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:
February 28, 1999 0-03362
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 April 30, 1999: 3,708,037.
(4) The aggregate market value of the voting stock held by non-affiliates as
of April 30, 1999 was: $41,284,000.
(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 21, 1999 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 $24,000,000. The Company derives much of its sales from North
American corporations and the federal government. Sales to companies in the
United States as a percentage of total sales during fiscal 1999, 1998, and 1997
were 87.2%, 95.6%, and 97.4%, respectively.
The Company's backlog of orders at February 28, 1999 was $19,884,000,
$3,793,000 of which is with the federal government. The Company's backlog of
orders at March 1, 1998 was $22,092,000. The rate of new orders can vary
substantially from month to month. Fluctuations in the Company's sales and
earnings occur with increases or decreases in major installations. The Company
expects to fill, within its 2000 fiscal year, all of the February 28, 1999
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 14.9%,
11.8%, and 18.5% for fiscal 1999, 1998, and 1997, 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 SI
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Ordermatic order selection system, described below. A typical Cartrac system
takes six to nine months to design, manufacture, and install.
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 26.8%, 42.9%, and 27.3% for
fiscal 1999, 1998, and 1997, 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 operates at
a depth of approximately three inches, 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
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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, 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 rapidly. 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(R). Accupic is a state-of-the-art, pick-to-light system. It is a
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paperless picking system that facilitates the items currently being picked
manually in distribution centers and greatly improves picking accuracy. Bright
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 either less-than-full case picking or for
full case picking.
A typical Accupic system requires approximately six to nine months to
engineer, manufacture, and install.
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,
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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.
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 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.
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 provides a single traveling dispenser to 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 an additional order selection system product offering. 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.
The SI "P4(TM)," an automated, single unit order picking system, is a
recent addition to the Company's order selection system product offerings. Some
of the design elements of the P4 include electrically operated dispensers,
cleated belt conveyors, product guide block and frame, drive motor, sensors, and
PC-based system controls. A definite advantage of the P4 is its ability to pick
and convey products in a single file with consistent orientation to a downstream
secondary process, such as store labeling, automatic cartoning/packaging, and
price stickering. The system can be configured for different package sizes by
changing the product guide block and can handle packages which range from 2" x
2" up to a maximum size of 10" x 18." The system is highly accurate and can
process up to 150 pieces per minute.
Order Selection sales, which are comprised of Ordermatic, Itematic,
Accupic, and Dispen-SI-matic sales (including sales of Automated Pharmacy
Systems to the SI/BAKER, INC. ("SI/BAKER") joint venture), as a percent of total
sales were 33.6%, 30.9%, and 28.7% for fiscal 1999, 1998, and 1997,
respectively.
Sortation Systems. The Company provides a high speed, computer-controlled
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tilt-tray sortation system for sorting packaged 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
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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.
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 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 5.1%, 2.9%, and 0.2% for fiscal
1999, 1998, and 1997, respectively.
A typical sortation system requires approximately six to nine months to
engineer, manufacture, and install.
Automated Guided Vehicle ("AGV") Systems. During March 1992, the
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Company concluded the acquisition of all of the outstanding capital stock of BT
Systems, Inc.("BT Systems"), a U.S. corporation, from its Swedish parent
company, BT Systems AB.
BT Systems, located in Rochester Hills, Michigan, was one of the world's
largest suppliers of Automated Guided Vehicle ("AGV") Systems, with over 1,500
AGV's at 60 installations in North America. The acquisition of the AGV product
line has given the Company one of the broadest ranges of horizontal transport
products in the industry.
In 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. With the departure of a significant portion
of the original AGV talent base, except for aftermarket capabilities, the
Company has been assessing 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 5.2%, 0.0%, and 1.5% for
fiscal 1999, 1998, and 1997, respectively.
During April 1999, the Company concluded the acquisition of all of the
outstanding capital stock of Modular Automation Corp. ("MAC") of Greene, New
York. Since its formation in 1981, MAC had been a respected supplier of AGV
Systems for warehousing, distribution, and progressive assembly applications.
The acquisition of the AGV technology from MAC complements and expands the
Company's AGV product offerings. The MAC 1-2-3(TM) operating software, which
controls the vehicles, allows for rapid modification of vehicle routing, traffic
control, and guidepath layout, thereby minimizing the need for customization and
computer software changes. The acquired AGV products vary in speed, size, and
guidance technology, handle a wide range of weight capacities and materials, and
are marketed primarily under the ROBOMAC(TM) and MiniMac(TM) trade names.
Existing customers, with approximately 100 vehicles currently installed in the
United States and Europe, are fully supported by SI on their system expansion,
service, and spare parts requirements. The acquired AGV products and personnel
have been integrated into the Company's existing Easton, Pennsylvania facility.
Automated Storage/Retrieval Systems (AS/RS). In addition to its AGV
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capabilities, BT Systems also offered a wide range of capability in Automated
Storage and Retrieval Systems ("AS/RS") for which the Company had already
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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, Pennsylvania facility.
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. AS/RS sales as a percent of total sales were 0.0%,
0.0%, and 0.0% for fiscal 1999, 1998, and 1997, 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, 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 conveyors, robots, and other high technology
components, provide computer controlled flexible manufacturing systems ("FMS").
Automated Pharmacy Systems. During March 1993, the Company and Automated
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Prescription Systems, Inc. of Pineville, Louisiana formed a joint venture,
SI/BAKER. On September 29, 1998, McKesson HBOC, Inc. [NYSE:MCK], a healthcare
supply management company, announced the completion of its acquisition of
Automated Prescription Systems, Inc. Automated Prescription Systems, Inc. was
renamed McKesson Automated Prescription Systems, Inc. ("McKesson APS"). SI/BAKER
draws upon the automated materials handling systems experience of the Company
and the automated pill counting and dispensing products of McKesson 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.
McKesson 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.
McKesson APS also markets robotic, automated prescription filling systems
primarily for use in high volume pharmacy operations. McKesson APS' products
have lowered the costs of filling prescriptions and increased the time available
to the pharmacist for customer counseling.
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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 and central fill pharmacy operations. 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 and warranty experience. Historically, charges 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 15
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.
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 $8,586,000 in fiscal 1999), common carriers, and national retail
chains. A substantial amount of 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 industry 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
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systems are becoming more advanced and now provide higher picking rates than
they have in the past. The Company possesses its own pick-to-light system known
as Accupic. 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 realizing gains
in market share as compared to tilt-tray sorters. SI's family of small parcel
sorters participate in the markets that distribute small, lightweight packages.
These sorters are targeted to companies in the mail order merchandise industry.
There are approximately twenty other companies that supply sortation equipment.
Over the past several years, the Company has not attempted to sell new
AS/RS or AGV systems, but concentrated its efforts on the parts, service, and
rehab business. However, with the recent acquisition of AGV technology from MAC,
the Company is targeting market segments that are seeking delivery and assembly
systems that can be installed and modified quickly and easily. Competition in
the AGV marketplace has typically been on the basis of price. 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.
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
--------------------
Significant design features of the Cartrac, Switch-Cart, Sortation, AGV,
Itematic, Ordermatic, and Dispen-SI-matic systems are covered by patents or
patent applications in the United States.
The Company has approximately 45 patents with lives that expire through May
2012. The Company believes that it has approximately 15 significant patents.
These patents when used in conjunction with the remaining 30 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.
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During fiscal 1991, the Company entered into a 10-year licensing agreement
with Robotrac, Inc. (a subsidiary of Heico, Inc.) of Lisle, 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 1999, 1998, and 1997 was $286,000,
$356,000, and $306,000, 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 1999, 1998, and 1997 was $57,000,
$36,000, and $67,000, 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 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 is
required to pay 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 in order to prevent cancellation of the agreement by the
licensor. 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 1999, 1998, and 1997 was
$0, $0, and $7,000, respectively.
In February 1999, the Company entered into an exclusive renewable licensing
agreement with Digitron Translift AG to market their electrified monorail system
to designated applications throughout North America. The licensing agreement,
which is automatically renewable for additional five-year terms, has an
expiration date of February 1, 2004. The licensing agreement requires payment of
royalties based on the contract value of systems sold, with targeted royalties
each year through fiscal year 2004, in order to maintain exclusivity and prevent
cancellation of the agreement by the licensor. Royalty expense relating to the
Digitron Translift AG licensing agreement for fiscal 1999 was $0.
In July 1998, the Company entered into a supply agreement with Integrated
Dispensing Systems, Inc. ("IDS") granting IDS the exclusive right to market and
sell the Company's products that pertain to the dispensing or delivery of single
"unit of use" packages of drugs and/or medical supplies in hospitals and other
healthcare entities. The licensing agreement, which is automatically renewable
for additional four-year terms, has an expiration date of July 31, 2002. The
licensing agreement requires IDS to purchase a minimum amount of licensed
products from the Company, with targeted purchase requirements each year through
fiscal year 2003, in order for IDS to retain its exclusive distributorship and
prevent cancellation of the agreement by the Company.
Development efforts pertaining to the alliance between the Company and IDS
have produced a blister-dispensing device utilized as part of a unit dose
selection
10
<PAGE>
system. Targeted primarily to automate the distribution of medications and
materials in hospitals and other healthcare facilities, the blister-dispensing
device addresses the need for dispensing or delivery of single "unit of use"
packages of drugs and/or medical supplies. Some of the design elements of the
blister-dispensing device include an aluminum frame, linear actuator, single
traveling dispenser, gripper mechanism, and air-driven cutting blade. A major
advantage of the blister-dispensing device is the speed and accuracy at which it
can pick and package patient prescription requirements. The device can
accommodate the needs of approximately 300 patients per hour.
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
-------------------
Product development costs, including patent expense and amortization, were
$478,000, $287,000, and $277,000 for fiscal years 1999, 1998, and 1997,
respectively. Development programs in fiscal 1999 included enhancements to the
Company's product controls and features, and improvements to the Order Selection
product line with efforts directed toward unit picking techniques. 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. 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.
Employees
---------
The Company employs 160 persons in the United States. Its staff includes 6
executive employees, 109 office employees including salespersons, draftspersons
and engineers, and 45 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.
11
<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 February 28, 1999.
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.
12
<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 1999 Fiscal 1998*
------------------- ----------------
High Low High Low
-------- ------- ------ ------
<S> <C> <C> <C> <C>
First Quarter..........................15 1/4 12 1/2 13 9 3/4
Second Quarter.........................14 15/16 11 3/4 13 10 5/6
Third Quarter..........................14 10 1/4 15 1/4 10 5/6
Fourth Quarter.........................15 11 9/16 14 1/2 12 1/8
*Adjusted for three-for-two stock split that was distributed in November 1997.
<FN>
The Company paid cash dividends of 10 cents per share in fiscal 1999 and 6
2/3 cents per share in fiscal 1998, after adjustment for the three-for-two stock
split that was distributed in November 1997.
The number of beneficial holders of the Company's Common Stock at February
28, 1999 was approximately 1,850.
The closing market price on May 26, 1999 was $11.00.
</FN>
</TABLE>
Item 6. Selected Financial Data
- ------- -----------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
Fiscal Year Ended 2/28/99 3/01/98 3/02/97 3/03/96 2/26/95
- ----------------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales........................ $39,573 47,631 24,000 25,786 28,631
Net earnings (loss)*............. 1,378 2,612 2,053 1,625 ( 1,468)
Basic earnings (loss) per share .37 .70 .56 .44 ( .40)
Diluted earnings (loss) per
share......................... .36 .70 .55 .44 ( .40)
Total assets..................... 23,580 22,219 16,547 12,570 13,136
Long-term liabilities............ 228 216 167 150 665
Cash dividends per share......... .10 .07 .07 .04 .04
<FN>
* Fiscal 1995 included approximately $525,000 of expenses relating to the
rescinded sale of the AGV product line, $1,700,000 of losses associated
with the AGV product line, and $190,000 in corporate restructuring charges.
Fiscal 1996 included approximately $436,000 of income relating to the
rescinded sale of the AGV product line.
</FN>
</TABLE>
13
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations
---------------------
Liquidity And Capital Resources
- -------------------------------
The Company's cash and cash equivalents increased to $1,829,000 during
fiscal 1999 from $752,000 at the end of fiscal 1998. The increase resulted from
cash provided by operating activities totaling $3,299,000 and proceeds of
$74,000 from the sale of common stock in connection with the employee incentive
stock option plan. Partially offsetting the increase in cash and cash
equivalents from these sources were the repayments of long-term debt of $9,000
and the revolving credit loan payable to bank of $1,000,000 purchases of
building improvements and purchases of capital equipment of $528,000, the
payment of $372,000 in cash dividends to shareholders, and the payment of
$399,000 in connection with the repurchase and retirement of the Company's
common stock. Funds used by operating activities in fiscal 1998 were $5,150,000,
while funds provided by operating activities in fiscal 1997 were $2,553,000.
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 1999. Currently,
the committed revolving credit facility has an expiration date of August 31,
2000. The Company repaid its outstanding debt under the committed revolving
credit facility on March 2, 1998, and the Company did not have any additional
borrowings under the committed revolving credit facility during fiscal 1999.
On March 4, 1996, 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 McKesson
Automated Prescription Systems, Inc., have each provided a limited guarantee and
surety in an 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 expiration date of the Facility. As of February 28, 1999, SI/BAKER's related
debt outstanding under the facility was $500,000. SI/BAKER repaid its
outstanding debt under the facility on March 18, 1999. The Facility has an
expiration date of August 31, 1999.
On October 14, 1997, the Board of Directors of the Company declared a
three-for-two stock split that was distributed on November 10, 1997 to the
shareholders of record on October 27, 1997. The purpose of the stock split was
to increase the number of outstanding shares and broaden ownership and
availability of the Company's common stock.
On October 14, 1998, the Board of Directors of the Company authorized
management to purchase up to $400,000 of the Company's common stock through open
market transactions or negotiated transactions at prices not to exceed
prevailing market prices. During fiscal 1999, the Company spent $399,000 on
purchases of its common stock through open market transactions as part of the
stock purchase program.
The Company believes that its financial resources consisting of its current
assets, anticipated cash flow, and the available revolving credit facility will
adequately finance its operating requirements for 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.
14
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results Of Operations - Fiscal 1999 Compared To Fiscal 1998
- -----------------------------------------------------------
The Company's net earnings for fiscal 1999 were $1,378,000 compared to net
earnings of $2,612,000 for fiscal 1998.
Backlog at the end of fiscal 1999 was $19,884,000. During fiscal 1999, the
Company received orders totaling approximately $37,365,000. The largest order
received, totaling approximately $12,300,000, engages the Company to automate
the distribution process at a major health and beauty aids company, including an
innovative utilization of robotics. This systems integration contract contains a
high degree of ancillary products, providing lower gross profit margins than
sales of the Company's proprietary products and is scheduled to be completed by
the end of the first half of fiscal 2000.
Net sales of $39,573,000 for fiscal 1999 decreased 16.9% compared to net
sales of $47,631,000 for fiscal 1998. The sales decrease in fiscal 1999 was
attributed primarily to a smaller backlog of orders entering fiscal 1999
($22,092,000 versus a $31,029,000 backlog beginning fiscal 1998). The largest
declines in sales occurred in the Order Selection and Switch-Cart product lines.
During fiscal 1999, Order Selection sales of approximately $13,300,000 declined
approximately $1,400,000 from the fiscal 1998 sales level due to an order
suspension caused by a customer's financial condition and delays in earlier
periods by prospective customers in signing contracts often caused by expanding
project scope or protracted contractual negotiations. During fiscal 1999,
Switch-Cart sales of approximately $10,600,000 declined approximately $9,800,000
from the fiscal 1998 sales level due primarily to the fiscal 1998 period
containing a greater amount of revenue for progress on the contract with the
U.S. Defense Logistics Agency. Partially offsetting the decline in Order
Selection and Switch-Cart sales during fiscal 1999 was an increase in sales of
approximately $3,100,000 across the Company's other products lines, with the
majority of the increase relating to sales of the Company's Sortation and
Automated Guided Vehicle product lines.
Gross profit as a percentage of sales was 22.0% for fiscal 1999 compared to
21.3% for fiscal 1998. Although the gross profit percentages were comparable for
both fiscal years, the fiscal 1999 gross profit percentage was impacted by
favorable performance on several contracts, principally for the Company's higher
margin proprietary products, initiated in the prior fiscal year that were
completed during fiscal 1999. However, offsetting the favorable performance was
progress on systems integration contracts that contain a high degree of
ancillary products and provide lower gross profit margins than sales of
proprietary products.
Selling, general and administrative expenses of $6,353,000 were lower by
$319,000 in fiscal 1999 than in fiscal 1998. The decrease in selling, general
and administrative expenses was attributable to a reduction of approximately
$625,000 for expenses associated with the Company's incentive-based compensation
plan which provides for gain sharing as a means of promoting performance
excellence. Also contributing to the higher selling, general and administrative
expenses in fiscal 1998 were approximately $220,000 in consulting expenditures
associated with increasing the visibility of the Company and attaining the ISO
9001 quality certification designation. Partially offsetting the decrease in
selling, general and administrative expenses were (1) increases of approximately
$425,000 for costs associated with inflationary factors and product promotion
and sales efforts aimed at expanding the Company's customer base of business
consistent with the Company's strategic plan to grow the business as a systems
integrator and (2)increases of approximately $100,000 in professional fees and
expenses associated with the recent appointment of a new President.
15
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results Of Operations - Fiscal 1999 Compared To Fiscal 1998 (Continued)
- -----------------------------------------------------------
Product development costs of $478,000 were higher by $191,000 in fiscal
1999 than in fiscal 1998. Development programs in fiscal 1999 included
enhancements to the Company's product controls and features, and improvements to
the Order Selection product line with efforts directed towards unit picking
techniques. 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. Interest
income of $166,000 was higher by $43,000 in fiscal 1999 than in
fiscal 1998. The increase in interest income was primarily attributable to the
higher level of funds available for short-term investments during fiscal 1999.
Equity in income of joint venture represents the Company's proportionate
share of its investment in SI/BAKER which is being accounted for under the
equity method. The unfavorable variance of $407,000 for fiscal 1999 in the
equity in income of joint venture was attributable to SI/BAKER's decline in
sales to approximately $8,056,000 as compared to sales of $19,979,000 in fiscal
1998. The sales decrease in fiscal 1999 was primarily attributable to a smaller
backlog of orders entering fiscal 1999 versus a record high opening backlog of
orders at the beginning of fiscal 1998. Fiscal 1998 sales were favorably
impacted by performance on contracts with customer specifications requiring
systems to be commercially operable by the end of fiscal 1998; however, the
fiscal 1998 gross profit percentage was unfavorably impacted by difficulties in
executing and concluding several contracts as additional costs became necessary
to meet contractual throughput requirements. Also contributing to fiscal 1999's
unfavorable variance was increased development expenses of $396,000 for software
and controls capabilities for various new products addressing changing market
requirements. Partially offsetting the unfavorable variance were SI/BAKER's
decreases of (1) $478,000 in revenue-based royalty costs due to the parent
companies and (2) $61,000 in selling, general and administrative expenses. The
decrease in selling, general and administrative expenses was primarily
attributable to a reduction of $195,000 of expenses based on revenue and profit
performance. Partially offsetting the decrease in selling, general and
administrative expenses was an increase in costs associated with sales and
administrative efforts aimed at expanding SI/BAKER's customer base of business.
The unfavorable variance of $203,000 in other income, net, was primarily
attributable to a decrease in the revenue-based royalty income related to the
SI/BAKER joint venture.
The Company incurred income tax expense of $856,000 during fiscal 1999
compared to income tax expense of $1,490,000 in fiscal 1998. Income tax expense
for fiscal 1999 and fiscal 1998 was generally recorded at statutory federal and
state tax rates.
Results Of Operations - Fiscal 1998 Compared To Fiscal 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
16
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results Of Operations - Fiscal 1998 Compared To Fiscal 1997 (Continued)
- -----------------------------------------------------------
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.
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 was
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 was 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
17
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Results Of Operations - Fiscal 1998 Compared To Fiscal 1997 (Continued)
- ------------------------------------------------------------------
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 was primarily attributable to the
lower level of funds available for short-term investments during fiscal 1998.
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, was 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 became realizable due to the current and projected
profitability of the Company.
Year 2000
- ---------
The Year 2000 issue relates to the ability of computer systems,
microprocessors, and other electronic devices to deal appropriately with dates
on or after January 1, 2000 and other dates used for special programmatic
functions (e.g., 9999). The effect of the Year 2000 issue may include computer
failures and business interruption.
The Company has assembled a team of internal staff to oversee the matter
and is underway in completing its Year 2000 assessment. Internally, the Company
has upgraded its business system to address the Year 2000 issue. Externally, the
Company has and will continue to survey its suppliers, financial institutions,
and other organizations to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems or business activities may impact
the Company's operations. However, based on the response of its survey to date,
the Company cannot presently estimate the impact of the failure of third parties
to be Year 2000 compliant. Also, customers may utilize the services, on a fee
basis, of the Company's customer support group to assess and upgrade their
materials
18
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Year 2000 (Continued)
- ---------
handling systems previously purchased from the Company for Year 2000 compliance.
Costs incurred to date and estimated costs to complete the Company's Year 2000
compliance efforts are not expected to be material.
The outline of the general phases of the Company's Year 2000 project is as
follows: (1) Year 2000 methodology and compliance training for key personnel;
(2) inventorying Year 2000 items, internally and externally; (3) assigning
priorities to identified Year 2000 items; (4) assessing the Year 2000 compliance
of items determined to be material to the Company; (5) remediating or replacing
material items that are determined not to be Year 2000 compliant; (6) testing
material items for Year 2000 compliance; and (7) designing and implementing
contingency plans to the extent deemed necessary. The Company has substantially
completed phases (1) through (5) relating to existing internal hardware,
software, facilities and equipment; however, testing is ongoing as hardware,
software, and equipment are remediated, upgraded or replaced. Additionally, the
Company continues to assess and test newly engaged suppliers and their products
for Year 2000 compliance as part of the Company's normal business operations.
The Company has not completed its external surveys or contingency plans in the
case that it is not Year 2000 compliant by the Year 2000. The Company will
continue to monitor its Year 2000 compliance program, address any material
issues, and develop contingency planning as it deems appropriate.
The scheduled completion date for the Company's efforts to address the Year
2000 issue is August 1999. The failure to identify or correct a material Year
2000 problem could result in an interruption in, or a failure of, certain
business activities or operations such as the Company's ability to service its
customers. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and financial condition. The Company's Year
2000 assessment process is expected to significantly reduce the Company's level
of uncertainty about the Year 2000 problem and, in particular, about the Year
2000 compliance and readiness of its material suppliers and customers. However,
due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity and financial condition.
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 or by the Securities and Exchange Commission
rules, regulations, and releases. The Company intends that such forward-looking
statements be subject to the safe harbors created thereby. 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,"
"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 and in the Company's other publicly
filed reports; (2) as a result of factors over which the Company has no control,
including the strength of domestic and foreign economies, sales growth,
competition, certain cost increases, and any potential exposures relating to
Year
19
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations (Continued)
---------------------
Cautionary Statement (Continued)
- --------------------
2000 matters; or (3) if the factors on which the Company's conclusions are based
do not conform to the Company's expectations.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
- -------- ----------------------------------------------------------
The Company does not believe that its exposures to interest rate risk or
foreign currency exchange risk, risks from commodity prices, equity prices and
other market changes that affect market risk sensitive instruments are material
to its results of operations.
20
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
I N D E X
---------
o Independent Auditors' Report.
o Financial Statements:
Balance sheets, February 28, 1999 and March 1, 1998.
Statements of operations for the years ended February 28, 1999, March 1,
1998, and March 2, 1997.
Statements of stockholders' equity for the years ended February 28,
1999, March 1, 1998, and March 2, 1997.
Statements of cash flows for the years ended February 28, 1999, March 1,
1998, and March 2, 1997.
Notes to financial statements.
o Schedule for the years ended February 28, 1999, March 1, 1998, and March 2,
1997:
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.
21
<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
February 28, 1999 and March 1, 1998, and the results of its operations and its
cash flows for each of the years in the three-year period ended February 28,
1999, 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 LLP
KPMG LLP
Allentown, PA
April 30, 1999
22
<PAGE>
SI HANDLING SYSTEMS, INC.
Balance Sheets
February 28, 1999 and March 1, 1998
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents, principally
time deposits.............................. $ 1,829 752
Short-term investments....................... - -
------ ------
Total cash, cash equivalents, and
short-term investments................. 1,829 752
------ ------
Receivables:
Trade...................................... 7,603 8,830
Notes and other receivables................ 51 51
------ ------
Total receivables........................ 7,654 8,881
------ ------
Costs and estimated earnings in excess
of billings................................ 7,709 6,774
------ ------
Inventories:
Finished goods and work-in-process......... 1,613 1,578
Raw materials.............................. 1,002 920
------ ------
Total inventories........................ 2,615 2,498
------ ------
Deferred income tax benefits................. 600 435
Prepaid expenses and other current assets.... 199 162
------ ------
Total current assets..................... 20,606 19,502
------ ------
Property, plant and equipment, at cost:
Land......................................... 27 27
Buildings and improvements................... 3,485 3,387
Machinery and equipment...................... 4,544 4,180
------ ------
8,056 7,594
Less: accumulated depreciation.............. 6,426 6,131
------ ------
Net property, plant and equipment.......... 1,630 1,463
------ ------
Deferred income tax benefits.................... 175 175
Investment in joint venture..................... 1,041 1,027
Other assets, at cost less accumulated
amortization of $90 in 1999 and
$78 in 1998.................................. 128 52
------ ------
Total assets............................. $23,580 22,219
====== ======
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
SI HANDLING SYSTEMS, INC.
Balance Sheets
February 28, 1999 and March 1, 1998
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Liabilities And Stockholders' Equity
- ------------------------------------
Current liabilities:
Revolving credit loan payable to bank........ $ - 1,000
Current installments of long-term debt....... 9 8
Accounts payable............................. 4,079 4,044
Customers' deposits and billings in excess
of costs and estimated earnings............ 4,173 2,218
Accrued salaries, wages, and commissions..... 761 1,495
Income taxes payable......................... 410 380
Accrued royalties payable.................... 357 432
Accrued other liabilities.................... 1,416 960
------ ------
Total current liabilities................ 11,205 10,537
------ ------
Long-term liabilities:
Long-term debt, excluding current installments:
Mortgage payable........................... 16 26
------ ------
Total long-term debt..................... 16 26
Deferred compensation........................ 212 190
------ ------
Total long-term liabilities.............. 228 216
------ ------
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued 3,705,048 shares
in 1999 and 3,711,826 shares in 1998....... 3,705 3,712
Additional paid-in capital................... 2,767 2,645
Retained earnings............................ 5,675 5,109
------ ------
Total stockholders' equity............... 12,147 11,466
------ ------
Total liabilities and stockholders' equity $23,580 22,219
====== ======
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
SI HANDLING SYSTEMS, INC.
Statements Of Operations
Years Ended February 28, 1999, March 1, 1998, and March 2, 1997
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales.................................... $ 39,573 47,631 24,000
Cost of sales................................ 30,859 37,488 16,823
------ ------ ------
Gross profit on sales..................... 8,714 10,143 7,177
------ ------ ------
Selling, general and administrative
expenses.................................. 6,353 6,672 5,474
Product development costs.................... 478 287 277
Interest expense............................. 20 20 12
Interest income.............................. ( 166) ( 123) ( 236)
Equity in income of joint venture............ ( 14) ( 421) ( 76)
Other income, net............................ ( 191) ( 394) ( 327)
------ ------ ------
6,480 6,041 5,124
------ ------ ------
Earnings before income taxes................. 2,234 4,102 2,053
Income tax expense........................... 856 1,490 -
------ ------ ------
Net earnings.............................. $ 1,378 2,612 2,053
====== ====== ======
Basic earnings per share..................... $ .37 .70 .56
====== ====== ======
Diluted earnings per share................... $ .36 .70 .55
====== ====== ======
Weighted average shares outstanding:
Basic..................................... 3,718,887 3,705,590 3,677,577
========= ========= =========
Diluted................................... 3,757,330 3,755,595 3,712,421
========= ========= =========
</TABLE>
25
<PAGE>
SI HANDLING SYSTEMS, INC.
Statements Of Stockholders' Equity
Years Ended February 28, 1999, March 1, 1998, and March 2, 1997
(In Thousands, Except Share And Per Share Data)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
-------- ---------- -------- -------------
<S> <C> <C> <C> <C>
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
Net earnings................................................ - - 1,378 1,378
Dividends declared - $.10 per share cash dividend........... - - ( 372) ( 372)
Acquisition and retirement of 40,928 common shares.......... ( 41) ( 30) ( 440) ( 511)
Sale of 34,150 common shares in connection with
employee incentive stock option plan................. 34 152 - 186
----- ----- ----- ------
Balance at February 28, 1999................................ $ 3,705 2,767 5,675 12,147
===== ===== ===== ======
</TABLE>
See accompanying notes to financial statements.
26
<PAGE>
SI HANDLING SYSTEMS, INC.
Statements Of Cash Flows
Years Ended February 28, 1999, March 1, 1998, and March 2, 1997
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................... $ 1,378 2,612 2,053
Adjustments to reconcile net earnings
to net cash provided (used) by
operating activities:
Depreciation of plant and equipment.... 361 330 340
Amortization of intangibles and
deferred costs....................... 12 11 10
Gain on disposition
of equipment......................... ( 12) ( 3) ( 1)
Equity in income of joint venture...... ( 14) ( 421) ( 76)
Changes in operating assets and liabilities:
Receivables............................ 1,227 (4,262) (1,586)
Costs and estimated earnings
in excess of billings................ ( 935) (5,134) 163
Inventories............................ ( 117) ( 533) ( 203)
Deferred income tax benefits........... ( 165) ( 24) ( 286)
Prepaid expenses and other
current assets....................... ( 37) 11 ( 32)
Other noncurrent assets................ ( 88) 1 5
Accounts payable....................... 35 1,988 514
Customers' deposits and billings
in excess of costs and estimated
earnings............................. 1,955 ( 534) 1,640
Accrued salaries, wages, and
commissions.......................... ( 734) 717 ( 151)
Income taxes payable................... 30 ( 62) 167
Accrued royalties payable.............. ( 75) 5 ( 166)
Accrued other liabilities.............. 456 90 131
Deferred compensation.................. 22 58 31
----- ----- -----
Net cash provided (used) by
operating activities..................... 3,299 (5,150) 2,553
----- ----- -----
Cash flows from investing activities:
Purchase of short-term investments......... - (1,473) (7,047)
Sale of short-term investments............. - 5,214 5,720
Proceeds from the disposition of
equipment................................ 12 3 1
Additions to property, plant and
equipment................................ ( 528) ( 492) ( 468)
----- ----- -----
Net cash provided (used) by
investing activities..................... ( 516) 3,252 (1,794)
----- ----- -----
</TABLE>
27
<PAGE>
SI HANDLING SYSTEMS, INC.
Statements Of Cash Flows (Continued)
Years Ended February 28, 1999, March 1, 1998, and March 2, 1997 (In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Repayment of long-term debt................ ( 9) ( 13) ( 22)
Sale of common stock in connection
with employee incentive stock option plan 74 59 24
Dividends paid on common stock............. ( 372) ( 246) ( 244)
Dividends paid to stockholders for
fractional shares in connection with
three-for-two stock split................ - ( 2) -
Repurchase and retirement of
common stock............................. ( 399) - -
Increase in (repayment of) revolving
credit loan payable to bank.............. (1,000) 1,000 -
----- ----- -----
Net cash provided (used) by
financing activities..................... (1,706) 798 ( 242)
----- ----- -----
Increase (decrease) in cash and cash
equivalents................................ 1,077 (1,100) 517
Cash and cash equivalents,
beginning of year.......................... 752 1,852 1,335
----- ----- -----
Cash and cash equivalents,
end of year................................ $ 1,829 752 1,852
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
28
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements
February 28, 1999 and March 1, 1998
(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
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.
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 1999, three customers accounted for revenues
of $8,586,000, $4,347,000, and $4,103,000, respectively. In fiscal 1998, one
customer accounted for revenues of $17,513,000. In fiscal 1997, one customer
accounted for revenues of $4,249,000. No other customer accounted for over 10%
of revenues.
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
February 28, 1999, one customer owed the Company $4,344,000 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. Each of the fiscal years ended February 28, 1999, March 1, 1998, and
March 2, 1997 consisted of 52 weeks.
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.
29
<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 McKesson Automated Prescription Systems,
Inc. ("McKesson 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 McKesson 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
30
<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 and
warranty experience.
Income Taxes
- ------------
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. 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 Stock Split
- ------------------
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. All references throughout the financial statements to shares
of common stock or per share amounts have been adjusted in all years to reflect
the stock split.
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 (income) for the phantom stock unit
plan was $(23,000), $17,000, and $5,000, respectively in fiscal 1999, 1998, and
1997.
31
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
Earnings Per Share
- ------------------
Basic and diluted earnings per share for fiscal years 1999, 1998, and 1997
have been adjusted to reflect the three-for-two stock split of November 1997 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>
1999
- ----
Income (loss)
numerator............. $1,378,000 (1) (14,000) $1,364,000 (5)
Shares
denominator........... 3,718,887 38,443 (2) 3,757,330
--------- ---------
Per share
amount................ .37 .36
========= =========
1998
Income
numerator............. 2,612,000 (1) 11,000 $2,623,000 (5)
Shares
denominator........... 3,705,590 50,005 (3) 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 (4) 3,712,421
--------- ---------
Per share
amount................ .56 .55
========= =========
<FN>
(1)Income available to common shareholders.
(2)Includes 27,173 stock options and 11,270 phantom stock units.
(3)Includes 42,879 stock options and 7,126 phantom stock units.
(4)Includes 33,831 stock options and 1,013 phantom stock units.
(5)Income available to common shareholders plus assumed conversions.
</FN>
</TABLE>
32
<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. The Company adopted these statements effective March 2, 1998.
The adoption of these statements did not 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," effective for fiscal years
beginning after December 15, 1997. This statement revises employers' disclosures
about pension and other postretirement benefit plans but does not change the
measurement or recognition of those plans. The Company adopted this statement
effective March 2, 1998. The adoption of this statement did not have a material
impact on the Company's financial statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." The SOP is
effective for fiscal years beginning after December 15, 1998, and establishes
criteria for capitalizing certain internal use software costs. It is not
expected that the adoption of the SOP will have a material impact on the
Company's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" which is effective for fiscal years beginning after December 15,
1998, and provides guidance on the expensing of costs of start-up activities as
these costs are incurred. It is not expected that the adoption of the SOP will
have a material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." The statement is effective for fiscal years
beginning after June 15, 1999, though earlier adoption is encouraged and
retroactive application is prohibited. It is not expected that the adoption of
this statement will have a material impact on the Company's financial
statements.
33
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(2) Uncompleted Contracts
- --- ---------------------
Costs and estimated earnings on uncompleted contracts are as follows (in
thousands):
<TABLE>
<CAPTION>
February 28, 1999 March 1, 1998
----------------- -------------
<S> <C> <C>
Costs and estimated earnings on
uncompleted contracts..................... $ 29,191 47,892
Less: billings to date...................... 25,655 43,336
------ ------
$ 3,536 4,556
====== ======
Included in accompanying balance
sheets under the following captions:
Costs and estimated earnings in excess
of billings............................ $ 7,709 6,774
Customers' deposits and billings in
excess of costs and estimated earnings. ( 4,173) ( 2,218)
------ ------
$ 3,536 4,556
====== ======
</TABLE>
There were no retainages included in accounts receivable at February 28, 1999
and March 1, 1998.
(3) Revolving Credit Loan
- --- ---------------------
A summary of the revolving credit loan payable to bank is as follows (in
thousands):
<TABLE>
<CAPTION>
February March
28, 1999 1, 1998
--------- -------
<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 (7.75% as of
February 28, 1999) 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
1999. 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.
34
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(4) Long-Term Debt and Compensating Balances
- --- ----------------------------------------
A summary of long-term debt follows (in thousands):
<TABLE>
<CAPTION>
February March
28, 1999 1, 1998
--------- -------
<S> <C> <C>
Mortgage payable.............................. $ 25 34
Less: current installments of long-term debt. 9 8
------ ------
$ 16 26
====== =====
</TABLE>
The mortgage bears an interest rate of 5.0%, is secured by the land and
buildings with a depreciated cost of $575,000 at February 28, 1999, and is
payable through October 2001.
Principal payments of long-term debt in each of the next five years from
February 28, 1999 under terms of the existing agreement is as follows (in
thousands):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$ 9 10 6 - -
=== === === === ===
</TABLE>
35
<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 1999,
1998, and 1997:
<TABLE>
<CAPTION>
1982 ISOP 1992 ISOP 1997 ECP TOTAL
------------------ ------------------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Option price*......... $ 2.47 4.94 4.36 5.33 6.33 13.33 15.25
====== ====== ====== ====== ====== ====== ======
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
Changes in 1999:
Granted............ - - - - - - 52,748 52,748
Exercised.......... - - ( 6,011) (17,716) (10,423) - - ( 34,150)
Lapsed............. - - - - - - - -
------ ------ ------ ------ ------ ------ ------ -------
Options outstanding
as of
February 28, 1999 - - 7,264 - 26,400 58,800 52,748 145,212
====== ====== ====== ====== ====== ====== ====== =======
<FN>
* 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.
</FN>
</TABLE>
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.
36
<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, 33,664 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, 111,548 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 1999,
1998, and 1997 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 February 28,
1999, March 1, 1998, and March 2, 1997 would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net earnings As reported............. $1,378 2,612 2,053
Pro forma............... 1,227 2,556 2,026
Basic earnings As reported............. $ .37 .70 .56
per share Pro forma............... .33 .69 .55
</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 1999, 1998, and 1997,
respectively: dividend yields of .66%, .5%, and 1.05%; risk-free interest rates
of 5.12%, 5.78%, and 6.38%; expected volatilities of 34.3%, 35.5%, and 36.0%;
and an expected holding period of four years.
Pro forma net earnings reflects only options granted in fiscal years 1996
through 1999. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net earnings
presented above because compensation cost occurs over the option vesting period,
and compensation cost is not considered for options granted prior to March 4,
1995.
37
<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.
Assets of the Company's defined benefit plan are primarily invested in publicly
traded common stocks, corporate and government debt securities, and cash or cash
equivalents.
Reconciliation of the beginning and ending balances of the benefit
obligations for the Company's defined benefit plan were (in thousands):
<TABLE>
<CAPTION>
November November
30, 1998 30, 1997
-------- --------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year........... $ 2,074 1,735
Service cost (excluding administrative expenses).. 54 45
Interest cost..................................... 141 129
Amendments........................................ 0 217
Actuarial gain (loss)............................. 46 22
Benefits paid..................................... ( 74) ( 74)
----- -----
Benefit obligation at end of year................. $ 2,241 2,074
===== =====
</TABLE>
A reconciliation of the beginning and ending balances of the fair value of
the plan assets of the Company's defined benefit plan follows (in thousands):
<TABLE>
<CAPTION>
November November
30, 1998 30, 1997
-------- --------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year.... $ 2,581 2,034
Actual return on plan assets...................... 862 676
Expenses.......................................... ( 49) ( 55)
Benefits paid..................................... ( 74) ( 74)
----- -----
Fair value of plan assets at end of year.......... $ 3,320 2,581
===== =====
</TABLE>
Accrued pension liability included in the Company's balance sheets at
November 30 were (in thousands):
<TABLE>
<CAPTION>
November November
30, 1998 30, 1997
-------- --------
<S> <C> <C>
Reconciliation to balance sheets:
Funded status:
Plan assets in excess of benefit obligation....... $ 1,079 507
Unrecognized net actuarial gain................... (1,790) (1,124)
Unrecognized net obligation....................... ( 39) ( 61)
Unrecognized prior service costs.................. 350 398
----- -----
Accrued benefit cost recognized in the
Company's balance sheets...................... $( 400) ( 280)
===== =====
</TABLE>
38
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(6) Employee Benefit Plans (Continued)
- --- ----------------------
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 1999, 1998, and 1997,
includes the following components (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Service cost - benefits earned during the period..... $ 108 89 72
Interest cost on projected benefit obligation........ 141 129 113
Expected return on plan assets - increase............ (144) (123) (111)
Amortization of net asset............................ ( 22) ( 22) ( 22)
Amortization of prior service cost................... 48 40 29
Recognized net actuarial gain........................ ( 11) - -
---- --- ---
Net periodic pension expense......................... $ 120 113 81
=== === ===
</TABLE>
Significant weighted average rates and actuarial assumptions used to
develop the net periodic pension expense and the projected benefit obligation
were:
<TABLE>
<CAPTION>
As of November 30,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Discount rate........................................ 6.75% 7.0% 7.0%
Expected long-term rate of return on plan assets..... 8.50% 8.5% 8.5%
</TABLE>
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 $356,000, $461,000, and $307,000 for
fiscal years 1999, 1998, and 1997, respectively.
39
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(7) Income Taxes
- --- ------------
The provision for income tax expense (benefit) consists of the following
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal - current............................ $ 828 1,236 223
- deferred........................... ( 134) ( 12) ( 223)
----- ----- -----
694 1,224 -
----- ----- -----
State - current............................ 193 278 63
- deferred........................... ( 31) ( 12) ( 63)
----- ----- -----
162 266 -
----- ----- -----
$ 856 1,490 -
===== ===== =====
</TABLE>
A reconciliation between the U.S. federal statutory rate and the Company's
effective income tax rate is (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Computed tax expense (benefit) at statutory
rate of 34%................................... $ 759 1,395 698
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit.. 108 176 -
Equity in earnings of joint venture......... ( 5) ( 115) ( 21)
Change in the valuation allowance for
deferred tax assets....................... ( 43) - ( 770)
Miscellaneous items......................... 37 34 93
----- ----- -----
$ 856 1,490 -
===== ===== =====
</TABLE>
The significant components of deferred income tax expense (benefit) are as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Deferred tax expense (benefit)
(exclusive of change in valuation allowance) $( 122) ( 24) 484
Decrease in the valuation allowance
for deferred tax assets....................... ( 43) - ( 770)
----- ----- -----
$( 165) ( 24) ( 286)
===== ===== =====
</TABLE>
40
<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 February 28, 1999 and
March 1, 1998 are presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating and built in loss carryforward......... $ 345 388
Inventories, principally due to book reserves
not yet deductible for tax purposes, and
additional costs inventoried for tax purposes
pursuant to uniform capitalization rules........... 526 468
Accrued warranty costs............................... 187 28
Accrued pension costs................................ 154 107
Accruals for other book costs, not yet deductible
for tax purposes................................... 256 300
----- -----
Total gross deferred tax assets.................. 1,468 1,291
Less valuation allowance......................... 460 503
----- -----
Net deferred tax assets.......................... 1,008 788
----- -----
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation........................ ( 98) ( 61)
Other................................................ ( 135) ( 117)
----- -----
Total gross deferred tax liabilities............. ( 233) ( 178)
----- -----
Net deferred tax assets.......................... $ 775 610
===== =====
</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 February 28,
1999.
(8) Settlement of Litigation
- --- ------------------------
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.
41
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(8) Settlement of Litigation (Continued)
- --- ------------------------
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
$500,000 at February 28, 1999.
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 1999,
1998, and 1997, approximated $37,000, $81,000, and $81,000, respectively.
Future minimum rental commitments at February 28, 1999 under all operating,
noncancelable leases, primarily for facilities, are as follows (in thousands):
<TABLE>
<S> <C>
2000............... $ 30
2001............... 14
2002............... 3
</TABLE>
In fiscal 1997, the Company entered into an exclusive licensing agreement
which requires payment of royalties based on the number of machines sold, with
minimum royalties each year through fiscal year 2002 in order to prevent
cancellation of the agreement by the licensor. Future minimum royalties payable
are as follows (in thousands):
<TABLE>
<S> <C>
2000............... $ 25
2001............... 25
2002............... 25
</TABLE>
In fiscal 1999, the Company entered into an exclusive licensing agreement
which requires payment of royalties based on the contract value of systems sold,
with targeted royalties each year through fiscal year 2004, in order to maintain
exclusivity and prevent cancellation of the agreement by the licensor. Future
targeted royalties payable are as follows (in thousands):
<TABLE>
<S> <C>
2000............... $ 40
2001............... 105
2002............... 150
2003............... 210
2004............... 270
</TABLE>
42
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(11) Cash Flow Information
- ---- ---------------------
Supplemental disclosures of cash flow information for fiscal years 1999,
1998, and 1997 are as follows (in thousands, except share data):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest............................. $ 19 11 4
===== ===== =====
Income taxes......................... $ 991 1,576 119
===== ===== =====
Supplemental disclosures of noncash
financing activities:
Issuance of 20,897 common shares
treasury in exchange for
8,228 common shares delivered to
the Company by officers in connection
with employee incentive stock
option plan........................... $ 112 - -
===== ===== =====
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 -
===== ===== =====
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
===== ===== =====
</TABLE>
43
<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>
February March
28, 1999 1, 1998
-------- -------
<S> <C> <C>
SI/BAKER, INC., 50% owned by the Company:
Balance Sheets Data (in thousands) -
Amount included in notes and other receivables....... $ 41 51
Amount included in costs and estimated
earnings in excess of billings..................... 10 14
Investment in SI/BAKER............................... 1,041 1,027
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Statements of Operations Data (in thousands) -
Systems and services sold under various
subcontracts....................................... $ 463 1,120 2,355
Reimbursement for administrative and other
services provided.................................. 113 98 108
Other income, net.................................... 161 400 348
</TABLE>
Information pertaining to the Company's investment in the SI/BAKER joint
venture is as follows (in thousands):
<TABLE>
<S> <C>
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
Equity in net earnings................................................ 14
-----
Balance at February 28, 1999.......................................... $1,041
=====
</TABLE>
Undistributed earnings of SI/BAKER (less related deferred tax expenses) at
February 28, 1999 and March 1, 1998 were $864,000 and $853,000, 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, 1999 28, 1998
-------- --------
<S> <C> <C>
Current assets.......................................... $4,960 7,028
Property, plant and equipment........................... 81 61
Other assets............................................ 263 330
Current liabilities..................................... 3,099 5,254
Long-term liabilities................................... 123 111
----- -----
Net assets.............................................. $2,082 2,054
===== =====
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Net sales.................................... $ 8,056 19,979 17,388
====== ====== ======
Net earnings................................. $ 28 843 151
====== ====== ======
</TABLE>
44
<PAGE>
SI HANDLING SYSTEMS, INC.
Notes To Financial Statements (Continued)
(13) Subsequent Event
- ---- ----------------
In April 1999, the Company acquired all of the outstanding capital stock of
Modular Automation Corp. for $1,957,000.
45
<PAGE>
SI HANDLING SYSTEMS, INC. Schedule II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended February 28, 1999, March 1, 1998, and March 2, 1997 (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 February 28, 1999:
Reserve for inventory loss................ $ 790 98 34 (a) 854 (b)
Reserve for product warranty.............. 75 447 (c) 36 (d) 486 (e)
Allowance for doubtful receivables........ - - - -
----- --- ----- -----
$ 865 545 70 1,340
===== === ===== =====
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
===== === ===== =====
<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>
46
<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 February 28, 1999, 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 61 Vice Chairman of the Board of Directors
and Chief Executive
William R. Johnson 52 President
Kenneth D. Buck 46 Vice President - Corporate Services
William J. Casey 55 Vice President - Production & Assembly
Systems
Barry V. Mack 56 Vice President - Finance, Chief Financial
Officer, and Treasurer
James L. Thatcher 55 Vice President - Warehousing &
Distribution Systems
Ronald J. Semanick 38 Secretary
</TABLE>
Mr. Yurkovic was appointed Vice Chairman of the Board of Directors on January
1, 1999. On February 12, 1988, he was appointed President and Chief Executive
Officer and held the position of President until he was succeeded by Mr. Johnson
on March 29, 1999. Mr. Yurkovic 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. Johnson was appointed President on March 29, 1999. From 1977 to 1998,
Mr. Johnson was employed by Rockwell Automation. He was Senior Vice President of
their Reliance Electric Motor Group. From 1968 to 1977, Mr. Johnson was employed
by Electric Machinery Manufacturing Company where he was an engineering manager.
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.
47
<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-Warehousing & Distribution Systems
on May 6, 1999 and previously held the position of Vice President-Manufacturing
& Assembly Services and Customer & Software Services. He has served the Company
in several key positions including Vice President-Operations,
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.
48
<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, filed on August 14, 1996 [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]).
10.8 Joint Venture Agreement and Governing Documents Relating to
SI/BAKER, INC. (incorporated by reference to Exhibit 21.1 to
Annual Report on Form 10-K for the fiscal year ended February
26, 1995).
10.9 Second Amendment to the Joint Venture Agreement Relating to
SI/BAKER, INC.
11.1 Statement regarding computation of per share earnings (loss)
(see Note 1 of Notes to Financial Statements).
21 Subsidiaries of the Registrant.
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 February 28, 1999, no report on Form 8-K was
filed.
(c) Exhibits 10.9, 21, 23, and 27 are filed with this report.
(d) Schedule A - SI/BAKER, INC. Financial Statements and Independent
Auditors' Report Thereon.
49
<PAGE>
Schedule A
SI/BAKER, INC.
Financial Statements
February 28, 1999 and February 28, 1998
(With Independent Auditors' Report Thereon)
50
<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, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended February 28, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each
of the years in the three-year period ended February 28, 1999, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Allentown, Pennsylvania
April 30, 1999
51
<PAGE>
SI/BAKER, INC.
Balance Sheets
February 28, 1999 and 1998
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1999 1998
-------- -------
Assets
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents, principally time deposits.... $ 154 388
Receivables:
Trade................................................. 1,658 2,881
Other receivables..................................... 238 51
----- -----
Total receivables................................... 1,896 2,932
----- -----
Costs and estimated earnings in excess of billings...... 2,516 3,263
Inventories............................................. - 118
Deferred income tax benefits............................ 258 309
Prepaid expenses and other current assets............... 136 18
----- -----
Total current assets................................ 4,960 7,028
----- -----
Machinery and equipment, at cost........................... 176 125
Less: accumulated depreciation.......................... 95 64
----- -----
Net machinery and equipment........................... 81 61
----- -----
Equipment leased to customer............................... 487 487
Less: accumulated depreciation......................... 370 249
----- -----
Net equipment leased to customer...................... 117 238
------ -----
Deferred income tax benefits............................... 51 35
------ -----
Other assets............................................... 95 57
------ -----
Total assets........................................ $ 5,304 7,419
===== =====
</TABLE>
See accompanying notes to financial statements.
52
<PAGE>
SI/BAKER, INC.
Balance Sheets
February 28, 1999 and 1998
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable to bank................................... $ 500 900
Accounts payable:
Trade................................................. 510 930
Affiliated companies.................................. 15 97
----- -----
Total accounts payable.............................. 525 1,027
----- -----
Customers' deposits and billings in excess of
costs and estimated earnings.......................... 1,104 1,740
Accrued salaries, wages, and commissions................ 91 413
Income taxes payable.................................... - 44
Accrued royalties payable............................... 209 288
Accrued product warranties.............................. 660 799
Accrued other liabilities............................... 10 43
----- -----
Total current liabilities........................... 3,099 5,254
----- -----
Deferred compensation...................................... 123 111
----- -----
Stockholders' equity:
Common stock, $1 par value; authorized 1,000
shares; issued 200 shares............................. - -
Additional paid-in capital.............................. 200 200
Retained earnings....................................... 1,882 1,854
----- -----
Total stockholders' equity.......................... 2,082 2,054
----- -----
Total liabilities and stockholders' equity.......... $ 5,304 7,419
===== =====
</TABLE>
See accompanying notes to financial statements.
53
<PAGE>
SI/BAKER, INC.
Statements Of Operations
Fiscal Years Ended February 28, 1999, 1998, and 1997
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Net sales...................................... $ 8,056 19,979 17,388
Cost of sales.................................. 6,376 16,781 15,191
----- ------ ------
Gross profit on sales....................... 1,680 3,198 2,197
----- ------ -------
Selling, general and administrative expenses... 920 981 1,149
Product development costs...................... 399 3 263
Royalty expense to parent companies............ 322 800 696
Interest income................................ ( 17) ( 29) ( 41)
Interest expense............................... 72 129 17
Other income, net.............................. ( 85) ( 106) ( 144)
----- ------ ------
1,611 1,778 1,940
------ ------ ------
Earnings before income taxes................... 69 1,420 257
Income tax expense............................. 41 577 106
----- ------ ------
Net earnings.............................. $ 28 843 151
===== ====== ======
</TABLE>
See accompanying notes to financial statements.
SI/BAKER, INC.
Statements Of Stockholders' Equity
Fiscal Years Ended February 28, 1999, 1998, and 1997
(In Thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
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
Net earnings..................... - - 28 28
--- --- ----- -----
Balance at February 28, 1999..... $ - 200 1,882 2,082
=== === ===== =====
</TABLE>
See accompanying notes to financial statements.
54
<PAGE>
SI/BAKER, INC.
Statements Of Cash Flows
Fiscal Years Ended February 28, 1999, 1998, and 1997
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................... $ 28 843 151
Adjustments to reconcile net earnings to
net cash provided (used) by operating
activities:
Depreciation of machinery and
equipment and leased equipment........... 152 145 145
Changes in operating assets and liabilities:
Receivables.................................. 1,036 (1,192) (1,217)
Costs and estimated earnings in excess
of billings................................ 747 848 ( 698)
Inventories.................................. 118 ( 82) ( 20)
Deferred income taxes........................ 35 29 ( 218)
Prepaid expenses and other
current assets............................. ( 118) 69 ( 82)
Other assets................................. ( 38) ( 57) -
Accounts payable............................. ( 502) (1,249) 398
Customers' deposits and billings in excess
of costs and estimated earnings............ ( 636) 961 ( 228)
Accrued salaries, wages, and
commissions................................ ( 322) 160 ( 19)
Income taxes payable......................... ( 44) 44 ( 194)
Accrued royalties payable.................... ( 79) ( 31) ( 65)
Accrued product warranties................... ( 139) 336 330
Accrued other liabilities.................... ( 33) ( 108) 110
Deferred compensation........................ 12 57 54
----- ----- -----
Net cash provided (used) by
operating activities..................... 217 773 (1,553)
----- ----- -----
Cash flows from investing activities:
Additions to machinery and equipment........... ( 51) ( 19) ( 31)
Equipment leased to customer................... - - ( 9)
----- ----- -----
Net cash used by investing activities........ ( 51) ( 19) ( 40)
----- ----- -----
Cash flows from financing activities:
Increase in (repayment of) notes
payable to bank.............................. ( 400) ( 850) 1,750
----- ----- -----
Increase (decrease) in cash and
cash equivalents............................... ( 234) ( 96) 157
Cash and cash equivalents,
beginning of year.............................. 388 484 327
----- ----- -----
Cash and cash equivalents,
end of year.................................... $ 154 388 484
===== ===== =====
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes............................... $ 324 479 564
===== ===== =====
Interest................................... $ 71 126 9
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
55
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements
February 28, 1999 and 1998
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"). On September 29, 1998, McKesson HBOC, Inc. [NYSE:MCK], a healthcare
supply management company, announced the completion of its acquisition of
Automated Prescription Systems, Inc. Automated Prescription Systems, Inc. was
renamed McKesson Automated Prescription Systems, Inc. ("McKesson APS"). 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 McKesson 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 and central fill 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 systems for managed care
and central fill pharmacy operations for North American corporations and the
federal government. In the fiscal year ended February 28, 1999, two customers
accounted for revenues of $2,671,000 and $928,000, respectively. 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. No other customer
accounted for over 10% of revenues.
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 February 28,
1999, two customers owed the Company $654,000 and $309,000, 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 creditworthiness 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.
56
<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
3-7 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 three 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.
57
<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 McKesson APS based on the monthly lease
rates for all cells, counters, cassettes, and any other McKesson 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
- ------------
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. 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. The Company adopted these statements effective March 1, 1998.
The adoption of these statements did not 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," effective for fiscal years
beginning after December 15, 1997. This statement revises employers' disclosures
about pension and other postretirement benefit plans but does not change the
measurement or recognition of those plans. The Company adopted this statement
effective March 1, 1998. The adoption of this statement did not have a material
impact on the Company's financial statements.
58
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Recently Issued Accounting Pronouncements (Continued)
- -----------------------------------------------------
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." The SOP is
effective for fiscal years beginning after December 15, 1998, and establishes
criteria for capitalizing certain internal use software costs. It is not
expected that the adoption of the SOP will have a material impact on the
Company's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" which is effective for fiscal years beginning after December 15,
1998, and provides guidance on the expensing of costs of start-up activities as
these costs are incurred. It is not expected that the adoption of the SOP will
have a material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." The statement is effective for fiscal years
beginning after June 15, 1999, though earlier adoption is encouraged and
retroactive application is prohibited. It is not expected that the adoption of
this statement will have a material impact on the Company's financial
statements.
Note 2: Uncompleted Contracts
- ------- ---------------------
Costs and estimated earnings on uncompleted contracts are as follows at
February 28, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Costs incurred on uncompleted contracts............... $ 22,778 29,927
Estimated earnings.................................... 5,212 6,595
------ ------
27,990 36,522
Less: billings to date............................... 26,578 34,999
------ ------
$ 1,412 1,523
====== ======
</TABLE>
<TABLE>
<S> <C> <C>
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess
of billings.................................... $ 2,516 3,263
Customers' deposits and billings in excess
of costs and estimated billings................ ( 1,104) ( 1,740)
------ ------
$ 1,412 1,523
====== ======
</TABLE>
59
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
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. The Facility
contains various covenants and requires the maintenance of a net worth ratio.
The Company was in compliance with all covenants during fiscal 1999. The
Facility has an expiration date of August 31, 1999.
As of February 28, 1999, the Company's related debt outstanding under the
Facility was $500,000. The Company repaid its outstanding debt under the
Facility on March 18, 1999. Interest on the Facility is at the Bank's prime rate
of interest minus one percent (6.75% as of February 28, 1999) 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 $47,000, $35,000, and $35,000 for the fiscal years ended
February 28, 1999, February 28, 1998, and February 28, 1997, respectively.
60
<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>
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Federal - current........................ $ 5 436 260
- deferred....................... 28 23 (179)
--- --- ---
33 459 81
--- --- ---
State - current........................ 1 112 64
- deferred....................... 7 6 ( 39)
--- --- ---
8 118 25
--- --- ---
$ 41 577 106
=== === ===
</TABLE>
A reconciliation between the U. S. federal statutory rate and the Company's
effective income tax rate is (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Computed tax expense at statutory rate of 34%.. $ 23 483 87
Increase in taxes resulting from:
State income taxes, net of federal benefit.. 5 78 17
Miscellaneous items......................... 13 16 2
--- --- ---
$ 41 577 106
=== === ===
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at February 28, 1999 and
1998 are presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Accruals of book costs, not yet
deductible for tax purposes............................ $ 318 358
Machinery and equipment, principally
due to differences in depreciation..................... 3 -
--- ---
Total gross deferred tax assets...................... 321 358
--- ---
Deferred tax liabilities:
Machinery and equipment, principally due
to differences in depreciation......................... - 9
Other.................................................... 12 5
---- ---
Total gross deferred tax liabilities................. 12 14
---- ---
Net deferred tax asset............................... $ 309 344
=== ===
</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, 1999.
61
<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 years 1999,
1998, and 1997 approximated $66,000, $47,000, and $35,000, respectively.
Future minimum rental commitments at February 28, 1999 under operating leases
for office space is as follows (in thousands):
<TABLE>
<S> <C>
2000.............................$75,000
2001............................. 67,000
2002............................. 69,000
2003............................. 17,000
</TABLE>
62
<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) McKesson Automated Prescription Systems, Inc.
(50% Stockholder):
Balance Sheets Data at February 28,
1999 and 1998 -- 1999 1998
-------- --------
<S> <C> <C> <C>
Amount included in trade
receivables......................... $ 135 991
Amount included in other
receivables......................... 63 51
Amount included in accounts
payable............................. 5 87
Amount included in accrued royalties
payable............................. 41 55
Statements of Operations Data for the
fiscal years ended February 28, 1999,
1998, and 1997 --........................ 1999 1998 1997
-------- -------- --------
Sales of systems and services.......... $ 259 1,113 469
Systems and services purchased for
resale under various subcontracts... 193 266 649
Royalty expense to parent companies.... 161 400 348
Other income - Royalty income.......... 87 80 122
</TABLE>
<TABLE>
<CAPTION>
(b) SI Handling Systems, Inc. (50% Stockholder):
Balance Sheets Data at February 28,
1999 and 1998 -- 1999 1998
-------- --------
<S> <C> <C> <C>
Amount included in accounts
payable............................. $ 10 10
Amount included in accrued royalties
payable............................. 41 55
Statements of Operations Data for the
fiscal years ended February 28, 1999,
1998, and 1997 --........................ 1999 1998 1997
-------- -------- --------
Systems and services purchased for
resale under various subcontracts... $ 463 1,120 2,355
Purchase of administrative and other
services............................ 113 98 108
Royalty expense to parent companies.... 161 400 348
</TABLE>
63
<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: June 1, 1999 By /s/ Leonard S. Yurkovic
-------------------------------------------
Leonard S. Yurkovic
Vice Chairman of the Board of Directors
and Chief Executive Officer
Dated: June 1, 1999 By /s/ William R. Johnson
-------------------------------------------
William R. Johnson
President
64
<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: June 1, 1999 /s/ Edward J. Fahey
----------------------------------------------
Edward J. Fahey
Chairman of the Board
Dated: June 1, 1999 /s/ Leonard S. Yurkovic
----------------------------------------------
Leonard S. Yurkovic
Vice Chairman of the Board of Directors
and Chief Executive Officer
Dated: June 1, 1999 /s/ William R. Johnson
----------------------------------------------
William R. Johnson
President
Dated: June 1, 1999 /s/ Barry V. Mack
---------------------------------------------
Barry V. Mack
Vice President-Finance, Chief Financial
Officer and Treasurer
(Principal Accounting and Financial Officer)
Dated: June 1, 1999 /s/ Elmer D. Gates
----------------------------------------------
Elmer D. Gates
Director
Dated: June 1, 1999 /s/ L. Jack Bradt
----------------------------------------------
L. Jack Bradt
Director
Dated: June 1, 1999 /s/ Michael J. Gausling
----------------------------------------------
Michael J. Gausling
Director
65
<PAGE>
EXHIBIT INDEX
-------------
10.9 - AMENDMENT TO THE JOINT VENTURE AGREEMENT RELATING TO
SI/BAKER, INC.
21 - SUBSIDIARIES OF THE REGISTRANT
23 - CONSENT OF INDEPENDENT AUDITORS
27 - FINANCIAL DATA SCHEDULE
66
Exhibit 10.9
SECOND AMENDMENT
----------------
THIS SECOND AMENDMENT ("Amendment") is made effective as of September 23, 1998
("Amendment Effective Date") by and between Automated Prescription Systems, Inc.
("APS") and SI Handling Systems, Inc. ("SI") to that certain Investment
Agreement between SI and APS dated January 27, 1993 and amended January 28, 1995
(as amended, the "Investment Agreement"), in agreement with SI/BAKER, Inc.
("SI/BAKER"), which is hereby made a party to the Investment Agreement as of the
Amendment Effective Date.
1. Market Definition. Notwithstanding anything to the contrary in the
------------------
Investment Agreement, SI/BAKER's permitted market for distributing
Integrated Prescription Fulfillment Systems ("IPFS"), as defined below,
will not include the APS Exclusive Market, also defined below. SI/BAKER
agrees not to sell IPFS or resell APS products in the APS Exclusive Market,
except as noted in paragraphs 1(c) and 1(d) below, during any period in
which APS is subject to the restrictions set forth in Sections 5 and 6 of
the Investment Agreement. Further, for purposes of the Investment
Agreement, the "managed care pharmacy market" shall have the meaning set
forth in paragraph (c) below.
(a) "Integrated Prescription Fulfillment Systems" or "IPFS" means
pharmaceutical dispensing systems similar to the systems marketed by
SI/BAKER or currently under development by SI/BAKER as of the
Amendment Effective Date (as identified on Schedule 1(a)) that utilize
and integrate SI's handling products or similar products and APS's
drug dispensing products or similar products. For all purposes of the
Investment Agreement, the term "integrated prescription fulfillment
systems" will be deemed to have the foregoing definition.
(b) "APS Exclusive Market" means facilities for dispensing prescription
pharmaceuticals that deliver prescriptions at such facilities to
walk-in customers, regardless of prescription volume.
(c) The "Managed Care Pharmacy Market" means facilities, systems or
systems upgrades where IPFS are installed or proposed to be installed
that are designed for, or intended to be used for, distributing 1500
prescriptions or more per day to non-walk-in customers, including such
facilities that also deliver prescriptions to walk-in customers.
(d) SI/BAKER will be permitted to market the "Automated Will Call" product
into the APS Exclusive Market.
2. Technology Rights and Obligations.
---------------------------------
(a) Past Technology Contributions. Subject to the following sentence,
-----------------------------
any technology or know-how delivered by APS or SI to SI/BAKER
prior to the Amendment Effective Date will be deemed to be
licensed to SI/BAKER under a grant of perpetual, worldwide
fully-paid and royalty free terms for the sole purpose of
developing, having developed, manufacturing, having manufactured
and distributing IPFSs that incorporate products proprietary to
the licensor party. Any license of technology or know-how
described in this Section 2(a) shall
<PAGE>
be terminated upon the occurrence of the dissolution of SI/BAKER or
SI/BAKER's ceasing to conduct business.
(b) Future Technology Contributions. Any future contribution or
---------------------------------
license of technology by the parties shall be made under a
written license agreement that references this section or is
otherwise void. For purposes of certainty, the respective parents
of APS or SI, or the subsidiaries of such parents (other than APS
or SI) shall not be obligated to grant any future licenses to
their respective proprietary technologies, provided that the
foregoing shall not apply to any such parent or subsidiary to the
extent that APS or SI has transferred technology or development
efforts with respect to such technology to such parent or
subsidiary with the intent of impairing or derogating from the
rights of the parties and/or SI/BAKER under the Investment
Agreement.
(c) Joint Technology Development. If 2 or more of the parties jointly
----------------------------
develop any technology, only to the extent jointly developed, the
technology will be deemed to be owned by SI/BAKER and licensed to
the joint developing part(ies). However, any such jointly
developed technology must be identified in writing with
reasonable detail. Any such jointly developed technology licensed
to APS or SI will not include any pre-existing or independently
developed technology of a party (even if it is required to make
use of the jointly developed technology). The parties will
cooperate to document the foregoing ownership and licenses.
3. Supply Agreement. Any rights and obligations the parties may have
----------------
to provide preferential prices to one another will terminate upon
the occurrence of any of the following events: (i) the purchase
by SI or APS of the other party's entire interest in SI/BAKER;
(ii) SI/BAKER ceasing to conduct business in the ordinary course;
or (iii) the dissolution of SI/BAKER. In the event either party
transfers its interest in SI/BAKER to a third party, such rights
and obligations will terminate upon (i) the termination date set
forth in the supply agreement or other document setting forth
such rights and obligations, or (ii) if no such terminate date is
set forth in such document, the date of such transfer of
interest. Notwithstanding the termination of such rights, either
party may, however, offer to sell its products and services to
SI/BAKER on mutually acceptable terms and conditions.
4. Exercise Put/Call Option. In order for APS or SI to initiate a purchase
------------------------
or sale of the initiating party's interest in SI/BAKER under Section
3(C) of the Investment Agreement, triggering the provision in such
section for response, the initiating party must give written notice to
the other party expressly referencing such section and setting forth
the specific information required to be noticed under such section.
<PAGE>
AGREED AS OF THE AMENDMENT EFFECTIVE DATE FIRST SET FORTH
ABOVE:
AUTOMATED PRESCRIPTION SI/BAKER, INC. ("SI/BAKER")
SYSTEMS, INC. ("APS")
By: /s/ James R. Baker By: /s/ Michael L. Jordan
------------------ ---------------------
Print Name: James R. Baker Print Name: Michael L. Jordan
-------------- -----------------
Print Title: CEO Print Title: President and CEO
--- -----------------
SI HANDLING SYSTEMS, INC. ("SI")
By: /s/ Leonard S. Yurkovic
--------------------
Print Name: Leonard S. Yurkovic
-------------------
Print Title: President
---------
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
SI/BAKER, INC., 50% owned joint venture with McKesson Automated
Prescription Systems, Inc.
EXHIBIT 23
The Board of Directors
SI Handling Systems, Inc.:
We consent to the incorporation by reference in the registration statements (No.
333- 10181, No. 333-25555, and No. 333-36397) on Form S-8 of SI Handling
Systems, Inc. of our report dated April 30, 1999, relating to the balance sheets
of SI Handling Systems, Inc. as of February 28, 1999 and March 1, 1998, and the
related statements of operations, stockholders' equity and cash flows for each
of the years in the three-year period ended February 28, 1999, and all related
schedules, which report appears in the February 28, 1999 annual report on Form
10-K of SI Handling Systems, Inc.
/s/ KPMG LLP
---------------------------------
KPMG LLP
Allentown, Pennsylvania
May 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-K FOR THE YEAR ENDED FEBRUARY 28, 1999 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> FEB-28-1999
<PERIOD-END> FEB-28-1999
<CASH> 1,829
<SECURITIES> 0
<RECEIVABLES> 7,603
<ALLOWANCES> 0
<INVENTORY> 2,615
<CURRENT-ASSETS> 20,606
<PP&E> 8,056
<DEPRECIATION> 6,426
<TOTAL-ASSETS> 23,580
<CURRENT-LIABILITIES> 11,205
<BONDS> 16
<COMMON> 3,705
0
0
<OTHER-SE> 8,442
<TOTAL-LIABILITY-AND-EQUITY> 23,580
<SALES> 39,573
<TOTAL-REVENUES> 39,573
<CGS> 30,859
<TOTAL-COSTS> 30,859
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 2,234
<INCOME-TAX> 856
<INCOME-CONTINUING> 1,378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,378
<EPS-BASIC> .37
<EPS-DILUTED> .36
</TABLE>