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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 333-2600
ALVEY SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
<S> <C>
DELAWARE 43-0157210
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
101 S. Hanley Street, Suite 1300
St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (314) 863-5776
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE NONE
</TABLE>
None
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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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
X
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is zero as all of the outstanding shares of the Company's Common
Stock, $0.01 par value per share (the "Common Stock"), are held by Pinnacle
Automation, Inc., a Delaware corporation.
The number of shares of Common Stock outstanding as of March 31, 1996 was 1,000
shares.
DOCUMENTS INCORPORATED BY REFERENCE
See Exhibit Index.
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PART I 1
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 20
ITEM 3. LEGAL PROCEEDINGS 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
PART II 21
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 21
ITEM 6. SELECTED FINANCIAL DATA 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 34
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 34
PART III 34
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 34
ITEM 11. EXECUTIVE COMPENSATION 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 40
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 41
PART IV 45
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 45
SIGNATURES 48
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PART I
ITEM 1.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BUSINESS
OVERVIEW
Alvey Systems, Inc., a Delaware corporation ("Alvey", or the "Company") and
a wholly-owned subsidiary of Pinnacle Automation, Inc., a Delaware corporation
("Pinnacle"), together with its five operating subsidiaries, is a MATERIALS
HANDLING AND INFORMATION SYSTEMS company which produces equipment and related
software and controls that enable manufacturers, distributors and retailers to
operate their manufacturing plants, distribution centers and warehouses more
efficiently. In connection with providing equipment and software, the Company's
engineers and sales force work closely with its customers to analyze their
specific manufacturing, distribution and warehousing needs and to design
customized systems that improve its customers' efficiency and reduce their
costs. As a full-service provider of materials and information handling products
and services, the Company is uniquely positioned to offer to its customers
integrated systems comprised of combinations of equipment, software and
controls. The Company believes that its ability to offer both engineering design
services as well as the equipment and related software necessary to implement
integrated solutions to materials handling needs provides a distinct competitive
advantage.
The Company manufactures a broad range of materials handling equipment such
as palletizers, depalletizers, conveyors, carousels and sorters which automate
the physical acts of loading, unloading, sorting and transporting raw materials
and finished products. In addition to moving materials, the Company's integrated
systems incorporate advanced software and controls developed by the Company to
collect data, process information and provide real-time feedback with respect to
equipment performance and materials processing. While a majority of the
Company's revenues are attributable to the manufacture and sale of equipment,
approximately 45% of total revenues result from product support functions and
non-manufactured products delivered in connection with sales of the Company's
equipment. Such revenues are generated from engineering, software license fees,
computer support services, systems and equipment maintenance, computer hardware
and peripheral equipment, and the integration and installation of these
products.
For customers applying materials handling and information solutions to
manufacturing applications, the Company offers products designed to (i) automate
and accelerate the input of materials into a manufacturing line, (ii) track and
transport finished products within a manufacturing facility, distribution center
or warehouse and (iii) automate the palletizing of finished goods. The Company's
customers, in large part, use the Company's products to
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sort (as used herein, the term "sort" and sortation mean the segregation of
packages destined for different locations), transport and palletize large
quantities of relatively small-sized products, such as beverages, canned and
bottled goods and personal consumer goods. For warehousing and distribution
applications, the Company offers conveyor and carousel systems to sort, track
and transport goods, and advanced software systems which monitor and optimize
the movement and shipment of products.
Through a combination of management initiatives, new product developments
and acquisitions, the Company has achieved rapid growth in sales and operating
performance. The Company's sales have increased from $72.3 million in 1989 to
$288.0 million for the year ended December 31, 1995. The principal factors
contributing to the Company's rapid growth in sales and operating performance
listed in their order of importance include new product offerings and
management initiatives, and acquisitions of complementary business. EBITDA has
increased from $4.2 million in 1989 to $20.1 million for the year ended December
31, 1995. As of December 31, 1995, the Company's backlog reached $143.9 million,
an increase of approximately 26% from a backlog of $114.5 million at
December 31, 1994.
PRODUCTS
The Company believes that each of its operating entities is a leading
manufacturer in each of its principal markets. The Company operates through the
entities described below:
ALVEY SYSTEMS, INC.: Manufactures and sells case palletizers and
depalletizers, case and pallet conveyors, related custom products and software
and controls which are sold to end users by a nationwide network of direct sales
personnel and independent representatives. Palletizers are large machines,
operated by programmable controls, that receive packaged products (typically
case goods) from a conveyor delivery system and deliver them to a pallet
conveyor take away system. The palletizer sequentially arranges individual
packages and groups them into rows and layers to form predetermined patterns
which are stacked onto a pallet or into a unit load, producing a stable cube for
efficient handling and shipping. Depalletizers unload palletized products for
further handling in the distribution process. Conveyor systems are used to move
products from one location to another and can be designed to sort, feed or
perform a number of different applications. Alvey primarily serves the segment
of the materials handling market that focuses on manufacturers of food,
beverages, paper, soap, detergent and other consumer products.
Alvey's annual net sales (excluding net sales of AEC) have increased 126%
since its acquisition by Pinnacle in August 1988 and currently represent
approximately 36% of the Company's total net sales. The Company believes that
this increased revenue is virtually entirely attributable to management's
initiatives which include the development and
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introduction of new or improved products. Management's primary initiative to
increase revenues at Alvey was to assemble experienced and highly qualified
sales and marketing personnel and develop the necessary products to support
their efforts. Management believed this would provide Alvey the means to
further penetrate its traditional manufacturing market and provide the sales and
consulting expertise to become a significant competitor in the more rapidly
growing warehousing and distribution segment of the materials handling market.
To fully support marketing efforts, Alvey found it necessary to re-engineer many
of its conveyor products and develop new equipment such as the case depalletizer
used primarily in warehouse applications. In addition, the engineering and
manufacturing managers recruited subsequent to 1988 brought new ideas and
processes which have resulted in a complete redesign of Alvey's entire
palletizer and pallet conveyor product lines. With the acquisition of Buschman
in 1992, responsibility for marketing major systems to the warehouse and
distribution market segments was shifted from Alvey to Buschman, and a number of
senior marketing managers were transferred to Buschman. This shift of
responsibilities and transfer of personnel has resulted in lower sales growth at
Alvey, while increasing Buschman's sales growth for 1993 and each subsequent
year.
Earnings before interest, income taxes, extraordinary items,
depreciation and amortization expense and management fees ("EBITDAM") at
Alvey has increased by approximately 184% since 1988. While benefiting from
the significant increase in volume, EBITDAM, as a percentage of sales, has
increased 25% as a result of certain cost reduction and productivity programs
initiated by management. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
AUTOMATION EQUIPMENT COMPANY: Manufactures gantry robots which can be
utilized in stacking applications, including the rapidly growing mixed-load and
multi-station palletizer market. Gantry robots are machines that access a large
rectangular work area. They can be customized and combined with a variety of
control software to accomplish various tasks such as in-process materials
handling and the stacking of cases, bags, drums and pails. One gantry robot can
service ten or more stacking positions. Gantry robots generally have slower
cycle times than Alvey's high-speed palletizers, but offer flexibility in
product handling and can handle extremely heavy product loads. AEC operates as a
division of Alvey. AEC's robots are sold directly and in conjunction with
Alvey's sales force.
AEC's annual net sales have increased 220% since its acquisition in
August 1994 and currently represent approximately 0.8% of the Company's total
net sales. The Company believes that this dramatic increase in sales resulted
from the ability to offer AEC's products through Alvey's much larger marketing
organization and the benefits attendant to being associated with a larger and
more diversified company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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BUSSE BROS., INC.: Manufactures bulk palletizing and depalletizing systems
which are sold directly and in conjunction with Alvey's sales force. Busse's
bulk palletizers palletize empty containers, such as cans and bottles, for
shipment to consumer product manufacturers, by building layers of containers
separated by plastic or paperboard sheets. Depending upon specifications, the
palletizer will build a designated number of layers. The pallet load of
containers will then be strapped down to secure and stabilize the load. When a
pallet of containers arrives at the filling location, containers must be removed
from the pallet and fed into a production line where they will be washed, filled
and then capped or seamed. Busse's bulk depalletizers accept the pallet of
containers and systematically sweep each layer of containers off the pallet and
onto conveyors that take the containers into the production line. Busse's
products serve the manufacturing phase of the industry segments as to which
Alvey serves the distribution phase, and Busse also serves the container
manufacturers that supply these industries.
Busse's annual net sales have increased 195% since its acquisition in
April 1992 and currently represent approximately 6% of the Company's total net
sales. The Company believes that this significant sales growth is primarily
attributable to the recruitment of experienced marketing personnel at Busse and
utilizing Alvey's much larger sales force to offer Busse products to existing
customers of Alvey. Another factor contributing to this increase in sales was
the availability in 1993 of Busse's redesigned bulk depalletizers which has
accounted for 40-60% of Busse's sales in recent years. Busse has grown from
basically a break-even operation in 1991 and 1992 to generate EBITDAM of
approximately 9% of sales in 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
THE BUSCHMAN COMPANY: Manufactures and sells a broad range of case
conveyors, controls, related products and software which are sold to end users
through its direct sales force, through a national network of independent
distributors and systems integrators and through the sales forces of Alvey and
White. Buschman sells standard conveyor and sortation products and modified
conveyor equipment as well as high-speed sortation systems, engineering,
controls, outside-purchased subsystems (such as bar code scanners) and/or
installation services. In addition, Buschman sells materials flow systems for
warehouses and distribution centers which are more complex in design and include
high-speed sortation, sophisticated control software and communications and
involve sophisticated engineering, project management and installation services.
These systems are designed to customer and/or consultant specifications through
Buschman's "design and build" process. Buschman primarily serves the warehouse
and distribution systems markets that perform the logistics operations required
to deliver a finished product from a warehouse or distribution center to a
retail store. Buschman also provides case conveyors used in systems sold by
White and provides case conveyors for systems sold by Alvey to the extent the
conveyors used in such systems are not directly manufactured by Alvey.
Buschman's annual net sales have increased approximately 78% since its
acquisition in October 1992 and
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currently represent approximately 24% of the Company's total net sales. The
Company believes that this increase in net revenues has resulted primarily from
management's initiative to reposition the Company as a premier supplier of
material handling solutions to the warehouse and distribution market segment.
This repositioning has been accomplished by an aggressive marketing effort
targeted at those customers requiring complex solutions and ongoing services.
Buschman's marketing efforts have benefited from the transfer of senior managers
from Alvey in 1992 and the recruitment of additional highly qualified personnel.
To support these marketing efforts and provide superior solutions capabilities,
Buschman redesigned its product line, including products previously manufactured
by Alvey, and introduced what it believes to be state-of-the-art sortation
equipment and systems software.
Buschman's EBITDAM (as defined above) were depressed in 1993 and 1994
primarily due to the costs associated with (i) consolidating the manufacture of
Alvey's conveyor products in Buschman's expanded facility, (ii) redesigning and
standardizing the product lines, (iii) recruiting additional marketing
personnel, (iv) recruiting and training approximately 200 additional product
employees, net of turnover and (v) pursuing aggressive marketing efforts,
particularly with strategic national accounts. However, in 1995, management's
efforts produced significant results as Buschman recorded record earnings. As a
percentage of gross sales, earnings increased to levels above those realized
before its 1992 acquisition. This is particularly significant in that Buschman
now supplies large quantities of hardware sold at negotiated lower margins,
which supports Alvey's case conveyor requirements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
WHITE STORAGE & RETRIEVAL SYSTEMS, INC.: Manufactures and sells a broad
line of horizontal carousels, vertical carousels, power columns, movable aisle
systems and related software and controls which are sold to end users through
its direct sales force and through a national dealer network. Horizontal
carousels are rotating storage devices which store and move parts to the point
of need, whether an operator workstation, an automated inserter/extractor or
another robotic interface device. Vertical carousels are similar to horizontal
carousels except that the carousel travels in a vertical plane, like a ferris
wheel. The power column is a modular automated vertical lift device within which
an inserter/extractor retrieves trays from internal shelving and delivers them
to an accessible location. Movable aisle storage systems double the storage
density of an area by enabling existing fixed shelving to move on rollers,
allowing an operator to open an aisle between any two rows of shelves. White
also manufactures a heavy duty pallet moveable aisle system for warehousing
applications which utilizes a customer's existing pallets or racking. White has
developed, and continues to develop, a line of standard software products which
interface with carousels, power columns and other systems. These software
products range from basic systems that bring a designated carousel bin to an
operator, to more advanced inventory management systems that control multiple
operations and interface with the user's central computer system. White serves
the warehouse and distribution systems markets, and, in addition, its storage
and retrieval products are used in a broad range of manufacturing and office
applications.
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White's net sales have decreased 11% since its acquisition in December 1993
and currently represent approximately 19% of the Company's total net sales.
Prior to its acquisition by the Company, White purchased equipment for resale to
its customers and included the sales price of such purchased equipment in its
annual net sales. Subsequent to its acquisition by the Company, various product
and customer responsibilities have been realigned. This has resulted in certain
products previously purchased and resold by White to be produced or otherwise
furnished by other operating units of the Company. Accordingly, the net annual
sales of these products are now reflected at the respective operating unit
rather than White. The effect of this change in product and customer
responsibility accounts for a portion of the reduction in White's annual net
sales since its acquisition by the Company. Since its acquisition in December
1993, earnings at White have decreased primarily as a result of lower sales
volumes as discussed above and the investments in additional resources and
information systems undertaken during this period. Although no assurances can
be given, management believes the initiatives introduced since the acquisition
of White will ultimately produce a favorable earnings trend similar to those
realized from each prior acquisition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
MCHUGH, FREEMAN & ASSOCIATES, INC.: Designs and installs warehouse
management software systems which incorporate radio frequency equipment and
computers. Warehouse management systems maintain control over inventory storage
locations, people and equipment. These systems track inventory on an
interactive, real-time basis from the point of receiving through shipping. The
systems communicate with a central computer to obtain and provide strategic
data. Systems employ barcoded "license plates" which identify and allow the
tracking of items, lot or model, storage locations, employees and picking
containers. The license plates are read by a bar code scanner and transmitted by
a radio frequency terminal. MFA provided custom systems until late 1994, when it
introduced its DMPLUS "standard product," which has been selected by General
Electric as its warehouse management system of choice. In the future, MFA will
offer both custom and "standard product" solutions. For the twelve months ended
December 31, 1995, custom and "standard product" warehouse management systems
represented 77% and 23%, respectively, of MFA's total net sales. The Company
anticipates that "standard product" sales will represent a larger percentage of
MFA's total net sales in the future. MFA designs and installs warehouse
management software systems primarily for the distribution marketplace.
MFA's annual net sales have increased 1,530% since its acquisition in
May 1989 and currently represent approximately 13% of the Company's total net
sales. The Company believes that this significant increase in revenues was
originally attributable to management's efforts to position MFA as a provider of
high quality, functional software to Fortune 500 customers requiring systems at
a number of locations. This strategy has allowed MFA to create customer-
specific systems which can be implemented throughout an organization while
requiring less customization, thus leveraging MFA's resources. More recently,
the development of DM+ (a standardized product requiring little customization)
has allowed MFA to reduce the cost to deliver a system which opens additional
markets and improves MFA's competitive position.
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Since the acquisition of MFA in 1989, EBITDAM has grown at a rate higher
than sales. In the years immediately following its acquisition, the growth in
EBITDAM was suppressed by significant costs incurred in connection with the
development of additional software offerings, the aggressive pursuit of multi-
site accounts and the training of new employees, as employment was increasing at
a rate of approximately 50% per year. Since 1992, EBITDAM, as a percentage of
sales, has significantly exceeded that of any of the other manufacturing
companies in the Pinnacle family. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
WESELEY SOFTWARE DEVELOPMENT CORP.: Pursuant to the stock purchase
agreement, dated as of December 20, 1995, among Pinnacle, Alvey, MFA and
Weseley, Weseley became a wholly owned subsidiary of MFA on January 29, 1996
(the "Weseley Acquisition"). MFA paid $15.0 million in cash for the outstanding
capital stock of Weseley on the date of acquisition; in addition, subject to the
continued employment of the former principal owner of Weseley and certain other
conditions, certain designated employees of Weseley will have an opportunity to
earn stay bonuses in the aggregate amount of $625,000 per year for each of eight
years and performance-based employee incentive compensation up to an aggregate
maximum of $13 million which would be payable over time as described below.
The performance-based incentive compensation will be paid on an annual
basis to eligible employees of Weseley and will be equal to 38.5% of
Weseley's earnings before interest, taxes, extraordinary items, depreciation
and amortization ("EBITDA") (excluding stay bonuses and incentive
compensation for such year and certain other adjustments) in excess of $2.5
million until the first to occur of (i) payments in the aggregate amount of
$13 million have been made or (ii) the eighth anniversary of the Weseley
Acquisition. All or a portion of the performance-based incentive compensation
would be deemed "earned" in the event that Weseley meets or exceeds certain
financial targets established by the Company in any of the years ending
December 31, 1996, 1997 or 1998, or meets or exceeds 90% of the targeted
amount on a cumulative basis over such three-year period.
Weseley develops, markets and supports transportation management products
and services which enable companies to better manage their shipping processes,
leading to lower freight costs and improved customer service. Pinnacle plans to
integrate Weseley's transportation management systems with MFA's warehouse
management systems, creating a high-quality, seamless supply chain logistics
product. Weseley has successfully installed software systems at 131 sites for
29 leading companies in the United States, including General Electric and Sara
Lee.
The Weseley Acquisition is part of the Company's strategy to enhance its
information systems expertise and to provide integrated solutions to a wide
array of materials handling problems. The combination of MFA's warehouse
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management system with Weseley's transportation management system, which the
Company believes can be integrated to operate as a single system, would link two
integral stages of the materials handling chain.
For the three years ended December 31, 1995, revenues at Weseley grew
significantly. The introduction of Weseley's TRACS Version 3.0 product (a
client server object-based operating system) in 1996 is expected to provide the
product base to continue Weseley's growth. Earnings at Weseley prior to the
date of its acquisition are not considered meaningful as Weseley generally
followed a policy of paying employee bonuses and making profit-sharing
contributions based upon available cash rather than earnings. Accordingly, in
1995, these significant payments exceeded earnings, which resulted in an
operating loss. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
For integrated systems, where the products and expertise of the Company's
subsidiaries are combined, a conveyor is typically the "linkage" that permits
the movement of products through the manufacturing line or distribution system
and software is the "enabler" that drives the entire system and provides needed
information. Company systems typically include significant design and
engineering work and turnkey installation services. Examples of some of the most
common integrated systems sold by the Company include:
CONSUMER PRODUCT MANUFACTURING LINES: Systems used by beverage
manufacturers including Coca-Cola and food manufacturers such as Kellogg. These
systems could include Alvey case palletizers, AEC robotic palletizers, Busse
bulk depalletizers, Buschman conveyors and related software designed by MFA,
Alvey or Buschman. Such systems typically range in price from $1 million to
$10 million.
WAREHOUSE AND DISTRIBUTION SYSTEMS: Systems used by retailers including
Sears and Target, by independent wholesalers or by manufacturers in conjunction
with a consumer product manufacturing line. A typical system could include
Buschman conveyors, White carousels and related software designed by MFA, Alvey,
Buschman or White. Such systems typically range in price from $1 million to
$10 million.
CONTAINER MANUFACTURING PLANTS: Systems used by can manufacturers
including Metal Container Corporation (an Anheuser-Busch subsidiary), or bottle
manufacturers including Ball Corporation. These systems could include Busse bulk
palletizers and Alvey conveyors and related software. Such systems typically
range in price from $300,000 to $1 million.
MEAT PRODUCTION SYSTEMS: Systems used by each of the four industry leaders in
meat production. These
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specialized distribution systems could include Alvey case palletizers, Buschman
conveyors, White carousels and related software designed by MFA, Alvey or White.
Such systems typically range in price from $8 million to $12 million. The
Company's initial success installing a revolutionary frozen meat distribution
system for ConAgra's Monfort Beef division in 1994 is an example of the
opportunities available in integrated systems. After the development and
implementation of the integrated system for ConAgra, the Company has received
orders for approximately $24 million of similar systems from ConAgra and other
industry participants.
ENGINEERING AND SUPPORT SERVICES
While a majority of the Company's revenues are attributable to the
manufacture and sale of equipment, approximately 45% of total revenues result
from product support functions and non-manufactured products delivered in
connection with sales of the Company's equipment. Such revenues are generated
from engineering, software license fees, computer support services, systems and
equipment maintenance, computer hardware and peripheral equipment, and the
integration and installation of these products. The Company's sales process
generally starts with a consultation between Company engineers and a customer
during which the Company assesses the customer's specific materials handling
needs and designs a system consisting of the Company's equipment, including
related software and controls, specifically tailored to meet such needs. The
Company installs the system and works with the customer to insure that the
system performs satisfactorily. After the system is operational, the Company
continues to provide ongoing support and maintenance for the system and works
with the customer in response to changes in the customer's materials handling
needs. These services are regularly provided to the Company's customers,
including through the "value-added" partnerships that the Company has formed
with certain large customers. See "Customers."
Through its Company-wide Customer One Protection ("COP") program, the
Company provides aggressive ongoing support and maintenance for its installed
base of equipment and integrated systems. COP provides the Company's customers
with comprehensive service and support including 24-hour assistance, field
service, training, parts and maintenance and warranty programs. The COP program
generated approximately $23.2 million of revenues during the year ended December
31, 1995.
BUSINESS STRATEGY
The Company's business objective is to build on its position as a full-
service provider of materials handling and information management products and
services tailored to meet the individual needs of its customers. To achieve this
objective, the Company intends to implement the following strategies:
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- Continue to build the Company's integrated project capabilities. Each
of the Company's operating companies was previously a stand-
alone enterprise, and management continually modifies the
ways in which the subsidiaries work together to design,
market and implement solutions. By combining the expertise
of its subsidiaries, the Company will be able to provide
manufacturers and distributors with equipment and systems
which represent the next step in materials handling and
information systems applications. Integrated solutions
exhibit a high degree of creativity and represent a
partnership with the customer, incorporating flexibility in
design and solution and thorough understanding of the
customer's business. These integrated solutions are also
designed to meet the increasing information needs of the
Company's customers.
- Continue margin enhancement measures. While the margins of its early
acquisitions have increased over time, the margins of
Buschman and White are generally lower than those of the
other operating companies. The Company believes that as
Buschman and White are further integrated into the Company,
the margins of these companies should continue to improve,
resulting in higher margins for the Company as a whole. In
order to further improve margins, the Company has sought the
services of a leading industry consultant to assist it in
implementing margin enhancing improvements at Alvey,
Buschman and White.
- Exploit the Company's strategic opportunity to expand its information
systems expertise and significantly increase the Company's
ability to provide integrated solutions to warehousing,
transportation and related demand planning problems. Merging
a warehouse management system with a transportation
management system through the Weseley Acquisition would link
two integral stages of the supply chain.
- Exploit new and emerging market opportunities. The manufacturing and
distribution markets are constantly changing. The Company intends
to exploit new market opportunities through its ability to create
new and revised custom and standard products that provide
solutions to market changes. In particular, the Company provides
products that respond to recent trends towards third-party
warehousing, point-of-sale ordering, mixed-load requirements,
mail order purchasing, improved occupational safety measures and
other customer needs.
- Build upon the Company's success in supplying integrated systems to
the meat production industry. The Company intends to build upon
its success in developing meat production systems by aggressively
pursuing the potentially large meat production market.
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- Continue to seek product line expansions including nonroller conveyor
products, systems to automate distribution centers and new
software products.
- Expand the Company's international business. The Company has
significant opportunities for such expansion through its U.S.-
based, international customers, as well as through new
international customers. The Company believes that the
international markets present significant opportunities for Alvey
and Busse palletizer/depalletizer systems, for MFA software
systems and for White storage and retrieval systems. The Company
intends to focus initially on Latin America, Asia and Europe.
During 1995, the Company hired additional U.S. based
international marketing and support personnel and established
marketing relationships with independent representatives in Latin
and South America and Asia. The Company intends to add
additional marketing personnel to support these geographical
areas as new order bookings and sales increase. Through its
subsidiary MFA, the Company plans to establish a marketing and
software engineering site in Europe during 1996. It is intended
that costs associated with this startup be minimized by "boot
strapping" the operation and providing services in Europe to
MFA's existing U.S. based customers while marketing to new
European customers.
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RECENT TRANSACTIONS BY ALVEY
On January 24, 1996 (the "Closing Date"), the Company issued $100,000,000
in principal amount of its 113/8% Senior Subordinated Notes due 2003 (the "Old
Notes") to NationsBanc Capital Markets, Inc. (the "Initial Purchaser"). The Old
Notes were issued in a transaction (the "Prior Offering") pursuant to a Purchase
Agreement, dated January 19, 1996 (the "Purchase Agreement"), among the Company,
Pinnacle and the Initial Purchaser. The Initial Purchaser subsequently resold
the Old Notes in reliance on Rule 144A under the Securities Act of 1933, as
amended (the "Securities Act"). The Company and the Initial Purchaser also
entered into the Registration Rights Agreement, pursuant to which the Company
granted certain registration rights for the benefit of the holders of the Old
Notes. The Company has filed a Registration Statement on Form S-4 (the
"Exchange Offer Registration Statement") with the Securities and Exchange
Commission to fulfill certain of its obligations under the Registration Rights
Agreement, which Exchange Offer Registration Statement describes the offer by
the Company to exchange $1,000 in principal amount of its 113/8% Senior
Subordinated Notes due 2003 (the "New Notes") for each $1,000 in principal
amount of the outstanding Old Notes (the "Exchange Offer").
The Old Notes were, and the New Notes will be, issued under the Indenture,
dated as of January 24, 1996 (the "Indenture"), among the Company and The Bank
of New York, as trustee (in such capacity, the "Trustee"). The form and terms
of the New Notes will be identical in all material respects to the form and
terms of the Old Notes, except that (i) the New Notes have been registered under
the Securities Act and, therefore, will not bear legends restricting the
transfer thereof, (ii) holders of New Notes will not be entitled to liquidated
damages equal to $.05 per week per $1,000 principal amount of Old Notes held by
such holders (up to a maximum amount of $0.30 per week per $1,000 principal
amount) otherwise payable under the terms of the Registration Rights Agreement
in respect of the Old Notes held by such holders during any period in which a
Registration Default (as defined) is continuing (the "Liquidated Damages") and
(iii) holders of New Notes will not be, and upon the consummation of the
Exchange Offer, holders of Old Notes will no longer be, entitled to certain
rights under the Registration Rights Agreement intended for the holders of
unregistered securities.
The net proceeds of the Prior Offering were used (i) to repay and fully
discharge the approximately $46.2 million of outstanding senior secured
indebtedness owing under Alvey's existing credit facilities, including accrued
and unpaid interest (the "Credit Facility Repayment"); (ii) to repay the
$2.3 million outstanding amount of the 11.95% Senior Subordinated Notes of Alvey
(the "11.95% Notes"), including accrued and unpaid interest (the "Note
Repayment"); and (iii) to facilitate a recapitalization of Pinnacle (the
"Recapitalization") through the funding of a $21.5 million dividend to Pinnacle
(the "Recapitalization Dividend"). Upon repayment of approximately $0.3 million
principal amount of the 11.95% Notes held by executive officers and management
of Pinnacle or Alvey in the Note Repayment, such executive officers and
management purchased shares of a newly created class of preferred stock of
12
<PAGE>
Pinnacle (the "Pinnacle Series B Preferred Stock") with the proceeds received by
them in the Note Repayment (the "Note Repayment Investment"). Concurrently with
the consummation of the Prior Offering, Alvey and Pinnacle entered into a Credit
Agreement with NationsBank, N.A., as administrative agent (the "Credit
Agreement"), pursuant to which Alvey obtained a revolving credit facility in the
amount of $30 million which is guaranteed by Pinnacle and the subsidiaries of
Alvey. In addition, the Company used $15.0 million of the net proceeds of the
Prior Offering to consummate the Weseley Acquisition (as defined above) and
intends to use borrowings under the Credit Agreement to finance approximately
$8.0 million of capital expenditures, of which approximately $6.5 million will
be spent in 1996, related to the construction and equipping of two new
manufacturing facilities to provide additional manufacturing capacity in
response to increased demand for the Company's products.
RECAPITALIZATION OF PINNACLE
Upon consummation of the Prior Offering, the members of the Boards of
Directors and executive officers of Pinnacle and Alvey ("Management") and an
investor group (the "Investors") consisting of Vestar Equity Partners, L.P.
("Vestar"), Chemical Equity Associates, A California Limited Partnership
("Chemical") and Hancock Venture Partners IV-Direct Fund L.P. ("Hancock")
effected the Recapitalization, pursuant to which the Investors purchased a
substantial equity interest in Pinnacle. The Recapitalization consisted of the
following transactions: (i) 48.9% of the common stock of Pinnacle (the "Pinnacle
Common Stock") on a fully-diluted basis and outstanding warrants to purchase
9.1% of the fully-diluted outstanding shares of Pinnacle Common Stock (the
"Pinnacle Original Warrants") were exchanged (the "Common Equity Exchange") for
a combination of cash and shares of Pinnacle Series B Preferred Stock; (ii) each
of the outstanding shares of Cumulative Exchangeable Preferred Stock of Pinnacle
(the "Pinnacle Original Preferred Stock") and certain of the outstanding shares
of Series A Senior Cumulative Exchangeable Preferred Stock of Pinnacle (the
"Pinnacle Original Senior Preferred Stock") were redeemed (the "Redemption");
(iii) the remaining shares of Pinnacle Original Senior Preferred Stock were
exchanged for Pinnacle Series B Preferred Stock (the "Preferred Stock
Exchange"); and (iv) the Note Repayment Investment was effected. The Common
Equity Exchange, the Redemption, the Preferred Stock Exchange and the Note
Repayment Investment are collectively referred to herein as the
"Recapitalization Transactions." No member of Management exchanged or redeemed
any equity interests in Pinnacle pursuant to the Common Equity Exchange or the
Redemption. Members of Management that held shares of Pinnacle Original Senior
Preferred Stock exchanged all of such shares for shares of Pinnacle Series B
Preferred Stock pursuant to the Preferred Stock Exchange. As a result of the
Recapitalization, Management and employees of Pinnacle and Alvey increased their
ownership interest in Pinnacle Common Stock from approximately 42% to
approximately 91% of the outstanding shares of Pinnacle Common Stock (or 65% on
a fully-diluted basis, including giving effect to the exercise of the Pinnacle
Warrants (as defined below)), and the Investors acquired preferred stock of
Pinnacle with an aggregate stated liquidation value of $30 million and warrants
to purchase 30% of the Pinnacle Common Stock on a fully-diluted basis.
13
<PAGE>
The total amount of cash required to fund the Recapitalization Transactions
was $49.1 million. Pinnacle obtained the funds necessary to effect the
Recapitalization from the Recapitalization Dividend and the proceeds from the
sale to the Investors of 23,000 shares of Series A 9% Cumulative Convertible
Preferred Stock of Pinnacle (the "Pinnacle Series A Preferred Stock") and 7,000
shares of Series C 9% Cumulative Convertible Preferred Stock of Pinnacle (the
"Pinnacle Series C Preferred Stock" and, collectively with the Pinnacle Series A
Preferred Stock, the "Pinnacle Investor Preferred Stock"), together with
warrants to purchase up to 256,075 shares of Pinnacle Common Stock, representing
30% of the issued and outstanding shares of Pinnacle Common Stock on a fully-
diluted basis after giving effect to the Recapitalization Transactions and the
Weseley Acquisition (the "Pinnacle Warrants"), for an aggregate purchase price
of $30 million (the "Pinnacle Preferred Stock and Warrants Offering"). Vestar,
Chemical and Hancock hold approximately 70%, 23% and 7% of the Pinnacle Investor
Preferred Stock and the Pinnacle Warrants, respectively.
The Credit Facility Repayment, Note Repayment, Recapitalization Dividend,
Credit Agreement, Pinnacle Preferred Stock and Warrants Offering,
Recapitalization Transactions and the Prior Offering are collectively referred
to herein as the "Financing Transactions."
14
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data of Alvey (the "Pro Forma
Financial Data") have been derived by the application of pro forma adjustments
to the historical Consolidated Financial Statements of Alvey included elsewhere
in this Form 10-K. The following unaudited pro forma consolidated statement of
operations data for the year ended December 31, 1995 give effect to the
Financing Transactions, the Prior Offering and the Exchange Offer and the
application of the net proceeds therefrom, the Weseley Acquisition, and the
termination of the Acadia Agreement (as defined herein) and the Raebarn
Agreement (as defined herein) (collectively, the "Pro Forma Transactions") as if
such events had occurred on January 1, 1995. The following unaudited pro forma
consolidated balance sheet data at December 31, 1995 gives effect to the Pro
Forma Transactions as if such events had occurred as of December 31, 1995. The
Pro Forma Financial Data reflect a preliminary purchase price allocation for the
Weseley Acquisition. The Pro Forma Financial Data do not purport to be
indicative of Alvey's financial position or results of operations that would
actually have been obtained had the Pro Forma Transactions been completed as of
the dates assumed, or to project Alvey's financial position or results of
operations at any future date. The Pro Forma Financial Data should be read in
conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Alvey's Consolidated Financial Statements and the related Notes to the
Consolidated Financial Statements and Weseley's Financial Statements and the
related Notes to the Financial Statements included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR 1995
WESELEY PRO
FORMA AND
FINANCING FINANCING PURCHASE
TRANSACTIONS TRANSACTIONS HISTORICAL ACCOUNTING
HISTORICAL ADJUSTMENTS PRO FORMA WESELEY ADJUSTMENTS(1) PRO FORMA
---------- ----------- ---------- ---------- -------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net Sales............................ $ 288,018 $ 0 $288,018 $ 3,397 $ 0 $ 291,415
Cost of goods sold................... 217,297 0 217,297 935 0 218,232
Gross profit......................... 70,721 0 70,721 2,462 0 73,183
Selling, general and administrative
expenses............................ 51,630 0 51,630 4,539 652(2) 56,821
Research and development expenses.... 2,051 0 2,051 615 0 2,666
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Amortization expense................. 1,737 (558)(4) 1,179 0 471 (5) 1,650
Other income, net.................... (108) (150)(3) (258) 0 0 (258)
Operating income (loss).............. 15,411 708 16,119 (2,692) (1,123) 12,304
Interest expense..................... 6,896 3,806 (6) 10,702 (19) 1,706 (7) 12,389
Income (loss) before income taxes.... 8,515 (3,098) 5,417 (2,673) (2,829) (85)
Income tax expense (benefit)......... 4,109 (1,239)(8) 2,870 (1,105) (944)(8) 821
-------- -------- ------- -------- -------- -------
$4,406 $(1,859) $2,547 $(1,568) $(1,885) $(906)(2)
-------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- -------
Income (loss) from continuing
operations..........................
Earnings per share (9)............... _ _ _ _ _
OTHER CONSOLIDATED AND PRO FORMA DATA
AND OTHER PERFORMANCE MEASURES
(NON-GAAP) (11):
Depreciation expense................. $2,952 $0 $2,952 $68 $0 $3,020
Capital expenditures, net (10)....... $4,496 $0 $4,496 $213 $0 $4,709
</TABLE>
______________________
(1) The Weseley Acquisition will be accounted for as a purchase. The purchase
price will be allocated to the acquired assets and liabilities based on
their relative fair values as of the date of acquisition based on
valuations and other studies which are essentially complete. Based on
the results of an independent appraisal, it is expected that approximately
$11.7 million of the Weseley purchase price will be allocated to
purchased research and development costs. Such research and development
costs will be recorded as research and development expense in Alvey's
consolidated statement of operations during the quarter ended March 31,
1996. This research and development expense has been excluded from
the pro forma statement of operations for the year ended December 31,
1995, as it represents a non-recurring charge to income which results
directly from the Weseley Acquisition. No significant adjustments to
the Weseley purchase price allocation shown herein are expected.
(2) Amount principally includes the stay bonuses payable to certain
designated employees of Weseley ($625,000 on an annual basis). The
adjustment does not eliminate the payment by Weseley and charge to
16
<PAGE>
income expense on December 31, 1995 (prior to the purchase of Weseley by
Pinnacle, Alvey and MFA) of an aggregate of $3.0 million in one-time,
nonrecurring bonuses to certain employees of Weseley. Had such amount
been included in this adjustment, Alvey's pro forma net income for
fiscal year 1995 would have been $894,000.
(3) Adjustment includes the effect of the termination of the Acadia
Agreement and the Raebarn Agreement, resulting in an annual reduction in
expense of $500,000, offset by new management fees of $150,000 and
$200,000 annually payable to Vestar and Mammoth (as defined herein),
respectively. The pro forma income statement does not include a
nonrecurring charge of $866,000, net of applicable tax benefits,
resulting from the termination of the Raebarn Agreement (total payments
of $2.0 million to be paid over 8 years will be expensed at the time
of termination of the Raebarn Agreement which occured concurrently with
the Prior Offering, less $510,000 which was accrued at December 31, 1995).
See "Certain Transactions."
(4) Reflects the reduction in amortization of certain unamortized deferred
financing fees associated with a previous debt issuance to be written-
off as a result of the Financing Transactions. The pro forma income
statement does not reflect a one-time $1.58 million extraordinary charge,
net of tax, for the write-off of such unamortized deferred financing
fees and for certain nonrecurring prepayment penalties which resulted
from the Credit Facility Repayment.
(5) Reflects the additional goodwill amortization to be recorded under the
preliminary purchase price allocation as a result of the Weseley
Acquisition; such goodwill is being amortized over a period of 10 years.
(6) Reflects the additional interest which will result from the Financing
Transactions, excluding interest at a rate of 11 3/8% relating to the
financing of the Weseley Acquisition. Amount includes additional expense
($1,014,000 for the year ended December 31, 1995) to result from the
amortization of deferred financing fees associated with the Prior
Offering over the term thereof.
(7) Reflects the additional interest expense resulting from the Weseley
Acquisition at a rate of 11 3/8%; $15 million of the proceeds of the Prior
Offering was used to fund the Weseley Acquisition.
(8) Reflects estimated income tax effect of pro forma adjustments. The
increase in the effective tax rate over the statutory federal rate in the
"Weseley Pro Forma and Purchase Accounting Adjustments" column is due
primarily to non-deductible goodwill amortization.
(9) Given the historical organization and capital structure of Alvey,
earnings per share information is not considered meaningful or relevant
and therefore has not been presented.
(11) EBITDAM consists of earnings before interest, income taxes,
extraordinary items, depreciation and amortization expense and
management
17
<PAGE>
fees. EBITDAM excludes management fees of $456,000 for the year ended
December 31, 1995. While EBITDAM should not be construed as an
alternative to operating income or net income calculated in accordance
with generally accepted accounting principles or as an indicator of
operating performance or liquidity, it is a measure that the Company
believes is used commonly to evaluate a company's ability to service debt.
(11) Other performance measures such as EBITDA and EBITDAM as shown below
should not be construed as an alternative to operating income or net
income calculated in accordance with GAAP or as an indicator of operating
performance or liquidity. However, the Company believes such non-GAAP
performance measures are commonly used to evaluate a company's ability
to service debt.
<TABLE>
<CAPTION>
WESELEY PRO
FORMA AND
FINANCING FINANCING PURCHASE
TRANSACTIONS TRANSACTIONS HISTORICAL ACCOUNTING
HISTORICAL ADJUSTMENTS PRO FORMA WESELEY ADJUSTMENTS $ PRO FORMA
---------- ----------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
EBITDA (12) $ 20,100 $ 150 $ 20,250 $ (2,624) $ (652) $ 16,974
EBITDAM (13) 20,706 0 20,706 (2,624) (652) 17,430
</TABLE>
(12) EBITDA consists of earnings before interest, income taxes,
extraordinary items and depreciation and amortization expense. EBITDA
also excludes a charge to income of $866,000, net of applicable income
taxes, for the termination of the Raebarn Agreement (such termination
occurred concurrently with the Prior Offering). Management fees of
$456,000 reduce EBITDA on a pro forma basis for the year ended
December 31, 1995.
(13) EBITDAM consists of earnings before interest, income taxes, extraordinary
items, depreciation and amortization expense and management fees.
EBITDAM excludes management fees of $456,000 for the year ended
December 31, 1995.
18
<PAGE>
PRO FORMA FINANCIAL STATEMENTS OF ALVEY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESELEY PRO
FORMA AND
FINANCING FINANCING PURCHASE
TRANSACTIONS TRANSACTIONS HISTORICAL ACCOUNTING
HISTORICAL ADJUSTMENTS PRO FORMA WESELEY ADJUSTMENTS(1) PRO FORMA
---------- ----------- ---------- ---------- -------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents $ 3,405 $ 22,698(2) $ 26,103 $ 216 $(15,000)(3) $11,319
Receivables:
Trade 42,567 0 42,567 341 0 42,908
Unbilled and other 6,211 0 6,211 39 0 6,250
Accumulated costs and
earnings in excess of
billings on uncompleted contracts 8,317 0 8,317 0 0 8,317
Inventories:
Raw materials 13,966 0 13,966 0 0 13,966
Work in process 5,720 0 5,720 0 0 5,720
Deferred income taxes 4,699 0 4,699 1,375 (1,595) 4,479
Prepaid expenses and other 1,665 0 1,665 10 0 1,675
Total current assets 86,550 22,698 109,248 1,981 (16,595) 94,634
Property, plant and equipment net 25,675 0 25.675 223 0 25,898
Other assets 6,031 4,460(4) 10,491 0 0 10,491
Goodwill 32,029 0 32,029 0 4,709(3) 36,738
----------- ----------- ---------- --------- ------------ ---------
Total assets $ 150,285 $ 27,158 $ 177,443 $ 2,204 $ (11,886) $167,761
----------- ----------- ---------- --------- ------------ ---------
----------- ----------- ---------- --------- ------------ ---------
LIABILITIES, REDEEMABLE
PREFERRED STOCK AND NET
INVESTMENT OF PINNACLE
Current liabilities:
Current portion of long-term debt $ 6,915 $ (6,625)(5) $ 290 $ 0 $ 0 $ 290
Accounts payable 24,368 0 24,368 104 0 24,472
Accrued expenses 27,764 250(6) 28,014 164 0 28,178
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Customer deposits 12,107 0 12,107 0 0 12,107
Billings in excess of
accumulated costs and
earnings on uncompleted
contracts 13,904 0 13,904 0 0 13,904
Deferred revenues 899 0 899 3,042 0 3,941
Taxes payable 994 0 994 56 0 1,050
Total current liabilities 86,951 (6,375) 80,576 3,366 0 83,942
Long-term debt 42,460 58,173(5) 100,633 0 0 100,633
Other long-term liabilities 5,075 1,193(6) 6,268 26 0 6,294
Deferred income taxes 4,196 (1,781)(7) 2,415 221 (1,595) 1,041
Redeemable preferred stock (8):
Series A Senior
Cumulative Exchangeable 21,070 (21,070)(9) 0 0 0
Preferred Stock
Cumulative Exchangeable
Preferred Stock 6,252 (6,252)(9) 0 0 0
Net investment of Pinnacle
and Weseley stockholders'
deficit (10) (15,719) 3,270(11) (12.449) (1,409) (10,291) (24,149)
----------- ----------- ---------- --------- ------------ ---------
Total liabilities,
redeemable preferred
stock and net investment of
Pinnacle $ 150,285 $ 27,158 $ 177,443 $ 2,204 $ (11,886) $167,761
----------- ----------- ---------- --------- ------------ ---------
----------- ----------- ---------- --------- ------------ ---------
</TABLE>
_________________
(1) The Weseley Acquisition will be accounted for as a purchase. The
purchase price will be allocated to the acquired assets and liabilities
based on their relative fair values as of the date of acquisition based
on valuations and other studies which are essentially complete.
Based on the results of an independent appraisal, it is expected that
approximately $11.7 million of the Weseley purchase price will be
allocated to purchased research and development costs. Such research
and development costs will be recorded as research and development expense
in Alvey's consolidated statement of operations during the quarter ended
March 31, 1996. This research and development expense has been
excluded from the pro forma statement of operations for the year ended
December 31, 1995, as it represents a non-recurring charge to income
which results directly from the Weseley Acquisition. No significant
adjustments to the Weseley purchase price allocation shown herein are
expected.
(2) Amounts (in thousands) as of December 31, 1995 are comprised of the
proceeds of the Prior Offering offset by payments as follows:
20
<PAGE>
- -------------------------------------------------------------------------------
Proceeds from the offering
(net of transaction costs of $7.1 million) . . . . . . . $ 92,900
Recapitalization dividend . . . . . . . . . . . . . . . . (21,380)
Credit facility repayment . . . . . . . . . . . . . . . . (46,199)
Prepayment penalties. . . . . . . . . . . . . . . . . . . (370)
Note repayment. . . . . . . . . . . . . . . . . . . . . . (2,253)
--------
$ 22,698
--------
--------
See additional description of the above events in the Recent
Transactions by Alvey." The $21.4 million Recapitalization Dividend
from Alvey to Pinnacle reflects the amount that would have been
necessary if the Recapitalization Transactions took place as of
December 31, 1995.
(3) The purchase price and preliminary allocation of the excess of cost over
the net book value of assets acquired of Weseley is as follows:
(in thousands)
-------------
Purchase price $ 15,000
Purchased research and development costs (11,700)
Book value of net liabilities assumed 1,409
--------
Goodwill $ 4,709
--------
--------
The $14.8 million adjustment to cash reflects the $15.0 million purchase
price net of $0.2 million cash acquired. Purchased research and
development costs will be immediately charged to expense. See footnote
(10) below.
(4) Reflects $7.1 million in costs associated with the Financing Transactions
offset by the reduction in unamortized deferred financing fees of $2.6
million associated with a previous debt issuance to be written-off as a
result of the Financing Transactions.
(5) Amount reflects the proceeds from the Prior Offering offset by the Credit
Facility Repayment and the Note Repayment. Pro Forma amount does not
include approximately $6.5 million which the Company expects to spend
in 1996 ($1.5 million is also expected to be spent in 1997) in
connection with the expansion of manufacturing facilities for Alvey and
Busse. No borrowings are expected to be drawn under the Credit
Agreement in order to effect the Pro Forma Transactions. See "Credit
Agreement" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(6) Adjustment includes the effect of the termination of the Raebarn Agreement,
which contemplates total payments of $2.0 million to be paid over 8 years
(but is partially offset by existing accruals for such payments of
$510,000). See "Certain Transactions."
(7) Reflects estimated income tax effect of pro forma adjustments for Financing
Transactions.
21
<PAGE>
(8) Represents redeemable preferred stock of Pinnacle. Due to exchangeable
feature of the preferred stock which allows the holder to exchange the
preferred stock for subordinated notes of Alvey, the preferred stock
has been pushed down to the financial statements of Alvey. See
"Description of Capital Stock."
(9) Amounts reflect the Redemption. See "Recapitalization of Pinnacle."
(10) Net investment of Pinnacle represents the basis of Pinnacle's
investment in Alvey, which has been pushed down to the financial
statements of Alvey, and includes cumulative contributions of capital
and cumulative income before extraordinary losses offset by
extraordinary losses and aggregate accreted/paid preferred stock
dividends. The historical amount at December 31, 1995 consists of
cumulative contributions of capital to Alvey by Pinnacle of $3.0
million and cumulative income before extraordinary losses of
$2.9 million offset by extraordinary losses of $7.5 million and an
aggregate accretion/payment of $14.1 million of paid-in-kind dividends
on preferred stock. The pro forma, as adjusted, amount reflects the
net effects ($27.3 million) of the Recapitalization Transactions at
Pinnacle, the $21.4 million dividend from Alvey to Pinnacle (the
amount that would have been necessary if the Recapitalization
Transactions took place as of December 31, 1995), approximately
$223,000 of prepayment penalties, net of applicable income taxes,
incurred in the Credit Facility Repayment, the write-off of unamortized
deferred financing fees of $1.58 million, net of applicable income
taxes, the charge to income of $866,000, net of applicable income
taxes, for the termination of the Raebarn Agreement (such write-off
and termination occurred concurrently with the Prior Offering), and the
charge to income of $11.7 million for purchased research and
development costs, which will be reflected as research and development
expense immediately subsecquent to the purchase of Weseley by Pinnacle,
Alvey and MFA.
(11) The adjustment reflects the net effects ($27.3 million) of the
Recapitalization Transactions at Pinnacle, the $21.4 million
Recapitalization Dividend from Alvey to Pinnacle (the amount that would
have been necessary if the Recapitalization Transactions took place as
of December 31, 1995), the write-off of unamortized deferred financing
fees of $1.58 million, net of applicable income taxes, the charge to
income of $223,000, net of applicable income taxes, related to
approximately $370,000 of prepayment penalties incurred in the Credit
Facility Repayment and the charge to income of $866,000, net of
applicable income taxes, for the termination of the Raebarn Agreement
(such write-off and termination occurred concurrently with the Prior
Offering).
22
<PAGE>
INDUSTRY OVERVIEW
Constant changes in consumer demands and buying trends offer new
opportunities for materials handling and information systems applications as the
need for a quick response to supply consumer needs is heightened. Trends such as
third-party distribution, point-of-sale ordering, mixed-load shipments and more
frequent, smaller quantity deliveries create new opportunities while enhancing
the need for advanced software and integrated systems. Similarly, changes in
packaging shapes and the elimination of secondary packaging create new
challenges for manufacturers and distributors alike. The Company believes that
the need to increase employee productivity, improve worker safety, improve
margins and meet customer demands are factors which lead manufacturers and
distributors to upgrade and replace their existing materials handling
equipment.
The materials handling industry is highly fragmented with many small,
single-product companies providing storage, transportation, software and other
products and services. Customers increasingly seek to satisfy their materials
handling requirements through fully integrated solutions consisting of the
equipment necessary to load, unload, sort and transport raw materials and
finished products, as well as related software and controls to monitor and
optimize the movement and shipment of products. Customers are also seeking
systems to manage manufacturing, warehousing and distribution logistics.
Companies able to provide complex integrated systems to satisfy materials
handling and logistics management requirements, such as the Company, are
experiencing new growth opportunities, and the Company believes that its broad
range of products and services provides it with a distinct competitive position.
CUSTOMERS
The Company's product leadership has resulted in sales to a diverse
customer base which includes many of the largest corporations in the United
States. In addition, the Company has successfully forged important "value-added
partnerships" with customers such as Anheuser-Busch, ConAgra, Gerber, Kellogg,
Quaker Oats and Target. Many of the Company's customers have reduced their
engineering staffs and consequently look to the Company for design and
engineering services with respect to their materials handling requirements. The
Company has a large installed base of equipment and systems with these customers
which provides reference sites which are critical for attracting potential new
customers. The Company believes that these value-added partnerships are a
significant competitive advantage, as they serve as sources of new product
ideas, generate ongoing, relatively high margin sales and demonstrate proven
systems capabilities to potential new customers.
Each of the customers listed below was one of the top 20 customers of
one of the Company's operating subsidiaries during the last three years. The
customers on the list accounted for 44% and 33% of the Company's sales in
23
<PAGE>
1995 and 1994, respectively. While a minority of the customers listed below are
not current customers of the Company, the Company has no reason to believe that
all customers listed below will not continue to be customers of the Company in
the future.
24
<PAGE>
The Following table sets forth a list of selected customers of the Company by
industry group:
BREWING INDUSTRIAL
- ------- ----------
DISTRIBUTION/MANUFACTURING
--------------------------
ANHEUSER-BUSCH
COORS
LABATTS ALEON
MILLER BREWING CHRYSLER
SOFT DRINKS CROWN CORK AND SEAL
- ----------- DEC
DUPONT
COCA-COLA FOXMEYER
PEPSI-COLA
ROYAL CROWN
CADBURY-SCHWEPPS HEWLETT-PACKARD
FOOD LIBBEY GLASS
- ---- LIBBEY-OWENS-FORD
CAMPBELL
CONAGRA REYNOLDS METAL
FARMLAND SCHERING PLOUGH
FRITO-LAY THE BALL CORPORATION
THOMAS & BETTS
GERBER PRODUCTS WARNER LAMBERT
HERSHEY FOODS CONSUMER GOODS
KELLOGG --------------
KRAFT/GENERAL FOODS AMWAY
NESTLE
PILLSBURY CO.
QUAKER OATS JOHNSON & JOHNSON
RALSTON PURINA LEVER BROS.
TROPICANA PROCTER & GAMBLE
TYSON RECKETT & COLMAN
VLASIC FOODS RUSSELL CORP.
CONSUMER PRODUCTS
-----------------
BLACK & DECKER
<PAGE>
GENERAL ELECTRIC SPIEGEL/EDDIE BAUER
STARTER TANDY
TARGET STORES
UNITED STATIONERS
SUNBEAM-OSTER WAL-MART
TOBACCO WARNER BROTHERS
- -------
BROWN AND WILLIAMSON
PHILIP MORRIS
THIRD PARTY DISTRIBUTION
- ------------------------
FEDERAL EXPRESS
TIBBETS & BRITTEN
WINE AND DISTILLED SPIRITS
- --------------------------
GALLO
UNITED DISTILLERS
GENERAL DISTRIBUTION/RETAIL
- ---------------------------
AUTOZONE
BJ'S STORES
CONSOLIDATED STORES
- -------------------
DAYTON HUDSON
DOLLAR GENERAL
FAMOUS FOOTWEAR
J.C. PENNEY
MEIJER
ROSS STORES
- -----------
SEARS
26
<PAGE>
During the year ended December 31, 1995, the Company's largest customer was
Procter & Gamble, which accounted for 3.5% of the Company's total sales. For the
year ended December 31, 1994, the Company's largest customer was Target Stores,
which accounted for 5.0% of the Company's total sales. For the same periods, the
Company's largest ten customers accounted for 23.6% and 24.9% of the Company's
total sales, respectively.
The Company focuses its research and development on key customers and
applications. These customers serve as significant funding sources for such
research and development efforts, with most of the cost paid for through
contracts which focus on solving specific problems or technical requirements.
These contracts also provide the Company with opportunities to enhance its
competitive position without additional capital investments. The Company expects
to create additional value-added relationships as it extends its product
offerings and installs new, integrated systems which can serve as additional
reference sites.
The Company believes that it has excellent working relationships with its
customers. These relationships include proprietary accounts where projects are
generally awarded without a competitive bid process and non-proprietary accounts
where projects are typically awarded through a bid process among two or three
potential suppliers.
SALES AND DISTRIBUTION
The Company has developed strong domestic sales channels, including over
100 direct salespeople and 260 independent distributors and independent
manufacturer's representatives. This sales force covers the entire United
States, with especially strong coverage in the major industrial centers.
Management believes that the Company has the strongest combination of direct and
independent sales networks in the materials handling industry.
International sales accounted for approximately $21.3 million or 7.4% of
the Company's sales for the year ended December 31, 1995, a 58% increase from
$13.5 million in international sales for the year ended December 31, 1994. The
Company is pursuing a strategy to significantly increase international sales as
a percentage of the Company's total net sales. An international division has
been established within the Company to develop and implement strategies to
achieve this goal. The Company expects to leverage its existing relationships
with major multinational corporations in the United States in order to follow
and support their activities throughout the global market.
BACKLOG
<PAGE>
The Company's backlog is based upon firm customer orders that are supported
by purchase orders, other contractual documents and cash payments. As of
December 31, 1995, the Company's backlog reached $143.9 million, compared to a
backlog of approximately $114.5 million at December 31, 1994. 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 99% of orders in backlog
at December 31, 1995 will be shipped within one year.
RESEARCH AND DEVELOPMENT
Strong research and development efforts are the basis of the Company's
product and market leadership. In the fiscal years ended December 31, 1995,
1994 and 1993, the Company incurred $2.1 million, $2.5 million and $1.4 million,
respectively, in research and development expenses. By utilizing customer
inputs, research with respect to competitors and research with respect to
externally available engineering to establish future product needs, the Company
focuses its research and development on key customers and applications. Based on
such data and subsequent analysis, the Company establishes product plans that
are continually reviewed and updated. To facilitate an integrated solutions
approach, the Company's research and development activities address three
engineering disciplines: mechanical, controls and computer software.
In addition to the Company's research and development expenses identified
above, customers serve as a significant funding source for these research and
development efforts, with much of the cost paid for through customer contracts
that focus on solving specific problems or technical requirements. These
contracts also provide the Company with opportunities to enhance its competitive
position without additional capital investments.
The Company holds 28 active U.S. patents, 12 active foreign patents and 15
U.S. registered trademarks and has 6 pending patent applications. In addition to
its extensive patent and trademark portfolio, the Company also licenses certain
intellectual property rights from third parties and owns a wide array of
unpatented proprietary engineering. The Company's U.S. patents have remaining
terms ranging from one to 16 years.
RAW MATERIALS AND COMPONENTS
The Company's principal raw materials and components purchased from third
parties are steel and electric motors and reducers. The Company avoids some of
the price volatility of these products by purchasing most of its requirements
through annual contracts. The Company does not rely on any single supplier for
these materials and believes it has the ability to quickly switch sources for
any of these materials should the need arise.
28
<PAGE>
ENVIRONMENTAL MATTERS
The Company's operations are subject to a variety of federal, state and
local environmental laws and regulations which have become increasingly
stringent. The Company believes its current operations are in material
compliance with current environmental laws and regulations. However, the scope
of environmental laws is very broad and is subject to change.
COMPETITION
The materials handling and related information systems industry is highly
fragmented and very competitive. The industry includes numerous small to medium
size suppliers who focus on specific market niches and/or singular applications.
The suppliers in this group generally do not offer systems or integrated
solutions, but instead offer individual kits, machines and applications. Certain
other competitors are larger, with significant financial and marketing
resources, and offer materials handling systems and integrated solutions.
Although the Company believes it is one of the preeminent suppliers of
integrated materials handling systems, many of the Company's competitors are
large and have significant financial, marketing and technical resources. In
addition, the Company may encounter competition from new market entrants.
EMPLOYEES
As of March 31, 1996, the Company had over 2,000 employees, approximately
700 of whom are engineers and other professional staff. The Company operates
through a decentralized organizational structure, interconnected by a corporate
staff of eleven professionals located at Pinnacle's headquarters in St. Louis,
Missouri. The Company is subject to collective bargaining agreements at all of
its manufacturing facilities except the Busse facility. The Company has not
experienced any work stoppages related to labor matters for more than 20 years.
The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company occupies almost 1,000,000 square feet of manufacturing and
office space. Primary production facilities are located in St. Louis, Missouri;
Cincinnati, Ohio; Randolph, Wisconsin; and Kenilworth, New Jersey. Software
facilities are located in Waukesha, Wisconsin; San Diego, California, Grand
Rapids, Michigan and Shelton,
<PAGE>
Connecticut.
In order to meet customer demand and improve manufacturing efficiencies,
the Company plans to complete two new manufacturing facilities in 1996: a 62,000
square foot addition to the Busse facility in Randolph, Wisconsin and an 82,000
square foot facility for Alvey in St. Louis, Missouri. The Company estimates
that these facilities will require a total of approximately $8.0 million for
construction and related equipment, of which $6.5 million will be spent in 1996.
The additions will enable the Company to meet strong growth in customer orders,
centralize operations to eliminate cost duplications, implement manufacturing
process and efficiency improvements and eliminate the need to out-source
manufacturing and assembly operations.
The location and size of each of the Company's significant facilities is
summarized below:
<TABLE>
<CAPTION>
Operating Company Location Size (Sq. Ft.) Owned/Leased Lease Expiration
----------------- -------- ------------- ------------ ----------------
<S> <C> <C> <C>
Alvey Olivette, MO 250,000 Owned _
Busse Randolph, WI 60,000 Owned _
Busse Randolph, WI 10,000 Leased December 1996
Busse Beaver Dam, WI 14,000 Leased July 1996
Buschman Cincinnati, OH 286,000 Owned _
White Kenilworth, NJ 263,000 Leased December 2006
White San Diego, CA 19,000 Leased May 1999
MFA Waukesha, WI 45,000 Leased October 2005
Weseley Shelton, CT 7,300 Leased May 2000
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. None of the matters in which the
Company is currently involved, either individually or in the aggregate, is
expected to have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1995.
30
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public market for the Company's Common Stock. All of
the Company's Common Stock is held by Pinnacle.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical consolidated financial data presented below at and
for the five years ended December 31, 1995 have been derived from the historical
Consolidated Financial Statements of Alvey which have been audited by Price
Waterhouse LLP, independent accountants. Alvey's historical consolidated
financial statements at and for the three years ended December 31, 1995, 1994
and 1993 are included elsewhere in this Form 10-K.
The information below is qualified in its entirety by the detailed
information included elsewhere herein and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and related Notes to
Consolidated Financial Statements included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
(dollars in thousands)
<S> <C> <C> <C> <C>
Results of Operations (1):
Net sales . . . . . . . . . . . . . . . . . . . $ 288,018 $ 248,177 $ 164,022 $ 106,579 $ 80,947
Cost of goods sold. . . . . . . . . . . . . . . 217,297 189,007 123,033 75,343 60,666
---------- ---------- ---------- ---------- ---------
Gross profit . . . . . . . . . . . . . . . . . 70,721 59,170 40,989 31,236 20,281
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . 51,630 43,402 30,421 22,467 16,582
Research and development expenses . . . . . . . 2,051 2,538 1,436 930 602
Amortization expense. . . . . . . . . . . . . . 1,737 1,836 1,479 1,095 1,002
Other expense (income) net (2). . . . . . . . . (108) 2,279 (11) (335) (308)
<PAGE>
Restructuring and plant consolidation
expense (3) . . . . . . . . . . . . . . . . . . 0 0 0 1,801 0
---------- ---------- ---------- ---------- ---------
Operating income . . . . . . . . . . . . . . . 15,411 9,115 7,664 5,278 2,403
Interest expense. . . . . . . . . . . . . . . . 6,896 5,921 4,053 2,690 2,512
---------- ---------- ---------- ---------- ---------
Income (loss) before income taxes and
extraordinary losses . . . . . . . . . . . . . 8,515 3,194 3,611 2,588 (109)
Income taxes. . . . . . . . . . . . . . . . . . 4,109 1,516 1,560 1,126 32
---------- ---------- ---------- ---------- ---------
Income (loss) before extraordinary
losses . . . . . . . . . . . . . . . . . . . . 4,406 1,678 2,051 1,462 (141)
Extraordinary losses, net (4) . . . . . . . . . 0 0 6,203 614 657
---------- ---------- ---------- ---------- ---------
Net income (loss). . . . . . . . . . . . . . . $ 4,406 $ 1,678 $ (4,152) $ 848 $ (798)
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Earnings per share (5). . . . . . . . . . . . . . _ _ _ _ _
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Working capital (deficit) . . . . . . . . . . . $ (401) $ 7,152 $ 8,155 $ (928) $ (1,035)
Total assets. . . . . . . . . . . . . . . . . . 150,285 138,536 129,658 83,021 45,349
Long-term debt, less current maturities . . . . 42,460 54,754 59,341 35,508 18,194
Redeemable preferred stock (6). . . . . . . . . 27,322 23,435 20,034 16,902 12,299
Net investment of Pinnacle (7). . . . . . . . . (15,719) (16,332) (15,015) (9,729) (8,475)
</TABLE>
32
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF ALVEY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993 1992 1991
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED FINANCIAL DATA (1):
Depreciation expense. . . . . . . . . . . . . $ 2,952 $ 2,752 $ 2,583 $ 1,724 $ 1,433
Capital expenditures, net (8) . . . . . . . . 4,496 5,091 3,471 1,920 491
OTHER PERFORMANCE MEASURES (NON-GAAP) (9):
EBITDA (10) . . . . . . . . . . . . . . . . . 20,100 15,877 11,726 8,097 4,838
Ratio of earnings to fixed charges plus
preferred stock dividends(11) . . . . . . . . 1.07 (11) (11) (11) (11)
Ratio of earnings to fixed charges (12) . . . . . 2.06 1.47 1.80 1.83 (12)
Ratio of EBITDA to cash interest
expense (13) . . . . . . . . . . . . . . . . . 3.27 2.77 3.17 3.30 1.93
Ratio of long-term debt to EBITDA. . . . . . . 2.11 3.45 5.06 4.33 3.76
EBITDAM (14) . . . . . . . . . . . . . . . . . $ 20,706 $ 16,379 $ 12,391 $ 8,597 $ 5,151
Ratio of EBITDAM to cash interest expense
(13) . . . . . . . . . . . . . . . . . . 3.37 2.86 3.35 3.50 2.05
Ratio of long-term debt to EBITDAM. . . . . . 2.05 3.34 4.79 4.08 3.53
</TABLE>
- -----------
(1) Includes various acquisitions from the date of such acquisition, including
Busse and Buschman in fiscal 1992, White in fiscal 1993 and AEC in
fiscal 1994.
(2) Amount in fiscal 1994 includes the payment of a one-time stay bonus in the
amount of $2.2 million to an executive of White in connection with the
acquisition of White.
(3) Reflects nonrecurring restructuring and plant consolidation expenses
associated with the closure of a Company-owned manufacturing plant.
(4) Reflects the write-off of unamortized deferred financing fees, net of
applicable income tax benefits, resulting from the early
extinguishment of debt during 1993, 1992 and 1991. Amount in 1993 also
includes approximately $5.4 million, net of applicable income tax
benefits, for the accrual of operating losses and other related costs
associated with the disposal of a carousel manufacturing plant in
Lewiston, Maine
<PAGE>
pursuant to a Federal Trade Commission order in 1993 (See Note 5 to
the Consolidated Financial Statements of Alvey).
(5) Given the historical organization and capital structure of Alvey, earnings
per share information is not considered meaningful or relevant and
therefore has not been presented.
(6) Represents redeemable preferred stock of Pinnacle. Due to the exchangeable
feature of the preferred stock which allows the holder to exchange the
preferred stock for subordinated notes of Alvey, the preferred stock
has been pushed down to the financial statements of Alvey.
(7) Net investment of Pinnacle represents the basis of Pinnacle's investment in
Alvey, which has been pushed down to the financial statements of
Alvey, and includes cumulative contributions of capital and cumulative
income before extraordinary losses offset by extraordinary losses and
aggregate accreted/paid preferred stock dividends. The historical
amount at December 31, 1995 consists of cumulative contributions of
capital to Alvey by Pinnacle of $3.0 million and cumulative income
before extraordinary losses of $2.9 million offset by extraordinary
losses of $7.5 million and an aggregate accretion/payment of $14.1
million of paid-in-kind dividends on preferred stock.
(8) Capital expenditures include amounts related to investments in fixed assets
and costs of software development.
(9) Other performance measures such as EBITDA and EBITDAM (discussed further
below) should not be construed as an alternative to operating income
or net income calculated in accordance with generally accepted
accounting principles ("GAAP") or as an indicator of operating
performance or liquidity. However, the Company believes such non-GAAP
performance measures are commonly used to evaluate a company's ability
to service debt.
(10) EBITDA consists of earnings before interest, income taxes, extraordinary
items and depreciation and amortization expense. In 1994, EBITDA also
excludes a $2.2 million one-time payment of a stay bonus in connection
with the acquisition of White which is included in "Other expense
(income) net" above. Management fees serve to reduce EBITDA by
$606,000, $502,000, $665,000, $500,000 and $313,000 for the years
ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively.
(11) For purposes of this computation, fixed charges consist of interest
expense, amortization of deferred financing fees, one-third of rental
expenses (representative of that portion of rental expense
attributable to interest) and accretion/payment of preferred stock
dividends. Earnings consist of income before income taxes plus all
fixed charges, except for the accretion/payment of preferred stock
dividends. Fixed charges exceeded earnings by $3.1 million,
$1.3 million, $1.1 million and $1.1 million for the years ended
December 31, 1994, 1993, 1992 and 1991, respectively.
(12) For purposes of this computation, fixed charges consist of interest
expense, amortization of deferred financing fees, and one-third of
rental expenses (representative of that portion of rental expense
attributable to interest) and excludes the accretion/payment of
preferred stock dividends. Earnings consist of income before income
taxes plus all fixed charges, except for the accretion/payment of
preferred
34
<PAGE>
stock dividends. Fixed charges exceeded earnings by $109,000 for the
year ended December 31, 1991.
(13) For purposes of this computation, interest expense consists of interest on
indebtedness and does not include amortization of deferred financing
fees and other noncash charges to interest which have been
capitalized.
(14) EBITDAM consists of earnings before interest, income taxes, extraordinary
items, depreciation and amortization expense and management fees. In
1994, EBITDAM also excludes a $2.2 million one-time payment of a stay
bonus in connection with the acquisition of White which is included in
"Other expense (income) net" above. EBITDAM excludes management fees
of $606,000, $502,000, $665,000, $500,000 and $313,000 for the years
ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively.
<PAGE>
ITEM 7. 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 Overview
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of the Company for the
three fiscal years ended December 31, 1995.
Subsequent to the acquisition of Alvey by Pinnacle in August 1988, Alvey
and Pinnacle completed a succession of five complementary acquisitions which has
resulted in expanded product lines and an ability to provide integrated
solutions in a wide range of manufacturing and distribution applications. Set
forth below is certain information with respect to the Company's acquisitions:
Acquisition ACQUISITION DATE
----------------
McHugh, Freeman & Associates, Inc. May 1989
Busse Bros., Inc. April 1992
The Buschman Company October 1992
White Storage & Retrieval Systems, Inc. December 1993
Automation Equipment Company August 1994
WESELEY SOFTWARE DEVELOPMENT CORP. January 1996
The Company believes that its emphasis on complementary acquisitions of
companies serving either targeted
36
<PAGE>
markets or providing niche products has enabled it to provide customers a single
source for complete integrated materials handling and information flow systems.
Further, the Company believes that in 1995 it began to benefit from, and in 1996
continues to benefit from, productivity and integration gains resulting from its
succession of complementary acquisitions combined with a stategy of integrating
the operations of each newly-acquired company with the operations of Alvey and
its other operating subsidiaries, which strategy is more fully described in the
next succeeding paragraph.
Shortly after acquiring each of its operating subsidiaries, management
reviewed each newly-acquired subsidiary with respect to the possible
integration of operations with Alvey and its other operating subsidiaries
in order to improve operating efficiencies. As a result of such previous
reviews, the Company initiated changes in each operating subsidiary's
production processes that were targeted at the improvement of manufacturing
efficiencies, the increase in facility capacity and ultimately the
reduction of product cost. Additionally, in recent years, management has
undertaken a number of programs targeted at reducing the cost to produce a
specific product by simplifying and standardizing components and
assemblies, thereby improving the productivity of the manufacturing
process. The following is a brief summary of some of the actions taken and
programs initiated in order to improve operating efficiencies:
Each of the manufacturing facilities of Alvey, Busse and Buschman have been
reorganized to modify the flow of product and raw materials through the
manufacturing process. Within three to 12 months after completing these
changes, each of Alvey, Busse and Buschman recorded meaningful improvements
in labor productivity and facility capacity.
In 1993, Alvey began production of the series 920 palletizer, which was
designed to be manufactured in modules rather than one large piece, thus
reducing the labor requirements. As with most new products, the
manufacture of the initial units resulted in cost overruns; however, by
early 1994, Alvey produced these units more efficiently than originally
estimated. The result of this engineering process was to produce a state-
of-the-art machine that could be sold at a price 15-25% below the machine
it replaced, yet generate a gross margin percentage significantly higher
than that of its predecessor.
Alvey also began production of the series 880 palletizer in late 1994.
This machine was redesigned to incorporate many of the same assemblies used
on the 920 series, resulting in labor efficiencies and reduced inventories.
While production of the series 880 palletizer has not produced operating
results that are as significant as those realized in the production of the
920 palletizer, the production of the series 880 is beginning to realize
similar cost improvements and efficiency trends.
Busse introduced the "Turbo" series depalletizer in 1993. Busse has
realized similar results on the production of the Turbo series
depalletizers as Alvey experienced with the series 920 palletizer. Busse
has been able to reduce its sales price while actually improving gross
margin dollars and percentages. Furthermore, the
37
<PAGE>
production changes initiated in 1993 have enabled Busse to increase sales
by approximately 300% over 1992 results (the year that Busse was acquired
by Alvey), with the number of employees increasing by approximately 200%.
- THE COMPANY HAS SUBSTANTIALLY COMPLETED THE PROCESS OF COMBINING THE
CONVEYOR PRODUCT LINE OF ALVEY WITH THAT OF BUSCHMAN. THE BEST PRODUCTS
FROM EACH COMPANY WERE SELECTED AND THEN RE-ENGINEERED TO INCORPORATE
CURRENT TECHNOLOGIES AND MANUFACTURING CAPABILITIES. THE EFFECT OF THIS
PROGRAM WAS TO GREATLY REDUCE THE NUMBER OF PARTS REQUIRED TO SUPPORT TWO
SEPARATE PRODUCTS AND TO SIMPLIFY THE MANUFACTURE OF THE NEW ENHANCED
PRODUCT. AS A RESULT OF THIS UNDERTAKING, AND OTHER PROGRAMS TARGETED AT
SPECIFIC ISSUES, PRODUCTIVITY AT BUSCHMAN BEGAN INCREASING IN THE LAST
HALF OF 1994 AND HAS CONTINUED TO DO SO THROUGHOUT 1995 AND INTO THE
FIRST QUARTER OF 1996. BUSCHMAN INCREASED 1995 EQUIPMENT SALES BY 37.3%
OVER 1994 WITH ONLY A MINIMAL INCREASE IN FACTORY EMPLOYMENT.
While no assurance may be given with respect to future productivity
performance, management believes additional efficiencies will be realized from
these programs.
Each of the Company's acquisitions was accounted for under the purchase
method of accounting, with the purchase prices allocated to the estimated fair
market value of the assets acquired and liabilities assumed. In each
acquisition, the excess of the purchase price paid over the estimated fair value
of the net assets acquired was allocated to goodwill. The Company has allocated
an aggregate of $35.7 million to goodwill since 1988, $32.0 million of which is
recorded on Alvey's balance sheet at December 31, 1995. Such goodwill is
amortized over a period of 40 years and will result in future annual goodwill
amortization expense of approximately $0.9 million per year. See "Pro Forma
Financial Data" for additional goodwill amortization estimated to result from
the acquisition of Weseley. The acquisitions were financed primarily through
bank borrowings, resulting in increases in the Company's debt and interest
expense. Results of operations of each acquired company have been included in
the Company's consolidated statement of operations from the dates of the
respective acquisition.
38
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, net sales
and categories of expenses, including "Other expense (income) net", in thousands
of dollars and as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net sales $288,018 100.0% $248,177 100.0% $164,022 100.0%
Cost of goods sold 217,297 75.4 189,007 76.2 123,033 75.0
--------- --------- ---------
Gross profit 70,721 24.6 59,170 23.8 40,989 25.0
Selling, general & adminis-
trative expenses 51,630 17.9 43,402 17.5 30,421 18.5
Research & development
expenses 2,051 0.7 2,538 1.0 1,436 0.9
Amortization expense 1,737 0.6 1,836 0.7 1,479 0.9
Other expense (income) net (108) (0.0) 2,279 0.9 (11) (0.0)
--------- --------- ---------
Operating income 15,411 5.4 9,115 3.7 7,664 4.7
Interest expense 6,896 2.4 5,921 2.4 4,053 2.5
--------- --------- ---------
Income before income
taxes and extraordinary
loss 8,515 3.0 3,194 1.3 3,611 2.2
Income taxes 4,109 1.5 1,516 0.6 1,560 0.9
--------- --------- ---------
Income before extraordinary
loss 4,406 1.5 1,678 0.7 2,051 1.3
Extraordinary loss, net 0 0.0 0 0.0 6,203 3.8
--------- --------- ---------
Net income (loss) $ 4,406 1.5 $ 1,678 0.7% $ (4,152) (2.5)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Comparison of the Year Ended December 31, 1995 to the Year Ended December 31,
1994
NET SALES were $288.0 million for the year ended December 31, 1995,
representing an increase of $39.8 million, or 16.1%, over net sales of $248.2
million for the year ended December 31, 1994 . Because the Company completed no
acquisitions during 1994, this increase in net sales is due to sales growth at
each of the
39
<PAGE>
Company's operating subsidiaries. In particular, the strong demand for Alvey's
redesigned mid-range and high-speed palletizers and its success in providing
integrated systems resulted in record shipments and sales and produced an
increase of $17.1 million, or 19.3%, in net sales over 1994. At MFA, continued
strong demand for warehouse management systems caused sales to grow by $11.9
million, or 42.6%, compared to 1994. Buschman also realized significant revenue
gains from integrated and systems projects as sales of these systems increased
$6.0 million, or 16.6%.
On a consolidated basis, new order bookings were $318.9 million for 1995,
representing an increase of $50.3 million, or 18.7%, over bookings for 1994.
Increases in 1995 new order bookings were realized by each of the Company's
operating subsidiaries other than White, with new order bookings at Alvey and
Buschman increasing by $33.5 million and $9.5 million, or 36.4% and 13.7%,
respectively. This significant increase in customer demand created a record
year-end sales backlog of $143.9 million at December 31, 1995, which represents
an increase of $29.4 million, or 25.7%, over the backlog at December 31, 1994.
The most significant increases in year-end backlog were recorded at Alvey, which
recorded an increase of $20.2 million, or 46.3%, and Buschman, which recorded an
increase of $8.6 million, or 31.1%. Alvey's backlog is driven by the increasing
number and size of integrated and palletizing systems while Buschman's success
has resulted from significant bookings increases in major warehouse systems.
GROSS PROFIT was $70.7 million for 1995, an increase of $11.6 million, or
19.5%, over 1994. This increase was primarily the result of increased sales
volume offset by a slightly less favorable mix of products resulting in
additional margins of approximately $9.5 million. In addition, improved
operating efficiencies at each manufacturing entity (other than White) offset
somewhat by project cost overruns, produced additional margins of $1.7
million. The gross profit margin as a percent of sales increased to 24.6% for
1995 from 23.8% for 1994 due to operating efficiencies and the effects of
re-engineering certain major products. These gains were partially offset by
product and project overruns caused by over-committed manufacturing and
engineering resources at Alvey and, to a lesser degree, at Busse, during
portions of 1995. However, management of the Company believes the expansion
of its facilities, the integration of the Company's systems and the
productivity enhancement and engineering programs initiated in recent years
have resulted in manufacturing efficiency and productivity gains.
Specifically, the gross margin percentage at Buschman increased 6.7
percentage points in 1995 compared to 1994. This increase is primarily a
result of the efficiency and productivity gains and targeted marketing
programs attributable to the efforts of the new management team that was put
in place during the second and third quarters of 1994. Since the second half
of 1994, "as sold" margins (the estimated gross margin an a specific project
at the time of sale) on new orders have improved, resulting in an increase in
Buschman's gross profit of approximately $800,000 during 1995. More
importantly, the standardization of Buschman's product line and manufacturing
engineering programs have generated substantial changes in the manufacturing
process and have resulted in significant improvements in labor efficiencies,
product deliveries and
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<PAGE>
inventory levels. These improvements increased gross profit in 1995 by
approximately $2.5 million over 1994 results.
Gross profit at White decreased 21.6% from 1994. This decrease is
primarily attributable to an under utilization of the manufacturing and
engineering resources in the first half of 1995, and an over-utilization of the
same resources during the last four months of 1995 as sales significantly
increased. This significant deviation in the demand for these resources caused
an under-absorption of overhead costs during the first half of 1995 and
inefficiencies during the fourth quarter and resulted in various product and
project cost overruns. In response to the difficulties encountered at White
during 1995, the Company has hired or transferred three senior executives and
realigned certain management functions at White to conform to policies and
structures in place and proven to be successful at other operating companies of
the Company.
While no assurance may be made with respect to future productivity
performance, the Company believes the recent productivity gains at Buschman are
sustainable and may be improved upon. The ability of the Company to increase
favorable productivity performance depends primarily upon (i) the ability of
White to fully realize the benefits of new systems and organizational changes,
(ii) the addition of capacity at Alvey and Busse during 1996, (iii) the
increased expertise and efficiency of the large number of new engineering and
production employees of the Company, and (iv) the implementation and success of
additional programs aimed at reducing project cycle times and engineering
productivity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $51.6 million for 1995,
representing an increase of $8.2 million, or 18.9%, over 1994. This increase is
primarily attributable to expenses associated with increased sales, the creation
of two new marketing and sales support teams responsible for integrated systems
and international sales and approximately $1.7 million of performance-based
incentive compensation and profit sharing distributions. As a percentage of
sales, selling, general and administrative expenses increased to 17.9% for 1995
from 17.5% for 1994. This increase reflects the cost of increased marketing
staff to secure the record bookings and the higher levels of incentive
compensation and profit sharing.
RESEARCH AND DEVELOPMENT EXPENSES were $2.1 million for 1995, a decrease of
$487,000, or 19.2%, compared to $2.5 million for 1994. Research and development
expenses were higher for 1994 as compared to 1995 as a result of expenses
incurred prior to the establishment of technological feasibility related to the
development of a standard warehouse management software system at MFA.
OTHER EXPENSE (INCOME) NET was income of $108,000 for 1995, representing a
difference of $2.4 million, as
41
<PAGE>
compared to $2.3 million in expense in 1994. The difference is primarily
attributable to the one-time payment of stay bonus to an executive at White
during 1994 in connection with the acquisition of that entity.
OPERATING INCOME increased to $15.4 million for 1995, representing an
increase of $6.3 million, or 69.1%, as compared to $9.1 million for 1994. As a
percentage of net sales, operating income increased to 5.4% for 1995 from 3.7%
in 1994. This increase is due primarily to the increase in gross profit margin
in 1995 and the payment of the one-time stay bonus in 1994 as described above.
INTEREST EXPENSE increased to $6.9 million for 1995, representing an
increase of $1.0 million or 16.5%, as compared to $5.9 million for 1994. This
increase is due primarily to an increase in the base borrowing rate under the
Company's credit facilities, interest incurred with respect to the 11.95% Notes
which were issued in January 1995 and bank fees incurred in the first quarter of
1995 in connection with an amendment of the Company's credit facility.
INCOME TAXEs ON CONTINUING OPERATIONS were $4.1 million for 1995,
representing an increase of $2.6 million from $1.5 million for 1994. The
effective income tax rate of 48.3% in 1995 increased from an effective rate of
47.5% experienced in 1994 due to the absence of foreign tax credits in 1995,
offset by somewhat lesser effects of (i) state income taxes, (ii) goodwill
amortization and (iii) non-deductible meals and entertainment.
Comparison of the Year Ended December 31, 1994 to the Year Ended
December 31, 1993
NET SALES were $248.2 million for the year ended December 31, 1994,
representing an increase of $84.2 million, or 51.3%, over net sales of $164.0
million for the year ended December 31, 1993. The full year inclusion of
White, acquired in December 1993, accounted for $49.6 million of the
increase. Record sales at each entity, other than the recently acquired
White, represented an aggregate $34.6 million, or 21.1%, increase over 1993
sales for such entities. This increase was primarily attributable to the
strong demand for warehouse management systems software, with respect to
which sales increased by $11.2 million, or 67.1%, from 1993. In addition, the
introduction of new and enhanced products and a targeted marketing effort
resulted in increased sales of $8.6 million, or 10.7%, and $5.3 million, or
62.9%, at Alvey and Busse, respectively.
GROSS PROFIT was $59.2 million in fiscal 1994, an increase of $18.2
million, or 44.4%, from $41.0 million in 1993. Of that increase, $11.5 million
reflects the full year inclusion of White. The remainder of the increase was
primarily attributable to increased sales volumes at entities other than White.
The gross profit margin, as a percentage of sales, decreased to 23.8% (24.1%
excluding White) from 25.0% in 1993 due (i) to additional costs incurred as the
Company continued its implementation of various manufacturing integration
programs at Buschman and (ii) to reduced
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<PAGE>
margins on two major projects, booked in 1993, in order to better strategically
position the Company. This decrease in gross profit margin was partially offset
by productivity gains at the Company's more established operating units. The
Company believes that the integration and productivity enhancement programs
initiated in recent years are now resulting in manufacturing efficiencies and
productivity gains.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $43.4 million in 1994,
representing an increase of $13.0 million, or 42.8%, from $30.4 million in 1993.
Of that increase, $9.2 million is attributable to the full year inclusion of
White. As a percentage of sales, selling, general and administrative expenses
decreased to 17.5% in fiscal 1994 compared to 18.5% in fiscal 1993. This
decrease was primarily attributable to the realization of administrative
synergies related to the Company's acquisition of White and the successful
efforts of the Company to increase certain sales without adding selling, general
and administrative expenses.
RESEARCH AND DEVELOPMENT EXPENSES were $2.5 million for 1994, representing
an increase of $1.1 million, or 78.6%, compared to $1.4 million for fiscal 1993.
The full year inclusion of White reflects $500,000 of this increase. The
remaining increase is attributable to increased product development efforts at
Busse, Alvey and MFA.
OTHER EXPENSE, NET was $2.3 million in 1994, representing an increase of
$2.3 million over 1993. This increase is almost entirely attributable to the
one-time payment of a stay bonus to an executive of White in connection with the
acquisition of that entity.
AMORTIZATION EXPENSE was $1.8 million in 1994, representing an increase of
$357,000, or 24.1%, from $1.5 million in fiscal 1993. This increase is primarily
attributable to the full year inclusion of goodwill amortization resulting from
the acquisition of White.
OPERATING INCOME increased to $9.1 million in 1994, representing an
increase of $1.4 million, or 18.2%, from $7.7 million for 1993. As a
percentage of net sales, operating income decreased to 3.7% in fiscal 1994
from 4.7% in fiscal 1993. This decrease is due primarily to the decrease in
the gross profit margin percentage and the payment of the one-time stay bonus
as described above.
INTEREST EXPENSE increased to $5.9 million in 1994, representing an
increase of $1.8 million, or 43.9%, from $4.1 million in 1993. This increase is
due primarily to the $27 million of additional debt incurred in connection with
the acquisition of White in December 1993 and an increase in interest rates on
the Company's floating rate debt, resulting from the general rate increase
experienced throughout the economy in 1994.
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<PAGE>
INCOME TAXES ON CONTINUING OPERATIONS were $1.52 million in 1994,
representing a decrease of $44,000 from $1.56 million in 1993. The related
effective income tax rate increased to 47.5% in fiscal 1994 from 43.2% in 1993.
The increase in the effective rate is attributable primarily to increased
nondeductible goodwill amortization and increased state income taxes relating to
the acquisition of White.
EXTRAORDINARY LOSS was $6.2 million in 1993 and there was no
extraordinary loss in 1994. Approximately $5.4 million, net of applicable tax
benefits, was charged as an expense as a result of losses incurred in 1993
and to accrue anticipated future losses with respect to the disposal of the
Lewiston, Maine manufacturing plant. As a result of Alvey's acquisition of
Buschman in 1992, the Company made a decision to close Buschman's carousel
manufacturing plant in Lewiston, Maine. The Company was subsequently ordered
by the Federal Trade Commission, beginning December 6, 1993, to hold the
Lewiston, Maine operation separate from operations of the Company, to fund
all operations of Lewiston without participating in the daily management of
the operations and to ultimately dispose of the facility. As a result of the
Federal Trade Commission intervention, an extraordinary loss was recorded in
1993. The Company sold the carousel manufacturing plant in July 1995 to a
third party which currently operates the plant. In addition, approximately
$803,000, net of applicable tax benefits, resulted from the write-off of the
unamortized portion of deferred financing fees associated with indebtedness
that was refinanced during the year.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the three years ended December 31, 1995, the
Company generated approximately $37.7 million of cash from operations, which has
been adequate to fund the Company's ongoing capital expenditure and debt service
requirements. Increases in working capital requirements (primarily related to
accounts receivable and inventory) over this period, as the Company's business
has expanded internally and through acquisitions, were significantly offset by
funds the Company received from its customers in the form of deposits and
progress billings. Annual first quarter funding of qualified profit sharing
plans, incentive compensation and bonus plans, disproportionate tax withholding
requirements and certain insurance and professional services generally result in
an increased use of cash in the first quarter.
CASH PROVIDED BY OPERATIONS. Cash flows from operations were $18.9
million, $12.1 million and $6.7 million for the years ended December 31, 1995,
1994 and 1993, respectively.
LEWISTON OPERATION. In connection with the acquisition of Buschman in
1992, the Company made a decision to close Buschman's carousel manufacturing
plant in Lewiston, Maine. In connection with the acquisition of White in
December 1993, the Company was ordered by the Federal Trade Commission to hold
Buschman's Lewiston operation separate and to find a suitable buyer for the
business. In the course of pursuing a buyer and pursuant to the FTC order,
44
<PAGE>
the Company was required to fund the Lewiston operation and, as a result, has
incurred expenditures in the amount of $2.3 million for the year ended December
31, 1995 and $2.7 million and $1.8 million for the years ended December 31, 1994
and 1993, respectively. The Lewiston operation was ultimately divested on
July 31, 1995, at which time the Company agreed to assist in funding the
operation through July 31, 1997. A third party currently operates the plant. As
of December 31, 1995, the remaining expenditures to assist in the funding are
expected to approximate an aggregate of $1.1 million. Upon its initial decision
to close the Lewiston plant, the Company accrued losses of $1.4 million at
December 31, 1992, net of applicable income taxes, with respect to plant closure
costs and the write-off of related assets, with an offsetting charge to
goodwill. As a result of the Federal Trade Commission intervention, all
subsequent losses, including those anticipated through ultimate disposal of the
facility, were charged to earnings as an extraordinary loss, net of tax
benefits, in fiscal 1993.
CAPITAL EXPENDITURES. Capital expenditures for the years ended
December 31, 1995, 1994 and 1993 were approximately $4.5 million, $5.1 million
and $3.5 million, respectively. These expenditures were used primarily to
finance the acquisition of computer and powder paint equipment and the
administrative restructuring at White (fiscal 1994), plant expansion and
reorganization at Buschman (fiscal 1993 and 1994), software development,
computer systems and equipment at MFA (fiscal 1994 and 1995) and normal
recurring replacements of machinery and equipment. The Company intends to use
approximately $6.5 million of borrowings under the Credit Agreement in 1996 and
$8.0 million in total to construct and equip two manufacturing facilities. See
"Properties."
RESEARCH AND DEVELOPMENT COSTS. As described in Note 15 to Alvey's
Consolidated Financial Statements, approximately $11.7 million of the Weseley
purchase price will be allocated to purchased research and development and
charged to expense in the quarter ended March 31, 1996. The purchased research
and development relates to the TRACS Version 3.0 product of Weseley. The
Company expects to incur between $600,000 and $900,000 of additional research
and development expenditures in fiscal 1996 in connection with TRACS Version
3.0.
ACQUISITIONS AND DIVESTITURES. The Company expended $0.1 million and
$24.1 million of cash, including payments of outstanding indebtedness, for
acquisitions in 1994 (AEC) and 1993 (White), respectively. These acquisitions
were financed primarily with increased bank borrowings. The Company received
$0.7 million of proceeds in 1994 from the sale of its closed facility in
Cassville, Missouri.
DEBT AND EQUITY INFUSIONS. In connection with the acquisition of White in
December 1993, the Company added $27 million to its existing debt facilities and
Pinnacle contributed $1.5 million in proceeds from the sale of preferred and
common stock to employees. Also in fiscal 1993, Pinnacle Common Stock was sold
to other employees for cash of $285,000 and notes of $545,000; such cash is
contributed to Alvey as it is collected from employees. On January 3, 1995, $2.0
million principal amount of Alvey's 11.95% Notes were sold to certain
shareholders of Pinnacle.
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<PAGE>
DEBT STRUCTURE RESULTING FROM THE FINANCING TRANSACTIONS. Since the
Financing Transactions of 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. Borrowings under the credit facility initially bear
interest at the Base Rate (as defined in the Credit Agreement) plus 1.50% or the
Eurodollar Rate (as defined in the Credit Agreement) plus 2.50%, at Alvey's
option, with a step down in rates based upon achieving predefined earnings
objectives. Borrowings under the credit facility are guaranteed by Pinnacle and
subsidiaries of Alvey. Pursuant to the Prior Offering, Alvey has $100 million of
Notes outstanding which are due in January 2003. Interest on the Notes is
payable semiannually commencing in July 1996.
After the Recapitalization, Pinnacle has $21.3 million of Pinnacle Series A
Preferred Stock, $6.5 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. 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 Prior
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% Notes;
(iii) approximately $21.5 million was distributed as the Recapitalization
Dividend to Pinnacle which, together with the net proceeds from the Pinnacle
Preferred Stock and Warrants Offering, was used by Pinnacle to fund, in part,
the cash necessary to effect the Recapitalization through the Common Equity
Exchange ($23.8 million) and the Redemption ($25.3 million); and
(iv) approximately $8.9 million will be used for general corporate purposes.
Prepayment penalties of $370,000 were incurred in connection with the repayment
of debt. In addition, the Company used $15.0 million of the proceeds of the
Prior Offering to consummate the Weseley Acquisition in January 1966 and intends
to use borrowings under the Credit Agreement to finance approximately $8.0
million of capital expenditures, of which approximately $6.5 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 and upon completion of the Financing Transactions, the Company
believes that it will have sufficient funds available to meet its currently
anticipated operating, debt service and capital expenditure requirements with
minimal, if any, additional borrowings. In addition, the Company expects to
continue to acquire businesses, although, no acquisitions are pending or
contemplated. The Company believes that its funds from operations will be
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
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<PAGE>
long-term capital requirements, including capital requirements related to
potential acquisitions.
SEASONALITY AND QUARTERLY RESULTS
The price of certain of the Company's systems can exceed several million
dollars, and therefore a relatively small number of orders can constitute a
significant percentage of the Company's revenues in any one period. Similarly, a
relatively small reduction in the number of large orders can have a material
impact on the Company's revenues in any one quarter or year. The timing of
shipments and product revenue recognition could affect the Company's operating
results for a particular period. In addition, most of the Company's revenues
come from fixed price contracts. To the extent that the original cost estimates
prove to be inaccurate, profitability from a particular contract may be
adversely affected. As a result, the Company's operating results can vary
significantly from quarter to quarter, and the financial results for any
particular quarter are not necessarily indicative of results in any subsequent
quarter or fiscal year.
EFFECT OF INFLATION
Fluctuations in commodity prices may periodically affect the results of the
Company's operations. However, inflation has not had a material effect on the
Company's business or results of operations.
NEW ACCOUNTING STANDARDS
The Company does not expect that the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 121, related to the accounting for impairments
of long-lived assets, and SFAS No. 123, related to the accounting for stock-
based compensation, will have a material effect on the Company's financial
position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this item are
included on pages F-1 through F-33 hereof.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
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<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning Alvey's
directors and executive officers.
<TABLE>
<CAPTION>
Years in
Name Age Industry Position with Alvey
---- --- -------- -------------------
<S> <C> <C> <C>
William R. Michaels (1) 61 21 Chairman of the Board and Chief
Executive Officer
Stephen J. O'Neill 54 25 President
Michael J. Tilton 46 16 Senior Vice President and Secretary
James A. Sharp 48 12 Vice President, Chief Financial
Officer, Treasurer and Assistant
Secretary
Frederick R. Ulrich, Jr. (1) 52 _ Director
Prakash A. Melwani (2) 37 _ Director
Daniel S. O'Connell (1) 41 _ Director
Charles A. Dill (2) 56 _ Director
</TABLE>
48
<PAGE>
The following table sets forth certain information concerning certain executive
officers and directors of Pinnacle and the Company. Each of Alvey and its five
subsidiaries are managed by Pinnacle.
<TABLE>
<CAPTION>
Years in
Name Age Industry Principal Position in Pinnacle Organization
---- --- -------- -------------------------------------------
<S> <C> <C> <C>
William R. Michaels (1) 61 21 Chairman of the Board, President and Chief Executive
Officer of Pinnacle
Michael J. Tilton 46 16 Executive Vice President - Operations and
Secretary of Pinnacle
James T. McHugh 50 27 Senior Vice President of Pinnacle
Armen G. Oumedian 72 39 Senior Vice President of Pinnacle
Richard D. Sampson 57 6 Senior Vice President of Pinnacle
Thomas J. Young 47 25 Senior Vice President of Pinnacle
James A. Sharp 48 12 Vice President - Finance and Chief Financial Officer of
Pinnacle
Christopher C. Cole 40 6 President of Buschman
Ritch J. Durheim 48 24 President of MFA
Kenneth D. Matson 37 14 President of Busse
Stephen J. O'Neill 54 25 President of Alvey
Frederick R. Ulrich, Jr. (1) 52 _ Director of Alvey and Pinnacle
Prakash A. Melwani (2) 37 _ Director of Alvey and Pinnacle
Daniel S. O'Connell (1) 41 _ Director of Alvey and Pinnacle
Charles A. Dill (2) 56 _ Director of Alvey and Pinnacle
</TABLE>
- -----------
<PAGE>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
WILLIAM R. MICHAELS has served as Chairman of the Board and Chief Executive
Officer of Alvey and as Chairman, President and Chief Executive Officer of
Pinnacle since September 1988. From 1984 to 1988, Mr. Michaels served as the
President and Chief Executive Officer of Rapistan Corp. Mr. Michaels is a member
of the Board of Governors of the Material Handling Institute of America, the
materials handling industry's trade association. In addition to his Pinnacle
duties, from July 1989 to January 1992 Mr. Michaels was the Chairman of the
board of directors of Holophane Company, Inc., a Columbus, Ohio company in the
lighting industry. Mr. Michaels continues as a director of Holophane.
Mr. Michaels is a graduate of the State University of New York.
STEPHEN J. O'NEILL has served as President of Alvey since November 1992.
Previously, Mr. O'Neill served as Senior Vice President of Alvey since
September 1988. Mr. O'Neill served as a Vice President of Rapistan Corp. from
1986 to 1988. Mr. O'Neill earned a B.S. degree in Electrical Engineering from
Rose Polytechnic Institute.
MICHAEL J. TILTON has served as Senior Vice President and Secretary of
Alvey and Executive Vice President of Pinnacle since April 1994. Previously,
Mr. Tilton served as Senior Vice President and Chief Financial Officer from
September 1988 to April 1994. Mr. Tilton served as a Vice President of Rapistan
Corp. from 1985 to 1988. Mr. Tilton graduated from the University of Iowa with a
B.B.A. degree in Finance and earned an M.B.A. degree from Drake University.
Mr. Tilton currently serves on the board of directors of the Caring Center.
JAMES A. SHARP has served as Vice President of Finance and Chief Financial
Officer since April 1994. Previously, Mr. Sharp held various accounting and
financial positions with Pinnacle and its subsidiaries, including Controller,
Treasurer and Chief Financial Officer of Alvey, since 1983. Mr. Sharp graduated
from Southern Illinois University with a B.S. degree in Accounting and is a
Certified Public Accountant in the state of Missouri.
FREDERICK R. ULRICH, JR. has been a Director of Alvey and Pinnacle since
August 1988. Mr. Ulrich has served as Chairman of the Board and Chief Executive
Officer of Raebarn Corporation since 1988 and of Buttonwood Capital Inc. since
December 1992. Mr. Ulrich is Chairman of the Board of Ames Company, Inc. and a
director of Paul Sebastian, Incorporated. Mr. Ulrich is a graduate of the United
States Military Academy and holds an M.B.A. degree from Harvard
50
<PAGE>
University.
PRAKASH A. MELWANI has served as a director of Alvey and Pinnacle since
January 1996. Mr. Melwani is a Managing Director of Vestar. He has been
associated with Vestar since its founding in 1988. Mr. Melwani is also Chairman
of the Board of Anvil Knitwear, Inc. and a director of Argo-Tech Corporation and
International AirParts Corporation. Mr. Melwani graduated from Cambridge
University with a B.A. degree and received an M.B.A. degree from Harvard
University.
DANIEL S. O'CONNELL has served as a director of Alvey and Pinnacle since
January 1996. Mr. O'Connell has served as the Chief Executive Officer of Vestar
since its founding in 1988. Mr. O'Connell also serves as a director of Anvil
Knitwear, Inc., Cabot Safety Corporation, La Petite Academy, Inc., Prestone
Products Corporation, Pyramid Communications, Inc. and Russell-Stanley
Corporation. Mr. O'Connell graduated from Brown University with an A.B. degree
and Yale University School of Management with an M.P.P.M. degree.
CHARLES A. DILL became a director of Alvey and Pinnacle on February 28,
1996. Mr. Dill is currently a General Partner in Gateway Associates, L.P., a
leading St. Louis-based equity management partnership. Previously, from April
1991 through April 1995, Mr. Dill was President and, from October 1992 through
April 1995, Chief Executive Officer of Bridge Information Systems, Inc. (a
leading provider of on-line financial information and databases to institutional
securities markets). From February 1988 to September 1990, he was President and
a Director of AVX Corporation (a ceramic electronic devices manufacturer). Mr.
Dill serves as a director of Stifel Financial, a securities brokerage and
investment banking form, and Zoltec, a specialty producer of carbon fiber
composite materials. Mr. Dill graduated from Yale University with a B.S. degree
in mechanical engineering and received an M.B.A. degree from Harvard University.
James T. McHugh has served as Senior Vice President of Pinnacle since May 1995.
Mr. McHugh served as Chief Executive Officer of MFA from 1975 until May 1995.
Previously, Mr. McHugh served as a director of S.R. Sales Company, Inc.
Mr. McHugh earned his undergraduate and M.B.A. degrees from Marquette
University.
ARMEN G. OUMEDIAN has served as a Senior Vice President of Pinnacle since
January 1995. Mr. Oumedian joined Alvey in 1988 as Vice President-System Sales
and subsequently served as Senior Vice President-System Sales of Buschman from
1992 to 1995. Previously, Mr. Oumedian held various positions with Rapistan
Corp. for 32 years and with General Motors for 11 years. Mr. Oumedian graduated
with a B.S.I.E. degree from General Motors Institute.
<PAGE>
RICHARD D. SAMPSON has served as Senior Vice President of Manufacturing of
Pinnacle since June 1989. Mr. Sampson is a graduate engineer from the University
of North Dakota and also holds an M.B.A. degree from Michigan State University.
THOMAS J. YOUNG has served as a Senior Vice President of Pinnacle since
April 1994 and was appointed President of Pinnacle Automation International in
September 1994. Previously, Mr. Young served as President of Busse from 1992 to
1994. From 1991 to his joining Pinnacle, Mr. Young was a principal of the
Sandringham Group, a corporation he formed to seek acquisitions in the packaging
and packaging machinery industries. From 1989 to 1991, Mr. Young served as Vice
President of Goldco Industries, a supplier of high-speed bulk container
palletizing and bulk depalletizing equipment. Mr. Young graduated with a B.S.
degree from St. John's University.
CHRISTOPHER C. COLE has served as President of Buschman since March 1994.
Prior to joining Buschman, Mr. Cole served in a variety of executive positions
at Cincinnati Milacron Inc. since 1979 and was Vice President since 1987.
Mr. Cole graduated from Wesleyan University with a B.A. degree and received an
M.B.A. degree from Harvard University. Mr. Cole has served on the board of
directors of the Cincinnati chapter of the American Red Cross since 1989 and is
currently a member of the executive committee of such board.
RITCH J. DURHEIM has served as President and Chief Executive Officer of MFA
since May 1995. From April 1994 to May 1995 Mr. Durheim served as President and
Chief Operating Officer of MFA. Prior to 1994, Mr. Durheim held various
positions with MFA since 1978. Mr. Durheim graduated from Marquette University
with a B.S. degree.
KENNETH D. MATSON has served as President of Busse since September 1994.
Prior to joining Busse, Mr. Matson was Vice President Marketing & Business
Development for the Material Handling Division of Western Atlas since
October 1993. From January 1991 to 1993, Mr. Matson was Vice President/General
Manager-Process & Packaging Systems of Western Atlas. Mr. Matson graduated from
Georgia Institute of Technology with a B.S. degree in Industrial & Systems
Engineering.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
52
<PAGE>
The following table sets forth, for the year ended December 31, 1995, the earned
compensation of the Chief Executive Officer and the next six highly compensated
executive officers of Alvey (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION FOR 1995
NAME AND PRINCIPAL POSITION SALARY BONUS(a) OTHER ANNUAL ALL OTHER
COMPENSATION(b) COMPENSATION
<S> <C> <C> <C> <C>
WILLIAM R. MICHAELS $302,500 $301,200 $26,506 $2,106
Chairman and Chief Executive
Officer of Alvey
RITCH J. DURHEIM 173,750 185,905 12,084 170
President of MFA
JAMES T. MCHUGH 167,000 74,000 13,189 170
Senior Vice President of
Pinnacle
STEPHEN J. O'NEILL 191,750 187,040 9,990 864
President of Alvey
DONALD J. WEISS(C) 225,000 35,000 0 0
President of White
CHRISTOPHER C. COLE 185,000 216,800 3,264 102
President of Buschman
MICHAEL J. TILTON 191,750 205,500 11,071 2,538
Executive Vice President of
Pinnacle
</TABLE>
- -----------
(a) Reflects amount earned in 1995, of which amount portions have been paid in
1996.
(b) Perquisites or other personal benefits which in the aggregate were less
than the lesser of $50,000 and 10% of an officer's annual salary and bonus
in 1995 have been omitted.
(c) Mr. Weiss resigned from his position as President of White in April 1996.
PENSION PLAN
The Company maintains 401(k) savings plans for virtually all employees who
meet certain eligibility requirements, except those certain union employees who
participate in multi-employer pension plans. Under the plans, the employees may
defer receipt of a portion of their eligible compensation, with the Company
matching a defined percentage of the employees' deferral. The Company's matching
contributions were $614,000 and $429,000 for the year ended December 31, 1995
and the year ended December 31, 1994, respectively. The Company may also elect
to make discretionary profit sharing contributions for virtually all employees,
except those union employees who participate in multi-employer pension plans.
<PAGE>
EMPLOYMENT AGREEMENTS
On May 31, 1995, Alvey, Pinnacle and William R. Michaels entered into an
amended and restated employment agreement pursuant to which Mr. Michaels will
serve as Chairman of the Board and Chief Executive Officer of Alvey and Chairman
of the Board, President and Chief Executive Officer of Pinnacle at a base annual
salary of $302,500. Mr. Michaels' base salary will be reviewed annually to
consider an upward adjustment for each subsequent year during the term of the
agreement. The agreement entitles Mr. Michaels to an automobile, club
membership, an annual bonus, disability and health insurance and to other
benefit plans provided by Alvey and Pinnacle to their employees. The agreement
also provides for deferred compensation, whereby following termination of
Mr. Michaels' employment with Pinnacle and Alvey because of death, disability or
retirement or upon Mr. Michaels having attained age 65, or for any other reason
excluding voluntary resignation to accept a comparable position before
Mr. Michaels attains age 65, Pinnacle and Alvey will pay to Mr. Michaels, for at
least 10 years and during the remainder of his life, an annual amount calculated
by (a) dividing Mr. Michaels' total compensation from Alvey and Pinnacle over
the thirty-six (36) month period prior to the termination of his employment by
three and (b) multiplying the result by twenty percent (20%) plus an additional
two percent (2%) for each year between September 1988 (the date of the original
employment agreement) and the termination of his employment. In addition, the
agreement requires Pinnacle and Alvey to provide to Mr. Michaels a $3,000,000
life insurance policy for the remainder of his lifetime, unless he voluntarily
terminates his employment with Pinnacle and Alvey to accept a comparable
position, at which time Pinnacle and Alvey's obligation to pay premiums will
cease.
On May 10, 1989, MFA entered into employment agreements with James T.
McHugh and Ritch Durheim. Pursuant to the agreements, Mr. McHugh served as Chief
Executive Officer of MFA until May 1995 and Mr. Durheim serves as President and,
subsequently, Chief Executive Officer of MFA for annual base salaries of
$167,000 and $172,250, respectively. The base salaries of each will be reviewed
annually to consider an upward adjustment for each subsequent year. Each of the
agreements entitles Messrs. McHugh and Durheim to an automobile allowance, club
membership, an annual bonus, life, disability and health insurance and to other
benefit plans provided by MFA to its other employees. Each of the agreements
contains a non-disclosure and non-competition provision which is effective for
the term of each of Messrs. McHugh and Durheim's employment with MFA.
On June 27, 1995, Alvey and Pinnacle entered into an amended and restated
employment agreement with Michael J. Tilton and Alvey entered into an amended
and restated employment agreement with Stephen J. O'Neill. Pursuant to the
agreements, Mr. Tilton will continue to serve as Senior Vice President and
Secretary of Alvey and Executive Vice President - Operations and Finance of
Pinnacle at a base salary of $191,750 and Mr. O'Neill will continue to serve as
President of Alvey at a base salary of $191,750. The base salaries of each will
be reviewed annually to consider an upward adjustment for each subsequent year.
Each of the agreements entitles Messrs. Tilton and O'Neill
54
<PAGE>
to an automobile, club membership, an annual bonus, life, disability and
health insurance and to other benefit plans provided by Alvey and Pinnacle to
their other employees. In addition, Pinnacle and Alvey are obliged to provide
a $1,000,000 life insurance policy for each of Messrs. Tilton and O'Neill for
the remainder of their lifetimes, unless they voluntarily terminate their
employment with Alvey and Pinnacle to accept a comparable position, at which
time Alvey and Pinnacle's obligation to pay such premiums will cease.
On December 14, 1993, White entered into an employment agreement with
Donald J. Weiss, pursuant to which Mr. Weiss agreed to serve as President of
White at a base annual salary of $215,000. Mr. Weiss' base salary will be
reviewed annually to consider an upward adjustment for each subsequent year
during the term of the agreement. The agreement entitles Mr. Weiss, among
other things, to an automobile, club membership, an annual bonus, life,
disability and health insurance and to other benefit plans provided by White
to its other employees. The agreement with Mr. Weiss contains a
non-disclosure and non-competition provision which is effective for the term
of his employment with White. Upon execution of the agreement, Mr. Weiss
purchased 10,197 shares of Pinnacle Common Stock and 1,025 shares of Pinnacle
Original Senior Preferred Stock. In April 1996, Mr. Weiss, pursuant to a
Memorandum of Understanding, resigned from his position as an officer and
director of Pinnacle, Alvey and White.
On March 9, 1994, Buschman entered into an employment agreement with
Christopher C. Cole, pursuant to which Mr. Cole agreed to serve as President and
Chief Executive Officer of Buschman and Executive Vice President of Pinnacle at
a base annual salary of $175,000. Mr. Cole's base salary will be reviewed
annually to consider an upward adjustment for each subsequent year during the
term of the agreement. The agreement entitles Mr. Cole to an automobile, club
membership, an annual bonus, life, disability and health insurance,
reimbursement of legal and accounting services and to other benefit plans
provided by Buschman to its other employees. The agreement with Mr. Cole
contains a non-disclosure and non-competition provision which is effective for
the term of his employment with Buschman. Upon execution of the agreement,
Mr. Cole was granted an option to purchase 18,700 shares of Pinnacle Common
Stock at an exercise price of $31.28 per share.
BOARD OF DIRECTORS COMMITTEES AND COMPENSATION
Alvey and Pinnacle each have a Compensation Committee and an Audit
Committee. During 1995, neither Alvey nor Pinnacle paid any compensation to
members of their Boards of Directors. In 1996, Alvey and Pinnacle expect to pay
to non-employee directors, except directors elected or nominated by the
Investors and Acadia Partners, L.P., an annual fee of $25,000 and intend to
reimburse each of its directors for their out-of-pocket expenses incurred in
connection with serving as a director. Directors who are employed by Pinnacle or
the Company do not receive a fee for serving as directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<PAGE>
Pinnacle owns 100% of the outstanding capital stock of Alvey. The following
table sets forth certain information regarding the beneficial ownership of the
Pinnacle Common Stock as of April 30, 1996 (i) by each person who is known by
the Company to own beneficially more than 5% of the Pinnacle Common Stock,
ii) by each of Alvey and Pinnacle's directors, (iii) by each Executive Of
ficer named below and (iv) by all directors and executive officers as a group.
<TABLE>
<CAPTION>
PINNACLE COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2) FULLY-DILUTED
SHARES OWNED PERCENTAGE(3) PERCENTAGE (4)
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Prakash A. Melwani (5)(6). . . . . . . . 179,253 27.0% 21.0%
Daniel S. O'Connell (5)(6) . . . . . . . 179,253 27.0 21.0
William R. Michaels (7). . . . . . . . . 72,187 14.8 8.5
Frederick R. Ulrich, Jr. (8) . . . . . . 27,867 5.7 3.3
Charles A. Dill. . . . . . . . . . . . . 0 0 0
Christopher C. Cole (9). . . . . . . . . 20,000 4.0 2.3
Ritch J. Durheim (10). . . . . . . . . . 5,407 1.1 0.6
James T. McHugh (10)(11) . . . . . . . . 5,407 1.1 0.6
Stephen J. O'Neill (12). . . . . . . . . 48,902 10.0 5.7
Michael J. Tilton. . . . . . . . . . . . 44,400 9.1 5.2
OTHER BENEFICIAL OWNERS. . . . . . . . . . .
Vestar Equity Partners, L.P. (6)(13) . . 179,253 27.0 21.0
Chase Equity Associates (13)(14) . . . . 56,763 10.5 6.6
All Executive Officers and Directors as a
Group (15 Persons). . . . . . . . . . 403,423 (15) 58.8 47.2
</TABLE>
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(1) Unless otherwise noted, the address of each of the foregoing is c/o
Pinnacle at 101 S. Hanley, Suite 1300, St. Louis, Missouri 63105.
(2) Unless otherwise noted, sole voting and dispositive power are
possessed with respect to all shares shown.
(3) The percentages under the heading "Percentages" are based upon 485,866
shares of Pinnacle Common Stock outstanding and takes into account all
derivative securities held by such Beneficial Owner that are convertible into
shares of Pinnacle Common Stock.
(4) The percentages under the heading "Fully-Diluted Percentages" are
based upon 853,933 shares of Pinnacle Common Stock outstanding, which gives
effect to the exercise of outstanding (i) options to purchase 67,200 shares of
Pinnacle Common Stock, (ii) warrants to purchase 14,917 shares of Pinnacle
Common Stock, (iii)
56
<PAGE>
warrants issued in the Weseley Acquisition that are exercisable to purchase
29,875 shares of Pinnacle Common Stock and (iv) the Pinnacle Warrants that are
exercisable to purchase 256,075 shares of Pinnacle Common Stock.
(5) Includes 179,253 shares issuable upon exercise of Pinnacle Warrants
held by Vestar Equity Partners, L.P., as to which Messrs. Melwani and O'Connell
disclaim beneficial ownership.
(6) Address is c/o Vestar Capital Partners, 245 Park Avenue, 41st Floor,
New York, New York 10167-4098.
(7) Includes 601 shares of Pinnacle Common Stock issuable upon exercise of
outstanding Series C Warrants of Pinnacle.
(8) Includes 401 shares of Pinnacle Common Stock issuable upon exercise of
outstanding Series C Warrants of Pinnacle. Includes the following number of
shares held by or in trust for Mr. Ulrich's children: 505 shares of Pinnacle
Common Stock; 705 shares of Pinnacle Common Stock held by the Lauren T. Ulrich
Trust '89; 706 shares of Pinnacle Common Stock held by the Farrell Ulrich Trust
'89; and 700 shares of Pinnacle Common Stock held by the Frederick Ulrich III
Trust '92.
(9) Includes 18,700 shares of Pinnacle Common Stock issuable upon exercise
of outstanding exercisable options.
(10) Includes 235 shares of Pinnacle Common Stock issuable upon exercise of
outstanding Series C Warrants of Pinnacle.
(11) Includes 5,172 shares of Pinnacle Common Stock held by the James T.
McHugh and Catherine A. McHugh Revocable Trust.
(12) Includes 902 shares of Pinnacle Common Stock issuable upon exercise of
outstanding Series C Warrants of Pinnacle.
(13) All of such shares are issuable upon exercise of Pinnacle Warrants.
(14) c/o Chemical Venture Partners, 270 Park Avenue, New York, New York
10017.
(15) The 179,253 shares of Pinnacle Common Stock issuable upon exercise of
Pinnacle Warrants held by Vestar Equity Partners, L.P., as to which Messrs.
Melwani and O'Connell disclaim beneficial ownership, are counted once in this
total.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stockholders Agreement and Registration Rights
In connection with the 1988 acquisition of Alvey by Pinnacle (the "1988
Acquisition"), entities affiliated with Acadia (the "Acadia Stockholders"),
individuals affiliated with Raebarn Corporation (the "Raebarn Stockholders"),
certain management stockholders and Pinnacle entered into a Stock Purchase and
Stockholders Agreement which has been amended and restated several times through
the date hereof (the "Initial Stockholders Agreement"). In connection with the
Financing Transactions, the Initial Stockholder Agreement was amended and
restated again pursuant to the Amended and Restated Stockholders Agreement by
and among Pinnacle, the Management Stockholders (as defined therein), the
Raebarn Stockholders (as defined therein) and the Investors (the "Amended and
Restated Stockholders Agreement").
The Initial Stockholders Agreement provides for certain rights of Pinnacle
to repurchase shares from employees whose employment has been terminated,
various provisions regarding the "vesting" of shares held by the management
stockholders, certain rights of first refusal by the stockholders upon the
proposed sale of Pinnacle
<PAGE>
Common Stock by any other stockholder, certain subscription rights by
stockholders in the event of a private placement by Pinnacle and certain rights
by the Acadia Stockholders to "drag-along" the other stockholders upon receipt
of an offer to purchase all of the Pinnacle Common Stock and certain rights by
all stockholders to "tag-along" upon the sale of Pinnacle Common Stock by the
Acadia Stockholders or the Raebarn Stockholders. The Initial Stockholders
Agreement provides that the Board of Directors of Pinnacle consists of eleven
members, two of whom will be nominated by the Raebarn Stockholders, one of whom
(who will be the President of Pinnacle) will be nominated by the management
stockholders, one of whom will be James M. Schloeman, one of whom will be Donald
J. Weiss, and six of whom will be nominated by the Acadia Stockholders. The
stockholders must vote their shares to elect such nominees to the Board of
Directors. Management stockholders do not have any demand registration rights
under the Initial Stockholders Agreement; however, management stockholders are
permitted to "piggyback" on to any other registration statement filed by
Pinnacle.
The following is a summary of the Amended and Restated Stockholders
Agreement:
VESTING OF MANAGEMENT STOCKHOLDER SHARES. Shares of Pinnacle Common Stock
issued to Management Stockholders (as defined in the Amended and Restated
Stockholders Agreement) vest in equal installments over a period generally
ranging between three and five years (depending on the terms set by the Board of
Directors at the time of issuance). Any shares of Pinnacle Common Stock held by
a Management Stockholder that are unvested at the time of the death, permanent
disability, resignation or termination (for whatever reason) of such Management
Stockholder will remain unvested and will not vest; PROVIDED, HOWEVER, that in
the event of the death or permanent disability of the holder, 50% of the shares
which are unvested at that time will become vested. In addition, all unvested
shares will become vested upon the acquisition of all of the outstanding shares
of Pinnacle by any third party or upon the sale of all of the assets of
Pinnacle.
REPURCHASE OF MANAGEMENT STOCKHOLDER SHARES. In the event of the
termination of any Management Stockholder's employment with Pinnacle, whether by
reason of death, permanent disability, termination for cause or without cause,
retirement or for any other reason, Pinnacle will have the right to repurchase
all or any portion of the unvested shares. To the extent that Pinnacle elects
not to repurchase all of the unvested shares held by a terminated Management
Stockholder, the other stockholders will have the right to purchase the
remaining shares on a PRO RATA basis.
RESTRICTIONS ON TRANSFER; RIGHT OF FIRST REFUSAL. Unvested shares may not
be transferred under any circumstances. With respect to vested shares, Pinnacle
and, to the extent that Pinnacle fails to exercise its first refusal right in
full, the other Management Stockholders and Raebarn Stockholders, have a right
of first refusal if any Management Stockholder or Raebarn Stockholder receives a
bona fide offer from an independent unrelated third party
58
<PAGE>
that such stockholder wishes to accept. Despite the general restrictions on
transfers by Management Stockholders and Raebarn Stockholders, transfers to
affiliates, officers, directors, certain family members or family trusts and
pledges of the shares to a bank as security for a loan used to buy the shares
are expressly permitted.
TAG-ALONG RIGHTS. The Amended and Restated Stockholders Agreement provides
that stockholders have a right to "tag along" upon the sale of Pinnacle Common
Stock or Pinnacle Warrants by any stockholder or holder of Pinnacle Warrants
prior to an initial public offering by Pinnacle and provides the stockholders
with "tag-along" rights with respect to a sale of a significant amount of
Pinnacle Common Stock or Pinnacle Warrants after an initial public offering by
Pinnacle. In addition, in the event any such sales would result in a change of
control of Pinnacle, the holders of the Pinnacle Investor Preferred Stock and
the Pinnacle Series B Preferred Stock have the right to cause any such stock
which is not redeemed by Pinnacle in accordance with its terms to be purchased
by the purchaser of such Pinnacle Common Stock or Pinnacle Warrants.
PRIORITY SUBSCRIPTION RIGHTS. If Pinnacle decides to effect a private
placement of shares of Pinnacle Common Stock or securities convertible into
Pinnacle Common Stock for less than Fair Market Value (as defined in the Amended
and Restated Stockholders Agreement) at any time prior to its initial public
offering, the stockholders will have a right, subject to certain exceptions
(which exceptions include the Financing Transactions, the Weseley Acquisition
and the issuance of financing warrants to institutional lenders), to purchase
their respective PRO RATA portions of the shares to be sold by Pinnacle.
VOTING AGREEMENT. The Amended and Restated Stockholders Agreement provides
that the Board of Directors of Pinnacle shall initially consist of seven
members, subject to increase or decrease upon certain specified events. The
stockholders are required to vote their shares to elect specified nominees to
the Board of Directors.
On and after the eighth anniversary of the date of issuance of the Pinnacle
Investor Preferred Stock and Pinnacle Warrants, if any shares of Pinnacle
Series A Preferred Stock and any Pinnacle Warrants are outstanding, the number
of directors of Pinnacle shall be increased by the Control Number (as defined
below), with such additional directors to be nominated by the holders of the
Pinnacle Warrants. In addition, if such directors are required to be elected,
from and after such date, each stockholder party to the Amended and Restated
Stockholders Agreement has agreed to (i) vote all shares held by such
stockholder to ratify, approve and adopt all actions adopted or approved by the
Board of Directors of Pinnacle and (ii) subject to certain conditions, be
"dragged along" in the event that the holders of the Pinnacle Warrants desire to
accept a third party offer for all of the outstanding shares of Pinnacle Common
Stock.
<PAGE>
REGISTRATION RIGHTS. Management Stockholders shall be entitled to a single
"demand" and certain "piggyback" registration rights, subject to customary
conditions.
CONSULTING AGREEMENT WITH ACADIA
Since the 1988 Acquisition, Alvey and Pinnacle have been parties to a
consulting agreement with an affiliate of Acadia pursuant to which Pinnacle has
been obliged, among other things, to pay consulting and transaction fees and to
reimburse Acadia for its out-of-pocket expenses. The current agreement with
Acadia is the Amended and Restated Consulting Agreement, dated as of October 14,
1992, as amended, among Pinnacle, Alvey and Penobscot-NB Partners ("Penobscot"),
an affiliate of Acadia (the "Acadia Agreement"). Pursuant to the Acadia
Agreement, Pinnacle is required to pay an annual fee of $250,000 to Penobscot,
in addition to reimbursement of its out-of-pocket expenses, through the earlier
to occur of February 1, 2000 or certain change of control transactions. In
addition, the Acadia Agreement provides that if Pinnacle or Alvey or any of
their affiliated companies engage in a transaction such as a merger,
consolidation or a sale of more than 10% of its assets or outstanding securities
or the acquisition of assets or stock of another company (a "Transaction"),
Penobscot would have the right to act as a financial advisor to Pinnacle or
Alvey. In addition, Pinnacle is required to consult with Penobscot with respect
to any prospective or actual public or private offering of debt or equity
securities of Pinnacle or Alvey and is required to pay to Penobscot an
investment banking fee in an amount equal to 1% of (i) the aggregate
consideration paid or received in each Transaction or (ii) in the case of an
initial public offering, the gross proceeds from the sale of the primary shares
sold by Pinnacle or Alvey. In connection with the Acadia Agreement, Pinnacle
paid $312,000 in 1992 (not including $250,000 of a $500,000 fee relating to the
acquisition of Buschman which was deferred), $510,000 in 1993 (which includes a
fee of $260,000 in connection with the acquisition of White), $250,000 in 1994
and $250,000 in 1995, in each case plus the reimbursement of out-of-pocket
expenses.
The Acadia Agreement terminated upon the completion of the Financing
Transaction and is no further force and effect. At such time, Pinnacle paid
Penobscot any theretofore unpaid regular monthly consulting fees and all unpaid
or unreimbursed expenses. As part of the Recapitalization Transactions, Acadia
waived any right to receive any other fee which may have been due under the
Acadia Agreement including any transaction fee by reason of the Recapitalization
Transactions.
CONSULTING AGREEMENT WITH RAEBARN
Since the 1988 Acquisition, Alvey and Pinnacle have also been parties to a
consulting agreement with Raebarn Corporation or a predecessor entity
("Raebarn"), each of which is or was beneficially owned by Mr. Ulrich and a
former director of Pinnacle, pursuant to which Pinnacle has been obliged, among
other things, to pay consulting and transaction fees, and to reimburse Raebarn
for its out-of-pocket expenses. The current agreement with Raebarn is
60
<PAGE>
the Amended and Restated Consulting Agreement, dated as of October 14, 1992, as
amended, among Pinnacle, Alvey and Raebarn (the "Raebarn Agreement"). Pursuant
to the Raebarn Agreement, Pinnacle is required to pay an annual fee of $250,000
to Raebarn, in addition to reimbursement of its out-of-pocket expenses, through
the earlier to occur of December 31, 2002 or certain change of control
transactions. In addition, the Raebarn Agreement provides that if Pinnacle or
Alvey or any of their affiliated companies engage in a transaction such as a
merger, consolidation or a sale of more than 10% of its assets or outstanding
securities or the acquisition of assets or stock of another company (a
"Transaction"), Raebarn would have the right to act as a financial advisor to
Pinnacle or Alvey. In addition, Pinnacle is required to consult with Raebarn
with respect to any prospective or actual public or private offering of debt or
equity securities of Pinnacle or Alvey and is required to pay to Raebarn an
investment banking fee in an amount equal to 1% of (i) the aggregate
consideration paid or received in each Transaction or (ii) in the case of an
initial public offering, the gross proceeds from the sale of the primary shares
sold by Pinnacle or Alvey. In connection with the Raebarn Agreement, Pinnacle
paid $550,000 in 1992 (not including $250,000 of a $500,000 fee relating to the
acquisition of Buschman which was deferred), $250,000 in 1993 (not including a
fee of $260,000 relating to the acquisition of White which was deferred),
$250,000 in 1994, $250,000 in 1995 and an aggregate of $1,500,000 (upon
completion of the Financing Transactions), in each case plus the reimbursement
of out-of-pocket expenses.
Alvey, Pinnacle and Raebarn terminated the Raebarn Agreement in its
entirety upon completion of the Financing Transactions. In connection with such
termination, Pinnacle and Alvey agreed to make termination payments to Raebarn
or its designees in the amount of $250,000 per year through the eighth
anniversary of the completion of the Financing Transactions. In April 1995,
Raebarn changed its name to Lafarick, Inc. Pinnacle and Alvey intend to expense
the payments of $2.0 million ($1.4 million net of tax), less $510,000 already
accrued at December 31, 1995, in the first quarter of 1996, the quarter in which
the Financing Transactions were consummated.
CONSULTING AGREEMENT WITH MAMMOTH CAPITAL INC.
On December 31, 1995, Pinnacle and Alvey entered into a consulting
agreement with Mammoth Capital Inc., a corporation owned by Mr. Ulrich, pursuant
to which Pinnacle and Alvey agreed to pay an annual fee of $200,000, subject to
an annual increase at a rate of 3%, in addition to the reimbursement for its
out-of-pocket expenses (the "Mammoth Agreement"). The Mammoth Agreement also
provides for the payment of a transaction fee in the amount of 1% of the
aggregate consideration paid or received in connection with specified merger and
acquisition transactions (the "M&A Fee") and 1 2 of 1% of the gross proceeds
received in connection with financing transactions involving the public or
private offering of debt or equity securities of Pinnacle and Alvey or the
incurrence of bank debt, other than financing transactions solely involving
amendments, modifications or extensions of the Credit Agreement or the Notes
(the "Financing Fee"); PROVIDED, HOWEVER, that the Financing Fee shall not
exceed $250,000. Pinnacle and Alvey are not obliged to pay duplicate M&A Fees
and Financing Fees in connection with any single transaction or series of
related transactions. The Mammoth Agreement will terminate on the earlier to
occur of (i) the
<PAGE>
eighth anniversary of the completion of the Financing Transactions, (ii) the
sale of all or substantially all of the capital stock or assets of either
Pinnacle or Alvey or (iii) the death or retirement of Mr. Ulrich. In addition,
the Mammoth Agreement will be terminable by Pinnacle and Alvey in the event that
Mr. Ulrich fails, or is otherwise unwilling, to perform the services required by
such agreement in a manner reasonably acceptable to Pinnacle and Alvey and
consistent with past practices.
CONSULTING AGREEMENT WITH VESTAR
On January 24, 1996, Pinnacle and Alvey entered into a consulting agreement
with Vestar Capital Partners ("Vestar Capital"), an affiliate of Vestar,
pursuant to which Pinnacle and Alvey agreed to pay an annual fee of $150,000 to
Vestar Capital (the "Vestar Agreement"). The Vestar Agreement terminates on the
earlier to occur of (i) the completion of an initial public offering by Pinnacle
of the Pinnacle Common Stock, (ii) the occurrence of a change of control (as
defined) or (iii) the date on which the Investors or certain specified
transferees cease to meet a certain minimum investment level. In addition, upon
consummation of the Pinnacle Preferred Stock and Warrants Offering, Pinnacle
paid to Vestar Capital a one-time fee of $750,000 and reimbursed the Investors
for all reasonable out-of-pocket costs and expenses (including reasonable
attorneys' fees and related expenses) incurred by the Investors in connection
with the Pinnacle Preferred Stock and Warrants Offering.
LEASE OF WHITE FACILITIES
The Company leases the manufacturing facility used by White in Kenilworth,
New Jersey from a partnership controlled by Donald J. Weiss, formerly a
director of Pinnacle and Alvey. Pursuant to the terms of the lease, the Company
paid rent in the amount of $900,000 in 1995. The term of the lease extends
through December 2006. The Company believes that the terms of the lease are
substantially similar to terms that would have been obtained from a third party
in an arms'-length negotiation.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Annual Report on Form 10-K/A
1. FINANCIAL STATEMENTS. The consolidated financial statements
identified on the index to consolidated financial statements and schedules on
page F-1 hereof are filed as part of this Annual Report on Form 10-K.
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<PAGE>
2. FINANCIAL STATEMENT SCHEDULES. Rule 12-09 Valuation and Qualifying
Accounts and Reserves of Registrant. See the Report of Independent Accountants
on Financial Statement Schedules.
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
3. EXHIBITS. The following are filed as exhibits to this Annual Report
on Form 10-K:
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
*3.1 Certificate of Incorporation of Alvey Systems, Inc.
*3.2 Bylaws of Alvey Systems, Inc.
*10.1 Recapitalization Agreement, dated as of September 28, 1995, by and
among Pinnacle Automation, Inc., Alvey Systems, Inc. and the Selling
Stockholders listed on Schedule A thereto
*10.2 Equity Purchase and Sale Agreement, dated as of December 13, 1995, by
and among Pinnacle Automation, Inc., Alvey Systems, Inc., James M.
Schloeman and each of the other persons or entities listed on Schedule
A thereto
*10.3 Equity Purchase and Sale Agreement, dated as of January 24, 1996, by
and among Pinnacle Automation, Inc., Alvey Systems, Inc. and Atlantic
Equity Corporation
*10.4 Amended and Restated Stockholders Agreement, dated as of January 11,
1996, by and among Pinnacle Automation, Inc., each of the Management
Stockholders (as defined therein), the Raebarn Stockholders (as
defined therein), the Series C Holders (as defined therein) and the
Warrantholders (as defined therein)
*10.5 Consulting Agreement, dated as of December 31, 1995, by and among
Pinnacle Automation, Inc., Alvey Systems, Inc. and Mammoth Capital
Inc.
*10.6 Termination Agreement, dated as of December 31, 1995, by and among
Pinnacle Automation, Inc., Alvey Systems, Inc., and Lafarick, Inc.
*10.7 Investment Agreement, dated as of December 12, 1995, by and among
Pinnacle Automation, Inc., Vestar Equity Partners, L.P., Chemical
Equity Associates and Hancock Venture Partners IV--Direct Fund, L.P.,
as amended
*10.8 Registration Rights Agreement, dated as of January 24, 1996, by and
among Pinnacle Automation, Inc., Vestar Equity Partners, L.P.,
Chemical Equity Associates, Hancock Venture Partners IV--Direct Fund,
L.P., and the other persons listed on the schedules thereto
*10.9 Consulting Agreement, dated as of January 24, 1996, by and among
Pinnacle Automation, Inc., Alvey Systems, Inc. and Vestar Capital
Partners
*10.10 Purchase Agreement, dated January 19, 1996, by and among Alvey
Systems, Inc., Pinnacle Automation, Inc. and NationsBanc Capital
Markets, Inc.
<PAGE>
*10.11 Indenture, dated as of January 24, 1996, by and between Alvey Systems,
Inc. and The Bank of New York
*10.12 Registration Rights Agreement, dated as of January 24, 1996, by and
among Alvey Systems, Inc., Pinnacle Automation, Inc. and NationsBanc
Capital Markets, Inc.
*10.13 Credit Agreement, dated as of January 24, 1996, among Alvey Systems,
Inc., the lenders named therein and NationsBank N.A.
*10.14 Pledge and Security Agreement, dated as of January 24, 1996, by Alvey
Systems, Inc., as pledgor, in favor of NationsBank, N.A.
*10.15 Pledge and Security Agreement, dated as of January 24, 1996, by
Pinnacle Automation, Inc., as pledgor, in favor of NationsBank, N.A.
*10.16 Security Agreement, dated as of January 24, 1996, by Alvey Systems,
Inc., and its subsidiaries, in favor of NationsBank, N.A.
*10.17 Non-Competition, Working Capital Guarantee and Security Agreement,
dated April 15, 1992, by and among the Company, Busse Bros, Inc.,
Eugene H. Busse and First Wisconsin Trust Company
*10.18 Non-Competition, Working Capital Guarantee and Security Agreement,
dated April 15, 1992, by and among the Company, Busse Bros, Inc.,
Sheldon C. Busse and First Wisconsin Trust Company
*10.19 Non-Competition, Working Capital Guarantee and Security Agreement,
dated April 15, 1992, by and among the Company, Busse Bros, Inc., Lois
B. Biel and First Wisconsin Trust Company
*10.20 Stock Purchase Agreement by and among Pinnacle Automation, Inc., Alvey
Systems, Inc., McHugh, Freeman & Associates, Inc., Weseley Software
Development Corp. and the other signatories thereto, dated December
20, 1995.
*10.21 Asset Purchase Agreement dated as of May 9, 1995 by and among Pinnacle
Automation, Inc., Alvey Systems, Inc., The Buschman Company, Diamond
Machine Co. and IMH of Lynchburg, Inc.
*10.22 Lease Agreement, dated December 31, 1986, by and among Boright Realty
and White Storage & Retrieval Systems, Inc.
*10.23 Amended and Restated Employment Agreement, dated May 31, 1995, by and
among Pinnacle Automation, Inc. and William R. Michaels
*10.24 Amended and Restated Employment Agreement, dated June 27, 1995, by and
among Pinnacle Automation, Inc. and Michael J. Tilton
*10.25 Amended and Restated Employment Agreement, dated June 27, 1995, by and
among Pinnacle Automation, Inc. and Stephen J. O'Neill
*10.26 Employment Agreement, dated March 9, 1994, by and among The Buschman
Company and Christopher C. Cole
*10.27 Employment Agreement, dated December 14, 1993, by and among White
Storage & Retrieval Systems, Inc. and Donald J. Weiss
*21 List of Subsidiaries
- -------------
* Filed as an exhibit to the Company's Registration Statement on Form S-4
(No. 333-2600) and incorporated herein by reference.
<PAGE>
(b) REPORTS ON FORM 8-K. The Company did not file any Reports on Form 8-K
during the last quarter of Fiscal 1995.
(c) Refer to (a)(3) above.
(d) Refer to (a)(2) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment on Form
10-K/A to its Form 10-K for the year ended December 31, 1995 to be signed on
its behalf by the undersigned, thereunto duly authorized, as of June___,
1996.
ALVEY SYSTEMS, INC.
By: /s/ William R. Michaels
----------------------------
William R. Michaels,
Chairman of the Board and Chief Executive Officer
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants on Alvey Systems, Inc.
December 31, 1995 Consolidated Financial Statements.. . . . . . . . . F-2
Consolidated Balance Sheet of Alvey Systems, Inc. as of
December 31, 1995 and 1994. . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Operations of Alvey Systems, Inc.
for the fiscal years ended December 31, 1995, 1994 and 1993.. . . . . F-4
Consolidated Statement of Cash Flows of Alvey Systems, Inc.
for the fiscal years ended December 31, 1995, 1994 and 1993.. . . . . F-5
Consolidated Statement of Net Investment of Parent of Alvey
Systems, Inc. for the fiscal years ended December 31, 1995,
1994 and 1993.. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements of Alvey Systems, Inc. . . . F-8
Report of Independent Accountants on Weseley Software Development
Corp. December 31, 1995 Financial Statements. . . . . . . . . . . . . F-24
Balance Sheet of Weseley Software Development Corp. as of
December 31, 1995 and 1994. . . . . . . . . . . . . . . . . . . . . . F-25
Statement of Operations of Weseley Software Development Corp.for the
fiscal years ended December 31, 1995 and 1994 . . . . . . . . . . . . F-26
Statement of Stockholders' Deficit of Weseley Software Development
Corp. for the fiscal years ended December 31, 1995 and 1994.. . . . . F-27
Statement of Cash Flows of Weseley Software Development Corp.
for the fiscal years ended December 31, 1995 and 1994.. . . . . . . . F-28
Notes to Financial Statements of Weseley Software Development Corp. . . F-29
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and
Board of Directors of
Alvey Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of net investment of
parent present fairly, in all material respects, the financial position of Alvey
Systems, Inc. and its subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
St. Louis, Missouri
February 23, 1996
F-2
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
ASSETS 1995 1994
---------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 3,405 $ 2,580
Receivables:
Trade (less allowance for doubtful accounts
of $824 and $595, respectively) . . . . . . . . . . . 42,567 37,881
Unbilled and other. . . . . . . . . . . . . . . . . . . 6,211 4,550
Accumulated costs and earnings in excess of
billings ($54,279 and $31,125, respectively)
on uncompleted contracts. . . . . . . . . . . . . . . . 8,317 6,585
Inventories:
Raw materials . . . . . . . . . . . . . . . . . . . . . 13,966 8,506
Work in process . . . . . . . . . . . . . . . . . . . . 5,720 5,544
Deferred income taxes . . . . . . . . . . . . . . . . . . 4,699 7,443
Prepaid expenses and other assets . . . . . . . . . . . . 1,665 1,542
---------- ---------
Total current assets. . . . . . . . . . . . . . . . . 86,550 74,631
Property, plant and equipment, net . . . . . . . . . . . . . 25,675 24,456
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 6,031 6,238
Goodwill (net of amortization of $3,613 and $2,548,
respectively) . . . . . . . . . . . . . . . . . . . . . . 32,029 33,211
---------- ---------
$ 150,285 $ 138,536
---------- ---------
---------- ---------
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND NET INVESTMENT OF PARENT:
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . $ 6,915 $ 5,431
Accounts payable. . . . . . . . . . . . . . . . . . . . . 24,368 19,385
Accrued expenses. . . . . . . . . . . . . . . . . . . . . 27,764 24,910
Customer deposits . . . . . . . . . . . . . . . . . . . . 12,107 6,638
Billings in excess of accumulated costs and
earnings ($31,233 and $29,133, respectively)
on uncompleted contracts. . . . . . . . . . . . . . . . 13,904 8,993
Deferred revenues . . . . . . . . . . . . . . . . . . . . 899 1,580
Taxes payable . . . . . . . . . . . . . . . . . . . . . . 994 542
---------- ---------
Total current liabilities . . . . . . . . . . . . . . 86,951 67,479
---------- ---------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 42,460 54,754
Other long-term liabilities. . . . . . . . . . . . . . . . . 5,075 4,920
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 4,196 4,280
Commitments and contingencies (Notes 5, 6 and 12)
Redeemable preferred stock:
Redeemable preferred stock of $.01 par value
per share, authorized 500,000 shares:
Series A Senior Cumulative Exchangeable
Preferred Stock of Pinnacle Automation, Inc.,
250,000 shares designated, 210,770 and 181,068
shares issued, 210,697 and 180,645 outstanding,
respectively. . . . . . . . . . . . . . . . . . . . . . 21,077 18,107
Cumulative Exchangeable Preferred Stock of
Pinnacle Automation, Inc., 100,000 shares
designated, 62,524 and 53,704 shares issued
and outstanding, respectively . . . . . . . . . . . . . 6,252 5,370
Preferred stock in treasury, 73 and 423 shares
of Series A Senior Cumulative Stock of Pinnacle
Automation, Inc.. . . . . . . . . . . . . . . . . . . . (7) (42)
---------- ---------
Total redeemable preferred stock. . . . . . . . . . . 27,322 23,435
Net investment of Parent . . . . . . . . . . . . . . . . . . (15,719) (16,332)
---------- ---------
$150,285 $138,536
---------- ---------
---------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . $288,018 $248,177 $164,022
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . 217,297 189,007 123,033
-------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 70,721 59,170 40,989
Selling, general and administrative expenses . . . . . . . . 51,630 43,402 30,421
Research and development expenses. . . . . . . . . . . . . . 2,051 2,538 1,436
Amortization expense . . . . . . . . . . . . . . . . . . . . 1,737 1,836 1,479
Other expense (income), net. . . . . . . . . . . . . . . . . (108) 2,279 (11)
-------- -------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . 15,411 9,115 7,664
Interest expense . . . . . . . . . . . . . . . . . . . . . . 6,896 5,921 4,053
-------- -------- --------
Income before income taxes and extraordinary loss. . . . . . 8,515 3,194 3,611
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 4,109 1,516 1,560
-------- -------- --------
Income before extraordinary loss . . . . . . . . . . . . . . 4,406 1,678 2,051
Extraordinary loss, net of income tax benefits of $2,740
(Notes 5 and 7). . . . . . . . . . . . . . . . . . . . . . -- -- (6,203)
-------- -------- --------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ 4,406 $ 1,678 $ (4,152)
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ 4,406 $ 1,678 $ (4,152)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 2,952 2,752 2,583
Amortization . . . . . . . . . . . . . . . . . . . . . . . 1,737 1,836 1,479
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 93 196
Deferred taxes, net of effect of acquisitions. . . . . . . 2,660 571 (2,325)
Reduction of unamortized debt issue costs
included in extraordinary loss . . . . . . . . . . . . . 1,300
Loss on disposal of Lewiston . . . . . . . . . . . . . . . 8,637
(Increase) decrease in current assets,
excluding effect of acquisitions:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . (5,979) (6,483) (7,395)
Accumulated costs and earnings in excess of
billings on uncompleted contracts. . . . . . . . . . . . (1,732) (1,070) (465)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . (5,636) 1,134 (1,913)
Other assets . . . . . . . . . . . . . . . . . . . . . . . (259) 1,409 165
(Decrease) increase in current liabilities,
excluding effect of acquisitions:
Accounts payable . . . . . . . . . . . . . . . . . . . . . 4,983 3,773 5,593
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 5,201 3,429 1,058
Customer deposits. . . . . . . . . . . . . . . . . . . . . 5,469 8 639
Billings in excess of accumulated costs
and earnings on uncompleted contracts. . . . . . . . . . 4,911 2,837 (425)
Deferred revenues. . . . . . . . . . . . . . . . . . . . . (681) 108 518
Taxes payable. . . . . . . . . . . . . . . . . . . . . . . 452 (201) 646
Other liabilities. . . . . . . . . . . . . . . . . . . . . 455 217 573
-------- -------- --------
Net cash provided by operating activities. . . . . . . . . 18,939 12,091 6,712
-------- -------- --------
INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash
acquired of $106 and $529, respectively. . . . . . . . . (101) (17,601)
Payment of debt of subsidiaries concurrent
with acquisitions. . . . . . . . . . . . . . . . . . . . . (6,513)
Cash proceeds on sale of Cassville plant . . . . . . . . . . 698
Payments for agreements not to compete . . . . . . . . . . . (300) (300) (2,400)
Cash payments to dispose of Lewiston . . . . . . . . . . . . (2,347) (2,683) (1,808)
Software development costs . . . . . . . . . . . . . . . . . (582) (1,106)
Additions to property, plant and equipment, net. . . . . . . (3,914) (3,985) (3,471)
-------- -------- --------
Net cash used for investing activities . . . . . . . . . . . $ (7,143) $ (7,477) $(31,793)
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds of borrowings . . . . . . . . . . . . . . . . . . . $ 27,728 $ 42,600 $ 75,157
-------- -------- --------
-------- -------- --------
Payments of debt and capital leases. . . . . . . . . . . . . (38,538) (46,317) (47,948)
Proceeds from issuance of preferred
stock. . . . . . . . . . . . . . . . . . . . . . . . . . . 271
Investment of Parent . . . . . . . . . . . . . . . . . . . . 59 43 1,214
Payments of debt issuance costs. . . . . . . . . . . . . . . (255) (89) (2,614)
Treasury preferred stock issuances
(purchases). . . . . . . . . . . . . . . . . . . . . . . . 35 (1) (41)
-------- -------- --------
Net cash provided by (used for) financing
activities. . . . . . . . . . . . . . . . . . . . . . (10,971) (3,764) 26,039
-------- -------- --------
Net increase in cash and cash equivalents. . . . . . . . . . 825 850 958
Cash and cash equivalents, beginning of year . . . . . . . . 2,580 1,730 772
-------- -------- --------
Cash and cash equivalents, end of year . . . . . . . . . . . $ 3,405 $ 2,580 $ 1,730
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on financings . . . . . . . . . . . . . . . . . . $ 6,851 $ 5,534 $ 3,913
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 997 1,161 234
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Alvey Systems, Inc. purchased Automation
Equipment Corporation in 1994 and White
Storage & Retrieval Systems, Inc. in 1993.
In conjunction with the acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired. . . . . . . . . . . . . . . $ 215 22,456
Fair value assigned to goodwill. . . . . . . . . . . . . . 810 12,800
Cash paid concurrent with acquisitions
including payments of debt of subsidiaries
and excluding cash acquired. . . . . . . . . . . . . . . (101) (24,114)
-------- --------
Liabilities assumed. . . . . . . . . . . . . . . . . . . . $ 924 $ 11,142
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET INVESTMENT OF PARENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
New Investment of
Parent
-----------------
<S> <C>
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Balance, December 31, 1992 . . . . . . . . . . . . . . . . . $ (9,729)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . (4,152)
Net investment of Parent1, . . . . . . . . . . . . . . . . . 637
Preferred stock dividend declared (Note 8) . . . . . . . . . (2,771)
--------
Balance December 31, 1993. . . . . . . . . . . . . . . . . . (15,015)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . 1,678
Net investment of Parent . . . . . . . . . . . . . . . . . . 309
Preferred stock dividend declared (Note 8) . . . . . . . . . (3,304)
--------
Balance December 31, 1994. . . . . . . . . . . . . . . . . . (16,332)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . 4,406
Net investment of Parent . . . . . . . . . . . . . . . . . . 59
Preferred stock dividend declared (Note 8) . . . . . . . . . (3,852)
--------
Balance December 31, 1995. . . . . . . . . . . . . . . . . . $(15,719)
--------
--------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Alvey Systems, Inc. ("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. Alvey, with its subsidiaries (the
"Company"), is a leading materials handling and information systems company
which provides integrated solutions to a wide range of manufacturing and
distribution applications. The Company develops software and controls for
materials handling systems and manufactures a broad range of industrial
equipment such as conveyors, palletizers, depalletizers, carousels, sorters and
robotics which carry out the physical acts of loading and unloading, sorting and
transporting raw materials and finished products.
The financial statements of the Company include the accounts of Alvey,
which was incorporated in Missouri in 1911, and Alvey's five operating
subsidiaries which include: McHugh Freeman & Associates, Inc. ("MFA"), located
in Waukesha, Wisconsin, which was acquired in May 1989; Busse Bros, Inc.
("Busse"), located in Randolph, Wisconsin, which was acquired in April 1992; The
Buschman Company ("Buschman"), located in Cincinnati, Ohio, which was acquired
in October 1992; White Storage and Retrieval Systems, Inc. ("White") located in
Kenilworth, New Jersey, which was acquired in December 1993; and Automation
Equipment Corporation ("AEC"), located in St. Louis, Missouri, which was
acquired in August 1994. See Notes 3 and 4 for additional information on the
White acquisition. The acquisition of AEC was not material to the consolidated
financial statements of the Company. All of the above transactions were
accounted for under the purchase method of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by the Company in the preparation of the financial
statements conform to generally accepted accounting principles, and require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual amounts
could differ from these estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Alvey and
Alvey's wholly-owned subsidiaries: MFA, Busse, Buschman, White and AEC. All
significant intercompany transactions, which primarily consist of sales, have
been eliminated.
NET INVESTMENT OF PARENT
Net investment of Parent reflects the net capital contributed by Pinnacle
as a result of the sales of its common stock, options and warrants or awards of
its common stock and options to certain employees of the Company as well as
cumulative results of operations and payment of preferred stock dividends. The
basis of Pinnacle's investment in Alvey has been pushed down to the accompanying
consolidated financial statements of Alvey. The redeemable preferred stock of
Pinnacle has also been pushed down to the accompanying consolidated financial
statements of Alvey; See Note 8.
At December 31, 1995, the net investment of Parent consists of cumulative
contributions of capital to Alvey by Pinnacle of $3.0 million plus cumulative
income before extraordinary losses of $2.9 million, offset by extraordinary
losses of $7.5 million and an aggregate accretion/payment of $14.1 million of
paid-in-kind dividends on preferred stock.
F-8
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
For purposes of financial reporting, the Company has determined that the
fair value of financial instruments approximates book value at December 31, 1995
and 1994, based on terms available to the Company in financial markets.
REVENUE RECOGNITION
The Company utilizes the percentage-of-completion method of accounting to
recognize revenue and profits on substantially all contracts, except for certain
machinery contracts for which revenue is recognized as individual pieces of
equipment are shipped under the terms of the contract and for sales of spare
parts which are recognized upon shipment. For other equipment contracts,
typically for larger machines and integrated systems, as well as the
installation phase of contracts and all consulting contracts, the percentage of
completion is determined based on the ratio of total costs incurred to date to
the estimated total costs to be incurred under the contracts. Any revisions in
the estimated total costs of the contracts during the course of the work are
reflected when the facts that require the revisions become known. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Revenues from maintenance and support contracts are
deferred and recognized ratably over the life of the related contract.
SOFTWARE DEVELOPMENT COSTS
Certain costs incurred in developing software products are capitalized and
amortized on a product-by-product basis using the greater of the ratio that
current gross revenues for a product bear to the current and anticipated future
gross revenues for that product or the straight-line method over the estimated
five year economic life of the products. The costs consist of salaries, computer
expenses and other overhead costs directly related to the development and/or
major enhancement of software products. Such costs are capitalized, to the
extent they are recoverable through future sales, from the time the product's
technological feasibility is established up to its general release to customers.
Costs incurred before or after this period are expensed as incurred except for
major product improvements, which are capitalized as described above. Net
unamortized capitalized software costs were $1,419,000 and $1,094,000 at
December 31, 1995 and 1994, respectively. Amortization of capitalized software
costs totaled $257,000 and $12,000 in 1995 and 1994, respectively.
Revenue from the sale of computer systems is recognized upon shipment to
the customer providing that no significant vendor obligations remain and
collection of the related receivable is deemed probable.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposit accounts, cash on hand and
time deposits with original maturities of less than 90 days. Such amounts are
carried at cost, which approximates market.
F-9
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY VALUATION
Work-in-process inventories consist principally of in-process palletizing
and depalletizing machines, conveyor and carousel systems, other materials
handling equipment and parts manufactured by the Company for use in these
products. Raw materials include steel, purchased parts and other materials used
in the manufacturing process. These inventories are valued at the lower of cost
(first-in, first-out) or market. Obsolete or unsalable inventories are reflected
at their estimated realizable values.
PROGRESS BILLINGS
The Company bills its customers based on the terms set forth in a sales
contract. The billing schedule does not necessarily match the stage of
completion of a customer's order for installation or software. As such, costs,
earnings and billings are accumulated for jobs in progress at period end and the
extent to which costs and earnings exceed billings and billings exceed costs and
earnings for such jobs, an asset or liability is recorded.
Unbilled receivables are those amounts recognized in revenues for completed
portions of manufacturing contracts which have not been billed to the customer.
Customer deposits represent cash received from customers in payment of billings
for equipment for which no associated revenue or cost has been recognized.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Costs assigned to
property, plant and equipment are based on estimated fair value at the date of
acquisition. Upon sale, retirement or other disposition, the cost and related
accumulated depreciation are removed from the respective accounts and any
resulting gain or loss is included in income.
Depreciation of property, plant and equipment, including equipment under
capital lease agreements, is charged to expense over the estimated useful lives
of the related assets using the straight-line method.
Useful lives by major asset category are as follows:
Building and improvements. . . . . . . . . . 7 to 25 years
Machinery and equipment. . . . . . . . . . . 3 to 12 years
Office furniture and equipment . . . . . . . 3 to 7 years
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of cost over the fair market value of net assets acquired in
purchase business transactions has been recorded as goodwill to be amortized
over a period of 40 years. The carrying value of goodwill is assessed for
recoverability by management based on an analysis of future expected
undiscounted cash flows from the underlying operations. Management believes
that there has been no impairment of goodwill at December 31, 1995.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). SFAS 121
F-10
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
specifies that an impairment review be performed, using undiscounted cash flows
resulting from the use of long-lived assets, whenever events or changes in
circumstances indicate that the amount of a long-lived asset may not be
recoverable. The Company anticipates that SFAS 121 will have no material effect
on the Company's financial position or results of operations when adopted in
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Debt issuance costs and agreements not to compete are amortized over the
life of the related agreements. All intangible assets are amortized using the
straight-line method.
INCOME TAXES
Income taxes are based upon income for financial reporting purposes and
deferred income taxes are provided for the temporary differences between the
financial reporting bases and the income tax bases of the Company's assets and
liabilities. The tax rates expected to be in effect when such differences are
reflected in the Company's income tax returns are used in calculating the
deferred tax asset or liability. The major temporary differences that give rise
to deferred taxes include retainage, depreciation, warranty and inventory costs,
deferred compensation, plant closing and various other reserves. See Note 9 for
additional information.
CONCENTRATIONS OF CREDIT RISK
The Company sells its products to a wide range of companies in the food,
beverage, national retailing and distribution industries, as well as certain
government entities. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral, although many customers pay
deposits to the Company prior to commencement of production in accordance with
terms of the sales contract. The Company maintains reserves for potential
credit losses based upon factors surrounding the credit risk of specific
customers, historical trends and other information; historically, such losses
have been within management's expectations.
EARNINGS PER SHARE INFORMATION
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 consolidated financial statements or the
notes thereto.
3. ACQUISITION OF WHITE STORAGE & RETRIEVAL SYSTEMS, INC.
On December 14, 1993, Alvey purchased all of the outstanding shares of
White for cash of $17.9 million and stock with an estimated value of $550,000
plus acquisition and other transaction costs of $366,000. In addition, Alvey
advanced $7.9 million to White concurrent with the acquisition in order to repay
debt obligations and employee bonuses. The transaction was accounted for as a
purchase and, accordingly, the excess of the cost of the acquisition over the
fair value of net assets acquired of $12.8 million was recorded as goodwill.
Employee bonuses of cash and stock paid out by White totaling $2.3 million were
capitalized and amortized over one year, the length of the related employment
agreement; accordingly, $2.2 million and $94,000 were charged to other expense
(income), net in 1994 and 1993, respectively. The purchase agreement between
Alvey and the former shareholder of White provides for a reduction in the
purchase price in the event that the valuation of certain assets or liabilities
is not as represented by such shareholder. The adjustment provisions extend to
three years from the date of purchase with scheduled assessment and payment
dates throughout the period; one adjustment which reduced the purchase price by
$413,000 was made during 1995. Such adjustment was recorded as a reduction of
the related goodwill. The consolidated financial statements of the Company
include the results of operations and cash flows of White
F-11
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from December 14, 1993. See Note 4 for pro forma consolidated income statement
data (unaudited) for the year ended December 31, 1993.
This acquisition was financed primarily with increased bank indebtedness.
See Note 7 for further discussion.
4. SUPPLEMENTAL ACQUISITION INFORMATION (UNAUDITED)
The following table sets forth pro forma income statement data for Alvey as
if the White acquisition had taken place on January 1, 1993. This income
statement data is unaudited and does not purport to represent the results of
operations had the acquisition actually occurred on January 1, 1993.
Pro forma Information
(in thousands)
<TABLE>
<CAPTION>
12 MONTHS ENDED
DECEMBER 31,
1993
---------------
(UNAUDITED)
<S> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . $220,789
Cost of goods sold. . . . . . . . . . . . . . . . . . . 166,583
-------
Gross profit. . . . . . . . . . . . . . . . . . . . . 54,206
Selling, general and administrative expenses. . . . . . 40,961
Research and development expenses . . . . . . . . . . . 1,436
Amortization expense. . . . . . . . . . . . . . . . . . 1,774
Other income, net . . . . . . . . . . . . . . . . . 349
-------
Operating income. . . . . . . . . . . . . . . . . . . 10,384
Interest expense . . . . . . . . . . . . . . . . . . . 5,923
-------
Income before income taxes. . . . . . . . . . . . . . 4,461
Income taxes . . . . . . . . . . . . . . . . . . . . . 2,007
-------
Income before extraordinary loss. . . . . . . . . . . $ 2,454
-------
-------
</TABLE>
Amortization of a non-recurring employee bonus paid under an employment
agreement resulting from the acquisition of White totaling $2.2 million has not
been reflected in the 1993 pro forma income statement data presented above.
5. FTC ORDER TO DISPOSE OF THE LEWISTON, MAINE MANUFACTURING PLANT
As a result of Alvey's acquisition of Buschman in 1992, the Company made a
decision to close Buschman's carousel manufacturing plant in Lewiston, Maine
("Lewiston"). Alvey was subsequently ordered by the Federal Trade Commission
(the "FTC"), beginning December 6, 1993, to hold the Lewiston operation separate
from operations of the Company and to ultimately dispose of the facility. Until
such time as a buyer suitable to Alvey and the FTC could be found for Lewiston,
Alvey was required to fund all cash requirements of Lewiston. However, pursuant
to the FTC order, the Company had no authority to make operating decisions for
Lewiston. Since its determination to close the Lewiston plant and through
December 31, 1995, Alvey has contributed approximately $6.8 million in cash to
fund the operation.
Upon its initial decision to close the Lewiston plant, the Company accrued
$1.4 million, net of applicable income taxes, for closing costs and the write-
off of assets; such amount was recorded under purchase accounting as goodwill
during 1992. Operating losses and other costs of closure incurred subsequent to
Federal Trade Commission intervention ($5.4 million, net of income tax benefits)
have been accrued and charged to income as an
F-12
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
extraordinary loss in fiscal 1993, including estimates of amounts expected to be
incurred through fiscal 1995 and in future periods, as discussed below.
5. FTC ORDER TO DISPOSE OF THE LEWISTON, MAINE MANUFACTURING PLANT (CONTINUED)
The sale of this operation was finalized on July 31, 1995. During 1995,
1994 and 1993, $2.3 million, $2.7 million and $1.8 million, respectively, was
paid and charged against the balance sheet accrual for the operations of
Lewiston and related sale agreement obligations. In addition, in 1995, $780,000
of related asset write-offs were also charged against the balance sheet accrual.
At December 31, 1995, $1.1 million is accrued to fund obligations resulting from
the sale agreement which extend through May 1, 1997. Management believes that
the remaining accrual is sufficient to cover future anticipated charges.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,140 $ 2,539
Buildings and improvements. . . . . . . . . . . . . . . 15,783 15,534
Machinery and equipment . . . . . . . . . . . . . . . . 6,986 6,300
Office and other equipment. . . . . . . . . . . . . . . 11,126 9,426
Construction in progress. . . . . . . . . . . . . . . . 178
Property held under capital lease . . . . . . . . . . . 1,277 848
------- -------
38,490 34,647
Less: Accumulated depreciation and amortization,
including $666 and $563, respectively,
related to property held under capital lease.. . 12,815 10,191
------- -------
$25,675 $24,456
------- -------
------- -------
</TABLE>
Depreciation expense for leased equipment was $103,000, $143,000 and
$193,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Future minimum lease payments under the capital leases and the present value of
the net minimum lease payments (in thousands) at December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1996. . . . . . . . . . . . . . . . . . $197
1997. . . . . . . . . . . . . . . . . . 151
1998. . . . . . . . . . . . . . . . . . 137
1999. . . . . . . . . . . . . . . . . . 90
2000. . . . . . . . . . . . . . . . . . 88
Thereafter . . . . . . . . . . . . . . 105
----
Total minimum lease payments. . . . . . 768
Less: Amount representing interest . . 144
----
Present value of minimum lease payments
at December 31, 1995, including current
portion of $157,000. . . . . . . . . . $624
----
----
</TABLE>
F-13
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Certain other office equipment, automobiles and office space are utilized
by the Company under operating leases which resulted in rental expense of
$3.4 million, $2.7 million and $1.3 million in 1995, 1994 and 1993,
respectively. Commitments under these leases total $2.9 million in 1996,
$2.7 million in 1997, $2.7 million in 1998, $2.4 million in 1999, $2.3 million
in 2000 and $11.1 million in the aggregate in years thereafter.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Term A Facility - weighted average rate
of 9.2% and 9.6%, respectively, at
December 31, 1995 and 1994, scheduled
quarterly reductions through March 31, 1999 . . . . . $24,817 $29,942
Term C Facility - 13%, quarterly reductions
March 31, 1999 through September 30, 2000 . . . . . . 12,382 12,382
Working Capital Facility - weighted average
rate of 9.2% and 9.7%, respectively, at
December 31, 1995 and 1994, balance due
on March 31, 1999 . . . . . . . . . . . . . . . . . . 9,000 17,100
Unsecured Subordinated Debt Agreement - 11.95%,
balance due December 31, 2001 . . . . . . . . . . . . 2,253
Lease obligations and other . . . . . . . . . . . . . . 923 761
------- -------
49,375 60,185
Less: Current portion . . . . . . . . . . . . . . . . . 6,915 5,431
------- -------
$42,460 $54,754
------- -------
------- -------
</TABLE>
Aggregate maturities of long-term debt (in thousands), excluding capital
leases, are:
<TABLE>
<CAPTION>
WORKING UNSECURED
TERM A TERM C CAPITAL SUBORDINATED
FACILITY FACILITY FACILITY DEBT TOTAL
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1996. . . . . . . . . . . $ 6,625 -- -- $ 6,625
1997. . . . . . . . . . . 8,000 -- -- 8,000
1998. . . . . . . . . . . 9,625 -- -- 9,625
1999. . . . . . . . . . . 567 $ 6,875 $9,000 16,442
2000. . . . . . . . . . . -- 5,507 -- 5,507
2001. . . . . . . . . . . $2,253 2,253
------- ------- ------ ------ -------
$24,817 $12,382 $9,000 $2,253 $48,452
------- ------- ------ ------ -------
------- ------- ------ ------ -------
</TABLE>
In addition to the above payments, certain additional reductions may be
required under the Alvey credit agreement based on annual excess cash flows, as
defined in the Credit Agreement.
As discussed in Note 15, amounts outstanding under the Term A Facility,
Term C Facility, Working Capital Facility and the Unsecured Subordinated Debt
Agreement were repaid on January 24, 1996.
F-14
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
In connection with the acquisition of White on December 14, 1993 and in
order to increase borrowings under its long-term credit facility, the Company
amended and restated the credit agreement among Alvey, Citibank N.A.
("Citibank"), NationsBank of Texas, N.A. ("NationsBank"), Equitable Capital
Private Income and Equity Partnership II, L.P. ("Equitable") and others (the
"Credit Agreement"). By the terms of the Credit Agreement, Alvey increased its
borrowings under the Term A Facility ("Term A") from $12.8 million to $34.5
million and paid off borrowings under a Term B Facility. Additionally, the
Working Capital Facility ("Working Capital") was increased to provide for up to
$29.9 million in revolving advances and letters of credit. Alvey had
approximately $20.9 million available for borrowing under such facility at
December 31, 1995. Under the Credit Agreement, the Term A and Working Capital
financings are provided and held equally by Citibank and NationsBank. The Term
C facility loan is provided by Equitable. Effective December 31, 1994, the
Credit Agreement was amended to revise certain of the covenants, amend the
interest accrual feature, revise the interest rate hedging feature and to allow
additional borrowings of $3 million. Of such additional debt, approximately $2
million was funded on January 3, 1995 through an unsecured subordinated debt
agreement with certain shareholders of Pinnacle at a rate of 11.95% for which
all interest and principal is due on December 31, 2001; the remaining $1 million
is available for additional borrowing.
Based on the achievement of certain ratios, interest accrues on the Term A
and Working Capital Facilities at Citibank's base rate plus a percentage ranging
from 1.25% to 1.75% or the Euro-dollar rate plus a percentage from 2.75% to
3.25% with the rate type being elected by Alvey periodically throughout the term
of the Credit Agreement. At December 31, 1995, the applicable rates were the
Citibank base rate plus 1.5% and the Euro-dollar rate plus 3.25%. The Credit
Agreement defines base rate as a function of Citibank's publicly announced base
rate, the Federal Funds Rate and average domestic three-month certificate of
deposit rates. Interest on base rate advances is payable monthly and interest
on Euro-dollar advances is payable every three months or at the end of the
elected interest period, whichever is earlier. Interest, payable monthly,
accrues on the Term C Facility at 13% per annum. Commitment fees accrue on the
average daily unused portion of the Working Capital Facility at 0.5% per annum
and are payable quarterly.
Debt issuance costs totaling $2.6 million were incurred in amending the
Credit Agreement at December 31, 1993 and are being amortized with certain
other costs over the weighted-average life of all remaining facilities.
Unamortized costs incurred in 1992 with the original issuance of the Term Loan
Facilities and the Working Capital Facility totaled $1.3 million. These costs,
net of applicable income tax benefits of $497,000, were written off during 1993
and accounted for as an extraordinary loss.
Under the Credit Agreement, Alvey has provided standby letters of credit at
December 31, 1995 in the amount of $2.0 million as security for payment of the
Company's workers' compensation claims. In addition to a .25% issuance fee,
outstanding letters of credit bear a 1.5% per annum fee which is payable
quarterly.
Prior to the December 31, 1994 amendment to the Credit Agreement, Alvey was
required to hedge not less than 50% of the notional amount of principal
outstanding on the Term A and Working Capital Facilities to provide protection
against fluctuations in interest rates above a rate per annum of 9% should
certain market conditions exist. In January 1993, Alvey purchased an interest
rate cap which limits the annual interest rate to 8.5% on borrowings of $11.0
million, $10.5 million, and $10 million during 1994, 1995 and 1996,
respectively. The December 31, 1994 amendment to the Credit Agreement requires
that for a period of not less than three years, Alvey will maintain hedges
totaling not less than $25 million on the notional amount of principal
outstanding on the Term A and Working Capital Facilities to provide protection
against fluctuations in interest
F-15
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
rates above a rate per annum of 11.75%. During January 1995, Alvey entered into
interest rate cap agreements which terminate in January 1998 and limit the
annual interest rate to 11.75% on a notional principal amount of $25 million.
Such agreements, with an original cost of $350,000, were capitalized and were
being amortized over the life of the agreements. In conjunction with the Debt
Offering (see Note 15), the unamortized portion of this amount was charged to
expense during the quarter ended March 31, 1996.
Virtually all of the tangible assets of the Company are pledged as
collateral under the Credit Agreement. Restrictive covenants of certain of the
debt instruments include the maintenance of certain key ratios as well as
limitations on capital expenditures, funding of divested operations (Note 5),
common stock issuances (including by Parent) and the payment of cash dividends.
Alvey was in compliance with such covenants at December 31, 1995.
8. REDEEMABLE PREFERRED STOCK
Pinnacle's Series A Senior Cumulative Exchangeable Preferred Stock ("Series
A Preferred") and Cumulative Exchangeable Preferred Stock ("Cumulative
Preferred") are redeemable by Pinnacle at a liquidation value of $100 per share.
At the option of the holder, the preferred stock may be exchanged for $100 of
senior subordinated notes to be issued by Alvey, which bear annual interest of
13% and are due on October 31, 2000. As the redeemable preferred stock is
exchangeable for debt issued by Alvey, such stock has been pushed down to the
financial statements of Alvey. On any dividend payment date or at any time after
October 31, 2000, Pinnacle may redeem, at its option, in whole or in part,
preferred stock at 100% of its liquidation value plus any accrued and unpaid
dividends. The preferred stock is only exchangeable or redeemable at such time
as it would not cause a default under any of the debt instruments of Alvey.
Pinnacle is required to pay dividends quarterly on both issues of preferred
stock and under terms of the related stockholder agreements, and may pay such
dividends in cash (at 13%) or stock (at 15.5%) at its option through December
31, 1996; cash dividends are funded by cash of the Company. However, the Credit
Agreement prohibits the payment of cash dividends throughout its term and, as
such, dividends declared in 1995, 1994 and 1993 were paid in the form of stock.
Pinnacle declared stock dividends of $3.9, $3.3 and $2.8 million in 1995, 1994
and 1993, respectively (38,522, 33,045, and 27,703 shares, respectively, at a
liquidating value of $100), all of which served to decrease the net investment
of Parent.
During 1993, certain employees of the Company purchased 3,725 shares of
preferred stock of Pinnacle with an aggregate liquidation value of $373,000; the
purchases were effected with cash of $271,000 and prepaid
F-16
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. REDEEMABLE PREFERRED STOCK (CONTINUED)
compensation of $102,000 to be charged to expense over one year. The following
table sets forth the changes in redeemable preferred stock (dollars in
thousands):
<TABLE>
<CAPTION>
SERIES A CUMULATIVE PREPAID TOTAL
PREFERRED STOCK PREFERED COMPENSATION REDEEMABLE
--------------------- --------------------- FOR PREFERRED PREFERRED
SHARES AMOUNT SHARES AMOUNT STOCK STOCK
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 . . . . . . 129,404 $12,940 39,620 $3,962 $ -- $16,902
Stock issued . . . . . . . . . . . 5,000 500 (102) 398
Compensation expense . . . . . . . 4 4
Treasury stock purchases . . . . . (416) (41) (41)
Stock dividend declared. . . . . . 21,195 2,120 6,508 651 -- 2,771
------- ------- ------- ------- ------- -------
Balance December 31, 1993 . . . . . . 155,183 15,519 46,128 4,613 (98) 20,034
Compensation expense . . . . . . . 98 98
Treasury stock purchases . . . . . (7) (1) (1)
Stock dividend declared. . . . . . 25,469 2,547 7,576 757 -- 3,304
------- ------- ------- ------- ------- -------
Balance December 31, 1994 . . . . . . 180,645 18,0655 3,704 5,370 0 23,435
Treasury stock sales . . . . . . . 350 35 35
Stock dividend declared. . . . . . 29,702 2,970 8,820 882 -- 3,852
------- ------- ------- ------- ------- -------
Balance December 31, 1995 . . . . . . 210,697 $21,070 62,524 $6,252 $ 0 $27,322
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
As discussed in Note 15, the Series A Preferred and Cumulative Preferred
Stock were redeemed on January 24, 1996.
9.INCOME TAXES
Income tax expense relative to income from continuing operations (before
extraordinary loss) is comprised of:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal. . . . . . . . . . . . . . . . . . . $ 1,001 $ 86 $ 422
State. . . . . . . . . . . . . . . . . . . . 448 14 112
------- ------- -------
1,449 100 534
Deferred, principally Federal. . . . . . . . 2,660 1,416 1,026
------- ------- -------
$ 4,109 $ 1,516 $ 1,560
------- ------- -------
------- ------- -------
</TABLE>
F-17
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of the income tax expense per the statutory federal income
tax rate to the reported income tax expense on income before extraordinary loss
is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense at statutory rate. . . . . $2,896 $1,086 $1,227
Expense (benefit) resulting from:
State taxes (net of Federal tax benefit) . 366 258 173
Goodwill amortization. . . . . . . . . . . 282 361 221
Foreign tax credit utilization . . . . . . (453) (200)
Meals and entertainment. . . . . . . . . . 216 176 50
Other . . . . . . . . . . . . . . . . . . 349 88 89
------ ------ ------
$4,109 $1,516 $1,560
------ ------ ------
------ ------ ------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accrued insurance claims. . . . . . . . . . . . . . . . $2,093 $1,248
Inventory reserves. . . . . . . . . . . . . . . . . . . 2,045 804
Accrued warranty costs. . . . . . . . . . . . . . . . . 1,021 1,109
Employee cost accruals. . . . . . . . . . . . . . . . . 2,513 2,565
Plant closing accruals. . . . . . . . . . . . . . . . . 470 2,756
Other . . . . . . . . . . . . . . . . . . . . . . . . . 676 1,087
------ ------
Total deferred tax assets . . . . . . . . . . . . . 8,818 9,569
------ ------
Revenue timing differences. . . . . . . . . . . . . . . 2,993 1,153
Property related items. . . . . . . . . . . . . . . . . 5,250 4,624
Other . . . . . . . . . . . . . . . . . . . . . . . . . 72 629
------ ------
Total deferred tax liabilities . . . . . . . . . . 8,315 6,406
------ ------
Net deferred tax asset . . . . . . . . . . . . . . . $ 503 $3,163
------ ------
------ ------
</TABLE>
10. EMPLOYEE BENEFIT AND STOCK OWNERSHIP PLANS
The Company maintains 401(k) savings plans for virtually all employees who
meet certain eligibility requirements, except those certain union employees who
participate in multi-employer pension plans. Under the plans, the employees may
defer receipt of a portion of their eligible compensation with the Company
matching a defined percentage of the employees' deferral. The Company's
matching contributions were $614,000, $429,000 and $296,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. The Company may also elect to
make discretionary profit sharing contributions for virtually all employees,
except those union employees who participate in multi-employer pension plans,
for which a provision of $2.2 million, $1.4 million and $1.4 million is included
in the consolidated financial statements in 1995, 1994 and 1993, respectively.
Contributions under the multi-employer pension plans are based on amounts
per employee as defined in the union labor agreement. Pension expense for the
union employees' pension plans was $629,000, $675,000 and $208,000 for the years
ended December 31, 1995, 1994 and 1993, respectively. The Company may be
obligated,
F-18
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT AND STOCK OWNERSHIP PLANS (CONTINUED)
under the Multi-Employer Pension Plan Amendment Act of 1980, for a part of these
plans' unfunded vested benefits if there is a withdrawal or partial withdrawal
from a plan, as defined within the Act. There is no intention on the part of
management to withdraw their participation from a plan.
Alvey also provides a deferred compensation plan for its Chief Executive
Officer. Under the plan, upon his termination of employment for any reason,
except voluntary resignation to accept a comparable position, Alvey will pay a
formula-based annual benefit for the remainder of his life or for at least 10
years. At December 31, 1995, an amount of $1.5 million is accrued for such
benefits and related expense of $299,000, $93,000, and $196,000 was recorded for
the three years then ended.
Management employees have received options to purchase Pinnacle common
stock which were granted at exercise prices which 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. The option term
expires ten years subsequent to the grant date. These options are summarized as
follows:
SHARES SUBJECT TO
AVERAGE PRICE OPTIONS
Exercisable at January 1, 1993. . . . . $ 1.20 14,000
Exercisable at December 31, 1993. . . . 1.20 14,000
Options granted in 1994 . . . . . . . . 31.28 21,700
Options expired in 1994 . . . . . . . . 1.20 (2,009)
-------
Exercisable at December 31, 1994. . . . 20.57 33,691
Options granted in 1995 . . . . . . . . 20.00 3,000
-------
Exercisable at December 31, 1995. . . . $20.53 36,691
During January 1996, an additional 58,375 options to purchase Pinnacle
common stock were issued to management employees at prices that approximate fair
market value.
During 1995, certain employees of the Company purchased shares of
Pinnacle common stock at estimated fair value totaling $409,000; these
purchases were effected with cash of $30,000 and employee notes receivable of
$379,000. During 1994, certain employees of the Company purchased and were
issued shares of Pinnacle common stock at estimated fair value totaling
$316,000; these purchases were effected with cash of $43,000, employee notes
receivable of $185,000 and funding by Alvey and its subsidiaries of $88,000;
amounts funded by Alvey will be expensed over the vesting period of the
related shares. During 1993, certain employees of the Company purchased
shares of Pinnacle common stock at estimated fair value of $2.1 million; the
purchases were effected with cash of $1.3 million, employee notes receivable
of $545,000 and prepaid compensation of $264,000 to be charged to expense of
Alvey over the vesting period of the related shares. Employee notes
receivable outstanding to Pinnacle at December 31, 1995 and 1994 totaled
$955,000 and $724,000, respectively, and are reflected as a reduction of the
net investment of Parent.
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 use the "Intrinsic
value based method" for valuing stock options granted when it adopts SFAS 123
in 1996. The
F-19
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT AND STOCK OWNERSHIP PLANS (CONTINUED)
Company anticipates that, when adopted, SFAS 123 will have no material effect on
the consolidated financial position or results of operations.
The Company also has agreed to provide life insurance policies, in
amounts ranging from $1 million to $3 million, for the remainder of the lives
of five of its executive managers or until such managers voluntarily resign
to accept a comparable position. Costs relative thereto are not material to
the Company's consolidated financial statements.
11. SIGNIFICANT CUSTOMERS
In 1995, 1994 and 1993, no single customer comprised more than 10% of
sales.
12. 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 up to $17 million per year for products 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.
Alvey has two agreements with related parties under which Alvey
receives investment banking and other consulting services. These agreements
terminate in the years 2000 and 2002, respectively. The agreements require
annual payments by Alvey totaling $500,000 plus out-of-pocket expenses which
are included in other expense (income), net in the accompanying financial
statements. In addition, Alvey is 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. Payments under the agreement are subordinate to Alvey's payments
under the Credit Agreement. At December 31, 1995, $510,000 is accrued for
such fees relative to the acquisitions of White and Buschman. In January
1996, concurrent with the Debt Offering (see Note 15), these agreements were
terminated at a cost of $1.5 million. Effective January 24, 1996, Pinnacle
established consulting agreements with two related parties whereby the
Company is obligated to payments of $350,000 per year plus expenses and,
under one contract, annual increases of up to 3%. Additionally, the Company
is obligated to compensate one related party for certain merger, acquisition
and financing transactions.
In conjunction with the acquisition of Busse, a covenant not to
compete was signed by the former owners of Busse. The covenant requires
Alvey to make twelve semi-annual payments of $150,000 to the former owners
commencing October 1992 and continuing through April 1998. A portion of the
Busse shares acquired by Alvey are pledged to secure payments under the
covenant-not-to-compete.
White leases its manufacturing facility located in Kenilworth, New
Jersey from a partnership controlled by Donald J. Weiss, a director of the
Company. Pursuant to the terms of the operating lease, the Company paid $0.9
million and $1.1 million in 1995 and 1994, respectively.
The Company has entered into employment agreements with several
members of executive management. The agreements require the Company to pay
the executive's salary for a period lasting from one to two years should the
executive's employment be terminated. In addition, the agreements provide
for annual bonuses of up to 117% to 189% of the executive's annual salary
based upon the achievement of pre-established performance targets.
F-20
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accrued expenses include the following:
DECEMBER 31,
----------------------
1995 1994
-------- -------
(IN THOUSANDS)
Project expenses. . . . . . . . . . . . . . . $ 4,013 $ 3,064
Bonuses, incentives and profit sharing. . . . 7,507 5,053
Wages and salaries. . . . . . . . . . . . . . 2,407 2,241
Vacation and other employee costs . . . . . . 7,064 5,719
Plant disposal costs. . . . . . . . . . . . . 1,119 4,246
Other expenses . . . . . . . . . . . . . . 5,654 4,587
------- ------
$27,764 $24,910
------- -------
------- -------
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data (in thousands) for fiscal 1995 and 1994
appears below:
1995 Net Sales Gross Profit Net Income
---------- --------------- ------------
First quarter . . . . . . . . . . . $67,008 $15,523 $ 326
Second quarter. . . . . . . . . . . 72,026 17,479 1,137
Third quarter . . . . . . . . . . . 68,271 17,610 1,370
Fourth quarter. . . . . . . . . . . 80,713 20,109 1,573
-------- -------- --------
$288,018 $70,721 $4,406
-------- -------- --------
-------- -------- --------
1994
First quarter.. . . . . . . . . . . $ 57,627 $11,142 $ (942)
Second quarter. . . . . . . . . . . 65,149 15,043 837
Third quarter . . . . . . . . . . . 58,898 15,215 553
Fourth quarter. . . . . . . . . . . 66,503 17,770 1,230
-------- -------- --------
$248,177 $59,170 $1,678
-------- -------- --------
-------- -------- --------
15. SUBSEQUENT EVENTS
ACQUISITION
On January 29, 1996, Pinnacle, Alvey and MFA purchased all of the
outstanding capital stock of Weseley Software Development Corp. ("Weseley") for
a purchase price of $15 million in cash. The acquisition, which will be
recorded pursuant to the purchase method of accounting, was financed with a
portion of the proceeds of the Debt Offering as described below. In addition,
subject to the continued employment of the former principal shareholder of
Weseley and certain 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 which will be charged to income in the year earned and employee
incentive compensation up to an aggregate maximum of $13 million which will be
charged to income when such amounts are estimatable and payment thereof is
deemed probable.
In the quarter ended December 31, 1995, Weseley received and
recorded as deferred revenue $2.5 million in fees in connection with a
distribution contract with a large manufacturing company. On December 31,
1995 (prior to the proposed purchase of Weseley by Pinnacle, Alvey and MFA),
Weseley paid and charged to income an aggregate of $3.0 million in bonuses to
certain of its employees.
F-21
<PAGE>
15.SUBSEQUENT EVENTS (CONTINUED)
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 which are essentially completed. Based on the results of an
independent appraisal, it is expected that approximately $11.7 million of the
Weseley purchase price will be allocated to purchased research and development
and charged to expense in the quarter ended March 31, 1996. The pro forma data
below does not reflect such charge to expense for the purchased research and
development. 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)
12 months ended
December 31, 1995
(unaudited)
--------------------
Net sales $291,415
Cost of goods sold 218,232
--------
Gross profit 73,183
Selling, general and administrative expenses 56,821
Research and development expenses 2,666
Amortization expense 2,208
Other income, net (108)
---------
Operating income 11,596
Interest expense 8,583
--------
Income before income taxes 3,013
Income taxes 2,060
--------
Net income $ 953
--------
--------
The pro forma income statement data presented above includes the payment by
Weseley and charge to expense on December 31, 1995 (prior to the purchase of
Weseley by Pinnacle, Alvey and MFA) of an aggregate of $3.0 million in one-time
nonrecurring bonuses to certain employees of Weseley. Had such amount been
excluded from the pro forma income statement data presented above, Alvey's pro
forma net income for fiscal year 1995 would have been $2,753,000.
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 operation of Alvey. In accordance
with the terms of the Debt Offering, Alvey intends to file 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 1993 with
terms substantially identical to those of the 11-3/8% Senior Subordinated
Notes. In addition, concurrent with the consummation of the Debt Offering,
Pinnacle sold $30 million in preferred stock and warrants (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
F-22
<PAGE>
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.
REVOLVING CREDIT FACILITY
Concurrent with the consummation of the Debt Offering, Alvey
entered into a new credit agreement for a $30 million revolving credit
facility (the "Revolving Credit Facility"), which is guaranteed by Pinnacle
and by each direct and indirect subsidiary of Alvey. Indebtedness of Alvey
under the Revolving Credit Facility 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 Bros., Inc. which are pledged
to secure certain noncompete payments). Indebtedness under this Revolving
Credit Facility will bear interest at a rate based (at Alvey's option) upon
(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 margins are subject to 0.25% reductions
in the event Alvey meets certain performance targets. The Revolving Credit
Facility is due January 24, 2001.
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.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Weseley Software Development Corp.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Weseley Software Development Corp.
at December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As explained in Note 7, in January 1996, Weseley Software Development Corp. sold
all of its outstanding stock to McHugh, Freeman & Associates, Inc., a wholly
owned subsidiary of Alvey Systems, Inc.
PRICE WATERHOUSE LLP
St. Louis, Missouri
February 21, 1996
F-24
<PAGE>
<TABLE>
<CAPTION>
WESELEY SOFTWARE DEVELOPMENT CORP.
Balance Sheet
DECEMBER 31,
1995 1994
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 216,398 $ 34,184
Accounts receivable, less allowance for doubtful accounts of $20,000 and $0,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341,386 204,958
Unbilled revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,487 35,450
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 1,061
---------- ----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . 607,271 275,653
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,374,073
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . 223,021 78,566
$2,204,365 $354,219
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 104,020 $ 62,947
Accrued pension and profit sharing. . . . . . . . . . . . . . . . . . . . . . 166,000 85,531
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,041,625 159,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,113 7,647
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,109 --
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 3,587,867 315,125
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,888
Commitments and contingencies (Note 8)
Stockholders' (deficit) equity:
Common stock, $1 par value; authorized 1,000 shares; 468 and 415 shares
issued; 464 and 415 shares outstanding, respectively . . . . . . . . . . . 468 415
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . 168,484 39,787
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,569,592) (1,108)
Treasury stock, at cost; 4 and 0 common shares, respectively. . . . . . . . . (8,750) --
---------- ----------
Total stockholders' (deficit) equity. . . . . . . . . . . . . . . . . . (1,409,390) 39,094
---------- ----------
$2,204,365 $ 354,219
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Financial Statements.
F-25
<PAGE>
<TABLE>
<CAPTION>
WESELEY SOFTWARE DEVELOPMENT CORP.
Statement of Operations
Year ended December 31,
-------------------------------------
1995 1994
------------------ ---------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,396,601 $1,810,239
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 935,390 602,981
-------------- --------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . 2,461,211 1,207,258
Selling, general and administrative expenses. . . . . . . . . . . 4,538,423 865,651
Product development and research and development expenses . . . . 615,445 450,971
-------------- --------------
Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . (2,692,657) (109,364)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . 18,675 5,458
-------------- --------------
Loss before income tax benefit. . . . . . . . . . . . . . . . . (2,673,982) (103,906)
Income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . 1,105,498 43,348
-------------- --------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . ($1,568,484) $ (60,558)
-------------- --------------
-------------- --------------
</TABLE>
See accompanying Notes to Financial Statements.
F-26
<PAGE>
<TABLE>
<CAPTION>
WESELEY SOFTWARE DEVELOPMENT CORP.
Statement of Stockholders' Deficit
Common Stock
-------------------------
Retained
For the year ended Number Additional Earnings Total
Decmber 31, 1994 and 1995 of Shares Paid-in (Accumulated Treasury Stocknolders'
Outstanding Par Value Capital Deficit) Stock Equity (Deficit)
- ----------------------------------- ------------ ---------- ---------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993. . . . . . 415 $ 415 $ 39,787 $59,450 $-- $99,652
Net loss . . . . . . . . . . . . . . (60,558) (60,558)
--- ----- -------- ------------ -------- ------------
Balance, December 31, 1994. . . . . . 415 415 39,787 (1,108) -- 39,094
Treasury stock purchased . . . . . (4) (8,750) (8,750)
Stock options exercised. . . . . . 53 53 128,697 128,750
Net loss . . . . . . . . . . . . . (1,568,484) (1,568,484)
--- ----- -------- ------------ -------- ------------
Balance, December 31, 1995. . . . . 464 $ 468 $168,484 $(1,569,592) $(8,750) $(1,409,390)
--- ----- -------- ------------ -------- ------------
--- ----- -------- ------------ -------- ------------
</TABLE>
See accompanying Notes to Financial Statements.
F-27
<PAGE>
<TABLE>
<CAPTION>
WESELEY SOFTWARE DEVELOPMENT CORP.
Statement of Cash Flows
Year ended December 31,
-------------------------------------
1995 1994
-------- --------
<S> <C> <C>
Operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $(1,568,484) $ (60,558)
Adjustments to reconcile net loss to net cash provided. . .
by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 68,708 44,100
Deferred income taxes. . . . . . . . . . . . . . . . . . . (1,161,607) (43,348)
Rent expense . . . . . . . . . . . . . . . . . . . . . . . 25,888
Increase in current assets:. . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . (136,428) (9,654)
Unbilled revenue . . . . . . . . . . . . . . . . . . . . . (4,037) (3,800)
Other assets . . . . . . . . . . . . . . . . . . . . . . . (8,939) (460)
Increase in current liabilities:. . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . 41,073 8,422
Taxes payable. . . . . . . . . . . . . . . . . . . . . . 56,109
Accrued expenses . . . . . . . . . . . . . . . . . . . . 80,469 13,834
Deferred revenues. . . . . . . . . . . . . . . . . . . . 2,882,625 109,672
----------- -----------
Net cash provided for operating activities . . . . . . . 275,377 58,208
Investing activities: . . . . . . . . . . . . . . . . . . .
Acquisition of property and equipment . . . . . . . . . . . (213,163) (47,612)
----------- -----------
Net cash used for investing activities . . . . . . . . . (213,163) (47,612)
----------- -----------
Financing activities: . . . . . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . 128,750
Purchase of treasury stock. . . . . . . . . . . . . . . . . (8,750) --
----------- -----------
Net cash provided by financing activities. . . . . . . . 120,000 --
----------- -----------
Increase in cash and cash equivalents. . . . . . . . . . . 182,214 10,596
Cash and cash equivalents, beginning of year . . . . . . . 34,184 23,588
----------- -----------
Cash and cash equivalents, end of year . . . . . . . . . . $ 216,398 $ 34,184
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Financial Statements
F-28
<PAGE>
WESELEY SOFTWARE DEVELOPMENT CORP.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
DESCRIPTION OF BUSINESS
Weseley Software Development Corp. (the "Company" or "Weseley")
develops, markets and supports software management products and provides
related services which are utilized by a variety of companies to manage their
shipping processes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by the Company in the preparation of the
financial statements conform to generally accepted accounting principles, and
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from these estimates.
REVENUE RECOGNITION
Revenue from the sale of software licenses is recognized upon
installation of the software providing that no significant vendor obligations
remain and collection of the related receivable is deemed probable. Cost and
expenses, primarily direct labor and materials, related to installation are
recorded as cost of sales as the related revenues are recognized.
UNBILLED REVENUE
Revenues for services rendered in the installation or maintenance of
software which have not been billed at the end of the year are recorded as
unbilled revenue.
DEFERRED REVENUES
Revenues related to sales of maintenance service contracts, which are
billed at the inception of the contract, are deferred and recognized ratably
over the term of the contract.
COST OF SALES
For purposes of estimating the cost of sales relating to
installation and maintenance services revenues, the Company includes all of
its customer service expenses plus an allocation of certain other expenses
based upon estimates made by management.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or
less at date of purchase are considered to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company sells its products to a variety of manufacturing companies
throughout the United States and generally does not require collateral (see also
Note 6). The Company maintains reserves for potential credit losses and
historically such losses have been within management's expectations.
F-29
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Upon sale or other
disposition, the cost and related accumulated depreciation are removed from the
respective accounts and any resulting gain or loss is included in income.
Property and equipment consists of:
December 31,
---------------------------
1995 1994
-------- --------
Computer equipment. . . . . . . . . . . . . $287,632 $ 84,925
Office furniture and fixtures . . . . . . . 90,177 79,721
-------- --------
377,809 164,646
Less accumulated depreciation . . . . . . . (154,788) (86,080)
-------- --------
$223,021 $ 78,566
-------- --------
-------- --------
Depreciation is provided on equipment and furniture using the straight-line
method over the estimated useful life (5 years) of each asset. Maintenance and
repairs are expensed as incurred.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. During
1995 and 1994, none of these expenses qualified for capitalization under
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
INCOME TAXES
The Company utilizes SFAS No. 109, "Accounting for Income Taxes." Income
taxes are based upon income for financial reporting purposes and deferred income
taxes are provided for the temporary differences between the financial reporting
bases and the income tax bases of the Company's assets and liabilities. The tax
rates expected to be in effect when such differences are reflected in the
Company's income tax returns are used in calculating the deferred tax asset or
liability. The major temporary differences that give rise to deferred taxes are
primarily the result of the Company using the cash basis of accounting for
income tax reporting purposes. See Note 3 for additional information.
EARNINGS PER SHARE INFORMATION
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 financial statements or the notes
thereto.
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<PAGE>
3.Income taxes
Income tax benefit is comprised of the following:
Year ended December 31,
-----------------------------
1995 1994
--------- ---------
Current:
Federal . . . . . . . . . . . . . . . . . $ 40,871 $ --
State . . . . . . . . . . . . . . . . . . 15,238 --
------------ ------------
56,109 --
Deferred:
Federal . . . . . . . . . . . . . . . . . (846,145) (31,574)
State . . . . . . . . . . . . . . . . . . (315,462) (11,774)
------------ ------------
(1,161,607) (43,348)
------------ ------------
$(1,105,498) $ (43,348)
------------ ------------
------------ ------------
A reconciliation of the income tax benefit at the statutory federal income
tax rate to reported income tax benefit per the accompanying financial
statements is as follows:
Year ended December 31,
-----------------------------
1995 1994
-------- --------
Income tax benefit at statutory rate$ . . . (909,154) $ (35,328)
Benefit resulting from:
State taxes (net of federal). . . . . . . (196,344) (8,020)
------------ ------------
($1,105,498) $ (43,348)
---------- ----------
------------ ------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
December 31,
1995 1994
-------- --------
Deferred revenues . . . . . . . . . . . . . $1,374,073 $ 71,948
Accounts payable. . . . . . . . . . . . . . 47,069 28,484
Allowance for doubtful accounts . . . . . . 9,050
Other accruals. . . . . . . . . . . . . . . 11,714 706
Total deferred tax assets . . . . . . . . 1,441,906 101,138
------------ ------------
Accounts receivable . . . . . . . . . . . . (163,527) (92,744)
Other . . . . . . . . . . . . . . . . . . . (124,419) (16,041)
------------ ------------
Total deferred tax liabilities. . . . . . (287,946) (108,785)
------------ ------------
Net deferred tax asset (liability . . . . $1,153,960 $ (7,647)
------------ ------------
------------ ------------
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<PAGE>
4. Stock option plans
The Company has a nonqualified stock option plan whereby the Company may
grant stock options to key employees for an option price of at least the fair
market value of the stock on the date of grant. The options vest three years
after the date of grant, during which time they are subject to repurchase
provisions at the option of the Company. In connection with the sale of the
Company, as further discussed in Note 7, all issued options vested on
November 21, 1995. Changes under this plan were as follows:
Average exercise
Shares price per share
------ ----------------
Shares subject to plan. . . . . . . . . . . 100
Options outstanding, January 1, 1994. . . . 41 $ 2,183
Options outstanding, January 1, 1995. . . . 41 2,183
Options issued. . . . . . . . . . . . . . 12 4,000
Options exercised . . . . . . . . . . . . (53) (2,429)
Options outstanding, December 31, 1995. . . -- --
5. EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS
The Company has two defined contribution benefit plans covering
substantially all regular full time employees of the Company who are at least 21
years of age and have at least 12 months of service. No employee contributions
to the plans are allowed except for roll-over contributions from another
retirement plan upon the inception of employment. The Company makes
contributions to the retirement plan once per year in an amount equal to 10% of
each participant's compensation for the plan year. The Company makes
contributions to the profit sharing plan once per year on a discretionary basis.
Employer contributions to the plans during the years ended December 31,
1995 and 1994 were $85,531 and $34,585, respectively. Employees vest in the
plans' assets ratably over a five-year period.
6. SIGNIFICANT CUSTOMERS
Two customers comprised approximately 38% and 9% of net accounts receivable
and 26% and 13% of net sales as of and for the year ended December 31, 1995,
respectively. Three customers comprised approximately 48%, 1% and 0% of
accounts receivable and 21%, 14% and 12% of net sales as of and for the year
ended December 31, 1994, respectively.
7. SIGNIFICANT EVENTS
SALE OF THE COMPANY
On January 29, 1996, the Company consummated the sale of all of its
outstanding stock to McHugh, Freeman & Associates, Inc., a wholly owned
subsidiary of Alvey Systems, Inc., for a purchase price of approximately
$15,000,000 in cash. In addition, subject to the continued employment of the
former principal owner of Weseley and other conditions, certain designated
employees of Weseley will have an opportunity to earn stay bonuses in the
aggregate amount of $625,000 per year for each of eight years and employment
incentive compensation up to an aggregate maximum of $13,000,000 which would be
payable over time. The accompanying financial statements reflect the
historical, pre-acquisition basis of accounting.
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<PAGE>
7. SIGNIFICANT EVENTS (CONTINUED)
Distribution contract and employee bonuses
On November 2, 1995, the Company entered into a distribution contract with
GE Capital Transportation Services Corporation ("GECTS") whereby GECTS has been
granted exclusive distribution rights on certain software currently under
development and to be manufactured by the Company (TRACS Version 3.0) in
exchange for a non-refundable prepaid fee of $2,500,000. During the seven year
term of the contract, for any licenses of such software sold by GECTS, the
Company shall perform all services required in connection with the license,
including software customization, installation, training and maintenance. The
Company is entitled to and will receive additional payments based upon the
actual services performed. The contract also provides for additional payments,
based on a percentage of the suggested retail list price of the software
licenses (as defined in the contract), to the Company should sales of the
software licenses and related installation, training and maintenance fees
exceed $2,850,000. Fees of approximately $2,500,000 received under this
contract are reflected as deferred revenues in the accompanying balance sheet at
December 31, 1995. Such fees will be recorded as revenue as related software
licenses are sold by GECTS or ratably over the life of the contract, whichever
is greater.
On December 31, 1995, the Company paid and charged to income an aggregate
of $3,000,000 in bonuses to certain of its employees.
8. COMMITMENTS AND CONTINGENCIES
The Company has various obligations under long-term operating leases. The
aggregate minimum rental commitments for the years ended December 31 under all
noncancellable long-term operating leases are as follows: 1996 - $63,621; 1997
- - $82,984; 1998 - $83,400; 1999 - $82,631; and 2000 - $58,328.
Total rental expenses under all noncancellable long-term operating leases
and various monthly equipment rentals was $130,200 and $99,538 for the years
ended December 31, 1995 and 1994, respectively.
The Company is party to certain lawsuits. Management and legal counsel do
not expect the outcome of any litigation to have a material adverse effect on
the Company's financial position, results of operations or liquidity.
F-33
