UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: Commission file number:
March 1, 1998 0-3362
SI HANDLING SYSTEMS, INC.
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(Exact Name Of Registrant As Specified In Its Charter)
Pennsylvania 22-1643428
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(State Or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation)
600 Kuebler Road, Easton, Pennsylvania 18040
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(Address Of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 610-252-7321
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00 Per Share
(Title Of Class)
(1) Has the registrant 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 with the Commission? Yes.
(2) Has the registrant been subject to such filing requirements for the past
90 days? Yes.
(3) Number of shares of common stock, par value $1.00 per share, outstanding
as of May 5, 1998: 3,711,826.
(4) The aggregate market value of the voting stock held by non-affiliates as
of May 5, 1998 was: $46,446,000.
(5) Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Documents incorporated by reference: the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on July 28, 1998 incorporated
partially in Part III hereof.
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PART I
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Item 1. Business
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SI Handling Systems, Inc. (the "Company" or "SI") is a systems integrator
supplying automated materials handling systems to manufacturing, order
selection, and distribution operations. The systems are designed, sold,
manufactured, installed, and serviced by the Company, or by others for the
Company, at its direction, generally as labor-saving devices to improve
productivity and reduce costs. The Company's products are utilized to automate
the movement or selection of products and are often integrated with other
automated equipment, such as conveyors and robots. The Company's systems involve
both standard and specially designed components and include integration of
non-proprietary automated handling technologies so as to provide solutions for
its customers' unique materials handling needs. The Company develops and designs
computer control programs required for the efficient operation of the systems.
The Company's systems vary in configuration and capacity. Historically, system
prices across the Company's product lines have ranged from as low as $100,000 to
as high as $23,000,000. The Company derives much of its sales from companies in
the United States. Sales to companies in the United States as a percentage of
total sales during fiscal 1998, 1997, and 1996 were 95.6%, 97.4%, and 94.3%,
respectively.
The Company's backlog of orders at March 1, 1998 and March 2, 1997 was
$22,092,000 and $31,029,000, respectively. The rate of new orders for major
installations can vary substantially from month to month. Fluctuations in the
Company's sales and earnings will occur in the event of an increase or decrease
in major installations. The Company expects to fill, within the 1999 fiscal
year, all of the March 1, 1998 backlog indicated above.
Products
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Cartrac(R). Cartrac is a modular conveyor system which is used in a variety
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of applications. The product moves materials to and through robotic and other
automated manufacturing operations in the automotive, appliance, electronic, and
other industries. Its features include high speed movement, precise positioning
of workloads, independent control of carriers, and a broad range of size and
load capacity. These features enable materials to move rapidly to and between
operations, stopping precisely at the work stations, as opposed to continuously
moving production lines. Cartrac sales as a percent of total sales were 11.8%,
18.5%, and 32.6% for fiscal 1998, 1997, and 1996, respectively.
A system includes a set of parallel metal tracks and holding stations.
Carriers are propelled along the tracks by means of a spinning drive tube
located between the tracks which is in contact with a specially designed drive
wheel underneath the carrier. The speed of individual carriers can be changed by
control of the angle of the drive wheel under the carrier. This permits gentle
acceleration to speeds of up to 350 feet per minute and gentle deceleration to a
complete stop. The average speed of a carrier in the system is 200 feet per
minute.
Cartrac can be mounted on walls and ceilings as well as floors and is
suitable for installation in existing as well as new buildings. It is capable of
vertical as well as horizontal movement and of right angle turning, thus saving
space. Modular design also permits the system to be enlarged through the
addition of components when higher volume or expanded systems become necessary.
Cartrac has been installed in facilities in the United States, Europe,
Japan, Canada, Mexico, and Australia. Cartrac systems can also be combined with
the Company's automated storage and retrieval systems ("AS/RS"), and with the
Ordermatic order selection system, described below. A typical Cartrac system
takes six to nine months to design, manufacture, and install.
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The Company also offers a Mini-Cartrac(R) and a ROBOLITE Cartrac(R) system.
The Mini-Cartrac(R) system provides the key features of the Cartrac system in a
scaled-down version for the handling of loads up to 200 pounds. The ROBOLITE
Cartrac(R) system features an extruded aluminum frame that is lightweight and
modular. This provides for flexibility and simplicity when designing systems.
The ROBOLITE Cartrac system is extremely reliable as it has few moving
parts and requires little or no maintenance. ROBOLITE Cartrac offers extremely
accurate positioning and repeatability so it is ideally suited for robotic
assembly and robotic welding systems. ROBOLITE Cartrac offers a fast, accurate,
reliable transportation system with controlled acceleration and deceleration for
smooth operation with no vibration. The system can accommodate up to 500-pound
loads at varying speeds up to 180 feet per minute.
During fiscal 1998, the Company entered into a strategic alliance with a
European supplier of an overhead light-duty conveyor transportation product. The
by-product of this business relationship is the Company's Roborail(TM) spinning
tube conveyor. Similar in design and construction to the Robolite Cartrac(R)
System, the Roborail(TM) has a wide range of applications. In addition to
straight and curved track sections, other components can be added to provide
carrier accumulation, change carrier direction, accomplish elevation change, and
to merge or divert carriers on or off the main line. The system can accommodate
up to 100-pound loads at varying speeds and transport product either
horizontally or vertically.
Switch-Cart(R). Switch-Cart systems are used in a wide variety of
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applications in distribution centers, warehouses, and manufacturing plants.
Switch-Cart sales as a percent of total sales were 42.9%, 27.3%, and 2.5% for
fiscal 1998, 1997, and 1996, respectively.
A system consists of an endless tow chain which engages and pulls
four-wheel platform carts. Electronically activated switches, similar to
railroad track switches, automatically change the cart's destination or
sidetrack it onto a spur. The tow chain and switches are imbedded in the floor
so as not to interfere with vehicular or foot traffic. The carts can be manually
operated when not engaged with the towline. Installations range from relatively
simple one-loop systems to highly sophisticated computer directed multiple loop
applications.
Of varying dimensions and configurations, Switch-Cart systems are used in
manufacturing operations ranging from soft goods to heavy industrial products.
Switch-Carts can serve as a traveling workbench or assembly platform. They can
be loaded and unloaded automatically and carry products through ovens, freezers,
or spray areas. They can move goods in process, products, packages, or other
materials horizontally and, through the use of ramps or elevators, vertically.
The systems are used in newspaper operations for roll handling as well as
in all types of warehouses, and truck, rail, and freight terminals. They vary in
length from a few hundred feet to over seven miles and can connect
multi-building complexes. Switch-Cart systems can be integrated with other
automated materials handling systems such as high-rise storage and retrieval
systems and automated production equipment to increase the utilization of those
tools.
Because the Company's Lo-Tow(R) tow chain used with the system is
approximately three inches deep, Switch-Cart systems can be installed in
existing one-story and multi-story buildings as well as newly constructed
facilities.
A typical Switch-Cart system requires approximately six months to engineer,
manufacture, and install.
Itematic(R). Itematic is an automated order selection system which selects
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and delivers items to packing or assembly stations. The system has been used to
select or "pick" bottles, cassettes, automotive parts, and vials and can be used
for other items such as small boxes and cartons. In addition to applications in
the wholesale and chain drug field, Itematic is used for the selection of health
and beauty aids,
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cosmetics, electronic components and parts, automotive parts, hardware, jewelry,
contact lenses, and other products. The Itematic is a sophisticated system with
the capacity to select and deliver automatically a variety of products in less
than full case quantities.
Modular in design, Itematic consists of storage shelves, adjustable lanes,
picking heads, and belt takeaway conveyors. Operating under electronic control,
Itematic selects the required number of pieces from the appropriate lanes. The
unit can respond to commands in milli-seconds. Sequences can be pre-determined
by invoice, family groups, optimum time sequence, or any other criteria
depending upon user requirements.
The capacity of the system depends on the number of shelf modules and
picking heads. One picking head can serve from one to six shelf modules, and one
system may contain a number of picking heads.
The system is designed to provide greater speed and accuracy than manual or
less automated order selection methods and to reduce product damage, pilferage,
and labor costs.
A typical Itematic system requires approximately six to nine months to
engineer, manufacture, and install.
Ordermatic(R). Ordermatic is an automated order selection system used
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primarily in large distribution centers. The system is designed to handle
products packaged in full cartons or cases rather than unpacked items.
The system consists of a series of tiered storage lanes which are inclined
to allow cases to advance along controlled friction runners. Release mechanisms
at the end of each lane allow the cases to escape in controlled amounts onto
takeaway conveyors for delivery to shipping stations. The release mechanisms are
activated electronically by computer and the merchandise arrives at the shipping
area in the sequence desired. Various methods, ranging from manual to automated,
are used to replenish the machines. Ordermatic systems can select cartons in
various sizes ranging in weight from one to sixty pounds. Lane widths can be
adjusted to fit various sizes.
A typical Ordermatic requires approximately one year to design, fabricate,
and install. Because of the large size of a typical system, an Ordermatic is
normally installed in a new warehouse. Ordermatic systems are operating on three
continents in such diverse applications as dry grocery, frozen foods, general
merchandise, and electronic and automotive parts.
The Company furnishes computer software programs as part of the Ordermatic
system. The Company's software integrates its order selection equipment with
other warehouse functions such as product receipt, storage location, inventory
control, and shipping.
Accupic(TM). SI introduced the Accupic System in February of 1995, as an
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addition to the automated order selection systems product offering. Accupic is a
state-of-the-art, pick-to-light system. It is a paperless picking system that
facilitates the items currently being picked manually in distribution centers
and greatly improves picking accuracy. Bright red LED displays direct personnel
through the picking sequence automatically. Pick lists are eliminated,
throughput is increased, and errors are dramatically reduced. The system can be
used for less-than-full case picking and for full case picking.
Dispen-SI-matic(R). Dispen-SI-matic is an automated order selection system
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for less than full case picking. On August 22, 1989, the Company entered into a
renewable five-year licensing agreement with Knapp Logistik Automation
Gesellschaft GmbH ("Knapp"), an Austrian firm, to acquire the exclusive right to
sell, engineer, manufacture, and install the Dispen-SI-matic product throughout
North America.
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The licensing agreement, which is automatically renewable for additional
one-year terms, extended through August 22,1997; however, an amendment to the
original licensing agreement was made effective April 29, 1997. The amendment,
also with a term of five years and automatically renewable for additional
one-year terms, retains many of the salient features of the original licensing
agreement with the exception of a change from an exclusive right to a
non-exclusive right and a reduction in royalties due Knapp for sales of the
Dispen-SI-matic product by the Company.
The most important feature of the Dispen-SI-matic is that it can operate up
to ten times faster than the Itematic. The Itematic, however, can handle a wider
range of oddly shaped packages. Order Selection sales, which are comprised of
Ordermatic, Itematic, Accupic, and Dispen-SI-matic sales (including sales of
Automated Mail Order Pharmacy Systems to the SI/BAKER, INC. ("SI/BAKER") joint
venture), as a percent of total sales were 30.9%, 28.7%, and 40.9% for fiscal
1998, 1997, and 1996, respectively.
The Dispen-SI-matic is an A-frame modular structure style of automatic
picking machine. The machine is made up of individual blocks or modules, any
number of which can be integrated over the conveying belt at any desired
location. Every module contains a variable number of channels, with each channel
having its own dispensing unit. Product is either dispensed onto a central
gathering belt which in turn deposits product into a tote bin or is dispensed
directly into a tote bin. The number of orders which the automatic picking line
can handle at any one time depends on the size of the line.
The Company also offers a Dispen-SI-matic Medium Mover. This machine was
introduced because research of the movement data indicated that in some
applications it was not necessary to have a dispenser for each product in the
system. The concept was to have a single traveling dispenser serve numerous
channels of product, thereby decreasing the cost of a system and making the
system justifiable for smaller or slow-moving distribution operations.
The Dispen-SI-matic serves the same markets as the Itematic and the choice
of system is application specific. A typical Dispen-SI-matic system requires
approximately six to nine months to engineer, manufacture, and install.
The SI Steady Pack, a less-than-case load A-Frame order picking and packing
system, is a recent addition to the Company's order selection system product
offerings. Some of the design elements of the Steady Pack include an A-Frame
dispensing machine with media dispensers and channels, belt conveyor, bar code
scanner, rotary indexers, and packing stations. Definite advantages of the
Steady Pack are its speed of delivering products to packing stations, efficiency
in handling a wide range of order sizes, flat orientation and even spacing of
orders, and ease in replenishment of product. The system is highly accurate and
can process up to 150 pieces per minute.
Sortation Systems. The Company provides a high speed, computer-controlled
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tilt-tray sortation system for sorting general merchandise. The system is
available with either Flat Tray or Gullwing (an SI exclusive) carriers and
offers both Bull Gear and Caterpillar drives. The Company offers a unique
Electro Mechanical Tripper that does not require air for operation. SI sortation
systems blend manual and automated induction with bar code reading and computed
destination.
The Company also offers a family of "small parcel sorting systems." These
systems consist of a family of diverters which can sort packages up to ten
pounds in weight with a maximum size of 12" x 12" x 18". Sortation rates of up
to two to three pieces per second can be achieved with each sorter mechanism.
Compressed air is not required as SI utilizes its proven dispenser design which
only requires electric power to operate. These products complement SI's other
products in the order selection marketplace. For example, the SI robotic Gantry
Sorter allows companies with large volumes of mailings to take advantage of
substantial postal
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savings by automating their small parcel and letter sorting capability.
Reliable, high speed, accurate sorting is accomplished by electric area gantries
that work over a network of mail bags or tote boxes arranged in a dense grid
pattern. The Gantry Sorter has a PC-based control system, will accommodate
weighing and manifesting, can be expanded with additional sorting modules, and
is flexible in design. The system can handle flow rate of up to 3,600 pieces per
hour. Sortation sales as a percent of total sales were 2.9%, 0.2%, and 0.8% for
fiscal 1998, 1997, and 1996, respectively.
A typical sortation system requires approximately six to nine months to
engineer, manufacture, and install.
Automated Guided Vehicle ("AGV") Systems. See Note 8 of Notes to Financial
----------------------------------------
Statements for information on the rescinded sale of the Company's AGV systems
product line to Apogee Robotics, Inc. ("Apogee"). In mid-April, 1995, the
balance of the Company's AGV operations in Rochester Hills, Michigan, consisting
primarily of parts and service support, relocated to a more appropriately sized
facility in Sterling Heights, Michigan. With AGV's talented human resources
depleted, except for aftermarket capabilities, the Company has sought no new AGV
systems business, but has accepted and completed one new AGV systems contract
since October 6, 1994, the closing date of the failed sale of the AGV business
to Apogee. However, as the affirmed owner of the former BT Systems AGV
technology, the Company continues to assess alternatives to ascertain its best
strategic position for the product.
The Company has supplied Sideloading Forklift, Backloading Forklift, Unit
Load, Platform and Towing Automated Guided Vehicle Systems. Automated Guided
Vehicle Systems sales as a percent of total sales were 0.0%, 1.5%, and 1.6% for
fiscal 1998, 1997, and 1996, respectively.
Automated Storage/Retrieval Systems (AS/RS). During March, 1992 the Company
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concluded the acquisition of all of the outstanding capital stock of BT Systems,
Inc. ("BT Systems"). BT Systems also offered a wide range of capability in
Automated Storage and Retrieval Systems ("AS/RS") for which the Company had
already possessed a strong technology base following its acquisition of the
Hartman product lines three years earlier, coupled with its long standing
technical partnership with Ishikawajima Harima Industries (IHI) in Japan.
In June, 1989 the Company purchased certain assets of the SPS-Hartman
Systems Division from SPS Technologies. The acquired AS/RS products consist of
the Hartman(TM)unitload, Autocube(TM) miniload, man-aboard Hustler(TM) and
Autotrieve(TM) tote handling systems, along with the appropriate integrated
systems software. Existing customers, with well over 600 installed systems, are
fully supported by SI on their system expansion, service, and spare parts
requirements.
The acquired products and certain personnel were integrated into the
Company's existing Easton, PA facility where the functions of sales, system
engineering, system integration, manufacturing, installation, training, service
and spare parts are located.
This purchase represented an expansion of the product and system offerings
to the manufacturing, order selection, and distribution markets where the
Company is currently a leading supplier of automated computer integrated
materials handling systems. Automated Storage/Retrieval Systems sales as a
percent of total sales were 0.0%, 0.0%, and 0.6% for fiscal 1998, 1997, and
1996, respectively.
Computer Control Systems. The Company has the capability to offer a
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materials handling system fully integrated with an information processing system
to regulate the materials handling process. The Company has control programs for
all of its products and possesses the ability to integrate its proprietary
equipment in combination with purchased components such as conveyors to provide
a total materials handling system, including the computer operations for
controlling,
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supervising, and monitoring the movement, storage, and inventory of products in
the system.
The Company is a recognized IBM Business Partner and a member of the
Control System Integrators Association ("CSIA").
The Company's materials handling products operate under computer direction
through SI software designed to integrate the components of factory automation
systems, and when integrated with robots and other high technology components,
provide computer controlled flexible manufacturing systems ("FMS").
Mail Order Pharmacy. On March 1, 1993, the Company and Automated
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Prescription Systems, Inc. ("APS") of Pineville, Louisiana formed a joint
venture, SI/BAKER, INC. ("SI/BAKER"). SI/BAKER draws upon the automated
materials handling systems experience of the Company and the automated pill
counting and dispensing products of APS to provide automated pharmacy systems.
Each member company contributed $100,000 in capital to fund the joint venture.
Since 1976, the Company has provided order filling machines and systems to
the wholesale and retail distribution marketplace. Prior to fiscal 1994, the
Company installed automated pharmacy systems at five domestic sites and one
international site. The Company's proprietary products, Itematic and
Dispen-SI-matic, coupled with its strong computer integration skills, provide
its customers with state-of-the-art split case order filling systems which lower
the cost of distributing products.
APS, the leading manufacturer of automated tablet and capsule counting and
dispensing machines since 1972, has systems in place in retail, hospital, and
mail order pharmacies throughout the United States and Canada. APS also markets
robotic, automated prescription filling systems primarily for use in high volume
pharmacy operations. APS' products have lowered the costs of filling
prescriptions and increased the time available to the pharmacist for customer
counseling.
The joint venture, SI/BAKER, was formed to address the rapidly evolving
automation needs of managed care pharmacy operations which fill prescriptions by
mail for the clients of health care provision plans. The demographics of the
aging population in the United States and the emphasis on reduced health care
costs, of which prescription costs are a major part, is the driving force behind
the automation of mail order pharmacy operations and refill centers. The
industry is expected to continue to grow rapidly through the year 2000. SI/BAKER
focuses on providing technologically advanced, error-free, automated
prescription filling systems to this growing market. Information pertaining to
the SI/BAKER joint venture is included in Note 12 of Notes to Financial
Statements. See also Settlement of Litigation in Note 8 and Contingencies in
Note 9 of Notes to Financial Statements.
Product Warranty. The Company's products are warranted against defects in
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materials and workmanship for a specified period. The Company provides an
accrual for estimated future warranty costs based upon a percentage of cost of
sales. Historically, payments applied against the product warranty reserve have
not been material.
Marketing
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Sales of the Company's products in the United States and Canada are made
through the Company's own sales personnel and independent sales representative
firms specializing in selling materials handling equipment. Approximately 20
employees are engaged in sales, advertising, and marketing activities. The
Company's independent sales representatives, by agreement, may not sell systems
competitive with those of the Company.
The Company's systems are sold on a fixed price basis. Generally, contract
terms provide for progress payments and a portion of the purchase price is
withheld by the buyer until the system has been tested in place.
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The Company's customers include major manufacturers and distributors of a
wide variety of products, as well as the federal government (which accounted for
revenues of $17,513,000 in fiscal 1998), common carriers, and national retail
chains. A substantial amount of repeat business has been achieved through the
sale of additional systems to the same customer, additions to systems already
installed, and parts and service.
Competition
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The materials handling field includes many products, devices, and systems
competitive with those of the Company.
The Company's Cartrac system competes with various alternative materials
handling systems, including automated guided vehicle systems, automatic dispatch
cart, electrified monorail and pallet skid systems, power and free conveyor
systems, and belt and roller conveyor systems, along with two principal
competitors supplying equipment similar to the Company's Cartrac system;
however, the Company believes that the Cartrac system's advantages, such as
controlled acceleration and deceleration, high speed, individual carrier
control, and right angle turning, are significant distinctive features.
There are four principal competitors supplying equipment similar to the
Company's Switch-Cart system who are well established in terms of sales and
financial resources. Competition in the automatic dispatch cart field is
primarily in the areas of price, experience, and product performance.
The Itematic and Dispen-SI-matic systems compete primarily with manual
picking methods and the Dispen-SI-matic also competes with similar devices
provided by four other manufacturers, along with various alternative picking
technologies. They are general purpose "broken case" automated order selection
systems that have been sold for picking items of non-uniform configuration. The
Company believes that the Itematic and Dispen-SI-matic systems provide greater
speed and accuracy than manual methods and reduce damage, pilferage, and labor
costs. Pick-to-light systems are becoming more advanced and now provide higher
picking rates than they have in the past. In February of 1995, the Company
introduced its own pick-to-light system (Accupic) into the marketplace. There
are approximately five principal competitors and numerous smaller firms which
provide this type of system, and this has resulted in more competition to the
Company's own automated systems offerings.
The Company's tilt-tray sortation system (encompassing both Flat Tray and
Gullwing) competes primarily with other tilt-tray sortation systems, as well as
belt sorters and roller conveyor sorters. Tilt-tray sorters, as opposed to belt
and roller sorters, are generally used when higher throughput is required. Slat
and shoe sorters are increasing throughput capabilities and are beginning to
realize gains in market share as compared to tilt-tray sorters. SI introduced
the family of small parcel sorters to participate in the markets that distribute
small, light weight packages. These sorters will be sold mainly to companies in
the mail order merchandise industry. There are approximately twenty other
companies that supply sortation equipment.
The Company does not attempt to sell new AS/RS or AGV systems, but
concentrates its efforts on the parts, service, and rehab business. Due to the
decline in AGV systems sales in the U.S. over the past five years, competition
on the basis of price has increased in an attempt to garner all potential
business. There are approximately ten other companies that supply Automated
Storage/Retrieval Systems and approximately five other companies that supply
Automated Guided Vehicle Systems.
The Company knows of no product comparable to its Ordermatic system. There
are other approaches to mechanizing and automating the storage and order picking
functions in warehouses and distribution centers, but the Company believes that
none is as fully automated as Ordermatic.
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New technology is constantly being developed in the materials handling
field. As in the case of other technically oriented companies, there is a risk
that the Company's business may be adversely affected by technological advances
in the materials handling field; however, the Company believes that its
competitive advantages include its reputation in the materials handling field,
its patents, and its experience and proven capabilities in the markets in which
it concentrates. Its disadvantages include its relatively small size as compared
to certain of its larger competitors.
Raw Materials
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The Company has not been adversely affected by energy or raw materials
shortages. Its principal plant uses natural gas for heating and electricity to
operate its machinery. The principal raw material purchased by the Company is
steel which the Company purchases from various suppliers.
Patents And Licenses
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Significant design features of the Cartrac, Switch-Cart, Sortation, AGV,
Itematic, and Ordermatic systems are covered by patents or patent applications
in the United States.
The Company has approximately 70 patents with lives that expire through May
2012. The Company believes that it has approximately 20 significant patents.
These patents when used in conjunction with the remaining 50 patents enable the
Company to build quality automated materials handling systems. The perceived
significant patents have useful lives expiring through May 2012. The significant
patents pertain mainly to the following areas: vehicles and carrier design,
loading and unloading products, speed and precision control, track design and
assembly, accumulation of vehicles, and simultaneous order requests processing
equipment.
Of greater value than the protection provided by patents is the
intellectual knowledge assembled over many years of application experience into
a mass of accumulated technical expertise possessed by a stable and dedicated
work force.
During fiscal 1991, the Company entered into a 10-year licensing agreement
with Robotrac, Inc. (a company of Heico, Inc.) of Addison, Illinois whereby SI
markets and manufactures Robotrac products, systems, and services along with the
Company's complete line of materials handling solutions. Under the terms of the
licensing agreement, the Company pays royalties to Robotrac, Inc. based on net
sales of Cartrac products and services. Royalty expense relating to the Robotrac
licensing agreement for fiscal years 1998, 1997, and 1996 was $356,000,
$306,000, and $501,000, respectively.
During fiscal 1990, the Company entered into a renewable five-year
licensing agreement with Knapp to acquire the exclusive right to sell, engineer,
manufacture, and install the Dispen-SI-matic product throughout North America.
The licensing agreement, which is automatically renewable for additional
one-year terms, extended through August 22, 1997; however, an amendment to the
original licensing agreement was made effective April 29, 1997. The amendment,
also with a term of five years and automatically renewable for additional
one-year terms, retains many of the salient features of the original licensing
agreement with the exception of a change from an exclusive right to a
non-exclusive right and a reduction in royalties due Knapp for sales of the
Dispen-SI-matic product by the Company. Under terms of the licensing agreement,
the Company pays royalties to Knapp based on the number of dispensers per system
with a minimum payment applicable to each system. Royalty expense relating to
the Knapp licensing agreement for fiscal years 1998, 1997, and 1996 was $36,000,
$67,000, and $125,000, respectively.
On October 21, 1996, the Company entered into a renewable licensing
agreement with a firm engaged in the mail-order film processing business to
acquire the exclusive right to sell, engineer, manufacture, and install,
throughout North America, an automated mail sortation system which identifies
and sorts mail by
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appropriate zip codes. The licensing agreement, which is automatically renewable
for additional one-year terms, has an expiration date of September 30, 2001.
Under terms of the licensing agreement, the Company pays royalties to the firm
based on the number of individual mail-sorting machines sold, with a minimum
payment applicable to each year of the licensing agreement. Since the inception
of the licensing agreement, the Company has sold one individual mail-sorting
machine. Royalty expense relating to the automated mail sortation system
licensing agreement for fiscal 1998 and 1997 was $0 and $7,000, respectively.
In June 1979, the Company entered into an agreement with its Japanese joint
venture partner to acquire technology for totally integrated computer controlled
transport and storage systems. The joint venture was dissolved during fiscal
1989 and in return the Company acquired U.S. market rights to the Japanese joint
venture partner's products.
Product Development
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Product development costs, including patent expense and amortization, were
$287,000, $277,000, and $395,000 for fiscal years 1998, 1997, and 1996,
respectively. Development programs in fiscal 1998 included efforts directed at
improvements across various product lines, and efforts associated with the
introduction of the Henke light-duty conveyor, for which the Company has
recently developed a strategic alliance. Development programs in fiscal 1997
included enhancements to the Company's product controls and features and
improvements to the Sortation, Order Selection, and Cartrac product lines, with
particular emphasis aimed at new market applications of existing or acquired
technologies. The Company's development efforts in fiscal 1996 were concentrated
on the small parcel sortation system and the pick-to-light technology. The small
parcel sorter was an essential and significant component of a large systems
integration contract that neared completion at the end of fiscal 1996.
Employees
---------
The Company employs 159 persons in the United States. Its staff includes 6
executive employees, 106 office employees including salespersons, draftspersons
and engineers, and 47 production personnel. The production personnel were
unionized in January 1971 by the United Steelworkers of America. The current
union contract expires on April 23, 2000.
The Company provides life insurance, major medical insurance, retirement
programs, and paid vacation and sick leave benefits, and considers its relations
with employees to be satisfactory.
Item 2. Properties and Leases
- ------ ---------------------
The Company's principal offices and its manufacturing facilities are
located in a 173,000 square foot concrete, brick, and steel facility in Easton,
Pennsylvania. The original building was constructed in 1963 and has been
expanded several times, the latest having been a 30,000 square foot addition
completed in September 1981. The Company holds the deed to its facilities and
the 20 acre site on which they are located. Financing for the property,
including construction and subsequent additions, was arranged by Easton Area
Industrial Developers, Inc., a non-profit industrial promotion corporation
organized by the Two Rivers Area Chamber of Commerce, providing favorable
interest rates through the Pennsylvania Industrial Development Authority.
Substantially all of the machinery and equipment in the Easton location is
owned by the Company and is unencumbered.
10
<PAGE>
Item 3. Legal Proceedings
- ------ -----------------
The Company is presently engaged in certain legal proceedings which
management believes present no significant risk of material loss to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 1, 1998.
Information with respect to the executive officers of the Company is
contained in Part III hereof and is incorporated by reference in this Part I.
11
<PAGE>
PART II
-------
Item 5. Market For The Registrant's Common Stock And Related Security
- ------ -------------------------------------------------------------
Holder Matters
--------------
The Company's Common Stock trades on The Nasdaq Stock Market(sm) under the
symbol "SIHS." The high and low sales prices for the past two fiscal years are
as follows:
<TABLE>
<CAPTION>
Fiscal 1998* Fiscal 1997*
--------------- -----------------
High Low High Low
------ ------ ------- ------
<S> <C> <C> <C> <C>
First Quarter...............................13 9 3/4 7 1/6 4 1/3
Second Quarter..............................13 10 5/6 7 5/12 5 7/12
Third Quarter...............................15 1/4 10 5/6 10 6 3/4
Fourth Quarter..............................14 1/2 12 1/8 11 1/2 8 3/4
<FN>
*Adjusted for three-for-two stock split that was distributed in November 1997.
</FN>
</TABLE>
The Company paid cash dividends of 6 2/3 cents per share in fiscal 1998 and
1997, after adjustment for the three-for-two stock split that was distributed in
November 1997.
The number of shareholders of the Company's Common Stock at March 1, 1998
was 1,509.
The closing market price on May 22, 1998 was $14.00.
Item 6. Selected Financial Data
- ------ -----------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
Fiscal Year Ended 3/01/98 3/02/97 3/03/96 2/26/95 2/27/94
- ----------------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales......................... $47,631 24,000 25,786 28,631 29,282
Net earnings (loss)*.............. 2,612 2,053 1,625 (1,468) 206
Basic earnings (loss) per share** .70 .56 .44 (.40) .06
Diluted earnings (loss) per
share**........................ .70 .55 .44 (.40) .06
Total assets...................... 22,219 16,547 12,570 13,136 13,204
Long-term liabilities............. 216 167 150 665 137
Cash dividends per share***....... .07 .07 .04 .04 .04
<FN>
* Fiscal 1995 included approximately $525,000 of expenses relating to the
rescinded Apogee transaction (see Note 8 of Notes to Financial Statements),
$1,700,000 of losses associated with the AGV product line, and $190,000 in
corporate restructuring charges. Fiscal 1996 includes approximately
$436,000 of income relating to the rescinded Apogee transaction.
** On October 14, 1997, the Board of Directors declared a three-for-two stock
split that was distributed on November 10, 1997 to shareholders of record
on October 27, 1997. On July 18, 1995, the Board of Directors declared a
three-for-two stock split that was distributed on August 11, 1995 to
shareholders of record on July 31, 1995. Basic earnings (loss) per share
for all periods presented reflect the three-for-two stock splits and are
based on the weighted average number of shares outstanding. Diluted
earnings (loss) per share for all periods presented reflect the three-for-
two stock splits and are based on the weighted average number of shares
outstanding and equivalent shares from dilutive stock options and phantom
stock units.
*** Adjusted from 10 cents per share for the three-for-two stock splits that
were distributed in November 1997 and August 1995.
</FN>
</TABLE>
12
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------ ---------------------------------------------------------------
Results Of Operations
---------------------
Business Unit Structure
- -----------------------
The Company's operating structure is in the form of five distinct business
units. The business unit concept has created focused business elements where
objectives and performance measures have been established and can be evaluated,
producing a synergistic impact on the total corporate entity. The units consist
of two that possess the Company's products and which have responsibility for
marketing, development, and application of those products. The Warehousing &
Distribution Systems ("WDS") unit possesses Order Selection products such as
Dispen-SI-matic, Accupic, Itematic, and Ordermatic, along with various sortation
systems offerings, while the Production & Assembly Systems ("PAS") unit offers
Switch-Cart, Cartrac, and Automated Storage/Retrieval Systems to its markets.
The Manufacturing & Assembly Services ("MAS") unit provides manufacturing,
inventory procurement and control service, on a competitive basis, to WDS and
PAS and also seeks to sell manufacturing service to markets outside the
materials handling arena. The Customer & Software Services ("CSS") unit is
multi-faceted, providing customer services principally in the materials handling
aftermarket area, as well as software and controls engineering to WDS and PAS,
on a competitive basis, or to other customers outside the traditional materials
handling market. A fifth business unit, Corporate Services, provides accounting,
general and corporate services, on a fee basis, to the other business units and
also derives some of its income by assessing a royalty on the aftermarket
business activity of CSS. Each of the units has an approved plan against which
its performance is monitored and measured.
Liquidity And Capital Resources
- -------------------------------
The Company's cash and cash equivalents decreased to $752,000 during fiscal
1998 from $1,852,000 at the end of fiscal 1997. The decrease resulted from cash
used by operating activities totaling $5,150,000 (principally due to increased
working capital needs resulting from the growth in sales), building improvements
and purchases of capital equipment of $492,000, the repayment of long-term debt
of $13,000, and the payment of $248,000 in cash dividends to shareholders.
Partially financing these uses were the net sales of short-term investments of
$3,741,000, borrowings of $1,000,000 under the revolving credit facility, and
proceeds of $59,000 from the sale of common stock in connection with the
employee incentive stock option plan. Funds provided by operating activities in
fiscal 1997 and 1996 were $2,553,000 and $4,049,000, respectively.
The Company has a $5,000,000 committed revolving credit facility which is
secured by a lien position on accounts receivable, land, and buildings and
contains various restrictive covenants relating to additional indebtedness,
asset acquisitions or dispositions, and maintenance of certain financial ratios.
The Company was in compliance with all covenants during fiscal 1998. Currently,
the committed revolving credit facility has an expiration date of August 31,
2000. The Company had borrowings under the committed revolving credit facility
during the fourth quarter of fiscal 1998. The highest level of borrowing during
this time period was $2,140,000. The Company repaid its outstanding debt under
the committed revolving credit facility on March 2, 1998.
On March 4, 1996, SI/BAKER, INC. ("SI/BAKER") established a $2,500,000 Line
of Credit Facility (the "Facility") with its principal bank (the "Bank"). Under
terms of the Facility, SI/BAKER's parent companies, SI Handling Systems, Inc.
and Automated Prescription Systems, Inc., have each provided a limited guarantee
and surety in the amount not to exceed $1,000,000 for a combined guarantee of
$2,000,000 to the Bank for the payment and performance of the related note,
including any further renewals or modifications of the Facility. During fiscal
1998, the Bank increased the borrowing availability to $3,000,000 and extended
the
13
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------ ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
expiration date of the Facility. As of February 28, 1998, SI/BAKER's related
debt outstanding under the Facility was $900,000. SI/BAKER intends to satisfy
the note and thereby release the parent companies' guarantees during the second
quarter of fiscal 1999. The Facility has an expiration date of August 31, 1998.
During fiscal 1995, the Company announced the sale of its Automated Guided
Vehicle ("AGV") systems product line to Apogee Robotics, Inc. ("Apogee").
Litigation regarding the closing ensued between the Company and Apogee; however,
the Company negotiated a Settlement Agreement during fiscal 1996 with Apogee
which provided the following: during fiscal 1996, the Company paid Apogee
$150,000 and returned the 100,000 Apogee preferred shares that the Company held;
Apogee transferred any right, title or interest it may have had in the Company's
AGV assets to the Company and disclaimed any interest in the assets; and the
parties released all claims that they may have had against each other.
During fiscal 1995, net expense of $525,000 associated with the rescinded
sale transaction and the AGV product line were included on the Company's
statement of operations. During fiscal 1996, the Company recognized net income
of $436,000 associated with the settlement of the rescinded sale transaction.
The net income included the impact of the favorable and expeditious resolution
of the Apogee dispute where the terms and legal costs associated with the
settlement were substantially more favorable than provided in the prior year.
On October 14, 1997, the Board of Directors declared a three-for-two stock
split that was distributed on November 10, 1997 to shareholders of record on
October 27, 1997. On July 18, 1995, the Board of Directors of the Company
declared a three-for-two stock split that was distributed on August 11, 1995 to
the shareholders of record on July 31, 1995. The purpose of the stock splits was
to increase the number of outstanding shares and broaden ownership and
availability of the Company's common stock.
The Company anticipates that its financial resources consisting of its
current assets, anticipated cash flow, and the available revolving credit
facility will adequately finance its operating requirements in the foreseeable
future.
The Company plans to consider expansion opportunities as they arise,
although ongoing operating results of the Company, the economics of the
expansion, and the circumstances justifying the expansion will be key factors in
determining the amount of resources the Company will devote to further
expansion. At this time, the Company does not have any material capital
commitments.
Results Of Operations - 1998 Compared To 1997
- ---------------------------------------------
The Company's net earnings for fiscal 1998 were $2,612,000 compared to net
earnings of $2,053,000 for fiscal 1997.
Backlog at the end of fiscal 1998 was $22,092,000 with the majority of the
backlog pertaining to Switch-Cart and Dispen-SI-matic contracts. During fiscal
1998, the Company was the recipient of orders totaling approximately $38.7
million. The Defense Logistics Agency of the United States government exercised
an option for a $6.6 million addition to the prime mechanization contract it
awarded the Company in September 1996. Several contract options were exercised
to expand the scope of the material handling and storage system at the
Distribution Operations Center of the Defense Distribution Depot located in Red
River, Texas. The contract, having a current backlog of approximately $4.3
million and expected to be completed during the second half of fiscal 1999, is
the largest in the Company's history and totals approximately $23.2 million.
14
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------ ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------------------
Results Of Operations - 1998 Compared To 1997 (Continued)
- ---------------------------------------------
Net sales of $47,631,000 for fiscal 1998 increased 98.5% compared to net
sales of $24,000,000 for fiscal 1997. The sales increase in fiscal 1998 is
attributed primarily to a larger backlog of orders entering fiscal 1998
($31,029,000 versus a $10,488,000 backlog beginning fiscal 1997). The largest
increases in sales occurred in the Switch-Cart and Order Selection product
lines. Switch-Cart sales rose approximately $13.8 million to $20.4 million,
while Order Selection sales rose $7.9 million to $14.7 million. The increase in
the Switch-Cart product line was primarily attributable to progress made on the
contract, which includes a high degree of ancillary products, with the Defense
Logistics Agency. The increase experienced in the Company's Order Selection
product line was primarily attributable to progress relating to several large
contracts received prior to the start of fiscal 1998, with approximately 60% of
the current fiscal year Order Selection revenues attributable to such contracts.
Contributing to the lower backlog at the beginning of fiscal 1997, and hence
sales in fiscal 1997, were delays by prospective customers, particularly those
interested in Order Selection Systems, in signing contracts due to expanding
project scope and to merger and acquisition interference occurring in a targeted
market.
Gross profit as a percentage of sales was 21.3% for fiscal 1998 compared to
29.9% for fiscal 1997. The decrease in the gross profit percentage for fiscal
1998 was primarily attributable to a higher content of ancillary products with
lower margins in contracts currently in progress versus prior contracts
containing a high degree of higher margin proprietary products. The attainment
of the higher gross profit percentage during fiscal 1997 was primarily
attributable to the favorable performance on several contracts initiated in
prior fiscal years that were completed during fiscal 1997 as well as to a higher
content of proprietary products in contracts then in progress.
Selling, general, and administrative expenses of $6,672,000 were higher by
$1,198,000 in fiscal 1998 than in fiscal 1997. The increase in selling, general,
and administrative expenses is primarily attributable to (1) increases of
approximately $750,000 of those expenses based on revenue and profit
performance, including salary rate adjustments, commissions, and costs related
to the Company's incentive-based compensation plan, (2) increases of
approximately $225,000 in consulting and shareholder relations expenditures
associated with increasing the visibility of the Company and attaining the ISO
9001 quality certification designation, and (3) increases of approximately
$150,000 in costs associated with product promotion and sales efforts aimed at
expanding the Company's customer base of business.
Product development costs for fiscal 1998 were relatively the same as such
costs for fiscal 1997. Development programs in fiscal 1998 included efforts
directed at improvements across various product lines, and efforts associated
with the introduction of the Henke light-duty overhead transportation product,
for which the Company has recently developed a strategic alliance. Development
programs in fiscal 1997 included enhancements to the Company's product controls
and features and improvements to the Sortation, Cartrac, and Order Selection
product lines, with particular emphasis aimed at new market applications of
existing or acquired technologies.
Interest income of $123,000 was lower by $113,000 in fiscal 1998 than in
fiscal 1997. The decrease in interest income is primarily attributable to the
lower level of funds available for short-term investments during fiscal 1998.
15
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------ ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------------------
Results Of Operations - 1998 Compared To 1997 (Continued)
- ---------------------------------------------
Equity in income of joint venture represented the Company's proportionate
share of its investment in SI/BAKER which is being accounted for under the
equity method. The favorable variance of $345,000 for fiscal 1998 in the equity
in income of joint venture was attributable to SI/BAKER's growth in revenues to
$20.0 million, as compared to fiscal 1997 revenues of $17.4 million and growth
in gross profit percentage to 16.0%, as compared to a fiscal 1997 gross profit
percentage of 12.6%, as well as to reductions of (1) $260,000 in product
development costs and (2) $168,000 in selling, general, and administrative
expenses. The increase in revenues is primarily attributable to SI/BAKER's
larger backlog of orders entering fiscal 1998 and customer requirements for job
completion during fiscal 1998. Contributing to the lower gross profit percentage
attained during fiscal 1997 were a combination of several factors including
competitively restrained prices, royalty costs, and cost overruns associated
with both first-time products and difficulties in executing and concluding
several contracts as additional costs became necessary to meet contractual
throughput requirements. SI/BAKER's fiscal 1997 product development costs were
associated with the BK2000 automated pharmacy system product line, while fiscal
1997 selling, general, and administrative expenses were impacted unfavorably by
legal costs associated with the settled patent infringement litigation.
Partially offsetting the favorable variance were increases in fiscal 1998 of (1)
$104,000 in revenue-based royalty costs due to the parent companies and (2)
$112,000 in interest expense related to bank borrowings to fund short-term
working capital requirements.
The favorable variance of $67,000 in other income, net, is primarily
attributable to an increase of $52,000 in royalty income related to the SI/BAKER
joint venture.
The Company incurred income tax expense of $1,490,000 during fiscal 1998.
Income tax expense for fiscal 1998 was generally recorded at statutory federal
and state tax rates. During fiscal 1997, the Company did not recognize any
income tax expense due to the recognition of previously unrecognized deferred
tax assets which were anticipated to be realizable due to the current and
projected profitability of the Company.
Results Of Operations - 1997 Compared To 1996
- ---------------------------------------------
The Company's net earnings for fiscal 1997 were $2,053,000 compared to net
earnings of $1,625,000 for fiscal 1996.
Backlog at the end of fiscal 1997 was $31,029,000 with the majority of the
backlog pertaining to Switch-Cart and Dispen-SI-matic contracts. During the
second half of fiscal 1997, the Company was the recipient of three large orders.
The first contract was a $16.9 million prime mechanization contract with the
Defense Logistics Agency for the Army Distribution Depot in Red River, Texas.
This contract, the largest in the Company's history, will take approximately two
years to complete. The second contract, totaling approximately $3.7 million,
engaged the Company to automate the distribution process at one of the leading
manufacturers of vitamins in the health and beauty aids field. This project
became operational during fiscal 1998. The third contract, totaling
approximately $2.4 million, engaged the Company to automate the distribution
process at one of the largest wholesale suppliers in the pharmaceutical
industry. This project became operational during fiscal 1998.
16
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------ ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results Of Operations - 1997 Compared To 1996 (Continued)
- ---------------------------------------------
Net sales of $24,000,000 for fiscal 1997 decreased 6.9% compared to net
sales of $25,786,000 for fiscal 1996. The sales decrease in fiscal 1997 was
attributed primarily to a smaller backlog of orders entering fiscal 1997
($10,488,000 versus a $16,665,000 backlog beginning fiscal 1996). The largest
declines in sales occurred in the Cartrac and Order Selection product lines. The
decline of approximately $3.7 million in the Order Selection product line was
primarily attributable to the prior year comparable period containing revenues
for progress relating to a large contract which encompassed a small parcel
sortation system. Also, the decline of approximately $4.0 million experienced in
the Company's Cartrac product line was similar to the above mentioned decline
associated with the Order Selection product line whereby progress relating to
two large automotive contracts, subsequently completed by the end of fiscal
1996, resulted in higher revenues. Contributing to the lower backlog at the
beginning of fiscal 1997, and hence sales in fiscal 1997, were delays by
prospective customers, particularly those interested in Order Selection Systems,
in signing contracts due to expanding project scope and to merger and
acquisition interference occurring in a targeted market. Partially offsetting
the declines mentioned above was an increase in sales of approximately $5.9
million of the Company's Switch-Cart product, principally relating to
performance on contracts received during the fourth quarter of fiscal 1996 and
the first quarter of fiscal 1997. During fiscal 1996, the Company's Switch-Cart
product line accounted for an insignificant amount of sales revenues.
Gross profit as a percentage of sales was 29.9% for fiscal 1997 compared to
24.6% for fiscal 1996. The increase in the gross profit percentage for fiscal
1997 was primarily attributable to the favorable performance on several
contracts initiated in prior fiscal years that were completed during fiscal 1997
as well as to a higher proportion of contracts in progress in fiscal 1997 that
contained a large amount of higher margin proprietary products compared to
contracts containing a high degree of ancillary products. Partially offsetting
the increase in the gross profit percentage were additional contract costs
arising from first-time design inefficiencies relating to the Company's
integration of new technology from a licensee for applications in distribution
operations. Also contributing to the lower gross profit percentage in fiscal
1996 were primarily two factors: difficulties in executing and concluding
several AGV systems contracts as additional costs became necessary to meet
contractual throughput and durability requirements and higher costs associated
with first-time design inefficiencies relating to the Company's new small parcel
sortation system aimed at improvements to mail order distribution operations.
Selling, general, and administrative expenses of $5,474,000 were higher by
$321,000 in fiscal 1997 than in fiscal 1996. The increase in selling, general,
and administrative expenses was due primarily to costs associated with product
promotion and sales efforts in response to increased quoting activities and
which were aimed at expanding the Company's customer base of business along with
shareholder relations expenditures associated with increasing the visibility of
the Company. Also contributing to the lower selling, general, and administrative
expenses in fiscal 1996 was the reversal of accrued legal fees provided in
fiscal 1995 that were no longer required due to the settlement of the Apogee
litigation.
During fiscal 1996, the Company recognized net income of $436,000
associated with the AGV Asset Purchase Agreement. The net income resulted from
the reversal of accrued liabilities, in addition to the legal fees mentioned
above, no longer required due to the settlement of the Apogee litigation during
fiscal 1996. The Company incurred no expense or income related to the AGV Asset
Purchase Agreement during the comparable fiscal 1997 period.
17
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------ ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results Of Operations - 1997 Compared To 1996 (Continued)
- ---------------------------------------------
Product development costs of $277,000 were lower by $118,000 in fiscal 1997
than in fiscal 1996. Development programs in fiscal 1997 included enhancements
to the Company's product controls and features and improvements to the
Sortation, Order Selection, and Cartrac product lines, with particular emphasis
aimed at new market applications of existing or acquired technologies.
Development programs in fiscal 1996 included improvements to the Order Selection
and Sortation product lines, with particular emphasis aimed at new technologies
to provide pick-to-light and small parcel sortation systems where orders had
already been received or were imminent.
Interest income of $236,000 was higher by $61,000 in fiscal 1997 than in
fiscal 1996. The increase in interest income was primarily attributable to the
higher level of funds available for short-term investments during fiscal 1997.
Equity in income of joint venture of $76,000 and $279,000 in fiscal 1997
and 1996, respectively, represents the Company's proportionate share of its
investment in SI/BAKER, INC. which is being accounted for under the equity
method. Despite the growth in revenues to $17.4 million as compared to fiscal
1996 revenues of $9.4 million, the unfavorable variance for fiscal 1997 in the
equity in income of joint venture was attributable to a combination of several
factors including a decline in the gross profit percentage to 12.6%, as compared
to a fiscal 1996 gross profit percentage of 24.0%, as well as to increases of
(1) $329,000 in selling, general, and administrative expenses, (2) $321,000 in
revenue-based royalty costs due to the parent companies, and (3) $92,000 in
product development costs. The increase in revenues is attributable to
SI/BAKER's larger backlog of orders entering fiscal 1997 and progress made on
several orders received during fiscal 1997. Contributing to the lower gross
profit percentage attained during fiscal 1997 were a combination of several
factors including competitively restrained prices, royalty costs, and costs
overruns associated with both first-time products and difficulties in executing
and concluding several contracts as additional costs became necessary to meet
contractual throughput requirements. Selling, general, and administrative
expenses for fiscal 1997 were impacted unfavorably by legal costs associated
with the settled patent infringement litigation and those expenses based on
revenue performance, including commissions. SI/BAKER's fiscal 1997 product
development costs were associated with the BK2000 automated pharmacy system
product line, while fiscal 1996 product development costs included efforts
directed at both the BK6000 and BK2000 automated pharmacy system product lines.
Partially offsetting the unfavorable variance was an increase in fiscal 1997 of
$128,000 in other income, net, primarily relating to royalty income.
The favorable variance of $167,000 in other income, net, was primarily
attributable to an increase of $160,000 in royalty income related to the
SI/BAKER, INC. joint venture.
During fiscal 1997, the Company did not recognize any income tax expense;
however, it recognized income tax expense of $212,000 during fiscal 1996. Income
tax expense for fiscal 1997 and 1996 were less than the statutory rate due to
the recognition of previously unrecognized deferred tax assets which are
anticipated to be realizable due to the current and projected profitability of
the Company.
18
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------ ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Year 2000
- ---------
The Year 2000 issue relates to the inability of computer systems,
microprocessors, and other electronic devices to deal appropriately with dates
on or after January 1, 2000. The Company has assembled a team of internal staff
to oversee the matter and is underway in completing its Year 2000 assessment.
The Company has recently upgraded its internal business system to address the
Year 2000 issue and has initiated discussions with its suppliers, financial
institutions, and other organizations to ensure that those parties have
appropriate plans to remediate Year 2000 issues where their systems impact the
Company's operations. The scheduled completion date for the Company's efforts to
address the Year 2000 issue is July 1999. Management presently believes that the
Year 2000 issue will not have a material impact on the Company's earnings or its
ability to conduct its business. However, there can be no assurance that the
systems of other organizations that impact the Company's operations also will be
made compliant or that any such failure in compliance by another company would
not have an adverse effect on the Company's operations.
Cautionary Statement
- --------------------
Certain statements contained herein are not based on historical fact and
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Among other things, they regard the Company's
earnings, liquidity, financial condition, and certain operational matters. Words
or phrases denoting the anticipated results of future events, such as
"anticipate," "believe," "estimate," "expect," "may," "will likely," "are
expected to," "will continue," "project," and similar expressions that denote
uncertainty, are intended to identify such forward-looking statements. The
Company's actual results, performance, or achievements could differ materially
from the results expressed in, or implied by, such "forward-looking statements":
(1) as a result of risks and uncertainties identified in connection with those
forward-looking statements, including those factors identified herein; (2) as a
result of factors over which the Company has no control, including the strength
of domestic and foreign economies, sales growth competition, and certain cost
increases; or (3) if the factors on which the Company's conclusions are based do
not conform to the Company's expectations.
19
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
I N D E X
---------
o Independent Auditors' Report.
o Financial Statements:
Balance sheets, March 1, 1998 and March 2, 1997.
Statements of operations for the years ended March 1, 1998, March 2,
1997, and March 3, 1996.
Statements of stockholders' equity for the years ended March 1, 1998,
March 2, 1997, and March 3, 1996.
Statements of cash flows for the years ended March 1, 1998, March 2,
1997, and March 3, 1996.
Notes to financial statements.
o Schedule for the years ended March 1, 1998, March 2, 1997, and March 3,
1996:
II - Valuation and qualifying accounts
o All other schedules are omitted as the required information is inapplicable
or the information is presented in the financial statements or related
notes.
20
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
SI Handling Systems, Inc.:
We have audited the financial statements of SI Handling Systems, Inc. as listed
in the accompanying index. In connection with our audits of the financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule 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 financial position of SI Handling Systems, Inc. as of
March 1, 1998 and March 2, 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended March 1, 1998, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Allentown, PA
April 30, 1998
21
<PAGE>
SI HANDLING SYSTEMS, INC.
Balance Sheets
March 1, 1998 and March 2, 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents, principally
time deposits.............................. $ 752 1,852
Short-term investments....................... - 3,741
------ ------
Total cash, cash equivalents, and
short-term investments................. 752 5,593
------ ------
Receivables:
Trade........................................ 8,830 3,900
Notes and other receivables.................. 51 719
------ ------
Total receivables.......................... 8,881 4,619
------ ------
Costs and estimated earnings in excess
of billings.................................. 6,774 1,640
------ ------
Inventories:
Finished goods and work-in-process........... 1,578 1,151
Raw materials................................ 920 814
------ ------
Total inventories.......................... 2,498 1,965
------ ------
Deferred income tax benefits.................... 435 372
Prepaid expenses and other current assets....... 162 173
------ ------
Total current assets....................... 19,502 14,362
------ ------
Property, plant and equipment, at cost:
Land......................................... 27 27
Buildings and improvements................... 3,387 3,358
Machinery and equipment...................... 4,180 3,717
------ ------
7,594 7,102
Less: accumulated depreciation.............. 6,131 5,801
------ ------
Net property, plant and equipment.......... 1,463 1,301
------ ------
Deferred income tax benefits.................... 175 214
Investment in joint venture..................... 1,027 606
Other assets, at cost less accumulated
amortization of $78 in 1998 and
$67 in 1997.................................. 52 64
------ ------
Total assets............................... $22,219 16,547
====== ======
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
SI HANDLING SYSTEMS, INC.
Balance Sheets
March 1, 1998 and March 2, 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Liabilities And Stockholders' Equity
- ------------------------------------
Current liabilities:
Revolving credit loan payable to bank........... $ 1,000 -
Current installments of long-term debt.......... 8 12
Accounts payable................................ 4,044 2,056
Customers' deposits and billings in excess
of costs and estimated earnings............... 2,218 2,752
Accrued salaries, wages, and commissions........ 1,495 778
Income taxes payable............................ 380 442
Accrued royalties payable....................... 432 427
Accrued other liabilities....................... 960 870
------ ------
Total current liabilities................... 10,537 7,337
------ ------
Long-term liabilities:
Long-term debt, excluding current installments:
Mortgage payable.............................. 26 35
------ ------
Total long-term debt........................ 26 35
Deferred compensation........................... 190 132
------ ------
Total long-term liabilities................. 216 167
------ ------
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued 3,711,826 shares
in 1998 and 3,690,327 shares in 1997.......... 3,712 3,690
Additional paid-in capital...................... 2,645 2,522
Retained earnings............................... 5,109 2,831
------ ------
Total stockholders' equity.................. 11,466 9,043
------ ------
Total liabilities and stockholders' equity... $22,219 16,547
====== ======
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
SI HANDLING SYSTEMS, INC.
Statements Of Operations
Years Ended March 1, 1998, March 2, 1997, and March 3, 1996
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales............................... $ 47,631 24,000 25,786
Cost of sales........................... 37,488 16,823 19,434
------ ------ ------
Gross profit on sales................ 10,143 7,177 6,352
------ ------ -------
Selling, general and administrative
expenses............................. 6,672 5,474 5,153
Net income associated with
the AGV Asset Purchase Agreement..... - - ( 436)
Product development costs............... 287 277 395
Interest expense........................ 20 12 17
Interest income......................... ( 123) ( 236) ( 175)
Equity in income of joint venture....... ( 421) ( 76) ( 279)
Other income, net....................... ( 394) ( 327) ( 160)
------ ------ ------
6,041 5,124 4,515
------ ------ ------
Earnings before income taxes............ 4,102 2,053 1,837
Income tax expense...................... 1,490 - 212
------ ------ ------
Net earnings......................... $ 2,612 2,053 1,625
====== ====== ======
Basic earnings per share*............... $ .70 .56 .44
========= ====== ======
Diluted earnings per share*............. $ .70 .55 .44
========= ====== ======
<FN>
* On October 14, 1997, the Board of Directors declared a three-for-two stock
split that was distributed on November 10, 1997 to shareholders of record on
October 27, 1997. On July 18, 1995, the Board of Directors declared a three-
for-two stock split that was distributed on August 11, 1995 to shareholders
of record on July 31, 1995. Basic earnings per share for all periods
presented reflect the three-for-two stock splits and are based on the
weighted average number of shares outstanding. Diluted earnings per share
for all periods presented reflect the three-for-two stock splits and are
based on the weighted average number of shares outstanding and equivalent
shares from dilutive stock options and phantom stock units.
</FN>
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
SI HANDLING SYSTEMS, INC.
Statements Of Stockholders' Equity
Years Ended March 1, 1998, March 2, 1997, and March 3, 1996
(In Thousands, Except Share And Per Share Data)
<TABLE>
<CAPTION>
Additional Retained Total
Common Paid-In Earnings Treasury Stockholders'
Stock Capital (Deficit) Stock Equity
-------- ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at February 26, 1995 ............................ $ 2,501 3,703 ( 17) (262) 5,925
Issuance of 1,236,739 common shares in connection with
three-for-two stock split of November 10, 1997 ....... 1,237 (1,237) - - -
----- ----- ----- --- ------
Balance at February 26, 1995 as adjusted ................ 3,738 2,466 ( 17) (262) 5,925
Net earnings ............................................ - - 1,625 - 1,625
Dividends declared - $.04 per share cash dividend ....... - - ( 164) - ( 164)
Dividends paid to stockholders for fractional shares
in connection with three-for-two stock split ......... - ( 1) - - ( 1)
Acquisition of 3,162* treasury shares ................... - - - ( 25) ( 25)
Retirement of 27,644* common shares held in treasury .... ( 28) ( 41) ( 119) 188 -
Repurchase and retirement of 48,600 common shares ....... ( 49) ( 31) ( 128) - ( 208)
Sale of 14,574* treasury shares in connection
with employee incentive stock option plan ............ - - ( 41) 99 58
----- ----- ----- ---
Balance at March 3, 1996 ................................ 3,661 2,393 1,156 - 7,210
Net earnings ............................................ - - 2,053 - 2,053
Dividends declared - $.07 per share cash dividend ....... - - ( 244) - ( 244)
Acquisition and retirement of 19,221 common shares ...... ( 19) ( 13) ( 134) - ( 166)
Sale of 47,668 common shares in connection
with employee incentive stock option plan ............ 48 142 - - 190
----- ----- ----- --- ------
Balance at March 2, 1997 ................................ 3,690 2,522 2,831 - 9,043
Net earnings ............................................ - - 2,612 - 2,612
Dividends declared - $.07 per share cash dividend ....... - - ( 246) - ( 246)
Dividends paid to stockholders for fractional
shares in connection with three-for-two stock split .. - ( 2) - - ( 2)
Acquisition and retirement of 8,064 common shares....... ( 8) ( 5) ( 88) --- ( 101)
Sale of 29,563 common shares in connection
with employee incentive stock option plan ............ 30 130 - - 160
----- ----- ----- --- ------
Balance at March 1, 1998 ................................ $ 3,712 2,645 5,109 - 11,466
===== ===== ===== === ======
<FN>
* Treasury share transactions have not been adjusted since additional shares
were not issued for treasury shares in connection with the three-for-two
stock splits of November 10, 1997 and August 11, 1995.
</FN>
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
SI HANDLING SYSTEMS, INC.
Statements Of Cash Flows
Years Ended March 1, 1998, March 2, 1997, and March 3, 1996 (In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ............................... $ 2,612 2,053 1,625
Adjustments to reconcile net earnings
to net cash provided (used) by
operating activities:
Depreciation of plant and equipment .... 330 340 415
Amortization of intangibles and
deferred costs ....................... 11 10 10
Loss (gain) on disposition and
write-off of equipment ............... ( 3) ( 1) 90
Equity in income of joint venture ...... ( 421) ( 76) ( 279)
Changes in operating assets and liabilities:
Receivables ............................ (4,262) (1,586) 3,768
Costs and estimated earnings
in excess of billings ................ (5,134) 163 ( 403)
Inventories ............................ ( 533) ( 203) 83
Deferred income tax benefits ........... ( 24) ( 286) ( 58)
Prepaid expenses and other
current assets ....................... 11 ( 32) 125
Other noncurrent assets ................ 1 5 1
Accounts payable ....................... 1,988 514 ( 844)
Customers' deposits and billings
in excess of costs and estimated
earnings ............................. ( 534) 1,640 ( 313)
Accrued salaries, wages, and
commissions .......................... 717 ( 151) 476
Income taxes payable ................... ( 62) 167 268
Accrued royalties payable .............. 5 ( 166) ( 27)
Accrued other liabilities .............. 90 131 ( 895)
Deferred compensation .................. 58 31 7
----- ----- -----
Net cash provided (used) by
operating activities ..................... (5,150) 2,553 4,049
----- ----- -----
Cash flows from investing activities:
Purchase of short-term investments ......... (1,473) (7,047) (2,414)
Sale of short-term investments ............. 5,214 5,720 -
Proceeds from the disposition of
property, plant and equipment ............ 3 1 170
Additions to property, plant and
equipment ................................ ( 492) ( 468) ( 178)
----- ----- -----
Net cash provided (used) by
investing activities ..................... 3,252 (1,794) (2,422)
----- ----- -----
</TABLE>
26
<PAGE>
SI HANDLING SYSTEMS, INC.
Statements Of Cash Flows (Continued)
Years Ended March 1, 1998, March 2, 1997, and March 3, 1996 (In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Repayment of long-term debt................. ( 13) ( 22) ( 23)
Sale of treasury stock in connection
with employee incentive stock option plan - - 33
Sale of common stock in connection
with employee incentive stock option plan 59 24 -
Dividends paid on common stock ............. ( 246) ( 244) ( 164)
Dividends paid to stockholders for
fractional shares in connection with
three-for-two stock split................. ( 2) - ( 1)
Repurchase and retirement of
common stock ............................. - - ( 208)
Increase in (repayment of) revolving
credit loan payable to bank .............. 1,000 - ( 500)
----- ----- ------
Net cash provided (used) by
financing activities ..................... 798 ( 242) ( 863)
----- ----- -----
Increase (decrease) in cash and cash
equivalents ................................ (1,100) 517 764
Cash and cash equivalents,
beginning of year .......................... 1,852 1,335 571
----- ----- -----
Cash and cash equivalents,
end of year................................. $ 752 1,852 1,335
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements
March 1, 1998 and March 2, 1997
(1) Description of Business and Summary of Significant Accounting Policies
- --- ----------------------------------------------------------------------
Description of Business and Concentration of Credit Risk
- --------------------------------------------------------
SI Handling Systems, Inc. (the "Company" or "SI") is a systems integrator
that supplies automated materials handling systems to manufacturing, order
selection, and distribution operations. The systems are designed, sold,
manufactured, installed, and serviced by the Company or by others for the
Company, at its direction, generally as labor-saving devices to improve
productivity and reduce costs. The Company's products are utilized to automate
the movement of products and are often integrated with other automated
equipment, such as robots. The Company's systems involve both standard and
specially designed components and include integration of non-proprietary
automated handling technologies so as to provide solutions for its customers'
unique materials handling needs. The Company develops and designs computer
control programs required for the efficient operation of the systems.
Although the Company is not dependent on any single customer, much of its
revenue is derived from contracts to design, manufacture, and install
large-scale materials handling systems for major North American corporations and
the federal government. In fiscal 1998, one customer accounted for revenues of
$17,513,000. In fiscal 1997, one customer accounted for revenues of $4,249,000.
In fiscal 1996, two customers accounted for revenues of $8,735,000 and
$4,671,000, respectively.
The Company's systems are sold on a fixed price basis. Generally, contract
terms provide for progress payments and a portion of the purchase price is
withheld by the buyer until the system has met contractual specifications. As of
March 1, 1998, two customers owed the Company $2,734,000 and $1,889,000,
respectively, in trade receivables. The Company believes that the concentration
of credit risk in its trade receivables is substantially mitigated by the
Company's ongoing credit evaluation process as well as the general
creditworthiness of its customer base.
Fiscal Year
- -----------
The Company's fiscal year ends on the Sunday nearest to the last day of
February. The fiscal years ended March 1, 1998, March 2, 1997, and March 3, 1996
were 52, 52, and 53 weeks, respectively.
Use of Estimates
- ----------------
The preparation of the financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Financial Instruments
- ---------------------
The Company believes the market values of its assets and liabilities which
are financial instruments materially approximate their carrying values due to
the short-term nature of the instruments.
28
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, cash on deposit, amounts invested on an overnight basis with a bank,
and other highly liquid debt instruments purchased with a maturity of three
months or less. The Company does not believe it is exposed to any significant
credit risk on cash and cash equivalents.
Short-Term Investments
- ----------------------
Short-term investments consist of marketable direct obligations of the United
States Treasury with original maturities at date of purchase beyond three months
and less than twelve months. Such short-term investments are carried at cost,
which approximates fair value, due to the short period of time to maturity. The
Company does not believe it is exposed to any significant credit risk on
short-term investments.
Inventories
- -----------
Inventories are valued at the lower of average cost or replacement market. It
is not practicable to state separately amounts of finished goods and
work-in-process. Inventories primarily consist of materials purchased or
manufactured for stock. The Company does not defer general and administrative
costs or initial startup costs.
Property, Plant and Equipment
- -----------------------------
Plant and equipment generally are depreciated, for financial statement
purposes, on the straight-line method over the estimated useful lives of
individual assets; whereas accelerated methods of depreciation are used for
certain items for tax purposes. The ranges of lives used in determining
depreciation rates for buildings and improvements and machinery and equipment
are 15-40 years and 3-7 years, respectively. Maintenance and repairs are charged
to operations; betterments and renewals are capitalized. Upon sale or retirement
of plant and equipment, the cost and related accumulated depreciation are
removed from the accounts and the resultant gain or loss, if any, is credited or
charged to earnings.
Investment in Joint Venture
- ---------------------------
On March 1, 1993, the Company and Automated Prescription Systems, Inc.
("APS") of Pineville, Louisiana formed a joint venture, SI/BAKER, INC.
("SI/BAKER"). SI/BAKER draws upon the automated materials handling systems
experience of the Company and the automated pill counting and dispensing
products of APS to provide automated pharmacy systems. Each member Company
contributed $100,000 in capital to fund the joint venture. The Company accounts
for its investment in the joint venture on the equity basis.
Intangibles
- -----------
Intangibles are amortized using the straight-line method, over a period of 10
years.
Sales Contracts
- ---------------
Profits on sales contracts are recorded on the basis of the Company's
estimates of the percentage of completion of individual contracts, commencing
when progress reaches a point where experience is sufficient to estimate final
results with reasonable accuracy. That portion of the total contract price is
accrued, which is allocable to contract expenditures incurred and work
performed, on the basis of the ratio of aggregate costs to date to the most
recent estimate of total costs at completion. As these contracts may extend over
one or more years, generally no more than two years, revisions in cost and
profit estimates during the course of the
29
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
Sales Contracts (Continued)
- ---------------
work are reflected in the accounting periods in which the facts requiring
revisions become known. At the time a loss on a contract becomes known, the
entire amount of the estimated ultimate loss is accrued.
Product Development Costs
- -------------------------
The Company expenses product development costs as incurred.
Warranty
- --------
The Company's products are warranted against defects in materials and
workmanship for a specified period. The Company provides an accrual for
estimated future warranty costs based upon a percentage of cost of sales.
Income Taxes
- ------------
Under the asset and liability method of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Common Shares
- -------------
On October 14, 1997, the Board of Directors declared a three-for-two stock
split that was distributed on November 10,1997 to shareholders of record on
October 27, 1997. On July 18, 1995, the Board of Directors declared a
three-for-two stock split that was distributed on August 11, 1995 to
shareholders of record on July 31, 1995. All references throughout the financial
statements to shares of common stock or per share amounts have been adjusted in
all years to reflect these stock splits, except for treasury shares for which no
additional shares were issued.
Stock-Based Compensation
- ------------------------
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
recognizes no compensation expense for the stock option grants.
The Company also grants phantom stock units to its directors as deferred
compensation. Such awards are redeemable in cash or the Company's common stock
at the director's option and are accounted for in accordance with APB Opinion
No. 25 as stock appreciation rights. Expense for the phantom stock unit plan was
$17,000 and $5,000, respectively in fiscal 1998 and 1997.
30
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
Earnings Per Share
- ------------------
Basic and diluted earnings per share for fiscal years 1998, 1997, and 1996
have been adjusted to reflect the three-for-two stock splits of November 1997
and August 1995 and are based on the weighted average number of shares
outstanding. In addition, diluted earnings per share reflect the effect of
dilutive securities which include phantom stock units, and the shares that would
be outstanding assuming the exercise of dilutive stock options. The number of
shares that would be issued from the exercise has been reduced by the number of
shares that could have been purchased from the proceeds at the average market
price of the Company's common stock.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Basic Earnings Effect of Dilutive Diluted Earnings
Per Share Securities Per Share
-------------- ------------------ ----------------
<S> <C> <C> <C>
1998
- ----
Income
numerator.............. $2,612,000 (1) 11,000 $2,623,000 (5)
Shares
denominator............ 3,705,590 50,005 (2) 3,755,595
--------- ---------
Per share
amount................. .70 .70
========= =========
1997
- ----
Income
numerator.............. 2,053,000 (1) 3,000 2,056,000 (5)
Shares
denominator............ 3,677,577 34,844 (3) 3,712,421
--------- ---------
Per share
amount................. .56 .55
========= =========
1996
- ----
Income
numerator.............. 1,625,000 (1) 1,625,000
Shares
denominator............ 3,694,808 19,276 (4) 3,714,084
--------- ---------
Per share
amount................. .44 .44
========= =========
<FN>
(1) Income available to common shareholders.
(2) Includes 42,879 stock options and 7,126 phantom stock units.
(3) Includes 33,831 stock options and 1,013 phantom stock units.
(4) Consists of 19,276 stock options.
(5) Income available to common shareholders plus assumed conversions.
</FN>
</TABLE>
31
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. Both SFAS No. 130 and
No. 131 are effective for financial statements for fiscal years beginning after
December 15, 1997. It is not expected that the adoption of either of these
statements will have a material impact on the Company's financial statements. In
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement revises employers'
disclosures about pension and other postretirement benefit plans but does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements, eliminates unnecessary disclosures and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 supersedes the
disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions,"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The Company plans to adopt this statement in its fiscal 1999 Annual
Report as required.
(2) Uncompleted Contracts
- --- ---------------------
Costs and estimated earnings on uncompleted contracts are as follows (in
thousands):
<TABLE>
<CAPTION>
March 1, 1998 March 2, 1997
------------- -------------
<S> <C> <C>
Costs and estimated earnings on
uncompleted contracts......................... $ 47,892 18,317
Less: billings to date.......................... 43,336 19,429
------ ------
$ 4,556 ( 1,112)
====== ======
Included in accompanying balance
sheets under the following captions:
Costs and estimated earnings in excess
of billings............................... $ 6,774 1,640
Customers' deposits and billings in
excess of costs and estimated earnings.... ( 2,218) ( 2,752)
------ ------
$ 4,556 ( 1,112)
====== ======
</TABLE>
There were no retainages included in accounts receivable at March 1, 1998 and
March 2, 1997.
32
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(3) Revolving Credit Loan
- --- ---------------------
A summary of the revolving credit loan payable to bank is as follows (in
thousands):
<TABLE>
<CAPTION>
March March
1, 1998 2, 1997
--------- ---------
<S> <C> <C>
Revolving credit loan payable to bank.................. $ 1,000 -
===== =====
</TABLE>
The Company has a $5,000,000 committed revolving credit facility. Interest on
the credit arrangement is at the lender's prime rate of interest (8.50% as of
March 1, 1998) or quoted money market rates. No compensating demand deposit
balances are required to be maintained regarding the credit arrangement. The
credit arrangement contains various restrictive covenants relating to additional
indebtedness, asset acquisitions or dispositions, and maintenance of certain
financial ratios. The Company was in compliance with all covenants during fiscal
1998. The credit arrangement is secured by a lien position on accounts
receivable, land, and buildings. Currently, the committed revolving credit
facility has an expiration date of August 31, 2000.
(4) Long-Term Debt and Compensating Balances
- --- ----------------------------------------
A summary of long-term debt follows (in thousands):
<TABLE>
<CAPTION>
March March
1, 1998 2, 1997
--------- ---------
<S> <C> <C>
Mortgage payable......................................... $ 34 47
Less: current installments of long-term debt............ 8 12
----- -----
$ 26 35
===== =====
</TABLE>
The mortgage bears an interest rate of 5.0%, is secured by the land and
buildings with a depreciated cost of $527,000 at March 1, 1998, and is payable
through October 2001.
Principal payments of long-term debt in each of the next five years from
March 1, 1998 under terms of the existing agreement is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$ 8 10 10 6 -
=== === === === ===
</TABLE>
33
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(5) Capital Stock Options
- --- ---------------------
The following is a summary of options available for grant and changes in
options outstanding under the Company's 1982 and 1992 Incentive Stock Option
Plans ("ISOP") and 1997 Equity Compensation Plan ("ECP") in fiscal years 1998,
1997, and 1996:
<TABLE>
<CAPTION>
1997
1982 ISOP 1992 ISOP ECP TOTAL
---------------------------- ----------------------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Option price*......... $ 1.97 2.47 4.94 4.36 5.33 6.33 13.33
====== ====== ====== ====== ====== ====== =====
Options outstanding
as of
February 26, 1995.. 18,247 44,059 51,412 - 41,063 - - 154,781
Changes in 1996:
Granted............ - - - 17,100 - - - 17,100
Exercised.......... ( 9,586) (15,783) - - - - - ( 25,369)
Lapsed............. ( 8,661) ( 1,237) (12,375) - ( 2,812) - - ( 25,085)
------ ------ ------ ------ ------ ------ ------ -------
Options outstanding
as of
March 3, 1996...... - 27,039 39,037 17,100 38,251 - - 121,427
Changes in 1997:
Granted............ - - - - - 45,300 - 45,300
Exercised.......... - (19,614) (17,479) ( 1,575) ( 9,000) - - ( 47,668)
Lapsed............. - ( 7,425) ( 562) - - - - ( 7,987)
------ ------ ------ ------ ------ ------ ------ -------
Options outstanding
as of
March 2, 1997...... - - 20,996 15,525 29,251 45,300 - 111,072
Changes in 1998:
Granted............ - - - - - - 58,800 58,800
Exercised.......... - - ( 8,058) ( 2,250) (11,535) ( 7,727) - ( 29,570)
Lapsed............. - - (12,938) - - ( 750) - ( 13,688)
------ ------ ------ ------ ------ ------ ------ -------
Options outstanding
as of
March 1, 1998...... - - - 13,275 17,716 36,823 58,800 126,614
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
*The option prices and number of options have been adjusted to reflect the
three-for-two stock splits of August 11, 1995 and November 10, 1997.
Under the Company's Incentive Stock Option Plans, officers and key employees
have been granted options to purchase common shares at the approximate market
price at the date of grant. Options become exercisable in increments of 25% on
the anniversary date of the grant; thus, at the end of four years, the options
are fully exercisable. Currently, all options have a term of five years. The
plans, approved in 1982 and 1992, also authorize stock appreciation rights;
however, none have been issued.
The 1982 Incentive Stock Option Plan expired in June, 1992; however, prior to
its expiration, options for 350,017 shares were available for grant. Currently,
there are no options outstanding under this plan.
34
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(5) Capital Stock Options (Continued)
- --- ---------------------
In July, 1992, the shareholders adopted the 1992 Incentive Stock Option Plan
which will expire in July, 2002. The terms of the 1992 Plan are essentially the
same as the terms of the 1982 Plan except that 112,500 shares were authorized
for issuance under the 1992 Plan. Currently, 67,814 options are outstanding
under this plan.
In July, 1997, the shareholders adopted the 1997 Equity Compensation Plan
("ECP") which will expire in July, 2007. The ECP provides for grants of stock
options, restricted stock, and stock appreciation rights to selected employees,
key advisors who perform valuable services to the Company, and directors of the
Company. In addition, the ECP provides for grants of performance units to
employees and key advisors. The ECP authorizes up to 412,500 shares of common
stock for issuance pursuant to the terms of the plan. Under the Company's ECP,
officers and key employees have been granted options to purchase common shares
at the approximate market price at the date of grant. Options become exercisable
in increments of 25% on the anniversary date of the grant; thus, at the end of
four years, the options are fully exercisable. Currently, 58,800 options are
outstanding under the plan, and all options have a term of five years.
The Company has elected to continue to account for its stock-based
compensation plans under the guidelines of Accounting Principles Board Opinion
No. 25; however, additional disclosure as required under the guidelines of SFAS
No. 123, "Accounting for Stock-Based Compensation," is included below. No
compensation expense was recognized on options granted during fiscal years 1998,
1997, and 1996 in the financial statements. If the Company had elected to
recognize stock-based compensation expense based on the fair value of granted
options at the grant date (as determined under SFAS No. 123), net earnings (in
thousands) and basic earnings per share for the fiscal years ended March 1,
1998, March 2, 1997, and March 3, 1996 would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- ------
<S> <C> <C> <C> <C>
Net earnings As reported............. $2,612 2,053 1,625
Pro forma............... 2,556 2,026 1,620
Basic earnings As reported............. $ .70 .56 .44
per share Pro forma............... .69 .55 .44
</TABLE>
The above pro forma net earnings and basic earnings per share were computed
using the fair value of granted options at the date of grant as calculated by
the Black-Scholes option pricing method. In order to perform this calculation,
the following assumptions were made for fiscal years 1998, 1997, and 1996,
respectively: dividend yields of .5%, 1.05%, and 1.02%; risk-free interest rates
of 5.78%, 6.38%, and 6.24%; expected volatilities of 35.5%, 36.0%, and 38.2%;
and an expected holding period of four years.
35
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(6) Employee Benefit Plans
- --- ----------------------
The Company maintains a defined benefit plan for employees covered by its
collective bargaining agreement. Retirement benefits are based on the employee's
years of service multiplied by the appropriate monthly benefit amount. The
Company's policy is to make an annual contribution to the Plan equal to the
amount required by ERISA, subject to the full funding limitation of ERISA.
The Company uses the projected unit credit actuarial method to compute
pension expense, which includes amortization of past service costs over 30
years. The net periodic pension expense for fiscal years 1998, 1997, and 1996,
includes the following components (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service cost - benefits earned during the period...... $ 89 72 73
Interest cost on projected benefit obligation......... 129 113 105
Actual return on assets............................... (676) (517) (452)
Amortization of unrecognized net assets and
other deferred amounts, net...................... 571 413 351
--- --- ---
Net periodic pension expense.......................... $ 113 81 77
=== === ===
</TABLE>
Actuarial assumptions used to develop the net periodic pension expense and
the projected benefit obligation were:
<TABLE>
<CAPTION>
As of November 30,
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate......................................... 7.0% 7.0% 7.0%
Expected long-term rate of return on assets........... 8.5% 8.5% 8.5%
</TABLE>
The following table sets forth the Plan's funded status and amounts
recognized in the Company's balance sheets (in thousands):
<TABLE>
<CAPTION>
November 30, November 30,
1997 1996
------------ ------------
<S> <C> <C>
Plan assets at fair value, primarily
listed stocks and bonds........................ $ 2,581 2,034
Projected benefit obligation...................... 2,074 1,735
----- -----
Plan assets in excess of
projected benefit obligation................... 507 299
Unrecognized net gain............................. (1,124) ( 604)
Prior service cost not yet recognized
in net periodic pension cost................... 398 221
Unrecognized net transition asset being
amortized over employee service lives.......... ( 61) ( 83)
----- -----
Net pension liability recognized
in the Company's balance sheets................ $( 280) ( 167)
===== =====
</TABLE>
36
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(6) Employee Benefit Plans (Continued)
- --- ----------------------
The Company has a multi-faceted defined contribution Retirement Savings Plan
for employees not covered by its collective bargaining agreement. Salaried
employees age 21 and above with at least one year of service are eligible to
participate in the Plan. Under the 401(k) feature of the Plan, the Company
contributes 2% of base pay to each eligible salaried employee's account and, in
addition, matches 50% of the first 4% of pay which the employee contributes to
the Plan. The Plan also contains provisions for profit sharing contributions in
the form of cash in amounts determined annually by the Board of Directors. Total
expense for the Retirement Savings Plan was $461,000, $307,000, and $301,000 for
fiscal years 1998, 1997, and 1996, respectively.
(7) Income Taxes
- --- ------------
The provision for income tax expense (benefit) consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Federal - current.............................. $ 1,236 223 197
- deferred............................. ( 12) (223) ( 58)
----- --- ---
1,224 - 139
----- --- ---
State - current.............................. 278 63 73
- deferred............................. ( 12) ( 63) -
----- --- ---
266 - 73
----- --- ---
$ 1,490 - 212
===== === ===
</TABLE>
A reconciliation between the U.S. federal statutory rate and the Company's
effective income tax rate is (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Computed tax expense (benefit) at statutory
rate of 34%....................................... $ 1,395 698 625
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit...... 176 - 48
Equity in earnings of joint venture............. ( 115) ( 21) ( 76)
Change in the valuation allowance for
deferred tax assets........................... - (770) (541)
Effect on change in state tax rate on
deferred tax assets........................... - - 85
Miscellaneous items............................. 34 93 71
----- ---- ---
$ 1,490 - 212
===== ==== ===
</TABLE>
The significant components of deferred income tax expense (benefit) are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Deferred tax expense (benefit)
(exclusive of change in valuation allowance)...... $( 24) 484 483
Increase (decrease) in the valuation allowance
for deferred tax assets........................... - (770) (541)
----- --- ---
$( 24) (286) ( 58)
===== === ===
</TABLE>
37
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(7) Income Taxes (Continued)
- --- ------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at March 1, 1998 and March
2, 1997 are presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating and built in loss carryforward.......... $ 388 432
Inventories, principally due to book reserves
not yet deductible for tax purposes, and
additional costs inventoried for tax purposes
pursuant to uniform capitalization rules............ 468 382
Accruals for other book costs, not yet deductible
for tax purposes.................................... 435 407
----- -----
Total gross deferred tax assets................... 1,291 1,221
Less valuation allowance.......................... 503 503
----- -----
Net deferred tax assets........................... 788 718
----- -----
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation......................... ( 61) ( 40)
Other................................................. ( 117) ( 92)
----- -----
Total gross deferred tax liabilities.............. ( 178) ( 132)
----- -----
Net deferred tax assets........................... $ 610 586
===== =====
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of these
deductible differences, net of the existing valuation allowances at March 1,
1998.
(8) Settlement of Litigation
- --- ------------------------
Apogee Robotics
- ---------------
During fiscal 1995, the Company announced the sale of its Automated Guided
Vehicle ("AGV") systems product line to Apogee Robotics, Inc. ("Apogee").
Litigation regarding the closing ensued between the Company and Apogee; however,
the Company negotiated a Settlement Agreement during fiscal 1996 with Apogee
which provided the following: during fiscal 1996, the Company paid Apogee
$150,000 and returned the 100,000 Apogee preferred shares that the Company held;
Apogee transferred any right, title or interest it may have had in the Company's
AGV assets to the Company and disclaimed any interest in the assets; and the
parties released all claims that they may have had against each other.
38
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(8) Settlement of Litigation (Continued)
- --- ------------------------
Apogee Robotics (Continued)
- ---------------
During fiscal 1995, net expense of $525,000 associated with the rescinded
sale transaction and the AGV product line were included on the Company's
statement of operations. During fiscal 1996, the Company recognized net income
of $436,000 associated with the settlement of the rescinded sale transaction.
The net income included the impact of the favorable and expeditious resolution
of the Apogee dispute where the terms and legal costs associated with the
settlement were substantially more favorable than provided in the prior year.
The Company has accepted and completed one new AGV systems contract since
October 6, 1994, the closing date of the failed sale of the AGV business to
Apogee, and has completed all the AGV contracts existing at that time. The
Company is continuing the sale of parts and other services relative to AGV
systems. Net sales from the AGV systems product line were $993,000, $1,557,000,
and $1,795,000 in fiscal years 1998, 1997, and 1996, respectively.
Patents
- -------
In April, 1996, a competitor filed suit against the Company and its SI/BAKER
joint venture, alleging that certain of the products of SI/BAKER infringed a
patent held by the competitor.
On December 20, 1996, a Settlement Agreement was reached between the Company,
SI/BAKER, and the competitor. The competitor dismissed the action and granted a
license to SI/BAKER for certain of its products. In exchange for the license,
SI/BAKER agreed to dismiss its counterclaims and pay the competitor a per system
royalty. On December 31, 1996, SI/BAKER satisfied a $600,000 liability under the
Settlement Agreement relative to systems installed to date.
The term of the Settlement Agreement continues until the expiration of the
competitor's patent; however, SI/BAKER's status as sole licensee will remain in
effect until December 31, 2000, and all orders related to licensed products
received by SI/BAKER after December 31, 2000 will not be subject to royalty
payments.
(9) Contingencies
- --- -------------
The Company is guarantor (not to exceed $1,000,000) of one-half of SI/BAKER's
borrowings under its line of credit, which had an outstanding balance of
$900,000 at February 28, 1998.
The Company is presently engaged in certain legal proceedings which
management believes present no significant risk of material loss to the Company.
(10) Commitments
- ---- -----------
Total rental expense, including short-term leases, in fiscal years 1998,
1997, and 1996, approximated $81,000, $81,000, and $83,000, respectively.
Future minimum rental commitments at March 1, 1998 under all operating,
noncancelable leases, primarily for facilities, are as follows (in thousands):
<TABLE>
<S> <C>
1999.............$28
2000............. 4
</TABLE>
39
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(10) Commitments (Continued)
- ---- -----------
In fiscal 1997, the Company entered into a licensing agreement which
requires payment of royalties based on the number of machines sold, with minimum
royalties each year through fiscal year 2002. Future minimum royalties payable
are as follows (in thousands):
<TABLE>
<S> <C>
1999............ $40
2000............ 25
2001............ 25
2002............ 25
</TABLE>
(11) Cash Flow Information
- ---- ---------------------
Supplemental disclosures of cash flow information for fiscal years 1998,
1997, and 1996 are as follows (in thousands, except share data):
<TABLE>
<CAPTION>
1998 1997 1996
======= ======= =======
<S> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.............................. $ 11 4 12
----- ----- -----
Income taxes.......................... $ 1,576 119 2
===== ===== =====
Supplemental disclosures of noncash
financing activities:
Issuance of 6,600 common shares
held in treasury in exchange for
3,162 common shares delivered to
treasury by officer in connection
with employee incentive stock
option plan........................... $ - - 25
===== ===== =====
Issuance of 41,146 common shares
in exchange for 19,221 common
shares delivered to the Company
by officers in connection with employee
incentive stock option plan........... $ - 134 -
===== ===== =====
Issuance of 18,225 common shares
in exchange for 8,064 common
shares delivered to the Company
by officers in connection with the
employee incentive stock option plan.. $ 88 - -
===== ===== =====
</TABLE>
40
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(12) Joint Venture
- ---- -------------
The Company has entered into various transactions with SI/BAKER as follows:
<TABLE>
<CAPTION>
March March
1, 1998 2, 1997
------- -------
<S> <C> <C>
SI/BAKER, INC., 50% owned by the Company:
Balance Sheets Data (in thousands) -
Amount included in notes and other receivables........ $ 51 342
Amount included in costs and estimated
earnings in excess of billings...................... 14 51
Investment in SI/BAKER................................ 1,027 606
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Statements of Operations Data (in thousands) -
Systems and services sold under various
subcontracts........................................ $1,120 2,355 770
Reimbursement for administrative and other
services provided................................... 98 108 106
Other income, net..................................... 400 348 188
</TABLE>
Information pertaining to the Company's investment in the SI/BAKER joint
venture is as follows (in thousands):
<TABLE>
<S> <C>
Balance at February 26, 1995.......................................... $ 251
Equity in net earnings................................................ 279
-----
Balance at March 3, 1996.............................................. 530
Equity in net earnings................................................ 76
-----
Balance at March 2, 1997.............................................. 606
Equity in net earnings................................................ 421
-----
Balance at March 1, 1998.............................................. $1,027
=====
</TABLE>
Undistributed earnings of SI/BAKER (less related deferred tax expenses) at
March 1, 1998 and March 2, 1997 were $853,000 and $472,000, respectively.
Summary financial information and operating results for the SI/BAKER joint
venture are set forth in the following table (in thousands):
<TABLE>
<CAPTION>
February February
28, 1998 28, 1997
-------- --------
<S> <C> <C>
Current assets......................................... $7,028 6,825
Property, plant and equipment.......................... 61 65
Other assets........................................... 330 366
Current liabilities.................................... 5,254 5,991
Long-term liabilities.................................. 111 54
----- -----
Net assets............................................. $2,054 1,211
===== =====
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Net sales.................................... $19,979 17,388 9,382
====== ====== ======
Net earnings................................. $ 843 151 557
====== ====== ======
</TABLE>
41
<PAGE>
SI HANDLING SYSTEMS, INC. Schedule II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 1, 1998, March 2, 1997, and March 3, 1996
(In Thousands)
<TABLE>
<CAPTION>
Additions
Balance At Charged To Balance
Beginning Costs And At End
Of Year Expenses Deductions Of Year
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended March 1, 1998:
Reserve for inventory loss................. $ 745 71 26 (a) 790 (b)
Reserve for product warranty............... 180 75 (c) 180 (d) 75 (e)
Allowance for doubtful receivables......... - 35 35 -
----- --- ----- -----
$ 925 181 241 865
===== === ===== =====
Year ended March 2, 1997:.......................
Reserve for inventory loss................. $1,713 23 991 (a) 745 (b)
Reserve for product warranty............... 47 322 (c) 189 (d) 180 (e)
Allowance for doubtful receivables......... - 32 32 -
----- --- ----- -----
$1,760 377 1,212 925
===== === ===== =====
Year ended March 3, 1996:
Reserve for inventory loss................. $1,605 188 80 (a) 1,713 (b)
Reserve for product warranty............... 93 - (c) 46 (d) 47 (e)
Allowance for doubtful receivables......... - - - -
----- --- ----- -----
$1,698 188 126 1,760
===== === ===== =====
<FN>
(a) Inventory items disposed of net of salvage proceeds.
(b) Allowance is reflected in the net inventory on the balance sheet.
(c) These costs include materials and incidental costs but exclude any
services.
(d) Payments of warranty costs and reversal of unused expired warranty reserve.
(e) Included in accrued other liabilities.
</FN>
</TABLE>
42
<PAGE>
PART III
--------
Part III, except for certain information relating to Executive Officers
listed below, is omitted inasmuch as the Company intends to file with the
Securities and Exchange Commission within 120 days of the close of the fiscal
year ended March 1, 1998, a definitive proxy statement containing such
information pursuant to Regulation 14A of the Securities Exchange Act of 1934
and such information shall be deemed to be incorporated herein by reference from
the date of filing such document.
Executive Officers of the Registrant
The names, ages, and offices with the Company of its executive officers are
as follows:
<TABLE>
<CAPTION>
Name Age Office
---- --- ------
<S> <C> <C>
Leonard S. Yurkovic 60 President and Chief Executive
Kenneth D. Buck 45 Vice President - Corporate Services
William J. Casey 54 Vice President - Production & Assembly
Systems
David A. Clark 41 Vice President - Warehousing & Distribution
Systems
Barry V. Mack 55 Vice President - Finance, Chief Financial Officer,
and Treasurer
James L. Thatcher 54 Vice President - Manufacturing & Assembly
Services and Customer & Software Services
Ronald J. Semanick 37 Secretary
</TABLE>
Mr. Yurkovic was appointed President and Chief Executive Officer on February
12, 1988 and previously held the positions of President and Managing Director of
European Operations (October 1987 - February 1988), and President and Chief
Operating Officer (March 1985 - October 1987). He also held the position of Vice
President-Operations and he joined the Company in July 1979 as Vice President-
Finance.
Mr. Buck was appointed Vice President-Corporate Services on July 18, 1995 and
previously held the positions of Vice President-Human Resources, Director-Human
Resources, and Manager of Human Resources. He joined the Company in November
1981 as a Personnel Manager.
Mr. Casey was appointed Vice President-Production & Assembly Systems on
July 18, 1995 and previously held the position of Vice President-Sales. He has
served the Company in several capacities including Director-Field Sales,
Estimating Supervisor, Manager of Switch-Cart Systems, and Mid-Atlantic Regional
Sales Manager. Mr. Casey joined the Company in February 1965.
Mr. Clark was appointed Vice President-Warehousing & Distribution Systems on
July 18, 1995. He joined the Company in May 1994 as the Director of Applications
Engineering. Prior to joining the Company, Mr. Clark was a self-employed
consultant for the Ford Motor Company. From 1985 to 1993, Mr. Clark was employed
by Valley Forge Technical Communications and held various positions, the last of
which being Chief Operating Officer. From 1978 to 1985, Mr. Clark was employed
by General Electric Company in various engineering capacities.
43
<PAGE>
Mr. Mack was appointed Vice President-Finance, Chief Financial Officer, and
Treasurer on January 13, 1994 and previously held the position of Controller.
Prior to joining the Company in 1980 as Manager of Financial Accounting, Mr.
Mack was employed as Financial Manager at the Coca-Cola Bottling Company of the
Lehigh Valley, and as an Assistant Controller within Harris Corporation's
Printing Equipment Division.
Mr. Thatcher was appointed Vice President-Manufacturing & Assembly Services
and Customer & Software Services on July 18, 1995 and previously held the
position of Vice President-Operations. He has served the Company in several key
positions including Director-Operations, Project Engineer, Project Manager, and
Director-Customer Service. He joined the Company in August 1970 as an engineer.
Mr. Semanick was appointed Secretary of the Company by the Board of
Directors on July 13, 1994. Currently, Mr. Semanick is the Company's Controller
and previously held the positions of Manager of Financial Accounting and Senior
Financial Accountant. Prior to joining the Company in 1985 as a Financial
Accountant, Mr. Semanick was employed as a Certified Public Accountant by Arthur
Andersen & Company of Philadelphia, Pennsylvania.
All executive officers hold office at the pleasure of the Board of Directors.
44
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a) 1. and 2. An index to the financial statements of the Company and the
financial statement schedule is included in Item 8. In addition, Schedule A
relating to the SI/BAKER, INC. joint venture is filed under 14(c) below.
3. Exhibits:
3.1 Amended and Restated Articles (incorporated by reference to
Exhibit 3.1 to Form 10-Q for the quarterly period ended August
31, 1997).
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 99.2 to the Company's Registration Statement on Form
S-8 [No. 333- 10181]).
10.1 Revolving Credit Agreement dated July 22, 1993 (Incorporated
by reference to Exhibit 10.1 to Annual Report on Form 10-K for
the fiscal year ended February 26, 1995).
10.2 Amendment to Revolving Credit Agreement dated April 28, 1995
(incorporated by reference to Exhibit 10.2 to Annual Report on
Form 10-K for the fiscal year ended February 26, 1995).
10.4 1992 Incentive Stock Option Plan, Amended and Restated,
Effective as of July 16, 1997* (incorporated by reference to
Exhibit 10.4 to Form 10-Q for the quarterly period ended
August 31, 1997).
10.5 Executive Officer Incentive Plan* (incorporated by reference
to Exhibit 10.5 to Annual Report on Form 10-K for the fiscal
year ended February 26, 1995).
10.6 Directors' Deferred Compensation Plan* (incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-8 [No. 333-10181]).
10.7 1997 Equity Compensation Plan* (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form
S-8 [No. 333-36397]).
11.1 Statement regarding computation of per share earnings (loss)
(see Note 1 of Notes to Financial Statements).
21.1 Joint Venture of the Registrant (incorporated by reference to
Exhibit 21.1 to Annual Report on Form 10-K for the fiscal year
ended February 26, 1995).
23 Consent of Independent Auditors.
27 Financial Data Schedule (in electronic format only).
* Management contract or compensatory plan or arrangement required
to be filed as an Exhibit pursuant to Item 14(c) of this report.
(b) Reports on Form 8-K.
During the quarter ended March 1, 1998, no report on Form 8-K was filed.
(c) Schedule A - SI/BAKER, INC. Financial Statements and Independent
Auditors' Report Thereon.
45
<PAGE>
Schedule A
SI/BAKER, INC.
Financial Statements
February 28, 1998 and February 28, 1997
(With Independent Auditors' Report Thereon)
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors SI/BAKER, INC.:
We have audited the accompanying balance sheets of SI/BAKER, INC. as of
February 28, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended February 28, 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SI/BAKER, INC. as of February
28, 1998 and 1997, and the results of its operations and its cash flows for each
of the years in the three-year period ended February 28, 1998, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Allentown, Pennsylvania
April 30, 1998
47
<PAGE>
SI/BAKER, INC.
Balance Sheets
February 28, 1998 and 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents, principally time deposits $ 388 484
Receivables:
Trade ............................................ 2,881 1,618
Other receivables ................................ 51 122
----- -----
Total receivables .............................. 2,932 1,740
----- -----
Costs and estimated earnings in excess of billings . 3,263 4,111
Inventories ........................................ 118 36
Deferred income tax benefits ....................... 309 367
Prepaid expenses and other current assets .......... 18 87
----- ------
Total current assets ........................... 7,028 6,825
----- -----
Machinery and equipment, at cost ................... 125 106
Less: accumulated depreciation ................... 64 41
----- -----
Net machinery and equipment .................... 61 65
----- -----
Equipment leased to customer ....................... 487 487
Less: accumulated depreciation .................. 249 127
----- -----
Net equipment leased to customer ............... 238 360
----- -----
Deferred income tax benefits ....................... 35 6
----- -----
Other assets ....................................... 57 -
----- -----
Total assets ................................. $7,419 7,256
===== =====
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
SI/BAKER, INC.
Balance Sheets
February 28, 1998 and 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable to bank............................... $ 900 1,750
Accounts payable:
Trade............................................. 930 1,920
Affiliated companies.............................. 97 356
----- -----
Total accounts payable.......................... 1,027 2,276
----- -----
Customers' deposits and billings in excess
costs and estimated earnings...................... 1,740 779
Accrued salaries, wages, and commissions............ 413 253
Income taxes payable................................ 44 -
Accrued royalties payable........................... 288 319
Accrued product warranties.......................... 799 463
Accrued other liabilities........................... 43 151
----- -----
Total current liabilities....................... 5,254 5,991
----- -----
Deferred compensation.................................. 111 54
----- -----
Stockholders' equity:
Common stock, $1 par value; authorized 1,000
shares; issued 200 shares......................... - -
Additional paid-in capital.......................... 200 200
Retained earnings................................... 1,854 1,011
----- -----
Total stockholders' equity...................... 2,054 1,211
----- -----
Total liabilities and stockholders' equity...... $ 7,419 7,256
===== =====
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
SI/BAKER, INC.
Statements Of Operations
Fiscal Years Ended February 28, 1998, February 28, 1997, and February 29, 1996
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $ 19,979 17,388 9,382
Cost of sales.................................... 16,781 15,191 7,130
------ ------ -----
Gross profit on sales......................... 3,198 2,197 2,252
------ ------ -----
Selling, general, and administrative expenses.... 981 1,149 820
Product development costs........................ 3 263 171
Royalty expense to parent companies.............. 800 696 375
Interest income.................................. ( 29) ( 41) ( 85)
Interest expense................................. 129 17 -
Other income, net................................ ( 106) ( 144) ( 16)
------ ------ ------
1,778 1,940 1,265
------ ------ ------
Earnings before income taxes..................... 1,420 257 987
Income tax expense............................... 577 106 430
------ ------ ------
Net earnings................................ $ 843 151 557
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
SI/BAKER, INC.
Statements Of Stockholders' Equity
Fiscal Years Ended February 28, 1998, February 28, 1997, and February 29, 1996
(In Thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
------ ---------- -------- ------------
<S> <C> <C> <C> <C>
Balance at February 28,1995....... $ - 200 303 503
Net earnings...................... - - 557 557
--- --- ----- -----
Balance at February 29, 1996...... - 200 860 1,060
Net earnings...................... - - 151 151
--- --- ----- -----
Balance at February 28, 1997...... - 200 1,011 1,211
Net earnings...................... - - 843 843
--- --- ----- -----
Balance at February 28, 1998...... $ - 200 1,854 2,054
=== === ===== =====
</TABLE>
See accompanying notes to financial statements.
50
<PAGE>
SI/BAKER, INC.
Statements Of Cash Flows
Fiscal Years Ended February 28, 1998, February 28, 1997, and February 29, 1996
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................ $ 843 151 557
Adjustments to reconcile net earnings to
net cash provided (used) by operating
activities:
Depreciation of machinery and
equipment and leased equipment........ 145 145 12
Changes in operating assets and liabilities:
Receivables............................... (1,192) (1,217) 429
Costs and estimated earnings in excess
of billings............................. 848 ( 698) (3,142)
Inventories............................... ( 82) ( 20) ( 3)
Deferred income taxes..................... 29 ( 218) ( 121)
Prepaid expenses and other
current assets.......................... 69 ( 82) 3
Other assets.............................. ( 57) - -
Accounts payable.......................... (1,249) 398 1,292
Customers' deposits and billings in excess
of costs and estimated earnings......... 961 ( 228) ( 565)
Accrued salaries, wages, and
commissions............................. 160 ( 19) 150
Income taxes payable...................... 44 ( 194) 188
Accrued royalties payable................. ( 31) ( 65) 127
Accrued product warranties................ 336 330 42
Accrued other liabilities................. ( 108) 110 24
Deferred compensation..................... 57 54 -
----- ----- -----
Net cash provided (used) by
operating activities.................. 773 (1,553) (1,007)
----- ----- -----
Cash flows used in investing activities:
Additions to machinery and equipment........ ( 19) ( 31) ( 18)
Equipment leased to customer................ - ( 9) ( 478)
----- ----- -----
Net cash used by investing activities..... ( 19) ( 40) ( 496)
----- ----- -----
Cash flows provided by financing activities:
Increase in (repayment of) notes
payable to bank........................... ( 850) 1,750 -
----- ----- -----
Increase (decrease) in cash and
cash equivalents............................ ( 96) 157 (1,503)
Cash and cash equivalents,
beginning of year........................... 484 327 1,830
----- ----- -----
Cash and cash equivalents,
end of year................................. $ 388 484 327
===== ===== =====
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes............................ $ 479 564 363
===== ===== =====
Interest................................ $ 126 9 -
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
51
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements
February 28, 1998 and 1997
Note 1: Organization, Description of Business, and Summary of
- ------- -----------------------------------------------------
Significant Accounting Policies
-------------------------------
Organization, Description of Business, and Concentration of Credit Risk
- -----------------------------------------------------------------------
During March, 1993, SI Handling Systems, Inc. and Automated Prescription
Systems, Inc. formed a joint venture, SI/BAKER, INC. (the "Company" or "joint
venture"). The joint venture draws upon the automated materials handling systems
experience of SI Handling Systems, Inc. and the automated pill counting and
dispensing products of Automated Prescription Systems, Inc. ("APS") to provide
automated pharmacy systems. Each member company contributed $100,000 in capital
to fund the joint venture.
The Company designs and installs computer controlled, fully automated,
integrated systems for managed care pharmacy operations. The Company's systems
are viewed as labor saving devices which address the issues of improved
productivity and cost reduction. Systems can be expanded as customers'
operations grow and they may be integrated with a wide variety of components to
meet specific customer needs.
Although the Company is not dependent on any single customer, much of its
revenue is derived from contracts to design and install mail order pharmacy
systems for North American corporations. In the fiscal year ended February 28,
1998, four customers accounted for revenues of $6,042,000, $3,045,000,
$3,003,000, and $2,358,000, respectively. In the fiscal year ended February 28,
1997, three customers accounted for revenues of $5,153,000, $4,357,000, and
$3,743,000, respectively. In the fiscal year ended February 29, 1996, five
customers accounted for revenues of $2,719,000, $1,763,000, $1,522,000,
$1,484,000, and $1,167,000, respectively.
The Company's systems are sold on a fixed price basis. Contract terms provide
for progress payments and a portion of the purchase price is withheld by the
buyer until the system has met contractual specifications. As of March 1, 1998,
two customers owed the Company $991,000 and $896,000, respectively. The Company
believes that the concentration of credit risk in its trade receivables is
substantially mitigated by the Company's ongoing credit evaluation process as
well as the general credit-worthiness of its customer base.
Fiscal Year
- -----------
The Company's fiscal year begins on March 1 and ends on the last day of
February.
Use of Estimates
- ----------------
The preparation of the financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes.
Actual results could differ from those estimates.
Financial Instruments
- ---------------------
The Company believes that the market values of its assets and liabilities
which are financial instruments materially approximate their carrying values due
to the short-term nature of the instruments.
52
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Cash and Cash Equivalents
- -------------------------
For the purpose of reporting cash flows, cash and cash equivalents include
cash on deposit, amounts invested on an overnight basis with a bank, and other
highly liquid debt instruments purchased with a maturity of three months or
less. The Company does not believe it is exposed to any significant credit risk
on cash and cash equivalents.
Machinery and Equipment
- -----------------------
Machinery and equipment are depreciated, for financial statement purposes, on
the straight-line method over the estimated useful lives of individual assets;
whereas accelerated methods of depreciation are used for tax purposes. The range
of lives used in determining depreciation rates for machinery and equipment is
5-7 years. Maintenance and repairs are charged to operations; betterments and
renewals are capitalized. Upon sale or retirement of equipment, the cost and
related accumulated depreciation are removed from the accounts and the resultant
gain or loss, if any, is credited or charged to earnings.
Equipment Leased To Customer
- ----------------------------
Equipment leased to customer represents the accumulated costs associated with
robotic, computer hardware, and prescription filling equipment that was leased
to a customer during the first quarter of fiscal 1997. The lease, with an
initial lease period of one year amounting to $139,000, also provides a series
of three one-year renewal options by the lessee and a buyout provision at the
end of the fourth year. The customer has exercised the first two one-year
renewal options. The equipment is depreciated, for financial statement purposes,
on the straight-line method over its estimated useful life of four years.
Sales Contracts
- ---------------
Profits on sales contracts are recorded on the basis of the Company's
estimates of the percentage of completion of individual contracts, commencing
when progress reaches a point where experience is sufficient to estimate final
results with reasonable accuracy. That portion of the total contract price is
accrued, which is allocable to contract expenditures incurred and work
performed, on the basis of the ratio of aggregate costs to date to the most
recent estimate of total costs at completion. As these contracts may extend over
one or more fiscal years, generally no more than two fiscal years, revisions in
cost and profit estimates during the course of the work are reflected in the
accounting periods in which the facts requiring revisions become known. At the
time a loss on a contract becomes known, the entire amount of the estimated
ultimate loss is accrued.
Warranty
- --------
The Company's products are warranted against defects in materials and
workmanship for a specified period. The Company provides an accrual for
estimated future warranty costs based upon a percentage of net sales.
Product Development Costs
- -------------------------
The Company expenses product development costs as incurred.
53
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Royalty Arrangement
- -------------------
During fiscal 1995, an amendment to the joint venture investment agreement
was adopted to compensate each member company at a rate of 2% of gross sales for
marketing and sales efforts on behalf of SI/BAKER, INC. The expense is included
as Royalty expense to parent companies in the Company's Statements of
Operations.
The Company receives a royalty from Automated Prescription Systems, Inc.
("APS") based on the monthly lease rates for all cells, counters, cassettes, and
any other APS equipment leased to customers in the Company's defined market
segment since the inception of SI/BAKER on March 1, 1993. The royalty received
by the Company is included in other income.
Income Taxes
- ------------
Under the asset and liability method of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. Both SFAS No. 130 and
No. 131 are effective for financial statements for fiscal years beginning after
December 15, 1997. It is not expected that the adoption of either of these
statements will have a material impact on the Company's financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement revises employers'
disclosures about pension and other postretirement benefit plans but does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements, eliminates unnecessary disclosures and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 supersedes the
disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions,"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The Company plans to adopt this statement in its fiscal 1999 Annual
Report as required.
54
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Note 2: Uncompleted Contracts
- ------ ---------------------
Costs and estimated earnings on uncompleted contracts are as follows at
February 28, 1998 and February 28, 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Costs incurred on uncompleted contracts........... $ 29,927 17,280
Estimated earnings................................ 6,595 3,756
------ ------
36,522 21,036
Less: billings to date........................... 34,999 17,704
------ ------
$ 1,523 3,332
====== ======
Included in accompanying balance sheets under the following captions:
Costs and estimated earnings in excess
of billings................................ $ 3,263 4,111
Customers' deposits and billings in excess
of costs and estimated billings............ ( 1,740) ( 779)
------ ------
$ 1,523 3,332
======= ======
</TABLE>
Note 3: Short-Term Bank Borrowings and Compensating Balances
- ------- ----------------------------------------------------
On March 4, 1996, the Company established a $2,500,000 Line of Credit
Facility (the "Facility") with its principal bank (the "Bank"). Under terms of
the Facility, the Company's parent companies have each provided a limited
guarantee and surety in the amount not to exceed $1,000,000 for a combined
guarantee of $2,000,000 to the Bank for the payment and performance of the
related note, including any further renewals or modifications of the Facility.
During fiscal 1998, the Bank increased the Company's borrowing availability to
$3,000,000 and extended the expiration date of the Facility until August 31,
1998. The Facility contains various covenants and requires the maintenance of a
net worth ratio. The Company was in compliance with all covenants during fiscal
1998. The Facility is secured by a lien position on accounts receivable and
inventory relating to one of the Company's contracts.
As of February 28, 1998, the Company's related debt outstanding under the
Facility was $900,000. Interest on the Facility is at the Bank's prime rate of
interest minus one percent (7.50% as of February 28, 1998) or the LIBOR-based
rate plus one and three-quarters percent.
Note 4: Employee Benefit Plan
- ------ ---------------------
The Company has a multi-faceted defined contribution Retirement Savings Plan.
Employees age 21 and above with at least one year of service are eligible to
participate in the Plan. Under the 401(k) feature of the Plan, the Company
contributes 2% of base pay to each eligible salaried employee's account and, in
addition, matches 50% of the first 4% of pay which the employee contributes to
the Plan. The Plan also contains provisions for profit sharing contributions
determined annually by the Board of Directors. Total expense for the Retirement
Savings Plan was $35,000, $35,000, and $37,000 for the fiscal years ended
February 28, 1998, February 28, 1997, and February 29, 1996, respectively.
55
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Note 5: Income Taxes
- ------ ------------
The provision for income tax expense (benefit) consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal - current..................... $ 436 260 436
- deferred.................... 23 (179) ( 96)
--- --- ---
459 81 340
--- --- ---
State - current..................... 112 64 115
- deferred.................... 6 ( 39) ( 25)
--- --- ---
118 25 90
--- --- ---
$ 577 106 430
=== === ===
</TABLE>
A reconciliation between the U. S. federal statutory rate and the Company's
effective income tax rate is (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Computed tax expense at statutory rate of 34%......... $ 483 87 336
Increase in taxes resulting from:
State income taxes, net of federal benefit......... 78 17 59
Miscellaneous items................................ 16 2 35
---- --- ---
$ 577 106 430
=== === ===
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at February 28, 1998 and
February 28, 1997 are presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Deferred tax assets:
Accruals of book costs, not yet
deductible for tax purposes............................ $ 358 379
--- ---
Total gross deferred tax assets...................... 358 379
--- ---
Deferred tax liabilities:
Machinery and equipment, principally due
to differences in depreciation......................... 9 -
Other.................................................... 5 6
----- ---
Total gross deferred tax liabilities................. 14 6
---- ---
Net deferred tax asset............................... $ 344 373
=== ===
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of these
deductible differences at February 28, 1998.
56
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Note 6: Royalties
- ------- ---------
In April, 1996, a competitor filed suit against the Company and its parents,
alleging that certain of the products of the Company infringed a patent held by
the competitor.
On December 20, 1996, a Settlement Agreement was reached between the Company,
its parents, and the competitor. The competitor dismissed the action and granted
a license to the Company for certain of its products. In exchange for the
license, the Company agreed to dismiss its counterclaims and pay the competitor
a per system royalty. On December 31, 1996, the Company satisfied a $600,000
liability under the Settlement Agreement relative to systems installed to date.
The term of the Settlement Agreement continues until the expiration of the
competitor's patent; however, the Company's status as sole licensee will remain
in effect until December 31, 2000, and all orders related to licensed products
received by the Company after December 31, 2000 will not be subject to royalty
payments. Royalty expense under this agreement is charged to cost of sales.
Note 7: Commitments
- ------- -----------
Total rental expense, including short-term leases, in fiscal year 1998, 1997,
and 1996 approximated $47,000, $35,000, and $28,000, respectively.
Future minimum rental commitments at February 28, 1998 under an operating
lease for office space is as follows (in thousands):
1999.................$9
57
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Note 8: Related Party Transactions
- ------- --------------------------
The Company has entered into various transactions with affiliated entities as
follows (in thousands):
<TABLE>
<CAPTION>
(a) Automated Prescription Systems, Inc.
(50% Stockholder):
Balance Sheets Data at February 28,
1998 and 1997 -- 1998 1997
------ ------
<S> <C> <C> <C>
Amount included in trade
receivables.......................... $ 991 21
Amount included in other
receivables.......................... 51 122
Amount included in accounts
payable.............................. 87 81
Amount included in accrued royalties
payable.............................. 55 118
Statements of Operations Data for the
fiscal years ended February 28, 1998,
February 28, 1997, and
February 29, 1996 -- 1998 1997 1996
------ ------ ------
Sales of systems and services............. $1,113 469 -
Systems and services purchased for
resale under various subcontracts....... 266 649 519
Royalty expense to parent companies....... 400 348 188
Other income - Royalty income............. - 122 -
</TABLE>
<TABLE>
<CAPTION>
(b) SI Handling Systems, Inc. (50% Stockholder):
Balance Sheets Data at February 28,
1998 and 1997 -- 1998 1997
------ -----
<S> <C> <C> <C>
Amount included in accounts
payable.............................. $ 10 275
Amount included in accrued royalties
payable................................ 55 118
Statements of Operations Data for the
fiscal years ended February 28, 1998,
February 28, 1997, and
February 29, 1996 -- 1998 1997 1996
------ ------ -----
Systems and services purchased for
resale under various subcontracts...... $1,120 2,355 770
Purchase of administrative and other
services............................... 98 108 106
Royalty expense to parent companies....... 400 348 188
</TABLE>
58
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Annual Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SI HANDLING SYSTEMS, INC.
Dated: May 29, 1998 By /s/ Leonard S. Yurkovic
-----------------------
Leonard S. Yurkovic
President and Chief Executive Officer
59
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated. This Annual
Report may be signed in multiple identical counterparts, all of which taken
together, shall constitute a single document.
Dated: May 29, 1998 /s/ Edward J. Fahey
-----------------------------
Edward J. Fahey
Chairman of the Board
Dated: May 29, 1998 /s/ Leonard S. Yurkovic
---------------------------------
Leonard S. Yurkovic
President and Chief Executive Officer
Dated: May 29, 1998 /s/ Barry V. Mack
---------------------------
Barry V. Mack
Vice President-Finance, Chief Financial
Officer and Treasurer
(Principal Accounting and Financial Officer)
Dated: May 29, 1998 /s/ Elmer D. Gates
----------------------------
Elmer D. Gates
Director
Dated: May 29, 1998 /s/ L. Jack Bradt
---------------------------
L. Jack Bradt
Director
Dated: May 29, 1998 /s/ Michael J. Gausling
---------------------------------
Michael J. Gausling
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-K FOR THE YEAR ENDED
MARCH 1, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000090045
<NAME> SI HANDLING SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-01-1998
<PERIOD-END> MAR-01-1998
<CASH> 752
<SECURITIES> 0
<RECEIVABLES> 8,830
<ALLOWANCES> 0
<INVENTORY> 2,498
<CURRENT-ASSETS> 19,502
<PP&E> 7,594
<DEPRECIATION> 6,131
<TOTAL-ASSETS> 22,219
<CURRENT-LIABILITIES> 10,537
<BONDS> 26
<COMMON> 3,712
0
0
<OTHER-SE> 7,754
<TOTAL-LIABILITY-AND-EQUITY> 22,219
<SALES> 47,631
<TOTAL-REVENUES> 47,631
<CGS> 37,488
<TOTAL-COSTS> 37,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 4,102
<INCOME-TAX> 1,490
<INCOME-CONTINUING> 2,612
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,612
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>