<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 March 31, 1997.
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 April 30, 1997 was 1,000
shares.
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ALVEY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations -
three months ended March 31, 1997 and 1996
(Unaudited) 3
Consolidated Balance Sheet - March 31, 1997
(Unaudited) and December 31, 1996 4
Consolidated Statement of Cash Flows -
three months ended March 31, 1997 and
1996 (Unaudited) 5-6
Consolidated Statement of Net Investment
of Parent for the three months ended March 31,
1997 (Unaudited) 7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
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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 MARCH 31,
1997 1996
---------- ----------
<S> <C> <C>
Net sales $ 83,737 $ 80,717
Cost of goods sold 61,857 61,235
---------- ----------
Gross profit 21,880 19,482
Selling, general and administrative expenses 16,029 15,309
Research and development expenses 2,053 639
Write-off of purchased in-process research and development cost 11,700
Amortization expense 426 438
Other (income) expense, net (21) 1,372
---------- ----------
Operating income (loss) 3,393 (9,976)
Interest expense 3,423 2,504
---------- ----------
Loss before provision for income taxes
and extraordinary loss (30) (12,480)
Provision for income taxes 113 75
---------- ----------
Net loss before extraordinary loss (143) (12,555)
Extraordinary loss, net of tax benefit of $1,328 (1,993)
---------- ----------
Net loss $ (143) $ (14,548)
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
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ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,376 $ 5,025
Receivables:
Trade (less allowance for doubtful accounts of $1,147 and $1,206,
respectively) 54,417 53,189
Unbilled and other 9,125 7,909
Accumulated costs and earnings in excess of billings on uncompleted contracts 10,888 15,647
Inventories:
Raw materials 15,494 14,634
Work in process 5,014 3,909
Deferred income taxes 8,520 8,509
Prepaid expenses and other assets 2,923 3,189
---------- ------------
Total current assets 109,757 112,011
Property, plant and equipment, net 34,986 34,367
Other assets 8,757 8,963
Goodwill, net 26,373 26,510
---------- ------------
$ 179,873 $ 181,851
---------- ------------
---------- ------------
LIABILITIES AND NET INVESTMENT OF PARENT
Current liabilities:
Current portion of long-term debt $ 248 $ 280
Accounts payable 28,909 34,405
Accrued expenses 31,584 40,685
Customer deposits 6,208 11,232
Billings in excess of accumulated costs and earnings on uncompleted contracts 22,313 20,426
Deferred revenues 3,299 4,379
---------- ------------
Total current liabilities 92,561 111,407
Long-term debt 117,159 100,493
Other long-term liabilities 9,629 9,125
Deferred income taxes 1,820 1,955
Commitments and contingencies (Note 5)
Net investment of Parent (41,296) (41,129)
---------- ------------
$ 179,873 $ 181,851
---------- ------------
---------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
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ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (143) $ (14,548)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and software amortization 1,115 763
Amortization 426 438
Write-off of purchased research and development costs 11,700
Other 10
Deferred taxes, net of effect of acquisitions (360) (769)
Reduction of unamortized debt issue costs
included in extraordinary loss 2,963
(Increase) decrease in current assets, excluding
effect of acquisitions:
Receivables (2,444) (714)
Accumulated costs and earnings in excess of
billings on uncompleted contracts 4,759 (4,309)
Inventories (1,965) 1,896
Prepaid expenses and other assets 653 (30)
(Decrease) increase in current liabilities,
excluding effect of acquisitions:
Accounts payable (5,496) (3,629)
Accrued expenses (8,634) (2,265)
Customer deposits (5,024) 1,701
Billings in excess of accumulated costs and
earnings on uncompleted contracts 1,887 2,248
Deferred revenues (1,080) 755
Taxes payable (612) (616)
Other liabilities 504 1,742
----------- -----------
Net cash used for operating activities (16,414) (2,664)
----------- -----------
INVESTING ACTIVITIES:
Acquisition of Weseley, net of cash acquired of $28 (14,972)
Cash payments to dispose of Diamond (159) (191)
Software development costs (100)
Additions to property, plant and equipment, net (1,686) (1,543)
----------- -----------
Net cash used for investing activities (1,845) (16,806)
----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements. (continued)
5
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ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
------------- -----------
<S> <C> <C>
FINANCING ACTIVITIES:
Proceeds of borrowings $ 39,300 $ 102,019
Payments of debt and capital leases (22,666) (50,343)
Redemption of preferred stock (27,600)
Net contributions from (to) Parent (24) 6,225
Payments of debt issuance costs (7,123)
------------- -----------
Net cash provided by financing activities 16,610 23,178
------------- -----------
Net increase (decrease) in cash and cash equivalents (1,649) 3,708
Cash and cash equivalents, beginning of period 5,025 3,405
------------- -----------
Cash and cash equivalents, end of period $ 3,376 $ 7,113
------------- -----------
------------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on financings $ 5,774 $ 610
Income taxes 1,085 132
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ATIVITIES:
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 $ 12,812
Fair value assigned to goodwill 5,137
Cash paid concurent with the acquisition,
excluding cash acquired (14,972)
-----------
Liabilities assumed $ 2,977
-----------
-----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
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ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET INVESTMENT OF PARENT
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE THREE MONTHS ENDED NET INVESTMENT
MARCH 31, 1997 OF PARENT
Balance December 31, 1996 $ (41,129)
Net loss (143)
Net contributions from (to) Parent (24)
-----------
Balance March 31, 1997 $ (41,296)
-----------
-----------
See accompanying Notes to Consolidated Financial Statements.
7
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ALVEY SYSTEMS, INC. AND SUBSIDIARIES
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, 1996.
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. ("White"), Weseley
Software Development Corp. ("Weseley") and Real Time Solutions, Inc.
("RTS"). 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.
8
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3. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accrued expenses include the following (in thousands):
MARCH 31,
1997 DECEMBER 31,
(unaudited) 1996
----------- ------------
Project expenses $ 6,699 $ 8,476
Bonuses, incentives and profit sharing 5,126 10,642
Wages and salaries 2,489 2,147
Vacation and other employee costs 9,018 8,171
Interest expense 2,294 4,927
Other expenses 5,958 6,322
----------- ------------
$ 31,584 $ 40,685
----------- ------------
----------- ------------
4. 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
When used in the following discussion, the words "believes", "anticipates" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
GENERAL
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of Alvey Systems, Inc.
for the three months ended March 31, 1997 compared to the three months ended
March 31, 1996. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
The Company's parent, Pinnacle, is considering a series of transactions
pursuant to which it would spin-off the material handling businesses
presently conducted by the Company, Buschman, White, Busse, and RTS
(together, the "Equipment Business") to the stockholders of Pinnacle (the
Spin-Off") and immediately thereafter effect an initial public offering of
the common stock of Pinnacle (the "IPO") which, following the Spin-Off, would
continue to own and operate the businesses currently operated by MFA and
Weseley (together, the "Software Business"). The proposed Spin-Off of the
Equipment Business and the contemporaneous IPO of the Software Business
would be conditioned on a number of factors, including the Company's ability
to restructure the terms of its outstanding Senior Subordinated Notes and
Pinnacle's outstanding Preferred Stock on acceptable terms, the receipt of a
private letter ruling from the IRS confirming the "tax-free" nature of the
Spin-Off and certain other contingencies. Pinnacle and the Company presently
anticipate that the proposed Spin-Off and IPO would occur no sooner than late
third quarter or fourth quarter of 1997. In addition, the IPO would only
occur if and to the extent the Company deems it advisable, in its sole
discretion. It is currently contemplated that the Company would offer to
exchange its outstanding Senior Subordinated Notes in one or more steps for a
combination of cash (which would be provided by the proceeds from the IPO)
and Senior Subordinated Notes of the Equipment Business. As a result of
these contingencies, no assurances can be given that either the Spin-Off or
the IPO will be consummated. No offer in connection with the IPO or related
restructuring of the Senior Subordinated Notes is made hereby.
As part of an overall corporate reorganization and realignment of
responsibilities in 1996, the Company began to serve its major markets
through three groups. The
10
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Consumer Products Group ("CPG"), which is comprised of Alvey and Busse,
serves the food, beverage and manufacturing sector of the Company's market.
The Distribution Logistics Group ("DLG"), which is comprised of Buschman,
White and RTS, serves retailers, independent wholesalers and manufacturers in
conjunction with their distribution logistics requirements. The Software
Logistics Group ("SLG"), which is comprised of MFA and Weseley, provides
logistics solutions for warehouse and transportation management needs.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, net sales and
categories of expenses in thousands of dollars and as a percentage of net sales.
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
1997 % 1996 %
--------- -------- --------- -------
Net sales $ 83,737 100.0% $ 80,717 100.0%
Cost of goods sold 61,857 73.9 61,235 75.9
--------- ---------
Gross profit 21,880 26.1 19,482 24.1
Selling, general & administrative
expenses 16,029 19.1 15,309 19.0
Research & development
expenses 2,053 2.4 639 0.8
Write-off of purchased R&D - - 11,700 14.5
Amortization expense 426 0.5 438 0.5
Other (income) expense, net (21) 0.0 1,372 1.7
--------- ---------
Operating income (loss) 3,393 4.1 (9,976) (12.4)
Interest expense 3,423 4.1 2,504 3.1
--------- ---------
Loss before income taxes
and extraordinary loss (30) 0.0 (12,480) (15.5)
Provision for income taxes 113 0.2 75 0.1
--------- ---------
Net loss before
extraordinary loss (143) (0.2) (12,555) (15.6)
Extraordinary loss, net - - (1,993) (2.4)
--------- ---------
Net loss $ (143) (0.2) $ (14,548) (18.0)
--------- ---------
--------- ---------
COMPARISON OF THE QUARTER ENDED MARCH 31, 1997 TO THE QUARTER ENDED MARCH 31,
1996
NET SALES were $83.7 million for the quarter ended March 31, 1997, representing
an increase of $3.0 million, or 3.7% over net sales of $80.7 million for the
quarter ended March 31, 1996. Excluding RTS, which the Company acquired in
December 1996, "same store" sales decreased $386,000, or 0.5% over the same
period of 1996. SLG
11
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sales increases over the first quarter of 1996 were offset by decreases in
"same store" sales in the CPG and the DLG.
NEW ORDER BOOKINGS were $104.1 million for the quarter ended March 31, 1997,
representing an increase of $30.7 million, or 41.7% over the quarter ended
March 31, 1996. Excluding the first time inclusion of RTS year-over-year
bookings increased $24.6 million, or 33.5% "Same store" bookings for the DLG
increased $12.4 million over the first quarter of 1996 with the CPG reporting
record first quarter bookings resulting in an increase of $10.8 million. In
addition, new order bookings by the SLG increased 46.8% over first quarter
1996.
GROSS PROFIT was $21.9 million for the quarter ended March 31, 1997, an
increase of $2.4 million, or 12.3% over the quarter ended March 31, 1996. As
a percent of sales, gross margins were 26.1% for the first quarter of 1997,
an increase of 2.0 percentage points over the same period of 1996. The
first-time inclusion of RTS increased gross profit by $1.0 million or 5.4%.
The SLG reported an increase in gross profit of 65.3% or 10.0 percentage
points as a percent of sales over the prior year quarter, reflecting a shift
to higher margin license fee revenue. Gross margins were adversely affected
by additional project overruns primarily attributable to supporting customer
production during the start-up and commissioning phase of a number of major
projects. The Company's commitment to these projects has been significantly
reduced since the end of the first quarter of 1997. As a result of certain
of the project overruns incurred during 1996 and the first quarter of 1997,
the Company continues to evaluate its business units with an intent to
further streamline operations, improve productivity and reduce costs.
Accordingly, the Company may implement rationalization programs in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) were $16.0 million for the
quarter ended March 31, 1997, representing an increase of $720,000, or 4.7%
over the quarter ended March 31, 1996. Excluding RTS, the "same store"
increase in SG&A was $32,000, or a 0.2% increase over the same period of 1996.
On a "same store" basis and as a percentage of sales, SG&A was 19.1% or 0.1
percentage points higher than the first quarter of 1996. Increases in SG&A,
resulting largely from increased staffing to support higher sales volumes,
particularly in the SLG, were offset by the absence in 1997 of non-recurring
charges associated with the placement and reorganization of senior management
at White and lower charges for annual bonus and profit sharing expense to
reflect adjustments based on individual company performance.
RESEARCH AND DEVELOPMENT EXPENSES were $2.1 million for the first quarter of
1997, an increase of $1.4 million compared to $639,000 for the first quarter of
1996. These increases are primarily the result of increased development
activities in the SLG and to a lesser degree in the DLG, as well as the
first-time inclusion of the results of RTS.
OTHER (INCOME) EXPENSE, NET reflected income of ($21,000) for the quarter ended
March 31, 1997 compared to expense of $1.4 million for the quarter ended
March 31, 1996. This decrease of $1.4 million is almost entirely
attributable to a one-time charge related to the termination of a management
agreement in the first quarter of 1996.
12
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OPERATING INCOME (LOSS) for the quarter ended March 31, 1997 was income of
$3.4 million as compared to a loss of $10.0 million in the first quarter of
1996. However, excluding 1996 non-recurring charges of $13.1 million
resulting from the $11.7 million write-off of purchased research and
development costs associated with the acquisition of Weseley and a $1.4
million expense associated with the termination of a management agreement,
operating income would have been $3.2 million for the first quarter of 1996,
resulting in an increase of $224,000 or 7.1 % in the first quarter of 1997, as
compared to the quarter ended March 31, 1996. As a percentage of sales, and
excluding such 1996 non-recurring charges, operating income was 4.1% in the
first quarter of 1997 compared to 3.9% for the same period of 1996. The
increase in operating income reflects the various factors described above.
INTEREST EXPENSE increased to $3.4 million for the quarter ended March 31,
1997, representing a $919,000 or 36.7% increase as compared to the $2.5
million of interest expense for the period ended March 31, 1996. This
increase is a result of (i) the inclusion of a full quarter of
interest expense on $100 million Senior Subordinated Notes which the Company
issued on January 24, 1996, (ii) the higher interest rate, 11.375%, on these
notes compared to rates on previous debt instruments, (iii) the increased
non-cash charges relating to the amortization of debt issuance cost also
associated with the Senior Subordinated Notes and (iv) increased borrowings
under the Company's credit facility, (v) partially offset by the elimination
of interest expense on debt agreements that were repaid in January 1996.
PROVISION FOR INCOME TAXES was $113,000 for the quarter ended March 31, 1997,
representing an increase of $38,000 from the $75,000 of tax expense for the
first quarter of 1996. The significant difference between the effective tax
rate on loss before income taxes and extraordinary loss and the expected
statutory rates is attributable to the non-deductibility of expenses related
to the write-off of purchased research and development in 1996 and the
amortization of goodwill.
EXTRAORDINARY LOSS, NET of $2.0 million for the quarter ended March 31, 1996
represents the write-off of debt issuance cost and related debt prepayment
penalties, net of tax benefits of $1.3 million resulting from the early
extinguishment of the Company's debt as part of a recapitalization in January
1996.
NET LOSS was $143,000 for the quarter ended March 31, 1997, an improvement of
$14.4 million from the quarter ended March 31, 1996. This increase is
primarily a result of costs incurred in 1996 that did not repeat in 1997 as
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CASH USED FOR OPERATING ACTIVITIES. During the three months ended March 31,
1997 and 1996, cash used for operating activities was $16.4 million and $2.7
million, respectively. This $13.8 million increase in the use of cash is
primarily attributable to an increase in working capital and other cash
resources required to fund operations. Of this change, $6.4 million can be
attributed to accrued expenses and $3.9 million is related to
13
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inventory. The reduction in accrued expenses includes an interest payment of
$5.7 million on the $100 million Senior Subordinated Notes and the payment of
a stay bonus totaling $625,000 at Weseley, both of which occurred in the
first quarter 1997, but were not present in the first quarter of 1996.
Inventory increased primarily due to the high levels of bookings, increased
production to meet customer's needs, reduced outsourcing allowed by recently
added or expanded facilities and increased demand for palletizers. First
quarter funding of annual profit sharing plan contributions, incentive
compensation and bonus plans; disproportionate tax withholding requirements
and certain professional services historically result in a significant use of
cash in the first quarter.
CAPITAL EXPENDITURES for the three months ended March 31, 1997 and 1996 were
$1.7 million and $1.5 million, respectively. Management anticipates that
current year capital expenditures will approximate $6.0 million, including
amounts to complete the purchase of machinery and equipment for two 1996
expansion projects.
DEBT OFFERING AND RECAPITALIZATION OF PINNACLE. Concurrently with the Debt
Offering in January 1996, as discussed below, the Company entered into a
senior bank credit agreement with NationsBank, N.A. consisting of a $30
million revolving credit facility which matures in 2001 (the "Revolving
Credit Facility"). Borrowings under the Revolving Credit Facility bear
interest at a rate based upon, at Alvey's option, the Base Rate (as defined
in the Revolving Credit Facility) plus 1.50% or the Euro-dollar Rate (as
defined in the Revolving Credit Facility) plus 2.50%, with a step down in
rates based upon achieving predefined earnings objectives. Borrowings under
the Revolving Credit Facility are guaranteed by Pinnacle and subsidiaries of
Alvey and secured by substantially all of the assets of Alvey and its
subsidiaries. At March 31, 1997 and 1996, borrowings outstanding under the
Revolving Credit Facility were $16.7 million and $0, respectively.
In the Debt Offering, Alvey issued $100 million of 11.375% Senior
Subordinated Notes which are due in January 2003. 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
11.375% Senior Subordinated Notes for a new issue of debt securities of Alvey
registered under the Securities Act of 1933, as amended, with terms
substantially identical to those of the 11.375% Senior Subordinated Notes.
Such registration statement was declared effective on May 9, 1996 and the
exchange of $100 million in principal amount of the original notes for $100
million in principal amount of registered notes was completed on June 11,
1996. Interest payments on such notes, which are payable semiannually,
commenced in July 1996.
Concurrent with the Debt Offering, Pinnacle sold $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,
together with warrants to purchase up to 256,075 shares of Pinnacle Common
Stock (the "Preferred Stock Offering"). 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
14
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series of Preferred Stock, Pinnacle has no financial resources, other than
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% subordinated debt; (iii)
approximately $21.6 million was distributed as a dividend from Alvey to
Pinnacle, which together with the net proceeds from the Pinnacle 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); (iv) approximately $7.5 million was used to pay
transaction costs; and (v) approximately $8.9 million was used for general
corporate purposes (including capital expenditures 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.
ONGOING CASH FLOWS FROM OPERATIONS. The Company believes that its funds from
operations, together with available funds under the Company's existing credit
facility, will be sufficient to meet its currently anticipated operating, debt
service and capital expenditure requirements, including capital requirements
related to potential acquisitions, although no acquisitions are pending or
contemplated.
BACKLOG. As of March 31, 1997 the Company had a backlog of $155.7 million,
as compared to $139.5 million and $136.1 million as of March 31, 1996 and
December 31, 1996, 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 virtually all orders in backlog at March 31, 1997 will
be shipped within one year.
PART II. OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are required to be filed herewith.
(b) No current reports on Form 8-K were filed during the quarter ended
March 31, 1997.
15
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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.
/s/ JAMES A. SHARP
--------------------------------------------
Date: May 15, 1997 James A. Sharp
Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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