<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934.
For the quarterly period ended June 30, 1996.
Transition report pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934.
For the transition period from to
------------------------- -----------------------
Commission File Number 333-2600
ALVEY SYSTEMS, INC.
101 S. Hanley Road, Suite 1300
St. Louis, MO 63105
314/863-5776
I.R.S. Employment I.D. 43-0157210
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
--------- ---------
The number of shares of common stock outstanding at July 31, 1996 was 1000
shares.
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
three months and six months ended June 30,
1996 (Unaudited) and 1995 (Unaudited). 3
Consolidated Balance Sheet - June 30, 1996
(Unaudited) and December 31, 1995 4
Consolidated Statement of Cash Flows -
six months ended June 30, 1996 (Unaudited)
and 1995 (Unaudited) 5-6
Consolidated Statement of Net Investment
of Parent for the six months ended June 30,
1996 (Unaudited) 7
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-21
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 83,338 $ 72,026 $ 164,055 $ 139,034
Cost of goods sold 63,109 54,547 124,344 106,032
----------- ----------- ----------- -----------
Gross profit 20,229 17,479 39,711 33,002
Selling, general and administrative expenses 14,561 12,454 29,870 24,282
Research and development expenses 1,184 566 1,823 1,004
Writeoff of purchased research and development costs - - 11,700 -
Amortization expense 400 458 838 926
Other expense (income), net 96 (38) 1,468 10
----------- ----------- ----------- -----------
Operating income (loss) 3,988 4,039 (5,988) 6,780
Interest expense 3,169 1,763 5,673 3,837
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes
and extraordinary loss 819 2,276 (11,661) 2,943
Provision for income taxes 345 1,139 420 1,480
----------- ----------- ----------- -----------
Net income (loss) before extraordinary loss 474 1,137 (12,081) 1,463
Extraordinary loss, net of tax benefit of $1,328 - - 1,993 -
----------- ----------- ----------- -----------
Net income (loss) $ 474 $ 1,137 $ (14,074) $ 1,463
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 3
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
(UNAUDITED)
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,911 $ 3,405
Receivables:
Trade (less allowance for doubtful accounts of $868 and $824, respectively) 44,867 42,567
Unbilled and other 9,676 6,211
Accumulated costs and earnings in excess of billings on uncompleted contracts 10,905 8,317
Inventories:
Raw materials 13,454 13,966
Work in process 2,785 5,720
Deferred income taxes 5,916 4,699
Prepaid expenses and other assets 2,144 1,665
--------------- ---------------
Total current assets 94,658 86,550
Property, plant and equipment, net 29,038 25,675
Other assets 10,220 6,031
Goodwill, net 36,319 32,029
--------------- ---------------
$ 170,235 $ 150,285
--------------- ---------------
--------------- ---------------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND NET INVESTMENT OF PARENT
Current Liabilities:
Current portion of long-term debt $ 280 $ 6,915
Accounts payable 19,792 24,368
Accrued expenses 30,320 27,764
Customer deposits 9,824 12,107
Billings in excess of accumulated costs and earnings on uncompleted contracts 17,856 13,904
Deferred revenues 2,183 899
Taxes payable 1,020 994
--------------- ---------------
Total current liabilities 81,275 86,951
Long-term debt 100,673 42,460
Other long-term liabilities 9,425 5,075
Deferred income taxes 2,945 4,196
Commitments and contingencies (Notes 3 and 9)
Redeemable preferred stock:
Redeemable preferred stock of $.01 par value per share, authorized 0 and 500,000
shares, respectively:
Series A Senior Cumulative Exchangeable Preferred Stock of Pinnacle Automation, Inc.,
0 and 250,000 designated, 0 and 210,770 shares issued, 0 and 210,697 outstanding,
respectively - 21,077
Cumulative Exchangeable Preferred Stock of Pinnacle Automation, Inc., 0 and
100,000 shares designated, 0 and 62,524 shares issued and outstanding, respectively - 6,252
Preferred stock in treasury, 0 and 73 Series A Senior Cumulative Stock of Pinnacle
Automation, Inc. - (7)
--------------- ---------------
Total redeemable preferred stock 0 27,322
Net investment of Parent (24,083) (15,719)
--------------- ---------------
$ 170,235 $ 150,285
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 4
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (14,074) $ 1,463
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Depreciation and software amortization 1,614 1,425
Amortization 838 926
Writeoff of purchased research and development
costs 11,700 -
Other 10 -
Deferred taxes, net of effect of acquisitions (1,371) 569
Reduction of unamortized debt issue costs included
in extraordinary loss 2,963 -
(Increase) decrease in current assets, excluding
effect of acquisitions:
Receivables (5,413) (4,851)
Accumulated costs and earnings in excess of billings
on uncompleted contracts (2,588) (326)
Inventories 3,447 (1,692)
Other assets 60 (698)
(Decrease) increase in current liabilities, excluding
effect of acquisitions
Accounts payable (4,665) (1,228)
Accrued expenses 2,337 (444)
Customer deposits (2,283) 6,736
Billings in excess of accumulated costs and earnings
on uncompleted contracts 3,952 581
Deferred revenues 394 (385)
Taxes payable 26 (374)
Other liabilities 2,328 (574)
----------- -----------
Net cash provided by (used for) operating activities (725) 1,128
----------- -----------
INVESTING ACTIVITIES:
Acquisition of Weseley, net of cash acquired of $28 (14,972) -
Payments for agreements not to compete (150) (150)
Cash payments to dispose of Lewiston (365) (739)
Software development costs (212) (140)
Additions to property, plant and equipment, net (4,613) (1,357)
----------- -----------
Net cash used for investing activities (20,312) (2,386)
----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 5
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES:
Proceeds of borrowings 102,019 24,453
Payments of debt and capital leases (50,441) (24,353)
Redemption of preferred stock (27,600) -
Investment of Parent 5,981 4
Payments of debt issuance costs (7,416) -
Treasury preferred stock issuances 35
----------- -----------
Net cash provided by financing activities 22,543 139
----------- -----------
Net increase in cash and cash equivalents 1,506 (1,119)
Cash and cash equivalents, beginning of period 3,405 2,580
----------- -----------
Cash and cash equivalents, end of period $ 4,911 $ 1,461
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on financings $ 623 $ 1,661
Income taxes 362 944
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Alvey Systems, Inc. purchased Weseley Software Development Corp. in January 1996.
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 12,674
Fair value assigned to goodwill 4,923
Cash paid concurrent with the acquisition,
excluding cash acquired (14,972)
-----------
Liabilities assumed $ 2,625
-----------
-----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 6
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET INVESTMENT OF PARENT
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS ENDED NET INVESTMENT
JUNE 30, 1996 OF PARENT
Balance December 31, 1995 $ (15,719)
Net loss (14,074)
Net investment of Parent 5,981
Preferred stock dividend declared (271)
------------
Balance June 30, 1996 $ (24,083)
------------
------------
See accompanying Notes to Consolidated Financial Statements
Page 7
<PAGE>
ALVEY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Alvey
Systems, Inc. ("Alvey" or the "Company") have been prepared in accordance
with the instructions for Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion of
management, such information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
results of operations for the periods presented. Operating results for any
quarter are not necessarily indicative of the results for any other quarter
or for the full year. These statements should be read in conjunction with
the consolidated financial statements and notes to the consolidated
financial statements thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
2. PRINCIPLES OF CONSOLIDATION, EARNINGS PER SHARE INFORMATION
Alvey is a wholly-owned subsidiary of Pinnacle Automation, Inc. ("Pinnacle"
or "Parent"). Pinnacle has no operations and no assets other than its
investment in Alvey. The financial statements of the Company include the
accounts of Alvey and Alvey's wholly-owned subsidiaries: McHugh Freeman &
Associates, Inc. ("MFA"), Busse Bros., Inc. ("Busse"), The Buschman Company
("Buschman"), White Systems, Inc., formerly White Storage & Retrieval
Systems, Inc. ("White") and Weseley Software Development Corp.
("Weseley"). All significant intercompany transactions, which primarily
consist of sales, have been eliminated.
Given the historical organization and capital structure of the Company,
earnings per share information is not considered meaningful or relevant and
has not been presented in the accompanying unaudited consolidated financial
statements or notes thereto.
3. ACQUISITIONS
On January 29, 1996, Pinnacle, Alvey and MFA purchased all of the
outstanding capital stock of Weseley for a purchase price of $15 million in
cash. The acquisition was financed with a portion of the proceeds of the
Debt Offering (as
Page 8
<PAGE>
defined in Note 4). 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 estimable and payment thereof is deemed probable.
The following table sets forth pro forma income statement data for Alvey as
if the Weseley acquisition had taken place on January 1, 1995. Such data
reflects the application of the purchase method of accounting. Amounts
have been preliminarily assigned to assets acquired and liabilities assumed
based on estimated fair values as of the date of acquisition pursuant to
valuations and other studies. This income statement data is unaudited and
does not purport to represent the results of operations had the acquisition
actually occurred on January 1, 1995.
PRO FORMA INFORMATION
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED)
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Net sales $ 164,240 $ 140,733
Net income (loss) before extraordinary item (575) 632
Net income (loss) (2,568) 632
</TABLE>
The pro forma results of Weseley for the six months ended June 30, 1996 and
1995 include actual results of Weseley for the periods prior to and since
the date of acquisition and certain pro forma adjustments. Based on the
results of an independent appraisal, $11.7 million of the Weseley purchase
price was allocated to purchased research and development costs at the date
of acquisition and was recorded as research and development expense in
Alvey's consolidated statement of operations during the first quarter of
1996. This research and development expense has been excluded from the pro
forma statement of operations as it represents a non-recurring charge to
income which results directly from the Weseley acquisition. Additional
goodwill amortization resulting from the Weseley purchase price allocation
is incorporated and is being amortized over a period of 10 years.
Page 9
<PAGE>
4. DEBT OFFERING AND RECAPITALIZATION OF PINNACLE
On January 24, 1996, Alvey issued and sold $100 million of 11 3/8% Senior
Subordinated Notes due 2003 (the "Debt Offering"). The proceeds of the
Debt Offering were used to repay all of Alvey's outstanding senior
indebtedness and certain other indebtedness, fund the acquisition of
Weseley, pay transaction fees, fund a dividend to Pinnacle of $21.5 million
and provide working capital for the ongoing operations of Alvey. As a
result of the repayment of the outstanding senior indebtedness, the Company
recorded an extraordinary loss of approximately $2.0 million representing
the writeoff of related debt issuance costs and debt repayment penalties,
net of tax. In accordance with the terms of the Debt Offering, Alvey
filed a registration statement with the Securities and Exchange Commission
with respect to an offer to exchange the 11 3/8% Senior Subordinated Notes
for a new issue of debt securities of Alvey registered under the Securities
Act of 1933 with terms substantially identical to those of the 11 3/8%
Senior Subordinated Notes. Such registration statement was declared
effective on May 9, 1996 and the exchange for registered securities of the
entire $100 million Senior Subordinated Notes due 2003 was completed on
June 11, 1996. 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 Pinnacle's outstanding common stock and to redeem
certain shares of its outstanding preferred stock which had been pushed
down to Alvey's consolidated financial statements. The preferred stock
and warrants from the Preferred Stock Offering have not been pushed down
to Alvey's consolidated financial statements as such preferred stock and
warrants are not exchangeable into securities of Alvey. While Alvey has
not guaranteed, nor is it contingently obligated with respect to the
preferred stock and warrants issued in the Preferred Stock Offering,
Pinnacle has no financial resources, other than from Alvey and Alvey's
operating subsidiaries, to satisfy cash requirements relative to these
shares.
5. REVOLVING CREDIT FACILITY
Concurrently with the consummation of the Debt Offering, Alvey entered into
a credit agreement (the "Credit Agreement") for a $30 million revolving
credit facility (the "Revolving Credit Facility ") which is guaranteed by
Pinnacle, Alvey and by each direct and indirect subsidiary of Alvey.
Indebtedness of Alvey under the Credit Agreement is secured by
substantially all of the personal property of Alvey and its subsidiaries,
all capital stock of Alvey and 100% of the capital stock of its domestic
subsidiaries (other than the portion of the shares of capital stock of
Busse which are pledged to secure certain non-compete payments).
Indebtedness under the Revolving Credit Facility 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
Page 10
<PAGE>
margins are subject to 0.25% reductions in the event Alvey meets certain
performance targets. The Revolving Credit Facility is due January 24,
2001. At June 30, 1996, there were no borrowings outstanding under the
Revolving Credit Facility.
6. REINCORPORATION
Effective January 16, 1996, the Company reincorporated in the State of
Delaware under the name Alvey Systems, Inc. The Company historically
conducted business as a Missouri corporation under the name Alvey, Inc.
7. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accrued expenses include the following (dollars in thousands):
JUNE 30, DECEMBER 31,
1996 1995
(Unaudited)
---------- ----------
Project expenses $ 4,584 $ 4,013
Bonuses, incentives and profit sharing 7,152 7,507
Wages and salaries 1,261 2,407
Vacation and other employee costs 6,847 7,064
Accrued interest 5,047 394
Plant disposal costs 754 1,119
Other expenses 4,675 5,260
---------- ----------
$ 30,320 $ 27,764
---------- ----------
---------- ----------
8. STOCK OPTIONS
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 in periods ranging from eight to ten years subsequent
to the grant date. For the period ended June 30, 1996, these options are
summarized as follows:
Page 11
<PAGE>
SHARES SUBJECT
AVERAGE PRICE TO OPTION
Exercisable at January 1, 1996 $20.53 36,691
Options granted in 1996 30.24 58,375
--------
Exercisable at June 30, 1996 26.49 95,066
--------
--------
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123"), which addresses
accounting for stock option, purchase and award plans. SFAS 123 specifies
that companies utilize either the "Fair value based method" or the
"Intrinsic value based method" for valuing stock options granted. The
Company currently utilizes and expects to continue to utilize the
"Intrinsic value based method" for valuing stock options granted when it
adopts SFAS 123. It is anticipated that the Company will adopt SFAS 123 in
the fourth quarter of 1996. The Company anticipates that, when adopted,
SFAS 123 will have no material effect on the consolidated financial
position or results of operations.
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation consisting almost entirely of
product and general liability claims arising in the normal course of its
business. After deduction of a per occurrence self-insured retention, the
Company is insured for losses of up to $27 million per year for 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.
At December 31, 1995, Alvey had two agreements with related parties under
which Alvey received investment banking and other consulting services.
These agreements were to terminate in the years 2000 and 2002,
respectively. The agreements required annual payments by Alvey totaling
$500,000 plus out-of-pocket expenses. In addition, Alvey was required to
pay an aggregate 2% investment banking fee on the total amount of
consideration paid or received through a merger, consolidation or sale of
more than 10% of Alvey's assets or outstanding securities, or the
acquisition of assets or stock of another company. In January 1996,
concurrent with the Debt Offering, (see Note 4), these agreements were
terminated at a cost of $1.4 million. Effective January 24, 1996, Pinnacle
established consulting agreements with two related parties whereby the
Company is obligated to payments of $350,000 per year plus expenses and,
under one contract, annual increases of up
Page 12
<PAGE>
to 3%. Additionally, the Company is obligated to compensate one related
party for certain merger, acquisition and financing transactions. Costs
of these agreements, including the termination fee, are included in other
expense, net in the accompanying financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When used in the following discussion, the words "believes", "anticipates" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
GENERAL
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of Alvey Systems, Inc.
for the three and six months ended June 30, 1996 compared to the three and six
months ended June 30, 1995. This discussion should be read in conjunction with
the consolidated financial statements and notes to the consolidated financial
statements thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
Page 13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, net sales and
categories of expenses, including "Other expense (income),net", as a percentage
of net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 75.7 75.7 75.8 76.3
------- ------- ------- -------
Gross profit 24.3 24.3 24.2 23.7
Selling, general & administrative
expenses 17.5 17.3 18.2 17.5
Research & development
expenses 1.4 0.8 1.1 0.7
Writeoff of purchased R&D - - 7.1 -
Amortization expense 0.5 0.6 0.5 0.7
Other expense (income), net 0.1 (0.1) 0.9 0.0
------- ------- ------- -------
Operating income (loss) 4.8 5.6 (3.6) 4.9
Interest expense 3.8 2.4 3.5 2.8
------- ------- ------- -------
Income (loss) before income
taxes and extraordinary loss 1.0 3.2 (7.1) 2.1
Provision for income taxes 0.4 1.6 0.3 1.1
------- ------- ------- -------
Net income (loss) before
extraordinary loss 0.6 1.6 (7.4) 1.1
Extraordinary loss, net - - 1.2 -
------- ------- ------- -------
Net income (loss) 0.6% 1.6% (8.6)% 1.1%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Page 14
<PAGE>
COMPARISON OF THE QUARTER ENDED JUNE 30, 1996 TO THE QUARTER
ENDED JUNE 30, 1995
NET SALES were $83.3 million for the quarter ended June 30, 1996, representing
an increase of $11.3 million, or 15.7% over net sales of $72.0 million for the
three months ended June 30, 1995. These results represent the third consecutive
quarter of record sales. Excluding Weseley, acquired in January 1996, "same
store" sales increased 13.4% over the second quarter of 1995. Increases were
particularly significant in the system areas of palletizing, depalletizing and
warehouse distribution as revenues at these operating units increased
approximately 22% over 1995.
NEW ORDER BOOKINGS were $85.4 million for the quarter ended June 30, 1996,
representing a significant improvement over the prior three quarters and are
the second highest total in Company history. The strongest bookings activity
during the quarter was in software and related products. These bookings
represent 25% of the total for the quarter compared to 14% for the second
quarter of 1995 and only 12% for the entire year of 1995. Second quarter
bookings have increased order backlog to $141.5 million which is up $0.4
million above the level at June 30, 1995.
GROSS PROFIT was $20.2 million for the three months ended June 30, 1996, an
increase of $2.8 million, or 15.7% over the quarter ended June 30, 1995.
Gross margins, as a percentage of sales, were 24.3% for the second quarter of
both 1996 and 1995. Approximately $2.4 million of the increase in margins is
attributable to the year-over-year growth in "same store" sales, offset in
part by a $0.9 million decrease in overall gross margin percentage on such
sales. Excess production and project costs were incurred at three of the
Company's manufacturing entities due to the construction activities and
related capacity issues at two facilities and reorganization activities at
the third. These operating issues, coupled with increased sales, required
high-cost outsourcing and significant installation premiums to meet
production requirements and contractual start-up dates on major projects.
Management believes, as explained further below, the additional capacity
available in the fourth quarter and the productivity improvements and cycle
time reduction initiatives currently in process will provide the opportunity
to reduce these excess costs. These additional costs were offset, in part, by
significant margin improvements at the software entities. Second quarter
results of the software entities reflect a shift in product mix to higher
margin license and service fees and away from lower margin hardware.
SELLING, GENERAL AND ADMINISTRATIVE expenses (SG&A) were $14.6 million for the
three months ended June 30, 1996, representing an increase of $2.1 million or
16.9% over the quarter ended June 30, 1995. This increase is primarily
attributable to the first-time inclusion of Weseley; the sales, commissions and
expenses related to increased revenues; and the $373,000 of strategic consulting
charges and stay bonuses, associated with the acquisition of Weseley, not
incurred in 1995. Excluding Weseley, second quarter SG&A increased by
$1.3 million or 10.5% over the same period of 1995. Due to the nature
Page 15
<PAGE>
of the business, Weseley's SG&A as a percentage of sales is approximately 32
percentage points higher than that of the rest of the Company. As a
percentage of sales, "same store" SG&A, which excludes Weseley, decreased 0.5
of a percentage point for the second quarter of 1996 from the same period of
1995.
RESEARCH AND DEVELOPMENT EXPENSES were $1.2 million for the first quarter of
1996, an increase of $618,000 or 109% compared to $566,000 for the first quarter
of 1995. Research and development expenses increased primarily as a result of
the significant efforts in process at MFA to expand the functionality of its
DMplus software to meet the requirements of additional market segments, the
addition of Weseley as they continue the development of a client server based
suite of software products, the cost to develop equipment at White for specific
applications in the meat industry and the development of a new palletizer
offering at Alvey.
OPERATING INCOME for the quarter ended June 30, 1996 was $4.0 million, which
is the same as reported for the three months ended June 30, 1995. As a
percentage of sales, operating income decreased to 4.8% in the quarter ended
June 30, 1996 compared to 5.6% for the same period of 1995. This decrease is
primarily attributable to the increase in research and development expense,
the increase in SG&A and the additional charges to cost of goods resulting
from capacity issues and the start-up of new facilities, all as further
explained above.
INTEREST EXPENSE increased to $3.2 million for the second quarter of 1996,
representing a $1.4 million or 79.8% increase as compared to the $1.8 million
for the period ended June 30, 1995. This increase reflects the higher level of
borrowings over the same period of 1995 resulting from the issuance of the $100
million Senior Subordinated Notes in January 1996, the higher interest rate on
these notes and the $220,000 increase in non-cash charges relating to the
amortization of debt issuance cost.
INCOME TAXES on continuing operations were $345,000 for the three months ended
June 30, 1996, representing a decrease of $794,000 or 69.7% from the $1.1
million tax expense for the same period of 1995. The difference between the
effective tax rate on income before income taxes and extraordinary item and the
expected statutory rates is primarily attributable to the non-deductibility of
expenses related to the amortization of goodwill.
NET INCOME of $474,000 for the quarter ended June 30, 1996 represents a
decrease of $663,000 or 58.3% from the quarter ended June 30, 1995, as a
result of the various factors described above.
Page 16
<PAGE>
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 TO THE SIX MONTHS
ENDED JUNE 30, 1995
NET SALES were $164.1 million for the six months ended June 30, 1996,
representing an increase of $25.0 million, or 18.0% over net sales of $139.0
million for the six months ended June 30, 1995. Sales increases were realized
at each of the Company's operating subsidiaries with palletizing, depalletizing
and warehouse distribution systems showing the largest increases, all at rates
above 21%. Excluding Weseley, "same store" sales increased $22.8 million, or
16.4% over the same period of 1995.
NEW ORDER BOOKINGS were $158.9 million for the six months ended June 30, 1996,
slightly below the record levels established during the six months ended June
30, 1995. Bookings related to software and associated products are particularly
strong and have increased 55% over the same period of 1995.
GROSS PROFIT was $39.7 million for the six months ended June 30, 1996, an
increase of $6.7 million, or 20.3% over the six months ended June 30, 1995.
As a percentage of sales, gross profit for the first half of 1996 is 24.2%, a
0.5 percentage point increase over the same period in 1995. Excluding the
effects of Weseley, gross profit increased $4.9 million or 14.9% and, as a
percentage of sales, was 23.4% or 0.3 points below the first half of 1995.
Gross profit was adversely affected at three of the Company's manufacturing
operations as cost overruns were incurred on a variety of projects due to the
cost of outsourcing production and compressed installation schedules
attributable to the facilities operating above practical capacity and the
implementation of first-time product applications. These overruns were
partially offset by productivity and resulting margin gains at the remaining
manufacturing entities and significant margin growth resulting from the
Company's software products as engineering productivity improved and
significant volume increases were realized from higher margin license and
service fees.
SELLING, GENERAL AND ADMINISTRATIVE expenses (SG&A) were $29.9 million for
the six months ended June 30, 1996, representing an increase of $5.6 million
or 23.0% over the six months ended June 30, 1995. As a percentage of sales,
SG&A was 18.2% for the first six months of 1996, an increase of 0.7
percentage points over the same period of 1995. Excluding Weseley, where due
to the nature of the business SG&A is significantly higher as a percentage of
sales, the "same store" increase in SG&A was $4.3 million, an 18% increase,
while SG&A as a percentage of sales is 17.6% or 0.1 percentage points above
the first six months of 1995. Higher charges for incentive-based annual
bonuses and profit sharing have increased 1996 SG&A expenses by $798,000 and
0.5% over 1995 results.
RESEARCH AND DEVELOPMENT EXPENSES were $1.8 million for the first half of
1996, an increase of $819,000 or 81.6% compared to $1.0 million for the same
period of 1995. Excluding Weseley, research and development expenses
increased $520,000 or 52%. Significant
Page 17
<PAGE>
increases were recorded at MFA as they continue to develop and broaden the
functionality of their software product, DMplus, at White to develop equipment
for specific applications in the meat industry, and the development of a new
palletizer at Alvey.
OTHER INCOME/EXPENSE, net was expense of $1.5 million for the six months
ended June 30, 1996 compared to expense of $10,000 for the six months ended
June 30, 1995. This increase of $1.5 million is primarily attributable to
the first quarter termination of a consulting agreement in connection with
the refinancing and recapitalization transactions, described below in the
section entitled "Liquidity and Capital Resources", which totaled $1.4 million.
OPERATING INCOME for the first six months of 1996 was a loss of $6.0 million.
However, excluding non-recurring charges of $13.1 million resulting from the
$11.7 million writeoff of purchased research and development costs associated
with the acquisition of Weseley (see Note 3 to the unaudited consolidated
financial statements for further discussion) and the $1.4 million expense
associated with the termination of a consulting agreement, operating income
would have been $7.2 million, representing an increase of $377,000 or 5.6 %
compared to operating income for the six months ended June 30, 1995. As a
percentage of sales, and excluding the non-recurring charges, operating
income decreased to 4.4% in the first six months of 1996 compared to 4.9% for
the same period of 1995. This decrease is primarily attributable to the
increase in SG&A and the increase in research and development expenses,
reduced in part by the increase in gross profit margins; all as further
explained above.
INTEREST EXPENSE increased to $5.7 million for the first half of 1996,
representing a $1.8 million or 47.8% increase as compared to the $3.8 million
for the period ended June 30, 1995. This increase reflects the higher level of
borrowings resulting from the issuance of the $100 million Senior Subordinated
Notes in January 1996, the higher interest rate on these notes and the $340,000
increase in non-cash charges relating to the amortization of debt issuance cost.
INCOME TAXES on continuing operations were $420,000 for the six months ended
June 30, 1996, representing a decrease of $1.1 million or 71.6% from the $1.5
million tax expense for the first half of 1995. The significant differences
between the effective tax rate on loss before income taxes and extraordinary
item and the expected statutory rates are attributable to the non-deductibility
of expenses related to the writeoff of purchased research and development and
the amortization of goodwill.
EXTRAORDINARY LOSS, net of tax benefit of $1.3 million, was $2.0 million for the
six months ended June 30, 1996. This extraordinary loss represents the writeoff
of debt issuance cost and related debt prepayment penalties, net of tax,
resulting from the early extinguishment of the Company's debt as part of the
recapitalization. (See Note 4 to the unaudited consolidated financial
statements for further discussion).
Page 18
<PAGE>
NET INCOME was a loss of $14.1 million for the six months ended June 30,
1996, a decrease of $15.5 million from the six months ended June 30, 1995, as
a result of the various factors described above.
LIQUIDITY AND CAPITAL RESOURCES
CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES. During the six months ended
June 30, 1996, cash used for operating activities was $725,000 compared to cash
provided by operations of $1.1 million during the six months ended June 30,
1995. This $1.9 million increase in the use of cash is primarily attributable
to an increase in working capital.
CAPITAL EXPENDITURES for the six months ended June 30, 1996 and 1995 were $4.6
million and $1.4 million, respectively. Expenditures during 1996 increased
primarily as a result of the facility expansion projects in process at Alvey and
Busse. The Company is funding these projects, including purchases of machinery
and equipment, through available cash and, if necessary, existing credit
facilities. Management anticipates that current year capital expenditures will
approximate $12.2 million, including $7.2 million for the two expansion
projects, and that 1997 capital expenditures will approximate $7.0 million which
includes an additional $1.5 million to complete the purchase of machinery and
equipment for the expansion projects.
RESEARCH AND DEVELOPMENT COSTS. As described in Note 3 to the Company's
financial statements, approximately $11.7 million of the Weseley purchase
price was immediately expensed as purchased research and development in the
first quarter of 1996. The purchased research and development relates to the
TRACS Version 3.0 product of Weseley. Additionally, approximately $300,000
each was expended for research and development on the TRACS Version 3.0 and
MFA's DMplus in the first half of 1996. In addition to the significant
investment in software research and development, the Company continues to
invest research and development dollars in specific products, such as the
next generation bulk palletizer at Busse, a new palletizing and depalletizing
product offering at Alvey and new carousel applications at White. These
projects and others resulted in expense of approximately $1.2 million in the
first six months of 1996. The Company expects to incur between $1.0 million
and $1.4 million of additional research and development expenditures in the
last half of 1996 in connection with the further development of software
products and between $1.2 million and $1.6 million for other products.
ACQUISITIONS. The Company expended $15.0 million, net of cash acquired and
excluding professional fees, to acquire Weseley on January 29, 1996. This
acquisition was financed primarily with proceeds from the issuance of the $100
million Senior Subordinated Notes. (See Notes 3 and 4 to the unaudited
consolidated financial statements for further discussion).
DEBT OFFERING AND RECAPITALIZATION OF PINNACLE. Since the financing transaction
which was
Page 19
<PAGE>
completed in January 1996, Alvey has had senior bank debt available with
NationsBank, N.A. consisting of a $30 million Revolving Credit Facility which
matures in 2001. Borrowings under the credit facility initially bear interest
at the Base Rate (as defined in the Credit Agreement) plus 1.5% or the
Euro-dollar Rate (as defined in the Credit Agreement) plus 2.5%, at Alvey's
option, with a step down in rates based upon achieving predefined earnings
objectives. Borrowings under the Revolving Credit Facility are guaranteed by
Pinnacle, Alvey and subsidiaries of Alvey. At June 30, 1996, there were no
borrowings outstanding under the Revolving Credit Facility. Pursuant to the
Debt Offering (see Note 4 to the unaudited consolidated financial statements),
Alvey has $100 million of Senior Subordinated Notes (Notes) which are due in
January 2003. Interest on the Notes is payable semiannually commencing in July
1996.
As a result of the recapitalization, Pinnacle has $23.0 million of Pinnacle
Series A Preferred Stock, $7.0 million of Pinnacle Series C Preferred Stock and
approximately $11.3 million of Pinnacle Series B Preferred Stock outstanding,
together with warrants to purchase up to 256,075 shares of Pinnacle Common
Stock. Dividends on the Pinnacle Series A, B and C Preferred Stock are payable
quarterly. The preferred stock and warrants from the Preferred Stock Offering
have not been pushed down to Alvey's consolidated financial statements as such
preferred stock and warrants are not exchangeable into securities of Alvey.
While Alvey has not guaranteed nor is it contingently obligated with respect to
any such series of Preferred Stock, Pinnacle has no financial resources, other
than from Alvey and Alvey's operating subsidiaries, to satisfy cash requirements
relative to these preferred shares.
USE OF PROCEEDS. The Company applied the net proceeds of the Debt Offering in
the following manner: (i) approximately $46.2 million was used to repay the
Company's outstanding senior indebtedness; (ii) approximately $2.3 million was
used to repay the Company's outstanding 11.95% Unsecured Subordinated Debt
Agreement; (iii) approximately $21.5 million was distributed as a dividend from
Alvey to Pinnacle, which, together with the net proceeds from the Preferred
Stock Offering, was used by Pinnacle to fund, in part, the cash necessary to buy
back certain shares of Pinnacle's outstanding common stock ($23.8 million) and
to redeem certain shares of Pinnacle's outstanding preferred stock ($25.3
million); and (iv) approximately $8.9 million will be used for general corporate
purposes in 1996. Prepayment penalties of $371,000 were incurred in connection
with the repayment of the subordinated debt. In addition, the Company used
$15.0 million of the proceeds of the Debt Offering to consummate the Weseley
Acquisition in January 1996 and intends to use, if necessary, borrowings under
the Revolving Credit Agreement to finance approximately $8.7 million of capital
expenditures, of which approximately $7.2 million will be spent in 1996, related
to the construction and equipping of two new manufacturing facilities.
ONGOING CASH FLOWS FROM OPERATIONS. Based on its ability to generate funds from
operations, the Company believes that it will have sufficient funds available to
meet its currently anticipated operating, debt service and capital expenditure
requirements with minimal additional borrowings. In addition, the Company
expects to continue to evaluate
Page 20
<PAGE>
and consider business acquisition candidates, 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 capital requirements for the forseeable future. The
Company's belief regarding its capital requirements is forward-looking and
involves risks and uncertainties that could significantly impact the
Company's expected liquidity requirements in the short and long term.
BACKLOG. As of June 30, 1996 the Company had a backlog of $141.5 million, as
compared to $141.1 million and $143.9 million as of June 30, 1995 and December
31, 1995, respectively. The Company's backlog is based upon firm customer
commitments that are supported by purchase orders, other contractual documents
and cash payments. While the level of backlog at any particular time may be an
indication of future sales, it is not necessarily indicative of the future
operating performance of the Company. Additionally, certain backlog orders may
be subject to cancellation in certain circumstances. The Company believes that
approximately 95% of orders in backlog at June 30, 1996 will be converted to
revenue within one year.
PART II. OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) No reports are required to be filed herewith.
(b) No Current Reports on Form 8-K were filed during the quarter ended
June 30, 1996.
Page 21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALVEY SYSTEMS, INC.
-----------------------------------
Date: August 13, 1996 James A. Sharp
Vice President, Finance
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,911
<SECURITIES> 0
<RECEIVABLES> 54,543
<ALLOWANCES> 868
<INVENTORY> 16,239
<CURRENT-ASSETS> 94,658
<PP&E> 43,308
<DEPRECIATION> 14,270
<TOTAL-ASSETS> 170,235
<CURRENT-LIABILITIES> 81,275
<BONDS> 100,673
0
0
<COMMON> 0
<OTHER-SE> (24,083)
<TOTAL-LIABILITY-AND-EQUITY> 170,235
<SALES> 164,055
<TOTAL-REVENUES> 164,055
<CGS> 124,344
<TOTAL-COSTS> 124,344
<OTHER-EXPENSES> 45,319
<LOSS-PROVISION> 380
<INTEREST-EXPENSE> 5,673
<INCOME-PRETAX> (11,661)
<INCOME-TAX> 420
<INCOME-CONTINUING> (12,081)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,993
<CHANGES> 0
<NET-INCOME> (14,074)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
