package that
includes, among other benefits, an incentive program to encourage prompt
recognition of superior customer service, exercise facilities, a tuition
reimbursement program and programs that encourage community and charitable
involvement. The Company believes its organization-wide employee turnover
rates are low by industry standards. Additionally, Company employees have an
average tenure of approximately 16 years of employment with the Company and
its predecessors.
RESEARCH AND DEVELOPMENT
The Company has demonstrated a commitment to continuous research and
development and is dedicated to current and future research and development
projects relating to its automated material handling equipment and software
products. The Company maintains a research and demonstration facility, that
provides it with the ability to test, adjust and demonstrate systems prior to
sale and installation, affording it the opportunity to ensure high quality
products and seek innovative technological advances at lower cost than those
competitors without similar resources, as well as helping customers avoid
downtime that occurs after installation. The Company also conducts research
and development at each of its engineering and manufacturing facilities.
In the three months ended January 31, 1998 and in fiscal 1997, 1996 and
1995, the Company incurred research and development expenses of $1.0 million,
$5.0 million, $2.0 million and $1.3 million, respectively. Based on the
Company's growth in the logistics and software systems market and its current
commitment to research and development, the Company intends to spend $5.0
million on research and development in fiscal 1998.
COMPETITION
The Company primarily competes in the North American markets for automated
material handling systems solutions, and the related customer service and
aftermarket, and SCM software. The Company believes the automated material
handling systems and SCM software markets are currently undergoing an
industry-wide consolidation which the Company anticipates will continue.
Although the Company believes it is one of the leading suppliers of
automated material handling systems integration solutions, this market is
competitive, and certain of Integrated Systems' competitors are large and have
significant financial, marketing and technical resources. The Company believes
its primary competitors in this market include Daifuku/Eskay, Hytrol,
Mannesmann Dematic Rapistan, Munck, Pinnacle Automation, Jervis B. Webb and
several consulting firms specializing in automated material handling systems
integration services.
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The Company believes the primary competitive factors in this market are price,
performance, functionality, customer service and support, reputation and
financial strength. To some extent, the Company also competes in this market
with small- to medium-sized suppliers who do not offer systems or integration
solutions but instead focus on market niches or singular applications.
The customer service market is highly fragmented and competitive with regard
to services of a low degree of sophistication but with fewer competitors at
higher levels of sophistication. In this market, Customer Services competes
principally with the original provider of a potential customer's material
handling equipment and with in-house maintenance departments. Local control
engineering houses and others have competed against the Company for projects
that do not require extensive prior experience and accomplishments as a
prerequisite for bidding. Although these firms may have certain advantages due
to their relationship with the customer and familiarity with its facility,
they are less likely to have the know-how or the resources to present a more
competitive bid than the Company. The Company believes the primary competitive
factors in this market are reputation and, to a lesser extent, price.
Logistics and Software Systems usually competes for WMS projects with
contract values greater than $400,000, with approximately 20 other companies
that compete for similar WMS projects. The Company believes approximately two-
thirds of the WMS market involves projects in excess of $400,000. Although
there are over 100 companies that claim to have WMS capabilities in the United
States, the Company's primary competitors in the SCM software systems market
are BDM International, Catalyst, EXE Technologies, McHugh International and
in-house MIS departments. The Company believes the primary competitive factors
in this market are performance and functionality; price; a vendor's ability to
implement software promptly and effectively; reputation; and a provider's
alliances with major accounting firms and other consultants.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company currently maintains both United States and foreign patents and
pending patent applications for technology utilized in its business. Except
for patents and patent applications relating to AGVS wireless control
technology, the Company does not believe any one of its patent rights is
material to the Company's business. The Company also relies on a combination
of trade secret, copyright and trademark laws, nondisclosure agreements and
other contractual provisions and technical measures to protect its proprietary
rights. There can be no assurance that these patent rights and other
protections will be adequate or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technology. Existing trade secret and copyright laws
afford only limited protection.
The Company is not aware that any of its material intellectual property
infringes the proprietary rights of third parties, but has not performed any
independent investigations to determine whether any such infringement exists.
There can be no assurance, therefore, that third parties will not claim
infringement by the Company with respect to current or future products. Any
intellectual property infringement claims, with or without merit, could be
time-consuming, result in costly litigation, divert management resources,
cause product shipment delays, require the Company to enter into royalty or
licensing agreements or may require the Company to withdraw products from the
market. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, which could have a material
adverse effect on the Company's business, operating results or financial
condition.
The Company currently utilizes trademarks to identify its products and
services and maintains federal trademark registration and pending trademark
applications in the United States and certain foreign countries, including
United States federal registrations for its marks HK SYSTEMS, STOCKMASTER and
VON GAL. The Company generally attempts to federally register a trademark
relating to a product's or a technology's name only when the Company intends
to actively promote the product or technology. Other than the marks HK
SYSTEMS, STOCKMASTER and VON GAL, the Company does not believe any trademark
is material to its business.
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FACILITIES
The Company operates its primary office in Milwaukee, Wisconsin, and
conducts its principal manufacturing, engineering and distribution operations
at the following facilities:
<TABLE>
<CAPTION>
SQUARE OWNED/ TERM
LOCATION UTILIZATION FOOTAGE LEASED EXPIRES
-------- ----------- ------- ------ -------
<C> <S> <C> <C> <C>
Milwaukee, WI Headquarters (Integrated Systems, 85,000 Leased 10-31-11
Customer Services and Logistics and
Software Systems)
Salt Lake City, UT Principal office (Integrated Systems 61,829 Leased 02-28-05
and Customer Services)
Bountiful, UT Manufacturing-AS/RS and AGVS 76,061 Owned
Hebron, KY Principal office (Integrated Systems) 19,773 Leased 10-31-98
Hebron, KY Office/Manufacturing-sortation and 157,144 Leased 10-31-16
conveyors
Montgomery, AL Office/Manufacturing-palletizer 113,753 Owned
systems
Glendale, WI Research and demonstration center 25,600 Leased 12-31-98
San Diego, CA Principal office (Logistics and 13,865 Leased 12-14-98
Software Systems)
</TABLE>
The research and demonstration center houses a complete integrated system
including a Unitload AS/RS, Miniload AS/RS, Microload AS/RS, AGVS and AEMS,
all under computer control. The center provides an environment for
experimentation, customer demonstration and prototyping client configurations.
The Company maintains sales offices in California, Georgia, Illinois,
Michigan, New Jersey and Texas to coordinate sales and marketing of unit
services and products. Full-time field service and factory technician teams
are located nationwide to provide fast and professional service and support
mission critical systems on an on-call basis or on a full-time basis.
To best serve its markets, the Company leases a number of sales and
engineering offices nationwide, strategic to the industries and locales that
they service.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS
The Company's operations are subject to a variety of federal, state and
local environmental laws and regulations that have become increasingly
stringent. The Company believes its current operations are in material
compliance with current environmental laws and regulations. However, the scope
of environmental laws is very broad and is subject to change.
LEGAL PROCEEDINGS
On July 1, 1992, Eaton-Kenway entered into the Fed Contract with the Federal
Reserve Bank of San Francisco relating to the installation of a material
handling system. On February 13, 1995, the Company assumed the Fed Contract in
the Eaton-Kenway Acquisition. On April 7, 1995, the SF Fed filed the Fed Suit
in the United States District Court for the Northern District of California
against the Company, Eaton-Kenway and Eaton alleging, among other things, a
failure to install a properly operating material handling system for two
existing SF Fed bank vaults in breach of the Fed Contract. The SF Fed
purported to seek not less than $3.55 million as restitution for the
consideration it paid under the Fed Contract, not less than $6.4 million for
incidental and consequential damages and not less than $46.7 million to cover
the costs of constructing two new bank vaults. In 1995, the court granted
partial summary judgment on the issue of liability in favor of the SF Fed and
against the Company and the other defendants on two counts of the SF Fed's
complaint for breach of contract and rescission and restitution. On January
30, 1998, the court granted partial summary judgment in favor of the Company
and the other defendants, holding that the SF Fed cannot recover the cost of
constructing new vaults or litigation expenses. However, the SF Fed may
continue to seek damages in excess of $10 million plus interest
43
<PAGE>
against the Company on the breach of contract and recission and restitution
claims which have not been dismissed, in addition to the damages it seeks from
Eaton and Eaton-Kenway on the fraud and RICO claims from which the Company was
previously dismissed. The January 30, 1998 ruling in favor of the Company and
the other defendants, as well as the 1995 partial summary judgment in favor of
the SF Fed, are subject to appeal after the entry of final judgment in the
action, and there can be no assurance that the results of any appeal would be
favorable to the Company. It is anticipated that a jury trial on the remaining
damage issues on the contract claim against the Company and Eaton-Kenway, if
not all the remaining claims against all the parties, will be held in 1998.
The Company believes it has meritorious defenses and rights in connection with
the Fed Suit. Nonetheless, due to the uncertainties inherent in litigation,
particularly where the verdict results from jury deliberations, the Fed Suit
could have a material adverse effect on the Company's business, results of
operations and financial condition.
On April 3, 1996, the Company filed a lawsuit in the United States District
Court for the Eastern District of Wisconsin against Mannesmann Dematic
Rapistan Corp. ("Rapistan") alleging infringement by Rapistan of two patents
held by the Company for certain of its AGVS technology. The Company seeks to
enjoin Rapistan's activity and is seeking unspecified damages. Rapistan filed
an answer to the charge of infringement alleging the general defenses of
invalidity of the patents, as well as non-infringement. Rapistan also filed
counterclaims asserting that the Company wrongfully characterized Rapistan's
products as infringing the Company's patents and alleging breach of a
confidentiality agreement in place between the parties. The Company does not
anticipate that an unfavorable outcome with respect to such counterclaims
would have a material effect on the Company's financial condition.
With the exception of the proceedings described herein and those that arise
in the ordinary course of business, the Company is currently not involved in
any legal proceedings that may materally effect the Company's business,
results of operations or financial condition.
GLOSSARY
1. "Automated Material Handling Systems"--combinations of equipment and
electrical and software controls that automate the physical and informational
aspects of receiving, transporting, sorting, picking, palletizing and shipping
materials throughout the manufacturing, warehousing and distribution
processes.
2. "Integration Services"--process by which a vendor plans, designs and/or
implements the coordination and interaction of the various components of a
system (such as an automated material handling system). Integration services
often include the original design and installation of the system components.
3. "Supply Chain"--represents all points in the complex physical and related
informational flow of materials from raw materials to products that are
distributed to end users.
4. "Supply Chain Management"--process by which a business coordinates
operations through points in the supply chain to improve order response times
and accuracy and cut operating expenses. Supply chain management, as the term
is generally used, connotes software designed to simultaneously manage
internal constraints (such as production capacity, human resource availability
and inventories) and external constraints (such as supplier lead times and
customer demand requirements). However, supply chain management also involves
the physical components of systems (such as automated material handling
systems) that sort, store and retrieve the materials used in any given
business.
5. "Supply Chain Solutions"--systems or services that allow businesses to
more efficiently manage the flow of materials along the supply chain. Supply
chain solutions can address operations at any single discrete point along the
supply chain or can integrate operations across multiple points along the
supply chain.
6. "Warehouse Management Systems"--systems that typically utilize radio
frequency equipment and bar code technology to enable companies to effectively
coordinate, at both the enterprise level and a facility or other local level,
the people and products necessary in performing the warehousing functions of
physical order fulfillment, inventory control and shipping.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table contains the name, age and position with the Company of
each executive officer and director as of January 31, 1998. Each person's
respective background is described following the table.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John W. Splude.......... 52 Chairman, President and Chief Executive Officer and Director (1)
Glen P. Davis........... 52 Executive Vice President-Integration Services and Director (2)
David W. Bartley........ 40 Senior Vice President-Integrated Systems
Larry S. Cinpinski...... 40 Senior Vice President-Logistics and Software Systems
John C. Hines........... 40 Senior Vice President-Administration and Chief Financial Officer
Woody M. McGee.......... 46 Senior Vice President-Unit Handling Systems
Stephen S. Sadowski..... 52 Senior Vice President-Customer Services
John R. Kuhnmuench, Jr.. 52 Vice President, Secretary and General Counsel
John T. Byrnes.......... 51 Director (1)
David M. Upton.......... 37 Director (3)
Jose J. Yglesias........ 68 Director (2)
</TABLE>
- --------
(1) Term expires in 2001.
(2) Term expires in 1999.
(3) Term expires in 2000.
Mr. Splude has served as President and Chief Executive Officer of the
Company since November 1993 and was elected Chairman of the Board in September
1997. Prior thereto, he served as President of HEI from November 1987 to
November 1993. Mr. Splude has also served as Vice President of Harnischfeger's
Industrial Technology Group, Vice President and Treasurer of Harnischfeger,
and President of Harnischfeger Credit Corporation. Mr. Splude has been a
director of the Company since 1993. Mr. Splude is also a director of Gehl
Company.
Mr. Davis has served as Executive Vice President-Integration Services of the
Company since November 1996. Prior thereto, he served as Senior Vice President
of the Company from November 1993 to November 1996, and as Vice President of
Sales and Marketing of HEI from 1987 to November 1993. Mr. Davis has been a
director of the Company since 1993.
Mr. Bartley has served as Senior Vice President-Integrated Systems of the
Company since November 1996. Prior thereto, Mr. Bartley served as the
Company's Vice President-Operations, Vice President-Stockmaster, and Director-
Commercial Systems, from September 1994 to November 1996, August 1993 to April
1995, and October 1991 to August 1993, respectively. In addition, Mr. Bartley
held various other management positions with HEI since 1980.
Mr. Cinpinski has served as Senior Vice President-Logistics and Software
Systems since November 1996 and Vice President of Operations-Logistics and
Software Systems from August 1996 to November 1996. Prior thereto, he served
in various information systems and information technology management positions
with Miller Brewing Company from August 1991 to August 1996.
45
<PAGE>
Mr. Hines has served as Senior Vice President-Administration and Chief
Financial Officer of the Company since October 1993. Prior thereto, he served
as Vice President and Controller of the Company from May 1992 to October 1993,
and as Vice President and Controller of HEI from 1987 to May 1992. Mr. Hines
has also held accounting positions for Rexnord Corporation and the Square D
Company.
Mr. McGee has served as Senior Vice President-Unit Handling Systems of the
Company since March 1997. Prior thereto, he served as Vice President, Chief
Financial Officer and Treasurer of Mosler Safe, an electronic security
company, from October 1996 to March 1997. Mr. McGee also served in various
executive positions with Western Atlas and its predecessor Litton Industries
from 1969 to September 1996.
Mr. Sadowski has served as Senior Vice President-Customer Services since
February 1995. Prior thereto, he served as the Company's Vice President-
Aftermarket System Services from August 1993 to February 1995 and as Director
and General Manager of the Modernizations Department of the Company from May
1992 to August 1993. Mr. Sadowski is on a temporary leave of absence, and his
duties are being assumed by other executives.
Mr. Kuhnmuench has served as Vice President, Secretary and General Counsel
of the Company since May 1994. Prior thereto, he served as Deputy General
Counsel and Assistant Secretary for A.O. Smith Corporation from May 1985 to
May 1994.
Mr. Byrnes has served as a Director of the Company since November 1993. He
has served as Senior Vice President of Marshall & Ilsley Corporation, a bank
holding company ("M&I Corporation"), since 1994; President of M&I Capital
Markets Group ("M&I Capital"), the merchant banking arm of the M&I
Corporation, since 1992; and President of M&I Ventures Corporation, a
subsidiary of M&I Capital ("MIVC"), since 1992. M&I Capital is an affiliate of
the Company by virtue of MIVC's ownership of Class B Preferred Stock and
common stock of the Company.
Mr. Upton has served as a director of the Company since September 1996. Mr.
Upton has been a Professor of Information Technologies at Harvard University
since June 1997. He served as an Associate Professor at Harvard University
from August 1994 to June 1997. Prior thereto, he served as Assistant Professor
at Harvard University from August 1989 to August 1994.
Mr. Yglesias has served as a director of the Company since 1993. Mr.
Yglesias was a founder of Syscon Corporation, a software systems integrator
("Syscon"), which Harnischfeger acquired in 1987. He retired as Chairman of
Syscon and Senior Vice President of the Systems Group of Harnischfeger, which
included Syscon and HEI, in 1992.
The Company's Amended and Restated Articles of Incorporation and Bylaws
provide for three classes of directors, with staggered terms expiring at each
successive annual meeting of the shareholders. Pursuant to the Amended and
Restated Articles of Incorporation, the Board of Directors has determined that
the Company will have five directors, two in the class whose term will expire
in 1999, one in the class whose term will expire in 2000 and two in the class
whose term will expire in 2001.
DIRECTOR COMPENSATION
Prior to the Offering, the directors who were not employees (other than Mr.
Byrnes) of the Company were paid an annual retainer fee of $4,000 per year and
a fee of $1,000 for attending each regular meeting of the Board of Directors
and reimbursement for out-of-pocket expenses. Messrs. Upton and Yglesias have
also each received grants of options under the 1993 Plan to purchase an
aggregate of 10,000 shares of Common Stock. In addition, MIVC received an
annual director fee of $50,000 per year, which it will not receive after the
Offering.
46
<PAGE>
Effective upon the consummation of the Offering and pursuant to the Directors
Plan, directors who are not employees of the Company, a 5% or greater
shareholder of the Company or either of the Company's original investors will
be paid an annual retainer fee of $10,000, which will be payable in Common
Stock commencing at the 1998 annual meeting of the Company's shareholders; a
fee of $1,000 for attending each meeting of the Board of Directors; and a fee
of $500 for attending each committee meeting, in addition to reimbursement of
out-of-pocket expenses. Pursuant to the Directors Plan, a director may elect
to have his fees paid in Common Stock. Other directors will not be compensated
for service as members of either the Board of Directors or committees thereof
after the Offering, but will be reimbursed for out-of-pocket expenses.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee, each consisting of two or more directors, the majority of whom will
be outside directors.
The duties of the Audit Committee will be to select and engage independent
public accountants to audit annually the books and records of the Company, to
review the activities and the reports of the independent public accountants
and authorize appropriate action. The Audit Committee will also approve any
other services to be performed by and approve the audit fee and other fees
payable to the independent public accountants and monitor the internal
accounting controls of the Company.
The duties of the Compensation Committee will be to provide a general review
of the Company's compensation and benefit plans to ensure that they meet the
Company's objectives. The Compensation Committee will have the sole authority
to administer the 1993 Plan and the Directors Plan described below and to
grant awards thereunder. In addition, the Compensation Committee will consider
and establish the compensation of all officers of the Company and adopt major
Company compensation policies and practices. The Compensation Committee will
also consider and make recommendations to the Board of Directors regarding the
selection and retention of all elected officers of the Company and its
subsidiaries.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company to the Company's Chief Executive Officer and each of the
Company's five other most highly compensated executive officers (collectively,
the "Named Executive Officers") for the fiscal year ended October 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
- --------------------------- -------- -------- ---------------
<S> <C> <C> <C>
John W. Splude.............................. $350,000 $191,800 $3,750
Chairman, President and Chief Executive
Officer
Glen P. Davis............................... 250,000 137,000 3,750
Executive Vice President--Integration
Services
John C. Hines............................... 175,000 95,900 3,750
Senior Vice President--Administration and
Chief Financial Officer
David W. Bartley............................ 140,000 74,310 3,750
Senior Vice President--Integrated Systems
Stephen S. Sadowski......................... 150,000 57,300 3,750
Senior Vice President--Customer Services
Larry S. Cinpinski.......................... 150,000 57,300 3,750
Senior Vice President--Logistics and
Software Systems
</TABLE>
- --------
(1) Amounts set forth represent the Company's matching contributions under its
401(k) plan.
47
<PAGE>
The following table sets forth the aggregate value of unexercised options at
October 31, 1997 held by each of the Named Executive Officers. No such options
were exercisable at October 31, 1997. No Named Executive Officer exercised any
options during fiscal 1997.
1997 FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES DOLLAR VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
NAME AT OCTOBER 31, 1997 OCTOBER 31, 1997(1)
- ---- ------------------------------ ---------------------------
<S> <C> <C>
John W. Splude...... 0 --
Glen P. Davis....... 0 --
John C. Hines....... 0 --
David W. Bartley.... 72,000 $979,200
Stephen S. Sadowski. 72,000 $979,200
Larry S. Cinpinski.. 28,000 $363,440
</TABLE>
- --------
(1) Determined by subtracting the option exercise price per share of Common
Stock from an assumed initial public offering price per share of $14.00
and multiplying by the number of shares subject to purchase upon option
exercise.
STOCK OPTION PLAN
The 1993 Plan has been administered by the Board of Directors in the past
and is now administered by the Compensation Committee. Employees and non-
employee members of the Board of Directors are eligible to receive options
under the 1993 Plan.
The 1993 Plan authorizes the granting of (i) incentive stock options and
(ii) nonstatutory stock options. Up to a maximum of 1,148,733 shares of Common
Stock (subject to adjustment as provided in the 1993 Plan) may be issued under
the 1993 Plan. Such shares may consist of treasury shares or authorized but
unissued shares. Shares subject to an option that expires or terminates may
again be the subject of an option under the 1993 Plan.
The Compensation Committee has the sole authority (subject to the provisions
of the 1993 Plan) to determine (i) the purchase price of shares of Common
Stock covered by each option; (ii) the number of shares of Common Stock to be
subject to each option; (iii) the employees and other persons to whom and the
time or times at which options shall be granted; (iv) the limitations and
conditions to be imposed on any option granted under the 1993 Plan; (v) the
rules and procedures pertaining to the 1993 Plan; (vi) the terms and
provisions of option agreements under the 1993 Plan; (vii) any modifications,
extensions or renewals of option agreements under the 1993 Plan; and (viii)
all other matters necessary for administration of the 1993 Plan.
Options granted under the 1993 Plan may not be exercised earlier than six
months following the date of grant. The Compensation Committee may require
that a holder be employed by the Company for a designated period of time prior
to exercise of any option granted under the 1993 Plan and may otherwise
determine the periods during which options may be exercised, subject to the
terms of the 1993 Plan. In general, an option that has vested terminates three
months after termination of employment. Options granted under the 1993 Plan
are not transferable (except upon death) and are exercisable only by the
holder or by the holder's guardian or legal representative during the lifetime
of the holder.
The exercise price for options granted under the 1993 Plan is payable in
cash or shares of Common Stock as determined by the Compensation Committee.
Such price must be paid in full at the time of exercise. As of January 31,
1998, there were options to purchase 1,123,800 shares of Common Stock
outstanding under the 1993 Plan at a weighted average exercise price of
approximately $2.41 per share, substantially all of which become exercisable
upon the consummation of the Offering.
48
<PAGE>
The per share purchase price of incentive stock options is determined by the
Compensation Committee but shall not be less than 100% of the fair market
value of Common Stock on the date of grant, as determined by the Compensation
Committee pursuant to the terms of the 1993 Plan. No incentive stock option
may be granted after 10 years from the effective date of the 1993 Plan or be
exercisable after the expiration of 10 years from the date of grant. Any
incentive stock option that has not been exercised within 10 years of the date
of its grant shall expire at the expiration of such 10 year period. The per
share exercise price of nonstatutory stock options granted under the 1993 Plan
shall not be less than 85% of the fair market value of Common Stock on the
date of grant, as determined by the Compensation Committee pursuant to the
terms of the 1993 Plan.
EMPLOYMENT AGREEMENTS
John W. Splude, Glen P. Davis and John C. Hines each entered into an
Employment and Noncompetition Agreement (collectively, the "Employment
Agreements") with the Company dated as of October 28, 1993 and amended as of
October 31, 1996. Under the terms of their respective agreements, Messrs.
Splude, Davis and Hines are entitled to a minimum annual base salary at their
current salary levels plus other bonuses, the amounts and payment of which are
within the discretion of the Compensation Committee. The Employment Agreements
may be terminated by the Company or by the executive officer's resignation at
any time and for any reason. The Employment Agreements also provide that if
any one of Messrs. Splude, Davis or Hines is terminated by the Company without
cause or if any of them terminates their respective Employment Agreement for
good reason or as a result of his disability, he will receive his average
compensation for a period of two years, in the case of Mr. Splude, or for a
period of one year, in the case of Messrs. Davis or Hines. The Employment
Agreements generally provide that Mr. Splude and Messrs. Davis and Hines will
not disclose any confidential information of the Company, or, for the term of
their employment and for a period of two years and one year, respectively,
following the end of their employment with the Company, compete with the
Company. Messrs. Splude and Hines' Employment Agreements provide that they
will not solicit any of the Company's employees or customers or otherwise
interfere with the relations of the Company for a period of one year (five
years if terminated for cause) after their termination. Mr. Davis' Employment
Agreement provides that he will not solicit any of the Company's employees or
customers or otherwise interfere with the relations of the Company for a
period of one year (three years if terminated for cause) after termination.
The Employment Agreements give each of Messrs. Splude, Davis and Hines and the
Company certain put and call rights with respect to common stock of the
Company that are exercisable when such individual is no longer employed by the
Company, which rights will terminate upon the consummation of the Offering.
David W. Bartley, Stephen S. Sadowski and Larry S. Cinpinski each entered
into an Employment and Noncompetition Agreement (collectively, the "Employment
and Noncompetition Agreements") with the Company dated as of July 1, 1997.
Under the terms of their respective agreements, Messrs. Bartley, Sadowski and
Cinpinski are entitled to annual base salaries of $140,000, $150,000 and
$150,000, respectively, plus other bonuses, the amounts and payment of which
are within the discretion of the Compensation Committee and may be adjusted
annually. The Employment and Noncompetition Agreements may be terminated by
the Company or by the executive officer's resignation upon effective notice of
termination at any time and for any reason. The Employment and Noncompetition
Agreements generally provide that Messrs. Bartley, Sadowski and Cinpinski will
not disclose any confidential information of the Company or, for the term of
their employment and for a period of one year following the end of such
executive officer's employment with the Company, compete with the Company. The
Employment and Noncompetition Agreements also provide that Messrs. Bartley,
Sadowski and Cinpinski will not solicit any of the Company's employees or
customers or otherwise interfere with the relations of the Company for a
period of one year (five years if terminated for cause) after their
termination.
49
<PAGE>
CERTAIN TRANSACTIONS; RELATIONSHIPS WITH SELLING SHAREHOLDERS;
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
COMPENSATION COMMITTEE
The Company's Compensation Committee reviews and acts on matters relating to
compensation levels and benefit plans for key executives of the Company. The
Compensation Committee currently consists of Messrs. Splude, Yglesias and
Byrnes. Effective upon the consummation of the Offering, the Compensation
Committee will consist of Messrs. Yglesias and Byrnes. Mr. Byrnes is the
President of MIVC which beneficially owns 1,895,360 shares of Common Stock
after giving effect to the Recapitalization (but not to MIVC's sale of Common
Stock in the Offering).
SHAREHOLDERS AGREEMENT
The Company entered into a Shareholders Agreement by and among the Company,
MIVC, State of Wisconsin Investment Board ("SWIB") and John W. Splude, Glen P.
Davis, John C. Hines and a former employee, dated as of October 28, 1993, as
amended and restated on February 13, 1995 and as subsequently amended (the
"Shareholders Agreement"). The Shareholders Agreement provides for
restrictions on the transfer of Common Stock by the shareholders who are a
party thereto, and it grants Management certain preemptive rights. The
Shareholders Agreement contains certain buy-sell provisions and other
shareholder matters. In addition, the Shareholders Agreement grants various
board of director composition entitlements to Management, MIVC and SWIB. This
Shareholders Agreement will be terminated upon the consummation of the
Offering.
REGISTRATION RIGHTS AGREEMENT
The Corporation entered into an Investment Agreement by and among the
Company, MIVC and SWIB dated as of October 28, 1993, as amended and restated
on February 13, 1995 and as subsequently amended (the "Investment Agreement").
The Investment Agreement granted registration rights to MIVC and SWIB subject
to certain restrictions. This Investment Agreement will be terminated upon the
consummation of the Offering. The registration rights contained in the
Investment Agreement will be amended and restated pursuant to a Registration
Rights Agreement by and among the Company, Management, MIVC and SWIB, which
such parties will execute upon the consummation of the Offering. Subject to
certain restrictions, MIVC and SWIB will have the right to two demand
registrations exercisable any time after the Offering as long as their
individual ownership of Common Stock exceeds 5%, and piggyback registration
rights. Management will also receive piggyback registration rights. In
addition, the Company will agree to indemnify SWIB, MIVC and Management
against certain liabilities, including liabilities under the Securities Act,
in connection with the Offering and any subsequent registrations. The Company
will pay the expenses of the Selling Shareholders in connection with the
Offering.
CERTAIN AFFILIATE TRANSACTIONS
Since the HEI Acquisition, the Company has paid MIVC, a holder of Class B
Preferred Stock, Class D Preferred Stock and Class C common stock of the
Company, for certain services. The Company paid MIVC $50,000 in each of the
1994-97 fiscal years as an annual director fee. In connection with the HEI
Acquisition, the Company paid MIVC $550,000 for its assistance in consummating
the acquisition and securing related outside debt commitments. In connection
with the Eaton-Kenway Acquisition, the Company paid SWIB, a holder of Class B
Preferred Stock and Class D Preferred Stock, $30,000 and paid MIVC $270,000
for financial advisory services. In November 1996, the Company paid MIVC
$225,000 for financial advisory services in connection with the Western Atlas
Acquisition.
ESOP TRANSACTIONS
The ESOP Transactions consisted of the following: (i) effective November 1,
1997, the Company adopted the ESOP, in which substantially all employees of
the Company participate; (ii) on December 15, 1997, the
50
<PAGE>
Company repurchased 420,000 shares of common stock of the Company (the
"Treasury Stock") from a former employee to liquidate his interest after the
employee exercised contractual "put" rights; (iii) the Company borrowed $6.0
million from its bank lenders and loaned that amount to the ESOP to enable the
ESOP to purchase 237,068, 64,672 and 64,672 shares of common stock of the
Company, on January 9, 1998, from Messrs. Splude, Davis and Hines,
respectively; and (iv) on January 31, 1998, the Company contributed 36,641
shares of Treasury Stock to the ESOP.
THE RECAPITALIZATION; DIVIDENDS AND REDEMPTION
In connection with and immediately prior to the consummation of the
Offering, the Company will effect the Recapitalization. Upon the consummation
of the Offering, as a result of the Recapitalization, the payment of accrued
dividends on the Class B Preferred Stock and Class D Preferred Stock and the
redemption of Class D Preferred Stock, Common Stock will be the only
outstanding capital stock of the Company. Prior to the Recapitalization, the
Company's outstanding capital stock consists of (i) 5,600,000 shares of Class
B Preferred Stock held by SWIB and MIVC, which is convertible into Class B
common stock of the Company ("Class B Common") on a share for share basis;
(ii) 2,416,640 shares of Class A common stock of the Company ("Class A
Common") held by the ESOP and Messrs. Splude, Davis and Hines; (iii) 215,360
shares of Class C common stock of the Company ("Class C Common") held by MIVC;
and (iv) shares of Class D Preferred Stock held by SWIB and MIVC. Directors,
officers and employees of the Company also have the right to acquire Class A
Common shares pursuant to options granted under the 1993 Plan. In connection
with and immediately prior to the consummation of the Offering, SWIB and MIVC
will convert all of the Class B Preferred Stock into Class B Common. In
addition, each share of Class A Common, Class B Common and Class C Common will
be reclassified into one share of Common Stock, and options to acquire Class A
Common shares will become options to acquire an equal number of shares of
Common Stock. Upon the consummation of the Offering, the Company will use a
portion of the proceeds of the Offering to (a) pay dividends that have accrued
on the Class B Preferred Stock prior to the Recapitalization by delivering
shares of Class D Preferred Stock with an equivalent stated value and (b)
redeem all of the outstanding shares of Class D Preferred Stock at their face
amount of $2.50 per share. See "Use of Proceeds."
51
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock (a) as of January 31, 1998 (without
giving effect to any allocation of ESOP shares to employee accounts), after
giving effect to the Recapitalization, and (b) as adjusted to reflect the sale
of Common Stock offered hereby for (i) each of the Company's directors; (ii)
each of the Named Executive Officers; (iii) each person who is known by the
Company to own beneficially more than 5% of the Common Stock; (iv) all
directors and officers as a group; (v) all holders of options granted under
the 1993 Plan ("Optionholders") as a group; and (vi) all directors, officers
and Optionholders as a group. The calculation of percentage of beneficial
ownership for each individual party or group of parties assumes the exercise
of any options held by that party or group. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission.
<TABLE>
<CAPTION>
NUMBER OF SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED
OFFERING SHARES AFTER OFFERING(1)
--------------------- BEING --------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
---- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
John W. Splude.......... 1,302,931(2) 15.8% 0(1) 1,302,931(2) 11.1%
Glen P. Davis........... 355,328(3) 4.3% 0(1) 355,328(3) 3.0%
John C. Hines........... 355,328(4) 4.3% 0(1) 355,328(4) 3.0%
David W. Bartley........ 72,000(5) * 0 72,000(5) *
Stephen S. Sadowski..... 72,000(5) * 0 72,000(5) *
Larry S. Cinpinski...... 28,000(5) * 0 28,000(5) *
John T. Byrnes.......... 1,895,360(6) 23.0% 360,000(1) 1,535,360 13.1%
David M. Upton.......... 10,000(5) * 0 10,000(5) *
Jose J. Yglesias........ 10,000(5) * 0 10,000(5) *
M&I Ventures
Corporation............ 1,895,360(7) 23.0%(8) 360,000(1) 1,535,360 13.1%
777 North Water Street
Milwaukee, WI 53202
State of Wisconsin
Investment Board....... 3,920,000 47.6%(8) 1,580,000(1) 2,340,000 20.0%
121 East Wilson St.
P.O. Box 7842
Madison, WI 53707-7842
HK Systems, Inc.
Employee Stock
Ownership Plan(9)...... 403,053 4.9% 0 403,053 3.4%
All Directors and
Executive Officers as a
group (11 persons)..... 4,144,947 50.4% 360,000(1) 3,784,947 31.7%
All Optionholders as a
group.................. 1,123,800 12.0% 0 1,123,800 8.8%
All Directors, Executive
Officers and
Optionholders as a
group.................. 3,137,387(10) 33.5% 0(1)(10) 3,137,387 24.5%
</TABLE>
- --------
*Less than one percent.
(1) Assumes no exercise of the Underwriters' over-allotment option to purchase
Common Stock from the Company and the Selling Shareholders. If the
Underwriters' over-allotment option is exercised in full, then upon
completion of the Offering Mr. Splude, Mr. Davis, Mr. Hines, MIVC, SWIB,
all directors and executive officers as a group, and all directors,
executive officers and optionholders as a group would beneficially own
1,160,074 shares (or 9.7%), 283,900 shares (or 2.4%), 319,613 shares (or
2.7%), 1,481,360 shares (or 12.4%) and 2,103,000 shares (or 17.6%),
3,480,947 shares (or 28.6%) and 2,887,387 shares (or 22.1%), respectively.
(2) Includes 640,000 shares held by the Splude Family Limited Partnership. Mr.
Splude is a general partner of the Splude Family Limited Partnership and
has shared voting and investment power over such shares. The address for
Mr. Splude is c/o HK Systems, Inc., 2855 South James Drive, New Berlin,
Wisconsin, 53005.
(3) Held by the Glen and Leslie Davis Family Limited Partnership. Mr. Davis is
a general partner of the Davis Family Limited Partnership and has shared
voting and investment power over such shares.
52
<PAGE>
(4) Held by the Pamela and John C. Hines Family Limited Partnership. Mr. Hines
is a general partner of the Hines Family Limited Partnership and has
shared voting and investment power over such shares.
(5) Represents the right to acquire these shares upon the exercise of stock
options under the 1993 Plan that vest upon consummation of the Offering.
(6) Mr. Byrnes is the President of MIVC, which holds 1,895,360 shares of
Common Stock. Mr. Byrnes disclaims beneficial ownership of such shares.
The address for Mr. Byrnes is c/o M&I Ventures Corporation, 777 North
Water Street, Milwaukee, Wisconsin, 53202.
(7) MIVC is a wholly-owned subsidiary of M&I Capital which is the merchant
banking arm of M&I Corporation.
(8) If percentage of beneficial ownership were calculated as if all
outstanding options exercisable upon consummation of the Offering were
exercised prior to the Offering, then MIVC would beneficially own 20.5% of
shares and SWIB would own 42.3% of shares.
(9) The address of HK Systems, Inc. Employee Stock Ownership Trust is c/o
Marshall & Ilsley Trust Company, 777 North Water Street, Milwaukee,
Wisconsin, 53202. Voting rights of the Common Stock held by the ESOP are
exercised by Marshall & Ilsley Trust Company ("M&I Trust") with respect to
all matters submitted to a vote of shareholders except for significant
transactions such as approvals of a merger, recapitalization, liquidation,
dissolution or sale of the Company's business. Voting on significant
transactions is passed through to and may be exercised by participants or
beneficiaries of the ESOP by direction to M&I Trust. If there is no
direction, then the shares are voted by M&I Trust.
(10) Excludes for purposes of this disclosure the Common Stock of MIVC
attributed to Mr. Byrnes as discussed above.
DESCRIPTION OF CAPITAL STOCK
Upon consummation of the Offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $.01 par value per
share, and 10,000,000 shares of preferred stock, $.01 par value per share.
Upon consummation of the Offering, 12,075,358 shares of Common Stock and no
shares of preferred stock will be issued and 11,692,000 shares of Common Stock
will be outstanding.
The following summary description of the Common Stock and preferred stock is
subject to, and qualified in its entirety by, the provisions of the Amended
and Restated Articles of Incorporation and By-laws which are included as
exhibits to the Registration Statement of which this Prospectus is a part and
by the provisions of applicable law. The Amended and Restated Articles of
Incorporation and By-laws will be effective upon the consummation of the
Offering.
COMMON STOCK
After all cumulative dividends have been paid or declared and set apart for
payment on any shares of preferred stock that are outstanding, the Common
Stock is entitled to such dividends as may be declared from time to time by
the Board of Directors in accordance with applicable law. For certain
restrictions on the ability of the Company to declare dividends, see "Dividend
Policy."
Except as may be determined by the Board of Directors of the Company with
respect to any series of preferred stock, only the holders of Common Stock
shall be entitled to vote for the election of directors of the Company and on
all other matters. Upon any such vote the holders of Common Stock will be
entitled to one vote for each share of Common Stock held by them subject to
any applicable law. Cumulative voting is not permitted.
All shares of Common Stock are entitled to participate equally in
distributions in liquidation, subject to the prior rights of any preferred
stock that may be outstanding. Except as the Board of Directors may in its
discretion otherwise determine, holders of Common Stock have no preemptive
rights to subscribe for or purchase shares of
53
<PAGE>
the Company. There are no conversion rights or sinking fund or redemption
provisions applicable to the Common Stock. The Common Stock to be outstanding
upon completion of the Offering will be fully paid and nonassessable (subject
to Section 180.0622(2)(b) of the Wisconsin Business Corporation Law ("WBCL")).
The transfer agent for the Common Stock is Firstar Trust Company.
PREFERRED STOCK
The Company's Amended and Restated Articles of Incorporation will provide
that the Board of Directors has the authority, without further action by the
shareholders, to issue up to 10,000,000 shares of preferred stock in one or
more series and to fix the designations, powers, preferences, privileges, and
relative participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the Common Stock. The Board of
Directors, without shareholder approval, can issue preferred stock with
voting, conversion or other rights that could adversely affect the voting
power and other rights of the holders of Common Stock. Preferred stock could
thus be issued quickly with terms calculated to delay or prevent a change in
control of the Company or make removal of management more difficult.
Additionally, the issuance of preferred stock may have the effect of
decreasing the market price of the Common Stock, and may adversely affect the
voting and other rights of the holders of Common Stock. The Company has no
present plans to issue any shares of preferred stock.
WARRANT
In connection with the Western Atlas Acquisition, the Company issued to
Western Atlas a warrant for the purchase of shares of Common Stock (the
"Warrant"). The Warrant may be exercised in whole or in part at any time
following the consummation of the Offering (the "Effective Date"). The Warrant
expires on the earlier to occur of (i) the exercise of all the rights
represented by the Warrant; (ii) the repurchase of the Warrant by the Company;
or (iii) November 15, 2003. The Warrant is exercisable to acquire a number of
shares of Common Stock (the "Warrant Shares Number") to be determined by
reference to the offering price per share of such stock in the Offering. The
Warrant Shares Number and the price per share to be paid by the holder are
subject to standard anti-dilution adjustments. Assuming an initial public
offering price of $14.00 per share, the Warrant may be exercised by the holder
following the Effective Date for a total of approximately 124,223 shares of
Common Stock at a price per share of $16.10 which is 115% of the initial
public offering price.
The Warrant also gives the holder certain rights (i) to participate in a
registration of Common Stock by the Company following the Effective Date and
(ii) until the earlier of November 15, 2000 or the third anniversary of the
Effective Date, to demand that all or a portion of the shares covered by the
Warrant be registered by the Company on a Form S-3 Registration Statement. The
Company will pay the expenses of Western Atlas in connection with the
registration of the shares covered by the Warrant.
CERTAIN ANTI-TAKEOVER AND INDEMNIFICATION PROVISIONS
Certain Charter and By-law Provisions
The Amended and Restated Articles of Incorporation of the Company provide
that the number of directors of the Company will be not less than five and not
more than fifteen and that the terms of directors will be staggered. The Board
of Directors shall determine the exact number of directors pursuant to a
majority vote. Pursuant to the Amended and Restated Articles of Incorporation,
the Board of Directors has determined that the Company will have five
directors, two in the class whose term will expire in 1999, one in the class
whose term will expire in 2000 and two in the class whose term will expire in
2001. Any vacancies on the Board may be filled for the unexpired portion of
the term only by a majority vote of the remaining directors. Any director may
be removed from office, but only for cause and only by the affirmative vote of
the holders of outstanding shares representing at least 80% of the voting
power of all shares of capital stock of the Company then entitled to vote
generally in the election of directors; provided, however, that if the Board
of Directors by resolution adopted by
54
<PAGE>
at least 75% of the directors then in office recommend removal of a director,
then the shareholders may remove such director from office without cause by a
majority vote of such outstanding shares. The Company's By-laws provide that a
special meeting of shareholders may be called only by (i) the Chairman of the
Board, (ii) the President, or (iii) the Board of Directors and shall be called
by the Chairman of the Board or the President upon the demand of the holders
of record of shares representing at least 10% of all the votes entitled to be
cast on any issue proposed to be considered at the special meeting. The
Amended and Restated Articles of Incorporation further provide that
nominations for the election of directors and advance notice of other action
to be taken at meetings of shareholders of the Company must be given in the
manner provided in the Company's By-laws, and the By-laws contain detailed
notice requirements relating to nominations and other action.
The Amended and Restated Articles of Incorporation prohibit the Company from
entering into certain "business combinations" (which term is defined
generally, for purposes of the Amended and Restated Articles of Incorporation,
to include a merger or consolidation of the Company, or the sale or
disposition of any assets of the Company or any subsidiary having an aggregate
fair market value of not less than one percent of the total assets of the
Company) with a shareholder owning 5% or more of the voting power of the
Company unless such transaction (i) is approved by at least 80% of the voting
power of all shares of capital stock of the Company; (ii) is approved by a
majority of "Continuing Directors" (as defined in the Amended and Restated
Articles of Incorporation); or (iii) meets certain "fair price" requirements
set forth in the Amended and Restated Articles of Incorporation. The Amended
and Restated Articles of Incorporation further require approval of amendments
to the By-laws (i) by the affirmative vote of at least 75% of the directors
then in office; (ii) by at least 80% of the voting power of all shares of
capital stock of the Company; or (iii) if at least 75% of the directors then
in office have proposed the amendment by the adoption of a resolution, by the
affirmative vote of the holders of outstanding shares representing a majority
of the voting power of all shares of capital stock of the Company then
entitled to vote generally in the election of directors.
The By-laws provide that the directors and executive officers of the Company
shall be indemnified to the fullest extent permitted by the WBCL against
expenses (including attorneys' fees), judgments, fines, settlements and other
amounts actually and reasonably incurred by them in connection with any
proceeding arising out of their status as directors and executive officers.
The foregoing provisions and the prohibitions set forth in the WBCL could
have the effect of delaying, deferring or preventing a change in control or
the removal of existing management of the Company.
Statutory Provisions
Section 180.1150 of the WBCL provides that the voting power of shares of
public Wisconsin corporations, such as the Company, held by any person or
persons acting as a group that hold in excess of 20% of the voting power for
the election of directors is limited to 10% of the full voting power of those
shares. This restriction does not apply to shares acquired directly from the
Company or shares for which full voting power has been restored pursuant to a
vote of shareholders. The Board of Directors of the Company cannot elect to
render this provision inapplicable to the Company.
Sections 180.1140 to 180.1144 of the WBCL (the "Wisconsin Business
Combination Statute") contain certain limitations and special voting
provisions applicable to "business combinations" between a Wisconsin
corporation and an "interested shareholder." The term "business combination"
is defined for purposes of the Wisconsin Business Combination Statute to
include a merger or share exchange, sale, lease, exchange, mortgage, pledge,
transfer or other disposition of assets equal to at least 5% of the market
value of the stock or assets of a corporation or 10% of its earning power,
issuance of stock or rights to purchase stock with a market value equal to at
least 5% of the outstanding stock, adoption of a plan of liquidation and
certain other transactions involving an "interested shareholder." An
"interested shareholder" is defined as a person who beneficially owns,
directly or indirectly, 10% of the voting power of the outstanding voting
stock of a corporation or who is an affiliate or associate of the corporation
and beneficially owned 10% of the voting power of the then outstanding voting
stock within the last three years. The Wisconsin Business Combination Statute
prohibits a corporation from engaging
55
<PAGE>
in a business combination (other than a business combination of a type
specifically excluded from the coverage of the statute) with an interested
shareholder for a period of three years following the date such person becomes
an interested shareholder, unless the Board of Directors approved the business
combination or the acquisition of the stock that resulted in a person becoming
an interested shareholder before such acquisition. Business combinations after
the three-year period following the stock acquisition date are permitted only
if (i) the Board of Directors approved the acquisition of the stock prior to
the acquisition date; (ii) the business combination is approved by a majority
of the outstanding voting stock not beneficially owned by the interested
shareholder; or (iii) the consideration to be received by shareholders meets
certain requirements of the Wisconsin Business Combination Statute with
respect to form and amount.
Sections 180.1130 to 180.1133 of the WBCL provide that certain "business
combinations" not meeting certain fair price standards must be approved by a
vote of at least 80% of the votes entitled to be cast by all shareholders and
by two-thirds of the votes entitled to be cast by shareholders other than a
"significant shareholder" who is a party to the transaction. The term
"business combination" is defined, for purposes of Sections 180.1130 to
180.1133 of the WBCL, to include, subject to certain exceptions, a merger or
consolidation of the corporation (or any subsidiary thereof) with, or the sale
or other disposition of substantially all of the assets of the corporation to,
any significant shareholder or affiliate thereof. "Significant shareholder" is
defined generally to include a person that is the beneficial owner of 10% or
more of the voting power of the corporation. The Board of Directors of the
Company cannot elect to render this provision inapplicable to the Company.
Section 180.1134 of the WBCL (the "Wisconsin Defensive Action Restrictions")
provides that, in addition to the vote otherwise required by law or the
articles of incorporation of an issuing public corporation, the approval of
the holders of a majority of the shares entitled to vote is required before
such corporation can take certain action while a takeover offer is being made
or after a takeover offer has been publicly announced and before it is
concluded. Under the Wisconsin Defensive Action Restrictions, shareholder
approval is required for the corporation to (i) acquire more than 5% of its
outstanding voting shares at a price above the market price from any
individual or organization that owns more than 3% of the outstanding voting
shares and has held such shares for less than two years, unless a similar
offer is made to acquire all voting shares; or (ii) sell or option assets of
the corporation that amount to at least 10% of the market value of the
corporation, unless the corporation has at least three independent directors
and a majority of the independent directors vote not to have the restrictions
described in clause (ii) apply to the corporation. The restrictions described
in clause (i) above may have the effect of deterring a shareholder from
acquiring shares of the Company with the goal of seeking to have the Company
repurchase such shares at a premium over the market price.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have an aggregate of
12,075,358 shares of Common Stock issued and 11,692,000 shares of Common Stock
outstanding. Of these outstanding shares of Common Stock, the 5,460,000 shares
sold in this Offering will be freely tradeable without restriction or further
registration under the Securities Act, unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act.
5,888,947 of the remaining shares of Common Stock are "restricted securities"
as that term is defined in Rule 144 under the Securities Act ("Restricted
Shares") and will be subject to the lock-up arrangements described below.
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144 or 144(k)
promulgated under the Securities Act, which are summarized below. Sales of the
Restricted Shares in the public market, or the availability of such shares for
sale, could adversely affect the market price of the Common Stock.
The Company and its directors, executive officers and shareholders have
entered into contractual "lock-up" agreements providing that they will not
offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of Common Stock owned by them or that could be purchased by them
through the exercise of options to purchase Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of
Lehman Brothers, except in the case of the Company for shares deliverable
under the 1993
56
<PAGE>
Plan and the Directors Plan. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144 and 144(k), the shares subject to lock-up agreements will not be
saleable until 180 days after the date of this Prospectus (or earlier with the
consent of Lehman Brothers).
In addition, the ESOP holds 403,053 shares of Common Stock, approximately
73,282 of which were allocated to employee accounts as of January 31, 1998,
and the remainder of which are held for future allocation to employee
accounts. The ESOP will distribute shares from time to time to ESOP
participants, but currently only following their retirement or other
termination of employment. Shares that the ESOP distributes can be either
freely traded without restriction under the Securities Act or sold in
accordance with Rule 144 thereunder depending on the amount of securities
distributed to all participants in any one year and whether or not the
participant is an affiliate of the Company. The Company is unable to provide a
reliable estimate as to the amount of Common Stock that may be distributed by
the ESOP over any specified period. Shares held by the ESOP will be allocated
to participant accounts no more slowly than on a pro rata basis over the
period ending October 31, 2006.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year (measured with respect to ESOP participants from the date
shares were allocated to their account) would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding (which
will equal approximately 116,920 shares immediately after the Offering) or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been
an affiliate of the Company at any time during the 90 days preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years (including the holding period of any prior owner except an affiliate of
the Company), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144; therefore, unless otherwise subject to holdback, "144(k) shares" may
be sold immediately upon the completion of the Offering.
The preceding description does not give effect to the Common Stock that may
be offered and sold pursuant to the 1993 Plan or the Directors Plan. See
"Management--Director Compensation" and "Management--Stock Option Plans."
Holders of options under the 1993 Plan to purchase 1,123,800 shares of Common
Stock (as of January 31, 1998) that will become exercisable upon consummation
of the Offering generally will not execute lock-up agreements. It is the
Company's current intent not to file a registration statement under the
Securities Act with respect to such shares until the expiration of 180 days
after the date of this Prospectus. Assuming the Company files such a
registration statement, such shares will be eligible for sale commencing
immediately after an option is exercised. Shares awarded under the Directors
Plan will be available for immediate resale following the Offering subject to
the volume and other limitations of Rule 144 for shares held by directors and
officers. The Company intends to file a registration statement under the
Securities Act to register the Common Stock issuable under the Directors Plan.
As of the date of this Prospectus, no awards have been made under the
Directors Plan.
Since there has been no public market for the Common Stock prior to this
Offering, no predictions can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of the Common Stock, or the perception that such sales could occur, could
adversely affect the prevailing market price of the Common Stock.
57
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the
underwriting agreement (the "Underwriting Agreement"), the form of which is
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, by and among the Company, the Selling Shareholders and each of
the underwriters named below (the "Underwriters"), for whom Lehman Brothers
Inc., Robert W. Baird & Co. Incorporated and Furman Selz LLC are acting as
representatives (the "Representatives"), the Underwriters have severally
agreed to purchase from the Company and Selling Shareholders, and the Company
and Selling Shareholders have agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite the name of each
such Underwriter below.
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITERS SHARES
------------ --------
<S> <C>
Lehman Brothers Inc..............................................
Robert W. Baird & Co. Incorporated...............................
Furman Selz LLC..................................................
--------
Total.......................................................
========
</TABLE>
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares to the
public at the initial public offering price on the cover page of this
Prospectus, and to certain dealers at such price less a selling concession not
in excess of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
underwriters or to certain other brokers or dealers. After the initial
offering to the public, the offering price and the concession to selected
dealers and the reallowance may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions and that if any of the above shares of Common
Stock are purchased by the Underwriters pursuant to the Underwriting
Agreement, all the shares of Common Stock agreed to be purchased by the
Underwriters (other than those covered by the over-allotment option described
below), must be so purchased.
The Company and the Selling Shareholders have agreed in the Underwriting
Agreement to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act, and to contribute in certain
circumstances to payments that the Underwriters may be required to make in
respect thereof.
58
<PAGE>
The Company and Selling Shareholders have granted to the Underwriters a 30-
day option to purchase up to an additional 269,000 shares and 541,000 shares
of Common Stock, respectively, on the same terms and conditions as set forth
above to cover over-allotments, if any. To the extent that such option is
exercised, each Underwriter will be committed, subject to certain conditions,
to purchase a number of the additional shares of Common Stock proportionate to
such Underwriter's initial commitment as indicated in the preceding table.
This Prospectus is not, and under no circumstances is to be construed as, an
advertisement or a public offering of shares of Common Stock in Canada or any
province or territory thereof. Any offer or sale of shares of Common Stock in
Canada may only be made pursuant to an exemption from the prospectus and
registration requirements in the province or territory of Canada in which such
offer or sale is made.
No action has been taken or will be taken in any jurisdiction by the Company
or the Underwriters that would permit a public offering of shares of Common
Stock in any jurisdiction where action for that purpose is required, other
than the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about,
and to observe any restrictions as to, the offering of shares of Common Stock
offered pursuant to the Offering and the distribution of this Prospectus.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Company has agreed that it will not, subject to certain limited
exceptions, directly or indirectly, offer, sell, contract to sell or otherwise
issue or dispose of any Common Stock or other capital stock of the Company
prior to the expiration of 180 days from the date of this Prospectus without
the prior written consent of Lehman Brothers Inc. The directors, executive
officers and shareholders of the Company have agreed that they will not,
subject to certain limited exceptions, directly or indirectly, offer, sell or
otherwise dispose of any Common Stock or any other capital stock of the
Company prior to expiration of 180 days from the date of this Prospectus
without the prior written consent of Lehman Brothers Inc.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 270,000 shares offered hereby for
directors, officers, employees, business associates and related persons of the
Company. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase
shares of Common Stock. As an exception to these rules, the Representatives
are permitted to engage in certain transactions that stabilize the price of
the Common Stock. Such transactions may consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth in the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives also may elect to reduce any short position by exercising
all or part of the over-allotment option described herein.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
this Offering.
The Underwriters anticipate effecting a distribution of the shares of Common
Stock offered hereby such that, if the Offering is consummated, there will be
no fewer than 2,000 holders (including beneficial holders of
59
<PAGE>
shares held in the name of New York Stock Exchange members) holding round lots
of 100 shares or more in order to fulfill a requirement for listing of the
Common Stock on the New York Stock Exchange.
Neither the Company, the Selling Shareholders nor any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
Common Stock. In addition, neither the Company, the Selling Shareholders nor
any of the Underwriters makes any representation that the Representatives will
engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations among the
Company, the Selling Shareholders and the Representatives. In determining such
price, consideration will be given to various factors, including prevailing
market conditions for initial public offerings, the history of and prospects
for the Company's business, the Company's past and present operations, its
past and present earnings and current financial position, an assessment of the
Company's management, the market of securities of companies in businesses
similar to those of the Company, the general condition of the securities
markets and other relevant factors. There can be no assurance that the initial
public offering price will correspond to the price at which the Common Stock
will trade in the public market subsequent to the Offering or that an active
trading market for the Common Stock will develop and continue after the
Offering.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Foley & Lardner, Milwaukee, Wisconsin, and for
the Underwriters by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The consolidated financial statements of the Company as of October 31, 1996
and 1997 and for each of the three years in the period ended October 31, 1997,
appearing in this Prospectus have been audited by Arthur Andersen LLP,
independent auditors, as set forth in their reports thereon appearing
elsewhere herein and in the Registration Statement, and are included herein in
reliance upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement and
the exhibits and schedules thereto, to which reference is hereby made.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved.
After the consummation of the Offering, the Company will be subject to the
informational requirements of the Securities and Exchange Act of 1934, as
amended, and, in accordance therewith, will file reports, proxy and
information statements and other information with the Commission. The
Registration Statement, as well as any such reports, proxy and information
statements and other information filed by the Company with the Commission, may
be inspected and copies at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York, 10048 and Citicorp Center,
60
<PAGE>
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission (http://www.sec.gov). Upon listing of the
Common Stock on the New York Stock Exchange, reports, proxy statements and
other information concerning the Company may be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York, 10005.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by its independent auditors.
61
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HK SYSTEMS, INC.
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of October 31, 1996 and 1997............... F-3
Consolidated Statements of Income for each of the three years ended
October 31, 1997......................................................... F-4
Consolidated Statements of Shareholders' Equity for each of the three
years ended October 31, 1997............................................. F-5
Consolidated Statements of Cash Flows for each of the three years ended
October 31, 1997......................................................... F-6
Notes to Consolidated Financial Statements for each of the three years
ended October 31, 1997................................................... F-7
MATERIAL HANDLING SYSTEMS DIVISION AND
VANTAGEWARE DIVISION OF WESTERN ATLAS INC.
Report of Independent Public Accountants.................................. F-20
Combined Statements of Income for the year ended December 31, 1995 and the
period January 1, 1996 to November 15, 1996.............................. F-21
Combined Statements of Changes in Division Equity for the year ended
December 31, 1995 and the period January 1, 1996 to November 15, 1996.... F-22
Combined Statements of Cash Flows for the year ended December 31, 1995 and
the period January 1, 1996 to November 15, 1996.......................... F-23
Notes to Combined Financial Statements for the year ended December 31,
1995 and the period January 1, 1996 to November 15, 1996................. F-24
HK SYSTEMS, INC.
Consolidated Balance Sheets as of October 31, 1997 and January 31, 1998... F-27
Consolidated Statements of Income for each of the three months ended
January 31, 1997 and 1998................................................ F-28
Consolidated Statements of Cash Flows for each of the three months ended
January 31, 1997 and 1998................................................ F-29
Notes to Consolidated Financial Statements for each of the three months
ended January 31, 1997 and 1998.......................................... F-30
HK SYSTEMS, INC.
Unaudited Pro Forma Consolidated Financial Statements..................... F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors
of HK Systems, Inc.:
We have audited the accompanying consolidated balance sheets of HK Systems,
Inc. (a Wisconsin corporation) and subsidiaries as of October 31, 1996 and
1997 and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended October 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of HK Systems, Inc. and subsidiaries as of October 31, 1996 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1997 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Milwaukee, Wisconsin, December
12, 1997 (except with respect
to the matters discussed in
Note 16, as to which the date
is February 27, 1998).
F-2
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1996 1997
------ ------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 152 $ 332
Accounts receivable, less allowance of $155 and $552
respectively............................................ 23,223 27,057
Unbilled revenue......................................... 20,273 25,539
Inventory................................................ 3,484 8,845
Deferred income taxes.................................... 1,325 3,900
Prepaid expenses and other current assets................ 830 823
------- --------
Total current assets................................... 49,287 66,496
Property, plant and equipment:
Land..................................................... 840 1,060
Building and building improvements....................... 1,980 3,986
Leasehold improvements................................... 2,599 2,321
Computer equipment....................................... 8,874 12,372
Machinery and equipment.................................. 4,314 7,398
Office furniture and other............................... 1,358 3,605
------- --------
19,965 30,742
Less--Accumulated depreciation........................... (8,123) (11,148)
------- --------
11,842 19,594
Goodwill................................................... 21,666 39,121
Deferred income taxes...................................... 2,622 2,527
Other assets............................................... 5,372 3,623
------- --------
Total.................................................. $90,789 $131,361
======= ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable......................................... $31,106 $ 27,951
Accrued liabilities...................................... 6,575 11,941
Accrued employee costs................................... 2,971 6,933
Billings in excess of costs.............................. 5,493 7,487
------- --------
Total current liabilities.............................. 46,145 54,312
Long-term debt............................................. 28,000 51,960
Other long-term liabilities................................ 2,015 3,499
Redeemable preferred stock................................. 16,948 18,068
Common stock with put rights $.01 par value; authorized
9,764,093 at 1996 and 1997; issued 3,015,360 at 1996 and
1997...................................................... 633 633
Shareholders' equity:
Common stock............................................. -- --
Additional paid-in capital............................... -- --
Retained (deficit) earnings.............................. (2,952) 2,889
------- --------
Total shareholders' (deficit) equity................... (2,952) 2,889
------- --------
Total.................................................. $90,789 $131,361
======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS ENDED OCTOBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Integrated systems............................. $ 70,689 $ 87,150 $163,472
Customer services.............................. 40,501 49,792 65,200
Logistics and software systems................. 15,413 13,143 17,478
-------- -------- --------
Total net revenues........................... 126,603 150,085 246,150
Cost of sales.................................... 108,526 123,354 193,646
-------- -------- --------
Gross profit................................... 18,077 26,731 52,504
Selling, general and administrative expenses..... 13,492 16,255 31,724
Amortization of goodwill......................... 1,033 1,225 3,979
-------- -------- --------
Income from operations......................... 3,552 9,251 16,801
Other income (expense):
Interest expense............................... (3,108) (3,545) (5,570)
Other, net..................................... 178 9 80
-------- -------- --------
Income before income taxes..................... 622 5,715 11,311
Provision for income taxes....................... 398 2,288 4,051
-------- -------- --------
Net income before minority interest and
dividends on preferred stock.................. 224 3,427 7,260
Minority interest expense........................ (187) -- --
-------- -------- --------
Net income before dividends on preferred stock. 37 3,427 7,260
Dividends on preferred stock..................... (1,131) (1,312) (1,419)
-------- -------- --------
Net income (loss) applicable to common
shareholders.................................. $ (1,094) $ 2,115 $ 5,841
======== ======== ========
Per share data:
Basic net income (loss) per share of common
stock......................................... $ (0.40) $ 0.70 $ 1.94
======== ======== ========
Diluted net income (loss) per share of common
stock......................................... $ (0.40) $ 0.37 $ 0.77
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS ENDED OCTOBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
REDEEMABLE COMMON STOCK RETAINED
PREFERRED WITH (DEFICIT)
STOCK PUT RIGHTS EARNINGS
---------- ------------ ---------
<S> <C> <C> <C>
BALANCE, October 31, 1994.................... $10,800 $461 $(3,973)
Shares issued.............................. 4,000 172 --
Stock dividends on Class B Preferred Stock. 1,028 -- (1,028)
Accrued dividends on Class D Preferred
Stock..................................... -- -- (103)
Net income................................. -- -- 37
------- ---- -------
BALANCE, October 31, 1995.................... 15,828 633 (5,067)
Stock dividends on Class B Preferred Stock. 1,120 -- (1,120)
Accrued dividends on Class D Preferred
Stock..................................... -- -- (192)
Net income................................. -- -- 3,427
------- ---- -------
BALANCE, October 31, 1996.................... 16,948 633 (2,952)
Stock dividends on Class B Preferred Stock. 1,120 -- (1,120)
Accrued dividends on Class D Preferred
Stock..................................... -- -- (299)
Net income................................. -- -- 7,260
------- ---- -------
BALANCE, October 31, 1997.................... $18,068 $633 $ 2,889
======= ==== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS ENDED OCTOBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income...................................... $ 37 $ 3,427 $ 7,260
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation.................................. 2,851 3,852 5,224
Amortization.................................. 2,690 2,882 4,939
Minority interest expense..................... 187 -- --
Deferred income taxes......................... (106) 265 (996)
Other......................................... 210 369 (827)
Changes in assets and liabilities--
Accounts receivable........................... (5,628) (220) 20,474
Unbilled revenue.............................. (1,084) (4,434) 667
Inventory..................................... 344 (555) 2,959
Prepaid expenses and other current assets..... (62) 471 147
Accounts payable.............................. 3,082 9,476 (12,674)
Accrued liabilities........................... (3,561) 1,492 3,729
Billings in excess of costs................... 2,850 (7,761) (8,243)
------- -------- --------
Net cash provided by operating activities... 1,810 9,264 22,659
------- -------- --------
Cash flows used for investing activities:
Purchase of fixed assets........................ (1,429) (3,145) (4,086)
Payment of financing fees....................... (169) (26) (290)
Acquisition of Eaton Kenway, Inc................ (2,273) -- --
Investment in joint venture..................... -- (2,600) 2,600
Acquisition of the Material Handling Systems and
VantageWare divisions of Western Atlas Inc..... -- -- (34,600)
Purchase of license rights...................... -- -- (2,063)
------- -------- --------
Net cash used for investing activities...... (3,871) (5,771) (38,439)
------- -------- --------
Cash flows (used for) provided by financing
activities:
Payment of Harnischfeger Industries, Inc. debt.. (4,000) (18,000) --
Proceeds from borrowings on revolving line of
credit, net.................................... 2,000 12,000 15,960
Sale of preferred stock......................... 4,000 -- --
Redemption of subsidiary preferred stock........ (771) -- --
Sale of common stock............................ 172 -- --
------- -------- --------
Net cash (used for) provided by financing
activities..................................... 1,401 (6,000) 15,960
------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (660) (2,507) 180
Cash and cash equivalents, beginning of year...... 3,319 2,659 152
------- -------- --------
Cash and cash equivalents, end of year............ $ 2,659 $ 152 $ 332
======= ======== ========
Supplemental information:
Interest paid................................... $ 2,215 $ 3,664 $ 5,053
Income taxes paid............................... $ 722 $ 1,035 $ 5,285
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS ENDED OCTOBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) ORGANIZATION--
On October 29, 1993, HK Systems, Inc., formerly known as HEI Systems, Inc.
(the "Company"), purchased all of the outstanding shares of common stock of
Harnischfeger Engineers, Inc. ("HEI") from Harnischfeger Industries, Inc.
("Harnischfeger"). On February 13, 1995, the Company acquired substantially
all of the net assets of Eaton-Kenway, Inc., a wholly-owned subsidiary of
Eaton Corporation (the "Eaton-Kenway Acquisition"). On November 15, 1996, the
Company acquired substantially all of the net assets of the Material Handling
Systems division ("MHS") and VantageWare division ("VW") of Western Atlas Inc.
(the "Western Atlas Acquisition").
(2) NATURE OF OPERATIONS--
The Company develops, implements and supports integrated solutions to the
complex material handling and supply chain needs of a wide array of
industries. The Company designs, installs and integrates automated material
handling systems that include customized software, manufactured equipment, and
purchased components such as microprocessor and PLC controls and optical
scanning and laser positioning devices ("Integrated Systems"); provides
aftermarket services for owners of systems and equipment the Company has
installed and for other customers ("Customer Services"); and develops and
implements advanced supply chain management software systems, including
warehouse management systems and customized software for specific supply chain
applications ("Logistics and Software Systems"). Sales are primarily in the
United States of America.
(3) ACQUISITIONS--
HEI Acquisition--
Effective October 29, 1993, the Company purchased all of the outstanding
shares of common stock of HEI. HEI's primary activities are considered to be
in the technological or software areas. The acquisition was accounted for
under the purchase method of accounting. The purchase price ($22,982 in cash,
$10,000 of preferred stock of HEI and a $12,000 promissory note to
Harnischfeger) was allocated based on fair values as follows:
<TABLE>
<S> <C>
Current assets.................................................. $ 43,768
Property, plant and equipment................................... 6,998
Goodwill and capitalized software costs......................... 23,024
Current liabilities............................................. (28,808)
--------
Purchase price.............................................. $ 44,982
========
</TABLE>
Harnischfeger retained its holding of the Class A Preferred Stock of HEI,
totalling $10,000. The Company recognized Harnischfeger's interest in HEI
Class A Preferred Stock as a minority interest.
Consistent with the Company's accounting policies, the purchase included the
acquisition of certain in-process software and development costs included in
goodwill and capitalized software costs above, which resulted in a charge to
income of $4,186 for the year ended October 31, 1994. The amount allocated to
the in-process software and development costs was determined by appraisal. The
projects in-process required resolution of high-risk development and testing
issues in order to reach technological feasibility. At the date of
acquisition, the purchased in-process software and development costs had no
alternative uses.
F-7
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Eaton-Kenway Acquisition--
The February 13, 1995 Eaton-Kenway Acquisition was accounted for under the
purchase method of accounting. Eaton-Kenway's primary activities are
considered to be in the technological or software areas. The purchase price
($2,273 in cash and a $10,000 promissory note to Eaton Corporation) was
allocated based on fair value as follows:
<TABLE>
<S> <C>
Current assets.................................................. $ 13,800
Property, plant and equipment................................... 8,200
Goodwill........................................................ 13,156
Current liabilities............................................. (22,883)
--------
Purchase price.............................................. $ 12,273
========
</TABLE>
Western Atlas Acquisition--
The November 15, 1996 Western Atlas Acquisition was accounted for under the
purchase method of accounting. Western Atlas' primary activities relate to
manufacturing. The purchase price ($34,600 in cash and an $8,000 promissory
note to Western Atlas) was allocated based on fair values as follows:
<TABLE>
<S> <C>
Current assets.................................................. $ 38,700
Property, plant and equipment................................... 11,196
Goodwill........................................................ 19,168
Current liabilities............................................. (26,464)
--------
Purchase price.............................................. $ 42,600
========
</TABLE>
Unaudited pro forma operating results of the Company for the year ended
October 31, 1996, assuming the Western Atlas Acquisition had been made as of
November 1, 1995, would be as follows:
<TABLE>
<S> <C>
Net revenues.................................................... $253,649
Net income applicable to common shareholders.................... 1,181
Basic net income per share of common stock...................... $0.39
Diluted net income per share of common stock.................... $0.11
</TABLE>
Unaudited pro forma operating results of the Company for the year ended
October 31, 1997, were not included as such results were not significantly
different than historical results.
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
Principles of consolidation--
The consolidated financial statements include the accounts of the Company
and all wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Concentration of credit risk--
The Company sells its products to a wide range of companies in diverse
industries that include automotive, banking, beverage production, food
processing and heavy manufacturing. Ongoing credit evaluations of its
customers' financial condition are made and generally no collateral is
required. For the years ended October 31, 1995 and 1996 the Company had a
different customer each year that accounted for 14% and 15% of net revenues,
respectively. For the year ended October 31, 1997, the Company had two
customers that accounted for 13% and 10% of net revenues, respectively.
Management does not believe that significant concentration of credit risk
exists at October 31, 1997 with respect to the Company's accounts receivable
or unbilled revenues.
Fair value of financial instruments--
The Company's financial instruments consist of an interest rate cap,
interest rate swaps and various debt instruments. The interest rate cap and
interest rate swaps are assets and are described in Note 13. The debt
instruments are liabilities to the Company and are more fully described in
Note 7.
The interest rate cap and interest rate swaps have an immaterial value as of
October 31, 1997 and no market value based on prevailing interest rates.
The Company's revolving line of credit bears interest at floating rates of
interest expressed in relation to either LIBOR or the bank's prime rate. Based
on the terms currently available, the Company believes that the revolving line
of credit balance of $33,960 as of October 31, 1997 is stated at fair market
value.
The Company has two junior subordinated notes that were given to the sellers
in conjunction with two separate acquisitions. Because each of these notes was
negotiated in the overall context of the related acquisition, the Company
believes it is impracticable to obtain the current market value of these notes
because of excessive costs that would have to be incurred to obtain this
information.
Revenue recognition--
Revenue and gross profits on virtually all long-term systems integration and
aftermarket customer service contracts is recorded using the percentage-of-
completion method of accounting. Under this method, percentage of completion
is determined by reference to the extent of contract performance, future
performance risk and cost incurrence. Any revisions in the estimated total
costs of the contracts during the course of the work are reflected when the
facts that require the revisions become known. Losses, if any, are recognized
in full as soon as identified.
Software license fee revenue is recorded when the software has been
delivered (which is generally considered to be at the completion of the first
installation), the license agreement with the customer has been executed, and
collection of the resulting receivable is deemed probable. Revenues for
customization and modification of licensed software and for implementation
services are recorded using the percentage-of-completion method of accounting.
Progress billings--
The Company bills its customers based on the terms set forth in a sales
contract. The billing schedule does not necessarily match the stage of
completion of a customer's order for installation. As such, costs, earnings
and billings are accumulated for jobs in progress at period end, and to the
extent costs and earnings exceed billings or billings exceed costs and
earnings, an asset (unbilled revenue) or liability (billings in excess of
costs) is recorded.
F-9
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and cash equivalents--
The Company considers all highly liquid investments with maturities of three
months or less at the date of acquisition to be cash equivalents.
Checks not presented for payment--
As of October 31, 1996 and 1997, $2,349 and $4,280 of checks not presented
for payment are included in accounts payable in the consolidated balance
sheets, respectively.
Inventories--
Inventories are stated at the lower of cost or market, using the first-in,
first-out (FIFO) method. Inventory cost includes material, labor and overhead.
Inventories at October 31, 1996 and 1997, consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Raw materials............................................... $3,213 $4,875
Work in process............................................. 257 2,551
Finished goods.............................................. 14 1,419
------ ------
$3,484 $8,845
====== ======
</TABLE>
Property, plant and equipment and depreciation--
Property, plant and equipment purchased in acquisitions is stated at fair
value at the date of acquisition. Subsequent additions are stated at cost.
Expenditures for major renewals and improvements are capitalized, while
maintenance and repairs that do not significantly improve the related asset or
extend its useful life are charged to expense as incurred. For financial
reporting purposes, depreciation is computed using the straight-line method
based upon estimated useful lives.
The estimated useful lives generally used for calculating depreciation
expense are as follows:
<TABLE>
<S> <C>
Building..................................................... 25 years
Leasehold improvements....................................... 15 years
Computer equipment........................................... 3 to 7 years
Machinery and equipment...................................... 5 to 7 years
Office furniture............................................. 3 to 7 years
</TABLE>
Depreciation expense for each of the three years ended October 31, 1997, was
$2,851, $3,852, and $5,224, respectively. Accelerated depreciation methods are
used for tax purposes.
Long-lived assets--
Effective November 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of." Adoption of this
standard did not have a material impact on the Company's financial position or
results of operations.
Property held for sale--
In connection with the Western Atlas Acquisition, the Company acquired
certain land and buildings which the Company did not consolidate into its
operations. The Company is currently holding this property for sale. At
F-10
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
October 31, 1997, the property was recorded at its estimated realizable value
of $1,800 and is included in other assets in the consolidated balance sheets.
Investment in joint venture--
Investment in joint venture, as included in other assets in the consolidated
balance sheets, consists of a non-controlling interest in a limited liability
company acquired on March 6, 1996. The Company sold its investment on October
31, 1997 for $2,600, and recorded a gain on sale of $343.
Income taxes--
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities and are measured by applying enacted tax rates and laws
to taxable years in which such differences are expected to reverse.
Deferred financing fees--
Financing fees, as included in other assets in the consolidated balance
sheets, are deferred and charged to interest expense over the term of the
related debt agreement. Amortization of these fees for each of the three years
ended October 31, 1997, was $226, $248, and $170, respectively. Accumulated
amortization at October 31, 1996 and 1997 is $642 and $812, respectively.
Goodwill--
Goodwill represents the excess of the purchase price over the fair value of
identifiable net assets acquired. Goodwill is being amortized on a straight-
line basis over 20 years for acquisitions of entities with primarily
technological or software related activities. Goodwill is being amortized on a
straight-line basis over 40 years for acquisitions of entities with primarily
manufacturing activities. Amortization expense for each of the three years
ended October 31, 1997, was $1,033, $1,225 and $3,979, respectively.
Accumulated amortization at October 31, 1996 and 1997 was $2,825 and $6,804,
respectively.
Management will periodically review the carrying value of its goodwill for
potential impairment. Any goodwill asset for which management believes there
is no future economic life is reflected when the facts that require the write-
off become known. During the first quarter of 1997, the Company decided to
abandon one of its software product lines. Amortization of goodwill includes a
write-off of $2,295 of unamortized software costs related to this decision.
Capitalized software costs--
Capitalized software costs, as included in other assets in the consolidated
balance sheets, are being amortized on a straight-line basis over four to five
years. Amortization expense for each of the three years ended October 31,
1997, was $1,657, $1,657 and $960, respectively. Accumulated amortization at
October 31, 1996 and 1997 was $4,971 and $5,931, respectively.
Management will periodically review the carrying value of its capitalized
software costs for potential impairment. Any capitalized software cost for
which management believes there is no future economic life is reflected when
the facts that require the write-off become known.
Minority interest--
During 1994, the Company recognized as minority interest the HEI Class A
Preferred Stock totaling $10,000 and Class C Preferred Stock totaling $600
held by Harnischfeger in HEI. During 1995, the Class A
F-11
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock was converted into a subordinated promissory note and the
Class C Preferred Stock was redeemed.
Research and development costs--
Research and development costs are expensed as incurred. Such costs incurred
in the development of new products or significant improvements to existing
products that were not charged directly to contracts amounted to $1,319,
$1,981, and $4,951 for each of the three years ended October 31, 1997,
respectively.
Advertising costs--
Advertising costs are expensed as incurred. Such costs amounted to $685,
$975, and $1,839 for each of the three years ended October 31, 1997,
respectively.
Derivatives--
Derivative financial instruments are used by the Company to manage its
foreign currency and interest rate exposures. Gains and losses on foreign
currency instruments are deferred until the hedged transaction occurs. Amounts
to be received or paid under interest rate swaps and caps are recognized as
interest income or expense in the periods in which they accrue. If interest
rate swap or cap agreements are terminated due to the underlying debt being
extinguished, any resulting gain or loss is recognized as interest income or
expense at the time of termination.
(5) RELATED PARTY TRANSACTIONS--
During 1995, the Company leased its main facility and headquarters from
Harnischfeger, its former parent. The Company paid Harnischfeger $780 in
accordance with this lease for the year ending October 31, 1995.
The Company pays M&I Ventures Corporation ("MIVC"), a holder of Class B
Preferred Stock and Class C Common Stock of the Company, for certain services.
For each of the three years ended October 31, 1997, the Company paid MIVC $50
for these services, respectively. Upon the acquisition of HEI, the Company
paid to MIVC $550 in connection with their efforts to consummate the
acquisition and secure related outside debt commitments. In connection with
the Eaton-Kenway Acquisition, the Company paid the State of Wisconsin
Investment Board, a holder of Class B Preferred Stock of the Company, $30 and
MIVC $270. In connection with the Western Atlas Acquisition, the Company paid
MIVC $225.
(6) OPERATING LEASES--
The Company leases certain facilities and equipment from unrelated parties,
which are classified as operating leases. Future minimum rentals under all
operating leases over their remaining terms are approximately as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- -------
<S> <C>
1998............................. $ 2,697
1999............................. 2,403
2000............................. 2,406
2001............................. 2,141
2002............................. 2,134
2003 and thereafter.............. 19,626
-------
$31,407
=======
</TABLE>
F-12
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total rental expense was $1,680, $2,239, and $3,295 for each of the three
years ended October 31, 1997, respectively.
(7) LONG-TERM DEBT--
Long-term debt at October 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Revolving line of credit agreement....................... $18,000 $33,960
Junior subordinated debt: 12%............................ 10,000 10,000
Junior subordinated debt: 10%............................ -- 8,000
------- -------
Total................................................ $28,000 $51,960
======= =======
</TABLE>
At October 31, 1997, the revolving line of credit totaled $90,000.
Availability under the revolving line of credit is limited by certain
financial covenants, and at October 31, 1997, the Company had $39,500
available. The revolving line of credit terminates on November 1, 1999. The
revolving line of credit bears interest at floating rates expressed in
relation to either LIBOR or the bank's prime rate. The revolving line of
credit is collateralized by substantially all the assets of the Company and
subsidiaries. Borrowings outstanding at October 31, 1997, bear interest
ranging from 7.06% to 8.50%. The Company is required to pay a commitment fee
of 0.25% on the unused portion of the revolving line of credit. The Company
considers the October 31, 1997, outstanding revolving line of credit
borrowings as long-term debt.
The Company has a $10,000 junior subordinated note due to Eaton Corporation
with interest at 12% in 1997 increasing to 20% after 2000. Principal is due in
annual installments of $1,667 commencing February 13, 2000, with final payment
due February 12, 2005 or upon demand in the event of an initial public
offering by the Company.
The Company has an $8,000 junior subordinated note due to Western Atlas Inc.
with interest at 10%, increasing to 15% after November 15, 1998. Principal is
due in full on November 30, 2003 or upon demand in the event of an initial
public offering by the Company.
As the Company has the ability, under its revolving line of credit, to pay
off its junior subordinated notes prior to interest rates increasing to 20%
and 15%, respectively, no incremental interest expense has been recorded.
Maturities of long-term debt, including borrowings under the revolving line
of credit, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- -------
<S> <C>
1998............................. $ --
1999............................. 33,960
2000............................. 1,667
2001............................. 1,667
2002............................. 1,666
2003 and Thereafter.............. 13,000
</TABLE>
The terms of the revolving line of credit agreement place limits on the
amount of additional long-term debt the Company may issue and on the amount of
capital expenditures in any year and restrictions on the payment of dividends;
require maintenance of minimum current, leverage and interest coverage ratios;
and require
F-13
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
minimum total capitalization and billed receivable balances, as defined. As of
October 31, 1996 and 1997, the Company was in compliance with its debt
covenants.
(8) COMMON STOCK WITH PUT RIGHTS--
The Company had authorized 9,572,640 (1995) and 9,764,093 (1996 and 1997)
shares of Common Stock, $0.01 par value divided into the following series:
(a) 3,757,280 (1995) and 3,948,733 (1996 and 1997) shares of Class A
Common Stock, of which 2,800,000 shares are issued and outstanding at
October 31, 1995, 1996 and 1997, respectively.
(b) 5,600,000 shares of Class B Common Stock, none of which is issued or
outstanding at October 31, 1995, 1996 and 1997, respectively; and
(c) 215,360 shares of Class C Common Stock, all of which are issued and
outstanding at October 31, 1995, 1996 and 1997, respectively.
There are no differences between the classes of Common Stock.
Certain employee agreements entered into between management and the Company
give management certain put rights with respect to the Common Stock of the
Company that are exercisable when they are no longer employed by the Company.
(9) REDEEMABLE PREFERRED STOCK--
The Company had authorized 7,600,000 shares of Preferred Stock, $0.01 par
value, subject to a mandatory redemption on the earlier of November 1, 2003,
or a liquidation of the Company, designated into the following series:
(a) 5,600,000 shares of Class B Cumulative Convertible Preferred Stock,
face value of $2.50 per share, convertible on a 1 to 1 basis into Class B
common shares. At October 31, 1996 and 1997, 5,600,000 shares,
respectively, are issued and outstanding; and
(b) 2,000,000 shares of Class D Cumulative Preferred Stock, face value of
$2.50 per share, 731,000 (1995), 1,179,000 (1996) and 1,627,000 (1997)
shares of which are issued and outstanding.
Class B Preferred Stock bears a cumulative annual dividend yield of 8%,
payable quarterly in Class D Preferred shares until October 31, 1996. The
Company may pay any and all quarterly dividends on the Class B Preferred Stock
which accrue after October 31, 1996, in the form of cash or Class D Preferred
shares. Class D Preferred shares bear a cumulative annual dividend yield of
8%, payable quarterly. The holders of Class B Preferred Stock are entitled to
one vote for each share owned. Class D Cumulative Preferred shares are not
entitled to any voting rights except as may be required by law.
(10) STOCK OPTIONS--
The Company's 1993 Executive Stock Option Plan ("the Plan"), as amended,
provides for the grant of nonqualified and incentive stock options to key
employees and directors. The Plan provides for the granting of options for a
total of 683,760 (1994), 957,280 (1995) and 1,148,733 (1996 and 1997) shares
of Class A Common Stock, respectively. The purchase price of shares subject to
each option granted will not be less than (i) the fair market value at the
date of grant in the case of incentive stock options or (ii) 85% of the fair
market value at the date of grant in the case of nonqualified stock options.
Generally, the options become exercisable in whole five years after the grant,
or upon a registered public offering of the Company or sale of the Company if
earlier. The
F-14
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
option term expires ten years subsequent to the grant date. Certain
information regarding the stock option plan follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- ------------ ----------------
<S> <C> <C> <C>
Outstanding at October 31,
1994.......................... 618,000 $1.00 $1.00
Granted...................... 358,000 1.00 1.00
Canceled..................... (32,000) 1.00 1.00
--------- ------------ -----
Outstanding at October 31,
1995.......................... 944,000 $1.00 $1.00
Granted...................... 30,000 1.00 1.00
Canceled..................... (24,000) 1.00 1.00
--------- ------------ -----
Outstanding at October 31,
1996.......................... 950,000 $1.00 $1.00
Granted...................... 271,800 6.43 - 8.75 6.50
Canceled..................... (134,000) 1.00 - 6.43 2.38
--------- ------------ -----
Outstanding at October 31,
1997.......................... 1,087,800 $1.00 - 8.75 $2.20
========= ============ =====
Exercisable at October 31,
1997.......................... -- $ -- $ --
========= ============ =====
</TABLE>
Effective November 1, 1996, the Company adopted SFAS No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." This standard establishes financial
accounting and reporting standards for stock-based employee compensation
plans.
SFAS 123 defines a fair value based method of accounting for employee stock
option or similar equity instruments. Under the fair value based method,
compensation cost is measured at the grant date based on the fair value of the
award using an option-pricing model that takes into account the stock price at
the grant date, the exercise price, the expected life of the option, the
volatility of the underlying stock, expected dividends and the risk-free
interest rate over the expected life of the option. The resulting compensation
cost is recognized over the service period, which is usually the vesting
period.
Compensation cost can also be measured and accounted for using the intrinsic
value based method of accounting prescribed in Accounting Principles Board
Opinion No. 25 ("APBO 25"), "Accounting for Stock Issued to Employees." Under
the intrinsic value based method, compensation cost is the excess, if any, of
the quoted market price of the stock at grant date or other measurement date
over the amount paid to acquire the stock.
The largest difference between SFAS 123 and APBO 25 as it relates to the
Company is the amount of compensation cost attributable to the Company. Under
APBO 25 no compensation cost is recognized for fixed stock option plans
because the exercise price is equal to the estimated market price at the date
of grant and therefore there is no intrinsic value. SFAS 123 compensation cost
would equal the calculated fair value of the options granted.
As permitted by SFAS 123, the Company continues to measure compensation cost
for such plans using the accounting method prescribed by APBO 25.
Had compensation cost for the Company's options granted after November 1,
1995, been determined consistent with SFAS 123, the Company's earnings per
share for the years ended October 31, 1996 and 1997 would have been reduced by
less than $0.01 and $0.02 per share in 1996 and 1997, respectively.
The fair value of each option grant was estimated as of the date of grant
using the Minimum Value pricing model. The resulting compensation cost was
amortized over the vesting period.
F-15
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The grant date fair values and assumptions used to determine such value are
as follows:
<TABLE>
<CAPTION>
OPTIONS GRANTED DURING 1996 1997
---------------------- -------- --------
<S> <C> <C>
Weighted-average grant date fair value.................. $0.47 $2.98
Weighted-average risk-free interest rate................ 6.3% 6.2%
Weighted-average expected life of option................ 10 years 10 years
</TABLE>
(11) STOCK PURCHASE WARRANTS--
In connection with the Western Atlas Acquisition, the Company issued
warrants to purchase common stock to Western Atlas. All of the warrants issued
were outstanding at October 31, 1997. The warrants allow Western Atlas to
purchase $2,000 of common stock at a price equal to 115% of the price to the
public per share of Common Stock in an initial public offering. The earliest
exercise date on the warrants would be following the Initial Public Offering
date. The warrants are not transferable at any time without the written
consent of the Company. These warrants expire on November 15, 2003. No value
was assigned to the warrants as the amount was deemed immaterial.
(12) EARNINGS PER SHARE OF COMMON STOCK--
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS 128"). The Company adopted SFAS 128 for the
three month period ended January 31, 1998. All earnings per share computations
have been applied retroactively to all periods to conform with the provisions
of SFAS 128.
The following reconciles the numerators and denominators of the basic and
diluted net income (loss) per share computations:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic
Net income before dividends on preferred
stock...................................... $ 37 $ 3,427 $ 7,260
Less: Class B and D preferred stock
dividends.................................. (1,131) (1,312) (1,419)
--------- --------- ---------
Net income (loss) applicable to common
shareholders............................... $ (1,094) $ 2,115 $ 5,841
========= ========= =========
Weighted average shares of common stock
outstanding................................ 2,764,083 3,015,360 3,015,360
========= ========= =========
Basic net income (loss) per share of common
stock...................................... $ (0.40) $ 0.70 $ 1.94
========= ========= =========
Diluted
Net income before dividends on preferred
stock...................................... $ 37 $ 3,427 $ 7,260
Less: Class B and D preferred stock
dividends.................................. (1,131) (1,312) (1,419)
Plus: Class B preferred stock dividends(a).. -- 1,120 1,120
--------- --------- ---------
Net income (loss) applicable to common
shareholders............................. $ (1,094) $ 3,235 $ 6,961
========= ========= =========
Weighted average shares of common stock
outstanding................................ 2,764,083 3,015,360 3,015,360
Incremental common shares applicable to
common stock options....................... -- 230,714 443,206
Incremental common shares applicable to
Class B convertible preferred stock........ -- 5,600,000 5,600,000
--------- --------- ---------
Average common shares, adjusted........... 2,764,083 8,846,074 9,058,566
========= ========= =========
Diluted net income (loss) per share of
common stock (b)......................... $ (0.40) $ 0.37 $ 0.77
========= ========= =========
</TABLE>
F-16
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------
(a) Class B preferred stock is a common stock equivalent. The dividends are
added back to net income as these dividends would be available to common
shareholders assuming the conversion of Class B preferred stock in all
periods when the common stock equivalents are dilutive.
(b) As the Company reported a net loss for the year ended October 31, 1995,
the inclusion of stock options and Class B preferred stock in the earnings
per share calculation for such period results in anti-dilution of the
earnings per share calculation. As such, per share for such period is
reported based on the weighted average number of common shares
outstanding.
(13) COMMITMENTS, CONTINGENCIES AND OFF BALANCE SHEET RISKS--
Surety bonds--
The Company was contingently liable to Harnischfeger in the amount of
$49,000 and $34,000 as of October 31, 1995 and 1996, respectively, for
outstanding surety bonds issued on behalf of the Company in which
Harnischfeger had agreed to indemnify third party sureties for certain
contractual obligations of the Company.
General litigation--
The Company is a party to litigation matters, claims and performance
guarantees, which are normal in the course of its operations, and while the
results of litigation, claims and performance guarantees cannot be predicted
with certainty, management believes that the final outcome of such matters
will not have a material adverse effect on the Company's consolidated results
of operations or financial position.
Federal Reserve Bank of San Francisco--
On July 1, 1992, Eaton-Kenway entered into a contract ("Fed Contract") with
the Federal Reserve Bank of San Francisco ("SF Fed") relating to the
installation of a material handling system. On February 13, 1995, the Company
assumed the Fed Contract in the Eaton-Kenway Acquisition. On April 7, 1995,
the SF Fed filed a lawsuit ("Fed Suit") in the United States District Court
for the Northern District of California against the Company, Eaton-Kenway and
Eaton alleging, among other things, a failure to install a properly operating
material handling system for two existing SF Fed bank vaults in breach of the
Fed Contract. The SF Fed purported to seek not less than $3.55 million as
restitution for the consideration it paid under the Fed Contract, not less
than $6.4 million for incidental and consequential damages and not less than
$46.7 million to cover the costs of constructing two new bank vaults. In 1995,
the court granted partial summary judgment on the issue of liability in favor
of the SF Fed and against the Company and the other defendants on two counts
of the SF Fed's complaint for breach of contract and rescission and
restitution. On January 30, 1998, the court granted partial summary judgment
in favor of the Company and the other defendants, holding that the SF Fed
cannot recover the cost of constructing two new vaults or litigation expenses.
However, the SF Fed may continue to seek damages in excess of $10 million
against the Company based on claims that have not been dismissed. The court's
orders granting partial summary judgment are subject to appeal after the entry
of final judgment in the action, and there can be no assurance that the
results of any appeal would be favorable to the Company. It is anticipated
that a jury trial on the remaining damage issues on the contract claim against
the Company and Eaton-Kenway, if not all the remaining claims against all the
parties, will be held in 1998. While the Company believes it has meritorious
defenses in the Fed Suit, the Fed Suit could have a material adverse effect on
the Company's business, results of operations and financial condition.
Off-balance sheet risks--
The Company entered into a three year interest rate cap with a commercial
bank agreement on March 9, 1995. The contract amount of the cap agreement is
$10,000 through March 9, 1997 and $5,000 thereafter. This
F-17
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
agreement requires quarterly payments to the Company when the LIBOR rate
exceeds the cap rate of 8%. The Company paid a fee of $106 related to the cap
agreement and is amortizing the fee over the life of the agreement. The LIBOR
rate during 1995, 1996 and 1997 did not exceed 8%; as such the Company did not
receive any payments.
On June 3, 1996, the Company entered into two interest rate swap agreements
with a commercial bank, each with a notional amount of $4,000. These
agreements expire on June 3, 1998. The first agreement effectively changes the
rate on $4,000 of revolver borrowings to 7.7%. The second agreement
effectively changes the rate on $4,000 of revolver borrowings to 7.9%. At
October 31, 1996 and 1997, $12 and $9 was payable by the Company under these
agreements, respectively.
Under the cap and swap agreements, the Company is exposed to credit risk
only in the event of nonperformance by the commercial banks, which is not
anticipated.
The Company occasionally enters into foreign currency future contracts to
hedge specific contract related receivables and payables denominated in
foreign currencies. There were no contracts outstanding at October 31, 1996
and 1997.
(14) FEDERAL AND STATE INCOME TAXES--
The provision for income taxes for each of the three years ended October 31,
1997, consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER
31,
--------------------
1995 1996 1997
----- ------ ------
<S> <C> <C> <C>
Current--
Federal........................................... $ 444 $1,458 $3,965
State............................................. 60 565 1,082
Deferred............................................ (106) 265 (996)
----- ------ ------
$ 398 $2,288 $4,051
===== ====== ======
</TABLE>
A reconciliation of the Federal statutory tax rate to the consolidated
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
OCTOBER 31,
--------------------
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
Federal statutory rate.............................. $218 $2,000 $3,959
State income taxes, net of Federal taxes............ 33 271 450
Nondeductible expenses.............................. 153 125 86
Research and development credit..................... 23 (19) (415)
Other............................................... (29) (89) (29)
---- ------ ------
Effective tax rate.............................. $398 $2,288 $4,051
==== ====== ======
</TABLE>
F-18
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred taxes result from temporary differences between the book and tax
basis of the Company's assets and liabilities. The components of the net
deferred tax asset (liability) as of October 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Current deferred tax assets:
Employee cost accruals.................................. $ 328 $1,296
Book versus tax contract accounting..................... 674 2,072
Warranty accrual........................................ 78 155
Reserve for bad debts................................... 37 159
Other................................................... 208 218
------ ------
Total current net deferred tax assets................. 1,325 3,900
Long-term deferred tax assets (liabilities):
Accelerated amortization................................ 1,895 2,391
Research and development credit carryforward............ 916 246
Accelerated depreciation................................ (189) (110)
------ ------
Total long-term net deferred tax assets............... $2,622 $2,527
====== ======
</TABLE>
No valuation allowance has been recorded as it is more likely than not that
the net deferred income tax assets will be realizable through future
profitable operations of the Company.
(15) RETIREMENT PLANS--
The Company maintains a defined contribution 401(k) plan for the Company
employees with employer match provisions up to certain levels subject to the
discretion of the Board of Directors on an annual basis. The Company's
matching expense for each of the three years ended October 31, 1997, totaled
$536, $685, and $1,137, respectively.
The Company also has a profit sharing program whereby funds are contributed
to the 401(k) plan. These contributions are subject to the discretion of the
Board of Directors on an annual basis. The Company's profit sharing expense
for each of the three years ended October 31, 1997, totaled $500, $750, and
$1,200, respectively.
(16) SUBSEQUENT EVENTS--
Subsequent to year-end, the Company executed the following:
(a) The Company adopted an employee stock ownership plan (the "ESOP") in
which substantially all employees of the Company participate.
(b) The Company incurred additional indebtedness on its revolving line of
credit of $6,500 to purchase 420,000 shares of Class A Common Stock at
$15.38 per share from a former employee to liquidate the employee's
interest after the employee exercised contractual put rights.
(c) The Company amended its revolving credit agreement by (i) reducing
the line from $90,000 to $80,000; (ii) extending the termination date to
December, 2002; (iii) amending certain of the financial covenants and (iv)
borrowing $6,000 under a term loan. The term loan was used by the Company
to fund its substantially concurrent loan of like amount to the ESOP.
(d) Declared a 0.40 to 1 stock split on preferred and common stock. All
share and per share information has been retroactively adjusted.
(e) All put rights that management has to require a repurchase of all of
the common stock will terminate upon the effectiveness of an initial public
offering of Common Stock.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Equityholders of the Material Handling
Systems Division and VantageWare Division
of Western Atlas Inc.:
We have audited the accompanying combined statements of income, changes in
division equity and cash flows of the Material Handling Systems Division and
VantageWare Division of Western Atlas Inc. (a Delaware corporation) for the
year ended December 31, 1995 and the period January 1, 1996 to November 15,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined results of operations and cash flows of
the Material Handling Systems Division and VantageWare Division of Western
Atlas Inc. for the year ended December 31, 1995 and the period January 1, 1996
to November 15, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Milwaukee, Wisconsin,
December 12, 1997.
F-20
<PAGE>
MATERIAL HANDLING SYSTEMS DIVISION AND
VANTAGEWARE DIVISION OF WESTERN ATLAS INC.
COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD JANUARY 1, 1996 TO NOVEMBER
15, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net revenues.................................................. $79,277 $89,333
Cost of sales................................................. 63,001 68,782
------- -------
Gross profit................................................ 16,276 20,551
Selling, general and administrative expenses.................. 19,828 20,281
------- -------
Income (loss) from operations............................... (3,552) 270
Other income, net............................................. 50 201
------- -------
Income (loss) before income taxes........................... (3,502) 471
Provision (credit) for income taxes........................... (1,369) 182
------- -------
Net income (loss)............................................. $(2,133) $ 289
======= =======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-21
<PAGE>
MATERIAL HANDLING SYSTEMS DIVISION AND
VANTAGEWARE DIVISION OF WESTERN ATLAS INC.
COMBINED STATEMENTS OF CHANGES IN DIVISION EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD JANUARY 1, 1996 TO NOVEMBER
15, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED RETAINED
DIVISION EQUITY DEFICIT TOTAL
--------------- -------- -------
<S> <C> <C> <C>
BALANCE, at December 31, 1994................ $40,512 $(12,538) $27,974
Net loss................................... -- (2,133) (2,133)
Contributions to parent, net............... (5,764) -- (5,764)
------- -------- -------
BALANCE, at December 31, 1995................ 34,748 (14,671) 20,077
Net income................................. -- 289 289
Contributions to parent, net............... (23) -- (23)
------- -------- -------
BALANCE, at November 15, 1996................ $34,725 $(14,382) $20,343
======= ======== =======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-22
<PAGE>
MATERIAL HANDLING SYSTEMS DIVISION AND VANTAGEWARE DIVISION OF WESTERN ATLAS
INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD JANUARY 1, 1996 TO NOVEMBER
15, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss).......................................... $(2,133) $ 289
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation............................................. 2,536 2,138
Deferred income taxes.................................... (1,369) --
Changes in assets and liabilities--
Accounts receivable.................................... (504) (5,630)
Unbilled revenue....................................... 4,953 564
Inventory.............................................. 1,736 (2,157)
Other assets........................................... 641 (117)
Accounts payable....................................... (1,725) 2,354
Accrued liabilities.................................... 303 1,402
Billings in excess of cost............................. 2,734 2,745
Other liabilities...................................... 394 (404)
------- -------
Net cash provided by operating activities............ 7,566 1,184
------- -------
Cash flows used for investing activities:
Purchase of fixed assets................................... (1,260) (1,688)
Cash flows used for financing activities:
Net contributions to parent................................ (5,764) (23)
------- -------
Net (decrease) increase in cash and cash equivalents......... 542 (527)
Cash and cash equivalents, beginning of period............... 177 719
------- -------
Cash and cash equivalents, end of period..................... $ 719 $ 192
======= =======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-23
<PAGE>
MATERIAL HANDLING SYSTEMS DIVISION AND
VANTAGEWARE DIVISION OF WESTERN ATLAS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD JANUARY 1, 1996 TO
NOVEMBER 15, 1996
(IN THOUSANDS)
(1) BUSINESS DESCRIPTION--
The Material Handling Systems division ("MHS") of Western Atlas Inc.
("Western Atlas") is engaged in the design, manufacture and sale of automated
storage/retrieval systems, conveyors and sortation equipment and palletizers.
The VantageWare division ("VW") of Western Atlas is engaged in designing and
selling software products for the material handling industry. Sales for both
divisions are primarily in the United States of America.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
Principles of combination--
The combined financial statements include the accounts of MHS and VW. All
significant interdivisional balances and transactions have been eliminated.
Use of estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition--
Revenue and gross profits on virtually all long-term customer contracts is
recorded using the percentage-of-completion method of accounting. Under this
method, percentage of completion is determined by reference to the extent of
contract performance, future performance risk and cost incurrence. Any
revisions in the estimated total costs of the contracts during the course of
the work are reflected when the facts that require the revisions become known.
Losses, if any, are recognized in full as soon as identified.
Software license fee revenue is recorded when the software has been
delivered, the license agreement with the customer has been executed and
collection of the resulting receivable is deemed probable. Revenues for
customization and modification of licensed software and for implementation
services are recorded using the percentage-of-completion method of accounting.
Inventories--
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property, plant and equipment and depreciation--
Property, plant and equipment additions are stated at cost. Expenditures for
major renewals and improvements are capitalized, while maintenance and repairs
which do not significantly improve the related assets or extend its useful
life are charged to expense as incurred. For financial reporting purposes,
depreciation is computed using the straight-line method over three to twenty
eight years based on asset type. Accelerated depreciation methods are used for
tax purposes.
F-24
<PAGE>
MATERIAL HANDLING SYSTEMS DIVISION AND
VANTAGEWARE DIVISION OF WESTERN ATLAS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Research and development expenses--
Research and development costs are expensed as incurred. Such costs incurred
in the development of new products or significant improvements to existing
products that were not charged directly to contracts amounted to $927 and
$1,769 for the year ended December 31, 1995 and the period January 1, 1996 to
November 15, 1996, respectively.
Capitalized software costs--
MHS and VW capitalize all costs associated with the purchase of software or
licenses that are to be sold. These costs are amortized on a straight-line
basis over the remaining estimated economic life of the product, which is
generally five years. During the year ended December 31, 1995, VW wrote off
approximately $1,165 of capitalized software costs for two products that
management believed had no future economic life. The write off is included in
cost of sales in the combined statements of income. As of November 15, 1996,
all unamortized capitalized software costs have been written off.
Intercompany charges--
MHS and VW have historically depended upon Western Atlas for support for
various services such as legal, financial, human resources, insurance, risk
management and communications. Western Atlas allocated the cost for these
services among its businesses based on sales, head count and net working
assets. The allocated costs for these services are included in selling,
general and administrative expenses in the combined statements of income and
totaled $1,060 and $943 for the year ended December 31, 1995 and the period
January 1, 1996 to November 15, 1996, respectively. Management believes that
the method used to allocate these expenses reasonably reflects the costs of
actual services provided.
(3) OPERATING LEASES--
MHS and VW are party to various operating leases for facilities and
equipment. Total rental expense was $462 and $406 for the year ended December
31, 1995 and the period January 1, 1996 to November 15, 1996, respectively.
(4) COMBINED DIVISION EQUITY--
Combined division equity includes retained deficit and all distributions
between Western Atlas and MHS and VW.
(5) RETIREMENT PLAN--
MHS and VW have a defined contributory plan for their employees under the
Western Atlas Financial Security and Savings Program. The plan provides for
employer match provisions up to certain levels. MHS and VW's matching expense
related to the plan totaled $244 and $235 for the year ended December 31, 1995
and the period January 1, 1996 to November 15, 1996, respectively.
(6) POST RETIREMENT BENEFIT PLAN OTHER THAN PENSIONS--
MHS and VW provide certain post retirement health care coverages for their
employees. The net postretirement cost for the year ended December 31, 1995
and the period January 1, 1996 to November 15, 1996, was approximately $196
and $145, respectively.
F-25
<PAGE>
MATERIAL HANDLING SYSTEMS DIVISION AND
VANTAGEWARE DIVISION OF WESTERN ATLAS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
(7) FEDERAL AND STATE INCOME TAXES--
MHS and VW are included in Western Atlas' consolidated federal income tax
return. The provision (credit) for income taxes as shown on the combined
statements of income was calculated on a standalone basis. The provision
(credit) for income taxes for the year ended December 31, 1995 and the period
January 1, 1996 to November 15, 1996, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------- ----
<S> <C> <C>
Current--
Federal................................................... $ -- $153
State..................................................... -- 29
Deferred.................................................... (1,369) --
------- ----
$(1,369) $182
======= ====
</TABLE>
A reconciliation of the Federal statutory tax rate to the consolidated
effective tax rate is as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Federal statutory rate........................................ (34)% 34%
State income taxes, net of Federal tax liability.............. (4) 4
Other......................................................... (1) 1
--- ---
Effective tax rate............................................ (39)% 39%
=== ===
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES--
MHS and VW are party to litigation matters, claims and performance
guarantees, which are normal in the course of its operations, and while the
results of litigation, claims and performance guarantees cannot be predicted
with certainty, management believes that the final outcome of such matters
will not have a material adverse effect on MHS and VW's operations.
(9) ACQUISITION--
On November 15, 1996, HK Systems, Inc. acquired substantially all of the net
assets of MHS and VW from Western Atlas for a purchase price of $42,600. The
purchase price consisted of $34,600 in cash and an $8,000 promissory note to
Western Atlas. HK Systems, Inc. also assumed $26,464 of liabilities of MHS and
VW in connection with the acquisition.
F-26
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AS OF OCTOBER 31, 1997 AND JANUARY 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
OCTOBER 31, JANUARY 31, JANUARY 31,
ASSETS 1997 1998 1998
------ ----------- ----------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 332 $ 90 $ 90
Accounts receivable, less allowance of
$552 and $517, respectively............. 27,057 29,254 29,254
Unbilled revenue......................... 25,539 26,616 26,616
Inventory................................ 8,845 10,658 10,658
Deferred income taxes.................... 3,900 3,900 3,900
Prepaid expenses and other current
assets.................................. 823 4,505 4,505
-------- -------- --------
Total current assets................... 66,496 75,023 75,023
Property, plant and equipment:
Land..................................... 1,060 1,060 1,060
Building and building improvements....... 3,986 3,905 3,905
Leasehold improvements................... 2,321 2,669 2,669
Computer equipment....................... 12,372 12,762 12,762
Machinery and equipment.................. 7,398 7,540 7,540
Office furniture and other............... 3,605 4,161 4,161
-------- -------- --------
30,742 32,097 32,097
Less--Accumulated depreciation........... (11,148) (12,316) (12,316)
-------- -------- --------
19,594 19,781 19,781
Goodwill................................... 39,121 38,695 38,695
Deferred income taxes...................... 2,527 2,527 2,527
Other assets............................... 3,623 3,520 3,520
-------- -------- --------
Total.................................. $131,361 $139,546 $139,546
======== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable......................... $ 27,951 $ 29,274 $ 29,274
Accrued liabilities...................... 11,941 9,330 9,330
Accrued employee costs................... 6,933 5,237 5,237
Billings in excess of costs.............. 7,487 12,548 12,548
-------- -------- --------
Total current liabilities.............. 54,312 56,389 56,389
Long-term debt............................. 51,960 68,170 68,170
Other long-term liabilities................ 3,499 3,499 3,499
Redeemable preferred stock................. 18,068 18,348 4,348
Common stock with put rights, $.01 par
value; authorized 9,764,093 at 1997 and
1998, issued 3,015,360 at 1997 and 1998... 633 633 --
Shareholders' equity:
Common stock, $.01 par value; authorized
40,000,000 at Pro Forma 1998; 8,615,360
issued and 7,902,230 outstanding at Pro
Forma 1998.............................. -- -- 86
Additional paid-in capital............... -- -- 14,547
Treasury, at cost, 383,358 shares of
Common Stock............................ -- (5,858) (5,858)
Unearned compensation--ESOP.............. -- (5,400) (5,400)
Retained earnings........................ 2,889 3,765 3,765
-------- -------- --------
Total shareholders' (deficit) equity... 2,889 (7,493) 7,140
-------- -------- --------
Total.................................. $131,361 $139,546 $139,546
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-27
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR EACH OF THE THREE MONTHS ENDED JANUARY 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Net revenues:
Integrated systems...................................... $ 47,003 $ 28,098
Customer services....................................... 15,626 17,371
Logistics and software systems.......................... 4,092 3,021
--------- ---------
Total net revenues.................................... 66,721 48,490
Cost of sales............................................. 54,032 37,125
--------- ---------
Gross profit............................................ 12,689 11,365
Selling, general and administrative expenses.............. 7,137 7,685
Amortization of goodwill.................................. 2,701 427
--------- ---------
Income from operations.................................. 2,851 3,253
Other income (expense):
Interest expense........................................ (1,365) (1,315)
Other, net.............................................. (60) --
--------- ---------
Income before income taxes.............................. 1,426 1,938
Provision for income taxes................................ 511 698
--------- ---------
Net income before dividends on preferred stock.......... 915 1,240
Dividends on preferred stock.............................. (354) (364)
--------- ---------
Net income applicable to common shareholders.......... $ 561 $ 876
========= =========
Per share data:
Basic net income per share of common stock.............. $ 0.19 $ 0.32
========= =========
Diluted net income per share of common stock............ $ 0.10 $ 0.13
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-28
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR EACH OF THE THREE MONTHS ENDED JANUARY 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Cash flows provided by (used for) operating activities:
Net income.............................................. $ 915 $ 1,240
Adjustments to reconcile net income to net cash provided
by (used for) operating activities--
Depreciation........................................... 1,308 1,160
Amortization........................................... 2,924 643
Changes in assets and liabilities--
Accounts receivable................................... 12,406 (2,196)
Unbilled revenue...................................... (8,856) (1,076)
Inventory............................................. (893) (1,814)
Prepaid expenses and other current assets............. (1,890) (3,683)
Accounts payable...................................... 3,420 849
Accrued liabilities................................... 3,448 (2,710)
Billings in excess of costs........................... (1,978) 5,060
--------- --------
Net cash provided by (used for) operating
activities......................................... 10,804 (2,527)
--------- --------
Cash flows used for investing activities:
Purchase of fixed assets................................ (554) (1,407)
Payment of financing fees............................... (265) (60)
Acquisition of Eaton Kenway, Inc........................ 33 --
Investment in joint venture............................. (1,890) --
Acquisition of the Material Handling Systems and
VantageWare divisions of Western Atlas Inc............. (31,402) --
--------- --------
Net cash used for investing activities.............. (34,078) (1,467)
--------- --------
Cash flows (used for) provided by financing activities:
Proceeds from borrowings on revolving line of credit,
net.................................................... 28,000 10,810
Proceeds from term loan, net............................ -- 5,400
Purchase of treasury stock.............................. -- (6,458)
Purchase of Unallocated ESOP shares..................... -- (6,000)
--------- --------
Net cash provided by financing activities........... 28,000 3,752
--------- --------
Net increase (decrease) in cash and cash equivalents...... 4,726 (242)
Cash and cash equivalents, beginning of period............ 152 332
--------- --------
Cash and cash equivalents, end of period.................. $ 4,878 $ 90
========= ========
Supplemental information:
Interest paid........................................... $ 688 $ 1,105
Income taxes paid....................................... $ 1,979 $ 1,800
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-29
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR EACH OF THE THREE MONTHS ENDED JANUARY 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) BASIS OF PRESENTATION--
The consolidated financial statements reflect all adjustments (consisting
only of normally recurring accruals) which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. These financial statements should be read in conjunction with the
Company's audited financial statements for each of the three years ended
October 31, 1997.
(2) PRO FORMA BALANCE SHEET--
The pro forma balance sheet reflects various equity transactions that
occurred subsequent to October 31, 1997 or will occur concurrently with the
initial public offering. Specifically, the pro forma balance sheet reflects
(i) the conversion of 5,600,000 shares of the Company's Class B Cumulative
Convertible Preferred Stock, face value of $2.50 per share, into common stock
of the Company on a share-for-share basis; (ii) the termination of certain
management common stock "put" rights; and (iii) the reclassification of all
common stock of the Company into Common Stock. The remaining preferred stock
balance represents the Class D Cumulative Preferred Stock which the Company
intends to redeem through proceeds from the initial public offering.
(3) EARNINGS PER SHARE OF COMMON STOCK--
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS 128"). The Company adopted SFAS 128 for the
three-month period ended January 31, 1998. All earnings per share computations
have been applied retroactively to all periods to conform with the provisions
of SFAS 128.
The following reconciles the numerators and denominators of the basic and
diluted net income per share computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Basic
Net income before dividends on preferred stock...... $ 915 $ 1,240
Less: Class B and D preferred stock dividends....... (354) (364)
--------- ---------
Net income applicable to common shareholders...... $ 561 $ 876
========= =========
Weighted average shares of common stock
outstanding...................................... 3,015,360 2,713,173
========= =========
Basic net income per share of common stock........ $ 0.19 $ 0.32
========= =========
Diluted
Net income before dividends on preferred stock...... $ 915 $ 1,240
Less: Class B and D preferred stock dividends....... (354) (364)
Plus: Class B preferred stock dividends(a).......... 280 280
--------- ---------
Net income applicable to common shareholders...... $ 841 $ 1,156
========= =========
Weighted average shares of common stock outstanding. 3,015,360 2,713,173
Incremental common shares applicable to common stock
options............................................ 230,714 488,351
Incremental common shares applicable to Class B
convertible preferred stock........................ 5,600,000 5,600,000
--------- ---------
Average common shares, adjusted................... 8,846,074 8,801,524
========= =========
Diluted net income per share of common stock...... $ 0.10 $ 0.13
========= =========
</TABLE>
F-30
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
- --------
(a) Class B preferred stock is a common stock equivalent. The dividends are
added back to net income as these dividends would be available to common
shareholders assuming the conversion of Class B preferred stock in all
periods when the common stock equivalents are dilutive.
(4) INVENTORIES--
Inventories are stated at the lower of cost or market, using the first-in,
first-out (FIFO) method. Inventory cost includes material, labor and overhead.
Inventories at October 31, 1997, and January 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Raw materials.............................................. $4,875 $ 4,904
Work in process............................................ 2,551 3,763
Finished goods............................................. 1,419 1,991
------ -------
$8,845 $10,658
====== =======
</TABLE>
(5) CONTINGENCY--
On July 1, 1992, Eaton-Kenway entered into a contract ("Fed Contract") with
the Federal Reserve Bank of San Francisco ("SF Fed") relating to the
installation of a material handling system. On February 13, 1995, the Company
assumed the Fed Contract in the Eaton-Kenway Acquisition. On April 7, 1995,
the SF Fed filed a lawsuit ("Fed Suit") in the United States District Court
for the Northern District of California against the Company, Eaton-Kenway and
Eaton alleging, among other things, a failure to install a properly operating
material handling system for two existing SF Fed bank vaults in breach of the
Fed Contract. The SF Fed purported to seek not less than $3.55 million as
restitution for the consideration it paid under the Fed Contract, not less
than $6.4 million for incidental and consequential damages and not less than
$46.7 million to cover the costs of constructing two new bank vaults. In 1995,
the court granted partial summary judgment on the issue of liability in favor
of the SF Fed and against the Company and the other defendants on two counts
of the SF Fed's complaint for breach of contract and rescission and
restitution. On January 30, 1998, the court granted partial summary judgment
in favor of the Company and the other defendants, holding that the SF Fed
cannot recover the cost of constructing two new vaults or litigation expenses.
However, the SF Fed may continue to seek damages in excess of $10 million
against the Company based on claims that have not been dismissed. The court's
orders granting partial summary judgment are subject to appeal after the entry
of final judgment in the action, and there can be no assurance that the
results of any appeal would be favorable to the Company. It is anticipated
that a jury trial on the remaining damage issues on the contract claim against
the Company and Eaton-Kenway, if not all the remaining claims against all the
parties, will be held in 1998. While the Company believes it has meritorious
defenses in the Fed Suit, the Fed Suit could have a material adverse effect on
the Company's business, results of operations and financial condition.
(6) EMPLOYEE STOCK OWNERSHIP PLAN--
Effective November 1, 1997, the Company adopted an employee stock ownership
plan (the "ESOP"), in which substantially all of the employees of the Company
participate. On December 15, 1997, the Company repurchased 420,000 shares of
common stock of the Company (the "Treasury Stock") from a former employee to
liquidate his interest after the employee exercised contractual "put" rights.
The Company also borrowed $6.0 million from its bank lenders and loaned that
amount to the ESOP to purchase 366,412 shares of the Company
F-31
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(UNAUDITED)
on January 9, 1998. In January 1998, shares with a value of $1.2 million were
allocated to the accounts of ESOP participants, of which $0.6 million
pertained to Treasury Stock and $0.6 million pertained to unallocated ESOP
shares.
Compensation expense related to the allocation of shares with a value of
$1.2 million to the accounts of ESOP participants was recognized in the
October 31, 1997 financial statements.
F-32
<PAGE>
HK SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is certain unaudited summary pro forma consolidated
financial data for the periods ended and as of the dates indicated. The
summary pro forma consolidated statement of income data for the year ended
October 31, 1997 and the three months ended January 31, 1997 and 1998 reflects
the effects on the historical results of operations of the Company of the
following transactions as if these transactions had occurred on November 1,
1996: (i) the Recapitalization; (ii) the ESOP Transactions; and (iii) the
Offering and the application of the proceeds to the Company from the Offering
to repay certain indebtedness and to pay accrued dividends on and redeem
preferred stock. The summary pro forma consolidated balance sheet data as of
January 31, 1998 reflects the effects of the Recapitalization and the Offering
transactions as if they had occurred on January 31, 1998. The summary pro
forma consolidated financial data does not purport to represent what the
Company's results of operations would actually have been if such transactions
in fact occurred as of such dates or results that may be attained in the
future.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997
----------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF INCOME DATA:
Net revenues.............................................. $246,150 $ -- $246,150
Gross profit.............................................. 52,504 -- 52,504
Selling, general & administrative expenses................ 31,724 -- 31,724
Amortization of goodwill.................................. 3,979 -- 3,979
Income from operations................................... 16,801 -- 16,801
Interest expense.......................................... 5,570 (3,083)(a) 3,353
866 (b)
Income before income taxes................................ 11,311 2,217 13,528
Provision for income taxes................................ 4,051 798 (c) 4,849
Net income before dividends on preferred stock........... 7,260 1,419 8,679
Dividends on preferred stock.............................. 1,419 (1,419)(d) --
Net income applicable to common shareholders............. 5,841 2,838 8,679
Basic net income per share of common stock............... 1.94 1.34
Diluted net income per share of common stock............. 0.77 0.69
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
--------------------------------------------------------------------
1997 1998
--------------------------------- ----------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF
INCOME DATA:
Net revenues............ $66,721 $ -- $66,721 $ 48,490 $ -- $ 48,490
Gross profit............ 12,689 -- 12,689 11,365 -- 11,365
Selling, general &
administrative
expenses............... 7,137 -- 7,137 7,685 -- 7,685
Amortization of
goodwill............... 2,701 -- 2,701 427 -- 427
Income from operations. 2,851 -- 2,851 3,253 -- 3,253
Interest expense........ 1,365 (771)(a) 811 1,315 (771)(a) 761
217 (b) 217 (b)
Income before income
taxes.................. 1,426 554 1,980 1,938 554 2,492
Provision for income
taxes.................. 511 199 (c) 710 698 199 (c) 897
Net income before
dividends on
preferred stock....... 915 355 1,270 1,240 355 1,595
Dividends on preferred
stock.................. 354 (354)(d) -- 364 (364)(d) --
Net income applicable
to common
shareholders.......... 561 709 1,270 876 735 1,595
Basic net income per
share of common stock. 0.19 0.20 0.32 0.26
Diluted net income per
share of common stock. 0.10 0.10 0.13 0.13
</TABLE>
F-33
<PAGE>
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1998
-------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
PRO FORMA BALANCE SHEET DATA:
Total assets............................. $139,546 -- $139,546
Accrued liabilities...................... 9,330 (673)(g) 8,657
Total current liabilities................ 56,389 (673) 55,716
Other liabilities........................ 3,499 -- 3,499
Long-term debt........................... 68,170 (8,000)(a) 28,892
(31,278)(a)
Mandatory redeemable preferred stock..... 18,348 (14,000)(f) --
(4,348)(g)
Common stock with put rights............. 633 (633)(f) --
Common stock............................. -- 121 (e)(f) 121
Additional paid-in capital............... -- 44,264 (e) 58,811
14,547 (f)
Treasury stock........................... (5,858) -- (5,858)
Unearned compensation--ESOP.............. (5,400) -- (5,400)
Retained earnings........................ 3,765 -- 3,765
Total shareholders' equity............... (7,493) 60,383 51,439
Total liabilities and shareholders'
equity.................................. 139,546 -- 139,546
</TABLE>
- --------
(a) In connection with the Offering and repayment of certain indebtedness, the
Company would have incurred a reduction in interest expense on the
following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, JANUARY 31,
1997 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
(1) $8,000 subordinated promissory
note due to Western Atlas;
interest rate at 10 percent..... $ (800) $(200) $(200)
(2) $31,278 outstanding on revolving
credit facility; average
interest rate of 7.3 percent.... (2,283) (571) (571)
------- ----- -----
$(3,083) $(771) $(771)
======= ===== =====
</TABLE>
(b) In connection with the ESOP Transactions, the Company incurred additional
indebtedness under its revolving credit facility as follows: (i) the
Company borrowed $6,458 ($600 of which was repaid in January 1998) to
repurchase 420,000 shares of common stock of the Company and (ii) the
Company borrowed $6,000 from its bank lenders under a term loan and loaned
that amount to the ESOP. Additional interest expense related to the above
is as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, JANUARY 31,
1997 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
(1) $6,000 term note due in December
2002; average interest rate of
7.3 percent:.................... $438 $110 $110
(2) $5,858 draw on revolving credit
facility; average interest rate
of 7.3 percent:................. 428 107 107
---- ---- ----
$866 $217 $217
==== ==== ====
</TABLE>
(c) Adjusts income taxes to reflect the above pro forma adjustments utilizing
a combined federal and state rate of 36 percent.
(d) Represents the reduction in dividends paid on the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, JANUARY 31,
1997 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
(1) Class B Preferred Stock;
dividends accrue at a rate of
8.0 percent:................. $(1,120) $(280) $ (280)
(2) Class D Preferred Stock;
dividends accrue at a rate of
8.0 percent:................. (299) (84) (74)
------- ----- ------
$(1,419) $(364) $ (354)
======= ===== ======
</TABLE>
F-34
<PAGE>
(e) Represents amount of net proceeds associated with the sale of 3,460,000
shares of Common Stock with a par value of $0.01 offered by the Company.
(f) Represents (i) the conversion of 5,600,000 shares of Class B Preferred
Stock with a stated amount of $14,000 to 5,600,000 shares of Common Stock
at a par value of $0.01 per share and (ii) the termination of certain
management common stock "put" rights with a stated amount of $633 to
3,015,360 shares of Common Stock at a par value of $0.01 per share.
(g) Represents the amount of net proceeds used to pay accrued dividends of
$673 and redeem shares of Class D Preferred Stock of $4,348.
F-35
<PAGE>
SUPPLY CHAIN MANAGEMENT SOLUTIONS
IN TODAY'S BUSINESS WORLD, COMPANIES CAN RESPOND TO INCREASING CUSTOMER
DEMANDS FOR FASTER, MORE EFFICIENT AND CUSTOMIZED PRODUCT DELIVERY THROUGH
SUPPLY CHAIN PRACTICES THAT INCLUDE DEMAND-PULL MANUFACTURING SYSTEMS, AS WELL
AS THIRD-PARTY DISTRIBUTION, MIXED-LOAD SHIPMENTS AND MORE FREQUENT, SMALLER
QUANTITY DELIVERIES.
AS COMPETITION IN MANY INDUSTRIES MAKES IT INCREASINGLY DIFFICULT TO ACHIEVE
REVENUE GROWTH, BUSINESSES ARE FOCUSING MORE ON REDUCING SUPPLY CHAIN COSTS AS
A MEANS OF INCREASING PROFITS. COMPANIES ARE INCREASINGLY FINDING THAT,
THROUGH THE IMPLEMENTATION OF AUTOMATED MATERIAL HANDLING AND SUPPLY CHAIN
SOFTWARE SYSTEMS AND OUTSOURCING OF SYSTEM MAINTENANCE, THEY CAN ACHIEVE
IMPROVEMENTS IN THROUGHPUT, REDUCE INVENTORY AND MANPOWER LEVELS, AND
RATIONALIZE SUPPLIER RELATIONSHIPS.
OUR EXPERIENCE SERVING DIVERSIFIED INDUSTRIES POSITIONS HK SYSTEMS TO DESIGN
AND IMPLEMENT SUPPLY CHAIN SOLUTIONS THAT INCLUDE EQUIPMENT INTEGRATION,
OUTSOURCING AND SOFTWARE FOR COMPLEX SUPPLY CHAIN MANAGEMENT NEEDS.
[text accompanies a graphic illustration of a cube with five "layers" that
reflect the following: (1) a layer that identifies various industries,
including consumer goods, electronics, distribution and retail,
pharmaceutical, publishing, automotive, discreet and process manufacturing and
food and beverage, with the Company's logo at the center; (2) three layers
identifying each of the Company's three business units: Integrated Systems;
Customer Services; and Logistics and Software Systems; and (3) a final layer
identifying the five principal equipment products of the Integration Services
unit.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No person is authorized in connection with any offering made hereby to give
any information or to make any representation other than as contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company or by any Underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than shares of Common Stock offered hereby,
nor does it constitute an offer to sell or a solicitation of an offer to buy
any of the securities offered hereby to any persons in any jurisdiction in
which it is unlawful to make such an offer or solicitation to such person.
Neither the delivery of this Prospectus nor any sale made hereunder shall
under any circumstance create any implication that the information herein is
correct as of any date subsequent to the date hereof.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Dividend Policy........................................................... 12
Use of Proceeds........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Selected Historical Consolidated Financial Data........................... 16
Summary Pro Forma Consolidated Financial Data............................. 18
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 20
Business.................................................................. 28
Management................................................................ 45
Certain Transactions; Relationships with Selling Shareholders;
Compensation Committee Interlocks and Insider Participation.............. 50
Principal and Selling Shareholders........................................ 52
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 56
Underwriting.............................................................. 58
Legal Matters............................................................. 60
Experts................................................................... 60
Available Information..................................................... 60
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------------
Until , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,400,000 SHARES
LOGO
COMMON STOCK
------------------
PROSPECTUS
, 1998
------------------
LEHMAN BROTHERS
ROBERT W. BAIRD & CO.
INCORPORATED
FURMAN SELZ
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee.................. $ 33,925
NASD fee....................................................... 12,000
NYSE listing fee............................................... 91,000
Blue sky fees and expenses..................................... 4,000
Transfer agent expenses and fees............................... 6,000
Printing and engraving......................................... 150,000
Accountants' fees and expenses................................. 150,000
Legal fees and expenses........................................ 275,000
Miscellaneous.................................................. 28,075
---------
Total...................................................... $ 750,000
=========
</TABLE>
All of the above fees, costs and expenses above will be paid by the Company.
Other than the SEC filing fee, all fees and expenses are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the WBCL and the Company's By-Laws, directors and officers of
the Company are entitled to mandatory indemnification from the Company against
certain liabilities and expenses (i) to the extent such officers or directors
are successful in the defense of a proceeding and (ii) in proceedings in which
the director or officer is not successful in defense thereof, unless (in the
latter case only) it is determined that the director or officer breached or
failed to perform his duties to the Company and such breach or failure
constituted: (a) a willful failure to deal fairly with the Company or its
Shareholders in connection with a matter in which the director or officer had
a material conflict of interest; (b) a violation of criminal law unless the
director or officer had reasonable cause to believe his or her conduct was
lawful or had no reasonable cause to believe his or her conduct was unlawful;
(c) a transaction from which the director or officer derived an improper
personal profit; or (d) willful misconduct. The WBCL specifically states that
it is public policy of Wisconsin to require or permit indemnification,
allowance of expenses and insurance in connection with a proceeding involving
securities regulation, as described therein, to the extent required or
permitted as described above. Additionally, under the WBCL, directors of the
Company are not subject to personal liability to the Company, its Shareholders
or any person asserting rights on behalf thereof for certain breaches or
failures to perform any duty resulting solely from their status as directors,
except in circumstances paralleling those in subparagraphs (a) through (d)
outlined above.
The Company also maintains director and officer liability insurance against
certain claims and liabilities that may be made against the Company's former,
current or future directors or officers.
The indemnification provided by the WBCL and the Company's Amended and
Restated By-Laws is not exclusive of any other rights to which a director or
officer may be entitled. The general effect of the foregoing provisions may be
to reduce the circumstances under which an officer or director may be required
to beach the economic burden of the foregoing liabilities and expense.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On February 13, 1995, in connection with the Eaton-Kenway Acquisition (and
as adjusted for the 100-for-one stock split which occurred on September 18,
1996), the Company issued and sold (a) 1,100,000 Class A Common shares to John
W. Splude and 300,000 Class A Common shares each to Glen P. Davis, John C.
Hines and Gordon W. Jones for an aggregate of $160,000; (b) 153,800 Class C
Common shares to MIVC for $12,304;
II-1
<PAGE>
and (c) 1,200,000 shares of Class B Preferred Stock to MIVC and 2,800,000
shares of Class B Preferred Stock to SWIB for an aggregate of $4,000,000. No
underwriters were engaged in connection with the foregoing sales. On November
15, 1996, in connection with the Western Atlas Acquisition, the Company issued
the Warrant to Western Atlas. The issuance of (i) securities in connection
with the Eaton-Kenway Acquisition and (ii) the Warrant were exempt from
registration under the Securities Act pursuant to Section 4(2) as transactions
not involving any public offering.
Other than as set forth in the preceding paragraphs, the Company has not
sold any securities within the past three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The exhibits filed herewith are as specified on the Exhibit
Index included herein.
(b) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because the
required information is not present or is not present in amounts sufficient to
require submission of a schedule or because the information required is
included in the consolidated financial statements of the Registrant or notes
thereto or the schedule is not required or inapplicable under the related
instructions.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF MILWAUKEE, AND STATE OF WISCONSIN, ON THIS 10TH DAY OF MARCH, 1998.
HK SYSTEMS, INC.
/s/ John W. Splude
By: _________________________________
John W. Splude
Chairman, President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW AS OF MARCH 10,
1998 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ John W. Splude* Chairman, President, Chief Executive
___________________________________________ Officer and Director
John W. Splude (Principal Executive Officer)
/s/ Glen P. Davis* Executive Vice President-Integration
___________________________________________ Services and Director
Glen P. Davis
/s/ John C. Hines Senior Vice President and Chief Financial
___________________________________________ Officer (Principal Financial and
John C. Hines Accounting Officer)
/s/ John Byrnes* Director
___________________________________________
John Byrnes
/s/ David Upton* Director
___________________________________________
David Upton
/s/ Jose Yglesias* Director
___________________________________________
Jose Yglesias
*By: ______________________________________
/s/ John W. Splude
Attorney-in-Fact
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S> <C>
1.1 Form of U.S. Underwriting Agreement.*
3.1 Proposed form of Amended and Restated Articles of Incorpora-
tion of the Company.*
3.2 Proposed form of Amended and Restated Bylaws of the Company.*
4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Re-
stated Articles of Incorporation and Bylaws of the Company de-
fining the rights of the holders of Common Stock.
4.3 Third Amended and Restated Credit Agreement dated as of Novem-
ber 15, 1996 by and among the Company, Harris Trust and Sav-
ings Bank, individually and as agent, and the lenders that are
a party thereto.*
4.4 Warrant, dated as of November 15, 1996, issued to Western At-
las by the Company.*
4.5 First Amendment to the Third Amended and Restated Credit
Agreement dated as of December 15, 1997 by and among the Com-
pany, Harris Trust and Savings Bank, individually and as
agent, and the lenders that are a party thereto.*
4.6 Second Amendment to the Third Amended and Restated Credit
Agreement dated as of January 9, 1998 by and among the Compa-
ny, Harris Trust and Savings Bank, individually and as agent,
and the lenders that are a party thereto.*
5.1 Opinion of Foley & Lardner regarding the legality of securi-
ties being offered.*
10.1 Employment and Noncompetition Agreement, dated as of October
28, 1993 and as amended October 31, 1996 and February 19,
1998, by and between the Company and John W. Splude.*
10.2 Employment and Noncompetition Agreement, dated as of October
28, 1993 and as amended October 31, 1996 and February 19,
1998, by and between the Company and Glen P. Davis.*
10.3 Employment and Noncompetition Agreement, dated as of July 1,
1997, by and between the Company and David W. Bartley.*
10.4 HK Systems, Inc. 1997 Stock Plan for Outside Directors.*
10.5 HK Systems, Inc. 1993 Executive Stock Option Plan.*
10.6 Proposed form of Registration Rights Agreement by and among
the Company, MIVC, SWIB, John W. Splude, Glen P. Davis and
John C. Hines.*
10.7 Lease Agreement, dated as of January 16, 1995 and as amended
April 17, 1996, by and between James Luterbach, as lessor, and
the Company, as lessee.*
10.8 Lease Agreement, dated as of February 13, 1995 and as amended
January 5, 1996, by and between Eaton Properties Corporation
and Eaton Utah Corporation (collectively, the lessor), and the
Company, as lessee.*
10.9 Lease Agreement, dated as of November 15, 1996, by and between
Western Atlas, Inc., as lessor, and the Company, as lessee.*
10.10 Employment and Noncompetition Agreement, dated as of October
28, 1993 and as amended October 31, 1996 and February 19,
1998, by and between the Company and John C. Hines.*
10.11 Employment and Noncompetition Agreement, dated as of July 1,
1997, by and between the Company and Stephen S. Sadowski.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S> <C>
10.12 Employment and Noncompetition Agreement, dated as of July 1,
1997, by and between the Company and Larry S. Cinpinski.*
10.13 Amendment to the HK Systems, Inc. 1993 Executive Stock Option
Plan.*
23.1 Consent of Independent Public Accountants.
23.2 Consent of Foley & Lardner (included in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page to the Reg-
istration Statement).*
27.1 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in this Registration Statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
March 9, 1998,
