<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934.
For the quarterly period ended September 30, 1996.
Transition report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934.
For the transition period from to
--------------------- -------------------
Commission File Number 333-2600
ALVEY SYSTEMS, INC.
101 S. Hanley Road, Suite 1300
St. Louis, MO 63105
314/863-5776
I.R.S. Employment I.D. 43-0157210
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety days.
Yes X No
----- -----
The number of shares of common stock outstanding at October 31, 1996 was
1,000 shares.
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
three months and nine months ended September 30,
1996 (Unaudited) and 1995 (Unaudited). 3
Consolidated Balance Sheet - September 30, 1996
(Unaudited) and December 31, 1995 4
Consolidated Statement of Cash Flows -
nine months ended September 30, 1996 (Unaudited)
and 1995 (Unaudited) 5-6
Consolidated Statement of Net Investment
of Parent for the nine months ended September 30,
1996 (Unaudited) 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-21
Part II - Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 21
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 79,347 $ 68,271 $ 243,402 $ 207,305
Cost of goods sold 59,338 50,661 183,682 156,693
--------- --------- ---------- ----------
Gross profit 20,009 17,610 59,720 50,612
Selling, general and administrative expenses 14,704 12,518 44,574 36,800
Research and development expenses 1,332 289 3,155 1,293
Write-off of purchased research and development costs - - 11,700 -
Amortization expense 421 438 1,259 1,364
Other expense, net 63 33 1,531 43
--------- --------- ---------- ----------
Operating income (loss) 3,489 4,332 (2,499) 11,112
Interest expense 3,384 1,608 9,057 5,445
--------- --------- ---------- ----------
Income (loss) before provision for income taxes
and extraordinary loss 105 2,724 (11,556) 5,667
Provision for income taxes 322 1,354 742 2,834
--------- --------- ---------- ----------
Net income (loss) before extraordinary loss (217) 1,370 (12,298) 2,833
Extraordinary loss, net of tax benefits of $1,328 - - 1,993 -
--------- --------- ---------- ----------
Net income (loss) $ (217) $ 1,370 $ (14,291) $ 2,833
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
Page 3
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
(UNAUDITED)
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,602 $ 3,405
Receivables:
Trade (less allowance for doubtful accounts of $809 and $824, respectively) 46,792 42,567
Unbilled and other 8,989 6,211
Accumulated costs and earnings in excess of billings on uncompleted contracts 13,503 8,317
Inventories:
Raw materials 13,411 13,966
Work in process 2,936 5,720
Deferred income taxes 6,492 4,699
Prepaid expenses and other assets 1,807 1,665
---------- ----------
Total current assets 95,532 86,550
Property, plant and equipment, net 31,514 25,675
Other assets 9,727 6,031
Goodwill, net 35,887 32,029
---------- ----------
$ 172,660 $ 150,285
---------- ----------
---------- ----------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND NET INVESTMENT OF PARENT
Current liabilities:
Current portion of long-term debt $ 269 $ 6,915
Accounts payable 19,916 24,368
Accrued expenses 30,745 27,764
Customer deposits 10,210 12,107
Billings in excess of accumulated costs and earnings on uncompleted contracts 19,138 13,904
Deferred revenues 1,504 899
Taxes payable 1,285 994
---------- ----------
Total current liabilities 83,067 86,951
Long-term debt 101,568 42,460
Other long-term liabilities 9,341 5,075
Deferred income taxes 2,984 4,196
Commitments and contingencies (Notes 3 and 9)
Redeemable preferred stock:
Redeemable preferred stock of $.01 par value per share, authorized 0 and 500,000
shares, respectively:
Series A Senior Cumulative Exchangeable Preferred Stock of Pinnacle Automation, Inc.,
0 and 250,000 designated, 0 and 210,770 shares issued, 0 and 210,697
outstanding, respectively - 21,077
Cumulative Exchangeable Preferred Stock of Pinnacle Automation, Inc., 0 and
100,000 shares designated, 0 and 62,524 shares issued and outstanding, respectively - 6,252
Preferred stock in treasury, 0 and 73 Series A Senior Cumulative Stock of Pinnacle
Automation, Inc. - (7)
---------- ----------
Total redeemable preferred stock 0 27,322
Net investment of Parent (24,300) (15,719)
---------- ----------
$ 172,660 $ 150,285
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 4
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (14,291) $ 2,833
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Depreciation and software amortization 2,572 2,146
Amortization 1,259 1,364
Write-off of purchased research and development costs 11,700 -
Deferred taxes, net of effect of acquisitions (1,748) 1,638
Reduction of unamortized debt issue costs
included in extraordinary loss 2,963 -
(Increase) decrease in current assets, excluding
effect of acquisitions:
Receivables (6,674) (1,993)
Accumulated costs and earnings in excess of
billings on uncompleted contracts (5,186) (4,636)
Inventories 3,339 (1,099)
Other assets 1,005 (661)
(Decrease) increase in current liabilities,
excluding effect of acquisitions:
Accounts payable (4,544) (1,935)
Accrued expenses 2,798 2,874
Customer deposits (1,897) 5,933
Billings in excess of accumulated costs and
earnings on uncompleted contracts 5,234 4,851
Deferred revenues (285) (472)
Taxes payable 291 751
Other liabilities 2,244 (399)
----------- ----------
Net cash provided by (used for) operating activities (1,220) 11,195
----------- ----------
INVESTING ACTIVITIES:
Acquisition of Weseley, net of cash acquired of $28 (14,972) -
Payments for agreements not to compete (150) (150)
Cash payments to dispose of Lewiston (454) (2,754)
Software development costs (237) (368)
Additions to property, plant and equipment, net (7,900) (2,112)
----------- ----------
Net cash used for investing activities (23,713) (5,384)
----------- ----------
</TABLE>
(CONTINUED)
See accompanying Notes To Consolidated Financial Statements.
Page 5
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
---------- ----------
<S> <C> <C>
FINANCING ACTIVITIES:
Proceeds of borrowings 112,119 26,035
Payments of debt and capital leases (59,657) (31,451)
Redemption of preferred stock (27,600) -
Investment of Parent 5,981 41
Payments of debt issuance costs (7,713) -
Treasury preferred stock issuances - 35
----------- ----------
Net cash provided by (used for) financing activities 23,130 (5,340)
----------- ----------
Net increase (decrease) in cash and cash equivalents (1,803) 471
Cash and cash equivalents, beginning of period 3,405 2,580
----------- ----------
Cash and cash equivalents, end of period $ 1,602 $ 3,051
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on financings $ 6,646 $ 5,507
Income taxes 871 445
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Alvey Systems, Inc. purchased Weseley Software Development Corp.
in January 1996. In conjunction with the acquisition, liabilities
were assumed as follows:
Fair value of assets acquired $ 12,668
Fair value assigned to goodwill 4,841
Cash paid concurrent with the acquisition,
excluding cash acquired (14,972)
-----------
Liabilities assumed $ 2,537
-----------
-----------
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
Page 6
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET INVESTMENT OF PARENT
(UNAUDITED)
(dollars in thousands)
FOR THE NINE MONTHS ENDED NET INVESTMENT
SEPTEMBER 30, 1996 OF PARENT
Balance December 31, 1995 $ (15,719)
Net loss (14,291)
Net investment of Parent 5,981
Preferred stock dividend declared (271)
-----------
Balance September 30, 1996 $ (24,300)
-----------
-----------
See accompanying Notes To Consolidated Financial Statements.
Page 7
<PAGE>
ALVEY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Alvey
Systems, Inc. ("Alvey" or the "Company") have been prepared in accordance
with the instructions for Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion of
management, such information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
results of operations for the periods presented. Operating results for any
quarter are not necessarily indicative of the results for any other quarter
or for the full year. These statements should be read in conjunction with
the consolidated financial statements and notes to the consolidated
financial statements thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
2. PRINCIPLES OF CONSOLIDATION, EARNINGS PER SHARE INFORMATION
Alvey is a wholly-owned subsidiary of Pinnacle Automation, Inc. ("Pinnacle"
or "Parent"). Pinnacle has no operations and no assets other than its
investment in Alvey. The financial statements of the Company include the
accounts of Alvey and Alvey's direct and indirect wholly-owned
subsidiaries: McHugh Freeman & Associates, Inc. ("MFA"), Busse Bros., Inc.
("Busse"), The Buschman Company ("Buschman"), White Systems, Inc., formerly
White Storage & Retrieval Systems, Inc. ("White"), Pinnacle Automation
Canada, Inc. and Weseley Software Development Corp. ("Weseley"). All
significant intercompany transactions, which primarily consist of sales,
have been eliminated.
Given the historical organization and capital structure of the Company,
earnings per share information is not considered meaningful or relevant and
has not been presented in the accompanying unaudited consolidated financial
statements or notes thereto.
3. ACQUISITIONS
On January 29, 1996, Pinnacle, Alvey and MFA purchased all of the
outstanding capital stock of Weseley for a purchase price of $15 million in
cash. The acquisition was financed with a portion of the proceeds of the
Debt Offering (as
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defined in Note 4). In addition, subject to the continued employment of
the former principal shareholder of Weseley and other conditions, certain
employees of Weseley have an opportunity to earn stay bonuses in the
aggregate of $625,000 per year for each of eight years. Additional
incentive compensation up to an aggregate maximum of $13 million will be
charged to income when such amounts can be determined and payment thereof
is deemed probable.
The following table sets forth pro forma income statement data for Alvey as
if the Weseley acquisition had taken place on January 1, 1995. Such data
reflects the application of the purchase method of accounting. Amounts
have been preliminarily assigned to assets acquired and liabilities assumed
based on estimated fair values as of the date of acquisition pursuant to
valuations and other studies. This income statement data is unaudited and
does not purport to represent the results of operations had the acquisition
actually occurred on January 1, 1995.
PRO FORMA INFORMATION
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
-------------------------
1996 1995
---------- --------
Net sales $243,587 $209,852
Net income (loss) before extraordinary item (792) 1,590
Net income (loss) (2,785) 1,590
The pro forma results set forth above for the nine months ended September 30,
1996 and 1995 include actual results of Weseley for the periods prior to and
since the date of acquisition and certain pro forma adjustments. Based on the
results of an independent appraisal, $11.7 million of the Weseley purchase
price was allocated to purchased research and development costs at the date
of acquisition and was recorded as research and development expense in
Alvey's consolidated statement of operations during the first quarter of
1996. This research and development expense has been excluded from the pro
forma statement of operations as it represents a non-recurring charge to
income which resulted directly from the Weseley acquisition. Additional
goodwill amortization resulting from the Weseley purchase price allocation is
incorporated and is being amortized over a period of 10 years.
Page 9
<PAGE>
4. DEBT OFFERING AND RECAPITALIZATION OF PINNACLE
On January 24, 1996, Alvey issued and sold $100 million of 11 3/8% Senior
Subordinated Notes due 2003 (the "Debt Offering"). The proceeds of the
Debt Offering were used to repay all of Alvey's outstanding senior
indebtedness and certain other indebtedness, fund the acquisition of
Weseley, pay transaction fees, fund a dividend to Pinnacle of $21.5 million
and provide working capital for the ongoing operations of Alvey. As a
result of the repayment of the outstanding senior indebtedness, the Company
recorded an extraordinary loss of approximately $2.0 million representing
the write-off of related debt issuance costs and debt repayment penalties,
net of tax. In accordance with the terms of the Debt Offering, Alvey filed
a registration statement with the Securities and Exchange Commission with
respect to an offer to exchange the 11 3/8% Senior Subordinated Notes for a
new issue of debt securities of Alvey registered under the Securities Act of
1933 with terms substantially identical to those of the 11 3/8% Senior
Subordinated Notes. Such registration statement was declared effective on
May 9, 1996 and the exchange of $100 million in principal amount of the
original notes for $100 million in principal amount of registered notes was
completed on June 11, 1996. In addition, concurrent with the consummation
of the Debt Offering, Pinnacle sold preferred stock and warrants to
purchase its common stock to an investor group for $30 million in cash
proceeds (the "Preferred Stock Offering"). The proceeds of the Preferred
Stock Offering, together with the dividend from Alvey to Pinnacle, were
used to buy back certain shares of Pinnacle's outstanding common stock and
to redeem certain shares of its outstanding preferred stock which had been
pushed down to Alvey's consolidated financial statements. The preferred
stock and warrants from the Preferred Stock Offering have not been pushed
down to Alvey's consolidated financial statements as such preferred stock
and warrants are not exchangeable into securities of Alvey. While Alvey
has not guaranteed, nor is it contingently obligated with respect to the
preferred stock and warrants issued in the Preferred Stock Offering,
Pinnacle has no financial resources, other than from Alvey and Alvey's
operating subsidiaries, to satisfy cash requirements relative to these
shares.
5. REVOLVING CREDIT FACILITY
Concurrently with the consummation of the Debt Offering, Alvey entered into
a credit agreement (the "Credit Agreement") for a $30 million revolving
credit facility (the "Revolving Credit Facility ") which is guaranteed by
Pinnacle and each direct and indirect subsidiary of Alvey.
Indebtedness of Alvey under the Credit Agreement is secured by
substantially all of the personal property of Alvey and its subsidiaries,
all capital stock of Alvey and 100% of the capital stock of its domestic
subsidiaries (other than the portion of the shares of capital stock of
Busse which are pledged to secure certain non-compete payments).
Indebtedness under the Revolving Credit Facility bears interest at a rate
based upon, at Alvey's option, (i) the Base Rate (as defined in the
Revolving Credit Facility) plus 1.50% or (ii) the Euro-dollar Rate (as
defined in the Revolving Credit Facility) for one, two, three, six or, if
available, nine or twelve months, plus 2.5%; provided, however, the
interest rate
Page 10
<PAGE>
margins are subject to 0.25% reductions in the event Alvey meets certain
performance targets. The Revolving Credit Facility expires January 24,
2001. At September 30, 1996, borrowings outstanding under the Revolving
Credit Facility totaled $1.0 million.
6. REINCORPORATION
Effective January 16, 1996, the Company reincorporated in the State of
Delaware under the name Alvey Systems, Inc. The Company historically
conducted business as a Missouri corporation under the name Alvey, Inc.
7. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accrued expenses include the following (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
1996 1995
(Unaudited)
------------- ------------
Project expenses $ 5,152 $ 4,013
Bonuses, incentives and profit sharing 9,171 7,507
Wages and salaries 2,323 2,407
Vacation and other employee costs 7,517 7,064
Accrued interest 2,111 431
Plant disposal costs 665 1,119
Other expenses 3,806 5,223
------------- ------------
$30,745 $27,764
------------- ------------
------------- ------------
8. STOCK OPTIONS
Certain management employees have been granted options to purchase Pinnacle
common stock at exercise prices that approximated fair market value of the
shares at the dates of grant. Certain of these shares vest based on
performance while others vest over a period of employment. Option terms
expire in periods ranging from eight to ten years subsequent to the grant
date. For the period ended September 30, 1996, these options are
summarized as follows:
SHARES SUBJECT
AVERAGE PRICE TO OPTION
Granted at January 1, 1996 $20.53 36,691
Options granted in 1996 29.07 65,875
----------
Granted at September 30, 1996 26.01 102,566
----------
----------
Page 11
<PAGE>
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123"), which addresses
accounting for stock option, purchase and award plans. SFAS 123 specifies
that companies utilize either the "Fair value based method" or the
"Intrinsic value based method" for valuing stock options granted. The
Company currently utilizes and expects to continue to utilize the
"Intrinsic value based method" for valuing stock options granted when it
adopts SFAS 123. It is anticipated that the Company will adopt SFAS 123 in
the fourth quarter of 1996. The Company anticipates that, when adopted,
SFAS 123 will have no material effect on the consolidated financial
position or results of operations.
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation consisting almost entirely of
product and general liability claims arising in the normal course of its
business. After deduction of a per occurrence self-insured retention, the
Company is insured for losses of up to $27 million per year for product
and general liability claims. The Company has provided reserves for the
estimated cost of the self-insured retention; accordingly, these actions,
when ultimately concluded, are not expected to have a material adverse
effect on the financial position, results of operations or liquidity of the
Company.
At December 31, 1995, Alvey had two agreements with related parties under
which Alvey received investment banking and other consulting services.
These agreements were to terminate in the years 2000 and 2002,
respectively. The agreements required annual payments by Alvey totaling
$500,000 plus out-of-pocket expenses. In addition, Alvey was required to
pay an aggregate 2% investment banking fee on the total amount of
consideration paid or received through a merger, consolidation or sale of
more than 10% of Alvey's assets or outstanding securities, or the
acquisition of assets or stock of another company. In January 1996,
concurrent with the Debt Offering, (see Note 4), these agreements were
terminated at a cost of $1.4 million. Effective January 24, 1996, Pinnacle
established consulting agreements with two related parties whereby the
Company is obligated to make annual payments of $350,000 plus expenses, and
one contract provides for annual increases of up to 3%. Additionally, the
Company is obligated to compensate one related party for certain merger,
acquisition and financing transactions. Costs of these agreements,
including the termination fee, are included in other expense, net in the
accompanying financial statements.
Page 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When used in the following discussion, the words "believes", "anticipates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation
to publicly release the result of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
GENERAL
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of Alvey Systems, Inc.
for the three and nine months ended September 30, 1996 compared to the three
and nine months ended September 30, 1995. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
Page 13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, net sales and
categories of expenses, including "Other expense, net", as a percentage of
net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(unaudited) (unaudited)
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 74.8 74.2 75.5 75.6
-------- -------- -------- --------
Gross profit 25.2 25.8 24.5 24.4
Selling, general & administrative
expenses 18.5 18.3 18.3 17.8
Research & development
expenses 1.7 0.4 1.3 0.6
Write-off of purchased R&D -- -- 4.8 --
Amortization expense 0.5 0.7 0.5 0.7
Other expense, net 0.1 0.0 0.6 0.0
-------- -------- -------- --------
Operating income (loss) 4.4 6.4 (1.0) 5.3
Interest expense 4.3 2.4 3.7 2.6
-------- -------- -------- --------
Income (loss) before income
taxes and extraordinary loss 0.1 4.0 (4.7) 2.7
Provision for income taxes 0.4 2.0 0.3 1.3
-------- -------- -------- --------
Net income (loss) before
extraordinary loss (0.3) 2.0 (5.0) 1.4
Extraordinary loss, net -- -- 0.8 --
-------- -------- -------- --------
Net income (loss) (0.3)% 2.0% (5.8)% 1.4%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Page 14
<PAGE>
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1996 TO THE QUARTER
ENDED SEPTEMBER 30, 1995
NET SALES were $79.3 million for the quarter ended September 30, 1996,
representing an increase of $11.1 million, or 16.2% over net sales of $68.3
million for the three months ended September 30, 1995. Excluding Weseley,
acquired in January 1996, "same store" sales increased 13.5% over the third
quarter of 1995. Increases were particularly significant in the areas of
palletizing and warehouse management systems as revenues at these operating
units increased 18% over third quarter 1995 levels.
NEW ORDER BOOKINGS were $93.0 million for the quarter ended September 30,
1996, representing the highest level of bookings over the previous four
quarters and the second highest quarterly total in Company history. The
strongest bookings activity during the quarter was in distribution systems,
representing an increase of 36.9% as compared to the third quarter of 1995
and accounting for 30% of total bookings for the quarter. Third quarter
bookings have increased order backlog to $154.3 million which is up $6.5
million or 4.4% above the level at September 30, 1995.
GROSS PROFIT was $20.0 million for the three months ended September 30, 1996,
an increase of $2.4 million, or 13.6% over the quarter ended September 30,
1995. Gross margins, as a percentage of sales, were 25.2% for the third
quarter of 1996, down 0.6 points from the third quarter of 1995.
Approximately $1.0 million of the increase in gross profit margins is
attributable to the year-over-year growth in "same store" sales with the
balance primarily attributable to the inclusion of Weseley. Excess
production and project costs were incurred at three of the Company's
manufacturing entities. Significant second quarter demands over-burdened
manufacturing and engineering resources requiring outsourcing of production
and utilization of temporary facilities. These factors ultimately resulted
in third quarter shipping and project commissioning delays. New facilities
have been brought on-line which in turn has enabled the Company to greatly
reduce outsourcing and eliminate the use of temporary facilities. These
excess costs were offset, in part, by significant margin improvements in the
delivery of warehouse management and distribution systems. Third quarter
results of the software entities reflect a shift in product mix to higher
margin license and service revenues and away from lower margin hardware
sales. Distribution systems profitability has improved due to continuing
engineering and manufacturing efficiency gains and favorable project
execution.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) were $14.7 million for
the three months ended September 30, 1996, representing an increase of $2.2
million or 17.5% over the quarter ended September 30, 1995. This increase
is primarily attributable to the first-time inclusion of Weseley; the
payroll, commissions and expenses related to increased revenues; the
incurrence of strategic consulting fees; and stay bonuses associated with the
acquisition of Weseley, not incurred in 1995. Excluding Weseley, third
quarter SG&A increased by $1.3 million or 10.7% over the same period of 1995.
Due to the nature of its business, Weseley's SG&A as a percentage of sales
is approximately 30 percentage points
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<PAGE>
higher than that of the rest of the Company. As a percentage of sales, "same
store" SG&A which excludes Weseley, decreased 0.4 percentage points for the
third quarter of 1996 from the same period of 1995. SG&A decreased, as a
percentage of sales, due to significant sales growth in the areas of major
systems and through dealers where selling costs are lower per revenue dollar.
RESEARCH AND DEVELOPMENT EXPENSES were $1.3 million for the third quarter of
1996, an increase of $1.0 million compared to $289,000 for the third quarter
of 1995. Research and development expenses increased primarily as a result
of the significant efforts in process at MFA to expand the functionality of
its DMPLUS software to meet the requirements of additional market segments,
the addition of Weseley as it continues the development of a client server
based suite of software products, the cost of developing new equipment and
product improvements at Buschman and the development of a new palletizer
offering at Busse.
OPERATING INCOME for the quarter ended September 30, 1996 was $3.5 million,
compared to $4.3 million for the three months ended September 30, 1995. As a
percentage of sales, operating income decreased to 4.4% in the quarter ended
September 30, 1996 compared to 6.4% for the same period of 1995. This
decrease is primarily attributable to the increase in research and
development expense, the increase in SG&A and the decrease in gross profit as
a percentage of sales caused by the additional charges to cost of goods
resulting from the excess production and product costs, all as further
explained above.
INTEREST EXPENSE increased to $3.4 million for the third quarter of 1996,
representing a $1.8 million or 110.4% increase as compared to $1.6 million
for the quarter ended September 30, 1995. This increase reflects the higher
level of borrowings compared to the same period of 1995 resulting from the
issuance of the $100 million Senior Subordinated Notes in January 1996,
interest expense on these notes and the $250,000 increase in non-cash charges
relating to the amortization of debt issuance cost.
INCOME TAXES on continuing operations were $322,000 for the three months
ended September 30, 1996, representing a decrease of $1.0 million or 76.2%
from the $1.4 million tax expense for the same period of 1995. The
difference between the effective tax rate on income before income taxes and
extraordinary item and the expected statutory rates is primarily attributable
to the non-deductibility of expenses related to the amortization of goodwill.
NET INCOME (LOSS) was ($217,000) for the quarter ended September 30, 1996,
representing a decrease of $1.6 million or 115.8% from the quarter ended
September 30, 1995. This decrease is a result of the various factors
described above.
Page 16
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1995
NET SALES were $243.4 million for the nine months ended September 30, 1996,
representing an increase of $36.1 million, or 17.4%, over net sales of $207.3
million for the nine months ended September 30, 1995. Excluding Weseley,
"same store" sales increased $32.0 million, or 15.4% over the same period of
1995. Sales increases were realized at each of the Company's operating
subsidiaries with palletizing, depalletizing and distribution systems
recording the largest increases.
NEW ORDER BOOKINGS were $251.9 million for the nine months ended September
30, 1996 representing a 3.7% increase over the record levels established by
the Company during the nine months ended September 30, 1995. Bookings
related to warehouse management systems and associated products were
particularly strong and have increased 27.3% over the same period of 1995.
Additionally, distribution systems and related product bookings exceeded 1995
levels by 11.4%.
GROSS PROFIT was $59.7 million for the nine months ended September 30, 1996,
an increase of $9.1 million, or 18.0% over the nine months ended September
30, 1995. As a percentage of sales, gross margin for the first nine months
of 1996 was 24.5%, a 0.1 percentage point increase over the same period in
1995. Excluding the effects of Weseley, gross profit increased $5.9 million
or 11.6% and, as a percentage of sales, was 23.6% or 0.8 points below the
first nine months of 1995. Gross profit was adversely affected at three of
the Company's manufacturing operations. Project overruns were incurred due
to the cost of outsourcing production, the use of temporary facilities and
the implementation of first-time product applications. These overruns were
partially offset by engineering and manufacturing productivity gains at the
remaining manufacturing entity. Additionally, the Company's software
products produced significant margin growth as engineering productivity
improved and significant volume increases were realized from higher margin
license and service fees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) were $44.6 million for
the nine months ended September 30, 1996, representing an increase of $7.8
million or 21.1% over the nine months ended September 30, 1995. As a
percentage of sales, SG&A was 18.3% for the first nine months of 1996, an
increase of 0.5 percentage points over the same period of 1995. Excluding
Weseley, where due to the nature of its business SG&A is significantly higher
as a percentage of sales, the "same store" increase in SG&A was $5.6 million,
or a 15.2% increase over the same period of 1995. As a percentage of sales,
"same store" SG&A was 17.7% or 0.1 point lower than the first nine months of
1995.
RESEARCH AND DEVELOPMENT EXPENSES were $3.2 million for the first nine months
of 1996, an increase of $1.9 million or 144.0% compared to $1.3 million for
the same period of 1995. Of this increase, $599,000 is attributable to the
inclusion of Weseley in 1996. Significant increases were recorded (i) at MFA
as it continues to develop and broaden the functionality
Page 17
<PAGE>
of its software product, DMPLUS, (ii) at White as it develops equipment for
specific applications in the meat industry, and (iii) at Busse for the
development of new palletizer and depalletizer offerings.
OTHER EXPENSE, NET was $1.5 million for the nine months ended September 30,
1996 compared to $43,000 for the nine months ended September 30, 1995. This
increase of $1.5 million is primarily attributable to the first quarter
termination of a consulting agreement in connection with the refinancing
and recapitalization transactions, described below in the section entitled
"Liquidity and Capital Resources".
OPERATING INCOME for the first nine months of 1996 was a loss of $2.5
million. However, excluding non-recurring charges of $13.1 million resulting
from the $11.7 million write-off of purchased research and development costs
associated with the acquisition of Weseley (see Note 3 to the unaudited
consolidated financial statements for further discussion) and the $1.4
million expense associated with the termination of a consulting agreement,
operating income would have been $10.6 million, representing a decrease of
$466,000 compared to operating income for the nine months ended September 30,
1995. As a percentage of sales, and excluding the non-recurring charges,
operating income decreased to 4.4% in the first nine months of 1996 compared
to 5.4% for the same period of 1995. This decrease is primarily attributable
to the increases in SG&A and R&D as noted above.
INTEREST EXPENSE increased to $9.1 million for the first nine months of 1996,
representing a $3.6 million or 66.3% increase as compared to $5.4 million for
the period ended September 30, 1995. This increase reflects the higher level
of borrowings resulting from the issuance of the $100 million Senior
Subordinated Notes in January 1996, interest expense on these notes and the
$590,000 increase in non-cash charges relating to the amortization of debt
issuance cost.
INCOME TAXES on continuing operations were $742,000 for the nine months ended
September 30, 1996, representing a decrease of $2.1 million or 73.8% from
$2.8 million of tax expense for the first nine months of 1995. The
significant differences between the effective tax rate on loss before income
taxes and extraordinary item and the expected statutory rates are primarily
attributable to the non-deductibility of expenses related to the write-off of
purchased research and development and the amortization of goodwill.
EXTRAORDINARY LOSS, NET of tax benefit of $1.3 million, was $2.0 million for
the nine months ended September 30, 1996. This extraordinary loss represents
the write-off of debt issuance cost and related debt prepayment penalties,
net of tax, resulting from the early extinguishment of the Company's debt as
part of the recapitalization. (See Note 4 to the unaudited consolidated
financial statements for further discussion).
NET INCOME (LOSS) was a loss of $14.3 million for the nine months ended
September 30, 1996, a decrease of $17.1 million from the nine months ended
September 30, 1995. Excluding non-recurring charges and the extraordinary
loss, net income was $847,000, a $2.0 million decrease from the same period
of 1995. This decrease results from the various factors discussed above.
Page 18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES. During the nine months
ended September 30, 1996, cash used by operating activities was $1.2 million
compared to cash provided by operating activities of $11.2 million during the
nine months ended September 30, 1995. This $12.4 million increase in the use
of cash is primarily attributable to an increase in working capital of
approximately $10.3 million resulting from an overall increase in sales
volume and less aggressive billing terms combined with lower earnings before
non-cash charges.
CAPITAL EXPENDITURES for the nine months ended September 30, 1996 and 1995
were $7.9 million and $2.1 million, respectively. Expenditures during 1996
increased primarily as a result of the facility expansion projects in process
at Alvey and Busse. The Company is funding these projects, including
purchases of machinery and equipment, through available cash and, if
necessary, existing credit facilities. Management anticipates that current
year capital expenditures will approximate $12.2 million, including $7.2
million for the two expansion projects, and that 1997 capital expenditures
will approximate $7.0 million, which includes $1.5 million to complete the
purchase of machinery and equipment for the expansion projects.
RESEARCH AND DEVELOPMENT COSTS. As described in Note 3 to the Company's
unaudited consolidated financial statements, approximately $11.7 million of
the Weseley purchase price was immediately expensed as purchased research and
development in the first quarter of 1996. The purchased research and
development relates to the TRACS Version 3.0 product of Weseley.
Additionally, approximately $599,000 and $714,000 was expended for research
and development on the TRACS Version 3.0 and MFA's DMPLUS, respectively, in
the first nine months of 1996. In addition to the significant investment in
software research and development, the Company continues to invest research
and development dollars in specific products, such as the next generation
bulk palletizer at Busse, new palletizing product offerings at Alvey,
conveyor equipment development at Buschman and new carousel applications at
White. These projects and others resulted in an expense of approximately
$3.2 million in the first nine months of 1996. The Company expects to incur
between $700,000 and $1.0 million of additional research and development
expenditures in the last quarter of 1996 in connection with the further
development of software products and between $600,000 and $900,000 for other
products.
ACQUISITIONS. The Company expended $15.0 million, net of cash acquired and
excluding professional fees, to acquire Weseley on January 29, 1996. This
acquisition was financed primarily with proceeds from the issuance of the
$100 million Senior Subordinated Notes. (See Notes 3 and 4 to the unaudited
consolidated financial statements for further discussion).
DEBT OFFERING AND RECAPITALIZATION OF PINNACLE. Since the financing
transaction which was completed in January 1996, Alvey has had senior bank
debt available with NationsBank, N.A. consisting of a $30 million Revolving
Credit Facility which matures in 2001.
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<PAGE>
Borrowings under the credit facility initially bear interest at the Base Rate
(as defined in the Credit Agreement) plus 1.5% or the Euro-dollar Rate (as
defined in the Credit Agreement) plus 2.5%, at Alvey's option, with a step
down in rates based upon achieving predefined earnings objectives.
Borrowings under the Revolving Credit Facility are guaranteed by Pinnacle and
Alvey's subsidiaries. At September 30, 1996, there were $1.0 million of
borrowings outstanding under the Revolving Credit Facility. Pursuant to the
Debt Offering (see Note 4 to the unaudited consolidated financial
statements), Alvey has $100 million of Senior Subordinated Notes (Notes)
which are due in January 2003. Interest on the Notes, which is payable
semiannually, commenced in July 1996.
As a result of the recapitalization, Pinnacle has $23.0 million of Pinnacle
Series A Preferred Stock, $7.0 million of Pinnacle Series C Preferred Stock
and approximately $11.3 million of Pinnacle Series B Preferred Stock
outstanding, together with warrants to purchase up to 256,075 shares of
Pinnacle Common Stock. Dividends on the Pinnacle Series A, B and C Preferred
Stock are payable quarterly. The preferred stock and warrants from the
Preferred Stock Offering have not been pushed down to Alvey's consolidated
financial statements as such preferred stock and warrants are not
exchangeable into securities of Alvey. While Alvey has not guaranteed nor is
it contingently obligated with respect to any such series of Preferred Stock,
Pinnacle has no financial resources, other than from Alvey and Alvey's
operating subsidiaries, to satisfy cash requirements relative to these
preferred shares.
USE OF PROCEEDS. The Company applied the net proceeds of the Debt Offering
in the following manner: (i) approximately $46.2 million was used to repay
the Company's outstanding senior indebtedness; (ii) approximately $2.3
million was used to repay the Company's outstanding 11.95% Unsecured
Subordinated Notes; (iii) approximately $21.5 million was distributed as a
dividend from Alvey to Pinnacle, which, together with the net proceeds from
the Preferred Stock Offering, was used by Pinnacle to fund, in part, the cash
necessary to buy back certain shares of Pinnacle's outstanding common stock
($23.8 million) and to redeem certain shares of Pinnacle's outstanding
preferred stock ($25.3 million); and (iv) approximately $8.9 million was used
for general corporate purposes in 1996. Prepayment penalties of $371,000
were incurred in connection with the repayment of the subordinated debt. In
addition, the Company used $15.0 million of the proceeds of the Debt Offering
to consummate the Weseley Acquisition in January 1996 and intends to use, if
necessary, borrowings under the Revolving Credit Agreement to finance
approximately $8.7 million of capital expenditures, of which approximately
$7.2 million will be spent in 1996, related to the construction and equipping
of two new manufacturing facilities.
ONGOING CASH FLOWS FROM OPERATIONS. Based on its ability to generate funds
from operations, the Company believes that it will have sufficient funds
available to meet its currently anticipated operating, debt service and
capital expenditure requirements with minimal additional borrowings. In
addition, the Company expects to continue to evaluate and consider business
acquisition candidates, although no significant acquisitions are pending or
contemplated. The Company believes that its funds from operations will be
Page 20
<PAGE>
sufficient to meet its short-term capital requirements and that such funds,
together with available funds under the Credit Agreement, will be sufficient
to meet its capital requirements for the foreseeable future. The Company's
belief regarding its capital requirements is forward-looking and involves
risks and uncertainties that could significantly impact the Company's
expected liquidity requirements in the short and long term.
BACKLOG. As of September 30, 1996 the Company had a backlog of $154.3
million, as compared to $147.8 million and $143.9 million as of September 30,
1995 and December 31, 1995, respectively. The Company's backlog is based
upon firm customer commitments that are supported by purchase orders, other
contractual documents and cash payments. While the level of backlog at any
particular time may be an indication of future sales, it is not necessarily
indicative of the future operating performance of the Company. Additionally,
certain backlog orders may be subject to cancellation in certain
circumstances. The Company believes that approximately 95% of orders in
backlog at September 30, 1996 will be converted to revenue within one year.
PART II. OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) No reports are required to be filed herewith.
(b) No Current Reports on Form 8-K were filed during the quarter ended
September 30, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALVEY SYSTEMS, INC.
----------------------------------
Date: November 11, 1996 James A. Sharp
Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 21
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<PERIOD-START> JAN-01-1996
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