UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the ten months ended: Commission file number:
December 31, 1999 0-03362
SI HANDLING SYSTEMS, INC.
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(Exact Name Of Registrant As Specified In Its Charter)
Pennsylvania 22-1643428
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(State Or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation)
600 Kuebler Road, Easton, Pennsylvania 18040
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(Address Of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 610-252-7321
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00 Per Share
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(Title Of Class)
(1) Has the registrant filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months with the Commission? Yes.
(2) Has the registrant been subject to such filing requirements for the past
90 days? Yes.
(3) Number of shares of common stock, par value $1.00 per share, outstanding
as of March 7, 2000 was: 4,184,878.
(4) The aggregate market value of the voting stock held by non-affiliates as
of March 7, 2000 was: $15,485,000.
(5) Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. |X|
Documents incorporated by reference. The Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on June 22, 2000 incorporated
partially in Part III hereof.
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PART I
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Item 1. Business
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On September 30, 1999, the Board of Directors of SI Handling Systems, Inc.
and Subsidiary ("the Company") approved an amendment to Article 1, 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. For the year ended
December 31, 1999, the fiscal year consisted of ten months. Prior to the recent
change in the Company's Bylaws, each of the fiscal years ended February 28, 1999
and March 1, 1998 consisted of 52 weeks.
On September 30, 1999, the Company concluded the acquisition of all of the
outstanding common stock of Ermanco Incorporated ("Ermanco"). Ermanco operates
as a wholly-owned subsidiary of the Company, and the results for the ten months
ended December 31, 1999 includes the operating results from October 1, 1999
through December 31, 1999.
The Company's Easton, Pennsylvania operation (hereafter referred to as "SI
Easton") is a systems integrator supplying automated materials handling systems
to manufacturing, order selection, and distribution operations. The systems are
designed, sold, manufactured, installed, and serviced by its own staff, or by
others, for SI Easton, at its direction, generally as labor-saving devices to
improve productivity and reduce costs. SI Easton's products are utilized to
automate the movement or selection of products and are often integrated with
other automated equipment, such as conveyors and robots. SI Easton's systems
involve both standard and specially designed components and include integration
of non-proprietary automated handling technologies so as to provide solutions
for its customers' unique materials handling needs. SI Easton's staff develops
and designs computer control programs required for the efficient operation of
the systems. SI Easton derives most of its sales from North American
corporations and the federal government.
Ermanco is a manufacturer of light to medium duty unit handling conveyor
products, serving the material handling industry through local independent
distributors in North America. Ermanco also provides complete conveyor systems
for a variety of applications, including distribution and manufacture of
computers and electronic products, utilizing primarily its own manufactured
conveyor products, engineering services by its own staff, or subcontracted, and
subcontracted installation services.
Drawing upon its engineering resources and expertise, Ermanco is devoted to
completely understanding client needs, then creating and delivering
specifically-tailored materials handling solutions through superior product
quality, seamless systems integration, and a demonstrated commitment to
long-term application success.
Ermanco supplies material handling systems and equipment to both national
and international markets. They offer services ranging from the delivery of
basic transportation conveyors to turnkey installations of complex, fully
automated work-in-process production lines and distribution centers, utilizing
the most sophisticated, custom-designed controls software. The systems product
line of Ermanco accounts for approximately 40% of Ermanco's total revenues, and
the balance is from distribution (resale).
The Company's systems vary in configuration and capacity. Historically,
system prices across the Company's product lines have ranged from $100,000 to
$24,000,000 per system. Sales to companies in the United States as a percentage
of total sales during the ten months ended December 31, 1999, and during the
fiscal years ended February 28, 1999 and March 1, 1998 were 96.3%, 87.2%, and
95.6%, respectively.
The Company's backlog of orders at December 31, 1999 was $23,685,000,
$4,214,000 of which is with the federal government. The Company's backlog of
orders at February 28, 1999 was $19,884,000. The rate of new orders can vary
substantially from month to month. Fluctuations in the Company's sales and
earnings occur with increases or decreases in major installations. The Company
expects to fill, within its 2000 calendar year, all of the December 31, 1999
backlog indicated above.
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Products
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The SI Easton segment encompasses the horizontal transport and order
picking and fulfillment families of products.
Horizontal Transport
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Cartrac(R). Cartrac(R) systems are used in the automation of production,
manufacturing, and assembly operations through various industries. Some of these
industries are automotive, aerospace, appliance, electronics, machine tools,
radiation chambers, castings, and foundries. As part of a fully computerized
manufacturing system, Cartrac(R) offers zero pressure accumulation capabilities
that are well suited for the manufacturing environment where high volume product
rate and short cycle time are critical. Cartrac(R) is a spinning tube conveyor
with several variations:
Roborail(TM) -- The "featherweight" of the Cartrac(R), with a load capacity
of up to 100 pounds. Known for its speed, it is effective in light assembly as
well as material and component delivery applications.
Robolite(R) -- This product has a 500-pound load capacity and was designed
specifically for light assembly and sub-assembly operations. It is particularly
adept, with accurate positioning of product.
Robodrive(R) -- The "brute" of the Cartrac(R) line. In its minimal
configuration, utilizing four drive wheels, it has the capacity to index 8,000
pounds over 12 feet in only five seconds.
Cartrac(R) MD -- This medium-duty version is most often utilized in the
engine cradle and rear suspension auto assembly areas. It has also been
successfully used in appliance assembly operations.
Cartrac(R) HD -- This heavy-duty version of Cartrac(R) has exhibited
flawless performance and reliability in all areas of auto body shop assembly
operations.
Cartrac(R) has been installed in facilities in the United States, Europe,
Japan, Canada, Mexico, and Australia. Cartrac systems can also be combined with
the Company's other automated products. A typical Cartrac system takes six to
nine months to design, manufacture, and install.
Cartrac(R) sales, as a percent of total sales, were 4.6%, 14.9%, and 11.8%
for the ten months ended December 31, 1999 and for the fiscal years ended
February 28, 1999 and March 1, 1998, respectively.
Lo-Tow(R). Lo-Tow(R) is the platform of the towline conveyor systems
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utilized in the automation of manufacturing, unit load handling, and large roll
delivery systems. This simple, robust component design allows for a variety of
configurations well suited for any application. Lo-Tow(R) is an in-floor towline
conveyor. It provides reliable and efficient transportation for unit loads of
all types in progressive assembly or distribution applications. Because SI
Easton's Lo-Tow(R) tow chain used with the system operates at a depth of
approximately three inches, systems can be installed in existing one-story and
multi-story buildings as well as newly constructed facilities. SI Easton is the
world's largest supplier of in-floor towline systems. A typical Lo-Tow(R) system
requires approximately six months to engineer, manufacture, and install.
Lo-Tow(R) sales as a percent of total sales were 37.3%, 26.8%, and 42.9% for the
ten months ended December 31, 1999 and for the fiscal years ended February 28,
1999 and March 1, 1998, respectively.
Automated Guided Vehicle ("AGV") Systems. On April 13,1999, the Company
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acquired all of the outstanding common stock of Modular Automation Corp. ("MAC")
of Greene, New York, for $1,957,000, paid in the form of cash. The acquisition
required a net cash outlay of $928,000. The acquired Automated Guided Vehicle
("AGV") products and personnel were integrated into the Company's existing
Easton, Pennsylvania facility.
The acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations" ("APB No.
16") and, accordingly, the acquired assets and assumed liabilities have been
recorded at their estimated fair market value at their date of acquisition.
However, as of December 31, 1999, the Company decided to abandon the AGV product
line associated with the MAC acquisition. The write-off of certain long-lived
assets, in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-
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Lived Assets and for the Long-Lived Assets to be Disposed of," including
goodwill, has been recognized in the Consolidated Statement of Operations for
the ten months ended December 31, 1999.
SI Easton possesses an AGV technology base following its acquisition of the
BT Systems seven years earlier. SI Easton primarily has concentrated its efforts
on the parts, service, and rehab business of the AGV product line.
In previous years, SI Easton has supplied Sideloading Forklift, Backloading
Forklift, Unit Load, Platform and Towing Automated Guided Vehicle Systems.
Automated Guided Vehicle Systems sales, as a percent of total sales, were 0.5%,
5.2%, and 0.0% for the ten months ended December 31, 1999, and for the fiscal
years ended February 28, 1999 and March 1, 1998, respectively.
SI-Egemin
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On July 15, 1999, the Company and Egemin N.V. ("Egemin") of Schoten,
Belgium formed a joint venture, SI-Egemin N.V. ("SI-Egemin"). SI-Egemin draws
upon the automated materials handling systems experience of SI Easton and Egemin
to provide automated material handling systems worldwide. During the ten months
ended December 31, 1999, each member company contributed $228,000 in capital to
fund the joint venture. The Company accounts for its investment in the joint
venture on the equity basis.
SI-Egemin's marketing focus is targeted at the worldwide horizontal
transport arena, with the exception of certain territorial exclusions. The joint
venture's access to each member company's horizontal transportation products
(Lo-Tow(R) , Cartrac(R), and AGV) provides greater capabilities to address
customer needs.
Order Picking and Fulfillment
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Dispen-SI-matic
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Automation of the order selection process to pick customers' orders with
accuracy, speed, and minimum human interface has been a challenge facing the
material handling industry for quite some time. Dispen-SI-matic offers a perfect
solution for the elimination of inefficiencies, labor-intensive methods, and
long-time deliveries where high volume of small orders must be picked and
fulfilled.
SI Easton offers a variety of Dispen-SI-matic models for automated order
selection, where volume, speed, and efficiency are of the essence. The
Pick-to-Belt, Totes Through, and Buckets Through are few solutions that provide
ultra-high throughput for loose-pick individual items. Additionally, the
Dispen-SI-matic allows a package to be dispensed directly into a tote, thus
achieving complete accuracy of order picking and fulfillment every time.
The Steady Pack, a less-than-case load order picking and packing system, is
an additional order selection system product offering. Definite advantages of
the Steady Pack are its speed of delivering products to packing stations,
efficiency in handling a wide range of order sizes, flat orientation and even
spacing of orders, and ease in replenishment of product.
The "P4"(TM)" an automated, single unit order picking system, is an
additional product offering related to the Company's order selection systems. A
definite advantage of the P4 is its ability to pick and convey products in a
single file with consistent orientation to a downstream secondary process. The
system can be configured for different package sizes.
A typical Dispen-SI-matic system requires approximately six to nine months
to engineer, manufacture, and install.
Dispen-SI-matic and related order picking fulfillment systems sales
(including sales of Automated Pharmacy Systems to the SI/BAKER, INC.
("SI/BAKER") joint venture), as a percent of total sales were 27.0%, 33.6%, and
30.9%, for the ten months ended December 31, 1999, and for the fiscal years
ended February 28, 1999 and March 1, 1998, respectively.
Sortation
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SI Easton provides a high speed, computer-controlled tilt-tray sortation
system for sorting packaged merchandise. SI Easton's sortation systems blend
manual and automated induction with bar code reading and computed destination.
SI Easton also offers a family of "small parcel sorting systems." These
systems consist of a family of diverters which can sort various size packages of
up to ten pounds. These products complement SI Easton's other products in the
order selection marketplace. For example, SI Easton's robotic Gantry Sorter
allows companies with large volumes of mailings
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to take advantage of substantial postal savings by automating their small parcel
and letter sorting capability. The Gantry Sorter has a PC-based control system,
will accommodate weighing and manifesting, can be expanded with additional
sorting modules, and is flexible in design.
A typical sortation system requires approximately six to nine months to
engineer, manufacture, and install.
Sortation sales, as a percent of total sales, were 1.7%, 5.1%, and 2.9% for
the ten months ended December 31, 1999, and for the fiscal years ended February
28, 1999 and March 1, 1998, respectively.
Automated Pharmacy Systems. During March 1993, the Company and Automated
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Prescription Systems, Inc. of Pineville, Louisiana formed a joint venture,
SI/BAKER. On September 29, 1998, McKesson HBOC, Inc. [NYSE:MCK], a healthcare
supply management company, announced the completion of its acquisition of
Automated Prescription Systems, Inc. Automated Prescription Systems, Inc. was
renamed McKesson Automated Prescription Systems, Inc. ("McKesson APS"). SI/BAKER
draws upon the automated materials handling systems experience of SI Easton 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.
Prior to SI/BAKER's formation, SI Easton installed automated pharmacy
systems at five domestic sites and one international site. SI Easton's
proprietary product, Dispen-SI-matic, coupled with its strong computer
integration skills, provide its customers with state-of-the-art split case order
filling systems which lower the cost of distributing products. McKesson APS, the
leading manufacturer of automated tablet and capsule counting and dispensing
machines since 1972, has systems in place in retail, hospital, and mail order
pharmacies throughout the United States and Canada.
McKesson APS also markets robotic, automated prescription filling systems
primarily for use in high volume pharmacy operations. McKesson APS' products
have lowered the costs of filling prescriptions and increased the time available
to the pharmacist for customer counseling.
SI/BAKER, was formed to address the rapidly evolving automation needs of
managed care pharmacy operations which fill prescriptions by mail for the
clients of health care provision plans. The demographics of the aging population
in the United States and the emphasis on reduced health care costs, of which
prescription costs are a major part, is the driving force behind the automation
of mail order and central fill pharmacy operations. SI/BAKER focuses on
providing technologically advanced, automated prescription filling systems to
this growing market. Information pertaining to the SI/BAKER joint venture is
included in Note 12 of Notes to Consolidated Financial Statements. See also
Settlement of Litigation in Note 8 and Contingencies in Note 9 of Notes to
Consolidated Financial Statements. See also Schedule A for SI/BAKER's Financial
Statements and Independent Auditors' Report thereon.
Conveyor Systems
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Ermanco Incorporated
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Ermanco Incorporated encompasses the conveyor systems segment of the
business.
Effective September 30, 1999, the Company acquired all of the outstanding
common stock of Ermanco Incorporated ("Ermanco") of Spring Lake, Michigan.
Ermanco operates as a wholly-owned subsidiary of the Company and the results of
the Company for the ten months ended December 31, 1999 include the operations of
Ermanco from October 1, 1999 through December 31, 1999.
Ermanco supplies material handling systems and equipment to both national
and international markets. They offer services that range from the delivery of
basic transportation conveyors to turnkey installations of complex, fully
automated work-in-process production lines and distributions centers, utilizing
the most sophisticated, custom-designed controls software.
Ermanco's expertise encompasses products in two main families: line
shaft-driven live roller conveyor known as XenoROL(R) and belt-driven live
roller conveyor known as AccuROL(R). Within each of these drive concepts, there
are conveyors, accessories, and options of varying capacities to satisfy a wide
range of applications for transportation, accumulation, and sortation products.
Ermanco also offers conveyor technology outside these two product lines,
including belt and gravity conveyors, and special equipment. Since its
introduction in 1980, Ermanco's XenoPRESSURE technology has provided a new
degree of true non-contact zero-pressure
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accumulation to the material handling industry. The introduction of PoweROL(TM),
a self-powered roller technology was introduced in 1999 and has become a very
popular offering for unique applications. Ermanco sales as a percent of total
sales were 18.6% for the ten months ended December 31, 1999.
Product Warranty. The Company's products are warranted against defects in
materials and workmanship for a specified period. The Company provides an
accrual for estimated future warranty costs based upon a percentage of cost of
sales and warranty experience. Historically, charges applied against the product
warranty reserve have not been material.
Marketing
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Sales of SI Easton's products in the United States and Canada are made
through its own sales personnel and independent sales representative firms
specializing in materials handling equipment. SI Easton's independent sales
representatives, by agreement, may not sell competitive systems. The systems are
sold on a fixed price basis. Generally, contract terms provide for progress
payments and a portion of the purchase price is withheld by the buyer until the
system has been accepted. Customers include major manufacturers and distributors
of a wide variety of products, as well as the federal government (which
accounted for revenues of $11,565,000 for the ten months ended December 31,
1999), common carriers, e-commerce organizations, and national retail chains. A
substantial amount of business has been achieved through the sale of additional
systems to repetitive customers, additions to existing systems, plus parts and
service.
In order to best serve customers domestically and internationally, Ermanco
coordinates a worldwide network of approximately 90 experienced material
handling equipment distributors and licensees. Ermanco services these support
channels through its Michigan-based corporate headquarters and five regional
sales offices. Licensees are located in Australia, India, Japan, and the
Republic of South Africa, with global partners in Malaysia and Ireland. The
customer base includes many Fortune 500 corporations. In 1998, Ermanco created
the Ermanco Systems Division which supplies complete systems, utilizing the
latest in controls technology and software to integrate Ermanco products with
products of other manufacturers and to manage the system integration. Ermanco's
products and services are sold on a fixed price basis. Generally, contract terms
are net 30 days for product sales, with progressive payments for system-type
projects.
Competition
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The materials handling industry includes many products, devices, and
systems competitive with those of the Company.
SI Easton's Cartrac system competes with various alternative materials
handling systems, including automated guided vehicle systems, automatic dispatch
cart, electrified monorail and pallet skid systems, power and free conveyor
systems, and belt and roller conveyor systems. Two principal competitors supply
equipment similar to the Cartrac system. However, the Company believes that the
Cartrac system's advantages, such as controlled acceleration and deceleration,
high speed, individual carrier control, and right angle turning, are significant
distinctive features providing competitive advantages.
There are four principal competitors supplying equipment similar to the
Lo-Tow system who are well established in terms of sales and financial
resources. Competition in the automatic dispatch cart field is primarily in the
areas of price, experience, and product performance.
The Dispen-SI-matic system competes primarily with manual picking methods,
and it also competes with similar devices provided by four other manufacturers,
along with various alternative picking technologies. They are general purpose
"broken case" automated order selection systems that have been sold for picking
items of non-uniform configuration. The Company believes that the
Dispen-SI-matic system provides greater speed and accuracy than manual methods
and reduces damage, pilferage, and labor costs.
SI Easton's tilt-tray sortation system competes primarily with other
tilt-tray sortation systems, as well as belt sorters and roller conveyor
sorters. Tilt-tray sorters, as opposed to belt and roller sorters, are generally
used when higher throughput is required. Slat and shoe sorters are increasing
throughput capabilities and are realizing gains in market share as compared to
tilt-tray sorters. SI Easton's family of small parcel sorters participate in the
markets that distribute small, lightweight packages. These sorters are targeted
to companies
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in the mail order merchandise industry. There are approximately twenty other
companies that supply sortation equipment.
The 1999-2000 Conveyor Equipment Manufacturers Association yearbook
includes 40 companies in the list of members in the Unit Handling Conveyors
(Light to Medium) classification (SIC 353501). Twenty-six members report
statistics on a monthly basis in this category, with 1999 booked sales of $1.56
billion. Many companies are involved in more than this one category. Many of
these companies pursue opportunities with a direct sales force. Ermanco embraces
a philosophy of utilizing a distributor network of independently owned and
operated companies (SIC 508410 Conveying and Conveying Equipment-Wholesale or
SIC 508426 Material Handling-Wholesale). There are approximately 1,000 companies
listed under SIC 508410; however, this includes those companies involved in bulk
material handling and unit conveyor handling. These distributors locate
opportunities that they may fulfill themselves by purchasing products and/or
services from Ermanco and take the order in their name, acting as the system
integrator, or they may elect to have Ermanco assume the role of system
integrator. In the latter case, Ermanco will negotiate the contract with the end
user and assume total system responsibility, providing the distributor with a
"finder's fee." Ninety percent of Ermanco's volume is orders processed by
distributors, and ten percent of the volume is orders processed with the end
user. Depending upon the distribution channel that is used, the typical number
of competitors on any particular project varies. As the Ermanco product line and
available services expand, the quality and size of the distributors that pursue
opportunities on behalf of Ermanco is increasing, bringing better and larger
opportunities to our attention.
New technology is constantly being developed in the materials handling
field. As in the case of other technically oriented companies, there is a risk
that the Company's business may be adversely affected by technological advances.
However, the Company believes that its competitive advantages include its
reputation in the materials handling field, patents, and proven capabilities in
the markets in which it concentrates. Its disadvantages include its relatively
small size as compared to certain of its larger competitors.
Raw Materials
-------------
The Company has not been adversely affected by energy or raw materials
shortages. Its plants use natural gas for heating and electricity to operate its
machinery. The principal raw material purchased by the Company is steel which
the Company purchases from various suppliers.
Patents And Licenses
--------------------
Significant design features of the Cartrac, Lo-Tow, Sortation, and
Dispen-SI-matic systems are covered by patents or patent applications in the
United States.
The Company has approximately 45 patents with lives that expire through May
2012. The significant patents pertain mainly to the following areas: vehicles
and carrier design, loading and unloading products, speed and precision control,
track design and assembly, accumulation of vehicles, and simultaneous order
requests processing equipment.
Of greater value than the protection provided by patents is the
intellectual knowledge assembled over many years of application experience into
a mass of accumulated technical expertise possessed by a stable and dedicated
work force.
During the fiscal year ended March 3, 1991, the Company entered into a
10-year licensing agreement with Robotrac, Inc. (a subsidiary of Heico, Inc.) of
Lisle, Illinois whereby SI Easton markets and manufactures Robotrac products,
systems, and services along with the Company's complete line of materials
handling solutions. Under the terms of the licensing agreement, the Company pays
royalties to Robotrac, Inc. based on net sales of Cartrac products and services.
Royalty expense relating to the licensing agreement for the ten months ended
December 31, 1999 and for the fiscal years ended February 28, 1999 and March 1,
1998 was $146,000, $286,000, and $356,000, respectively.
During the fiscal year ended February 25, 1990, the Company entered into a
renewable five-year licensing agreement with Knapp to acquire the exclusive
right to sell, engineer, manufacture, and install the Dispen-SI-matic product
throughout North America. The licensing agreement, which is automatically
renewable for additional one-year terms, extended through August 22, 1997;
however, an amendment to the original licensing agreement was made effective
April 29, 1997. The amendment, also with a term of five years and automatically
renewable for additional one-year terms, retains many of the salient features of
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the original licensing agreement with the exception of a change from an
exclusive right to a non-exclusive right and a reduction in royalties due Knapp
for sales of the Dispen-SI-matic product by the Company. Under terms of the
licensing agreement, the Company pays royalties to Knapp based on the number of
dispensers per system with a minimum payment applicable to each system. Royalty
expense relating to the Knapp licensing agreement for the ten months ended
December 31, 1999, and for the fiscal years ended February 28, 1999 and March 1,
1998 was $8,000, $57,000, $36,000, respectively.
In February 1999, the Company entered into an exclusive renewable licensing
agreement with Digitron Translift AG to market their electrified monorail system
to designated applications throughout North America. The licensing agreement,
which is automatically renewable for additional five-year terms, has an
expiration date of February 1, 2004. The licensing agreement requires payment of
royalties based on the contract value of systems sold, with targeted royalties
each year through February 1, 2004, in order to maintain exclusivity and prevent
cancellation of the agreement by the licensor. Expense relating to the Digitron
Translift AG licensing agreement for the ten months ended December 31, 1999 and
for the fiscal year ended February 28, 1999 was $13,000 and $1,000,
respectively.
In July 1998, the Company entered into a supply agreement with Integrated
Dispensing Systems, Inc. ("IDS") granting IDS the exclusive right to market and
sell the Company's products that pertain to the dispensing or delivery of single
"unit of use" packages of drugs and/or medical supplies in hospitals and other
healthcare entities. The licensing agreement, which is automatically renewable
for additional four-year terms, has an expiration date of July 31, 2002. The
licensing agreement requires IDS to purchase a minimum amount of licensed
products from the Company, with targeted purchase requirements each year through
July 31, 2002, in order for IDS to retain its exclusive distributorship and
prevent cancellation of the agreement by the Company.
Ermanco currently has licenses with four foreign companies. These
agreements typically permit the licensee to manufacture conveyors using
Ermanco's technology. Royalties are received based on sales volume.
Product Development
-------------------
Product development costs, including patent expense and amortization, were
$301,000, $478,000, and $287,000 for the ten months ended December 31, 1999, and
for the fiscal years ended February 28, 1999 and March 1, 1998, respectively.
Development programs in the ten months ended December 31, 1999 included
enhancements to the Lo-Tow and Order Selection product lines. Development
programs in the fiscal year ended February 28, 1999 included enhancements to the
Company's product controls and features, and improvements to the Order Selection
product line. Development programs in the fiscal year ended March 1, 1998
involved improvements across various product lines, plus the introduction of the
Henke light-duty overhead transportation product.
The Company aggressively pursues continual research of new product
requirements and opportunities, with a concentrated effort to improve existing
technologies that improve customer efficiency. Over the years, the Company has
developed new products and integration capabilities that have been financed
through continuous customer projects.
Employees
---------
SI Easton employs 112 persons in the United States. Its staff includes 6
executive employees, 81 office employees, including salespersons, draftspersons
and engineers, and 25 production personnel. The production personnel are a
collective bargaining group. The current union contract expires on April 23,
2000. The Company has opened negotiations with the collective bargaining group
and anticipates a successful conclusion.
Ermanco employs 190 persons in the United States. Included in that total
are 4 executives, 64 office employees, and 122 manufacturing employees. All
manufacturing employees are collective bargaining personnel. The current
collective bargaining agreement expires on May 31, 2003.
The Company provides life insurance, major medical insurance, retirement
programs, and paid vacation and sick leave benefits, and considers its relations
with employees to be satisfactory.
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Item 2. Properties and Leases
- ------- ---------------------
SI Easton's principal offices and its manufacturing facilities are located
in a 173,000 square foot concrete, brick, and steel facility in Easton,
Pennsylvania. The Company holds the deed to its facilities and the 20 acre site
on which they are located.
Ermanco's principal offices and manufacturing facility are located in a
113,000 square foot steel building in Spring Lake, Michigan. The building is
leased from an organization that is affiliated with Ermanco and SI Handling
Systems, Inc. through common officers. 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.
The terms of the lease require payment by Ermanco of all taxes, insurance, and
other ownership-related costs of the property. This operating lease expires on
October 31, 2003.
In order to obtain a line of credit and term loan to complete the
acquisition of Ermanco, the Company granted its principal bank 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.
Item 3. Legal Proceedings
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The Company is presently engaged in certain legal proceedings which
management believes present no significant risk of material loss to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1999.
Information with respect to the executive officers of the Company is
contained in Part III hereof and is incorporated by reference.
9
<PAGE>
PART II
-------
Item 5. Market For The Registrant's Common Stock And Related Security
- ------- -------------------------------------------------------------
Holder Matters
--------------
On March 9, 2000, the Company's Common Stock began trading on the American
Stock Exchange (Amex) under the symbol "PTG." Prior to this date, the Company's
common stock was traded on The Nasdaq Stock Market (sm) under the symbol "SIHS."
The high and low sales prices for the ten months ended December 31, 1999 and the
fiscal year ended February 28, 1999 are as follows:
<TABLE>
<CAPTION>
For the Ten For the Fiscal
Months Ended Year Ended
December 31, 1999 February 28, 1999
----------------- -----------------
High Low High Low
------ ------ ------- ------
<S> <C> <C> <C> <C>
First Quarter.......................... 13 1/4 10 15 1/4 12 1/2
Second Quarter......................... 11 1/4 6 1/8 14 15/16 11 3/4
Third Quarter.......................... 9 3/4 6 1/2 14 10 1/4
Fourth Quarter (one month for
the period ended December
31, 1999)........................... 10 7 3/4 15 11 9/16
</TABLE>
The Company paid cash dividends of 10 cents per share during the ten months
ended December 31, 1999 and during the fiscal year ended February 28, 1999. In
accordance with the terms and conditions of the Company's line of credit and
term loan with its principal bank, the Company is restricted from paying
dividends in excess of 20% of net earnings during the fiscal year ended December
31, 2000, and is restricted from paying dividends in excess of 15% of net
earnings during the fiscal year ended December 31, 2001, and thereafter.
The number of beneficial holders of the Company's Common Stock at December
31, 1999 was approximately 1,546.
The closing market price on March 7, 2000 was $5 15/16.
Item 6. Selected Financial Data
- ------- -----------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the
Ten Months
Ended For the Fiscal Years Ended
---------- -------------------------------------------
12/31/99 2/28/99 3/01/98 3/02/97 3/03/96
---------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............................. $41,108 39,573 47,631 24,000 25,786
Net earnings (loss)................... (2,780) 1,378 2,612 2,053 1,625
Basic earnings (loss) per share....... (.72) .37 .70 .56 .44
Diluted earnings (loss) per share..... (.73) .36 .70 .55 .44
Total assets.......................... 45,406 23,580 22,219 16,547 12,570
Long-term liabilities................. 15,670 228 216 167 150
Cash dividends per share.............. .10 .10 .07 .07 .04
</TABLE>
10
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations
---------------------
Liquidity And Capital Resources
- -------------------------------
The Company's cash and cash equivalents increased to $6,242,000 at December
31, 1999 from $1,829,000 at February 28, 1999. The increase resulted from cash
provided by operating activities totaling $8,369,000 and proceeds of $34,000
from the sale of common stock in connection with the Company's employee
incentive stock option plan. Partially offsetting the increase in cash and cash
equivalents from the sources was the repayment of long-term debt of $30,000,
purchases of capital equipment of $298,000, acquisition of Modular Automation
Corp., net of cash acquired for $928,000, the acquisition of Ermanco
Incorporated, net of cash acquired for $2,033,000, investment of $228,000 in the
SI-Egemin joint venture, payment of $371,000 in cash dividends to stockholders,
and payment of $105,000 in connection with the purchase and retirement of the
Company's common stock. Funds provided by operating activities during the fiscal
year ended February 28, 1999 were $3,299,000, while funds used by operating
activities during the fiscal year ended March 1, 1998 were $5,150,000.
On April 13, 1999, the Company acquired all of the outstanding common stock
of Modular Automation Corp. ("MAC") of Greene, New York for $1,957,000. The
acquisition required a net cash outlay of $928,000. The purchase price of the
acquisition was allocated to the assets acquired based on fair value with the
remainder representing goodwill. The acquired Automated Guided Vehicle ("AGV")
products and personnel were integrated into the SI Easton operation. However, as
of December 31, 1999, the AGV product line associated with the MAC acquisition
was abandoned. The write-off of certain long-lived assets, including goodwill,
totaling $561,000 has been recognized in the Consolidated Statement of
Operations for the ten months ended December 31, 1999 in accordance with the
criteria set forth by SFAS No. 121.
On September 30, 1999, the Company completed the acquisition of all of the
outstanding common 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, the Company acquired all of the
outstanding common 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
($801,000 was released in January 2000), $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. The
acquisition required a net cash outlay of $2,033,000.
On the Closing Date, Company entered into employment agreements with four
employees. Leon C. Kirschner and Steven Shulman, both principal stockholders of
Ermanco, joined the Board of Directors of the Company.
In order to complete the Ermanco acquisition, the Company obtained
financing from its principal bank. 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 will 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. As of December 31, 1999,
the Company did not have any borrowings under the line of credit facility.
The Company financed $14,000,000 of the acquisition through a seven-year
term loan from its bank. 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 $7,000,000 of the term loan is variable
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Liquidity And Capital Resources (Continued)
- -------------------------------
at a rate equal to the three-month LIBOR Market Index Rate plus two and
three-quarters percent. The Company also entered into an interest rate swap
agreement for fifty percent of the term loan to hedge the floating interest
rate. The seven-year interest rate swap for $7,000,000 of the term loan was at a
fixed rate of 9.38%.
To obtain the line of credit and term loan, the Company granted the bank 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. 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 or obtained appropriate waivers as of December 31, 1999.
The promissory notes issued to the fourteen stockholders of Ermanco totaled
$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. The weighted average interest rates
on the promissory notes is 11.714% over the term of the notes. Interest 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 provided that there is no
debt outstanding under its line of credit facility and term loan.
Prior to the acquisition, 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. 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 concurrent with the
acquisition of Ermanco were repaid as of October 6, 1999.
On March 4, 1996, SI/BAKER established a $2,500,000 line of credit facility
(the "facility") with its principal bank (the "bank"). Under 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 the
fiscal year ended March 1, 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 $500,000. As of
December 31, 1999, SI/BAKER did not have any borrowings under the facility, and
the facility expires effective August 31, 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 expended $105,000 on purchases of 10,000 shares of common stock through
open market transactions.
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 fiscal year ended February 28, 1999, the
Company expended $399,000 on purchases of common stock through open market
transactions.
The Company believes that its financial resources consisting of its current
assets, anticipated cash flow, and 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,
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. The Company did not have any material capital
commitments as of December 31, 1999.
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations - For The Ten Months Ended December 31, 1999 Compared To
- ------------------------------------------------------------------------------
The Fiscal Year Ended February 28, 1999
- -----------------------------------------
On September 30, 1999, the Board of Directors of the Company approved an
amendment to Article 1, Section 1.03 of the Bylaws to change the fiscal year end
from the Sunday nearest to the last day of February to December 31. For the year
ended December 31, 1999, the fiscal year consisted of ten months. Prior to the
recent change in the Bylaws, each of the fiscal years ended February 28, 1999
and March 1, 1998 consisted of 52 weeks.
On September 30, 1999, the Company concluded the acquisition of all of the
outstanding common stock of Ermanco Incorporated. Ermanco operates as a
wholly-owned subsidiary of SI Handling Systems, Inc., and the results for the
ten months ended December 31, 1999 include the operations of Ermanco from
October 1, 1999 through December 31, 1999. See Note 13 of Notes to Consolidated
Financial Statements for further information.
The Company's net loss for the ten months ended December 31, 1999 was
$2,780,000 compared to net earnings of $1,378,000 for the fiscal year ended
February 28, 1999. Contributing to the net loss for the ten months ended
December 31, 1999 were cost overruns associated with four contracts of
$3,000,000, severance charges of $323,000, and the write-off of certain
long-lived assets of $561,000.
The total backlog at December 31, 1999 was approximately $23,685,000.
During the ten months ended December 31, 1999, the Company received orders
totaling approximately $38,996,000. 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 $41,108,000 for the ten months ended December 31, 1999
increased 3.9% compared to net sales of $39,573,000 for the fiscal year ended
February 28, 1999. The sales increase of $1,535,000 is comprised of Ermanco's
contribution to product sales approximating $7,664,000, offset a decrease in SI
Easton's sales of approximately $6,129,000 for the shortened fiscal year, when
compared to the fiscal year ended February 28, 1999. During the ten months ended
December 31, 1999, Lo-Tow sales of approximately $15,350,000 rose approximately
$4,750,000 when compared to the fiscal year ended February 28, 1999 due
primarily to progress made on contracts with a government agency. Offsetting the
impact of Ermanco and Lo-Tow sales during the ten months ended December 31, 1999
was a decrease in sales of approximately $10,875,000 across SI Easton's other
product lines, with the majority of the decrease relating to sales of the
Cartrac, Sortation, Order Selection, and Automated Guided Vehicle product lines.
Gross profit as a percentage of sales was 10.0% for the ten months ended
December 31, 1999 compared to 22.0% for the fiscal year ended February 28, 1999.
The decrease in the gross profit percentage for the ten months ended December
31, 1999 was primarily attributable to significant cost overruns on four
projects, competitive pricing pressures, as well as to first time inefficiencies
associated with the development of enhanced Order Selection products related to
these projects. The cost overruns associated with these contracts resulted in
approximately $8,700,000 in current year sales with $11,700,000 in related cost
of sales. SI Easton has accrued the estimated costs to completion for the four
projects incurring cost overruns. Estimates relative to loss contracts, which
the Company experienced to an unusual extent in the period ended December 31,
1999, are inherently more difficult to make than those in which the contract has
proceeded according to original expectations. Uncertainty exists with respect to
the resources required to accomplish the contractual scope of work dealing with
the final integration of state-of-the-art automated materials handling systems.
Consequently, while the Company believes the full effect of both projected and
presently incurred cost overruns has been accrued, current estimates may need to
be revised as additional information becomes available. Also the backlog of
orders of approximately $3,900,000 attributable to these contracts will be
recognized at no gross profit in calendar year 2000. However, in the process of
completing these contracts, SI Easton has developed additional proprietary
products and services to sell in various marketplaces. Also contributing
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations - For The Ten Months Ended December 31, 1999 Compared To
- --------------------------------------------------------------------------------
The Fiscal Year Ended February 28, 1999 (Continued)
- ----------------------------------------
to the higher gross profit percentage in the fiscal year ended February 28, 1999
was the favorable performance on several contracts, principally for SI Easton's
higher margin proprietary products, initiated in the prior year, that were
completed during the fiscal year ended February 28, 1999.
Selling, general and administrative expenses of $6,806,000 were higher by
$453,000 in the ten months ended December 31, 1999 than in the fiscal year ended
February 28, 1999. The increase of $453,000 is comprised of additional cost of
operations totaling approximately $1,300,000 related to Ermanco, offset by a
decrease in selling, general and administrative expenses of approximately
$847,000 for the shortened fiscal period when compared to the fiscal year ended
February 28, 1999. Partially offsetting the decrease in selling, general and
administrative expenses was approximately $325,000 in costs associated with the
appointment of a new President and CEO and the addition of corporate purchasing
resources aimed at establishing global procurement capabilities which develop
supplier relationships that provide a competitive advantage.
Product development costs of $301,000 were lower by $177,000 for the ten
months ended December 31, 1999 than in the fiscal year ended February 28, 1999.
Development programs in the ten months ended December 31, 1999 included
enhancements to the Lo-Tow and Order Selection product lines with efforts
directed towards unit picking techniques and automated replenishment.
Development programs in the fiscal year ended February 28, 1999 included
enhancements to SI Easton's product controls and features, and improvements to
the Order Selection product line.
Amortization of goodwill represented costs associated with the acquisition
of Modular Automation Corp. and Ermanco Incorporated. Goodwill amortization
expense associated with the acquisitions of Modular Automation Corp. and Ermanco
Incorporated totaled approximately $93,000 and $116,000, respectively for the
ten months ended December 31, 1999.
Goodwill and other asset impairment of $561,000 for the ten months ended
December 31, 1999 represented the write-off of certain long-lived assets,
primarily goodwill, associated with the elimination of the Automated Guided
Vehicle product line related to the acquisition of Modular Automation Corp.
Employee severance termination benefits of $323,000 represented a
restructuring initiative whereby approximately ten employees were separated from
the Company.
Interest expense of $444,000 was higher by $424,000 in the ten months ended
December 31, 1999 than in the fiscal year ended February 28, 1999. The increase
in interest expense was primarily attributable to the term debt and subordinated
notes issued in connection with the Ermanco acquisition which was completed on
September 30, 1999.
Interest income of $130,000 was lower by $36,000 in the ten months ended
December 31, 1999 compared to the fiscal year ended February 28, 1999. The
decrease in interest income was attributable to the lower level of funds
available for short-term investments.
Equity in income 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
$116,000 for the ten months ended December 31, 1999 in the equity in income of
joint ventures was comprised of a favorable variance of $201,000 attributable to
the SI/BAKER joint venture and an unfavorable variance of $85,000 attributable
to the SI-Egemin joint venture. The favorable variance of $201,000 for the ten
months ended December 31, 1999 in the equity in income of SI/BAKER joint venture
was attributable to its increased sales of approximately $10,495,000, as
compared to the comparable prior fiscal year of approximately $8,056,000, plus a
reduction of $199,000 in its product development expenses, and an increase of
$136,000 in its interest income, net. Partially offsetting these favorable
variance were SI/BAKER's increases of (1) $98,000 in revenue-based royalty costs
due to the parent companies, and (2) $64,000 in selling, general and
administrative expenses.
The unfavorable variance of $85,000 for the ten months ended December 31,
1999 in the equity in income of the SI-Egemin joint venture was attributable to
start-up costs. The SI-Egemin joint venture was initiated in July 1999.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations - For The Ten Months Ended December 31, 1999 Compared To
- ------------------------------------------------------------------------------
The Fiscal Year Ended February 28, 1999 (Continued)
- ---------------------------------------
The unfavorable variance of $107,000 in other income, net, was primarily
attributable to an increase of approximately $115,000 in miscellaneous taxes and
license fees. Partially offsetting the unfavorable variance was an increase of
approximately $50,000 in the revenue-based royalty income related to the
SI/BAKER joint venture.
The Company recognized an income tax benefit of $1,394,000 during the ten
months ended December 31, 1999 compared to the incurrence of income tax expense
of $856,000 during the fiscal year ended February 28, 1999. The income tax
benefit recognized for the ten months ended December 31, 1999 represented the
carryback of current fiscal year losses against prior year income. Income tax
expense for the fiscal year ended February 28, 1999 was generally recorded at
statutory federal and state tax rates. The income tax benefit recognized for the
ten months ended December 31, 1999 was negatively impacted by the write-off of
goodwill of Modular Automation Corp. which is not deductible.
Results Of Operations - For the Fiscal Year Ended February 28, 1999 Compared to
- -------------------------------------------------------------------------------
the Fiscal Year Ended March 1, 1998
- -----------------------------------
The Company's net earnings for the fiscal year ended February 28, 1999
("fiscal 1999") were $1,378,000 compared to net earnings of $2,612,000 for the
fiscal year ended March 1, 1998 ("fiscal 1998").
Backlog at February 28, 1999 was $19,884,000. During fiscal 1999, the
Company received orders totaling approximately $37,365,000. The largest order
received, totaling approximately $12,300,000, engages the Company to automate
the distribution process at a major health and beauty aids company, including an
innovative utilization of robotics. This systems integration contract contains a
high degree of ancillary products, providing lower gross profit margins than
sales of the Company's proprietary products and is scheduled to be completed by
the end of the first half of calendar year 2000.
Net sales of $39,573,000 for fiscal 1999 decreased 16.9% compared to net
sales of $47,631,000 for fiscal 1998. The sales decrease in fiscal 1999 was
attributed primarily to a smaller backlog of orders entering fiscal 1999
($22,092,000 versus a $31,029,000 backlog beginning fiscal 1998). The largest
declines in sales occurred in the Order Selection and Lo-Tow product lines.
During fiscal 1999, Order Selection sales of approximately $13,300,000 declined
approximately $1,400,000 from the fiscal 1998 sales level due to an order
suspension caused by a customer's financial condition and delays in earlier
periods by prospective customers in signing contracts often caused by expanding
project scope or protracted contractual negotiations. During fiscal 1999, Lo-Tow
sales of approximately $10,600,000 declined approximately $9,800,000 from the
fiscal 1998 sales level due primarily to the fiscal 1998 period containing a
greater amount of revenue for progress on the contract with the U.S. Defense
Logistics Agency. Partially offsetting the decline in Order Selection and Lo-Tow
sales during fiscal 1999 was an increase in sales of approximately $3,100,000
across the Company's other products lines, with the majority of the increase
relating to sales of the Company's Sortation and Automated Guided Vehicle
product lines.
Gross profit as a percentage of sales was 22.0% for fiscal 1999 compared to
21.3% for fiscal 1998. Although the gross profit percentages were comparable for
both fiscal years, the fiscal 1999 gross profit percentage was impacted by
favorable performance on several contracts, principally for the Company's higher
margin proprietary products, initiated in the prior fiscal year that were
completed during fiscal 1999. However, offsetting the favorable performance was
progress on systems integration contracts that contain a high degree of
ancillary products and provide lower gross profit margins than sales of
proprietary products.
15
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations
---------------------
Results Of Operations - For the Fiscal Year Ended February 28, 1999 Compared to
- -------------------------------------------------------------------------------
the Fiscal Year Ended March 1, 1998 (Continued)
- -----------------------------------
Selling, general and administrative expenses of $6,353,000 were lower by
$319,000 in fiscal 1999 than in fiscal 1998. The decrease in selling, general
and administrative expenses was attributable to a reduction of approximately
$625,000 for expenses associated with the Company's incentive-based compensation
plan which provides for gain sharing as a means of promoting performance
excellence. Also contributing to the higher selling, general and administrative
expenses in fiscal 1998 were approximately $220,000 in consulting expenditures
associated with increasing the visibility of the Company and attaining the ISO
9001 quality certification designation. Partially offsetting the decrease in
selling, general and administrative expenses were (1) increases of approximately
$425,000 for costs associated with inflationary factors and product promotion
and sales efforts aimed at expanding the Company's customer base of business
consistent with the Company's strategic plan to grow the business as a systems
integrator and (2) increases of approximately $100,000 in professional fees and
expenses associated with the appointment of a new President.
Product development costs of $478,000 were higher by $191,000 in fiscal
1999 than in fiscal 1998. Development programs in fiscal 1999 included
enhancements to the Company's product controls and features, and improvements to
the Order Selection product line with efforts directed towards unit picking
techniques. Development programs in fiscal 1998 included efforts directed at
improvements across various product lines, and efforts associated with the
introduction of the Henke light-duty overhead transportation product.
Interest income of $166,000 was higher by $43,000 in fiscal 1999 than in
fiscal 1998. The increase in interest income was primarily attributable to the
higher level of funds available for short-term investments during fiscal 1999.
Equity in income of joint venture represents the Company's proportionate
share of its investment in SI/BAKER which is being accounted for under the
equity method. The unfavorable variance of $407,000 for fiscal 1999 in the
equity in income of joint venture was attributable to SI/BAKER's decline in
sales to approximately $8,056,000 as compared to sales of $19,979,000 in fiscal
1998. The sales decrease in fiscal 1999 was primarily attributable to a smaller
backlog of orders entering fiscal 1999 versus a record high opening backlog of
orders at the beginning of fiscal 1998. Fiscal 1998 sales were favorably
impacted by performance on contracts with customer specifications requiring
systems to be commercially operable by the end of fiscal 1998; however, the
fiscal 1998 gross profit percentage was unfavorably impacted by difficulties in
executing and concluding several contracts as additional costs became necessary
to meet contractual throughput requirements. Also contributing to fiscal 1999's
unfavorable variance was increased development expenses of $396,000 for software
and controls capabilities for various new products addressing changing market
requirements. Partially offsetting the unfavorable variance were SI/BAKER's
decreases of (1) $478,000 in revenue-based royalty costs due to the parent
companies and (2) $61,000 in selling, general and administrative expenses. The
decrease in selling, general and administrative expenses was primarily
attributable to a reduction of $195,000 of expenses based on revenue and profit
performance. Partially offsetting the decrease in selling, general and
administrative expenses was an increase in costs associated with sales and
administrative efforts aimed at expanding SI/BAKER's customer base of business.
The unfavorable variance of $203,000 in other income, net, was primarily
attributable to a decrease in the revenue-based royalty income related to the
SI/BAKER joint venture.
The Company incurred income tax expense of $856,000 during fiscal 1999
compared to income tax expense of $1,490,000 in fiscal 1998. Income tax expense
for fiscal 1999 and fiscal 1998 was generally recorded at statutory federal and
state tax rates.
16
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
- ------- ---------------------------------------------------------------
Results Of Operations
---------------------
Cautionary Statement
- --------------------
Certain statements contained herein are not based on historical fact and
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 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 cost 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.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
- -------- ----------------------------------------------------------
The Company's primary market risk exposure is from changes in interest
rates. The Company's policy is to manage interest rate exposure through the use
of a combination of fixed and floating rate debt instruments, and in the ten
months ended December 31, 1999, an interest rate swap agreement. Generally, the
Company seeks to match the terms of its debt with its purpose. The Company uses
a variable rate line of credit facility to provide working capital for
operations. In the ten months ended December 31, 1999, the Company entered into
an interest rate swap agreement for 50% of its new term loan from its principal
bank to effectively convert half of the term loan from a variable rate note to a
fixed rate note. A standard interest rate swap agreement involves the payment of
a fixed rate times a notional amount by one part in exchange for a floating rate
times the same notional amount from another party. The counterpart to the swap
agreement is the Company's principal bank.
The Company does not believe that its exposures to interest rate risk or
foreign currency exchange risk, risks from commodity prices, equity prices and
other market changes that affect market risk sensitive instruments, including
the interest rate swap agreement, are material to its results of operations.
17
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
- ------- --------------------------------------------------------
I N D E X
o Independent Auditors' Report.
o Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 1999 and February 28, 1999.
Consolidated Statements of Operations for the ten months ended December
31, 1999, and for the fiscal years ended February 28, 1999 and March 1,
1998.
Consolidated Statements of Stockholders' Equity for the ten months ended
December 31, 1999, and for the fiscal years ended February 28, 1999 and
March 1, 1998.
Consolidated Statements of Cash Flows for the ten months ended December
31, 1999, and for the fiscal years ended February 28, 1999 and March 1,
1998.
Notes to Consolidated Financial Statements.
o Schedule for the ten months ended December 31, 1999, and for the fiscal
years ended February 28, 1999 and March 1, 1998:
II - Valuation and qualifying accounts
o All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
18
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
SI Handling Systems, Inc.:
We have audited the consolidated financial statements of SI Handling Systems,
Inc. and subsidiary as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SI Handling Systems,
Inc. and subsidiary as of December 31, 1999 and February 28, 1999, and the
results of their operations and their cash flows for the ten months ended
December 31, 1999 and for the years ended February 28, 1999 and March 1, 1998,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
Allentown, PA
March 7, 2000, except for Note 14 which is as of March 30, 2000
19
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and February 28, 1999
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, February 28,
1999 1999
------------ ------------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents, principally
time deposits........................................ $ 6,242 1,829
------- -------
Receivables:
Trade (net of allowance for doubtful
accounts of $54 as of December 31,
1999 and $0 as of February 28, 1999................ 6,824 7,603
Notes and other receivables.......................... 952 51
-------- ---------
Total receivables.................................. 7,776 7,654
------- ------
Costs and estimated earnings in excess
of billings.......................................... 1,864 7,709
------- ------
Inventories:
Raw materials........................................ 1,819 1,002
Finished goods and work-in-process................... 1,586 1,613
------ ------
Total inventories.................................. 3,405 2,615
----- ------
Deferred income tax benefits........................... 1,684 600
Prepaid expenses and other current assets.............. 715 199
------ ------
Total current assets............................... 21,686 20,606
------ ------
Property, plant and equipment, at cost:
Land................................................... 327 27
Buildings and improvements............................. 3,717 3,485
Machinery and equipment................................ 6,078 4,544
------ ------
10,122 8,056
Less: accumulated depreciation........................ 6,788 6,426
------ ------
Net property, plant and equipment.................... 3,334 1,630
------ ------
Deferred income tax benefits.............................. 260 175
Investments in joint ventures............................. 1,399 1,041
Excess of cost over fair value of net assets
acquired, less amortization of $116 as of
December 31, 1999...................................... 18,524 -
Other assets, at cost less accumulated
amortization of $121 as of December 31,
1999 and $90 as of February 28, 1999................... 203 128
------ ------
Total assets....................................... $45,406 23,580
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and February 28, 1999
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, February 28,
1999 1999
------------ ------------
<S> <C> <C>
Liabilities And Stockholders' Equity
Current liabilities:
Current installments of long-term debt................. $ 1,578 9
Accounts payable....................................... 5,169 4,079
Customers' deposits and billings in excess
of costs and estimated earnings...................... 5,154 4,173
Accrued salaries, wages, and commissions............... 1,356 761
Income taxes payable................................... 49 410
Accrued royalties payable.............................. 284 357
Accrued product warranties............................. 903 486
Accrued pension and retirement
savings plan liabilities............................. 463 556
Accrued other liabilities.............................. 1,355 374
------ ------
Total current liabilities.......................... 16,311 11,205
------ ------
Long-term liabilities:
Long-term debt, excluding current installments:
Term loan............................................ 12,438 -
Subordinated notes payable........................... 3,000 -
Other................................................ 13 16
------ ------
Total long-term debt............................... 15,451 16
Deferred compensation.................................. 219 212
------ ------
Total long-term liabilities........................ 15,670 228
------ ------
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and outstanding
4,184,878 shares as of December
31, 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...................................... 2,423 5,675
------ ------
Total stockholders' equity......................... 13,425 12,147
------ ------
Total liabilities and stockholders' equity......... $ 45,406 23,580
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements Of Operations
For the Ten Months Ended December 31, 1999, and For The Fiscal Years Ended
February 28, 1999 and March 1, 1998
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31 February 28, March 1,
1999 1999 1998
----------- ------------ --------
<S> <C> <C> <C>
Net sales.................................... $ 41,108 39,573 47,631
Cost of sales................................ 36,982 30,859 37,488
------ ------ ------
Gross profit on sales..................... 4,126 8,714 10,143
------- ------- ------
Selling, general and administrative
expenses.................................. 6,806 6,353 6,672
Product development costs.................... 301 478 287
Amortization of goodwill..................... 209 - -
Goodwill and other asset impairment.......... 561 - -
Employee severance and termination
benefits.................................. 323 - -
Interest expense............................. 444 20 20
Interest income.............................. (130) (166) (123)
Equity in income of joint ventures........... (130) (14) (421)
Other income, net............................ (84) (191) (394)
--------- -------- --------
8,300 6,480 6,041
------- ------- -------
Earnings (loss) before income taxes.......... (4,174) 2,234 4,102
Income tax expense (benefit)................. (1,394) 856 1,490
-------- -------- -------
Net earnings (loss)....................... $ (2,780) 1,378 2,612
======= ======= =======
Basic earnings (loss) per share.............. $ (0.72) .37 .70
======== ========= ========
Diluted earnings (loss) per share........... $ (0.73) .36 .70
======== ========= ========
Weighted average shares outstanding.......... 3,835,718 3,718,887 3,705,590
Dilutive effect of stock options............. - 27,173 42,879
Dilutive effect of phantom stock units....... 16,493 11,270 7,126
----------- ----------- ------------
Weighted average shares outstanding
assuming dilution......................... 3,852,211 3,757,330 3,755,595
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements Of Stockholders' Equity
For the Ten Months Ended December 31, 1999, and For The Fiscal Years Ended
February 28, 1999 and March 1, 1998 (In Thousands, Except Share And Per
Share Data)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
------- ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at March 2, 1997................................................... $ 3,690 2,522 2,831 9,043
Net earnings............................................................... - - 2,612 2,612
Dividends declared - $.07 per share cash dividend.......................... - - (246) (246)
Dividends paid to stockholders for fractional shares in connection with
three-for-two stock split............................................... - (2) - (2)
Acquisition and retirement of 8,064 common shares.......................... (8) (5) (88) (101)
Sale of 29,563 common shares in connection
with employee incentive stock option plan............................... 30 130 - 160
----- ----- ----- ------
Balance at March 1, 1998................................................... 3,712 2,645 5,109 11,466
Net earnings............................................................... - - 1,378 1,378
Dividends declared - $.10 per share cash dividend.......................... - - (372) (372)
Acquisition and retirement of 40,928 common shares......................... (41) (30) (440) (511)
Sale of 34,150 common shares in connection
with employee incentive stock option plan............................... 34 152 - 186
----- ----- ----- ------
Balance at February 28, 1999............................................... 3,705 2,767 5,675 12,147
Net loss................................................................... - - (2,780) (2,780)
Dividends declared - $.10 per share cash dividend.......................... - - (371) (371)
Acquisition and retirement of 11,493 common shares......................... (11) (9) (101) (121)
Sale of 10,039 common shares in connection with
employee incentive stock option plan.................................... 10 40 - 50
Shares issued in connection with Ermanco acquisition....................... 481 4,019 - 4,500
----- ----- ----- ------
Balance at December 31, 1999............................................... $ 4,185 6,817 2,423 13,425
===== ===== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements Of Cash Flows
For the Ten Months Ended December 31, 1999, and For the Fiscal Years Ended
February 28, 1999 and March 1, 1998
(In thousands)
<TABLE>
<CAPTION>
December 31, February 28, March 1,
1999 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................... $(2,780) 1,378 2,612
Adjustments to reconcile net earnings
(loss) to net cash provided (used) by
operating activities:
Depreciation of plant and equipment....... 369 361 330
Amortization of intangibles............... 252 12 11
Gain on disposition of equipment.......... (3) (12) (3)
Equity in income of joint ventures........ (130) (14) (421)
Write-off of intangible assets............ 561 - -
Change in operating assets and
liabilities, net of effects of the
acquisition of Modular Automation
Corp. and Ermanco Incorporated:
Receivables........................... 4,752 1,227 (4,262)
Costs and estimated earnings
in excess of billings.............. 7,070 (935) (5,134)
Inventories........................... 366 (117) (533)
Deferred income tax benefits.......... (1,058) (165) (24)
Prepaid expenses and other
current assets..................... 211 (37) 11
Other noncurrent assets............... 94 (88) 1
Accounts payable...................... (1,647) 35 1,988
Customers' deposits and billings
in excess of costs and
estimated earnings................. 478 1,955 (534)
Accrued salaries, wages, and
commissions........................ 336 (734) 717
Income taxes payable.................. (874) 30 (62)
Accrued royalties payable............. (73) (75) 5
Accrued pension and retirement
savings plan liabilities........... (119) 3 194
Accrued product warranties............ 367 411 (105)
Accrued other liabilities............. 444 42 1
Deferred compensation................. (247) 22 58
----- ----- -----
Net cash provided (used) by operating
activities.................................. 8,369 3,299 (5,150)
----- ----- -----
Cash flows for investing activities:
Purchase of short-term investments............ - - (1,473)
Sale of short-term investments................ - - 5,214
Investment in joint venture................... (228) - -
Acquisition of Modular Automation Corp.,
net of cash acquired........................ (928) - -
Acquisition of Ermanco Incorporated, net
of cash acquired............................ (2,033) - -
Proceeds from the disposition of
equipment................................... 3 12 3
Additions to property, plant and equipment (298) (528) (492)
----- ------ -----
Net cash provided (used) by
investing activities....................... (3,484) (516) 3,252
----- ------ -----
</TABLE>
24
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements Of Cash Flows (Continued)
For the Ten Months Ended December 31, 1999, and For The Fiscal Years Ended
February 28, 1999 and March 1, 1998
(In thousands)
<TABLE>
<CAPTION>
December 31, February 28, March 1,
1999 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Sale of common shares in
connection with employee
incentive stock option plan................. 34 74 59
Repayment of long-term debt................... (30) (9) (13)
Dividends paid on common stock................ (371) (372) (246)
Dividends paid to stockholders for
fractional shares in connection
with three-for-two stock split.............. - - (2)
Repurchase and retirement of
common stock................................ (105) (399) -
Repayment of revolving credit
loan payable to bank........................ - (1,000) 1,000
----- ------ -----
Net cash provided (used) by
financing activities........................ (472) (1,706) 798
----- ------ -----
Increase (decrease) in cash and
cash equivalents............................ 4,413 1,077 (1,100)
Cash and cash equivalents,
beginning of period......................... 1,829 752 1,852
----- ------ -----
Cash and cash equivalents,
end of period............................... $ 6,242 1,829 752
===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(1) Description of Business and Summary of Significant Accounting Policies
- --- ----------------------------------------------------------------------
Description of Business and Concentration of Credit Risk
- --------------------------------------------------------
On September 30, 1999, SI Handling Systems, Inc. ("the Company") concluded
the acquisition of all of the outstanding common stock of Ermanco Incorporated
("Ermanco"). Ermanco operates as a wholly-owned subsidiary of the Company, and
the results for the ten months ended December 31, 1999, include the operating
results from October 1, 1999 through December 31, 1999.
The Company's Easton, Pennsylvania operations (hereafter referred to as "SI
Easton") is a systems integrator supplying automated materials handling systems
to manufacturing, order selection, and distribution operations. The systems are
designed, sold, manufactured, installed, and serviced by its own staff, or by
others, for SI Easton, at its direction, generally as labor-saving devices to
improve productivity and reduce costs. SI Easton's products are utilized to
automate the movement or selection of products and are often integrated with
other automated equipment, such as conveyors and robots. SI Easton's systems
involve both standard and specially designed components and include integration
of non-proprietary automated handling technologies so as to provide solutions
for its customers' unique materials handling needs. SI Easton's staff develops
and designs computer control programs required for the efficient operation of
the systems.
Although SI Easton is not dependent on any single customer, much of its
revenue is derived from contracts to design, manufacture, and install
large-scale materials handling systems for major North American corporations and
the federal government.
Ermanco is a manufacturer of light to medium duty unit handling conveyor
products, serving the material handling industry through local independent
distributors in North America. Ermanco also provides complete conveyor systems
for a variety of applications, including distribution, and manufacture of
computers and electronic products, utilizing primarily its own manufactured
conveyor products, engineering services by its own staff or subcontracted, and
subcontracted installation services. The systems product line of Ermanco
accounts for approximately 40% of Ermanco's total revenues, and the balance is
from distribution (resale).
In the ten months ended December 31, 1999, two customers accounted for
revenues of $11,565,000 and $6,600,000, respectively. In the fiscal year ended
February 28, 1999, three customers accounted for revenues of $8,586,000,
$4,347,000, and $4,103,000, respectively. In the fiscal year ended March 1,
1998, one customer accounted for revenues of $17,513,000.
No other customer accounted for over 10% of revenues.
SI Easton's systems are sold on a fixed price basis. Generally, contract
terms provide for progress payments and a portion of the purchase price is
withheld by the buyer until the system has been accepted. Ermanco's products and
services are also sold on a fixed price basis. Generally, contract terms are net
30 days for product sales, with progressive payments for system-type projects.
As of December 31, 1999, no customer owed the Company in excess of 10% in trade
receivables. The Company believes that the concentration of credit risk in its
trade receivables is substantially mitigated by the Company's ongoing credit
evaluation process, as well as the general creditworthiness of its customer
base.
Fiscal Year
- -----------
On September 30, 1999, the Board of Directors of the Company approved an
amendment to Article 1, 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. For the year ended December 31, 1999, the fiscal year
consisted of ten months. Prior to the recent change in the Company's Bylaws,
each of the fiscal years ended February 28, 1999 and March 1, 1998 consisted of
52 weeks.
Principles of Consolidation
- ---------------------------
For the ten months ended December 31, 1999, the consolidated financial
statements include the accounts of the Company and Ermanco Incorporated, a
wholly-owned subsidiary company, after elimination of intercompany balances and
transactions.
26
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Acquisitions
- ------------
Acquisition of Modular Automation Corp.
- ---------------------------------------
On April 13, 1999, the Company acquired all of the outstanding common stock
of Modular Automation Corp. ("MAC") of Greene, New York, for $1,957,000, paid in
the form of cash. The acquisition required a net cash outlay of $928,000. The
acquired Automated Guided Vehicle ("AGV") products and personnel were integrated
into the Company's existing Easton, Pennsylvania facility. The acquisition was
accounted for as a purchase in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations" ("APB No. 16") and, accordingly, the
acquired assets and assumed liabilities have been recorded at their estimated
fair market value at their date of acquisition.
The amount of goodwill and covenant not to compete recorded at the time of
the acquisition were $616,000 and $50,000, respectively. Amortization expenses
of $105,000 were recognized through December 31, 1999 on these intangible
assets. However, as of December 31, 1999, the Company decided to abandon the AGV
product line associated with the MAC acquisition. The write-off of the related
long-lived assets, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed
of," including goodwill, has been recognized in the Consolidated Statement of
Operations for the ten months ended December 31, 1999.
On the basis of a pro forma consolidation of the result of operations as if
the acquisition of MAC had taken place on March 2, 1998, management believes
that the acquisition would not have had a material effect on the reported
amounts.
Acquisition of Ermanco Incorporated
- -----------------------------------
On September 30, 1999, the Company acquired all of the outstanding common
stock of Ermanco Incorporated. Ermanco, headquartered in Spring Lake, Michigan,
designs and installs complete conveyor systems for a variety of manufacturing
and warehousing applications. Under terms of the Stock Purchase Agreement and
based on the definitive closing balance sheet, the Company acquired all of the
outstanding common 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
($801,000 was released in January 2000), $3,000,000 in promissory notes payable
to 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. The Company financed
$14,000,000 of the acquisition through term debt. The acquisition required a net
cash outlay of $2,033,000.
The acquisition was accounted for as purchase in accordance with APB No. 16
and, accordingly, the acquired assets and assumed liabilities have been recorded
at their estimated fair value at the date of acquisition. The amount of goodwill
recorded at the time of acquisition was $18,640,000 and is being amortized over
a period of 40 years.
On the basis of a pro forma consolidation of the results of operations of
Ermanco, as if the acquisition had taken place on March 2, 1998, the following
pro forma financial results for the ten months ended December 31, 1999 and for
the fiscal year ended February 28, 1999 are as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
For the Ten For the Fiscal
Months Ended Year Ended
December 31, 1999 February 28, 1999
----------------- -----------------
<S> <C> <C>
Net sales.................................... $ 60,168 66,345
====== ======
Net earnings (loss).......................... $ (1,715) 1,723
====== ======
Basic earnings (loss) per share.............. $ (.41) .41
====== ======
Diluted earnings (loss) per share............ $ (.41) .40
====== ======
</TABLE>
27
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Use of Estimates
- ----------------
The preparation of the financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Financial Instruments
- ---------------------
The Company believes the market values of its short-term assets and
liabilities which are financial instruments materially approximate their
carrying values due to the short-term nature of the instruments. The fair value
of the Company's long-term debt is estimated based on quoted market prices for
the same or similar issues, or in the current rates offered to the Company for
similar debt. The estimated fair value of the Company's long-term debt
approximates its carrying value at December 31, 1999.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, cash on deposit, amounts invested on an overnight basis with a bank,
and other highly liquid debt instruments purchased with a maturity of three
months or less. The Company does not believe it is exposed to any significant
credit risk on cash and cash equivalents.
Allowance for Doubtful Accounts
- -------------------------------
The Company provides an allowance for doubtful accounts determined by a
specific identification of individual accounts and a general reserve to cover
other accounts based on historical experience. The Company writes off
receivables upon determination that no further collections are probable.
Inventories
- -----------
Inventories are valued at the lower of average cost or replacement market. It
is not practicable to state separately amounts of finished goods and
work-in-process. Inventories primarily consist of materials purchased or
manufactured for stock. The Company does not defer general and administrative
costs or initial startup costs.
Property, Plant and Equipment
- -----------------------------
Plant and equipment generally are depreciated, for financial statement
purposes, on the straight-line method over the estimated useful lives of
individual assets; whereas accelerated methods of depreciation are used for
certain items for tax purposes. The ranges of lives used in determining
depreciation rates for buildings and improvements and machinery and equipment
are 15-40 years and 3-7 years, respectively. Maintenance and repairs are charged
to operations; betterments and renewals are capitalized. Upon sale or retirement
of plant and equipment, the cost and related accumulated depreciation are
removed from the accounts and the resultant gain or loss, if any, is credited or
charged to earnings.
Investments in Joint Ventures
- -----------------------------
On March 1, 1993, the Company and McKesson Automated Prescription Systems,
Inc. ("McKesson APS") of Pineville, Louisiana formed a joint venture, SI/BAKER,
INC. ("SI/BAKER"). SI/BAKER draws upon the automated materials handling systems
experience of the Company and the automated pill counting and dispensing
products of McKesson APS to provide automated pharmacy systems. Each member
company contributed $100,000 in capital to fund the joint venture. The Company
accounts for its investment in the joint venture on the equity basis.
On July 15, 1999, the Company and Egemin N.V. ("Egemin") of Schoten, Belgium
formed a joint venture, SI-Egemin N.V. ("SI-Egemin"). SI-Egemin draws upon the
automated materials handling systems experience of the Company and Egemin to
provide automated material handling systems worldwide. During the ten months
ended December 31, 1999, each member company contributed $228,000 in capital to
fund the joint venture. The Company accounts for its investment in the joint
venture on the equity basis.
28
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Intangibles
- -----------
The excess of cost over fair value of net assets at the date of acquisition
in the Company's wholly-owned subsidiary, Ermanco, is being amortized on a
straight-line basis over 40 years.
Deferred debt issuance costs, included in Other assets, incurred in
connection with the line of credit and term loan with the Company's principal
bank associated with the acquisition of Ermanco (see Notes 3 and 4) are
amortized over a period of 3 and 7 years, respectively.
Sales Contracts
- ---------------
Profits on sales contracts are recorded on the basis of the Company's
estimates of the percentage of completion of individual contracts, commencing
when progress reaches a point where experience is sufficient to estimate final
results with reasonable accuracy. That portion of the total contract price is
accrued, which is allocable to contract expenditures incurred and work
performed, on the basis of the ratio of aggregate costs to date to the most
recent estimate of total costs at completion. As these contracts may extend over
one or more years, generally no more than two years, revisions in cost and
profit estimates during the course of the work are reflected in the accounting
periods in which the facts requiring revisions become known. At the time a loss
on a contract becomes known, the entire amount of the estimated ultimate loss is
accrued.
Product Development Costs
- -------------------------
The Company expenses product development costs as incurred.
Warranty
- --------
The Company's products are warranted against defects in materials and
workmanship for a specified period. The Company provides an accrual for
estimated future warranty costs based upon a percentage of cost of sales and
warranty experience.
Income Taxes
- ------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Stock-Based Compensation
- ------------------------
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
recognizes no compensation expense for the stock option grants.
The Company also grants phantom stock units to its directors as deferred
compensation. Such awards are redeemable in cash or the Company's common stock
at the director's option and are accounted for in accordance with APB Opinion
No. 25 as stock appreciation rights. Expense (income) for the phantom stock unit
plan was $(30,000), $(23,000), and $17,000 in the ten months ended December 31,
1999, and in the fiscal years ended February 28, 1999 and March 1, 1998,
respectively.
29
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Earnings (Loss) Per Share
- -------------------------
Basic and diluted earnings (loss) per share for the ten months ended December
31, 1999, and for the fiscal years ended February 28, 1999 and March 1, 1998 are
based on the weighted average number of shares outstanding. In addition, diluted
earnings (loss) per share reflect the effect of dilutive securities which
include phantom stock units, and the shares that would be outstanding assuming
the exercise of dilutive stock options. The number of shares that would be
issued from the exercise has been reduced by the number of shares that could
have been purchased from the proceeds at the average market price of the
Company's common stock.
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Basic Earnings Effect of Dilutive Diluted Earnings
(Loss) Per Share Securities (Loss) Per Share
---------------- ------------------ ----------------
<S> <C> <C> <C>
For the ten months ended
December 31, 1999
Income (loss) numerator........ $(2,780,000)(1) (20,000) (2,800,000)(5)
Shares denominator............. 3,835,718 16,493 (2) 3,852,211
--------- ---------
Per share amount............... $ (.72) (.73)
========== =========
For the fiscal year ended
February 28, 1999
Income (loss) numerator........ $ 1,378,000 (1) (14,000) 1,364,000 (5)
Shares denominator............. 3,718,887 38,443 (3) 3,757,330
--------- ---------
Per share amount............... $ .37 .36
========= =========
For the fiscal year ended
March 1, 1998
Income numerator............... $ 2,612,000 (1) 11,000 2,623,000 (5)
Shares denominator............. 3,705,590 50,005 (4) 3,755,595
--------- ---------
Per share amount............... $ .70 .70
========= =========
<FN>
(1)Income (loss) available to common stockholders.
(2)Includes 0 stock options and 16,493 phantom stock units.
(3)Includes 27,173 stock options and 11,270 phantom stock units.
(4)Includes 42,879 stock options and 7,126 phantom stock units.
(5)Income (loss) available to common stockholders plus assumed conversions.
</FN>
</TABLE>
30
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
Recently Issued Accounting Pronouncements
- -----------------------------------------
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." The SOP is
effective for fiscal years beginning after December 15, 1998, and establishes
criteria for capitalizing certain internal use software costs. The adoption of
this statement did not have a material impact on the Company's financial
statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" which is effective for fiscal years beginning after December 15,
1998, and provides guidance on the expensing of costs of start-up activities as
these costs are incurred. The adoption of this statement did not have a material
impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." The statement, as amended, is effective for
fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. It is not expected that
the adoption of this statement will have a material impact on the Company's
financial statements.
(2) Uncompleted Contracts
- --- ---------------------
Costs and estimated earnings on uncompleted contracts are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1999 February 28, 1999
----------------- -----------------
<S> <C> <C>
Costs and estimated earnings on
uncompleted contracts........................... $ 52,586 29,191
Less: billings to date............................ 55,876 25,655
------ ------
$ (3,290) 3,536
====== ======
Included in accompanying balance sheets under the following captions:
Costs and estimated earnings
in excess of billings....................... $ 1,864 7,709
Customers' deposits and billings in
excess of costs and estimated earnings...... (5,154) (4,173)
------ ------
$ (3,290) 3,536
====== ======
</TABLE>
Retainages of $142,000 were included in accounts receivable at December 31,
1999. There was no retainage included in accounts receivable at February 28,
1999.
As of December 31, 1999, the Company accrued costs required to complete four
projects, which incurred cost overruns during the course of the year, resulting
in losses on these contracts. The additional accruals were required to provide
for the uncertainty as to the remaining scope of work which entails primarily
software modifications and other system integration costs.
31
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(3) Line of Credit Loan
- --- -------------------
A summary of the line of credit loan payable to bank is as follows (in
thousands):
<TABLE>
<CAPTION>
December February
31, 1999 28, 1999
-------- --------
<S> <C> <C>
Line of credit loan payable to bank................ $ - -
===== =====
</TABLE>
Prior to the acquisition of Ermanco on September 30, 1999, the Company had a
$5,000,000 committed revolving credit facility. Interest on the credit
arrangement was at the principal bank's prime rate of interest or quoted money
market rates. No compensating demand deposit balances were required to be
maintained regarding the credit arrangement. The credit arrangement 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 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.
In order to complete the acquisition of Ermanco, the Company obtained
financing from its principal bank. 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, which
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. The line of credit facility is to be used
primarily for working capital purposes and closing costs associated with the
Ermanco acquisition. Interest on the line of credit facility was at the bank's
prime rate of interest (8.50% as of December 31, 1999) or LIBOR Market Index
Rate plus 2%.
In order to obtain the line of credit, the Company granted the bank 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. The line of credit facility contains various
restrictive covenants relating to additional indebtedness, asset acquisitions or
dispositions, investments, guarantees, and maintenance of certain financial
ratios. In addition, the Company is restricted from paying dividends in excess
of 20% of its net earnings during the fiscal year ended December 31, 2000, and
is restricted from paying dividends in excess of 15% of its net earnings during
the fiscal year ended December 31, 2001 and thereafter. The Company was in
compliance with all covenants or obtained the appropriate waivers as of December
31, 1999 (see Note 14 of Notes to Consolidated Financial Statements). As of
December 31, 1999, the Company did not have any borrowings under the line of
credit facility. The line of credit facility replaced the Company's former
$5,000,000 committed revolving credit facility. Currently, the line of credit
facility has an expiration date of September 30, 2002.
32
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(4) Long-Term Debt
- --- --------------
A summary of long-term debt follows (in thousands):
<TABLE>
<CAPTION>
December February
31, 1999 28, 1999
-------- --------
<S> <C> <C>
Term loan............................................................ $14,000 -
Subordinated notes payable........................................... 3,000 -
Capital lease obligations............................................ 29 -
Mortgage payable..................................................... - 25
------ ------
Total................................................................ 17,029 25
Less: current installments of long-term debt......................... 1,578 9
------ ------
Long-term debt....................................................... $15,451 16
====== ======
</TABLE>
The Company received $14,000,000 in the form of a seven-year term loan from
its bank to finance the acquisition of Ermanco on September 30, 1999. 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 Company hedged $7,000,000 of the term
loan at a fixed interest rate entering into a seven year interest rate swap
agreement at 9.38%. The balance of the term loan on $7,000,000 is subject to a
variable interest rate, which is based on the three month LIBOR Market Index
Rate plus two and three-quarters percent. The interest rate on the variable
portion of the term loan as of December 31, 1999 was 8.93%.
In order to obtain the term loan, the Company granted the bank 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. The term loan contains various restrictive
covenants relating to additional indebtedness, asset acquisitions or
dispositions, investments, guarantees, and maintenance of certain financial
ratios. In addition, the Company is restricted from paying dividends in excess
of 20% of its net earnings during the fiscal year ended December 31, 2000, and
is restricted from paying dividends in excess of 15% of its net earnings during
the fiscal year ended December 31, 2001 and thereafter. The Company was in
compliance with all covenants as of December 31, 1999 or obtained the
appropriate waivers (see Note 14 of Notes to Consolidated Financial Statements).
The subordinated promissory notes issued on September 30, 1999 to the
fourteen stockholders of Ermanco totaled $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. The weighted average interest rate on the promissory notes is 11.714%
over the term of the notes. 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.
Financing agreements related to the lease of computer software have been
recorded as capital leases. These agreements had a total initial contract value
of $36,000. The current and long-term portions of capital lease obligations are
$16,000 and $13,000, respectively.
The mortgage payable, which had an interest rate of 5% and was secured by the
Company's Easton, Pennsylvania land and buildings, was fully paid in September
1999.
Principal payments of long-term debt (including capital leases) from December
31, 1999 under terms of existing agreements are as follows:
2000 $ 1,578
2001 1,521
2002 2,305
2003 2,300
2004 2,300
Thereafter 7,025
------
$ 17,029
======
33
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(5) Capital Stock Options
- --- ---------------------
The following is a summary of options available for grant and changes in
options outstanding under the Company's 1982 and 1992 Incentive Stock Option
Plans ("ISOP") and 1997 Equity Compensation Plan ("ECP") for the ten months
ended December 31, 1999, and for the fiscal years ended February 28, 1999 and
March 1, 1998:
<TABLE>
<CAPTION>
1982 ISOP 1992 ISOP 1997 ECP TOTAL
--------- ------------------------ --------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Option price*.......... $ 4.94 4.36 5.33 6.33 13.33 15.25 10.88 10.00 8.25 8.00 8.94
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Options outstanding
as of March 2, 1997.... 20,996 15,525 29,251 45,300 - - - - - - - 111,072
Granted............ - - - - 58,800 - - - - - - 58,800
Exercised.......... (8,058) (2,250) (11,535) (7,727) - - - - - - - (29,570)
Lapsed............. (12,938) - - (750) - - - - - - - (13,688)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Options outstanding
as of March 1, 1998.... - 13,275 17,716 36,823 58,800 - - - - - - 126,614
Granted............ - - - - - 52,748 - - - - - 52,748
Exercised.......... - (6,011) (17,716) (10,423) - - - - - - - (34,150)
Lapsed............. - - - - - - - - - - - -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Options outstanding
as of February 28,1999. - 7,264 - 26,400 58,800 52,748 - - - - - 145,212
Granted............ - - - - - - 40,000 76,772 39,000 10,000 7,000 172,772
Exercised.......... - (7,039) - (3,000) - - - - - - - (10,039)
Lapsed............. - - - (7,875) (18,900) (19,579) - - - - - (46,354)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Options outstanding as
of December 31, 1999... - 225 - 15,525 39,900 33,169 40,000 76,772 39,000 10,000 7,000 261,591
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
34
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(5) Capital Stock Options (Continued)
- --- ---------------------------------
Under the Company's Incentive Stock Option Plans, officers and key employees
have been granted options to purchase shares of common stock at the approximate
market price at the date of grant. Options became exercisable in increments of
25% on the anniversary date of the grant; thus, at the end of four years, the
options are fully exercisable. Currently, all options have a term of five years.
The plans, approved in 1982 and 1992, also authorize stock appreciation rights;
however, none have been issued.
In July, 1992, the stockholders adopted the 1992 Incentive Stock Option Plan
which will expire in July, 2002. The terms of the 1992 Plan are essentially the
same as the terms of the 1982 Plan except that 112,500 shares of common stock
were authorized for issuance under the 1992 Plan.
In July, 1997, the stockholders adopted the 1997 Equity Compensation Plan
("ECP") which will expire in July, 2007. The ECP provides for grants of stock
options, restricted stock, and stock appreciation rights to selected employees,
key advisors who perform valuable services, and directors of the Company. In
addition, the ECP provides for grants of performance units to employees and key
advisors. The ECP authorizes up to 412,500 shares of common stock for issuance
pursuant to the terms of the plan. Under the Company's ECP, officers and key
employees have been granted options to purchase shares of common stock at the
approximate market price at the date of grant. Options become exercisable in
increments of 25% on the anniversary date of the grant; thus, at the end of four
years, the options are fully exercisable. Currently, 245,841 options are
outstanding under the plan, and all options have a term of five years.
The Company has elected to continue to account for its stock-based
compensation plans under the guidelines of Accounting Principles Board Opinion
No. 25; however, additional disclosure as required under the guidelines of SFAS
No. 123, "Accounting for Stock-Based Compensation," is included below. No
compensation expense was recognized on options granted during the ten months
ended December 31, 1999, and during the fiscal years ended February 28, 1999 and
March 1, 1998 in the financial statements. If the Company had elected to
recognize stock-based compensation expense based on the fair value of granted
options at the grant date (as determined under SFAS No. 123), net earnings
(loss) (in thousands) and basic earnings (loss) per share for the ten months
ended December 31, 1999 and for the fiscal years ended February 28, 1999 and
March 1, 1998 would have been as follows:
<TABLE>
<CAPTION>
For the Fiscal Years Ended
For the Ten --------------------------
Months Ended February 28, March 1,
December 31, 1999 1999 1998
----------------- ------------ ----------
<S> <C> <C> <C>
Net earnings (loss) As reported........ $(2,780) 1,378 2,612
Pro forma.......... (2,867) 1,227 2,556
Basic earnings (loss) As reported........ $ (.72) .37 .70
per share Pro forma.......... (.75) .33 .69
</TABLE>
The above pro forma net earnings (loss) and basic earnings (loss) per share
were computed using the fair value of granted options at the date of grant as
calculated by the Black-Scholes option pricing method. In order to perform this
calculation, the following assumptions were made for the ten months ended
December 31, 1999, and for the fiscal years ended February 28, 1999 and March 1,
1998, respectively: dividend yields of 1.25%, .66%, and .5%; risk-free interest
rates of 6.50%, 5.12%, and 5.78%; expected volatilities of 33.6%, 34.3%, and
35.5%; and an expected holding period of four years.
Pro forma net earnings (loss) reflects only options granted in fiscal years
ended March 3, 1996 through the ten months ended December 31, 1999. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net earnings (loss) presented above
because compensation cost occurs over the option vesting period, and
compensation cost is not considered for options granted prior to March 4, 1995.
35
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(6) Employee Benefit Plans
- --- ----------------------
The Company and its subsidiary maintain defined benefit plans for employees
covered by collective bargaining agreements. Retirement benefits are based on
the employee's years of service multiplied by the appropriate monthly benefit
amount. The Company's policy is to fund the Plans in compliance with applicable
laws and regulations. Assets of the Company's defined benefit plans are
primarily invested in publicly traded common stocks, corporate and government
debt securities, and cash or cash equivalents.
The benefit obligations for the Company's defined benefit plans were (in
thousands):
<TABLE>
<CAPTION>
September November
30, 1999 30, 1998
--------- --------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year.......................... $ 2,241 2,074
Benefit obligation assumed with Ermanco
acquisition.................................................. 334 -
Service cost (excluding administrative expenses)................. 48 54
Interest cost.................................................... 123 141
Actuarial (gain) loss............................................ (228) 46
Benefits paid.................................................... (68) (74)
----- -----
Benefit obligation at end of year................................ $ 2,450 2,241
===== =====
</TABLE>
The fair value of the plan assets of the Company's defined benefit plans
follows (in thousands):
<TABLE>
<CAPTION>
September November
30, 1999 30, 1998
--------- --------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year................... $ 3,320 2,581
Fair value of plan assets assumed
with Ermanco acquisition..................................... 454 -
Actual return on plan assets..................................... (319) 862
Expenses......................................................... (58) (49)
Benefits paid.................................................... (68) (74)
----- -----
Fair value of plan assets at end of year......................... $ 3,329 3,320
===== =====
</TABLE>
Accrued pension liability included in the Company's balance sheets at
September 30, 1999 and November 30, 1998 were (in thousands):
<TABLE>
<CAPTION>
September November
30, 1999 30, 1998
--------- --------
<S> <C> <C>
Reconciliation to balance sheets:
Funded status:
Plan assets in excess of benefit obligation...................... $ 759 1,079
Plan assets in excess of benefit obligation assumed
with Ermanco acquisition..................................... 120 -
Unrecognized net actuarial gain.................................. (1,499) (1,790)
Unrecognized net obligation...................................... (20) (39)
Unrecognized prior service costs................................. 310 350
----- -----
Accrued benefit cost recognized in the Company's
balance sheets............................................... $ (330) (400)
===== =====
</TABLE>
36
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(6) Employee Benefit Plans (Continued)
- --- ----------------------
The Company uses the projected unit credit actuarial method to compute
pension expense, which includes amortization of past service costs over 30
years. The net periodic pension expense for the ten months ended December 31,
1999, and for the fiscal years ended February 28, 1999 and March 1, 1998,
includes the following components (in thousands):
<TABLE>
<CAPTION>
For the Ten For the Fiscal Years
Months Ended
Ended --------------------
December February March
31, 1999 28, 1999 1, 1998
-------- -------- -------
<S> <C> <C> <C>
Service cost-benefits earned during the period.......... $ 89 108 89
Interest cost on projected benefit obligation........... 123 141 129
Expected return on plan assets - increase............... (151) (144) (123)
Amortization of net asset............................... (18) (22) (22)
Amortization of prior service cost...................... 40 48 40
Recognized net actuarial gain........................... (33) (11) -
----- ----- -----
Net periodic pension expense............................ $ 50 120 113
===== ===== =====
</TABLE>
The weighted average rates and actuarial assumptions used to develop the net
periodic pension expense and the projected benefit obligation were:
<TABLE>
<CAPTION>
As of
September November November
30, 1999 30, 1998 30, 1997
--------- -------- --------
<S> <C> <C> <C>
Discount rate........................................ 7.0%-7.5% 6.75% 7.00%
Expected long-term rate of return
on plan assets.................................... 8.0%-8.5% 8.50% 8.50%
</TABLE>
The SI Easton operations has a multi-faceted defined contribution
Retirement Savings Plan for employees not covered by its collective bargaining
agreement. Salaried employees age 21 and above with at least one year of service
are eligible to participate in the Plan. Under the 401(k) feature of the Plan,
SI Easton contributes 2% of base pay to each eligible salaried employee's
account and matches 50% of the first 4% of pay which the employee contributes to
the Plan. The Plan also contains provisions for profit sharing contributions in
the form of cash as determined annually by the Board of Directors. Total expense
for the Retirement Savings Plan was $186,000, $356,000, and $461,000 for the ten
months ended December 31, 1999, and for the fiscal years ended February 28, 1999
and March 1, 1998, respectively.
Ermanco also maintains 401(k) Retirement Savings Plans for substantially
all employees who have completed at least 90 days of service. Ermanco's plans
allow discretionary employer contributions, which are partially matched at a
rate of 20% up to 1% of the employees' gross compensation. The contributions to
the 401(k) plans during the period ended December 31, 1999 totaled $12,000.
37
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(7) Income Taxes
- --- ------------
The provision for income tax expense (benefit) consists of the following
(in thousands):
<TABLE>
<CAPTION>
For the Fiscal Years Ended
For the Ten --------------------------
Months Ended February 28, March 1,
December 31, 1999 1999 1998
----------------- ------------ --------
<S> <C> <C> <C>
Federal - current................... $ (365) 828 1,236
- deferred.................. (777) (134) (12)
----- ----- -----
(1,142) 694 1,224
----- ----- -----
State - current................... 27 193 278
- deferred.................. (281) (31) (12)
----- ----- -----
(254) 162 266
----- ----- -----
Foreign - current................... 2 - -
----- ----- -----
$(1,394) 856 1,490
===== ===== =====
</TABLE>
The reconciliation between the U.S. federal statutory rate and the Company's
effective income tax rate is (in thousands):
<TABLE>
<CAPTION>
For the Fiscal Years Ended
For the Ten --------------------------
Months Ended February 28, March 1,
December 31, 1999 1999 1998
----------------- ------------ --------
<S> <C> <C> <C>
Computed tax expense (benefit) at
statutory rate of 34%................ $(1,419) 759 1,395
Increase (reduction) in taxes
resulting from:
State income taxes, net of
federal benefit.................. (167) 108 176
Equity in income of joint
venture.......................... (58) (5) (115)
Change in the valuation
allowance for deferred
tax assets...................... - (43) -
Write-off of intangible assets..... 210 - -
Miscellaneous items................ 40 37 34
----- ----- -----
$(1,394) 856 1,490
===== ===== =====
</TABLE>
The significant components of deferred income tax expense (benefit) are as
follows (in thousands):
<TABLE>
<CAPTION>
For the Fiscal Years Ended
For the Ten --------------------------
Months Ended February 28, March 1,
December 31, 1999 1999 1998
----------------- ------------ --------
<S> <C> <C> <C>
Deferred tax benefit
(exclusive of change in
valuation allowance)................. $(1,058) (122) (24)
Decrease in the valuation allowance
for deferred tax assets.............. - (43) -
----- ----- -----
$(1,058) (165) (24)
===== ===== =====
</TABLE>
38
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(7) Income Taxes (Continued)
- --- ------------ -----------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
February 28, 1999 are presented below (in thousands):
<TABLE>
<CAPTION>
December 31, February 28,
1999 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating and built-in loss carryforward
(expiring in 2007)......................................... $ 410 345
Inventories, principally due to book reserves
not yet deductible for tax purposes, and
additional costs inventoried for tax purposes
pursuant to uniform capitalization rules................... 473 526
Accrued warranty costs....................................... 328 187
Accrued pension costs........................................ 174 154
Accruals for other book expenses, not yet deductible
for tax purposes........................................... 1,341 256
----- -----
Total gross deferred tax assets.......................... 2,726 1,468
Less valuation allowance................................. 460 460
------ -----
Net deferred tax assets.................................. 2,266 1,008
----- -----
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation................................ (96) (98)
Amortization................................................. (76) -
Other .................................................. (150) (135)
------- -----
Total gross deferred tax liabilities..................... (322) (233)
------ -----
Net deferred tax assets.................................. $ 1,944 775
===== =====
</TABLE>
Net deferred tax assets totaling $111,000 were acquired as a result of
temporary differences in the MAC acquisition which occurred in April 1999.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon historical
taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 1999.
(8) Settlement of Litigation
- --- ------------------------
In April, 1996, a competitor filed suit against the Company and its SI/BAKER
joint venture, alleging that certain of the products of SI/BAKER infringed a
patent held by the competitor.
On December 20, 1996, a Settlement Agreement was reached between the Company,
SI/BAKER, and the competitor. The competitor dismissed the action and granted a
license to SI/BAKER for certain of its products. In exchange for the license,
SI/BAKER agreed to dismiss its counterclaims and pay a royalty. On December 31,
1996, SI/BAKER satisfied a $600,000 liability under the Settlement Agreement
relative to systems installed to date.
39
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(8) Settlement of Litigation (Continued)
- --- ------------------------
The term of the Settlement Agreement continues until the expiration of the
competitor's patent; however, SI/BAKER's status as sole licensee will remain in
effect until December 31, 2000, and all orders related to licensed products
received by SI/BAKER after December 31, 2000 will not be subject to royalty
payments.
(9) Contingencies
- --- -------------
The Company is guarantor (not to exceed $1,000,000) of one-half of SI/BAKER's
borrowings under a line of credit which had no outstanding balance at December
31, 1999.
The Company is presently engaged in certain legal proceedings, which
management believes present no significant risk of material loss to the Company.
(10) Commitments and Related Party Transactions
- ---- ------------------------------------------
Ermanco's principal offices and manufacturing facility are located in a
113,000 square foot steel building in Spring Lake, Michigan. The building is
leased from an organization that is affiliated with Ermanco and SI Handling
Systems, Inc. through common officers. 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.
The terms of the lease require the payment of all taxes, insurance, and other
ownership related costs of the property. The lease expires on October 31, 2003.
The Company also leases certain automobiles and office equipment, office
space, computer equipment, and software under various operating leases with
terms extending through June 2004.
Financing agreements related to the lease of computer software have been
recorded as capital leases. These agreements had a total initial contract value
of $36,000.
Total rental expense, including short-term leases, in the ten months ended
December 31, 1999, and in the fiscal years ended February 28, 1999 and March 1,
1998, approximated $199,000, $37,000, and $81,000, respectively.
Future minimum rental commitments at December 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
2000................................................. $ 19 573
2001................................................. 10 483
2002................................................. 5 396
2003................................................. - 316
2004................................................. - 7
----- -----
Total minimum lease payments......................... 34 1,775
=====
Less: amounts representing interest................. 5
-----
Net minimum lease payments........................... 29
Less: current portion............................... 16
-----
Long-term capital lease obligations.................. $ 13
=====
</TABLE>
40
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(10) Commitments and Related Party Transactions (Continued)
- ---- ------------------------------------------
In October 1996, the Company entered into an exclusive licensing agreement
that requires payment of royalties based on the number of machines sold, with
minimum royalties each year through September 2001 in order to prevent
cancellation of the agreement by the licensor. Future minimum royalties payable
are as follows (in thousands):
2000................................................. $ 25
2001................................................. 25
In February 1999, the Company entered into an exclusive licensing agreement
that requires payment of royalties based on the contract value of systems sold,
with targeted royalties each year through February 2004, in order to maintain
exclusivity and prevent cancellation of the agreement by the licensor. Future
targeted royalties payable are as follows (in thousands):
2000................................................. $ 40
2001................................................. 105
2002................................................. 150
2003................................................. 210
2004................................................. 270
To complete the acquisition of Ermanco, the Company issued $3,000,000 in
subordinated promissory notes to the stockholders of Ermanco. See Note 4 of the
Notes to Consolidated Financial Statements for more information on the
promissory notes issued to the fourteen stockholders of Ermanco, 13 of whom
continue to be employees, and one is a director of the Company.
Employment agreements were entered into with the Company's President and
Chief Executive Officer and Ermanco's President and three other officers of its
Ermanco subsidiary. Each of the agreements has varying terms, none of which
exceeds three years. They provide for each party to guaranteed annual
compensation during the term of the employment agreements, participate in the
subsidiary's bonus plans, plus usual and customary fringe benefits associated
with being an employee of the Company.
41
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(11) Cash Flow Information
- ---- ---------------------
Supplemental disclosures of cash flow information for the ten months ended
December 31, 1999 and for the fiscal years ended February 28, 1999 and March 1,
1998 are as follows (in thousands, except share data):
<TABLE>
<CAPTION>
For the Fiscal Years Ended
For the Ten --------------------------
Months Ended February 28, March 1,
December 31, 1999 1999 1998
----------------- ----------- ----------
<S> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid for:
Interest........................... $ 7 19 11
====== ====== ======
Income taxes....................... $ 1,030 991 1,576
====== ====== ======
Supplemental disclosures of noncash
investing and financial 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 plan........................ $ 16 - -
====== ====== ======
Issuance of 20,897 common shares
in exchange for 8,228 common
shares delivered to the Company
by officers in connection with the
employee incentive stock
option plan........................ $ - 112 -
====== ====== ======
Issuance of 18,225 common shares
in exchange for 8,064 common
shares delivered to the Company
by officers in connection with the
employee incentive stock
option plan....................... $ - - 88
====== ====== ======
Issuance of 481,284 common shares
for the Ermanco acquisition........ $ 4,500 - -
====== ====== ======
Issuance of $14,000 of term debt
for the Ermanco acquisition........ $ 14,000 - -
====== ====== ======
Issuance of $3,000 in subordinated
notes payable in connection with
the Ermanco acquisition............ $ 3,000 - -
====== ====== ======
Additional consideration and costs
payable in connection with
the Ermanco acquisition............ $ 231 - -
====== ====== ======
</TABLE>
42
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(12) Joint Ventures
- ---- --------------
The Company has entered into various transactions with SI/BAKER as follows:
<TABLE>
<CAPTION>
December 31, February 28,
1999 1999
------------ ------------
<S> <C> <C>
SI/BAKER, INC., 50% owned by the Company:
Balance Sheets Data (in thousands) -
Amount included in notes and other receivables................ $ 31 41
Amount included in costs and estimated
earnings in excess of billings.............................. 64 10
Investment in SI/BAKER........................................ 1,256 1,041
Amount included in accounts payable........................... 21 -
</TABLE>
<TABLE>
<CAPTION>
For the Fiscal Years Ended
For the Ten --------------------------
Months Ended February 28, March 1,
December 31, 1999 1999 1998
----------------- ------------ ----------
<S> <C> <C> <C>
Statements of Operations Data
(in thousands):
Systems and services sold under
various subcontracts............... $ 237 463 1,120
Services purchased for resale
under various subcontracts......... 60 - -
Reimbursement for administrative
and other services provided........ 116 113 98
Other income, net.................... 210 161 400
</TABLE>
Information pertaining to the Company's investment in the SI/BAKER joint
venture is as follows (in thousands):
<TABLE>
<S> <C>
Balance at March 2, 1997............................................................. $ 606
Equity in net earnings............................................................... 421
-----
Balance at March 1, 1998............................................................. 1,027
Equity in net earnings............................................................... 14
-----
Balance at February 28, 1999......................................................... 1,041
Equity in net earnings............................................................... 215
-----
Balance at December 31, 1999......................................................... $ 1,256
=====
</TABLE>
Undistributed earnings of SI/BAKER (less related deferred tax expenses) at
December 31, 1999 and February 28, 1999 were $1,067,000, and $864,000,
respectively.
Summary financial information and operating results for the SI/BAKER joint
venture are set forth in the following table (in thousands):
<TABLE>
<CAPTION>
December 31, February 28,
1999 1999
------------ ------------
<S> <C> <C>
Current assets.................................................... $ 6,985 4,960
Property, plant and equipment..................................... 73 81
Other assets...................................................... 42 263
Current liabilities............................................... 4,587 3,099
Long-term liabilities............................................. - 123
--------- -----
Net assets........................................................ $2,513 2,082
===== =====
</TABLE>
<TABLE>
<CAPTION>
For the Fiscal Years Ended
For the Ten --------------------------
Months Ended February 28, March 1,
December 31, 1999 1999 1998
----------------- ------------ ----------
<S> <C> <C> <C>
Net sales............................... $10,495 8,056 19,979
====== ===== ======
Net earnings............................ $ 431 28 843
====== ===== ======
</TABLE>
43
<PAGE>
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Continued)
(12) Joint Ventures (Continued)
- ---- --------------
Operations of the SI-Egemin joint venture were not material to the Company
during the ten months ended December 31, 1999.
(13) Major Segments of Business
- ---- --------------------------
Operating segments are defined as components of an enterprise in which
separate financial information is available and evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company identified such segments based on both management
responsibility and types of products offered for sale.
On September 30, 1999, the Company completed the acquisition of Ermanco
Incorporated. Prior to the acquisition, the Company operated in one major market
segment. See Note 1 of Notes to Consolidated Financial Statements for a
discussion on the Company's Description of Business. With the addition of the
Ermanco operations, the Company now operates in two major market segments, and
products are sold worldwide as follows (in thousands):
<TABLE>
<CAPTION>
For the ten months ended Automated Material Conveyor
December 31, 1999: Handling Systems Systems Total
- --------------------------- ------------------ --------- ---------
<S> <C> <C> <C>
Sales....................................... $ 33,444 7,664 41,108
Earnings (loss) before
interest expense, interest income, equity
in income of joint ventures, and
income taxes............................. (4,620) 629 (3,991)
Total assets................................ 16,525 28,881 45,406
Capital expenditures........................ 206 92 298
Depreciation and amortization expense....... 430 191 621
</TABLE>
Geographic segment information was as follows (in thousands):
<TABLE>
<CAPTION>
For the ten months ended
December 31, 1999: Domestic Europe and Asia Canada Total
- --------------------------- -------- --------------- ------ ---------
<S> <C> <C> <C> <C>
Sales........................... $39,574 864 670 41,108
Earnings (loss) before
interest expense, interest income,
equity in income of joint ventures,
and income taxes............. (3,991) - - (3,991)
Total assets.................... 45,406 - - 45,406
Capital expenditures............ 298 - - 298
Depreciation and
amortization expense......... 621 - - 621
</TABLE>
Intersegment sales for the ten months ended December 31, 1999 totaled $30,000.
(14) Subsequent Events
- ---- -----------------
In February 2000, the Company announced a restructuring of the SI Easton
operations, aimed at profit improvement. These actions involved a reduction of
approximately 20% of the workforce. The Company incurred a charge, primarily for
severance costs, to first quarter earnings of approximately $400,000.
On March 30, 2000, the Company received a waiver of certain loan covenants
as well as an amendment to the term loan and line of credit agreements relative
to future covenant requirements, a variable term loan interest rate increase to
LIBOR plus 3%, and limitations on cash payments of interest on subordinated
debt.
44
<PAGE>
Schedule II
SI HANDLING SYSTEMS, INC. AND SUBSIDIARY -----------
VALUATION AND QUALIFYING ACCOUNTS
For the Ten Months Ended December 31, 1999, and for the Fiscal Years Ended
February 28, 1999 and March 1, 1998 (in thousands)
<TABLE>
<CAPTION>
Additions
Due to Additions
Balance At Acquisition Charged To Balance
Beginning of Ermanco Costs And At End
Of Year Incorporated Expenses Deductions Of Year
------- ------------ --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Ten months ended December 31, 1999:
Reserve for inventory loss.................... $ 854 79 508 500 (a) 941 (b)
Reserve for product warranty.................. 486 51 486 (c) 120 (d) 903 (e)
Allowance for doubtful receivables............ - 48 6 - 54
----- ----- ----- ----- -----
$ 1,340 178 1,000 620 1,898
===== ===== ===== ===== =====
Fiscal year ended February 28, 1999:
Reserve for inventory loss.................... $ 790 - 98 34 (a) 854 (b)
Reserve for product warranty.................. 75 - 447 (c) 36 (d) 486 (e)
Allowance for doubtful receivables............ - - - - -
----- ----- ----- ----- -----
$ 865 - 545 70 1,340
===== ===== ===== ===== =====
Year ended March 1, 1998:
Reserve for inventory loss.................... $ 745 - 71 26 (a) 790 (b)
Reserve for product warranty.................. 180 - 75 (c) 180 (d) 75 (e)
Allowance for doubtful receivables............ - - 35 35 -
----- ----- ----- ----- -----
$ 925 - 181 241 865
===== ===== ===== ===== =====
<FN>
(a) Inventory items disposed of, net of salvage proceeds.
(b) Allowance is reflected in the net inventory on the balance sheet.
(c) Costs include materials and incidental costs, but exclude any services.
(d) Payments of warranty costs and reversal of unused expired warranty reserve.
(e) Included in accrued other liabilities.
</FN>
</TABLE>
45
<PAGE>
PART III
--------
Part III, except for certain information relating to Executive Officers
listed below, is omitted inasmuch as the Company intends to file with the
Securities and Exchange Commission within 120 days of the close of the ten
months ended December 31, 1999, a definitive proxy statement containing such
information pursuant to Regulation 14A of the Securities Exchange Act of 1934
and such information shall be deemed to be incorporated herein by reference from
the date of filing such document.
Executive Officers of the Registrant
The names, ages, and offices with the Company of its executive officers are
as follows:
<TABLE>
<CAPTION>
Name Age Office
---- --- ------
<S> <C> <C>
William R. Johnson 53 President and Chief Executive Officer, Director
Leon C. Kirschner 60 Corporate Vice President, President-Ermanco, Director
William J. Casey 56 Executive Vice President
William F. Moffitt 50 Vice President - Finance, Chief Financial
Officer and Treasurer
Thomas M. Pinkin 50 Vice President - Sales
James L. Thatcher 56 Vice President - Operations
Ronald J. Semanick 38 Controller and Secretary
</TABLE>
Mr. Johnson was appointed President and a Director on March 29, 1999 and
Chief Executive Officer of the Company on July 21, 1999. From 1977 to 1998, Mr.
Johnson was employed by Rockwell Automation. He was Senior Vice President of
their Reliance Electric Motor Group. From 1968 to 1977, Mr. Johnson was employed
by Electric Machinery Manufacturing Company where he was an engineering manager.
Mr. Kirschner joined the Company upon the acquisition of Ermanco
Incorporated on September 30, 1999. He was appointed as Director and Corporate
Vice President of SI Handling Systems, Inc. and President of Ermanco.
Previously, he had served as President of Ermanco (1983 - 1999), and Senior Vice
President of W & H Systems, Inc. (1968 - 1983).
Mr. Casey was appointed Executive Vice President of the Company on November
10, 1999, and previously held the position of Vice President - Production &
Assembly Systems. He has served the Company in several capacities, including
Vice President - Sales, Director Field Sales, Estimating Supervisor, Manager of
Lo-Tow Systems, and Mid-Atlantic Regional Sales Manager. Mr. Casey joined the
Company in February 1965.
Mr. Moffitt was appointed Vice President - Finance of the Company on
October 25, 1999. Prior to joining the Company, he was employed by Met-Pro (1986
- - 1998) as the Vice President - Finance, Secretary/Treasurer and Chief Financial
Officer, and as a Director. Previously, he was employed by IU International in
various capacities.
Mr. Pinkin was appointed Vice President Sales of the Company on December
13, 1999. He was previously employed by Crisplant, Inc. as a Business
Development Manager (1997 - 1999), and by Forte Industries (1993 - 1996) as a
Corporate Marketing Manager.
Mr. Thatcher was appointed Vice President - Operations of the Company on
November 10, 1999 and previously held the position of Vice President -
Warehousing & Distribution Systems. He has served the Company in several key
positions including Vice President - Manufacturing & Assembly Services and
Customer & Software Services, Director-Operations, Project Engineer, Project
Manager, and Director-Customer Service. He joined the Company in August 1970 as
an engineer.
Mr. Semanick was appointed Secretary of the Company by the Board of
Directors on July 13, 1994. Currently, Mr. Semanick is the Company's Controller
and previously held the positions of Manager of Financial Accounting, Senior
Financial Accountant, and Financial Accountant. Prior to joining the Company in
1985, Mr. Semanick was employed as a Certified Public Accountant by Arthur
Andersen & Company of Philadelphia, Pennsylvania.
All executive officers hold office at the pleasure of the Board of
Directors.
46
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a) 1. and 2. An index to the consolidated financial statements of the
Company and the consolidated financial statement schedule is included in Item 8.
In addition, Schedule A relating to the SI/BAKER, INC. joint venture is filed
under 14(c) below.
3. Exhibits:
2.1 Stock Purchase Agreement dated as of August 6, 1999 among SI
Handling Systems, Inc., Ermanco Incorporated, and the
stockholders of Ermanco Incorporated (incorporated by
reference to Exhibit 2.1 to Form 10-Q for the quarterly
period ended August 29, 1999).
3.1 Amended and Restated Articles (incorporated by reference to
Exhibit 3.1 to Form 10-Q for the quarterly period ended
August 31, 1997).
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 99.2 to the Company's Registration Statement on Form
S-8, filed on August 14, 1996 [No. 333-10181]).
4.1 Form of Subordinated Promissory Note payable to the
Stockholders of Ermanco Incorporated dated September 30,
1999 (incorporated by reference to Exhibit 4.1 to Form 8-K
filed on October 15, 1999).
10.1 Revolving Credit Agreement dated July 22, 1993 (incorporated
by reference to Exhibit 10.1 to Annual Report on Form 10-K
for the fiscal year ended February 26, 1995).
10.2 Amendment to Revolving Credit Agreement dated April 28, 1995
(incorporated by reference to Exhibit 10.2 to Annual Report
on Form 10-K for the fiscal year ended February 26, 1995).
10.4 1992 Incentive Stock Option Plan, Amended and Restated,
Effective as of July 16, 1997* (incorporated by reference to
Exhibit 10.4 to Form 10-Q for the quarterly period ended
August 31, 1997).
10.5 Executive Officer Incentive Plan* (incorporated by reference
to Exhibit 10.5 to Annual Report on Form 10-K for the fiscal
year ended February 26, 1995).
10.6 Directors' Deferred Compensation Plan* (incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-8 [No.
333-10181]).
10.7 1997 Equity Compensation Plan* (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form
S-8 [No. 333-36397]).
10.8 Joint Venture Agreement and Governing Documents Relating to
SI/BAKER, INC. (incorporated by reference to Exhibit 21.1 to
Annual Report on Form 10-K for the fiscal year ended
February 26, 1995).
10.9 Second Amendment to the Joint Venture Agreement Relating to
SI/BAKER, INC. (incorporated by reference to Exhibit 10.9 to
Annual Report on Form 10-K for the fiscal year ended
February 28, 1999).
10.10 Executive Employment Agreement with William R. Johnson dated
March 29, 1999* (incorporated by reference to Exhibit 10.10
to Form 10-Q for the quarterly period ended May 30, 1999).
10.11 Employment Agreement with Leon C. Kirschner* (incorporated
by reference to Exhibit 10.11 to Form 8-K filed on October
15, 1999).
10.12 Line of Credit Loan Agreement entered into September 30,
1999 by and between SI Handling Systems, Inc., Ermanco
Incorporated, and First Union National Bank (incorporated by
reference to Exhibit 10.12 to Form 8-K filed on October 15,
1999).
10.13 Promissory Note related to the Line of Credit Loan Agreement
entered into September 30, 1999 by and between SI Handling
Systems, Inc., Ermanco Incorporated, and First Union
National Bank (incorporated by reference to Exhibit 10.13 to
Form 8-K filed on October 15, 1999).
47
<PAGE>
PART IV (Continued)
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(Continued)
10.14 Term Loan Loan Agreement entered into September 30, 1999 by
and between SI Handling Systems, Inc., Ermanco Incorporated,
and First Union National Bank (incorporated by reference to
Exhibit 10.14 to Form 8-K filed on October 15, 1999).
10.15 Promissory Note related to the Term Loan Loan Agreement
entered into September 30, 1999 by and between SI Handling
Systems, Inc., Ermanco Incorporated, and First Union
National Bank (incorporated by reference to Exhibit 10.15 to
Form 8-K filed on October 15, 1999).
10.16 Escrow Agreement entered into September 30, 1999 by and
among SI Handling Systems, Inc., the stockholders of Ermanco
Incorporated, and First Union National Bank (incorporated by
reference to Exhibit 10.16 to Form 8-K filed on October 15,
1999).
11.1 Statement regarding computation of per share earnings (loss)
(see Note 1 of Notes to Consolidated Financial Statements).
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule (in electronic format only).
* Management contract or compensatory plan or arrangement required
to be filed as an Exhibit pursuant to Item 14(c) of this report.
(b) Reports on Form 8-K.
During the quarter ended December 31, 1999, Form 8-K/A's were filed on
December 14, 1999 and December 17, 1999. The filings pertained to the
pro forma financial information and audited financial statements of
Ermanco Incorporated. Closing of the acquisition occurred on September
30, 1999.
(c) Exhibits 21, 23, and 27 are filed with this report.
(d) Schedule A - SI/BAKER, INC. Financial Statements and Independent
Auditors' Report Thereon.
48
<PAGE>
Schedule A
----------
SI/BAKER, INC.
Financial Statements
December 31, 1999 and February 28, 1999
(With Independent Auditors' Report Thereon)
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors SI/BAKER, INC.:
We have audited the accompanying balance sheets of SI/BAKER, INC. as of
December 31, 1999 and February 28, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the ten months ended
December 31, 1999, and the years ended February 28, 1999 and 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SI/BAKER, INC. as of December
31, 1999 and February 28, 1999, and the results of its operations and its cash
flows for the ten months ended December 31, 1999, and the years ended February
28, 1999 and 1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Allentown, Pennsylvania
March 7, 2000
50
<PAGE>
SI/BAKER, INC.
Balance Sheets
December 31, 1999 and February 28, 1999
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, February 28,
1999 1999
------------ ------------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents, principally
time deposits....................................... $2,895 154
----- -----
Receivables:
Trade............................................... 1,358 1,658
Other receivables................................... 129 238
----- -----
Total receivables................................ 1,487 1,896
----- -----
Costs and estimated earnings in
excess of billings.................................. 2,159 2,516
Deferred income tax benefits........................... 391 258
Prepaid expenses and other current assets.............. 53 136
----- -----
Total current assets................................ 6,985 4,960
----- -----
Machinery and equipment, at cost.......................... 194 176
Less: accumulated depreciation......................... 121 95
----- -----
Net machinery and equipment......................... 73 81
----- -----
Equipment leased to customer.............................. 487 487
Less: accumulated depreciation........................ 467 370
----- -----
Net equipment leased to customer.................... 20 117
----- -----
Deferred income tax benefits.............................. 22 51
----- -----
Other assets.............................................. - 95
----- -----
Total assets..................................... $ 7,100 5,304
===== =====
</TABLE>
See accompanying notes to financial statements.
51
<PAGE>
SI/BAKER, INC.
Balance Sheets
December 31, 1999 and February 28, 1999
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, February 28,
1999 1999
------------ ------------
<S> <C> <C>
Liabilities
Current liabilities:
Notes payable to bank.................................. $ - 500
----- -----
Accounts payable:
Trade............................................... 739 510
Affiliated companies................................ 64 15
----- -----
Total accounts payable........................... 803 525
----- -----
Customers' deposits and billings in excess of
costs and estimated earnings........................ 2,114 1,104
Accrued salaries, wages, and commissions............... 247 91
Income taxes payable................................... 143 -
Accrued royalties payable.............................. 361 209
Accrued product warranties............................. 842 660
Accrued other liabilities.............................. 77 10
----- -----
Total current liabilities........................ 4,587 3,099
----- -----
Deferred compensation..................................... - 123
----- -----
Stockholders' equity:
Common stock, $1 par value; authorized 1,000
shares; issued and outstanding 200 shares........... - -
Additional paid-in capital............................. 200 200
Retained earnings...................................... 2,313 1,882
----- -----
Total stockholders' equity....................... 2,513 2,082
----- -----
Total liabilities and stockholders'
equity....................................... $ 7,100 5,304
===== =====
</TABLE>
See accompanying notes to financial statements.
52
<PAGE>
SI/BAKER, INC.
Statements Of Operations
For the Ten Months Ended December 31, 1999, and For The Fiscal Years Ended
February 28, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
December 31, February 28, February 28,
1999 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.................................... $ 10,495 8,056 19,979
Cost of sales................................ 8,326 6,376 16,781
------ ------ ------
Gross profit on sales..................... 2,169 1,680 3,198
------ ------ ------
Selling, general and
administrative expenses................... 984 920 981
Product development costs.................... 200 399 3
Royalty expense to parent
companies................................. 420 322 800
Interest income.............................. (85) (17) (29)
Interest expense............................. 4 72 129
Other income, net............................ (98) (85) (106)
------ ------ ------
1,425 1,611 1,778
------ ------ ------
Earnings before income taxes................. 744 69 1,420
Income tax expense........................... 313 41 577
------ ------ ------
Net earnings............................ $ 431 28 843
====== ====== ======
</TABLE>
SI/BAKER, INC.
Statements Of Stockholders' Equity
For the Ten Months Ended December 31, 1999, and For The Fiscal Years Ended
February 28, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
------ ---------- -------- --------------
<S> <C> <C> <C> <C>
Balance at February 28, 1997.......... $ - 200 1,011 1,211
Net earnings.......................... - - 843 843
----- ----- ----- -----
Balance at February 28, 1998.......... - 200 1,854 2,054
Net earnings.......................... - - 28 28
----- ----- ----- -----
Balance at February 28, 1999.......... - 200 1,882 2,082
Net earnings.......................... - - 431 431
----- ----- ----- -----
Balance at December 31, 1999.......... $ - 200 2,313 2,513
===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
53
<PAGE>
SI/BAKER, INC.
Statements Of Cash Flows
For the Ten Months Ended December 31, 1999, and For The Fiscal Years Ended
February 28, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
December 31, February 28, February 28,
1999 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................. $ 431 28 843
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation of machinery and
equipment and leased equipment 123 152 145
Changes in operating assets and liabilities:
Receivables........................ 409 1,036 (1,192)
Costs and estimated earnings in
in excess of billings.......... 357 747 848
Inventories........................ - 118 (82)
Deferred income taxes.............. (104) 35 29
Prepaid expenses and other
current assets................. 83 (118) 69
Other assets....................... 95 (38) (57)
Accounts payable................... 278 (502) (1,249)
Customers' deposits and
billings in excess of costs
and estimated earnings......... 1,010 (636) 961
Accrued salaries, wages, and
commissions.................... 156 (322) 160
Income taxes payable............... 143 (44) 44
Accrued royalties payable.......... 152 (79) (31)
Accrued product warranties......... 182 (139) 336
Accrued other liabilities.......... 67 (33) (108)
Deferred compensation.............. (123) 12 57
----- ----- -----
Net cash provided
by operating activities..... 3,259 217 773
----- ----- -----
Cash flows from investing activities:
Additions to machinery and
equipment............................. (18) (51) (19)
----- ----- -----
Cash flows from financing activities:
Repayment of notes payable
to bank ............................ (500) (400) (850)
----- ----- -----
Increase (decrease) in cash and
cash equivalents......................... 2,741 (234) (96)
Cash and cash equivalents,
beginning of year........................ 154 388 484
------ ----- -----
Cash and cash equivalents,
end of year ............................ $ 2,895 154 388
===== ===== =====
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Income taxes....................... $ 2 324 479
===== ===== =====
Interest........................... $ 3 71 126
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
54
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements
Note 1: Organization, Description of Business, and Summary of
- ------- -----------------------------------------------------
Significant Accounting Policies
-------------------------------
Organization, Description of Business, and Concentration of Credit Risk
During March, 1993, SI Handling Systems, Inc. and Automated Prescription
Systems, Inc. formed a joint venture, SI/BAKER, INC. (the "Company" or "joint
venture"). On September 29, 1998, McKesson HBOC, Inc. [NYSE:MCK], a healthcare
supply management company, announced the completion of its acquisition of
Automated Prescription Systems, Inc. Automated Prescription Systems, Inc. was
renamed McKesson Automated Prescription Systems, Inc. ("McKesson APS"). The
joint venture draws upon the automated materials handling systems experience of
SI Handling Systems, Inc. and the automated pill counting and dispensing
products of McKesson APS to provide automated pharmacy systems. Each member
company contributed $100,000 in capital to fund the joint venture.
The Company designs and installs computer controlled, fully automated,
integrated systems for managed care and central fill pharmacy operations. The
Company's systems are viewed as labor saving devices which address the issues of
improved productivity and cost reduction. Systems can be expanded as customers'
operations grow and they may be integrated with a wide variety of components to
meet specific customer needs.
Although the Company is not dependent on any single customer, much of its
revenue is derived from contracts to design and install systems for managed care
and central fill pharmacy operations for North American corporations and the
federal government. In the ten months ended December 31, 1999, two customers
accounted for revenues of $3,608,000 and $2,700,000, respectively. In the fiscal
year ended February 28, 1999, two customers accounted for revenues of $2,671,000
and $928,000, respectively. In the fiscal year ended February 28, 1998, four
customers accounted for revenues of $6,042,000, $3,045,000, $3,003,000, and
$2,358,000, respectively. No other customer accounted for over 10% of revenues.
The Company's systems are sold on a fixed price basis. Contract terms provide
for progress payments and a portion of the purchase price is withheld by the
buyer until the system has met contractual specifications. As of December 31,
1999, two customers owed the Company $557,000 and $536,000, respectively. The
Company believes that the concentration of credit risk in its trade receivables
is substantially mitigated by the Company's ongoing credit evaluation process as
well as the general creditworthiness of its customer base.
Fiscal Year
- -----------
On November 4, 1999, the Board of Directors of the Company approved an
amendment to the Company's Bylaws to change the fiscal year end from the last
day of February to December 31. For the year ended December 31, 1999, the fiscal
year consisted of ten months. Prior to the recent change in the Bylaws, each of
the fiscal years ended February 28, 1999 and 1998 consisted of twelve months.
Use of Estimates
- ----------------
The preparation of the financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Financial Instruments
- ---------------------
The Company believes that the market values of its financial instruments
approximate their carrying values due to the short-term nature of the
instruments.
55
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Cash and Cash Equivalents
- -------------------------
For the purpose of reporting cash flows, cash and cash equivalents include
cash on deposit, amounts invested on an overnight basis with a bank, and other
highly liquid debt instruments purchased with a maturity of three months or
less. The Company does not believe it is exposed to any significant credit risk
on cash and cash equivalents.
Machinery and Equipment
- -----------------------
Machinery and equipment are depreciated, for financial statement purposes, on
the straight-line method over the estimated useful lives of individual assets;
whereas accelerated methods of depreciation are used for tax purposes. The range
of lives used in determining depreciation rates for machinery and equipment is
3-7 years. Maintenance and repairs are charged to operations; betterments and
renewals are capitalized. Upon sale or retirement of equipment, the cost and
related accumulated depreciation are removed from the accounts and the resultant
gain or loss, if any, is credited or charged to earnings.
Equipment Leased To Customer
- ----------------------------
Equipment leased to customer represents the accumulated costs associated with
robotic, computer hardware, and prescription filling equipment that was leased
to a customer during the first quarter of the fiscal year ended February 28,
1997. The lease, with an initial lease period of one year amounting to $139,000,
also provides for a series of three one-year renewal options by the lessee, and
a buyout provision at the end of the fourth year. The customer has exercised the
three one-year renewal options. The equipment is depreciated, for financial
statement purposes, on the straight-line method over its estimated useful life
of four years.
Sales Contracts
- ---------------
Profits on sales contracts are recorded on the basis of estimates of the
percentage of completion of individual contracts, commencing when progress
reaches a point where experience is sufficient to estimate final results with
reasonable accuracy. That portion of the total contract price is accrued, which
is allocable to contract expenditures incurred and work performed, on the basis
of the ratio of aggregate costs to date to the most recent estimate of total
costs at completion. As these contracts may extend over one or more fiscal
years, generally no more than two fiscal years, revisions in cost and profit
estimates during the course of the work are reflected in the accounting periods
in which the facts requiring revisions become known. At the time a loss on a
contract becomes known, the entire amount of the estimated ultimate loss is
accrued.
Warranty
- --------
The Company's products are warranted against defects in materials and
workmanship for a specified period. The Company provides an accrual for
estimated future warranty costs based upon a percentage of net sales.
Product Development Costs
- -------------------------
The Company expenses product development costs as incurred.
Royalty Arrangement
- -------------------
During the fiscal year ended February 28, 1995, an amendment to the joint
venture investment agreement was adopted to compensate each member company at a
rate of 2% of gross sales for marketing and sales efforts on behalf of SI/BAKER,
INC. The expense is included as royalty expense to parent companies in the
Company's Statements of Operations.
The Company receives a royalty from McKesson APS based on the monthly lease
rates for all cells, counters, cassettes, and any other McKesson APS equipment
leased to customers in the Company's defined market segment since the inception
of SI/BAKER on March 1, 1993. The royalty received by the Company is included in
other income.
56
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Income Taxes
- ------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." The SOP is
effective for fiscal years beginning after December 15, 1998, and establishes
criteria for capitalizing certain internal use software costs. The adoption of
this statement did not have a material impact on the Company's financial
statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" which is effective for fiscal years beginning after December 15,
1998, and provides guidance on the expensing of costs of start-up activities as
these costs are incurred. The adoption of this statement did not have a material
impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." The statement, as amended, is effective for
fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. It is not expected that
the adoption of this statement will have a material impact on the Company's
financial statements.
Note 2: Uncompleted Contracts
- ------- ---------------------
Costs and estimated earnings on uncompleted contracts are as follows at
December 31, 1999 and February 28, 1999 (in thousands):
<TABLE>
<CAPTION>
December 31, February 28,
1999 1999
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts................... $ 29,048 22,778
Estimated earnings........................................ 7,713 5,212
------ ------
36,761 27,990
Less: billings to date................................... 36,716 26,578
------ ------
$ 45 1,412
====== ======
Included in accompanying balance sheets under
the following captions:
Costs and estimated earnings in excess
of billings........................................ $ 2,159 2,516
Customers' deposits and billings in excess
of costs and estimated billings.................... (2,114) (1,104)
------ ------
$ 45 1,412
====== ======
</TABLE>
57
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Note 3: Short-Term Bank Borrowings and Compensating Balances
- ------- ----------------------------------------------------
On March 4, 1996, the Company established a $2,500,000 Line of Credit
Facility (the "Facility") with its principal bank (the "Bank"). Under terms of
the Facility, the Company's parent companies have each provided a limited
guarantee and surety in the amount not to exceed $1,000,000 for a combined
guarantee of $2,000,000 to the Bank for the payment and performance of the
related note, including any further renewals or modifications of the Facility.
During the fiscal year ended February 28, 1998, the Bank increased the Company's
borrowing availability to $3,000,000 and extended the expiration date of the
Facility. The Facility contains various covenants and requires the maintenance
of a net worth ratio. The Company was in compliance with all covenants during
the ten months ended December 31, 1999. The Facility has an expiration date of
August 31, 2000.
As of December 31, 1999, there was no debt outstanding under the Facility.
Interest on the Facility is at the Bank's prime rate of interest minus one
percent (7.5% as of December 31, 1999) or the LIBOR-based rate plus one and
three-quarters percent.
As of February 28, 1999, the Company's related debt outstanding under the
Facility was $500,000. The Company repaid its outstanding debt under the
Facility on March 18, 1999.
Note 4: Employee Benefit Plan
- ------- ---------------------
The Company has a multi-faceted defined contribution Retirement Savings Plan.
Employees age 21 and above with at least one year of service are eligible to
participate in the Plan. Under the 401(k) feature of the Plan, the Company
contributes 2% of base pay to each eligible salaried employee's account and, in
addition, matches 50% of the first 4% of pay which the employee contributes to
the Plan. The Plan also contains provisions for profit sharing contributions
determined annually by the Board of Directors. Total expense for the Retirement
Savings Plan was $67,000, $47,000, and $35,000 for the ten months ended December
31, 1999, and for the fiscal years ended February 28, 1999 and 1998,
respectively.
58
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Note 5: Income Taxes
- ------- ------------
The provision for income tax expense (benefit) consists of the following (in
thousands):
<TABLE>
<CAPTION>
For the Fiscal Years
For the Ten Ended February 28,
Months Ended ---------------------
December 31,1999 1999 1998
---------------- ---- ----
<S> <C> <C> <C>
Federal - current.......................... $ 322 5 436
- deferred......................... (83) 28 23
--- --- ---
239 33 459
--- --- ---
State - current.......................... 95 1 112
- deferred......................... (21) 7 6
--- --- ---
74 8 118
--- --- ---
$ 313 41 577
=== === ===
</TABLE>
A reconciliation between the U. S. federal statutory rate and the Company's
effective income tax rate is (in thousands):
<TABLE>
<CAPTION>
For the Fiscal Years
For the Ten Ended February 28,
Months Ended ---------------------
December 31,1999 1999 1998
---------------- ---- ----
<S> <C> <C> <C>
Computed tax expense at statutory
rate of 34% ............................... $ 253 23 483
Increase in taxes resulting from:
State income taxes, net of
federal benefit........................... 49 5 78
Miscellaneous items......................... 11 13 16
--- --- ---
$ 313 41 577
=== === ===
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
February 28,1999 are presented below (in thousands):
<TABLE>
<CAPTION>
December 31, February 28,
1999 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accruals of book costs, not yet
deductible for tax purposes........................... $ 408 318
Machinery and equipment, principally
due to differences in depreciation.................... 22 3
--- ---
Total gross deferred tax assets..................... 430 321
--- ---
Deferred tax liabilities:
Other ........................................... 17 12
--- ---
Total gross deferred tax liabilities................ 17 12
--- ---
Net deferred tax asset.............................. $ 413 309
=== ===
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not that the Company will realize the benefits of these
deductible differences at December 31, 1999.
59
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Note 6: Royalties
- ------- ---------
In April, 1996, a competitor filed suit against the Company and its parents,
alleging that certain of the products of the Company infringed a patent held by
the competitor.
On December 20, 1996, a Settlement Agreement was reached between the Company,
its parents, and the competitor. The competitor dismissed the action and granted
a license to the Company for certain of its products. In exchange for the
license, the Company agreed to dismiss its counterclaims and pay the competitor
a per system royalty. On December 31, 1996, the Company satisfied a $600,000
liability under the Settlement Agreement relative to systems installed to date.
The term of the Settlement Agreement continues until the expiration of the
competitor's patent; however, the Company's status as sole licensee will remain
in effect until December 31, 2000, and all orders related to licensed products
received by the Company after December 31, 2000 will not be subject to royalty
payments. Royalty expense under this agreement is charged to cost of sales.
Note 7: Commitments
- ------- -----------
Total rental expense, including short-term leases, for the ten months ended
December 31, 1999 and the fiscal years ended February 28, 1999 and 1998
approximated $74,000, $66,000, and $47,000, respectively.
Future minimum rental commitments at December 31, 1999 under operating leases
for office space is as follows (in thousands):
2000...........................$ 70,000
2001........................... 70,000
2002........................... 30,000
60
<PAGE>
SI/BAKER, INC.
Notes To Financial Statements (Continued)
Note 8: Related Party Transactions
- ------- --------------------------
The Company has entered into various transactions with affiliated entities as
follows (in thousands):
<TABLE>
<CAPTION>
(a) McKesson Automated Prescription
Systems, Inc. (50% Stockholder):
December February
Balance Sheets Data 31, 1999 28, 1999
----------- ---------
<S> <C> <C>
Amount included in trade
receivables......................... $ 130 135
Amount included in other
receivables......................... 56 63
Amount included in costs and
estimated earnings in
excess of billings.................. 155 -
Amount included in accounts
payable............................. - 5
Amount included in accrued
royalties payable................... 31 41
Amount included in accrued
other liabilities................... 50 -
</TABLE>
<TABLE>
<CAPTION>
For the Fiscal Years
For the Ten Ended February 28,
Months Ended ---------------------------
Statements of Operations Data December 31, 1999 1999 1998
----------------- ---------- ----------
<S> <C> <C> <C>
Sales of systems and services......... $ 216 259 1,113
Systems and services
purchased for resale
under various subcontracts.......... 115 193 266
Royalty expense to parent
companies........................ 210 161 400
Other income - royalty income....... 95 87 80
</TABLE>
<TABLE>
<CAPTION>
(b) SI Handling Systems, Inc. (50% Stockholder):
December February
Balance Sheets Data 31, 1999 28, 1999
----------- ---------
<S> <C> <C>
Amount included in trade
receivables......................... $ 21 -
Amount included in accounts
payable............................. 64 10
Amount included in accrued
royalties payable................... 31 41
</TABLE>
<TABLE>
<CAPTION>
For the Ten For the Fiscal Years
Months ended Ended February 28,
Statements of Operations Data December 31, 1999 1999 1998
----------------- ---------- ----------
<S> <C> <C> <C>
Systems and services
purchased for resale under
various subcontracts................ $ 237 463 1,120
Systems and services sold
under various subcontracts.......... 60 - -
Purchase of administrative and
other services...................... 116 113 98
Royalty expense to parent
companies........................... 210 161 400
</TABLE>
61
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Annual Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SI HANDLING SYSTEMS, INC.
Dated: March 30, 2000 By /s/ Elmer D. Gates
--------------------------------------
Elmer D. Gates
Chairman of the Board of Directors
Dated: March 30, 2000 By /s/ William R. Johnson
--------------------------------------
William R. Johnson
President and Chief Executive Officer
62
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated. This Annual
Report may be signed in multiple identical counterparts, all of which taken
together, shall constitute a single document.
Dated: March 30, 2000 /s/ Elmer D. Gates
------------------------------------------------
Elmer D. Gates
Chairman of the Board of Directors
Dated: March 30, 2000 /s/ William R. Johnson
------------------------------------------------
William R. Johnson
President & Chief Executive Officer, Director
Dated: March 30, 2000 /s/ William F. Moffitt
------------------------------------------------
William F. Moffitt
Vice President-Finance, Chief Financial
Officer and Treasurer
(Principal Accounting and Financial Officer)
Dated: March 30, 2000 /s/ Leon C. Kirschner
------------------------------------------------
Leon C. Kirschner
Corporate Vice President, and
President of Ermanco Incorporated, Director
Dated: March 30, 2000 /s/ L. Jack Bradt
------------------------------------------------
L. Jack Bradt
Director
Dated: March 30, 2000 /s/ Michael J. Gausling
------------------------------------------------
Michael J. Gausling
Director
Dated: March 30, 2000 /s/ Steven Shulman
------------------------------------------------
Steven Shulman
Director
63
<PAGE>
EXHIBIT INDEX
21 - SUBSIDIARIES OF THE REGISTRANT
23 - CONSENT OF INDEPENDENT AUDITORS
27 - FINANCIAL DATA SCHEDULE
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Ermanco Incorporated, a wholly-owned subsidiary of SI Handling Systems, Inc.
SI/BAKER, INC., 50% owned joint venture with McKesson Automated Prescription
Systems, Inc.
SI-Egemin N.V., 50% owned joint venture with Egemin N.V.
EXHIBIT 23
The Board of Directors
SI Handling Systems, Inc.:
We consent to the incorporation by reference in the registration statements (No.
333-10181, No. 333-25555, and No. 333-36397) on Form S-8 of SI Handling Systems,
Inc. of our report dated March 7, 2000, except for Note 14 which is as of March
30, 2000, relating to the consolidated balance sheets of SI Handling Systems,
Inc. and subsidiary as of December 31, 1999, and the related statements of
operations, stockholders' equity and cash flows for the ten months ended
December 31, 1999 and for the years ended February 28, 1999 and March 1, 1998,
and all related schedules, which report appears in the December 31, 1999 annual
report on Form 10-K of SI Handling Systems, Inc.
/s/ KPMG LLP
KPMG LLP
Allentown, Pennsylvania
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-K FOR THE TEN MONTHS ENDED
DECEMBER 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000090045
<NAME> SI HANDLING SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,242
<SECURITIES> 0
<RECEIVABLES> 6,878
<ALLOWANCES> 54
<INVENTORY> 3,405
<CURRENT-ASSETS> 21,686
<PP&E> 10,122
<DEPRECIATION> 6,788
<TOTAL-ASSETS> 45,406
<CURRENT-LIABILITIES> 16,311
<BONDS> 15,451
<COMMON> 4,185
0
0
<OTHER-SE> 9,240
<TOTAL-LIABILITY-AND-EQUITY> 45,406
<SALES> 41,108
<TOTAL-REVENUES> 41,108
<CGS> 36,982
<TOTAL-COSTS> 36,982
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 444
<INCOME-PRETAX> (4,174)
<INCOME-TAX> (1,394)
<INCOME-CONTINUING> (2,780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,780)
<EPS-BASIC> (.72)
<EPS-DILUTED> (.73)
</TABLE>
