UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported)..............September 30, 1999
SI HANDLING SYSTEMS, INC.
................................................................................
(Exact name of registrant as specified in its charter)
Pennsylvania 0-03362 22-1643428
................................................................................
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
600 Kuebler Road, Easton, PA 18040
................................................................................
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code..................610-252-7321
................................................................................
(Former name or former address, if changed since last report.)
<PAGE>
Item 2. Acquisition or Disposition of Assets
- ------ ------------------------------------
This Form 8-K/A amends the Form 8-K/A filed on December 14, 1999 to incorporate
the signed Report of Independent Auditors in Item 7(a), the Audited Financial
Statements of Ermanco Incorporated for the three years ended September 30, 1999.
As previously reported, on September 30, 1999, SI Handling Systems, Inc. ("SI"
or the "Company") completed the acquisition of all of the outstanding capital
stock of Ermanco Incorporated, a Michigan corporation ("Ermanco").
Ermanco, headquartered in Spring Lake, Michigan, designs and installs complete
conveying systems for a variety of manufacturing and warehousing applications.
Under the terms of the Stock Purchase Agreement and based on Ermanco's
definitive Closing Balance Sheet, the Company acquired all of the outstanding
capital stock of Ermanco for a purchase price of $22,801,000 consisting of
$15,301,000 in cash, of which $1,551,000 is held in escrow, $3,000,000 in
promissory notes payable to the fourteen stockholders of Ermanco, and 481,284
shares of the Company's common stock with a value of $4,500,000 based on the
average closing price of $9.35 of the Company's common stock for the five
trading days immediately preceding the date of the Stock Purchase Agreement,
August 6, 1999.
On the Closing Date of the acquisition, the purchase price was increased by
$615,000 to $22,615,000 based upon Ermanco's projected net working capital for
the period ended September 30, 1999. Under the terms of the Stock Purchase
Agreement, upon receipt of the definitive Closing Balance Sheet, any difference
between the guaranteed amount of $2,700,000 would increase or decrease the cash
portion of the purchase price paid effective as of the Closing Date. Subsequent
to the Closing Date of the acquisition, the Company received Ermanco's
definitive Closing Balance Sheet and the purchase price was increased by
$186,000 to $22,801,000 based on the actual net working capital. The total
working capital adjustment of $801,000 has been added to the escrow and this
amount will be paid to the Sellers upon completion and acceptance of the
Post-Closing Audit. Therefore, the purchase price is subject to further
adjustment pending the acceptance by the Company and the Sellers of the
Post-Closing Audit. Any funds remaining in escrow eighteen months following the
Closing will be distributed to the selling stockholders of Ermanco.
The acquisition of the Ermanco technology complements and expands the Company's
current product offerings. Ermanco's products, property, equipment, and
personnel will continue to be located in Spring Lake, Michigan and operate as a
wholly owned subsidiary of the Company. The Company has not yet received an
appraisal on Ermanco's property, plant and equipment and it will continue to
review the allocation of the purchase price.
On the Closing Date, the Company entered into employment agreements with four
employees, Leon C. Kirschner, Thomas C. Hubbell, Lee F. Schomberg, and Gordon A.
Hellberg. Mr. Kirschner and Steven Shulman, another principal stockholder of
Ermanco, joined the Board of Directors of the Company.
In order to complete the acquisition of Ermanco, the Company obtained financing
from its principal bank, First Union National Bank ("First Union"). The Company
entered into a new three-year line of credit facility which may not exceed the
lesser of $6,000,000 or an amount based on a borrowing base formula tied
principally to accounts receivable, inventory, fair market value of the
Company's property and plant, and liquidation value of equipment, plus an amount
equal to $2,500,000. This amount shall be reduced by $625,000 every six months
during the first two years of the line of credit facility until such amount
reaches zero, minus the unpaid principal balance of the term loan described
below. The line of credit facility is to be used primarily for working capital
purposes and closing costs associated with the Ermanco acquisition. The line of
credit facility replaced the Company's former $5,000,000 committed revolving
credit facility with First Union.
The Company also received $14,000,000 in the form of a seven-year term loan from
First Union to finance the acquisition. During the first two years of the term
loan, the Company will repay First Union equal quarterly payments of $312,500
plus accrued interest. After the second anniversary of the September 30, 1999
Closing Date, the Company will make equal quarterly payments of $575,000 plus
accrued interest. The interest rate on the term loan is the three-month LIBOR
Market Index Rate plus two and three-quarters percent. The Company entered into
an interest rate swap agreement for fifty percent of the term loan to hedge the
floating interest rate. The Company entered into a seven-year interest rate swap
for $7,000,000 of the term loan at a fixed interest rate of 9.38%.
In order to obtain the line of credit and term loan, the Company granted First
Union a security interest in all personal property, including, without
limitation, all accounts, deposits, documents, equipment, fixtures, general
intangibles, goods, instruments, inventory, letters of credit, money,
securities, and a first mortgage on all real estate owned by the Company and
Ermanco. The line of credit facility and term loan contain various restrictive
covenants relating to additional indebtedness, asset acquisitions or
dispositions, investments, guarantees, payment of dividends, and maintenance of
certain financial ratios.
The promissory notes issued to the fourteen stockholders of Ermanco total
$3,000,000, have a term of seven years, and bear interest at an annual rate of
ten percent in years one through three, twelve percent in years four and five,
and fourteen percent in years six and seven. Interest on the promissory notes
shall be payable quarterly, in cash, or under certain conditions, in the
Company's common stock upon approval of the Company's Board of Directors. The
promissory notes may be prepaid prior to the end of the seven-year term as long
as the Company has no debt outstanding under its line of credit facility and
term loan.
SI and Ermanco serve common North American marketplaces, with clients and
customers in the automotive/transportation, computer, newspaper/publishing,
pharmaceutical/cosmetic, entertainment, and warehousing business. The Company
believes the acquisition of Ermanco will enhance SI's automated materials
handling capability in all marketplace segments.
Item 7. Financial Statements and Exhibits.
- ------ ---------------------------------
(a) Audited Financial Statements of Ermanco Incorporated for the three
years ended September 30, 1999.
(b) Pro Forma Financial Information.
(c) Exhibits - None.
<PAGE>
Financial Statements
Ermanco Incorporated
Three years ended September 30, 1999
ERNST & YOUNG LLP
<PAGE>
Ermanco Incorporated
Financial Statements
Three years ended September 30, 1999
Contents
Report of Independent Auditors.................................................1
Audited Financial Statements
Balance Sheets.................................................................2
Statements of Shareholders' Equity.............................................4
Statements of Operations.......................................................5
Statements of Cash Flows.......................................................6
Notes to Financial Statements..................................................7
<PAGE>
Ernst & Young LLP
Suite 1000
171 Monroe Avenue, N.W.
Grand Rapids, Michigan 49503
Suite 910
Old Kent Bank Building
136 East Michigan Avenue
Kalamazoo, Michigan 49007
Report of Independent Auditors
Board of Directors
Ermanco Incorporated
We have audited the accompanying balance sheets of Ermanco Incorporated as of
September 30, 1999 and 1998, and the related statements of shareholders' equity,
operations and cash flows for each of the three years in the period ended
September 30, 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 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 Ermanco Incorporated at
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999, in
conformity with generally accepted accounting principles.
/S/ Ernst & Young LLP
---------------------
Ernst & Young LLP
October 27, 1999
<PAGE>
Ermanco Incorporated
Balance Sheets
<TABLE>
<CAPTION>
September 30
1999 1998
-----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 420,595 $1,219,877
Accounts receivable, less allowances
(1999--$48,000; 1998--$45,000) 4,828,180 3,146,955
Inventories 1,000,145 1,039,471
Costs and estimated earnings in excess
of billings on uncompleted contracts 875,718
Prepaid expenses and other current assets 301,398 313,993
Federal tax deposit 353,876
-----------------------------
Total current assets 7,779,912 5,720,296
Property and equipment:
Land and leasehold improvements 568,982 550,362
Machinery and equipment 1,271,370 1,144,493
Office equipment 1,142,379 901,634
-----------------------------
2,982,731 2,596,489
Less accumulated depreciation 1,761,973 1,553,603
-----------------------------
1,220,758 1,042,886
Federal tax deposit 385,845
-----------------------------
$9,000,670 $7,149,027
=============================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30
1999 1998
-----------------------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $2,736,652 $1,396,694
Billings in excess of costs and earnings on
uncompleted contracts 503,175 641,852
Accrued compensation and related taxes 258,725 417,956
Accrued federal income taxes 300,000
Accrued state income taxes 213,000 40,363
Dividends payable 316,618
Other current liabilities 248,591 177,804
Current portion of capital lease obligations 18,621
---------------------------
Total current liabilities 4,278,764 2,991,287
Capital lease obligations, less current portion 15,404
Shareholders' equity:
Common stock, par value $1 per share--
200,000 shares authorized; 72,350
shares in 1999 and 71,300 shares in 1998
issued and outstanding 72,350 71,300
Additional paid-in capital 573,459 469,509
Retained earnings 4,060,693 3,616,931
-----------------------------
4,706,502 4,157,740
-----------------------------
$9,000,670 $7,149,027
=============================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Ermanco Incorporated
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1996 $67,475 $216,638 $1,936,401 $2,220,514
Net earnings 2,602,953 2,602,953
Issuance of 2,300 shares 2,300 89,700 92,000
Cash dividends declared ($23 per
share) (1,637,800) (1,637,800)
-------------------------------------------
Balance at
September 30, 1997 69,775 306,338 2,901,554 3,277,667
Net earnings 2,705,264 2,705,264
Issuance of 2,875 shares 2,875 184,000 186,875
Purchase of 1,350 shares (1,350) (20,829) (38,287) (60,466)
Cash dividends declared ($27 per
share) (1,951,600) (1,951,600)
-------------------------------------------
Balance at
September 30, 1998 71,300 469,509 3,616,931 4,157,740
Net earnings 3,472,720 3,472,720
Issuance of 1,050 shares 1,050 103,950 105,000
Cash dividends declared ($43 per
share) (3,028,958) (3,028,958)
===========================================
Balance at
September 30, 1999 $72,350 $573,459 $4,060,693 $4,706,502
===========================================
</TABLE>
( ) Denotes reduction.
See accompanying notes to financial statements.
<PAGE>
Ermanco Incorporated
Statements of Operations
<TABLE>
<CAPTION>
Year ended September 30
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Net sales $31,417,481 $26,294,618 $29,978,804
Cost of products sold 22,855,268 19,603,962 23,001,207
----------------------------------------
Gross profit 8,562,213 6,690,656 6,977,597
Selling expenses 2,388,580 1,990,259 2,093,717
General and administrative expenses 2,527,471 2,178,664 2,432,123
----------------------------------------
4,916,051 4,168,923 4,525,840
----------------------------------------
Operating profit 3,646,162 2,521,733 2,451,757
Other income (expense):
Interest income 56,604 57,745 54,668
Royalty income 90,450 156,821 164,990
Amortization of intangibles (17,324) (54,688)
Other (9,726) 461 977
----------------------------------------
137,328 197,703 165,947
----------------------------------------
Earnings before income taxes 3,783,490 2,719,436 2,617,704
Income taxes 310,770 14,172 14,751
----------------------------------------
Net earnings $ 3,472,720 $ 2,705,264 $ 2,602,953
========================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Ermanco Incorporated
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended September 30
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Operating activities
Net earnings $3,472,720 $2,705,264 $2,602,953
Adjustments necessary to
reconcile net earnings to
net cash provided by operating
activities:
Noncash charges to earnings:
Depreciation 208,370 248,999 208,507
Amortization 17,324 54,688
Loss on disposal of equipment 2,417 3,667
----------------------------------------
208,370 268,740 266,862
Changes in operating assets
and liabilities:
Accounts receivable (1,681,225) (340,919) 1,243,492
Inventories 39,326 106,166 (53,690)
Other current operating assets (863,123) 106,366 158,622
Accounts payable 1,339,958 434,714 (908,491)
Other current liabilities 245,516 (329,958) (705,542)
----------------------------------------
(919,548) (23,631) (265,609)
----------------------------------------
Net cash provided by operating
activities 2,761,542 2,950,373 2,604,206
Investing activities
Additions to property and equipment (350,712) (446,411) (413,779)
Federal tax deposit 31,969 (166,779) (69,667)
----------------------------------------
Net cash used in investing activities (318,743) (613,190) (483,446)
Financing activities
Purchase of common stock (60,466)
Payments on capital lease obligations (1,505)
Sale of common stock 105,000 186,875 92,000
Cash dividends paid (3,345,576) (2,017,119) (1,569,678)
Other (33,184) (33,141)
----------------------------------------
Net cash used in financing activities (3,242,081) (1,923,894) (1,510,819)
----------------------------------------
Increase (decrease) in cash and
cash equivalents (799,282) 413,289 609,941
Cash and cash equivalents at
beginning of year 1,219,877 806,588 196,647
----------------------------------------
Cash and cash equivalents at
end of year $ 420,595 $1,219,877 $ 806,588
========================================
( ) Denotes use of cash and cash equivalents.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Ermanco Incorporated
Notes to Financial Statements
September 30, 1999 and 1998
Note A--Summary of Significant Accounting Policies
Nature of Operations and Credit Risk
Ermanco Incorporated (the Company) manufactures conveyors and designs and
installs conveyor systems for a wide variety of domestic industrial and
warehousing customers.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. Allowances for potential credit losses are
maintained and such losses have historically been within expectations.
Approximately 59% of the Company's workforce is covered by a collective
bargaining agreement that will expire on May 31, 2000.
Cash Equivalents
The Company considers all investments with maturities of three months or less
when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method.
Revenue Recognition
Revenues under contracts to design and install conveyor systems are recognized
on the percentage-of-completion method at such time as reasonable estimates of
the ultimate contract costs and profitability can be made. Revisions in earnings
estimates on systems contracts are recorded in the accounting period in which
the basis for such revision becomes known. Any anticipated losses on contracts
are recognized as soon as such losses become apparent.
Revenues for product sales are recognized when the goods are shipped.
<PAGE>
Ermanco Incorporated
Notes to Financial Statements (continued)
Note A--Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated on the basis of cost and include expenditures
for major renewals and betterments. Maintenance and repairs that do not improve
or extend the lives of the respective assets are expensed as incurred.
Depreciation of equipment, including amounts amortized under capital leases, is
computed on the straight-line method over the estimated useful lives of the
assets.
Intangibles
Intangibles (primarily patents) were amortized over their remaining legal lives
on the straight-line method.
Stock Options
The Company follows Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for its employee stock options.
Under APB Opinion No. 25, no compensation expense is recognized because the
Board of Directors establishes the exercise price of the Company's employee
stock options to equal the estimated fair value of the underlying stock on the
date of grant.
New Accounting Standard Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Statement will
require the Company to record all derivatives on the balance sheet at fair
value. Changes in the fair value of derivatives that do not meet the criteria to
be treated as a hedge under the Statement will be included in earnings. If
derivatives meet the hedge criteria, changes in the fair value of the
derivatives will offset changes in the fair value of the items being hedged. The
Statement is required to be adopted by the Company beginning in the first
quarter of 2001. The Company has not determined what effect the Statement will
have on the Company's results of operations or financial position when adopted.
<PAGE>
Ermanco Incorporated
Notes to Financial Statements (continued)
Note A--Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Note B--Inventories
The components of inventory are as follows:
<TABLE>
<CAPTION>
September 30
1999 1998
------------------------------------
<S> <C> <C>
Stock inventory $ 870,509 $ 890,167
Work in process 129,636 149,304
------------------------------------
$ 1,000,145 $ 1,039,471
====================================
</TABLE>
If the first-in, first-out method had been used to value inventory, the carrying
amount of inventory would have been approximately $142,000 and $156,000 higher
than reported at September 30, 1999 and 1998, respectively.
Note C--Line of Credit
The Company has an unsecured line-of-credit agreement with a bank that provides
for borrowings through December 31, 1999 of up to $3,000,000, with interest at
the bank's prime rate (8.25% at September 30, 1999) less 0.25%. The bank
agreement contains certain covenants that require the Company, among other
things, to maintain a tangible net worth of not less than $1,650,000 and a
current ratio of not less than 1.2 to 1. There were no outstanding borrowings
under the line-of-credit agreement at any time during 1999 or 1998. The Company
does not pay a commitment fee on available funds under this credit agreement.
<PAGE>
Ermanco Incorporated
Notes to Financial Statements (continued)
Note D--Leases
The Company leases its principal manufacturing and office facility from a
partnership affiliated through common ownership. The leasing agreement requires
fixed monthly rentals of $28,000 (with annual increases of 2.5%) plus a variable
portion based on the lessor's borrowing rate and the unpaid mortgage balance.
Amounts paid under this lease arrangement were approximately $353,000 in 1999,
$348,000 in 1998 and $340,000 in 1997. This operating lease expires on October
31, 2003. Under the terms of the lease, the Company is required to pay all
taxes, insurance and other ownership-related costs of the property. The Company
also leases certain automobiles, machinery, computer equipment and software
under agreements expiring at various dates through 2004.
At September 30, 1998, minimum rental payments due under all noncancelable
operating leases are as follows: 2000--$543,000; 2001--$487,000; 2002--$391,000;
2003--$373,000; 2004--$36,000.
Rental expense was approximately $516,000 in 1999, $550,000 in 1998 and $485,000
in 1997.
During fiscal 1999, the Company entered into two financing agreements related to
the lease of computer software, which have been recorded as capital leases.
These agreements had a total initial contract value of $35,530. Remaining
amounts outstanding at September 30, 1999 are as follows:
Payments by year:
2000 $22,615
2001 10,099
2002 7,574
------------
40,288
Less amounts representing interest 6,263
------------
34,025
Less current portion 18,621
------------
$15,404
============
<PAGE>
Ermanco Incorporated
Notes to Financial Statements (continued)
Note D--Leases (continued)
Amounts recorded as property and equipment under these capital lease agreements
at September 30, 1999 are as follows:
Office equipment $35,530
Less accumulated depreciation 1,240
------------
$34,290
============
Note E--Income Taxes
Effective October 1, 1994, the shareholders of the Company elected under
Subchapter S of the Internal Revenue Code to include the Company's taxable
income in their own income for federal income tax purposes. As a condition of
electing S corporation status, the Internal Revenue Code required the Company to
recapture its tax LIFO inventory reserve and include it as taxable income in its
fiscal 1994 tax return. Federal income taxes on the recapture were payable over
a four-year period beginning in fiscal 1995, with such amounts paid in full
during fiscal 1998.
As a condition of S corporation election with a taxable year ending on a date
other than the calendar year, the Company is required to maintain on deposit an
estimate of the federal income tax that would otherwise be due and payable for
the period from the taxable year end to December 31. This deposit equaled
$353,876 and $385,845 at September 30, 1999 and 1998, respectively. The deposit
is classified as current at September 30, 1999, as the Company will no longer
qualify for S corporation status as a result of the sale transaction (see Note
I). The accrued federal income taxes payable at September 30, 1999 amounting to
$300,000 represent an estimate of the built-in gains tax that will become due,
as the sale of the Company will occur before the tenth anniversary of its S
corporation election. This amount is combined with foreign income taxes of
$10,770 in the 1999 income tax provision and is currently payable. The 1998 and
1997 income tax provisions are composed solely of foreign income taxes due on
foreign royalty income.
Note F--Retirement Plans
The Company sponsors a defined benefit pension plan covering substantially all
union employees. Pension costs are actuarially determined and include
amortization of the initial accrued liability over the average years of future
service of plan participants.
<PAGE>
Ermanco Incorporated
Notes to Financial Statements (continued)
Note F--Retirement Plans (continued)
The following table sets forth the funded status of the Company's defined
benefit plan:
<TABLE>
<CAPTION>
September 30
1999 1998
-------------------------------------
<S> <C> <C>
Benefit obligation $334,333 $283,886
Fair value of plan assets 454,606 348,540
-------------------------------------
Funded status $120,273 $ 64,654
=====================================
Prepaid benefit cost, recorded within
prepaid expenses and othercurrent
assets on balance sheets $ 47,767 $ 37,329
=====================================
Actuarial assumptions:
Discount rate 7.0% 7.0%
Expected return on plan assets 8.0 8.0
</TABLE>
Other information regarding amounts expensed, amounts contributed and benefits
paid are as follows:
<TABLE>
<CAPTION>
Year ended September 30
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Benefit cost $26,562 $22,679 $20,122
Employer contributions 37,000 46,020 37,255
Benefits paid 2,080 4,280 2,080
</TABLE>
The Company also has a profit-sharing plan for certain key employees and a
401(k) plan for substantially all employees who have completed one year of
service. Amounts contributed under the profit-sharing plan are made at the
discretion of the Board of Directors and, under the 401(k) plan, on a partial
matching basis. The Company made no contributions to the profit-sharing plan
during 1999, and made contributions of $35,000 in 1998 and $50,000 in 1997.
Company contributions under the 401(k) plan were $55,000 in 1999 and $37,000 in
1998 and 1997.
<PAGE>
Ermanco Incorporated
Notes to Financial Statements (continued)
Note G--Stock Option Plan
The Company has an incentive stock plan whereby options are granted to certain
key employees of the Company and are exercisable over a period of time at fair
market value per share as estimated by the Board of Directors. A summary of the
transactions and shares under option are as follows:
<TABLE>
<CAPTION>
Year ended September 30
1999 1998
--------------------------
<S> <C> <C>
Outstanding at beginning of year 1,200 3,250
Granted 1,200
Exercised (850) (2,375)
Canceled (350) (875)
--------------------------
Outstanding at end of year -0- 1,200
==========================
Available for future grants -0- 10,300
==========================
</TABLE>
Note H--Stock Repurchase Agreements
The Company has agreements with the majority of its shareholders to repurchase
their common stock in the event of death, disability or termination of
employment. In addition, the Company has the first option to repurchase any
shares of common stock a shareholder offers for sale. The other shareholders
have the second option to repurchase such shares. Shares issued under the
Company's stock option plan are subject to repurchase at the higher of the
initial purchase price or a price based on the net book value per share as
defined in the agreement. The redemption price for the other shares subject to
repurchase agreements is the fair value of the shares as determined by an
independent appraiser. The purchase price may be paid immediately or in equal
quarterly installments, including interest at prime plus 1.5%, over a period of
not more than ten years. The Company maintains term life insurance policies on
certain shareholders in amounts sufficient to discharge any obligations to
repurchase the common stock in the event of the death of such shareholders.
<PAGE>
Ermanco Incorporated
Notes to Financial Statements (continued)
Note I--Sale of Company
On August 12, 1999, the Board of Directors and shareholders of Ermanco
Incorporated approved a Stock Purchase Agreement whereby the shareholders would
sell all of the issued and outstanding common stock of the Company to SI
Handling Systems, Inc. effective September 30, 1999. The purchase price would be
$22,000,000, adjusted for working capital and other specified adjustments at
closing, as defined in the agreement, based upon the final September 30, 1999
balance sheet of the Company.
Note J--Year 2000 Readiness (unaudited)
The year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 instead of 2000. This situation could result in
a system failure or miscalculations that cause disruptions of operations.
The Company has evaluated its existing information systems and has determined
that they are year 2000 compliant. The Company has initiated formal
communications with its significant customers and vendors to determine the
extent to which the Company is vulnerable to those third parties' failure to
remediate their own year 2000 issues. Management cannot guarantee that systems
of other companies on which the Company relies will be year 2000 compliant and,
in the event of noncompliance, would not have an adverse effect on the Company.
<PAGE>
SI HANDLING SYSTEMS, INC.
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed consolidated balance sheet includes
the historical condensed balance sheet of SI Handling Systems, Inc. ("SI
Handling") at August 29, 1999 and the pro forma adjustments to reflect the
Ermanco Incorporated ("Ermanco") acquisition as if the transaction occurred on
August 29, 1999. The pro forma information should be read in conjunction with
the Company's historical financial statements previously filed with the
Commission.
SI HANDLING SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF AUGUST 29, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
SIHS ERMANCO PRO FORMA PRO FORMA
08/29/1999 08/29/1999 ADJUSTMENTS CONSOLIDATED
-------------------------------------------------
<S> <C> <C> <C> <C>
Current assets:
Cash 105 552 (505)(A)(B) 152
Receivables 6,465 5,584 (420)(C) 11,629
Costs and estimated earnings
in excess of billings 5,753 0 588 (C) 6,341
Inventories 2,321 1,419 60 (A)(D) 3,800
Deferred income tax benefits 905 0 905
Prepaid expenses and other
current assets 265 423 688
-----------------------------------------------
Total current assets 15,814 7,978 (277) 23,515
-----------------------------------------------
Property, plant and equipment,
at cost:
Property, plant and equipment 8,162 2,909 11,071
Less: accumulated depreciation 6,612 1,700 8,312
-----------------------------------------------
Property, plant and equipment,
net 1,550 1,209 0 2,759
-----------------------------------------------
Deferred income tax benefits 276 0 276
Investments in joint ventures 1,237 0 1,237
Goodwill 453 0 19,225 (A)(D)(E) 19,678
Other assets 89 0 200 (A)(F) 289
-----------------------------------------------
Total assets 19,419 9,187 19,148 47,754
===============================================
Current liabilities:
Note payable to bank 0 0 2,081 (A)(G) 2,081
Current installments of
long-term debt 20 20 1,250 (A)(H) 1,290
Accounts payable 2,230 2,418 (142)(D) 4,506
Customers' deposits and
billings in excess of
costs and estimated earnings 2,887 552 168 (C) 3,607
Accrued salaries, wages, and
commissions 753 747 1,500
Income taxes payable 25 358 155 (D) 538
Accrued royalties payable 232 0 232
Accrued product warranties 672 51 723
Accrued pension and retirement
savings plan liabilities 577 23 600
Accrued other liabilities 296 389 685
-----------------------------------------------
Total current liabilities 7,692 4,558 3,512 15,762
-----------------------------------------------
Long-term liabilities:
Long-term debt, excluding
current installments:
Capital lease obligation 0 15 15
Term loan 0 0 12,750 (A)(I) 12,750
Subordinated notes 0 0 3,000 (A)(J) 3,000
-----------------------------------------------
Total long-term debt 0 15 15,750 15,765
Deferred compensation 449 0 449
-----------------------------------------------
Total long-term liabilities 449 15 15,750 16,214
-----------------------------------------------
Shareholders' equity:
Common stock 3,704 646 (165)(A)(K) 4,185
Additional paid-in capital 2,798 2,289 1,730 (A)(K) 6,817
Retained earnings 4,776 1,679 (1,679)(A)(K) 4,776
-----------------------------------------------
Total shareholders' equity 11,278 4,614 (114) 15,778
-----------------------------------------------
Total liabilities and
shareholders' equity 19,419 9,187 19,148 47,754
===============================================
<FN>
Notes (in thousands, except share and per share data):
(A) To reflect the excess of acquisition cost over the estimated fair value of
net assets acquired (goodwill). The purchase price, purchase-price
allocation, and financing of the transaction are summarized as follows:
Purchase price paid as:
Subordinated notes 3,000
Term loan (current portion of $1,250,
and long-term portion of $12,750) 14,000
Common stock 481
Additional paid-in capital 4,019
Line of credit from September 30, 1999
through October 4, 1999 2,081
Cash 505
------
Total purchase consideration and other acquisition costs 24,086
------
Allocated to:
Historical book value of Ermanco's assets and liabilities 4,614
Adjustments to step-up assets and liabilities to fair value:
Inventory 60
Income taxes payable (155)
Accounts payable 142
Deferred debt expense associated with acquisition financing 200
------
Total allocation 4,861
------
Excess purchase price over allocation to identifiable
assets and liabilities (goodwill) 19,225
======
To reflect the purchase of Ermanco
DR Investment in Ermanco 4,614
DR Goodwill 19,272
DR Deferred debt expense 200
CR Common stock 481
CR Additional paid-in capital 4,019
CR Note payable to bank 2,081
CR Subordinated notes payable 3,000
CR Current portion of long-term debt 1,250
CR Term loan - long-term portion 12,750
CR Cash 505
To reflect the elimination of the investment in Ermanco
DR Common stock 646
DR Additional paid-in capital 2,289
DR Retained earnings 1,679
CR Investment in Ermanco 4,614
(B) To reflect the cash outlay of $505 associated with the acquisition of
Ermanco.
(C) To reflect the adjustment necessary to properly record intercompany
purchases of $588 in costs and estimated earnings in excess of billings
and accounts payable on the books of SI Handling Systems, Inc.
DR Costs and estimated earnings
in excess of billings 588
CR Accounts payable 588
To reflect the elimination of intercompany account balance
DR Accounts payable 588
CR Accounts receivable 420
CR Customer deposits and billings
in excess of costs and
estimated earnings 168
(D) To reflect the adjustment necessary to properly record accounts
payable on the books of Ermanco (See (A) above)
DR Accounts payable 142
CR Goodwill 142
To reflect the step-up of $60 in inventory to fair value
related to Ermanco (See (A) above)
DR Inventory 60
CR Goodwill 60
To reflect the adjustment necessary to record income taxes
payable of $155 on the books of Ermanco (See (A) above)
DR Goodwill 155
CR Income taxes payable 155
(E) To reflect the excess of acquisition costs over the estimated fair value
of net assets acquired (goodwill).
(F) To reflect the deferred debt expense of $200 associated with the
acquisition financing.
(G) To reflect the utilization of $2,081 of the line of credit facility
to finance the cash portion of the purchase price and other acquisition
costs.
(H) To reflect the issuance of $1,250 in new debt (current portion of term loan)
to finance the cash portion of the purchase price.
(I) To reflect the issuance of $12,750 of new debt (long-term portion of term
loan) to finance the cash portion of the purchase price.
(J) To reflect the issuance of $3,000 of subordinated notes payable to the
fourteen selling stockholders of Ermanco.
(K) To reflect the issuance of 481,284 shares of SI Handling Systems common
stock (par value of $1.00 per share) with a market value of $4,500
as partial consideration for the purchase, and the elimination of the
shareholders' equity accounts of Ermanco totaling $4,614.
</FN>
</TABLE>
<PAGE>
SI HANDLING SYSTEMS, INC.
SELECTED UNAUDITIED PRO FORMA FINANCIAL DATA
The following selected unaudited pro forma consolidated statements of operations
data gives effect to the acquisition of Ermanco Incorporated ("Ermanco") as if
the transaction occurred at the beginning of the 1999 fiscal year and was in
effect through the period ended August 29, 1999. The pro forma data presented
below should be read in conjunction with the Company's financial statements
previously filed with the Commission and pro forma condensed consolidated
financial information and accompanying assumptions previously included elsewhere
herein. Such data is not necessarily indicative of the results of operations
that would have been achieved had the transaction described above occurred on
the date indicated or that may be expected to occur in the future as a result of
such transaction.
<TABLE>
<CAPTION>
SI HANDLING SYSTEMS, INC. SI HANDLING SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED UNAUDITED PRO FORMA CONDENSED
STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1999 FOR THE SIX MONTHS ENDED AUGUST 29, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
---------------------------------------------------- ----------------------------------------------------
HISTORICAL HISTORICAL
-------------------------- (1) PRO FORMA -------------------------- (1) PRO FORMA
SIHS ERMANCO PRO FORMA CONSOLIDATED SIHS ERMANCO PRO FORMA CONSOLIDATED
2/28/99 2/28/99 COMBINED ADJUSTMENTS RESULTS 8/29/99 8/29/99 COMBINED ADJUSTMENTS RESULTS
---------------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 39,573 27,087 66,660 (315)(L) 66,345 21,569 16,889 38,458 (587)(R) 37,871
Cost of sales 30,859 20,198 51,057 (194)(L) 50,863 18,756 11,776 30,532 (587)(R) 29,945
---------------------------------------------------- ----------------------------------------------------
Gross profit on sales 8,714 6,889 15,603 (121) 15,482 2,813 5,113 7,926 0 7,926
---------------------------------------------------- ----------------------------------------------------
Selling, general and
administrative expenses 6,353 4,133 10,486 10,486 3,456 2,464 5,920 5,920
Productive development costs 478 57 535 535 260 21 281 281
Intrest expense 20 20 1,604 (M) 1,624 10 10 803 (M) 813
Intrest income (166) (63) (229) 129 (N) (100) (46) (25) (71) 65 (N) (6)
Equity in income of
joint venture (14) (14) (14) (99) (99) (99)
Amortization of goodwill - 481 (O) 481 38 38 240 (O) 278
Other income, net (191) (116) (307) (307) (118) (84) (202) (202)
---------------------------------------------------- ----------------------------------------------------
6,480 4,011 10,491 2,214 12,705 3,501 2,376 5,877 1,108 6,985
---------------------------------------------------- ----------------------------------------------------
Earnings (loss) before
income taxes 2,234 2,878 5,112 (2,335) 2,777 (688) 2,737 2,049 (1,108) 941
Income tax expense
(benefit) 856 (18) 838 226 (P) 1,064 (261) 256 (5) 365 (P) 360
---------------------------------------------------- ----------------------------------------------------
Net earnings (loss) 1,378 2,896 4,274 (2,561) 1,713 (427) 2,481 2,054 (1,473) 581
==================================================== ====================================================
Basic earnings (loss)
per share 0.37 0.41 (0.12) 0.14
==================================================== ====================================================
Diluted earnings (loss)
per share 0.36 0.40 (0.12) 0.13
==================================================== ====================================================
Average shares
outstanding 3,718,887 3,718,887 481,284 (Q) 4,200,171 3,704,953 3,704,953 481,284 (Q) 4,186,237
Dilutive effect of
stock options 27,173 27,173 27,173 0 0 13,046 13,046
Dilutive effect of
phantom stock units 11,270 11,270 11,270 15,075 15,075 15,075
---------------------------------------------------- ----------------------------------------------------
Average shares
outstanding assuming
dilution 3,757,330 3,757,330 481,284 4,238,614 3,720,028 3,720,028 494,330 4,214,358
==================================================== ====================================================
<FN>
Notes (in thousands, except share and per share data):
(1) The following acquisition adjustments reflect results of operations as if the acquisition of Ermanco,
which was concluded on September 30, 1999, had occurred on March 2, 1998. The results of operations
are derived from the Company's historical statement of operations for the year ended February 28, 1999
and Ermanco's historical statement of operations for the twelve months ended February 28, 1999 and the Company's
historical financial statements for the six months ended August 29, 1999 and Ermanco's historical financial
statements for the six months ended August 29, 1999.
In accordance with purchase accounting the assets acquired and liabilities assumed are recorded at the lower of the
purchase price or fair value. The estimated fair value adjustments have been determined based upon the most recent
information available. The resultant excess of purchase price and acquisition costs over the fair value of net assets
acquired will be amortized on a straight-line basis over 40 years. The Company has not yet received an appraisal on
Ermanco's property, plant and equipment, net; however, it does not believe that the historical value as stated in the
Consolidated Pro Forma Balance Sheet is materially different from the appraised value.
(L) To reflect the elimination of sales by Ermanco to SI Handling Systems ($315), and the adjustment to the estimated overall
gross profit margin of $61 on the contract in which Ermanco is a supplier to SI, and to recognize the manufacturing profit
of $60 in inventory at acquisition.
(M) To reflect the increase in interest expense resulting from the issuance of debt to finance the acquisition of Ermanco.
The annual interest rate on the new debt of $3,000 in subordinated notes payable to the fourteen selling stockholders of Ermanco
over the seven year term is as follows: ten percent in years one through three, twelve percent in years four and five, and
fourteen percent in years six and seven. The annualized effective interest rate over the seven year term is 11.714%.
SI Handling also received $14,000 in the form of a seven-year term loan from its principal bank to finance the acquisition of
Ermanco. The annual interest rate on the term loan of $14,000 is the three-month LIBOR Market Index Rate plus two and
three-quarters percent. In order to partially hedge the term loan's floating interest expense, the Company entered into a
seven-year interest rate swap for $7,000 of the term loan at a fixed interest rate of 9.38%. The annual interest rate on the
$7,000 term loan which is not partially hedged is assumed to be 8.26%.
A change of 1/8 percent in the interest rate on the part of the term loan which is not partially hedged would result in a
change in interest expense and net earnings of $9 and $5 before and after taxes, respectively, for the year ended
February 28, 1999.
The annual amortization of deferred debt expense associated with the three-year line of credit facility is $20, while the annual
amortization associated with the seven-year term loan is $20.
6 months ended 12 months ended
Aug. 29, 1999 Feb. 28, 1999
----------------------------------------
Interest expense is summarized as follows:
To reflect amortization of deferred debt expense 20 40
To reflect interest expense:
$7,000 Term loan hedged with an interest rate
swap at 9.38% 323 645
$7,000 Term loan with an interest rate of three-month
LIBOR plus 2.75% 284 568
Subordinate notes of $3,000 with an effective annual
interest rate of 11.714% 176 351
------------ ------------
Total interest expense
(including amortization expense) 803 1,604
------------ ------------
(N) To reflect the elimination of interest income earned
on cash investments.
Interest income earned on cash balances used to pay
off the line of credit of $2,081 and cash outlays
of $505 associated with the acquisition was eliminated.
The interest income foregone was assumed at an
annual interest rate of 5%. 65 129
------------ ------------
(O) To reflect the increase in amortization expense due
to the amortization of goodwill ($19,225)
on a straight-line basis over 40 years. 240 481
------------ ------------
(P) To reflect the adjustment to record income tax expense at an estimated effective rate of 38.3%
(Q) To reflect the issuance of SI Handling Systems common stock as partial consideration for the purchase.
(R) To reflect the elimination of sales by Ermanco to SI Handling Systems.
</FN>
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SI HANDLING SYSTEMS, INC.
/S/ William F. Moffitt
William F. Moffitt
Vice President - Finance
(Principal Financial Officer)
Dated: December 17, 1999
-----------------
