UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended November 28, 1999
Commission File No. 0-3362
SI HANDLING SYSTEMS, INC.
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(Exact Name Of Registrant As Specified In Its Charter)
Pennsylvania 22-1643428
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(State Or Other Jurisdiction Of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
600 Kuebler Road, Easton, PA 18040
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(Address Of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 610-252-7321
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Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Number of shares of common stock, par value $1.00 per share, outstanding as of
November 28, 1999: 4,184,878.
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<PAGE>
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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SI Handling Systems, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
November February
28, 1999 28, 1999
-------- --------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents, principally
time deposits $ 3,935 1,829
------ ------
Receivables:
Trade 11,106 7,603
Notes and other receivables 450 51
------ ------
Total receivables 11,556 7,654
------ ------
Costs and estimated earnings in excess
of billings 1,986 7,709
Inventories:
Raw materials 1,407 1,002
Finished goods and work-in-process 1,660 1,613
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Total inventories 3,067 2,615
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Deferred income tax benefits 937 600
Prepaid expenses and other current assets 824 199
------ ------
Total current assets 22,305 20,606
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Property, plant and equipment, at cost:
Land 56 27
Buildings and improvements 4,025 3,485
Machinery and equipment 7,227 4,544
------ ------
11,308 8,056
Less: accumulated depreciation 8,515 6,426
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Net property, plant and equipment 2,793 1,630
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Deferred income tax benefits 276 175
Investments in joint ventures 1,328 1,041
Excess of cost over fair value of net assets
acquired, less amortization of $162 as of November
28, 1999 and $0 as of February 28, 1999 19,634 -
Other assets, at cost less accumulated
amortization of $127 as of November 28, 1999
and $90 as of February 28, 1999 302 128
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Total assets $ 46,638 23,580
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Item 1. Financial Statements (Continued)
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SI Handling Systems, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
November February
28, 1999 28, 1999
-------- --------
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current installments of long-term debt $ 1,265 9
Accounts payable 4,987 4,079
Customers' deposits and billings in excess
of costs and estimated earnings 3,854 4,173
Accrued salaries, wages, and commissions 1,117 761
Income taxes payable 729 410
Accrued royalties payable 265 357
Accrued product warranties 711 486
Accrued pension and retirement savings
plan liabilities 575 556
Accrued other liabilities 1,183 374
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Total current liabilities 14,686 11,205
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Long-term liabilities:
Long-term debt, excluding current installments:
Capital lease obligations 15 -
Mortgage payable - 16
Term loan 12,750 -
Subordinated notes payable 3,000 -
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Total long-term debt 15,765 16
Deferred compensation 473 212
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Total long-term liabilities 16,238 228
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Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued 4,184,878
shares as of November 28, 1999 and
3,705,048 shares as of February 28, 1999 4,185 3,705
Additional paid-in capital 6,817 2,767
Retained earnings 4,712 5,675
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Total stockholders' equity 15,714 12,147
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Total liabilities and stockholders' equity $ 46,638 23,580
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Item 1. Financial Statements (Continued)
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SI Handling Systems, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Share And Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ -----------------------
November November November November
28, 1999 29, 1998 28, 1999 29, 1998
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 16,089 11,349 37,658 30,091
Cost of sales 13,230 9,074 31,986 23,223
--------- --------- --------- ---------
Gross profit on sales 2,859 2,275 5,672 6,868
--------- --------- --------- ---------
Selling, general and
administrative expenses 2,618 1,549 6,074 4,811
Product development costs 27 115 287 361
Interest expense 281 6 291 10
Interest income (45) (37) (91) (117)
Equity in (income) loss
of joint ventures 40 (6) (59) (17)
Amortization of goodwill 124 - 162 -
Other income, net (54) (67) (172) (138)
--------- --------- --------- ---------
2,991 1,560 6,492 4,910
--------- --------- --------- ---------
Earnings (loss) before
income taxes (132) 715 (820) 1,958
Income tax expense
(benefit) (68) 270 (329) 748
--------- --------- --------- ---------
Net earnings (loss) (64) 445 (491) 1,210
========= ========= ========= =========
Basic earnings (loss)
per share $ (.02) .12 (.13) .33
========= ========= ========= =========
Diluted earnings (loss)
per share $ (.02) .12 (.14) .32
========= ========= ========= =========
Cash dividends
per share $ - - .10 .10
========= ========= ========= =========
Average shares
outstanding 3,992,500 3,722,554 3,800,802 3,721,558
Dilutive effect of
stock options - 24,566 - 29,258
Dilutive effect of
phantom stock units 18,333 11,920 16,161 10,714
--------- --------- --------- ---------
Average shares
outstanding
assuming dilution 4,010,833 3,759,040 3,816,963 3,761,530
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Item 1. Financial Statements (Continued)
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SI Handling Systems, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
November November
28, 1999 29, 1998
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<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (491) 1,210
Adjustments to reconcile net earnings (loss)
to net cash provided
by operating activities:
Depreciation of plant and equipment 327 301
Amortization of intangibles 199 7
Gain on disposition of equipment (3) -
Equity in income of joint ventures (59) (17)
Change in operating assets and liabilities,
net of effects of the acquisition of Modular
Automation Corp. and Ermanco Incorporated:
Receivables 972 923
Costs and estimated earnings in
excess of billings 6,948 (555)
Inventories 554 43
Deferred income tax benefits (324) -
Prepaid expenses and other current assets 30 (80)
Other noncurrent assets 39 -
Accounts payable (1,829) (6)
Customers' deposits and billings in excess
of costs and estimated earnings (822) 2,101
Accrued salaries, wages, and
commissions 97 (772)
Income taxes payable (194) 8
Accrued royalties payable (92) (110)
Accrued pension and retirement
savings plan liabilities (7) (5)
Accrued product warranties 175 277
Accrued other liabilities 452 (60)
Deferred compensation 6 25
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Net cash provided by operating activities 5,978 3,290
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Cash flows from investing activities:
Investment in joint venture (228) -
Proceeds from the disposition of equipment 3 -
Acquisition of Modular Automation Corp.,
net of cash acquired (928) -
Acquisition of Ermanco Incorporated,
net of cash acquired (1,980) -
Additions to property, plant and equipment (268) (329)
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Net cash used by investing activities (3,401) (329)
------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
Item 1. Financial Statements (Continued)
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SI Handling Systems, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited) (Continued)
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
November November
28, 1999 29, 1998
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Sale of common shares in connection
with employee incentive stock option plan 34 60
Repayment of long-term debt (29) (6)
Dividends paid on common stock (371) (372)
Repurchase and retirement of common stock (105) (157)
Repayment of revolving credit loan payable to bank - (1,000)
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Net cash used by financing activities (471) (1,475)
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Increase in cash and cash equivalents 2,106 1,486
Cash and cash equivalents, beginning
of period 1,829 752
------ ------
Cash and cash equivalents, end of period $ 3,935 2,238
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2 9
====== ======
Income taxes $ 464 740
====== ======
Supplemental disclosures of noncash
investing and financing activities:
Issuance of 2,850 common shares
in exchange for 1,493 common shares
delivered to the Company by an officer
in connection with the employee
incentive stock option. $ 15 -
====== ======
Issuance of 14,886 common shares in
exchange for 5,978 common shares
delivered to the Company by officers
in connection with the employee
incentive stock option plan $ - 84
====== ======
Issuance of 481,284 common shares
for Ermanco acquisition $ 4,500 -
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Issuance of $14,000 of term debt for
Ermanco acquisition $ 14,000 -
====== ======
Issuance of subordinated notes payable
for Ermanco acquisition $ 3,000 -
====== ======
Additional consideration payable in
connection with the Ermanco acquisition $ 186 -
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
Item 1. Financial Statements (Continued)
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SI Handling Systems, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended November 28, 1999 and November 29, 1998
(1) The information contained in this 10-Q report is unaudited and is subject
to year-end adjustments and audit. However, in the opinion of management,
the interim financial statements furnished reflect all adjustments and
accruals which are necessary to a fair statement of results for the interim
periods presented. Results for interim periods are not necessarily
indicative of results expected for the fiscal year. Refer to the Company's
10-K for the year ended February 28, 1999 for more complete financial
information.
On September 30, 1999, the Board of Directors of the Company approved an
amendment to Article I, Section 1.03 of the Company's Bylaws to change the
fiscal year end of the Company from the Sunday nearest to the last day of
February to December 31. The Company will file a report on Form 10-K for
the 10-month period ending December 31, 1999 to cover the transition
period.
(2) SI Handling Systems, Inc. ("SI" or the "Company") and McKesson Automated
Prescription Systems, Inc. ("McKesson APS"), formerly known as Automated
Prescription Systems, Inc., are co-venturers in a joint venture named
SI/BAKER, INC. ("SI/BAKER" or the "joint venture"). On September 29, 1998,
McKesson Corporation [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. The SI/BAKER joint venture draws upon
the automated materials handling systems experience of SI 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 joint venture designs and installs computer controlled, fully
automated, integrated systems for managed care pharmacy operations. The
joint venture'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.
Schedule A contains the SI/BAKER, INC. financial statements. The
information contained in the SI/BAKER, INC. financial statements is
unaudited and is subject to year-end adjustments and audit. However, in the
opinion of management, the interim financial statements furnished reflect
all adjustments and accruals which are necessary to a fair statement of
results for the interim periods presented.
On November 4, 1999, the Board of Directors of SI/BAKER approved an
amendment to Article VII, Section 5, of the Bylaws to change the fiscal
year end of the Company from the last day of February to December 31.
SI/BAKER's financial statements for the 10-month period ending December 31,
1999 will be included in SI's report on Form 10-K for the 10-month period
ending December 31, 1999.
- 7 -
<PAGE>
Item 1. Financial Statements (Continued)
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SI Handling Systems, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended November 28, 1999 and November 29, 1998
(3) On April 13, 1999, the Company acquired all of the outstanding capital
stock of Modular Automation Corp. of Greene, New York for $1,957,000. The
purchase price of the acquisition was allocated to the assets acquired
based on fair value with the remainder representing goodwill. The effects
of the acquisition are immaterial.
(4) On September 30, 1999, the Company acquired Ermanco Incorporated as
described in the Liquidity and Capital Resources Section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which was financed by the issuance of additional common stock,
new subordinated debt, and a term loan described therein.
For the nine months ended November 28, 1999, pro forma financial results
are as followings (in thousands, except per share amounts):
Net sales $ 56,718
========
Net earnings $ 574
========
Basic earnings per share $ .14
========
Diluted earnings per share $ .13
========
Item 2. 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 $3,935,000 during the
nine months ended November 28, 1999 from $1,829,000 at the year ended February
28, 1999. The increase resulted from cash provided by operating activities
totaling $5,978,000 and proceeds of $34,000 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 was the repayment
of long-term debt of $29,000, purchases of capital equipment of $268,000, the
acquisition of Modular Automation Corp., net of cash acquired for $928,000, the
acquisition of Ermanco Incorporated, net of cash acquired for $1,980,000, the
investment of $228,000 in the SI-Egemin joint venture, the payment of $371,000
in cash dividends to stockholders, and the payment of $105,000 in connection
with the purchase and retirement of the Company's common stock. Funds provided
by operating activities during the nine months ended November 29, 1998 were
$3,290,000.
On April 13, 1999, the Company acquired all of the outstanding capital
stock of Modular Automation Corp. ("MAC") of Greene, New York for $1,957,000.
The purchase price of the acquisition was allocated to the assets acquired based
on fair value with the remainder representing goodwill. Since its formation in
1981, MAC was a respected supplier of Automated Guided Vehicle ("AGV") Systems.
The acquisition of the AGV technology complements and expands the Company's AGV
product offerings. The acquired AGV products and personnel have been integrated
into the Company's existing Easton, Pennsylvania facility.
- 8 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Liquidity And Capital Resources (Continued)
- -------------------------------
On September 30, 1999, the Company completed the acquisition of all of the
outstanding capital stock of Ermanco Incorporated ("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, under the terms of the Stock
Purchase Agreement 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 working capital 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 be continued to be located in Spring Lake, Michigan and
operate as a wholly owned subsidiary of the Company. For purposes of the
purchase price allocation, 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 of the acquisition, 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. As of
November 28, 1999, the Company did not have any borrowings
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Liquidity And Capital Resources (Continued)
- -------------------------------
under the line of credit facility. 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 of Ermanco. During the first two
years of the term loan, the Company will repay 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 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 Company was in compliance with all covenants as of
November 28, 1999.
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.
Prior to the acquisition of Ermanco, the Company had a $5,000,000 committed
revolving credit facility which was secured by a lien position on accounts
receivable, land, and buildings and contained 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 the six months ended August 29, 1999 and prior to the
acquisition of Ermanco. The Company did not have any borrowings under the
committed revolving credit facility during the six months ended August 29, 1999;
however, borrowings which occurred after the six months ended August 29, 1999 or
contemporaneous with the acquisition of Ermanco were repaid as of October 6,
1999. As noted above, this facility was replaced by a new $6,000,000 three-year
line of credit facility with the Company's principal bank.
On March 4, 1996, SI/BAKER established a $2,500,000 Line of Credit Facility
(the "Facility") with its principal bank (the "Bank"). Under the 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. On March 18, 1999, SI/BAKER repaid its
outstanding debt under the Facility of
- 10 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Liquidity And Capital Resources (Continued)
- -------------------------------
$500,000. As of November 30, 1999, SI/BAKER did not have any borrowings under
the Facility. The Facility has an expiration date of February 29, 2000.
On June 7, 1999, the Board of Directors of the Company authorized
management to purchase up to 10,000 shares of the Company's common stock through
open market transactions or negotiated transactions at prices not to exceed
prevailing market prices. During the second quarter ended August 29, 1999, the
Company spent $105,000 on purchases of 10,000 shares of its common stock through
open market transactions as part of the stock purchase program.
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 the year ended February 28, 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 line of 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 restrictive covenants
associated with the recent financing obtained from the Company's principal bank
to complete the acquisition of Ermanco, the economics of the expansion, and the
circumstances justifying the expansion will be key factors in determining the
amount of resources the Company will devote to further expansion. At this time,
the Company does not have any material capital commitments.
Results Of Operations
- ---------------------
(a) Nine Months Ended November 28, 1999 Versus Nine Months Ended November 29,
---------------------------------------------------------------------------
1998
----
On September 30, 1999, the Company concluded the acquisition of all of the
outstanding capital stock of Ermanco Incorporated. Ermanco operates as a wholly
owned subsidiary of SI and the results for the nine months ended November 28,
1999 include the operations of Ermanco from October 1, 1999.
The Company's net loss for the nine months ended November 28, 1999 was
$491,000 compared to net earnings of $1,210,000 for the nine months ended
November 29, 1998.
Backlog at the end of the nine months ended November 28, 1999 was
approximately $19,800,000. During the nine months ended November 28, 1999, the
Company received orders totaling approximately $31,650,000. Two orders, totaling
approximately $10,450,000, engage the Company to modernize and expand two
distribution facilities for a major government agency. These contracts, won
under a competitive bidding process, are scheduled to be completed by September
2000.
Net sales of $37,658,000 for the nine months ended November 28, 1999
increased 25.1% compared to net sales of $30,091,000 for the nine months ended
November 29, 1998. The sales increase of $7,567,000 is comprised of Ermanco's
contribution to product sales approximating $5,525,000 and SI's increase in
sales of approximately $2,042,000 when compared to the nine months ended
November 29, 1998. The largest increase in SI's sales occurred in the
Switch-Cart product line.
- 11 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
- ---------------------
(a) Nine Months Ended November 28, 1999 Versus Nine Months Ended November
---------------------------------------------------------------------
29, 1998 (Continued)
--------
During the nine months ended November 28, 1999, Switch-Cart sales of
approximately $14,200,000 rose approximately $7,175,000 when compared to the
nine months ended November 29, 1998 due primarily to progress made on contracts
with a major government agency. Partially offsetting the impact of Ermanco and
Switch-Cart sales during the nine months ended November 28, 1999 was a decrease
in sales of approximately $5,125,000 across SI's other products lines, with the
majority of the decrease relating to sales of the Company's Cartrac, Sortation,
and Automated Guided Vehicle product lines.
Gross profit as a percentage of sales was 15.1% for the nine months ended
November 28, 1999 compared to 22.8% for the nine months ended November 29, 1998.
The decrease in the gross profit percentage for the nine months ended November
28, 1999 was primarily attributable to competitive pressures as well as to
first-time inefficiencies associated with the development of enhanced products
related to contracts in process. The inefficiencies associated with one major
systems integration contract accounted for a second quarter cost overrun
resulting in an unfavorable impact on gross profit of approximately $1,100,000
in the second quarter. Although the full effect of the cost overrun was provided
for in the second quarter, third quarter revenue of approximately $2,240,000 was
attributable to this contract at no gross profit. However, in the process the
Company has developed an additional proprietary product and service to sell in
various marketplaces. Also contributing to the higher gross profit percentage in
the nine months ended November 29, 1998 was the favorable performance on several
contracts, principally for the Company's higher margin proprietary products,
initiated in the prior fiscal year, that were completed or nearing completion
during the nine months ended November 29, 1998.
Selling, general and administrative expenses of $6,074,000 were higher by
$1,263,000 in the nine months ended November 28, 1999 than in the nine months
ended November 29, 1998. The majority of the increase, approximately $725,000,
is attributable to Ermanco. Also contributing to the increase in selling,
general and administrative expenses was approximately $300,000 in severance
costs and $300,000 in costs associated with (1) the appointment of a new
President and CEO; (2) the addition of corporate purchasing resources aimed at
establishing global procurement capabilities which develop supplier
relationships that provide a competitive advantage; and (3) expenses based on
revenue performance. Partially offsetting the increase in selling, general, and
administrative expenses was a larger amount of costs during the nine months
ended November 29, 1998 associated with product promotion and sales efforts
aimed at expanding the customer base.
Product development costs of $287,000 were lower by $74,000 for the nine
months ended November 28, 1999 than in the nine months ended November 29, 1998.
Development programs in the nine months ended November 28, 1999 included
enhancements to the Switch-Cart and Order Selection product lines with efforts
directed towards unit picking techniques and automated replenishment.
- 12 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
- ---------------------
(a) Nine Months Ended November 28, 1999 Versus Nine Months Ended November
---------------------------------------------------------------------
29, 1998 (Continued)
--------
Development programs in the nine months ended November 29, 1998 included
enhancements to the Company's product controls, and improvements primarily to
the Order Selection product line, with particular emphasis aimed at the controls
platform for Dispen-SI-matic Systems, unit-picking techniques, and automated
replenishment.
Interest income of $91,000 was lower by $26,000 in the nine months ended
November 28, 1999 compared to the nine months ended November 29, 1998. The
decrease in interest income was attributable to the lower level of funds
available for short-term investments primarily during the six months ended
August 29, 1999.
Interest expense of $291,000 was higher by $281,000 in the nine months
ended November 28, 1999 than in the nine months ended November 29, 1998. The
increase in interest expense was primarily attributable to the term debt and
subordinated notes issued in connection with the Ermanco acquisition during the
third quarter ended November 28, 1999.
Equity in (income) loss of joint ventures represents the Company's
proportionate share of its investments in the SI-Egemin and SI/BAKER joint
ventures that are being accounted for under the equity method. The net favorable
variance of $59,000 for the nine months ended November 28, 1999 in the equity in
(income) loss of joint ventures was comprised of a favorable variance of
$166,000 attributable to the SI/BAKER joint venture and an unfavorable variance
of $107,000 attributable to the SI-Egemin joint venture. The favorable variance
of $166,000 for the nine months ended November 28, 1999 in the equity in
(income) loss of the SI/BAKER joint venture was attributable to increased sales
of approximately $8,945,000, as compared to the comparable prior fiscal period
of approximately $5,993,000, plus a reduction of $137,000 in product development
expenses, and an increase of $92,000 in interest income, net. The sales increase
was primarily attributable to a larger backlog of orders entering the current
fiscal year versus a smaller backlog of orders at the beginning of prior fiscal
year. During the third quarter of the comparable prior fiscal year, SI/BAKER
increased development expenses for software and controls capabilities for
various new products addressing changing market requirements. The favorable
variance in interest income, net was primarily attributable to the higher level
of working capital and short-term investments during the first nine months of
current fiscal year. Partially offsetting the favorable variance were SI/BAKER's
increases of (1) $118,000 in revenue-based royalty costs due to the parent
companies, and (2) $186,000 in selling, general and administrative expenses. The
increase in selling, general and administrative expenses was primarily
attributable to an increase of $140,000 in expenses based on revenue and profit
performance and an increase of $30,000 in costs associated with sales and
administrative efforts aimed at expanding the customer base.
The unfavorable variance of $107,000 for the nine months ended November 28,
1999 in the equity in (income) loss of the SI-Egemin joint venture was
attributable to start up costs, primarily in the third quarter ended November
28, 1999. The SI-Egemin joint venture was initiated in July 1999.
The favorable variance of $34 in other income, net, was primarily
attributable to an increase in the revenue-based royalty income related to the
SI/BAKER joint venture.
- 13 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
- ---------------------
(a) Nine Months Ended November 28, 1999 Versus Nine Months Ended November 29,
---------------------------------------------------------------------------
1998 (Continued)
----
Amortization of goodwill represented amortization, using the straight-line
method over a period of five years, associated with the acquisition of Modular
Automation Corp. and amortization, using the straight-line method over a period
of forty years, associated with the recent acquisition of Ermanco Incorporated.
Goodwill amortization expense associated with the acquisitions of Modular
Automation Corp. and Ermanco Incorporated totaled approximately $80,000 each.
The Company recognized an income tax benefit of $329,000 during the nine
months ended November 28, 1999 compared to the incurrence of income tax expense
of $748,000 in the nine months ended November 29, 1998. The income tax benefit
recognized for the nine months ended November 28, 1999 represented the carryback
of current fiscal year losses against prior year income. Income tax expense for
the nine months ended November 29, 1998 was generally recorded at statutory
federal and state tax rates expected to apply for that fiscal year.
(b) Three Months Ended November 28, 1999 Versus Three Months Ended November 29,
---------------------------------------------------------------------------
1998
----
With the exception of the following Statements of Operations captions,
changes in the third quarter of the current fiscal year compared to the prior
year were consistent with those previously noted above for the nine-month
period.
Net sales of $16,089,000 for the third quarter ended November 28, 1999
increased 41.8% compared to net sales of $11,349,000 for the third quarter ended
November 29, 1998. The sales increase of $4,740,000 is comprised of Ermanco's
contribution to product sales approximating $5,525,000 and SI's decrease in
sales of approximately $785,000 when compared to the third quarter ended
November 29, 1998. With the exception of Switch-Cart sales, the decrease in SI's
sales was experienced across the Company's other product lines with the majority
of the decrease relating to sales of the Company's Cartrac, Order Selection, and
Automated Guided Vehicle product lines.
Gross profit as a percentage of sales was 17.8% for the third quarter ended
November 28, 1999 compared to 20.0% for the third quarter ended November 29,
1998. The decrease in the gross profit percentage for the third quarter ended
November 28, 1999 was primarily attributable to competitive pressures as well as
to first-time inefficiencies associated with the development of enhanced Order
Selection products related to contracts in process. Although the full effect of
the cost overrun on a major systems integration contract was provided for in the
second quarter, third quarter revenue of approximately $2,240,000 was
attributable to this contract at no gross profit.
Selling, general and administrative expenses of $2,618,000 were higher by
$1,069,000 in the third quarter ended November 28, 1999 than in the third
quarter ended November 29, 1998. The majority of the increase, approximately
$725,000, is attributable to Ermanco. Also contributing to the increase in
selling, general and administrative expenses was approximately $300,000 in
severance costs.
- 14 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
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 (i.e. 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 has completed 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 remediated or have appropriate
plans to remediate Year 2000 issues where their systems or business activities
may impact the Company's operations. However, many suppliers have either
declined to provide the requested Year 2000 assurances or have limited the scope
of assurances to which they are willing to commit; therefore, 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 handling systems purchased from the Company
for Year 2000 compliance. If a significant number of suppliers and customers
were to experience business disruptions as a result of their lack of Year 2000
readiness, their problems could have a material adverse effect on the financial
position, liquidity, and results of operations of the Company. In order to
address this situation, the Company has formulated contingency plans intended to
deal with the impact on the Company of Year 2000 problems that may be
experienced by suppliers and customers. In any event, even where the Company has
contingency plans, there can be no assurance that such plans will address all
the problems that may arise, or that such plans, even if implemented, will be
successful. Notwithstanding the foregoing, the Company has no reason to believe
that its exposure to the risks of supplier and customer Year 2000 readiness is
any greater than the exposure to such risk that affects its competitors
generally. Costs incurred to date to complete the Company's Year 2000 compliance
efforts have not been 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 (7) relating to existing internal hardware,
software, facilities and equipment; however, testing is ongoing as hardware,
software, and equipment are 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
will continue to monitor its Year 2000 compliance program and address any
material issues.
- 15 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Year 2000 (Continued)
- ---------
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
has significantly reduced 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.
As of the date of this filing, the Company has not experienced nor has it
been informed by any third parties of any material events associated with the
Year 2000 issue.
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 acquisition activities, 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," "should," "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 risks and uncertainties
associated with the Ermanco acquisition, including the failure to realize
anticipated benefits of such acquisition, the failure to integrate Ermanco
successfully with the Company, and any unforeseen complications related to the
Ermanco acquisition; (3) as a result of risks associated with the Company's
restructuring, including the failure to achieve anticipated operating savings,
and the possibility that the restructuring charges will be greater than
anticipated; (4) as a result of factors over which the Company has no control,
including the strength of domestic and foreign economies, sales growth,
competition, certain costs increases, and any potential exposures relating to
Year 2000 matters; or (5) if the factors on which the Company's conclusions are
based do not conform to the Company's expectations.
Quantitative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------
The Company does not believe that its exposures to interest rate risk or
foreign currency exchange risks, risks from commodity prices, equity prices and
other market changes that affect market risk sensitive instruments, including
the interest rate swap agreement incurred in connection with the Ermanco
acquisition, are material to its results of operations.
- 16 -
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 5. Other Information
- ------ -----------------
Effective October 25, 1999, William F. Moffitt became Vice President -
Finance of the Company.
Effective November 10, 1999, William J. Casey was named to the position of
Executive Vice President of the Company.
Effective December 13, 1999, Thomas M. Pinkin became Vice President - Sales
of the Company.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibit 27 - Financial Data Schedule.
(b) A Form 8-K was filed on October 15, 1999. The filing pertained to SI
Handling Systems' completion of the acquisition of all of the outstanding
capital stock of Ermanco. Closing of the acquisition occurred on September 30,
1999.
- 17 -
<PAGE>
SI Handling Systems, Inc. and Subsidiary
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 thereunto duly authorized.
SI HANDLING SYSTEMS, INC.
/S/ William F. Moffitt
William F. Moffitt
Vice President - Finance
(Principal Financial Officer)
Dated: January 12, 2000
----------------
- 18 -
<PAGE>
Schedule A
SI/BAKER, INC.
Financial Statements
November 30, 1999
- 19 -
<PAGE>
SI/BAKER, INC.
Balance Sheets (Unaudited)
November 30, 1999 and February 28, 1999
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
November February
30, 1999 28, 1999
-------- --------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents, principally
time deposits $ 747 154
------ ------
Receivables:
Trade 5,600 1,658
Other receivables 4 238
------ ------
Total receivables 5,604 1,896
------ ------
Costs and estimated earnings in
excess of billings 1,190 2,516
Inventories 62 -
Deferred income tax benefits 276 258
Prepaid expenses and other current
assets 104 136
------ ------
Total current assets 7,983 4,960
------ ------
Machinery and equipment, at cost 194 176
Less: accumulated depreciation 122 95
------ ------
Net machinery and equipment 72 81
------ ------
Equipment leased to customer 487 487
Less: accumulated depreciation 470 370
------ ------
Net equipment leased to customer 17 117
------ ------
Deferred income tax benefits 33 51
------ ------
Other assets - 95
------ ------
Total assets $ 8,105 5,304
====== ======
</TABLE>
- 20 -
<PAGE>
SI/BAKER, INC.
Balance Sheets (Unaudited)
November 30, 1999 and February 28, 1999
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
November February
30, 1999 28, 1999
-------- --------
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Note payable to bank $ - 500
------ ------
Accounts payable:
Trade 944 510
Affiliated companies - 15
------ ------
Total accounts payable 944 525
------ ------
Customers' deposits and billings in
excess of costs and estimated
earnings 3,362 1,104
Accrued salaries, wages, and
commissions 197 91
Income taxes payable 3 -
Accrued royalties payable 394 209
Accrued product warranties 738 660
Accrued other liabilities 52 10
------ ------
Total current liabilities 5,690 3,099
------ ------
Deferred compensation - 123
------ ------
Stockholders' equity:
Common stock, $1 par value; authorized
1,000 shares; issued 200 shares - -
Additional paid-in capital 200 200
Retained earnings 2,215 1,882
------ ------
Total stockholders' equity 2,415 2,082
------ ------
Total liabilities and stockholders'
equity $ 8,105 5,304
====== ======
</TABLE>
- 21 -
<PAGE>
SI/BAKER, INC.
Statements of Operations (Unaudited)
Nine Months Ended November 30, 1999 and 1998
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
November November November November
30, 1999 30, 1998 30, 1999 30, 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 2,960 2,132 8,945 5,993
Cost of sales 2,293 1,497 7,042 4,656
----- ----- ----- -----
Gross profit on sales 667 635 1,903 1,337
----- ----- ----- -----
Selling, general and
administrative
expenses 304 238 861 675
Product development
costs 44 266 200 337
Royalty expense
to parent companies 119 86 358 240
Interest income (21) (1) (42) (6)
Interest expense - 25 4 60
Other income, net - - (42) (25)
----- ----- ----- -----
446 614 1,339 1,281
----- ----- ----- -----
Earnings before
income taxes 221 21 564 56
Income tax expense 87 8 231 22
----- ----- ----- -----
Net earnings $ 134 13 333 34
===== ===== ===== =====
</TABLE>
- 22 -
<PAGE>
SI/BAKER, INC.
Statements of Cash Flows (Unaudited)
Nine Months Ended November 30, 1999 and 1998
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
November November
30, 1999 30, 1998
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net earnings $ 333 34
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation of machinery and
equipment and leased equipment 127 113
Changes in operating assets and
liabilities:
Receivables (3,708) 2,374
Costs and estimated earnings
in excess of billings 1,326 899
Inventories (62) 118
Prepaid expenses and other
current assets 32 (294)
Other assets 95 (29)
Accounts payable 419 (522)
Customers' deposits and
billings in excess of costs
and estimated earnings 2,258 (990)
Accrued salaries, wages, and
commissions 106 (362)
Income taxes payable 3 (44)
Accrued royalties payable 185 (133)
Accrued product warranties 78 (184)
Accrued other liabilities 42 (32)
Deferred compensation (123) -
------ ------
Net cash provided
by operating activities 1,111 948
------ ------
Cash flows from investing activities:
Additions to machinery and equipment (18) (48)
------ ------
Net cash used by investing activities (18) (48)
------ ------
Cash flows from financing activities:
Repayment of note payable to bank (500) (900)
------ ------
Net cash used by financing activities (500) (900)
------ ------
Increase in cash and cash equivalents 593 -
Cash and cash equivalents,
beginning of period 154 388
------ ------
Cash and cash equivalents, end of period $ 747 388
====== ======
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Income taxes $ (43) 325
====== ======
Interest $ 3 71
====== ======
</TABLE>
- 23 -
<PAGE>
SI HANDLING SYSTEMS, INC.
FORM 10-Q
EXHIBIT INDEX
Exhibit No.
27 Financial Data Schedule.
- 24 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE QUARTER ENDED
NOVEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> NOV-28-1999
<CASH> 3,935
<SECURITIES> 0
<RECEIVABLES> 11,106
<ALLOWANCES> 0
<INVENTORY> 3,067
<CURRENT-ASSETS> 22,305
<PP&E> 11,308
<DEPRECIATION> 8,515
<TOTAL-ASSETS> 46,638
<CURRENT-LIABILITIES> 14,686
<BONDS> 15,765
0
0
<COMMON> 4,185
<OTHER-SE> 11,529
<TOTAL-LIABILITY-AND-EQUITY> 46,638
<SALES> 37,658
<TOTAL-REVENUES> 37,658
<CGS> 31,986
<TOTAL-COSTS> 31,986
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 291
<INCOME-PRETAX> (820)
<INCOME-TAX> (329)
<INCOME-CONTINUING> (491)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (491)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.14)
</TABLE>
