-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EkOClQmkwRQxl6ox1CdcjmOqHlenV3QQVuV0JiDCZat8Xs4pmZY6z67HiSYqZavN BE4cIqmECJtgZA/1Iyq+UQ== 0000090045-99-000022.txt : 19991220 0000090045-99-000022.hdr.sgml : 19991220 ACCESSION NUMBER: 0000090045-99-000022 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990930 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19991217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SI HANDLING SYSTEMS INC CENTRAL INDEX KEY: 0000090045 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION, MINING & MATERIALS HANDLING MACHINERY & EQUIP [3530] IRS NUMBER: 221643428 STATE OF INCORPORATION: PA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-03362 FILM NUMBER: 99776516 BUSINESS ADDRESS: STREET 1: 600 KUEBLER ROAD CITY: EASTON STATE: PA ZIP: 18040 BUSINESS PHONE: 6102527321 MAIL ADDRESS: STREET 1: P O BOX 70 CITY: EASTON STATE: PA ZIP: 18040 8-K/A 1 8-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K/A Current Report Pursuant to Section 13 or 15(d) of The Securities Act of 1934 Date of Report (Date of earliest event reported)..............September 30, 1999 SI HANDLING SYSTEMS, INC. ................................................................................ (Exact name of registrant as specified in its charter) Pennsylvania 0-03362 22-1643428 ................................................................................ (State or other (Commission (I.R.S. Employer jurisdiction File Number) Identification No.) of incorporation) 600 Kuebler Road, Easton, PA 18040 ................................................................................ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code..................610-252-7321 ................................................................................ (Former name or former address, if changed since last report.) Item 2. Acquisition or Disposition of Assets - ------ ------------------------------------ This Form 8-K/A amends the Form 8-K/A filed on December 14, 1999 to incorporate the signed Report of Independent Auditors in Item 7(a), the Audited Financial Statements of Ermanco Incorporated for the three years ended September 30, 1999. As previously reported, on September 30, 1999, SI Handling Systems, Inc. ("SI" or the "Company") completed the acquisition of all of the outstanding capital stock of Ermanco Incorporated, a Michigan corporation ("Ermanco"). Ermanco, headquartered in Spring Lake, Michigan, designs and installs complete conveying systems for a variety of manufacturing and warehousing applications. Under the terms of the Stock Purchase Agreement and based on Ermanco's definitive Closing Balance Sheet, the Company acquired all of the outstanding capital stock of Ermanco for a purchase price of $22,801,000 consisting of $15,301,000 in cash, of which $1,551,000 is held in escrow, $3,000,000 in promissory notes payable to the fourteen stockholders of Ermanco, and 481,284 shares of the Company's common stock with a value of $4,500,000 based on the average closing price of $9.35 of the Company's common stock for the five trading days immediately preceding the date of the Stock Purchase Agreement, August 6, 1999. On the Closing Date of the acquisition, the purchase price was increased by $615,000 to $22,615,000 based upon Ermanco's projected net working capital for the period ended September 30, 1999. Under the terms of the Stock Purchase Agreement, upon receipt of the definitive Closing Balance Sheet, any difference between the guaranteed amount of $2,700,000 would increase or decrease the cash portion of the purchase price paid effective as of the Closing Date. Subsequent to the Closing Date of the acquisition, the Company received Ermanco's definitive Closing Balance Sheet and the purchase price was increased by $186,000 to $22,801,000 based on the actual net working capital. The total working capital adjustment of $801,000 has been added to the escrow and this amount will be paid to the Sellers upon completion and acceptance of the Post-Closing Audit. Therefore, the purchase price is subject to further adjustment pending the acceptance by the Company and the Sellers of the Post-Closing Audit. Any funds remaining in escrow eighteen months following the Closing will be distributed to the selling stockholders of Ermanco. The acquisition of the Ermanco technology complements and expands the Company's current product offerings. Ermanco's products, property, equipment, and personnel will continue to be located in Spring Lake, Michigan and operate as a wholly owned subsidiary of the Company. The Company has not yet received an appraisal on Ermanco's property, plant and equipment and it will continue to review the allocation of the purchase price. On the Closing Date, the Company entered into employment agreements with four employees, Leon C. Kirschner, Thomas C. Hubbell, Lee F. Schomberg, and Gordon A. Hellberg. Mr. Kirschner and Steven Shulman, another principal stockholder of Ermanco, joined the Board of Directors of the Company. In order to complete the acquisition of Ermanco, the Company obtained financing from its principal bank, First Union National Bank ("First Union"). The Company entered into a new three-year line of credit facility which may not exceed the lesser of $6,000,000 or an amount based on a borrowing base formula tied principally to accounts receivable, inventory, fair market value of the Company's property and plant, and liquidation value of equipment, plus an amount equal to $2,500,000. This amount shall be reduced by $625,000 every six months during the first two years of the line of credit facility until such amount reaches zero, minus the unpaid principal balance of the term loan described below. The line of credit facility is to be used primarily for working capital purposes and closing costs associated with the Ermanco acquisition. The line of credit facility replaced the Company's former $5,000,000 committed revolving credit facility with First Union. The Company also received $14,000,000 in the form of a seven-year term loan from First Union to finance the acquisition. During the first two years of the term loan, the Company will repay First Union equal quarterly payments of $312,500 plus accrued interest. After the second anniversary of the September 30, 1999 Closing Date, the Company will make equal quarterly payments of $575,000 plus accrued interest. The interest rate on the term loan is the three-month LIBOR Market Index Rate plus two and three-quarters percent. The Company entered into an interest rate swap agreement for fifty percent of the term loan to hedge the floating interest rate. The Company entered into a seven-year interest rate swap for $7,000,000 of the term loan at a fixed interest rate of 9.38%. In order to obtain the line of credit and term loan, the Company granted First Union a security interest in all personal property, including, without limitation, all accounts, deposits, documents, equipment, fixtures, general intangibles, goods, instruments, inventory, letters of credit, money, securities, and a first mortgage on all real estate owned by the Company and Ermanco. The line of credit facility and term loan contain various restrictive covenants relating to additional indebtedness, asset acquisitions or dispositions, investments, guarantees, payment of dividends, and maintenance of certain financial ratios. The promissory notes issued to the fourteen stockholders of Ermanco total $3,000,000, have a term of seven years, and bear interest at an annual rate of ten percent in years one through three, twelve percent in years four and five, and fourteen percent in years six and seven. Interest on the promissory notes shall be payable quarterly, in cash, or under certain conditions, in the Company's common stock upon approval of the Company's Board of Directors. The promissory notes may be prepaid prior to the end of the seven-year term as long as the Company has no debt outstanding under its line of credit facility and term loan. SI and Ermanco serve common North American marketplaces, with clients and customers in the automotive/transportation, computer, newspaper/publishing, pharmaceutical/cosmetic, entertainment, and warehousing business. The Company believes the acquisition of Ermanco will enhance SI's automated materials handling capability in all marketplace segments. Item 7. Financial Statements and Exhibits. - ------ --------------------------------- (a) Audited Financial Statements of Ermanco Incorporated for the three years ended September 30, 1999. (b) Pro Forma Financial Information. (c) Exhibits - None. Financial Statements Ermanco Incorporated Three years ended September 30, 1999 ERNST & YOUNG LLP Ermanco Incorporated Financial Statements Three years ended September 30, 1999 Contents Report of Independent Auditors.................................................1 Audited Financial Statements Balance Sheets.................................................................2 Statements of Shareholders' Equity.............................................4 Statements of Operations.......................................................5 Statements of Cash Flows.......................................................6 Notes to Financial Statements..................................................7 Ernst & Young LLP Suite 1000 171 Monroe Avenue, N.W. Grand Rapids, Michigan 49503 Suite 910 Old Kent Bank Building 136 East Michigan Avenue Kalamazoo, Michigan 49007 Report of Independent Auditors Board of Directors Ermanco Incorporated We have audited the accompanying balance sheets of Ermanco Incorporated as of September 30, 1999 and 1998, and the related statements of shareholders' equity, operations and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ermanco Incorporated at September 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. /S/ Ernst & Young LLP --------------------- Ernst & Young LLP October 27, 1999 Ermanco Incorporated Balance Sheets
September 30 1999 1998 ----------------------------- Assets Current assets: Cash and cash equivalents $ 420,595 $1,219,877 Accounts receivable, less allowances (1999--$48,000; 1998--$45,000) 4,828,180 3,146,955 Inventories 1,000,145 1,039,471 Costs and estimated earnings in excess of billings on uncompleted contracts 875,718 Prepaid expenses and other current assets 301,398 313,993 Federal tax deposit 353,876 ----------------------------- Total current assets 7,779,912 5,720,296 Property and equipment: Land and leasehold improvements 568,982 550,362 Machinery and equipment 1,271,370 1,144,493 Office equipment 1,142,379 901,634 ----------------------------- 2,982,731 2,596,489 Less accumulated depreciation 1,761,973 1,553,603 ----------------------------- 1,220,758 1,042,886 Federal tax deposit 385,845 ----------------------------- $9,000,670 $7,149,027 =============================
September 30 1999 1998 ----------------------------- Liabilities and shareholders' equity Current liabilities: Accounts payable $2,736,652 $1,396,694 Billings in excess of costs and earnings on uncompleted contracts 503,175 641,852 Accrued compensation and related taxes 258,725 417,956 Accrued federal income taxes 300,000 Accrued state income taxes 213,000 40,363 Dividends payable 316,618 Other current liabilities 248,591 177,804 Current portion of capital lease obligations 18,621 --------------------------- Total current liabilities 4,278,764 2,991,287 Capital lease obligations, less current portion 15,404 Shareholders' equity: Common stock, par value $1 per share-- 200,000 shares authorized; 72,350 shares in 1999 and 71,300 shares in 1998 issued and outstanding 72,350 71,300 Additional paid-in capital 573,459 469,509 Retained earnings 4,060,693 3,616,931 ----------------------------- 4,706,502 4,157,740 ----------------------------- $9,000,670 $7,149,027 =============================
See accompanying notes to financial statements. Ermanco Incorporated Statements of Shareholders' Equity
Additional Common Paid-in Retained Stock Capital Earnings Total ------------------------------------------- Balance at October 1, 1996 $67,475 $216,638 $1,936,401 $2,220,514 Net earnings 2,602,953 2,602,953 Issuance of 2,300 shares 2,300 89,700 92,000 Cash dividends declared ($23 per share) (1,637,800) (1,637,800) ------------------------------------------- Balance at September 30, 1997 69,775 306,338 2,901,554 3,277,667 Net earnings 2,705,264 2,705,264 Issuance of 2,875 shares 2,875 184,000 186,875 Purchase of 1,350 shares (1,350) (20,829) (38,287) (60,466) Cash dividends declared ($27 per share) (1,951,600) (1,951,600) ------------------------------------------- Balance at September 30, 1998 71,300 469,509 3,616,931 4,157,740 Net earnings 3,472,720 3,472,720 Issuance of 1,050 shares 1,050 103,950 105,000 Cash dividends declared ($43 per share) (3,028,958) (3,028,958) =========================================== Balance at September 30, 1999 $72,350 $573,459 $4,060,693 $4,706,502 ===========================================
( ) Denotes reduction. See accompanying notes to financial statements. Ermanco Incorporated Statements of Operations
Year ended September 30 1999 1998 1997 ---------------------------------------- Net sales $31,417,481 $26,294,618 $29,978,804 Cost of products sold 22,855,268 19,603,962 23,001,207 ---------------------------------------- Gross profit 8,562,213 6,690,656 6,977,597 Selling expenses 2,388,580 1,990,259 2,093,717 General and administrative expenses 2,527,471 2,178,664 2,432,123 ---------------------------------------- 4,916,051 4,168,923 4,525,840 ---------------------------------------- Operating profit 3,646,162 2,521,733 2,451,757 Other income (expense): Interest income 56,604 57,745 54,668 Royalty income 90,450 156,821 164,990 Amortization of intangibles (17,324) (54,688) Other (9,726) 461 977 ---------------------------------------- 137,328 197,703 165,947 ---------------------------------------- Earnings before income taxes 3,783,490 2,719,436 2,617,704 Income taxes 310,770 14,172 14,751 ---------------------------------------- Net earnings $ 3,472,720 $ 2,705,264 $ 2,602,953 ========================================
See accompanying notes to financial statements. Ermanco Incorporated Statements of Cash Flows
Year ended September 30 1999 1998 1997 ---------------------------------------- Operating activities Net earnings $3,472,720 $2,705,264 $2,602,953 Adjustments necessary to reconcile net earnings to net cash provided by operating activities: Noncash charges to earnings: Depreciation 208,370 248,999 208,507 Amortization 17,324 54,688 Loss on disposal of equipment 2,417 3,667 ---------------------------------------- 208,370 268,740 266,862 Changes in operating assets and liabilities: Accounts receivable (1,681,225) (340,919) 1,243,492 Inventories 39,326 106,166 (53,690) Other current operating assets (863,123) 106,366 158,622 Accounts payable 1,339,958 434,714 (908,491) Other current liabilities 245,516 (329,958) (705,542) ---------------------------------------- (919,548) (23,631) (265,609) ---------------------------------------- Net cash provided by operating activities 2,761,542 2,950,373 2,604,206 Investing activities Additions to property and equipment (350,712) (446,411) (413,779) Federal tax deposit 31,969 (166,779) (69,667) ---------------------------------------- Net cash used in investing activities (318,743) (613,190) (483,446) Financing activities Purchase of common stock (60,466) Payments on capital lease obligations (1,505) Sale of common stock 105,000 186,875 92,000 Cash dividends paid (3,345,576) (2,017,119) (1,569,678) Other (33,184) (33,141) ---------------------------------------- Net cash used in financing activities (3,242,081) (1,923,894) (1,510,819) ---------------------------------------- Increase (decrease) in cash and cash equivalents (799,282) 413,289 609,941 Cash and cash equivalents at beginning of year 1,219,877 806,588 196,647 ---------------------------------------- Cash and cash equivalents at end of year $ 420,595 $1,219,877 $ 806,588 ======================================== ( ) Denotes use of cash and cash equivalents.
See accompanying notes to financial statements. Ermanco Incorporated Notes to Financial Statements September 30, 1999 and 1998 Note A--Summary of Significant Accounting Policies Nature of Operations and Credit Risk Ermanco Incorporated (the Company) manufactures conveyors and designs and installs conveyor systems for a wide variety of domestic industrial and warehousing customers. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances for potential credit losses are maintained and such losses have historically been within expectations. Approximately 59% of the Company's workforce is covered by a collective bargaining agreement that will expire on May 31, 2000. Cash Equivalents The Company considers all investments with maturities of three months or less when purchased to be cash equivalents. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method. Revenue Recognition Revenues under contracts to design and install conveyor systems are recognized on the percentage-of-completion method at such time as reasonable estimates of the ultimate contract costs and profitability can be made. Revisions in earnings estimates on systems contracts are recorded in the accounting period in which the basis for such revision becomes known. Any anticipated losses on contracts are recognized as soon as such losses become apparent. Revenues for product sales are recognized when the goods are shipped. Ermanco Incorporated Notes to Financial Statements (continued) Note A--Summary of Significant Accounting Policies (continued) Property and Equipment Property and equipment are stated on the basis of cost and include expenditures for major renewals and betterments. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Depreciation of equipment, including amounts amortized under capital leases, is computed on the straight-line method over the estimated useful lives of the assets. Intangibles Intangibles (primarily patents) were amortized over their remaining legal lives on the straight-line method. Stock Options The Company follows Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its employee stock options. Under APB Opinion No. 25, no compensation expense is recognized because the Board of Directors establishes the exercise price of the Company's employee stock options to equal the estimated fair value of the underlying stock on the date of grant. New Accounting Standard Not Yet Adopted In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement will require the Company to record all derivatives on the balance sheet at fair value. Changes in the fair value of derivatives that do not meet the criteria to be treated as a hedge under the Statement will be included in earnings. If derivatives meet the hedge criteria, changes in the fair value of the derivatives will offset changes in the fair value of the items being hedged. The Statement is required to be adopted by the Company beginning in the first quarter of 2001. The Company has not determined what effect the Statement will have on the Company's results of operations or financial position when adopted. Ermanco Incorporated Notes to Financial Statements (continued) Note A--Summary of Significant Accounting Policies (continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Note B--Inventories The components of inventory are as follows:
September 30 1999 1998 ------------------------------------ Stock inventory $ 870,509 $ 890,167 Work in process 129,636 149,304 ------------------------------------ $ 1,000,145 $ 1,039,471 ====================================
If the first-in, first-out method had been used to value inventory, the carrying amount of inventory would have been approximately $142,000 and $156,000 higher than reported at September 30, 1999 and 1998, respectively. Note C--Line of Credit The Company has an unsecured line-of-credit agreement with a bank that provides for borrowings through December 31, 1999 of up to $3,000,000, with interest at the bank's prime rate (8.25% at September 30, 1999) less 0.25%. The bank agreement contains certain covenants that require the Company, among other things, to maintain a tangible net worth of not less than $1,650,000 and a current ratio of not less than 1.2 to 1. There were no outstanding borrowings under the line-of-credit agreement at any time during 1999 or 1998. The Company does not pay a commitment fee on available funds under this credit agreement. Ermanco Incorporated Notes to Financial Statements (continued) Note D--Leases The Company leases its principal manufacturing and office facility from a partnership affiliated through common ownership. The leasing agreement requires fixed monthly rentals of $28,000 (with annual increases of 2.5%) plus a variable portion based on the lessor's borrowing rate and the unpaid mortgage balance. Amounts paid under this lease arrangement were approximately $353,000 in 1999, $348,000 in 1998 and $340,000 in 1997. This operating lease expires on October 31, 2003. Under the terms of the lease, the Company is required to pay all taxes, insurance and other ownership-related costs of the property. The Company also leases certain automobiles, machinery, computer equipment and software under agreements expiring at various dates through 2004. At September 30, 1998, minimum rental payments due under all noncancelable operating leases are as follows: 2000--$543,000; 2001--$487,000; 2002--$391,000; 2003--$373,000; 2004--$36,000. Rental expense was approximately $516,000 in 1999, $550,000 in 1998 and $485,000 in 1997. During fiscal 1999, the Company entered into two financing agreements related to the lease of computer software, which have been recorded as capital leases. These agreements had a total initial contract value of $35,530. Remaining amounts outstanding at September 30, 1999 are as follows: Payments by year: 2000 $22,615 2001 10,099 2002 7,574 ------------ 40,288 Less amounts representing interest 6,263 ------------ 34,025 Less current portion 18,621 ------------ $15,404 ============ Ermanco Incorporated Notes to Financial Statements (continued) Note D--Leases (continued) Amounts recorded as property and equipment under these capital lease agreements at September 30, 1999 are as follows: Office equipment $35,530 Less accumulated depreciation 1,240 ------------ $34,290 ============ Note E--Income Taxes Effective October 1, 1994, the shareholders of the Company elected under Subchapter S of the Internal Revenue Code to include the Company's taxable income in their own income for federal income tax purposes. As a condition of electing S corporation status, the Internal Revenue Code required the Company to recapture its tax LIFO inventory reserve and include it as taxable income in its fiscal 1994 tax return. Federal income taxes on the recapture were payable over a four-year period beginning in fiscal 1995, with such amounts paid in full during fiscal 1998. As a condition of S corporation election with a taxable year ending on a date other than the calendar year, the Company is required to maintain on deposit an estimate of the federal income tax that would otherwise be due and payable for the period from the taxable year end to December 31. This deposit equaled $353,876 and $385,845 at September 30, 1999 and 1998, respectively. The deposit is classified as current at September 30, 1999, as the Company will no longer qualify for S corporation status as a result of the sale transaction (see Note I). The accrued federal income taxes payable at September 30, 1999 amounting to $300,000 represent an estimate of the built-in gains tax that will become due, as the sale of the Company will occur before the tenth anniversary of its S corporation election. This amount is combined with foreign income taxes of $10,770 in the 1999 income tax provision and is currently payable. The 1998 and 1997 income tax provisions are composed solely of foreign income taxes due on foreign royalty income. Note F--Retirement Plans The Company sponsors a defined benefit pension plan covering substantially all union employees. Pension costs are actuarially determined and include amortization of the initial accrued liability over the average years of future service of plan participants. Ermanco Incorporated Notes to Financial Statements (continued) Note F--Retirement Plans (continued) The following table sets forth the funded status of the Company's defined benefit plan:
September 30 1999 1998 ------------------------------------- Benefit obligation $334,333 $283,886 Fair value of plan assets 454,606 348,540 ------------------------------------- Funded status $120,273 $ 64,654 ===================================== Prepaid benefit cost, recorded within prepaid expenses and othercurrent assets on balance sheets $ 47,767 $ 37,329 ===================================== Actuarial assumptions: Discount rate 7.0% 7.0% Expected return on plan assets 8.0 8.0
Other information regarding amounts expensed, amounts contributed and benefits paid are as follows:
Year ended September 30 1999 1998 1997 ---------------------------------------------- Benefit cost $26,562 $22,679 $20,122 Employer contributions 37,000 46,020 37,255 Benefits paid 2,080 4,280 2,080
The Company also has a profit-sharing plan for certain key employees and a 401(k) plan for substantially all employees who have completed one year of service. Amounts contributed under the profit-sharing plan are made at the discretion of the Board of Directors and, under the 401(k) plan, on a partial matching basis. The Company made no contributions to the profit-sharing plan during 1999, and made contributions of $35,000 in 1998 and $50,000 in 1997. Company contributions under the 401(k) plan were $55,000 in 1999 and $37,000 in 1998 and 1997. Ermanco Incorporated Notes to Financial Statements (continued) Note G--Stock Option Plan The Company has an incentive stock plan whereby options are granted to certain key employees of the Company and are exercisable over a period of time at fair market value per share as estimated by the Board of Directors. A summary of the transactions and shares under option are as follows:
Year ended September 30 1999 1998 -------------------------- Outstanding at beginning of year 1,200 3,250 Granted 1,200 Exercised (850) (2,375) Canceled (350) (875) -------------------------- Outstanding at end of year -0- 1,200 ========================== Available for future grants -0- 10,300 ==========================
Note H--Stock Repurchase Agreements The Company has agreements with the majority of its shareholders to repurchase their common stock in the event of death, disability or termination of employment. In addition, the Company has the first option to repurchase any shares of common stock a shareholder offers for sale. The other shareholders have the second option to repurchase such shares. Shares issued under the Company's stock option plan are subject to repurchase at the higher of the initial purchase price or a price based on the net book value per share as defined in the agreement. The redemption price for the other shares subject to repurchase agreements is the fair value of the shares as determined by an independent appraiser. The purchase price may be paid immediately or in equal quarterly installments, including interest at prime plus 1.5%, over a period of not more than ten years. The Company maintains term life insurance policies on certain shareholders in amounts sufficient to discharge any obligations to repurchase the common stock in the event of the death of such shareholders. Ermanco Incorporated Notes to Financial Statements (continued) Note I--Sale of Company On August 12, 1999, the Board of Directors and shareholders of Ermanco Incorporated approved a Stock Purchase Agreement whereby the shareholders would sell all of the issued and outstanding common stock of the Company to SI Handling Systems, Inc. effective September 30, 1999. The purchase price would be $22,000,000, adjusted for working capital and other specified adjustments at closing, as defined in the agreement, based upon the final September 30, 1999 balance sheet of the Company. Note J--Year 2000 Readiness (unaudited) The year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 instead of 2000. This situation could result in a system failure or miscalculations that cause disruptions of operations. The Company has evaluated its existing information systems and has determined that they are year 2000 compliant. The Company has initiated formal communications with its significant customers and vendors to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own year 2000 issues. Management cannot guarantee that systems of other companies on which the Company relies will be year 2000 compliant and, in the event of noncompliance, would not have an adverse effect on the Company. SI HANDLING SYSTEMS, INC. SELECTED UNAUDITED PRO FORMA FINANCIAL DATA The following unaudited pro forma condensed consolidated balance sheet includes the historical condensed balance sheet of SI Handling Systems, Inc. ("SI Handling") at August 29, 1999 and the pro forma adjustments to reflect the Ermanco Incorporated ("Ermanco") acquisition as if the transaction occurred on August 29, 1999. The pro forma information should be read in conjunction with the Company's historical financial statements previously filed with the Commission. SI HANDLING SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF AUGUST 29, 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
HISTORICAL HISTORICAL SIHS ERMANCO PRO FORMA PRO FORMA 08/29/1999 08/29/1999 ADJUSTMENTS CONSOLIDATED ------------------------------------------------- Current assets: Cash 105 552 (505)(A)(B) 152 Receivables 6,465 5,584 (420)(C) 11,629 Costs and estimated earnings in excess of billings 5,753 0 588 (C) 6,341 Inventories 2,321 1,419 60 (A)(D) 3,800 Deferred income tax benefits 905 0 905 Prepaid expenses and other current assets 265 423 688 ----------------------------------------------- Total current assets 15,814 7,978 (277) 23,515 ----------------------------------------------- Property, plant and equipment, at cost: Property, plant and equipment 8,162 2,909 11,071 Less: accumulated depreciation 6,612 1,700 8,312 ----------------------------------------------- Property, plant and equipment, net 1,550 1,209 0 2,759 ----------------------------------------------- Deferred income tax benefits 276 0 276 Investments in joint ventures 1,237 0 1,237 Goodwill 453 0 19,225 (A)(D)(E) 19,678 Other assets 89 0 200 (A)(F) 289 ----------------------------------------------- Total assets 19,419 9,187 19,148 47,754 =============================================== Current liabilities: Note payable to bank 0 0 2,081 (A)(G) 2,081 Current installments of long-term debt 20 20 1,250 (A)(H) 1,290 Accounts payable 2,230 2,418 (142)(D) 4,506 Customers' deposits and billings in excess of costs and estimated earnings 2,887 552 168 (C) 3,607 Accrued salaries, wages, and commissions 753 747 1,500 Income taxes payable 25 358 155 (D) 538 Accrued royalties payable 232 0 232 Accrued product warranties 672 51 723 Accrued pension and retirement savings plan liabilities 577 23 600 Accrued other liabilities 296 389 685 ----------------------------------------------- Total current liabilities 7,692 4,558 3,512 15,762 ----------------------------------------------- Long-term liabilities: Long-term debt, excluding current installments: Capital lease obligation 0 15 15 Term loan 0 0 12,750 (A)(I) 12,750 Subordinated notes 0 0 3,000 (A)(J) 3,000 ----------------------------------------------- Total long-term debt 0 15 15,750 15,765 Deferred compensation 449 0 449 ----------------------------------------------- Total long-term liabilities 449 15 15,750 16,214 ----------------------------------------------- Shareholders' equity: Common stock 3,704 646 (165)(A)(K) 4,185 Additional paid-in capital 2,798 2,289 1,730 (A)(K) 6,817 Retained earnings 4,776 1,679 (1,679)(A)(K) 4,776 ----------------------------------------------- Total shareholders' equity 11,278 4,614 (114) 15,778 ----------------------------------------------- Total liabilities and shareholders' equity 19,419 9,187 19,148 47,754 =============================================== Notes (in thousands, except share and per share data): (A) To reflect the excess of acquisition cost over the estimated fair value of net assets acquired (goodwill). The purchase price, purchase-price allocation, and financing of the transaction are summarized as follows: Purchase price paid as: Subordinated notes 3,000 Term loan (current portion of $1,250, and long-term portion of $12,750) 14,000 Common stock 481 Additional paid-in capital 4,019 Line of credit from September 30, 1999 through October 4, 1999 2,081 Cash 505 ------ Total purchase consideration and other acquisition costs 24,086 ------ Allocated to: Historical book value of Ermanco's assets and liabilities 4,614 Adjustments to step-up assets and liabilities to fair value: Inventory 60 Income taxes payable (155) Accounts payable 142 Deferred debt expense associated with acquisition financing 200 ------ Total allocation 4,861 ------ Excess purchase price over allocation to identifiable assets and liabilities (goodwill) 19,225 ====== To reflect the purchase of Ermanco DR Investment in Ermanco 4,614 DR Goodwill 19,272 DR Deferred debt expense 200 CR Common stock 481 CR Additional paid-in capital 4,019 CR Note payable to bank 2,081 CR Subordinated notes payable 3,000 CR Current portion of long-term debt 1,250 CR Term loan - long-term portion 12,750 CR Cash 505 To reflect the elimination of the investment in Ermanco DR Common stock 646 DR Additional paid-in capital 2,289 DR Retained earnings 1,679 CR Investment in Ermanco 4,614 (B) To reflect the cash outlay of $505 associated with the acquisition of Ermanco. (C) To reflect the adjustment necessary to properly record intercompany purchases of $588 in costs and estimated earnings in excess of billings and accounts payable on the books of SI Handling Systems, Inc. DR Costs and estimated earnings in excess of billings 588 CR Accounts payable 588 To reflect the elimination of intercompany account balance DR Accounts payable 588 CR Accounts receivable 420 CR Customer deposits and billings in excess of costs and estimated earnings 168 (D) To reflect the adjustment necessary to properly record accounts payable on the books of Ermanco (See (A) above) DR Accounts payable 142 CR Goodwill 142 To reflect the step-up of $60 in inventory to fair value related to Ermanco (See (A) above) DR Inventory 60 CR Goodwill 60 To reflect the adjustment necessary to record income taxes payable of $155 on the books of Ermanco (See (A) above) DR Goodwill 155 CR Income taxes payable 155 (E) To reflect the excess of acquisition costs over the estimated fair value of net assets acquired (goodwill). (F) To reflect the deferred debt expense of $200 associated with the acquisition financing. (G) To reflect the utilization of $2,081 of the line of credit facility to finance the cash portion of the purchase price and other acquisition costs. (H) To reflect the issuance of $1,250 in new debt (current portion of term loan) to finance the cash portion of the purchase price. (I) To reflect the issuance of $12,750 of new debt (long-term portion of term loan) to finance the cash portion of the purchase price. (J) To reflect the issuance of $3,000 of subordinated notes payable to the fourteen selling stockholders of Ermanco. (K) To reflect the issuance of 481,284 shares of SI Handling Systems common stock (par value of $1.00 per share) with a market value of $4,500 as partial consideration for the purchase, and the elimination of the shareholders' equity accounts of Ermanco totaling $4,614.
SI HANDLING SYSTEMS, INC. SELECTED UNAUDITIED PRO FORMA FINANCIAL DATA The following selected unaudited pro forma consolidated statements of operations data gives effect to the acquisition of Ermanco Incorporated ("Ermanco") as if the transaction occurred at the beginning of the 1999 fiscal year and was in effect through the period ended August 29, 1999. The pro forma data presented below should be read in conjunction with the Company's financial statements previously filed with the Commission and pro forma condensed consolidated financial information and accompanying assumptions previously included elsewhere herein. Such data is not necessarily indicative of the results of operations that would have been achieved had the transaction described above occurred on the date indicated or that may be expected to occur in the future as a result of such transaction.
SI HANDLING SYSTEMS, INC. SI HANDLING SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 28, 1999 FOR THE SIX MONTHS ENDED AUGUST 29, 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ---------------------------------------------------- ---------------------------------------------------- HISTORICAL HISTORICAL -------------------------- (1) PRO FORMA -------------------------- (1) PRO FORMA SIHS ERMANCO PRO FORMA CONSOLIDATED SIHS ERMANCO PRO FORMA CONSOLIDATED 2/28/99 2/28/99 COMBINED ADJUSTMENTS RESULTS 8/29/99 8/29/99 COMBINED ADJUSTMENTS RESULTS ---------------------------------------------------- ---------------------------------------------------- Net sales 39,573 27,087 66,660 (315)(L) 66,345 21,569 16,889 38,458 (587)(R) 37,871 Cost of sales 30,859 20,198 51,057 (194)(L) 50,863 18,756 11,776 30,532 (587)(R) 29,945 ---------------------------------------------------- ---------------------------------------------------- Gross profit on sales 8,714 6,889 15,603 (121) 15,482 2,813 5,113 7,926 0 7,926 ---------------------------------------------------- ---------------------------------------------------- Selling, general and administrative expenses 6,353 4,133 10,486 10,486 3,456 2,464 5,920 5,920 Productive development costs 478 57 535 535 260 21 281 281 Intrest expense 20 20 1,604 (M) 1,624 10 10 803 (M) 813 Intrest income (166) (63) (229) 129 (N) (100) (46) (25) (71) 65 (N) (6) Equity in income of joint venture (14) (14) (14) (99) (99) (99) Amortization of goodwill - 481 (O) 481 38 38 240 (O) 278 Other income, net (191) (116) (307) (307) (118) (84) (202) (202) ---------------------------------------------------- ---------------------------------------------------- 6,480 4,011 10,491 2,214 12,705 3,501 2,376 5,877 1,108 6,985 ---------------------------------------------------- ---------------------------------------------------- Earnings (loss) before income taxes 2,234 2,878 5,112 (2,335) 2,777 (688) 2,737 2,049 (1,108) 941 Income tax expense (benefit) 856 (18) 838 226 (P) 1,064 (261) 256 (5) 365 (P) 360 ---------------------------------------------------- ---------------------------------------------------- Net earnings (loss) 1,378 2,896 4,274 (2,561) 1,713 (427) 2,481 2,054 (1,473) 581 ==================================================== ==================================================== Basic earnings (loss) per share 0.37 0.41 (0.12) 0.14 ==================================================== ==================================================== Diluted earnings (loss) per share 0.36 0.40 (0.12) 0.13 ==================================================== ==================================================== Average shares outstanding 3,718,887 3,718,887 481,284 (Q) 4,200,171 3,704,953 3,704,953 481,284 (Q) 4,186,237 Dilutive effect of stock options 27,173 27,173 27,173 0 0 13,046 13,046 Dilutive effect of phantom stock units 11,270 11,270 11,270 15,075 15,075 15,075 ---------------------------------------------------- ---------------------------------------------------- Average shares outstanding assuming dilution 3,757,330 3,757,330 481,284 4,238,614 3,720,028 3,720,028 494,330 4,214,358 ==================================================== ==================================================== Notes (in thousands, except share and per share data): (1) The following acquisition adjustments reflect results of operations as if the acquisition of Ermanco, which was concluded on September 30, 1999, had occurred on March 2, 1998. The results of operations are derived from the Company's historical statement of operations for the year ended February 28, 1999 and Ermanco's historical statement of operations for the twelve months ended February 28, 1999 and the Company's historical financial statements for the six months ended August 29, 1999 and Ermanco's historical financial statements for the six months ended August 29, 1999. In accordance with purchase accounting the assets acquired and liabilities assumed are recorded at the lower of the purchase price or fair value. The estimated fair value adjustments have been determined based upon the most recent information available. The resultant excess of purchase price and acquisition costs over the fair value of net assets acquired will be amortized on a straight-line basis over 40 years. The Company has not yet received an appraisal on Ermanco's property, plant and equipment, net; however, it does not believe that the historical value as stated in the Consolidated Pro Forma Balance Sheet is materially different from the appraised value. (L) To reflect the elimination of sales by Ermanco to SI Handling Systems ($315), and the adjustment to the estimated overall gross profit margin of $61 on the contract in which Ermanco is a supplier to SI, and to recognize the manufacturing profit of $60 in inventory at acquisition. (M) To reflect the increase in interest expense resulting from the issuance of debt to finance the acquisition of Ermanco. The annual interest rate on the new debt of $3,000 in subordinated notes payable to the fourteen selling stockholders of Ermanco over the seven year term is as follows: ten percent in years one through three, twelve percent in years four and five, and fourteen percent in years six and seven. The annualized effective interest rate over the seven year term is 11.714%. SI Handling also received $14,000 in the form of a seven-year term loan from its principal bank to finance the acquisition of Ermanco. The annual interest rate on the term loan of $14,000 is the three-month LIBOR Market Index Rate plus two and three-quarters percent. In order to partially hedge the term loan's floating interest expense, the Company entered into a seven-year interest rate swap for $7,000 of the term loan at a fixed interest rate of 9.38%. The annual interest rate on the $7,000 term loan which is not partially hedged is assumed to be 8.26%. A change of 1/8 percent in the interest rate on the part of the term loan which is not partially hedged would result in a change in interest expense and net earnings of $9 and $5 before and after taxes, respectively, for the year ended February 28, 1999. The annual amortization of deferred debt expense associated with the three-year line of credit facility is $20, while the annual amortization associated with the seven-year term loan is $20. 6 months ended 12 months ended Aug. 29, 1999 Feb. 28, 1999 ---------------------------------------- Interest expense is summarized as follows: To reflect amortization of deferred debt expense 20 40 To reflect interest expense: $7,000 Term loan hedged with an interest rate swap at 9.38% 323 645 $7,000 Term loan with an interest rate of three-month LIBOR plus 2.75% 284 568 Subordinate notes of $3,000 with an effective annual interest rate of 11.714% 176 351 ------------ ------------ Total interest expense (including amortization expense) 803 1,604 ------------ ------------ (N) To reflect the elimination of interest income earned on cash investments. Interest income earned on cash balances used to pay off the line of credit of $2,081 and cash outlays of $505 associated with the acquisition was eliminated. The interest income foregone was assumed at an annual interest rate of 5%. 65 129 ------------ ------------ (O) To reflect the increase in amortization expense due to the amortization of goodwill ($19,225) on a straight-line basis over 40 years. 240 481 ------------ ------------ (P) To reflect the adjustment to record income tax expense at an estimated effective rate of 38.3% (Q) To reflect the issuance of SI Handling Systems common stock as partial consideration for the purchase. (R) To reflect the elimination of sales by Ermanco to SI Handling Systems.
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SI HANDLING SYSTEMS, INC. /S/ William F. Moffitt William F. Moffitt Vice President - Finance (Principal Financial Officer) Dated: December 17, 1999 ----------------- -----END PRIVACY-ENHANCED MESSAGE-----