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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10 - KSB
Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the Fiscal Year Ended Commission File Number 0-12370
July 31, 1998
SI TECHNOLOGIES, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 95-3381440
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
Identification Number) incorporation or organization)
4611 South 134th Place, Tukwila, Washington 98168
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(Address of principal executive offices) (Zip Code)
(206) 244-6100
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g):
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ( X )
Issuer's revenues for most recent fiscal year $23,829,033.
The number of shares outstanding of each of the issuer's classes of
common stock is 3,547,123 (as of October 23, 1998).
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant is $6,463,107 (as of October 23, 1998).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual meeting of
Shareholders to be held on January 21, 1999 (the "Proxy Statement"), are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
SI Technologies, Inc. and Subsidiaries ("SI" or the "Company") is a rapidly
growing designer, manufacturer and marketer of high-performance industrial
sensors, weighing and material-handling equipment and systems. Recent
acquisitions have diversified the Company's revenue base and positioned SI
Technologies as a consolidator of technologies, products and companies that
are enabling SI to become a leading global provider of devices, equipment and
systems that handle, inspect and measure goods and materials. SI products are
used throughout the world in a wide variety of industries, including
aerospace, agriculture, aviation, food processing, forestry, manufacturing,
mining, transportation/distribution and waste management.
In recent years, the Company has been capitalizing on its technology and
existing customer relationships through product and market expansion in the
$70-billion industrial sensor, weighing and material handling equipment
industry. Driving SI's business expansion are both an aggressive internal
product development program and the acquisition of businesses with technology
and revenue synergy.
The Company was incorporated in California on May 29, 1979 as IDEA,
Invention, Design, Engineering Associates, Inc. and was reincorporated in
Delaware on April 20, 1983. In February 1996, the Company changed its name to
SI Technologies, Inc. The name SI Technologies serves to preserve a loyal
customer following in the Company's dynamic weighing systems business while
at the same time representing the broader technologies and business interests
of the Company.
The Company's principal executive offices and headquarters are located at
4611 South 134th Place, Seattle, Washington. Headquarters communication
information is as follows: telephone, 206-244-6100, fax, 206-246-7195, e-mail
address, [email protected], Web site, www.sitechnologies.com.
BUSINESS STRATEGY
The Company aspires to become a leading provider of manufactured devices,
equipment, engineered systems and services used in the niche industrial
markets in which it operates and to expand its markets through acquisition of
complementary product and service lines as an industry consolidator in the
$70-billion industrial sensor, weighing and material-handling equipment
industry. SI Technologies has experienced significant growth since 1990
through a combination of internal growth and strategic acquisitions.
INTERNAL GROWTH
The Company expects to continue generating organic growth through internal
product development, entrance into new markets and geographic expansion. In
the past several years, internal investment has primarily been focused on
expansion of existing product lines and installation of a company-wide
marketing information system. In 1999, the Company expects to shift a portion
of its internal growth focus to the integration of technologies across
product lines and business units, and to the expansion and training of
distribution channels to effectively cross-sell products to key markets.
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ACQUISITION STRATEGY
SI Technologies pursues a strategy of acquiring leading providers of
complementary manufactured products and services in highly fragmented
industrial equipment markets, with a view to further consolidating those
markets. SI Technologies believes it is one of the few domestic acquirers and
consolidators of businesses in those markets. In general, the Company pursues
the acquisition of businesses that meet the following criteria:
- Well-managed companies serving niche industrial markets
- Products utilizing technology compatible with SI core technologies
- Significant installed product base and successful operating history
- Complementary products and services that offer cross-selling
opportunities
- Potential for international business expansion
- Predictable cash flow and earnings potential
SI believes its consolidation strategy will allow it to achieve greater
efficiencies in acquired companies through elimination of redundant cost and
by leveraging economies of scale in manufacturing operations, and procurement
of materials and services. Past the early stages of assimilating acquired
companies, SI expects to capitalize on revenue synergies developed through
cross selling, joint market development, and sharing and integration of
technology across product lines and business units.
The Company intends to finance acquisitions in the near term primarily with
debt, relieved subsequently by capital raised through the sale of equity. As
the momentum of the consolidation plan increases, the Company expects to
utilize equity on an increasing basis as currency in acquisition and merger
transactions.
Since 1990, SI Technologies has completed eight acquisitions. The most recent
of these were the purchases of Revere Transducers and Allegany Technology,
Inc. in July of 1998. Revere Transducers is a manufacturer of industrial
sensors and static weighing equipment. Allegany is a manufacturer of dynamic
weighing equipment and systems.
<TABLE>
<CAPTION>
Date
Acquired Company Acquired Primary Products Industries Served
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<S> <C> <C> <C>
Lodec, Inc. 1990 Dynamic & Static Agriculture, forestry,
Weighing Systems government
Advanced Recording 1995 Data Recording Transportation, distribution
Instruments, Inc. Instrumentation
Load Measurement 1996 Sensors & Dynamic Agriculture, waste management
Corporation Weighing Systems
Evergreen Weigh, 1996 Dynamic & Static Aviation, mining,
Inc. Weighing Systems transportation
AeroGo, Inc. 1997 Load Handling & Aviation/aerospace, automotive,
Moving Systems manufacturing, general industry
NV Technology, Inc. 1998 Sensors General industry, food,
transportation
Allegany Technology, 1998 Dynamic Weighing Aerospace, transportation,
Inc. Equipment & Systems general industry
Revere Transducers, 1998 Sensors & Static Aviation/aerospace, food,
Inc. Weighing Equipment general industry
</TABLE>
Further acquisition detail may be found under the ACQUISITION HISTORY section.
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CURRENT ACQUISITION ACTIVITIES
In pursuit of the Company's consolidation strategy, management is
continuously evaluating acquisition/merger opportunities with numerous
companies ranging in size from $5 million to $50 million in annual revenue.
Companies of interest are leading manufacturers, distributors and service
providers who compete with technology advantage, are generating internal
growth, and show potential for strong synergy with the Company's technology,
manufacturing operations and marketing and sales organization.
PRODUCTS AND SERVICES
WEIGHING EQUIPMENT & SYSTEMS
SI designs and manufactures dynamic and static electronic weighing equipment
and systems for use in a wide array of industrial applications. As a result
of the uniqueness of the Company's combined sensor, weighing and
material-handling technologies, SI is one of few manufacturers in the
industry who design and manufacture all three of the primary components of an
electronic scale. These components are the load-handling structure, sensors
and instrumentation. Many manufacturers of conventional scale systems
manufacture only load-handling structures, outsourcing to industry suppliers
their sensor and instrumentation requirements. The Company utilizes its
expertise and manufacturing know-how in each of these critical components to
competitive advantage and believes our broad expertise can be exploited
through our consolidation strategy.
Dynamic weighing systems are installed on transportation vehicles,
material-handling equipment and in manufacturing process systems for weight
measurement of goods and materials. Weight information generated by these
systems has broad application including loading, transporting and delivery
payload management; manufacturing process, inventory and quality control; and
operations automation. Key products marketed under the ALLEGANY, AIRSCALE,
CHECKMATE, ROUTEMAN, SMARTPIN, THE LOGGER, TROJAN, and TUFFER trade names are
dynamic "weigh-in-motion" and mobile on-board vehicle and material-handling
equipment scales, pallet weighers, crane scales and engineered system scales.
SI systems are available as standard products for use with most major
original equipment manufacturer (OEM) trucks, trailers, forklifts, loaders,
cranes and lifting devices. Products are marketed predominately to the
agriculture, construction, forestry, foundry, freight transportation,
manufacturing, mining, steel and waste management industries.
Depending on application, specific economic benefit is derived from reduced
overweight vehicle fines and delays; reduced time loading, checkweighing and
adjusting loads to maximum legal limits; reduced mileage and driving time to
checkweighing locations such as commercial in-ground truck scales; immediate
measurement and recording of pick-up and delivery weights; reduced equipment
abuse, maintenance downtime and expense; and higher capital equipment
capacity utilization. Additionally, the weight information produced by these
systems is often the critical measurement in controlling batching, blending
and mixing operations in the manufacture of materials.
All systems include force measurement sensors and microprocessor-based
electronic meters (instrumentation). The meter supplies power to the sensors,
provides all operator interface and controls, processes sensor electronic
signals to determine weights, and displays and records in memory weight
information and other inputs from the system and/or the operator. Force
measurement sensors employing electronic strain gage technology measure force
values. The electrical resistance of force measurement sensors changes
proportionally to the force applied; thus the return signal to the meter
varies by load or force.
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The company's static weighing system product line consists of scales designed
for numerous industrial and aviation weighing applications. Key products
marketed under the trade names LODEC, ROAD GUARDIAN, AIR GUARDIAN, ROAD
RUNNER, JET WEIGH AND MTSERIES are permanent and portable axle scales,
wheel-load weighers, canister load cell systems and heavy-capacity platform
scales. Much like dynamic weighing systems, the static weighing systems have
broad industrial application. Key markets in which these products enjoy
significant market share include aggregate, aviation, construction, freight
terminals, land remediation, mining and weight enforcement. Static weighing
systems utilize the same technology as dynamic weighing systems; however,
they are designed to weigh loads in a static or stationary mode.
MATERIAL HANDLING EQUIPMENT AND SYSTEMS
SI's material handling equipment products consist of load handling, moving
and positioning equipment and systems. These products often utilize highly
specialized air-bearing movement systems to move loads of any weight
efficiently and with extreme precision. Air bearings are air-cushion devices
that are used to "float" heavy loads on a thin film of air. Additionally, the
Company manufactures systems utilizing water bearings for use in large
outdoor applications where water is used as the flotation medium rather than
air. These products, marketed under the trade names AEROGO, AEROCASTER,
AEROPLANKS and AEROPALLETS, are the world leaders in practical and efficient
methods of alignment, location, movement, rotation and transfer of materials
and products weighing from several hundred pounds to more than 6,000 tons.
The Company's load-handling, moving and positioning product line comprises
two distinct categories. The first is a standard product line of rugged,
industrial, off-the-shelf air-cushion devices that allow a single person to
easily and safely move loads weighing from a few hundred pounds to many tons.
Standard products routinely move manufacturing fixtures, printing press bulky
paper rolls, jet engines, and other heavy loads. The other category of the
product line consists of engineered products. Engineered products and
specialized systems designed and manufactured by the Company in recent years
are currently moving 100,000-pound dies, launching ships, moving 4,500-ton
stadium sections, transporting aerospace booster rockets and moving large
assemblies in and out of assembly line operations in numerous heavy equipment
manufacturing facilities.
Additional examples of engineered products include: automated guided vehicle
systems, transporters, assembly line turntable systems, precision handling
and positioning fixtures, quick die/mold changing carts, caisson
manufacturing and moving systems, and aircraft inspection turntables.
SI load-handling and moving products commonly represent significant economic
benefit in comparison to conventional material handling equipment through
lower capital investment in manufacturing site construction, preparation and
system installation, and greater operating efficiencies based on system
versatility (not limited to following rails or tracks, as typically required
with cranes and conveyors). These systems often represent the most viable
means for handling extreme material handling applications involving very
heavy loads and precision movement and positioning.
SENSORS
The Company's industrial sensor product line consists of a wide range of
force measurement devices (FMDs). FMDs, a core SI technology, are
electromechanical components that convert a physical force to an electrical
signal. When matched with microprocessor-controlled digital electronics, FMDs
measure forces such as pressure, weight, mass and torque. Commercially, force
measurement devices are used in electronic scales and a wide range of
machinery and equipment. SI instrumentation is normally designed as an
integral part of a complete weighing system. In recent years, SI
instrumentation has been expanded to provide users with the ability to
acquire, record in memory and download to management information
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systems operational information other than weight information. In this
expanded capacity, SI instrumentation becomes a critical link between
operations and management information systems.
MARKETING AND SALES
The Company's products are marketed throughout the world primarily through
400 distributors and manufacturer representatives, each operating in a
specific trade area and serving industrial customers, engineering firms and
various government agencies. In addition to headquarters marketing and sales
personnel, and subsidiary business unit marketing and sales operations, the
Company maintains North American regional sales offices in California,
Georgia, Indiana, Oregon, Pennsylvania, Texas, and British Columbia and
Alberta, Canada; and European regional sales offices in France, Germany, the
United Kingdom and the Netherlands. Company regional sales personnel assist
distributors and representatives, make direct sales call on potential
customers in areas not covered by distribution, and support the Company's
direct major accounts.
The Company generates leads through a full complement of marketing practices,
including advertisement in industry publications, direct-mail advertising,
direct-fax advertising, trade show participation and telemarketing.
Headquarters and subsidiary personnel initiate the Company's sales process on
all inquiries by providing the inquirer with information on Company products
and services and qualifying the lead. After qualification, inquiries are
either maintained in sales for follow-up by Company sales personnel and
distribution, or dispatched to engineering for design, cost estimating and
preparation of price quotations or bid packages.
Due to the Company's mix of standard off-the-shelf products and
custom-engineered products, the time period between initial inquiry, purchase
order receipt and shipment varies widely. Standard product orders are
normally shipped within one to three days of purchase order receipt at
published prices and with trade terms of FOB factory and 30 days net.
Engineered products and projects are subject to specific contract terms
negotiated between the Company and customer. Typically, contract terms
provide for progress payments, provision for change orders and, on
longer-term projects, provision for inflation-based price adjustment. On
certain projects, the Company provides complete site preparation, system
installation, start-up and customer training services. In this capacity, from
time to time, the company serves as a contractor on a time and material basis.
MARKET CONDITIONS AND COMPETITION
MARKET CONDITIONS
Worldwide capital expenditures for industrial sensors, weighing and
material-handling equipment and systems have averaged about $70 billion in
recent years, with domestic spending accounting for approximately 30% of the
total. The industry is mature and overall growth is negligible. Although the
overall industry is mature, the Company believes our unique products,
diversity of markets and worldwide geographic presence present significant
opportunities for internal growth within the industry. Additionally, the high
fragmentation of the industry provides similar opportunities for execution of
the Company's consolidation acquisition strategy.
Product uniqueness (niche products) is a competitive advantage for SI.
Manufacturers of conventional mature products competing for market share with
non-differentiated products normally compete primarily on product price and
availability. SI's unique products such as dynamic weighing and air-bearing
load-handling and moving systems frequently compete within the industry as
substitute products or as an alternative means for meeting the customers'
needs. As a result of this high level of product differentiation and the
application versatility of SI's unique products, the Company believes demand
for
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SI products is more elastic than demand for conventional products within the
industry. Also, as expected with highly differentiated products, SI products
have historically produced gross margins higher than the industry average.
Market diversity is a growing competitive advantage for SI. Over the past few
years, SI has been redirecting its focus to new markets in an effort to
mitigate a sharp capital spending downturn in the Company's traditionally
strong forestry and waste management markets. Since the 1996 acquisition of
Evergreen Weigh and Load Measurement Corporation, cross-selling of products
and integration of Company sales organizations have steadily increased
revenues in the aggregate, agriculture, aviation, construction and mining
industries. With the acquisition of AeroGo late in fiscal 1997, and the
acquisitions of NV Technology, Allegany Technology and Revere Transducers in
fiscal 1998, the Company has further expanded its market diversity and
potential for revenue synergies. The Company intends to capitalize on its
growing market diversity, worldwide presence and cross-selling opportunities
with an expanding product line to create internal growth.
SI maintains inventories of raw materials, work-in-process and finished
goods. To supply products with competitive availability, the Company carries
approximately 35% of inventory in finished goods. While the Company
manufacturers the majority of its value-added components, certain components,
manufacturing processes and sub-assemblies are outsourced. Outsourced items
are normally purchased on fixed price contracts on a just-in-time basis.
Should the need arise, the Company believes that any supplier and/or
subcontractor could be replaced without significant disruption to its
business.
COMPETITION
Competition in the industrial sensor, weighing and material-handling
equipment and system industry is extremely fragmented with approximately
6,000 manufacturers and a greater number of distributors and service
companies. To the Company's knowledge, there are no competitors with the same
product mix as SI. Direct competitors (competing head-to-head with similar
products) normally compete on a single product line and are all smaller and
have less financial resources than SI. General industry-wide competitors
(competing with alternative conventional products) range from very small,
local companies to large, international companies with greater financial
resources than SI.
In the dynamic and static weighing systems product line, direct competitors
are all smaller, privately held companies. Occasionally and on specific
applications, the weighing systems product line competes as an alternative
product with larger companies that manufacture conventional weighing systems.
These companies include Cardinal Scale Manufacturing Company, Fairbanks Scale
Company, Mettler-Toledo Holding, Inc. and Weigh-Tronix, Inc. Competition
among larger manufacturers of conventional weighing systems, due to lack of
product differentiation, is principally based on price, local dealer
trade-area presence and relationships, and product availability.
Competition in the industrial sensor product line varies widely depending on
customer type and application. Industry standard sensors sold directly to
large industrial scale manufacturers compete primarily on price, quality and
service. Standard and custom sensors sold to OEMs of other types of products
and equipment, and to user customers in process industries, primarily compete
on the supplier's ability to provide engineering expertise and assistance,
quality, and on-going customer support and service. Competitors range from
small, local companies to large, international companies.
Competition in load-handling and moving products is similar to weighing
system products. In the air and water bearing product line, all competitors
are smaller, privately held companies with less financial resources than the
Company. Direct competitors include, Airfloat, Hovair, and Aircaster. In
custom-
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engineered products and projects, the Company normally competes as a
substitute or alternative product versus conventional material-handling
equipment manufactured by companies ranging in size from much smaller to
significantly larger than the Company.
International markets vary widely in competitive issues. In some countries,
price competition is more intense than in North America, while in others
prior relationships and product quality receive more customer emphasis than
do marginal pricing differentials, thus price competition is less intensive.
As a result of product uniqueness, innovative design solutions, quality of
product and dependability, SI products and services are frequently sold in
situations where the Company is not the low bidder.
SIGNIFICANT CUSTOMERS
Historically the Company's primary customers have been transportation,
agriculture, forestry, waste management and general industrial companies.
Over the past few years, as a result of the Company's consolidation strategy,
the customer base has expanded to include the aviation/aerospace, automotive,
food processing, construction and maritime industries. Significant customers
in recent years include Boeing, Caterpillar, Chrysler, Continental Airlines,
Ford, Hyundai, Kraft Foods, Lockheed, Michelin, Mitsubishi, NASA, Siemens,
Waste Management and Weyerhaeuser.
While a significant portion of the Company's annual revenues represent repeat
business from its customers, no individual customer represents 10% or more of
the Company's revenues.
ACQUISITION HISTORY
ACQUISITION OF LODEC, INC.
In March 1990, the Company acquired Lodec, Inc., a Washington corporation. As
a manufacturer of dynamic and static weighing systems, Lodec was a direct
competitor of the Company at the time of acquisition. Lodec's primary product
at the time of acquisition was an on-board weighing system. The acquisition
of Lodec increased the Company's market share in on-board weighing systems,
expanded the product line through the addition of Lodec portable axle scales,
and brought the Company an international dealer organization in Latin
America, Europe and Asia. In January of 1991, the Company consolidated all
Lodec operations into the Weighing Systems Division operation in Seattle,
Washington.
ASSET PURCHASE FROM ADVANCED RECORDING INSTRUMENTS, INC.
In October 1995, the Company purchased the assets of Advanced Recording
Instruments, Inc. (ARI). The asset purchase included the ARI on-board data
recorder and operations information system product lines, all related
technology, trade names, inventory and fixed assets. Acquisition of the ARI
product line strengthened the Company's ability to serve a growing customer
demand for operations information useful for improving the performance of
material-handling and transportation operations. System utilization benefits
include increased operations efficiency, lower equipment maintenance costs,
better safety records, reduced manual report generation and improved customer
service.
ACQUISITION OF EVERGREEN WEIGH, INC.
In April 1996, the Company acquired Evergreen Weigh, Inc. (Evergreen), a
Washington corporation. Evergreen is a manufacturer of dynamic and static
weighing systems. Evergreen's primary products include weigh-in-motion
on-board scales for material-handling equipment, axle scales and wheel-load
weighers. Key markets served by Evergreen products include the aviation,
heavy construction, mining,
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quarry and transportation industries. The acquisition of Evergreen expanded
the Company's product line and increased the number of markets in which the
Company sells products. SI and Evergreen sales organizations merged into one
integrated sales organization shortly after the acquisition. Evergreen
operations were consolidated into the Company's Weighing Systems Division in
Seattle in June of 1997.
ASSET PURCHASE FROM LOAD MEASUREMENT CORPORATION
In June 1996, the Company purchased the assets of Load Measurement
Corporation (LMC). The asset purchase included the LMC on-board weighing
system product lines, all related technology, trade names and inventory. LMC
products are designed for and marketed primarily to the agriculture industry.
ACQUISITION OF AEROGO, INC.
In July 1997 the Company acquired AeroGo, Inc., a Washington corporation.
AeroGo is a world leader in the design and manufacture of load-handling,
moving and positioning systems. AeroGo products, utilizing both standard and
highly specialized air bearing movement systems, are marketed chiefly to
aviation/aerospace, automotive, construction, manufacturing, maritime and
general industry. AeroGo's material-handling expertise lies in the design and
manufacturing of heavy load moving equipment, die carts, automated guided
vehicle systems, transport skates, sideloaders, step conveyors and flexible
manufacturing systems.
The acquisition of AeroGo provided the Company with an entrance to the
material-handling equipment industry where additional acquisitions of
complementary products and businesses will be pursued. In October 1997, the
Company consolidated the manufacture of all Company-fabricated products into
the AeroGo operation in Seattle, Washington.
ACQUISITION OF NV TECHNOLOGY, INC.
In February 1998, the Company acquired NV Technology, Inc. (NV), a Nevada
corporation. The transaction, which was a tax-free merger, was accounted for
as a pooling-of-interest. NV is a manufacturer of high-performance,
stainless steel sensors. The addition of NV's National Institute of Science &
Technology (NIST) certified products expanded the Company's business in
legal-for-trade, weighing and process control applications. NV operations
were relocated from Las Vegas, Nevada to the Company's Weighing System
Division in Seattle in June of 1998.
ACQUISITION OF ALLEGANY TECHNOLOGY, INC.
In July 1998, the Company acquired Allegany Technology, Inc. (Allegany), a
Delaware corporation. Allegany is a leading designer and manufacturer of
specialty sensors, industrial crane and lift truck scales, along with billet
weighing systems. Allegany's unique billet weighing systems increase
productivity and profitability in the steel and heavy metals industries.
Other major markets for Allegany products include aerospace, distribution,
manufacturing, transportation and warehousing. Allegany products expanded the
Company's strong position as a manufacturer of weighing products for niche
markets.
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ACQUISITION OF REVERE TRANSDUCERS
In July 1998, the Company acquired Revere Transducers, Inc. and Revere
Transducers Europe B.V. from Harnischfeger Industries (NYSE-HPH). Revere is
headquartered in Tustin, California, with operations in Tustin and Breda, the
Netherlands. Revere is one of the four largest manufacturers of electronic
weighing load cells, sensors and related devices in the industry, with world
wide market share estimated at 8%. In addition to a highly recognized brand
name, the acquisition of Revere brings the Company new technology and
manufacturing capability in the design and manufacture of proprietary strain
gages and a manufacturing facility and marketing organization in Europe.
BACKLOG
At July 31, 1998, the Company's backlog was $7,819,506, compared with
$2,277,738 on July 31, 1997. The Company's backlog consists of written
orders and commitments believed to be firm and shippable in fiscal 1999, and,
in comparison to 1997, includes backlog attributable to companies acquired
during 1998; Allegany Technology, Inc. and Revere Transducers. Purchase
orders and contracts for products and services are from time to time modified
and/or canceled by mutual consent between the Company and the customer.
Therefore, the backlog on any specific date may not be indicative of the
Company's future performance.
EMPLOYEES
At July 31, 1998, the Company employed 441 full time employees.
SOURCES OF SUPPLY
The materials and components used by the Company to manufacture its products
are available from a variety of sources. The Company believes that it is not
dependent at this time on any particular supplier for either its materials or
components and has experienced no difficulty in obtaining supplies.
PATENTS AND TRADEMARKS
The Company holds 24 patents on various force measurement devices and
weighing system design applications. The patents have expiration dates
ranging from 1999 to 2016. The company also has patent license agreements to
build force measurement devices under patents held by others. The license
agreements are fully paid up and irrevocable for the lifetime of these
patents. The Company has no reason to believe its patents are not valid.
However, if the patents were successfully contested, management does not
believe it would have a material adverse impact on the Company.
FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS AND EXPORT SALES
FOREIGN OPERATIONS
Included in the consolidated balance sheet at July 31, 1998 are the
identifiable assets of the Company's subsidiary, Revere Transducers Europe
B.V., which total approximately $5,787,000. Revere Transducers Europe was
acquired by the Company at July 1, 1998 and was included in the results of
operations from that date. The subsidiary is located in the Netherlands, and
had sales of $1,116,192 and operating profits of $73,731 for the one month
included in the year ended July 31, 1998.
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EXPORT SALES
The Company sells its products throughout the world. Net export sales by
foreign geographic area are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Americas $2,477,000 $2,459,000 $2,756,000
Asia/Pacific 2,316,000 2,351,000 497,000
Europe/Africa 969,000 628,000 689,000
---------- ---------- ----------
$5,762,000 $5,438,000 $3,942,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
ITEM 2. PROPERTIES
<TABLE>
<CAPTION>
Square
Location Utilization Footage Leased or Owned Lease Termination
- -------- ----------- ------- --------------- -----------------
<S> <C> <C> <C> <C>
UNITED STATES
Tukwila, WA Corporate offices and
manufacturing and sales
offices for the Weighing
Systems Division 30,000 Leased April 2004
Tustin, CA Manufacturing and sales
for the U.S. operations
of Revere Transducers 93,000 Leased November 2004
Tukwila, WA Manufacturing and sales
offices for AeroGo, Inc. 55,000 Leased April 2004
Cumberland, MD Manufacturing and sales
offices for Allegany
Technology, Inc. 35,000 Owned
Cumberland, MD Aircraft hanger 5,000 Owned
INTERNATIONAL
Breda, the Manufacturing and
Netherlands sales offices for the
European operations of
Revere Transducers 22,000 Leased June 2007
Kelowna, B.C., Sales and distribution
Canada center 3,000 Leased May 2001
</TABLE>
The Company believes that its properties have been adequately maintained, are
in generally good condition and are suitable for the Company's business as
presently conducted. The Company believes its existing facilities provide
sufficient production capacity for its present needs and for its anticipated
needs in the foreseeable future. The Company also believes that upon the
expiration of its current leases, it either will be able to secure renewal
terms or enter into leases for alternative locations at market terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in various legal actions. In the opinion of
management, based upon the advice of counsel, the ultimate outcome of these
actions will not have a material impact on the Company's consolidated
financial statements.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Security Holders during the quarter
ended July 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
As of October 23, 1998, there were 233 shareholders of record. Management
believes this represents approximately 600 beneficial owners of SI common
stock. SI's common stock is traded on the over-the-counter market on the
NASDAQ system under the symbol "SISI." The Company has not declared nor paid
any dividends since its inception. The following chart describes the price
range of Common Shares of SI, as quoted by NASDAQ, by quarter for fiscal 1998
and fiscal 1997:
Price Range of Common Shares
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
HIGH LOW HIGH LOW
----- ------- ----- -----
<S> <C> <C> <C> <C>
1st Quarter 7 1/4 4 3 1/2 2 3/8
2nd Quarter 8 1/4 4 13/16 3 3/8 2 1/8
3rd Quarter 7 5 2 3/4 1 1/2
4th Quarter 8 1/2 5 1/4 4 5/8 1 7/8
</TABLE>
DIVIDEND POLICY
The Company has never declared nor paid cash dividends on the Common
Stock. The Company intends to retain all future earnings for reinvestment in
its business and does not plan to pay dividends in the foreseeable future.
Furthermore, the Company is prohibited from declaring and/or paying cash
dividends on its capital stock under the terms of certain indebtedness.
SI TECHNOLOGIES, INC.
Selected Consolidated Financial Data
Year ended July 31
<TABLE>
<CAPTION>
1998 1997(1) 1996(1) 1995(1) 1994(1)
---- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales $23,829,033 $14,123,243 $12,385,777 $10,603,692 $8,383,531
Net earnings 830,379 499,276 666,546 361,462 121,709
Net earnings per share
basic 0.30 0.20 0.26 0.14 0.05
Net earnings per share
diluted 0.28 0.19 0.25 0.14 0.05
Total assets 39,997,005 17,604,726 10,131,990 7,921,466 7,505,022
Long-term debt, less
current portion 12,134,989 4,348,405 1,952,162 670,792 867,529
Other long-term obligations 1,932,607 178,300 468,000 407,200 412,400
</TABLE>
(1) as restated for the NV Technology acquisition
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As an aid to understanding the Company's operating results, the following
table indicates the percentage of revenues that each income statement item
represents and the percentage increase or decrease in such items for the
years indicated. Since 1990, the Company has acquired eight businesses. As a
result of the impact of these acquisitions, and the integration of the
acquired operations on the Company's business, results of operations for
prior periods are not necessarily comparable with or indicative of operations
for current or future periods.
<TABLE>
<CAPTION>
Percent
Year ended July 31 Increase/(Decrease)
1998 vs. 1997 vs.
1998 1997 1996 1997 1996
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 68.7% 14.0%
Cost of sales 57.4 57.8 54.6 67.6 20.5
--------------------------------
Gross profit 42.6 42.2 45.4 70.2 6.2
Selling, general and
administrative 26.1 27.2 25.8 61.8 20.2
Research, development
and engineering 5.2 5.8 9.7 50.6 (31.2)
Amortization of intangibles 1.4 1.0 0.9 130.5 31.7
-------------------------------
Operating expense 32.7 34.0 36.4 62.0 6.8
-------------------------------
Operating profit 9.9 8.2 9.0 104.3 3.9
Interest expense (4.0) (2.3) (1.1) 195.9 128.3
Other income - 0.1 .3 (64.7) (65.0)
------------------------------
Earnings before income tax 5.9 6.0 8.2 66.7 (16.3)
Income tax (2.4) (2.5) (2.8) 67.2 0.5
------------------------------
Net earnings 3.5 3.5 5.4 66.3 (25.1)
------------------------------
------------------------------
</TABLE>
14
<PAGE>
RESULTS OF OPERATIONS
The Company grew significantly in 1998. Sales, earnings and cash flow
increased to record levels. This performance is reflective of the
acquisitions completed in 1997 and 1998. Due to the magnitude of these
acquisitions, and the integration of the acquired operations with the
Company's existing businesses, results of operations for prior periods are
not necessarily comparable with or indicative of results of operations for
current or future periods.
NET SALES
Net sales for the year ended July 31, 1998 increased $9,705,790 or 69% to
$23,829,033 from $14,123,243 for the year ended July 31, 1997. The increase
in sales is primarily attributable to the acquisitions of AeroGo, Inc.,
Allegany Technology, Inc., NV Technology, Inc. and Revere Transducers.
Net sales from load-handling, moving and positioning systems increased by
approximately $7.4 million, industrial sensors net sales increased
approximately $2.5 million and weighing systems net sales decreased
approximately $.2 million. The growth in load-handling and moving systems
reflects the incorporation of AeroGo sales for a full year in 1998 as
compared to one month in 1997. The growth in industrial sensors sales
reflects both acquisition related increases from Revere Transducers products
as well as organic sales growth of new and existing products in the NV
Technology line. Weighing systems sales continued to be affected by the weak
forestry market. For the third consecutive year, sales to the depressed
forestry markets have decreased. This result has been offset by higher sales
to the waste market, which recovered in 1998 as compared to 1997, and from
increased sales of portable scale products. Weighing systems sales also
benefited from the results of the Allegany Technology acquisition, which were
included from the July 1, 1998 acquisition date. The increased revenue base
has resulted in a more diverse customer universe that reduces the Company's
dependence on any single product line, market or geographic region.
Net sales for 1997 increased by $1,737,466 or 14% over the 1996 net sales of
$12,385,777. Revenues from new weighing systems and load-handling and moving
products, and increased sales to new markets for weighing systems more than
offset decreased weighing system sales to the Company's traditional forestry
and waste management markets. Since early 1996, the forestry and waste
management industries have decreased capital equipment expenditures as a
direct result of declining pulp prices.
International sales increased to $6.9 million in 1998 from $5.4 million in
1997. International sales accounted for 29% and 38% of total Company sales in
1998 and 1997 respectively. The decreased proportion of international sales
reflects a reduced proportion of sales to Canadian and Asia Pacific markets.
International sales are transacted both in U.S. dollars and in local
currency. Sales in local foreign currency are generally in Canadian and
European markets. Sales in other markets are generally conducted in U.S.
dollars. Due to the acquisition of Revere Transducers' European operations,
future sales are likely to have a larger component that are conducted in
non-U.S. dollar currencies. There has not been a significant impact on the
financial statements due to changes in currency rates.
GROSS PROFIT
Gross profit for the year ended July 31, 1998 increased $4,189,162 or 70% to
$10,156,654 from $5,967,492 for the year ended July 31, 1997. This increase
in gross profit is directly attributable to higher sales volume resulting
from acquisitions completed in late fiscal 1997, and in fiscal 1998. The
corresponding gross margins for the periods were 42.6% and 42.2%,
respectively.
15
<PAGE>
The gross profit margins of future periods are likely to be lower than the
levels of recent years. Some products and markets of recently acquired
companies experience lower average margins that those that the Company has
historically recorded. Consequently, the Company anticipates these products
will lower the gross margin percentage reported in the future.
Gross profit for the year ended July 31, 1997 increased $348,590 or 6% to
$5,967,492 from $5,618,902 for the year ended July 31, 1996. Corresponding
gross margins for the periods were 42.2% and 45.4%. The decrease in gross
margin resulted from increased price pressure for products serving the
forestry and waste management industries and start-up efficiencies associated
with relocating the manufacturing of the acquired Evergreen Weigh products
into the Company's primary manufacturing facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the years ended July 31,
1998 and 1997 were $6,212,443 and $3,838,825, respectively. This is an
increase of $2,373,618 or 62%. The increase is primarily related to the
acquisitions discussed above. Selling, general and administrative expenses
as a percentage of sales was 26% in 1998 as compared to 27% in 1997. This
decrease as a percentage of sales is the result of administrative savings
derived from combining acquired operations with the Company's existing
businesses.
Selling, general and administrative expenses for the years ended July 31,
1997 and 1996 were $3,838,825 and $3,193,852, respectively. This is an
increase of $644,973 or 20%. The increase is primarily related to the
inclusion of acquired companies. As a percentage of sales, S,G&A expenses
were 27.2% in 1997 as compared to 25.8% in 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Research, development and engineering expenses for the years ended July 31,
1998 and 1997 were $1,242,533 and $825,312, respectively. This is an
increase of $417,221 or 51%. Spending as a percentage of sales was 5.2% in
1998 and 5.8% in 1997. The increase in dollar amount is attributable to the
acquisitions noted earlier.
Research, development and engineering expenses for the years ended July 31,
1997 and 1996 were $825,312 and $1,200,412, respectively. This is a decrease
of $375,100 or 31%. Expenses decreased as a result of the Company completing
several product development projects early in 1997. These decreases more
than offset the increased spending resulting from the incorporation of
acquired company operations during the year.
AMORTIZATION EXPENSES
Intangible amortization expenses amounted to $339,114 in 1998 as compared to
$147,126 in 1997. This is an increase of $191,988 or 130%. In 1997
intangible amortization increased $35,382 over the amount recorded in the
year ended July 31, 1996 of $111,744. The increases in amortization in both
years were the results of increases in the costs in excess of assets acquired
recorded for the acquisitions completed during those years.
16
<PAGE>
INTEREST AND OTHER INCOME
Interest expense for 1998 increased $629,294, or 196%, to $950,601 from
$321,307 in 1997. This increase in interest reflects the costs of additional
borrowings required to finance the AeroGo, Allegany Technology and Revere
Transducers acquisitions. Interest expense in 1996 was $140,764.
Other income was $5,416 in 1998 as compared to $15,354 in 1997. In 1996
other income was $43,832. The amount in 1996 includes the non-recurring
recovery of a previously written off bad debt.
INCOME TAXES
Income tax expense for the years ended July 31, 1998 and 1997 was $587,000
and $351,000, respectively. The Company's effective tax rate was 41% in both
1998 and 1997. The effective tax rate exceeds the U.S. federal corporate
income tax rate due primarily to the amortization of intangible assets that
are not deductible for income tax purposes and due to state income taxes.
Income tax expense in 1997 of $351,000 increased by $1,584 as compared to the
$349,416 recorded in 1996. The Company's effective tax rate in 1996 was 34%.
INFLATION
Historically, the impact of inflation has been negligible, as the Company has
been able to offset the effects through efficiency and price adjustments.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998 the Company's cash position was $573,863 compared to
$155,826 at July 31, 1997. Cash available in excess of that required for
general corporate purposes is used to reduce borrowings under the Company's
line of credit. Working capital increased to $6,889,483 from $704,176 at
July 31, 1997. This increase reflects the impact of incorporating the
acquisitions discussed earlier.
The Company's existing capital resources consist of cash balances, cash
provided by operating activities and funds available under its line of
credit. Cash provided by operations in 1998 was $1,024,768. During 1997,
cash provided by operations was $141,358. In April 1998, the Company sold
839,664 shares of common stock and used the net proceeds (approximately
$3,653,000) to reduce debt incurred with the acquisition of AeroGo, Inc.
The Company's cash requirements consist of its general working capital needs,
capital expenditures, obligations under its leases, notes payable and capital
required for future acquisitions. Working capital requirements include the
salary costs of employees and related overhead and the purchase of material
and components. The Company anticipates capital expenditures of
approximately $350,000 in 1999 as compared to $217,000 in 1998. Excluding
payments under the Company's lines of credit, principal payments made under
notes payable totaled approximately $4,098,000 for the year ended July 31,
1998. In 1999, approximately $4,430,000 in principal will be due on notes
payable.
In July 1998, the Company amended its principal credit agreement with its
bank for the purpose of financing the acquisitions of Allegany Technology,
Inc. and Revere Transducers. This agreement included an increase to the
Company's existing line of credit from $4,000,000 to $8,000,000, a one-year
note in the amount of $3,000,000, a seven-year note in the amount of
$5,000,000 and the continuation of a seven-year note (due in 2004) with a
balance of $1,628,571 as of July 31, 1998. The amended credit
17
<PAGE>
agreement includes a requirement that the Company obtain additional equity
financing of no less than $3,000,000 no later than July 1, 1999. The
Company's credit facility requires the Company to maintain certain levels of
working capital, stockholders' equity, and other covenants.
The Company's $8,000,000 line of credit, maturing November 1999, continues to
be extended as requested. As of July 31, 1998, the Company had borrowings of
$5,911,009 under the line of credit.
In addition to its principal credit agreement, the Company maintains a second
line of credit to support the working capital requirements of its European
operations. This line of credit amounts to $3,250,000. As of July 31, 1998,
the Company had borrowings of $1,993,200 under the line of credit.
Except with respect to funding any future acquisitions, the Company believes
that cash flow from operations, funds available under its bank facilities and
the anticipated equity financing will be sufficient to meet the Company's
working capital needs, anticipated capital expenditures and payments required
under its credit facilities. The Company believes that it could obtain the
capital necessary to make additional acquisitions primarily through either
issuances of common or preferred stock or debt, although no assurance can be
given with respect to whether such financing would be available when required
or whether such financing can be obtained on terms acceptable to the Company.
YEAR 2000 INITIATIVES
The Company is currently working to resolve the potential impact of "Year
2000" issues on the processing of date-sensitive information by the Company's
information processing systems. The Company regularly updates its
information systems capabilities and has evaluated all significant computer
software applications for compatibility with the year 2000. With the system
changes implemented to date and other planned changes, the Company
anticipates that its computer software applications will be compatible with
the year 2000. Expenditures specifically related to software modifications
for year 2000 compatibility are not expected to have a material effect on the
Company's operations or financial position. However, the Company is
dependent on numerous vendors and customers who may incur disruptions as a
result of year 2000 software issues. The Company is taking steps to assess
the year 2000 status of its significant customers and suppliers. The Company
has not yet developed a contingency plan to operate in the event that any
critical systems are not year 2000 compliant, or if failure of vendors,
suppliers or third party systems have a material effect on the Company.
Accordingly, no assurances can be given that the Company's results of
operations will not be affected by this global issue.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. All statements other than statements of
historical facts included in the preceding discussion regarding the Company's
financial position, business strategy and plans of management for future
operations are forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct.
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(FORM 10-KSB)
Pages(s)
<S> <C>
Report of Independent Certified Public Accountants . . . . . . 21
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Earnings . . . . . . . . . . . . . . 23
Consolidated Statement of Stockholders' Equity . . . . . . . . 24
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 25
Notes to Consolidated Financial Statements . . . . . . . . . . 26-38
</TABLE>
19
<PAGE>
Consolidated Financial Statements
SI TECHNOLOGIES, INC.
AND SUBSIDIARIES
July 31, 1998, 1997 and 1996
20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SI Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of SI
Technologies, Inc. and Subsidiaries as of July 31, 1998 and 1997 and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended July 31, 1998. 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 consolidated financial position of SI
Technologies, Inc. and Subsidiaries as of July 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended July 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
- --------------------------
Grant Thornton LLP
Seattle, Washington
October 23, 1998
21
<PAGE>
SI Technologies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
July 31,
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 573,863 $ 155,826
Trade accounts receivable, less allowance
for doubtful accounts of $466,134 in 1998
and $147,714 in 1997 7,764,447 2,969,852
Inventories 11,026,104 3,465,316
Deferred tax asset 1,245,000 262,100
Refundable income taxes - 702,546
Other current assets 498,533 301,856
------------ ------------
Total current assets 21,107,947 7,857,496
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 8,049,006 1,477,401
OTHER ASSETS
Intangible assets, net 10,217,389 7,613,787
Other 622,663 656,042
------------ ------------
$ 39,997,005 $ 17,604,726
------------ ------------
------------ ------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 5,104,411 $ 3,085,000
Current maturities of long-term debt 1,319,060 515,552
Put option obligations - 385,000
Trade accounts payable 3,758,849 1,974,507
Income taxes payable 134,280 -
Accrued liabilities 3,901,864 1,193,261
------------ ------------
Total current liabilities 14,218,464 7,153,320
LONG-TERM DEBT, less current maturities 12,134,989 4,348,405
OTHER LIABILITIES 1,385,307 -
DEFERRED TAXES 547,300 178,300
COMMITMENTS and CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share;
authorized, 2,000,000 shares; none outstanding - -
Common stock, par value $.01 per share;
authorized, 10,000,000; issued and outstanding,
3,547,123 in 1998 and 2,547,240 in 1997 35,471 25,472
Additional paid-in capital 10,320,765 5,391,256
Retained earnings 1,338,352 507,973
Cumulative translation adjustment 16,357 -
------------ ------------
11,710,945 5,924,701
------------ ------------
$ 39,997,005 $ 17,604,726
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
SI Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended July 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 23,829,033 $ 14,123,243 $ 12,385,777
Cost of sales 13,672,379 8,155,751 6,766,875
------------- ------------- -------------
Gross profit 10,156,654 5,967,492 5,618,902
Operating expenses:
Selling, general and administrative 6,212,443 3,838,825 3,193,852
Research, development and engineering 1,242,533 825,312 1,200,412
Amortization of intangibles 339,114 147,126 111,744
------------- ------------- -------------
7,794,090 4,811,263 4,506,008
------------- ------------- -------------
Earnings from operations 2,362,564 1,156,229 1,112,894
Interest expense (950,601) (321,307) (140,764)
Other income, net 5,416 15,354 43,832
------------- ------------- -------------
Net earnings before income taxes 1,417,379 850,276 1,015,962
Income tax expense (587,000) (351,000) (349,416)
------------- ------------- -------------
NET EARNINGS $ 830,379 $ 499,276 $ 666,546
------------- ------------- -------------
------------- ------------- -------------
Earnings per common share $ .30 $ .20 $ .26
------------- ------------- -------------
------------- ------------- -------------
Earnings per common share, assuming dilution $ .28 $ .19 $ .25
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
SI Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Additional Retained Cumulative Total
Paid-in earnings translation stockholders'
Shares Amount Capital (deficit) adjustment equity
--------- -------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 1, 1995, as
previously reported 2,347,240 $23,472 $4,769,268 $(403,487) $ - $4,389,253
Adjustment for pooling of
interest merger 200,000 2,000 621,988 (254,362) - 369,626
--------- -------- ---------- --------- ----------- -------------
Balance, August 1, 1995, as restated 2,547,240 25,472 5,391,256 (657,849) - 4,758,879
Net earnings - - - 666,546 - 666,546
--------- -------- ---------- --------- ----------- -------------
Balance, July 31, 1996 2,547,240 25,472 5,391,256 8,697 - 5,425,425
Net earnings - - - 499,276 - 499,276
--------- -------- ---------- --------- ----------- -------------
Balance, July 31, 1997 2,547,240 25,472 5,391,256 507,973 - 5,924,701
Expiration of put option obligations - - 385,000 - - 385,000
Compensation associated with stock bonus - - 72,000 - - 72,000
Proceeds from exercise of stock options 18,000 180 29,632 - - 29,812
Proceeds from sale of common stock, net of
issuance costs 839,664 8,397 3,644,303 - - 3,652,700
Issuance of common stock related
to acquisition 142,219 1,422 798,574 - - 799,996
Foreign currency translation adjustment - - - - 16,357 16,357
Net earnings - - - 830,379 - 830,379
--------- -------- ---------- --------- ----------- -------------
Balance, July 31, 1998 3,547,123 $ 35,471 $10,320,765 $1,338,352 $ 16,357 $ 11,710,945
--------- -------- ---------- --------- ----------- -------------
--------- -------- ---------- --------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
24
<PAGE>
SI Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended July 31,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities:
Net earnings $ 830,379 $ 499,276 $ 666,546
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 996,069 552,731 390,670
Deferred income taxes 32,344 171,500 70,400
Changes in operating assets and liabilities:
Increase in trade accounts receivable (646,309) (11,374) (323,869)
Decrease (increase) in inventories (634,615) 545,253 (549,299)
Decrease in refundable income taxes 702,546 22,431 -
Decrease (increase) in other current assets 43,749 (83,390) (88,190)
Increase (decrease) in trade accounts payable (264,320) (1,307,814) 358,869
Decrease in accrued liabilities (283,691) (101,225) (374,684)
Increase (decrease) in income taxes payable 248,616 (146,030) (114,285)
----------- ---------- ----------
Net cash provided by operating activities 1,024,768 141,358 36,158
Cash flows from investing activities:
Increase in other assets (61,828) (341,065) (250,950)
Purchase of property and equipment (216,870) (427,060) (450,804)
Acquisition of subsidiaries (net of $260,297
cash acquired in 1998, $1,159,395 in 1997
and $2,181 in 1996) (10,286,722) (4,840,605) (997,819)
----------- ---------- ----------
Net cash used in investing activities (10,565,420) (5,608,730) (1,699,573)
Cash flows from financing activities:
Borrowings on notes payable 3,088,290 3,079,452 -
Borrowings on line of credit, net 2,197,852 516,787 339,131
Proceeds from long-term debt 5,000,000 3,000,000 1,000,000
Proceeds from sale of common stock 3,682,512 - -
Payments on notes payable (3,323,129) - -
Payments on long-term debt (775,193) (1,138,305) (372,782)
Other 72,000 100,000 225,910
----------- ---------- ----------
Net cash provided by financing activities 9,942,332 5,557,934 1,192,259
Foreign currency translation adjustment 16,357 - -
----------- ---------- ----------
Net increase (decrease) in cash 418,037 90,562 (471,156)
Cash at beginning of year 155,826 65,264 536,420
----------- ---------- ----------
Cash at end of year $ 573,863 $ 155,826 $ 65,264
----------- ---------- ----------
----------- ---------- ----------
Cash paid during the year for:
Interest $ 778,539 $ 236,776 $ 136,901
Income taxes $ 567,866 $ 297,801 $ 383,575
Noncash investing and financing activities:
In conjunction with the acquisition, as described
in Note B, liabilities were assumed as follows:
Fair value of assets acquired $22,331,983 $8,873,558 $1,455,689
Consideration given 11,347,015 6,000,000 1,000,000
----------- ---------- ----------
Liabilities assumed $10,984,968 $2,873,558 $ 455,689
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
SI Technologies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SI Technologies, Inc. designs, manufactures and markets high performance
industrial sensors, weighing and material handling equipment and systems, and
related products. SI products incorporate devices, equipment and systems for
the handling, inspection and measurement of goods and materials. Key markets
served by SI include aerospace/aviation, food, forestry, manufacturing,
mining, transportation/distribution and waste management. Sales are made to
customers throughout the world. A summary of significant accounting policies
consistently applied in the preparation of the accompanying consolidated
financial statements follows.
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SI
Technologies, Inc. (SI or Company) and its subsidiaries; AeroGo, Inc.,
Allegany Technology, Inc., Evergreen Weigh, Inc., Revere Transducers, Inc.,
Revere Transducers Europe B.V., AeroGo Export, Inc., and IDEAutomation
International, Inc. All significant intercompany accounts and transactions
have been eliminated in consolidation.
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Uncompleted contracts are included in
inventory at the accumulated cost of each contract not in excess of
realizable value.
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives, principally on a straight-line basis. Leasehold
improvements are amortized over the lives of the respective leases or the
service lives of the improvements, whichever is shorter. Estimated service
lives of property and equipment are as follows:
<TABLE>
<S> <C>
Machinery and equipment 2 to 10 years
Buildings 35 years
Leasehold improvements 2 to 10 years
</TABLE>
The straight-line method of depreciation is followed for substantially all
assets for financial reporting purposes, but accelerated methods are used for
tax purposes.
4. INTANGIBLE ASSETS
Intangible assets represent the excess costs of acquiring subsidiaries over
the fair value of net assets acquired at the date of acquisition which are
amortized using the straight-line method primarily over periods of 25 to 40
years. The Company periodically reviews goodwill to assess recoverability.
Impairment is recognized in operating results if expected future operating
undiscounted cash flows of the acquired business are less than the carrying
value of goodwill. Accumulated amortization totaled $1,302,162 and $963,048
at July 31, 1998 and 1997, respectively.
5. CAPITALIZED COMPUTER SOFTWARE COSTS
Capitalized computer software costs with an unamortized cost of $383,380 and
$450,700 at July 31, 1998 and 1997, respectively, are reflected as other
assets in the accompanying consolidated balance sheets. These costs are
being amortized over periods ranging from one to three years. Amortization
expense charged to operations relating to these costs totaled approximately
$92,700, $39,700 and $23,700 for the years ended July 31, 1998, 1997 and
1996, respectively.
26
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. PRODUCT WARRANTY
Product warranty costs are estimated and accrued at the time sales are
recorded.
7. REVENUE RECOGNITION
Sales are recorded at the time of shipment for equipment and for special
orders with relatively short production time requirements. On long-term
contracts, sales are recorded based on the percentage that incurred costs
bear to the total estimated costs at completion. Estimated losses are
recorded in total when they become evident. Accounts receivable include
$373,327 and $346,830 at July 31, 1998 and 1997 respectively, of excess costs
and related profits over amounts billed. Such billings are generally made
and collected in the subsequent year.
8. FOREIGN CURRENCY TRANSLATION
Foreign currency assets and liabilities are translated into their U.S. dollar
equivalents based on year end exchange rates. Revenue and expense accounts
are translated at average exchange rates for the appropriate fiscal year.
Aggregate exchange gains and losses arising from the translation of foreign
assets and liabilities are included in stockholders' equity. Transaction
gains and losses are included in income and have not been significant in
amount.
9. USE OF ESTIMATES
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the 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.
10. RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements to conform to the 1998 presentation.
NOTE B - BUSINESS COMBINATIONS
1. NV TECHNOLOGY, INC.
Effective February 1998, the Company completed a merger with NV Technology,
Inc. (NV) by exchanging 200,000 shares of its common stock for all of the
common stock of NV. NV is engaged in the manufacture of industrial sensors.
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, all prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position and cash flows as though NV had
always been a part of the Company.
Prior to the merger, NV's fiscal year ended on December 31. In recording the
business combination, NV's prior period financial statements have been
restated to a year ended July 31, to conform with the Company's year end.
There were no transactions between the Company and NV prior to the
combination, and adjustments were recorded to conform NV's accounting
policies. Certain reclassifications were made to the NV financial statements
to conform to the Company's presentation.
27
<PAGE>
NOTE B - BUSINESS COMBINATIONS - Continued
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements follow.
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended Year Ended Year Ended
1/31/98 7/31/97 7/31/96
---------------- ------------ -------------
<S> <C> <C> <C>
Net sales
SI Technologies $ 9,976,607 $ 12,894,711 $ 11,087,537
NV Technology 835,567 1,228,532 1,298,240
------------ ------------ -------------
Combined $ 10,812,174 $ 14,123,243 $ 12,385,777
------------ ------------ -------------
------------ ------------ -------------
Net Earnings
SI Technologies $ 405,928 $ 582,685 $ 581,189
NV Technology 28,543 (83,409) 85,357
------------ ------------ -------------
Combined $ 434,471 $ 499,276 $ 666,546
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
2. REVERE TRANSDUCERS
Effective July 1, 1998, the Company purchased 100% of the common stock of
Revere Transducers, Inc. and Revere Transducers Europe B.V. (jointly -
Revere) for $8,282,000 in cash. Revere is engaged in the manufacture of
industrial sensors and weighing equipment. The combination is accounted for
under the purchase method of accounting. The fair value of net assets
acquired exceeded the acquisition cost by $552,297. This amount has been
applied to reduce the fair value of recorded property and equipment.
Earnings include the results of operations of Revere from the acquisition
date, July 1, 1998. The purchase of Revere was funded by the net proceeds
from the note payable from the bank and the term loan from the bank described
in Notes E and G.
The following table reflects the unaudited pro forma consolidated results of
operations of the acquisition of Revere as if it had occurred on August 1,
1996.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
7/31/98 7/31/97
----------- -----------
<S> <C> <C>
Net sales $43,144,471 $33,837,119
Net earnings (loss) $ 495,156 $(1,305,654)
Earnings (loss) per share $ .17 $ (.26)
</TABLE>
3. ALLEGANY TECHNOLOGY, INC.
Effective July 1, 1998, the Company purchased 100% of the common stock of
Allegany Technology, Inc. (Allegany) for $2,888,290 in cash and SI common
stock. Allegany is engaged in the manufacture of industrial sensors and
weighing equipment and systems. The combination is accounted for under the
purchase method of accounting. The excess of the total acquisition cost over
the fair value of net assets acquired in the amount of $2,810,537 is being
amortized on a straight-line basis over twenty-five years. Earnings include
the results of operations of Allegany from the acquisition date, July 1,
1998. The purchase of Allegany was funded by borrowings under the Company's
line of credit and from the issuance of 142,219 shares of common stock.
The following table reflects the unaudited pro forma consolidated results of
operations of the acquisition of Allegany as if it had occurred on August 1,
1996.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
7/31/98 7/31/97
----------- -----------
<S> <C> <C>
Net sales $25,541,856 $17,821,645
Net earnings (loss) $ (136,089) $ 256,168
Earnings (loss) per share $ (.05) $ .10
</TABLE>
28
<PAGE>
NOTE B - BUSINESS COMBINATIONS - Continued
4. AEROGO, INC.
Effective July 1, 1997, the Company purchased 100% of the common stock of
AeroGo, Inc. (AeroGo) for $6,000,000 in cash. AeroGo is engaged in the
manufacture of material handling equipment and systems. The combination is
accounted for under the purchase method of accounting. The excess of the
total acquisition cost over the fair value of net assets acquired in the
amount of $4,347,468 is being amortized on a straight-line basis over
twenty-five years. Earnings include the results of operations of AeroGo from
the acquisition date, July 1, 1997.
The following table reflects the unaudited pro forma consolidated results of
operations of the acquisition of AeroGo as if it had occurred on August 1,
1995.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
7/31/97 7/31/96
----------- -----------
<S> <C> <C>
Net sales $21,652,000 $20,876,000
Net earnings $ 311,600 $ 822,400
Earnings per share $ .12 $ .31
</TABLE>
5. EVERGREEN WEIGH, INC.
Effective April 1, 1996, the Company purchased 100% of the common stock of
Evergreen Weigh, Inc. (Evergreen) for $1,000,000 in cash. Evergreen is
principally engaged in the manufacture of weighing equipment. The
combination is accounted for under the purchase method of accounting. The
excess of the total acquisition cost over the fair value of net assets
acquired in the amount of $467,482 is being amortized on a straight-line
basis over twenty-five years. Earnings include the results of operations of
Evergreen from the acquisition date, April 1, 1996.
The following table reflects the unaudited pro forma consolidated results of
operations of the acquisition of Evergreen as if it had occurred on August 1,
1995.
<TABLE>
<CAPTION>
(Unaudited)
7/31/96
-----------
<S> <C>
Net sales $13,819,000
Net earnings $ 651,800
Earnings per share $ .25
</TABLE>
NOTE C - INVENTORIES
Inventories consist of the following at July 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 4,782,003 $ 1,139,556
Work in process 2,434,209 786,474
Finished goods 3,809,892 1,539,286
------------ ------------
$ 11,026,104 $ 3,465,316
------------ ------------
------------ ------------
</TABLE>
29
<PAGE>
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at July 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Machinery and equipment $7,837,765 $3,052,691
Buildings 730,680 -
Leasehold improvements 1,485,153 163,759
---------- ----------
10,053,598 3,216,450
Less accumulated depreciation and amortization 2,254,592 1,739,049
---------- ----------
7,799,006 1,477,401
Land 250,000 -
---------- ----------
$8,049,006 $1,477,401
---------- ----------
---------- ----------
</TABLE>
NOTE E - NOTES PAYABLE
In conjunction with the Revere Transducers acquisition described in Note B,
the Company entered into a term loan payable to a bank for $3,000,000. The
balance outstanding at July 31, 1998 totaled $3,022,921 due to currency
translation. The loan requires monthly interest only payments until July 1,
1999 when the loan is due in full. The interest rate on the note is 11.75%.
The Company has the option to convert this loan subject to the terms and
conditions of the $5 million note payable to the bank described in Note G if
the Company's funded debt ratio at April 30, 1999 is less than or equal to
2:0 to 1. The note is secured by all assets of the Company and is subject to
the financial covenants described in Note G.
The Company has a working capital line of credit with a bank for the purpose
of financing the operations of its Revere Transducers Europe subsidiary. The
line is available up to a maximum of approximately $3,250,000. As of July
31, 1998 the outstanding balance amounted to $1,993,200. The line of credit
bears interest at 4.6%. The line of credit is secured by the inventories and
accounts receivable of Revere Transducers Europe.
A note payable in the amount of $88,290 is due to shareholders of an acquired
company. The note bears interest at 5% and is due July 1999.
The note payable as of July 31, 1997 was paid in full in April 1998.
NOTE F - ACCRUED LIABILITIES
Accrued liabilities consist of the following at July 31:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Accrued salaries, wages and
other compensation $2,522,981 $450,209
Product start up and warranty reserve 408,050 361,500
Distributor commissions 62,601 190,298
Accrued legal and settlement costs 536,425 -
Customer advances in excess of costs incurred - 75,708
Other 371,807 115,546
---------- --------
$3,901,864 $1,193,261
---------- --------
---------- --------
</TABLE>
30
<PAGE>
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following at July 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revolving line of credit with a bank for up to $8,000,000
($4,000,000 at July, 31 1997), interest at the prime rate
plus 1%, .5%, .25% or at prime or LIBOR plus 3.25%, 2.75%,
2.5% or 2.25% depending on certain financial ratios of the
Company (9.5% at July 31, 1998 and July 31, 1997), secured
by trade accounts receivable, inventories and certain
equipment, due November 1999 $ 5,911,009 $ 2,174,836
Note payable to bank in monthly installments of $59,524 plus
interest at the prime rate plus 1.125%, .6875%, .375% or at
prime or LIBOR plus 3.375%, 3%, 2.625% or 2.375% depending
on certain financial ratios of the Company (9.625% at
July 31, 1998), secured by all assets, due July 2005 5,000,000 -
Note payable to bank in monthly installments of $22,619 plus
interest at the prime rate plus 1.125%, .6875% or .25% or
LIBOR plus 3.375%, 3% or 2.625%, depending on certain
financial ratios of the Company (9.625% at July 31, 1998
and 1997), secured by all assets, due July 2004 1,628,571 1,900,000
Note payable to bank in monthly installments of $3,626
including interest at 9.25%, secured by real estate,
due January 2011 540,310 -
Note payable to bank, paid in full February 1998 - 243,610
Other unsecured notes payable, at interest rates ranging
from 5% to 9%, due between 1999 and 2003 374,159 545,511
----------- -----------
13,454,049 4,863,957
Less current maturities 1,319,060 515,552
----------- -----------
$12,134,989 $ 4,348,405
----------- -----------
----------- -----------
</TABLE>
Aggregate maturities of long-term debt are approximately as follows at July
31, 1998:
<TABLE>
<CAPTION>
Year ending July 31,
- --------------------
<S> <C>
1999 $ 1,319,060
2000 7,000,900
2001 1,040,800
2002 1,035,900
2003 1,034,600
Thereafter 2,022,789
------------
$ 13,454,049
------------
------------
</TABLE>
The Company is required to maintain certain levels of working capital, net
worth and cash flow ratios and may not pay any cash dividends under terms of
its credit agreement.
31
<PAGE>
NOTE H - OTHER LIABILITIES
Other liabilities consist of the following at July 31, 1998:
<TABLE>
<S> <C>
Deferred lease costs $ 981,331
Deferred rent 403,976
----------
$1,385,307
----------
----------
</TABLE>
Deferred lease costs arising from an acquisition represent the discounted
operating lease costs for excess plant capacity acquired at the acquisition
date totaling $994,593. The deferred lease cost is amortized over 74 months,
the remaining life of the lease. Aggregate maturities of deferred lease
costs are as follows at July 31, 1998:
<TABLE>
<CAPTION>
Year ending July 31,
--------------------
<S> <C>
1999 $ 159,100
2000 159,100
2001 159,100
2002 159,100
2003 159,100
Thereafter 185,831
----------
$ 981,331
----------
----------
</TABLE>
NOTE I - STOCKHOLDERS' EQUITY
1. COMMON STOCK
As of January 1998, the authorized number of shares of common stock was
increased from 5,000,000 shares to 10,000,000 shares.
2. PRIVATE PLACEMENT OF EQUITY
In April 1998, the Company completed a private placement of securities. The
offering consisted of 168 units, each unit consisting of 4,998 shares of
common stock and two-year warrants to purchase 1,000 shares of common stock
at $8.00 per share. The offering raised $4.2 million in gross proceeds of
which the Company received approximately $3.7 million after commissions and
expenses.
In connection with the private placement offering, the Company also provided
the underwriter with a warrant entitling the holder to purchase 80,000 shares
of common stock at $5.50 per shares, exercisable for five years.
NOTE J - COMMITMENTS AND CONTINGENCIES
1. Leases
The Company leases the majority of its manufacturing and office space and
certain equipment under terms of noncancelable operating leases.
32
<PAGE>
NOTE J - COMMITMENTS AND CONTINGENCIES - Continued
Future minimum lease payments under noncancelable operating leases as of July
31, 1998 are approximately as follows:
<TABLE>
<CAPTION>
Year ending July 31,
- --------------------
<S> <C>
1999 $1,065,900
2000 878,500
2001 855,900
2002 882,800
2003 891,500
Thereafter 782,800
----------
$5,357,400
----------
----------
</TABLE>
Rent expense, net of sublease income, under noncancelable operating leases
was approximately $510,500, $416,000 and $319,900 for the years ended July
31, 1998, 1997 and 1996, respectively.
2. CONSULTING AND NON-COMPETE AGREEMENTS
Certain former executives of a company acquired in a prior year entered into
consulting and non-compete agreements with the Company. The consulting
agreements have a term of five years and the non-compete agreements have a
term of ten years. Future payments under these agreements are as follows:
<TABLE>
<CAPTION>
Year ending July 31,
- --------------------
<S> <C>
1999 $122,500
2000 122,500
2001 107,500
2002 62,500
2003 62,500
Thereafter 166,700
--------
$644,200
--------
--------
</TABLE>
The expense associated with these agreements totaled $122,500, $122,500 and
$44,833 for the years ended July 31, 1998, 1997and 1996, respectively.
3. LITIGATION
The Company is engaged in various legal actions. In the opinion of
management, based upon advice of counsel, adequate accruals and settlements
are provided for in the consolidated financial statements and the ultimate
outcome of these actions will not have a material impact on the Company's
consolidated financial statements.
NOTE K - INCOME TAXES
The Company accounts for income taxes on the liability method as prescibed by
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (SFAS 109).
Income tax expense consists of the following for the year ended July 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current expense $462,700 $179,500 $279,016
Deferred expense 124,300 171,500 70,400
-------- -------- --------
$587,000 $351,000 $349,416
-------- -------- --------
-------- -------- --------
</TABLE>
33
<PAGE>
NOTE K - INCOME TAXES - Continued
The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows for the year ended July 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Tax at statutory rate $481,900 $293,800 $345,400
Nondeductible goodwill 108,400 61,000 50,000
State and foreign taxes 41,000 3,000 16,000
Foreign sales corporation (13,400) (24,400) -
Credits and net operating losses utilized (46,900) (4,400) (42,900)
Other 16,000 22,000 (19,084)
-------- -------- --------
$587,000 $ 351,000 $ 349,416
-------- -------- --------
-------- -------- --------
</TABLE>
The components of deferred taxes included in the balance sheet are as follows
at July 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax asset:
Accrued vacation and warranty $ 268,500 $ 112,000
Provision for bad debts 55,400 41,900
Accrued liabilities not paid 129,900 4,000
Inventory reserve and capitalized overhead 785,800 100,400
Foreign currency adjustment 5,400 3,800
---------- ----------
$1,245,000 $ 262,100
---------- ----------
---------- ----------
Deferred tax liability:
Excess of tax over book depreciation $ 880,900 $ 178,300
Deferred lease costs (333,600) -
---------- ----------
$ 547,300 $ 178,300
---------- ----------
---------- ----------
</TABLE>
NOTE L - STOCK OPTION PLAN
The Company implemented a new stock option plan in 1995 and has authorized a
total of 300,000 shares of common stock to be set aside for grants.
Additionally, options are outstanding under the old plan which expired July
31, 1994. The vesting and expiration dates of the stock options are at the
discretion of the Board of Directors.
34
<PAGE>
NOTE L - STOCK OPTION PLAN - Continued
The Company has adapted only the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). It applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its plans which does not
require recognition of compensation expense due to options being granted at
fair value on the date of grant. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed by SFAS 123, the
Company's net earnings and earnings per share would be reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net earnings
As reported $830,379 $499,276 $666,546
Pro forma $726,875 $420,005 $640,595
Earnings per common share
As reported - basic $ .30 $ .20 $ .26
Pro forma $ .26 $ .17 $ .25
As reported - diluted $ .28 $ .19 $ .25
Pro forma $ .24 $ .16 $ .14
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants made before 1995.
The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions for the
periods ending July 31, 1998, 1997 and 1996, respectively: dividend yields
are nil, expected volatility of 54, 52 and 40 percent; risk-free interest
rate of 6.2%; and expected option lives of 6.9, 7.8 and 6.6 years,
respectively. The weighted-average fair value of options granted during the
periods ending July 31, 1998, 1997 and 1996, for which the weighted average
exercise price equals the market price on the grant date was $4.88, $3.63 and
$2.36, respectively.
The following tables summarize information concerning currently outstanding
and exercisable stock options:
<TABLE>
<CAPTION>
Stock Options Outstanding Weighted-Average Exercise Price
------------------------- -------------------------------
<S> <C> <C>
Balance, August 1, 1995 151,000 $1.77
Granted 101,500 $4.39
Exercised - $ -
Expired/canceled (10,000) $4.50
-------
Balance, July 31, 1996 242,500 $2.75
Granted 125,000 $2.15
Exercised - $ -
Expired/canceled (21,000) $3.90
-------
Balance, July 31, 1997 346,500 $2.47
Granted 60,000 $4.75
Exercised (18,000) $1.66
Expired/canceled (12,000) $2.13
-------
Balance, July 31, 1998 376,500 $2.87
-------
-------
</TABLE>
35
<PAGE>
NOTE L - STOCK OPTION PLAN - Continued
<TABLE>
<CAPTION>
Weighted-Average
Number of Shares Remaining Contractual Weighted-Average
Range of Exercise Prices Outstanding Life in Years Exercise Price
- ------------------------ ---------------- --------------------- ----------------
<S> <C> <C> <C>
$1-$2 200,000 6.9 $1.70
$2-$3 40,500 8.3 $2.94
$3-$4 1,000 7.3 $3.25
$4-$5 125,000 8.1 $4.55
$5-$6 10,000 9.8 $5.88
-------
376,500
-------
-------
</TABLE>
<TABLE>
<CAPTION>
Number of Shares Weighted-Average
Range of Exercise Prices Exercisable Exercise Price
- ------------------------ ---------------- ----------------
<S> <C> <C>
$1-$2 127,000 $1.64
$2-$3 36,300 $2.96
$3-$4 400 $3.25
$4-$5 45,000 $4.50
-------
208,700
-------
-------
</TABLE>
NOTE M - EARNINGS PER SHARE
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share" which established standards
for computing and presenting earnings per share (EPS). This statement
simplified the standards for computing earnings per share previously found in
APB Opinion No. 15, "Earnings per Share", and makes them comparable to
international EPS standards. In accordance with SFAS No. 128, all
prior-period EPS data has been restated to conform with the provisions of the
statement.
Earnings per share are based on the average number of shares outstanding
during each period and income available to common shareholders. Earnings per
share assuming dilution are based on the assumption that outstanding stock
options and warrants were exercised.
The table below presents the information used to compute earnings per common
share, with and without dilution:
<TABLE>
<CAPTION>
For the Year Ended July 31, 1998
---------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Earnings per common share
Earnings available to common stockholders $ 830,379 2,801,431 $ .30
------
------
Effect of dilutive securities
Stock options - 154,339
Warrants - 33,688
---------- ---------
Earnings per common share
assuming dilution
Earnings available to common stockholders
and effect of assumed conversions $ 830,379 2,989,458 $ .28
---------- --------- ------
---------- --------- ------
</TABLE>
36
<PAGE>
NOTE M - EARNINGS PER SHARE - Continued
<TABLE>
<CAPTION>
For the Year Ended July 31, 1997
---------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Earnings per common share
Earnings available to common stockholders $ 499,276 2,547,240 $ .20
------
------
Effect of dilutive securities
Stock options - 108,807
---------- ---------
Earnings per common share
assuming dilution
Earnings available to common stockholders
and effect of assumed conversions $ 499,276 2,656,047 $ .19
---------- --------- ------
---------- --------- ------
<CAPTION>
For the Year Ended July 31, 1996
---------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Earnings per common share
Earnings available to common stockholders $ 666,546 2,547,240 $ .26
------
------
Effect of dilutive securities
Stock options - 78,848
---------- ---------
Earnings per common share
assuming dilution
Earnings available to common stockholders
and effect of assumed conversions $ 666,546 2,626,088 $ .25
---------- --------- ------
---------- --------- ------
</TABLE>
Warrants to purchase 168,000 shares of common stock at $8.00 per share were
not included in the computation of diluted EPS because the exercise prices
were greater than the average market price of the common shares.
NOTE N - GEOGRAPHIC CONCENTRATIONS
1 FOREIGN OPERATIONS
Included in the consolidated balance sheet at July 31, 1998 are the
identifiable assets of the Company's subsidiary, Revere Transducers Europe
B.V., which total approximately $5,787,000. This subsidiary is located in
the Netherlands, and had sales of $1,116,192 and operating profits of $73,731
for the year ended July 31, 1998.
2 EXPORT SALES
The Company sells its products throughout the world. Net export sales by
foreign geographic area are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Americas $2,477,000 $2,459,000 $2,756,000
Asia/Pacific 2,316,000 2,351,000 497,000
Europe/Africa 969,000 628,000 689,000
---------- ---------- ----------
$5,762,000 $5,438,000 $3,942,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
37
<PAGE>
NOTE O - BENEFIT PLANS
The Company has defined contribution 401(k) plans for each subsidiary. All
employees are eligible for participation upon completion of a waiting period.
The contribution expense associated with these plans totaled approximately
$111,600, $19,400 and $17,000 for the years ended July 31, 1998, 1997 and
1996, respectively.
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the requirements of Statement of Financial Accounting
Standards No. 107 - "Disclosure About Fair Value of Financial Instruments",
the following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
1. NOTES PAYABLE
The carrying amount approximates fair value because of the short maturities
of the notes payable and the fact that the term loan and working capital line
of credit originated in July 1998.
2. LONG-TERM DEBT
Quoted market prices for the same or similar issues or the current rates
offered to the Company for debt of the same remaining maturities are used to
estimate the fair value of the Company's long-term debt. The estimated fair
value approximated the carrying value at July 31, 1998.
NOTE Q - FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of comprehensive income and
its components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. This statement requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. The statement is
effective for fiscal years beginning after December 15, 1997. The Company
believes the adoption of SFAS No. 130 will have no significant impact on the
Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131) which establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes the
related disclosures about products and services, geographic areas, and major
customers. Provisions of SFAS 131 are effective for fiscal years beginning
after December 15, 1997. The Company believes the adoption of SFAS 131 will
have no significant impact on the Company's consolidated financial statements.
38
<PAGE>
PART III
The information required by ITEMS 9, 10, 11 AND 12 will be included in
the registrants proxy statement under the captions "Election of Directors,"
"Executive Officers," "Compensation," and "Principal Shareholders" and is
incorporated herein by reference. Such proxy statement will be filed within
120 days of the registrants fiscal year end, July 31, 1998.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
The following documents are filed herewith for informational purposes, but are
not part of this Annual Report, except as otherwise indicated.
2 (a) Acquisition Agreement and Plan of Merger dated July 21, 1997 among SI
Technologies, Inc., SI Acquisition Corporation, AeroGo, Inc.,
Kurtis V. Kosty, Peter J Berger, Stanley B. McDonald, Robert J.
Behnke and T. Evans Wyckoff (Incorporated by reference to the
current report on Form 8-K dated July 22, 1997)
2 (b) Acquisition Agreement and Plan of Merger dated April 12, 1996 among SI
Technologies, Inc., SI Acquisition Corporation, Evergreen Weigh,
Inc., Carl Harris and Ruth Harris (Incorporated by reference to
the current report on Form 8-K dated April 12, 1996)
2 (c) Acquisition Agreement and Plan of Merger dated February 12, 1998 among SI
Technologies, Inc., NV Technology, Inc. (a Washington
corporation), NV Technology, Inc. (a Nevada corporation), Marvin
Moist and Ted Dawson (Incorporated by reference to the current
report on Form 8-K dated February 13, 1998)
2 (d) Stock Purchase Agreement among Dobson Park Industries, Inc., HCHC, Inc., and SI
Technologies, Inc. dated as of July 10, 1998 (Incorporated by
reference to the current report on Form 8-K dated July 14, 1998)
2 (e) Acquisition Agreement and Plan of Merger among SI Technologies, Inc., SI
Acquisition of Delaware Corporation, Allegany, Inc. and Mark
Stern and Judy Stern dated as of July 10, 1998 (Incorporated by
reference to the current report of Form 8-K dated July 14, 1998)
3 (a) Certificate of Incorporation (Incorporated by reference to the same exhibit
number as the Company's Annual Report on Form 10-KSB for the
fiscal year ending July 31, 1993)
3 (b) By-Laws (1)
3 (c) Certificate of Amendment to the Certificate of Incorporation of SI
Technologies, Inc.(Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended
January 31, 1998)
4 (a) Specimen certificate evidencing shares of Common Stock (Incorporated by
reference to the same exhibit number as the Company's Annual
Report on Form 10-KSB for the fiscal year ending July 31, 1993)
4 (b) Form of Subscription Agreement Supplement incorporated in the Company's
April 1998 financing (Incorporated by reference to the Company's
Registration Statement on Form S-3 dated July 31, 1998)
4 (c) Form of Subscription Agreement Supplement incorporated by reference into
the Company's Subscription Agreement (Incorporated by reference
to the Company's Registration Statement on Form S-3 dated July
31, 1998)
4 (d) Form of Warrant issued in connection with the Company's April 1998 financing
(Incorporated by reference to the Company's Registration
Statement on Form S-3 dated July 31, 1998)
4 (e) Form of Placement Agent Warrant issued in connection with the Company's April 1998
financing (Incorporated by reference to the Company's
Registration Statement on Form S-3 dated July 31, 1998)
39
<PAGE>
4 (f) Registration Rights Agreement entered into by and between the Company and
participants in the Company's April 1998 financing (Incorporated
by reference to the Company's Registration Statement on Form S-3
dated July 31, 1998)
10 (a) 1994 Stock Option Plan (Incorporated by reference to the Company's Proxy Statement
for the annual meeting held January 19, 1995)
10 (b) Amended and Restated 1984-85 Stock Option Plan (Incorporated by reference to
the same exhibit number to the Company's Annual Report on Form
10-KSB for the fiscal year ending July 31, 1994)
10 (c) Lease between Halverson-Lindell and SI dated November 20, 1988, for the
premises located at 4611 South 134th Place, Tukwila, Washington.
(Incorporated by reference to exhibit 1 to the Company's Annual
Report on Form 10K for fiscal year ending July 31, 1989)
21 Subsidiaries of the Registrant
23 Consent of Grant Thornton to incorporation by reference of financial statements
into Registration Statement on Form S-8 and Form S-3
27 (a) Financial Data Schedule July 31, 1998
27 (b) Financial Data Schedule Restated for NV Technology merger
(b) Reports of Form 8-K
The Company filed a Current Report on Form 8-K dated July 14, 1998 announcing the
acquisition of Allegany, Inc., Revere Transducers, Inc. and
Revere Transducers Europe B.V. by the Company and containing the
related acquisition agreement and plan of merger and the stock
purchase agreement.
</TABLE>
(1) Incorporated by reference to the same exhibit number to the Company's
Registration Statement of Form S-1 (File No. 2-83781), as amended.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this to be signed on its
behalf by the undersigned, thereunto duly authorized.
SI TECHNOLOGIES, INC.
DATED: October 28, 1998 /s/ Rick A. Beets
--------------------------------------
Rick A. Beets, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed as of October 28, 1998 by the following persons
in the capacities indicated:
/s/ Rick A. Beets
--------------------------------------
Rick A. Beets, President, CEO and
Director
(Principal Executive Officer)
/s/ Paul V. Cavanaugh
--------------------------------------
Paul V. Cavanaugh, Chief Financial
Officer
(Principal Financial and Accounting
Officer)
/s/ Edward A. Alkire
--------------------------------------
Edward A. Alkire, Director, Secretary
/s/ Ralph E. Crump
--------------------------------------
Ralph E. Crump, Chairman of the Board,
Director, Treasurer
/s/ S. Scott Crump
--------------------------------------
S. Scott Crump, Director
/s/ D. Dean Spatz
--------------------------------------
D. Dean Spatz, Director
/s/ Heinz Zweipfennig
--------------------------------------
Heinz Zweipfennig, Director
41
<PAGE>
(a) EXHIBITS
The following documents are filed for informational purposes, but are
not part of this Annual Report, except as otherwise indicated.
21 Subsidiaries of the Registrant
23 Consent of Grant Thornton to incorporate by reference of financial
statements into Registration Statement
27 (a) Financial Data Schedule - Year ended July 31, 1998
27 (b) Financial Data Schedule - Restated for NV Technology merger
42
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
AeroGo, Inc.
Incorporated in the state of Washington
Allegany, Inc.
Incorporated in the state of Delaware
Evergreen Weigh, Inc.
Incorporated in the state of Washington
NV Technology, Inc.
Incorporated in the state of Nevada
Revere Transducers, Inc.
Incorporated in the state of Delaware
Revere Transducers Europe BV
Incorporated in the Netherlands
IDEAutomation International, Inc.
Incorporated in the Virgin Islands
AeroGo Export I
Incorporated in Guam
AeroGo Export II
Incorporated in Guam
43
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated October 23, 1998, accompanying the
consolidated financial statements included in the Annual Report of SI
Technologies, Inc. and subsidiaries on Form 10-KSB for the year ended July
31, 1998. We hereby consent to the incorporation by reference of said reports
in the Registration Statement of SI Technologies, Inc. in Form S-8 (File No.
2-92865, effective August 6, 1984) and Form S-3 (File No. 333-60421,
effective September 14, 1998).
/s/ Grant Thornton LLP
- -----------------------------
Grant Thornton LLP
Seattle, Washington
October 28, 1998
44
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<PAGE>
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<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 573,863
<SECURITIES> 0
<RECEIVABLES> 7,764,447
<ALLOWANCES> 466,134
<INVENTORY> 11,026,104
<CURRENT-ASSETS> 21,107,947
<PP&E> 10,303,598
<DEPRECIATION> 2,254,592
<TOTAL-ASSETS> 39,997,005
<CURRENT-LIABILITIES> 14,218,464
<BONDS> 0
0
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<COMMON> 35,471
<OTHER-SE> 11,675,474
<TOTAL-LIABILITY-AND-EQUITY> 39,997,005
<SALES> 23,829,033
<TOTAL-REVENUES> 23,829,033
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<TOTAL-COSTS> 13,672,379
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<INTEREST-EXPENSE> 950,601
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<TABLE> <S> <C>
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