<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934.
For the quarterly period ended September 30, 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 October 31, 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 Statement of Operations -
three and nine months ended September 30, 1997
(Unaudited) and 1996 (Unaudited) 3
Consolidated Balance Sheet - September 30, 1997
(Unaudited) and December 31, 1996 4
Consolidated Statement of Cash Flows -
nine months ended September 30, 1997 (Unaudited)
and 1996 (Unaudited) 5-6
Consolidated Statement of Net Investment
of Parent for the nine months ended September 30,
1997 (Unaudited) 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-19
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signature 19
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 95,824 $ 79,347 $ 270,307 $ 243,402
Cost of goods sold 71,018 59,338 202,320 183,682
-------- -------- --------- ---------
Gross profit 24,806 20,009 67,987 59,720
Selling, general and administrative expenses 16,217 14,704 48,195 44,574
Research and development expenses 2,327 1,332 6,493 3,155
Write-off of purchased research and development costs - - - 11,700
Restructuring costs - - 15,284 -
Amortization expense 414 421 1,246 1,259
Other expense (income), net (117) 63 (124) 1,531
-------- -------- --------- ---------
Operating income (loss) 5,965 3,489 (3,107) (2,499)
Interest expense 3,409 3,384 10,384 9,057
-------- -------- --------- ---------
Income (loss) before income taxes
and extraordinary loss 2,556 105 (13,491) (11,556)
Income tax expense (benefit) 826 322 (4,547) 742
-------- -------- --------- ---------
Net income (loss) before extraordinary loss 1,730 (217) (8,944) (12,298)
Extraordinary loss, net of tax benefit of $1,328 - - - 1,993
-------- -------- --------- ---------
Net income (loss) $ 1,730 $ (217) $ (8,944) $ (14,291)
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-3-
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
(UNAUDITED)
----------- -----------
<C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,920 $ 5,025
Receivables:
Trade (less allowance for doubtful accounts of $1,755 and $1,206, respectively) 49,540 53,189
Unbilled and other 12,217 7,909
Accumulated costs and earnings in excess of billings on uncompleted contracts 14,229 15,647
Inventories:
Raw materials 15,042 14,634
Work in process 4,161 3,909
Deferred income taxes 11,827 8,509
Taxes receivable 366 -
Prepaid expenses and other assets 2,712 3,189
--------- ---------
Total current assets 112,014 112,011
Property, plant and equipment, net 35,214 34,367
Other assets 7,839 8,963
Goodwill, net 25,681 26,510
--------- ---------
$ 180,748 $ 181,851
--------- ---------
--------- ---------
LIABILITIES AND NET INVESTMENT OF PARENT
Current liabilities:
Current portion of long-term debt $ 266 $ 280
Accounts payable 28,997 34,405
Accrued expenses 40,670 40,685
Customer deposits 5,976 11,232
Billings in excess of accumulated costs and earnings on uncompleted contracts 27,422 20,426
Deferred revenues 2,422 4,379
--------- ---------
Total current liabilities 105,753 111,407
Long-term debt 111,694 100,493
Other long-term liabilities 13,324 9,125
Deferred income taxes 178 1,955
Commitments and contingencies (Note 6) - -
Net investment of Parent (50,201) (41,129)
--------- ---------
$ 180,748 $ 181,851
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(8,944) $(14,291)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and software amortization 3,555 2,572
Amortization 1,246 1,259
Write-off of purchased research and development costs - 11,700
Other 248 -
Deferred taxes, net of effect of acquisitions (5,259) (1,748)
Reduction of unamortized debt issue costs
included in extraordinary loss - 2,963
(Increase) decrease in assets, excluding effect
of acquisitions:
Receivables (659) (6,674)
Accumulated costs and earnings in excess of
billings on uncompleted contracts 1,418 (5,186)
Inventories (660) 3,339
Other assets 1,205 1,005
(Decrease) increase in liabilities, excluding
effect of acquisitions:
Accounts payable (5,408) (4,544)
Accrued expenses 712 2,798
Customer deposits (5,256) (1,897)
Billings in excess of accumulated costs and
earnings on uncompleted contracts 6,996 5,234
Deferred revenues (1,957) (285)
Taxes payable (674) 291
Other liabilities 4,349 2,244
------- --------
Net cash used for operating activities (9,088) (1,220)
------- --------
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 Diamond (419) (454)
Software development costs - (237)
Additions to property, plant and equipment, net (4,507) (7,900)
------- --------
Net cash used for investing activities (5,076) (23,713)
------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-5-
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
-------- --------
FINANCING ACTIVITIES:
Proceeds of borrowings 79,325 112,119
Payments of debt and capital leases (68,138) (59,657)
Redemption of preferred stock - (27,600)
Net contributions from (to) Parent (128) 5,981
Payments of debt issuance costs - (7,713)
-------- --------
Net cash provided by financing activities 11,059 23,130
-------- --------
Net decrease in cash and cash equivalents (3,105) (1,803)
Cash and cash equivalents, beginning of period 5,025 3,405
-------- --------
Cash and cash equivalents, end of period $ 1,920 $ 1,602
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on financings $12,440 $ 6,646
Income taxes 1,532 871
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 $12,812
Fair value assigned to goodwill 5,137
Cash paid concurrent with the acquisition,
excluding cash acquired (14,972)
--------
Liabilities assumed $ 2,977
--------
--------
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET INVESTMENT OF PARENT
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS ENDED NET INVESTMENT
SEPTEMBER 30, 1997 OF PARENT
Balance December 31, 1996 $ (41,129)
Net loss (8,944)
Net contributions to Parent (128)
-----------
Balance September 30, 1997 $ (50,201)
-----------
-----------
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
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 does not have any operations or
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 Software International, Inc. ("McHugh"),
comprised of the former McHugh, Freeman & Associates, Inc. and Weseley
Software Development Corp. ("Weseley"); Busse Bros., Inc. ("Busse"); The
Buschman Company ("Buschman"); White Systems, Inc. ("White") 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.
3. RESTRUCTURING AND OTHER CHARGES
During the second quarter of 1997, the Board of Directors initiated a plan
to reorganize and streamline the Company's corporate structure and to
restructure certain business entities within Pinnacle. In connection with
this plan, the Board defined management priorities as (1) satisfactory
completion and elimination of
-8-
<PAGE>
specific projects with continuing cost overruns primarily related to
products which will be discontinued, (2) restructure or eliminate, when
appropriate, products that are not strategic or profitable, (3)
restructure and streamline the Company's corporate organization and (4)
eliminate redundancies and streamline the organizational structure of
the Software Logistics Group (the "SLG") (see definition on Page 12) by
further consolidating the operations of McHugh.
As a result, the Company recorded a $15.3 million restructuring charge
($9.2 million, net of tax) in the second quarter of 1997. The
restructuring charge included costs to discontinue offering certain
proprietary systems software products at one subsidiary, to reorganize
and reduce the size of the Company's corporate organization and to
restructure and streamline the executive and marketing functions at the
SLG. Costs to discontinue certain proprietary software products
consist primarily of costs to complete certain projects incorporating
this software, payroll and facility charges during the phase-out of the
product, severance charges, sales returns and allowances (relative to
prior period sales) anticipated as a result of the discontinuance, the
write-off of assets that became obsolete or slow-moving as a result of
the discontinuance and other miscellaneous restructuring costs. The
corporate reorganization and SLG reorganization charges are primarily
severance costs. The subsequent 1997 year-to-date reduction of accrued
restructuring costs consisted primarily of the recording of sales
returns and allowances, the write-off of obsolete and slow-moving
assets, payroll and facility costs associated with the discontinued
software products, costs to complete projects involving the
discontinued products, severance and other costs. It is anticipated
that costs accrued as restructuring will be fully paid by April 30,
2004.
The following table displays a roll-forward of the liabilities, both
current and long-term, for restructuring from the initial accrual to
September 30, 1997:
September 30,
Initial Reductions/ 1997
Type of Cost Accrual Payments Balance
------------ ----------- -------------- --------------
Costs to discontinue
product offerings $8,566 ($5,068) $3,498
Corporate
reorganization 2,768 (1,097) 1,671
SLG reorganization 3,950 (675) 3,275
----------- -------------- --------------
Total $15,284 ($6,840) $8,444
----------- -------------- --------------
----------- -------------- --------------
In addition, a one-time asset write-down and other non-recurring
charges totaling $2.3 million ($1.4 million, net of tax) were recorded
in the second quarter of 1997. These non-recurring charges primarily
include a write-down in the carrying value of inventory at a
restructured subsidiary, employee moving costs
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<PAGE>
associated with exiting certain product offerings and costs associated
with bringing restructured production facilities up to Company
standards.
4. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accrued expenses include the following (in thousands):
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
-------------- ------------
Project expenses $5,223 $8,476
Bonuses, incentives and profit sharing 9,330 10,642
Wages and salaries 3,445 2,147
Vacation and other employee costs 8,501 8,171
Interest expense 2,037 4,927
Current portion of restructuring costs 5,108 -
Other expenses 7,026 6,322
--------- ---------
$40,670 $40,685
--------- ---------
--------- ---------
5. LONG-TERM DEBT
Effective August 12, 1997, the Company's $30 million revolving credit
facility with NationsBank, N.A. was amended to revise certain debt
covenant calculations. At September 30, 1997, the Company was in
compliance with such covenants as amended.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation matters consisting almost
entirely of product and general liability claims arising in the normal
course of its business. After deduction of a per occurrence
self-insured retention, the Company is insured for losses of up to $27
million per year for product and general liability claims. The Company
has provided reserves for the estimated cost of the self- insured
retention; accordingly, these actions, when ultimately concluded, are
not expected to have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
On October 20, 1997, Mitchell J. Weseley, former President and Chief
Executive Officer of Weseley Software Development Corp., filed an
action in the state of Connecticut against Pinnacle Automation, Inc.,
Alvey Systems, Inc. and McHugh Software International, Inc. alleging
fraudulent inducement, tortious interference with a contractual
relationship and violation of the Connecticut Unfair Trade Practices
Act. The Company believes such claims are without merit and intends to
vigorously defend such action.
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<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 results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
GENERAL
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of Alvey Systems, Inc.
for the three and nine months ended September 30, 1997 compared to the three
and nine months ended September 30, 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 exploring a number of strategic
alternatives. One of those alternatives is 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
"Systems 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 business currently operated by McHugh (the "Software
Business"). The proposed Spin-Off of the Systems 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 ability to affect a "tax-free"
spin-off in accordance with the private letter ruling received from the IRS
and certain other contingencies. Pinnacle and the Company presently
anticipate that the proposed Spin-Off and IPO would occur no sooner than late
first quarter of 1998. 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 Systems 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.
-11-
<PAGE>
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 Consumer Products Group ("CPG"), which is
comprised of Alvey and Busse, primarily 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, primarily
serves the distribution logistics market. The Software Logistics Group
("SLG"), comprised of McHugh, 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 as a percentage of net sales.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
------------------ -----------------
1997 1996 1997 1996
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 74.1 74.8 74.8 75.5
----- ----- ----- -----
Gross profit 25.9 25.2 25.2 24.5
Selling, general & administrative
expenses 16.9 18.5 17.8 18.3
Research & development
expenses 2.4 1.7 2.4 1.3
Write-off of purchased R&D - - - 4.8
Restructuring costs - - 5.7 -
Amortization expense 0.4 0.5 0.5 0.5
Other expense (income), net (0.1) 0.1 0.0 0.6
----- ----- ----- -----
Operating income (loss) 6.3 4.4 (1.2) (1.0)
Interest expense 3.6 4.3 3.8 3.7
----- ----- ----- -----
Income (loss) before income
taxes and extraordinary loss 2.7 0.1 (5.0) (4.7)
Income tax expense (benefit) 0.9 0.4 (1.7) 0.3
----- ----- ----- -----
Net income (loss) before
extraordinary loss 1.8 (0.3) (3.3) (5.0)
Extraordinary loss, net - - - 0.8
----- ----- ----- -----
Net income (loss) 1.8% (0.3)% (3.3)% (5.8)%
----- ----- ----- -----
----- ----- ----- -----
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1997 TO THE QUARTER ENDED
SEPTEMBER 30, 1996
NET SALES were $95.8 million for the quarter ended September 30, 1997,
representing an increase of $16.5 million, or 20.8%, over net sales of $79.3
million for the quarter ended September 30, 1996. Excluding RTS, which the
Company acquired in December 1996, "same store" sales increased $12.4
million, or 15.7%, over the same
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period of 1996. SLG and DLG "same store" sales increases over the third
quarter of 1996 were particularly significant at rates of 38.5% and 15.3%,
respectively.
NEW ORDER BOOKINGS were $88.3 million for the quarter ended September 30,
1997, representing a decrease of $4.7 million, or 5.1%, from the quarter
ended September 30, 1996. Lower third quarter bookings at the CPG were
partially offset by increases at the SLG and the addition of the results of
RTS in 1997. Although third quarter CPG and consolidated bookings decreased
from the comparable period of 1996, these results follow record first half
bookings. Consolidated and CPG backlogs have increased $19.4 million and $7.2
million, respectively, over fiscal 1996 year end.
GROSS PROFIT was $24.8 million for the quarter ended September 30, 1997, an
increase of $4.8 million, or 24.0%, over the quarter ended September 30,
1996. As a percent of sales, gross margins were 25.9% for the third quarter
of 1997, an increase of 0.7 percentage points over the same period of 1996.
The first-time inclusion of RTS increased gross profit by $1.3 million and
0.3 points as a percent of sales. Gross profit increases are primarily the
result of increased volume and the reduction in project overruns.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) were $16.2 million for
the quarter ended September 30, 1997, representing an increase of $1.5
million, or 10.3%, over the quarter ended September 30, 1996. Excluding RTS,
the "same store" increase in SG&A was $746,000, a 5.1% increase over the same
period of 1996. As a percentage of sales, "same store" SG&A was 16.8%, 1.7
percentage points below the third quarter of 1996. Increases in SG&A,
resulting largely from increased staffing, travel and commissions to support
higher sales volumes, particularly in the SLG, were offset by favorable
impacts of the June 1997 restructuring.
RESEARCH AND DEVELOPMENT EXPENSES were $2.3 million for the third quarter of
1997, an increase of $995,000, compared to $1.3 million for the third quarter
of 1996. This increase is primarily the result of increased development
activities in the SLG along with the first-time inclusion of the results of
RTS.
OPERATING INCOME for the quarter ended September 30, 1997 was $6.0 million as
compared to $3.5 million in the third quarter of 1996. As a percentage of
sales, operating income increased to 6.3% in the third quarter of 1997,
compared to 4.4% for the same period of 1996. The increase in operating
income is the result of the various factors described above, and the
inclusion of the results of RTS.
INTEREST EXPENSE was approximately $3.4 million for each of the quarters
ended September 30, 1996 and 1997.
INCOME TAX EXPENSE was $826,000 for the quarter ended September 30, 1997,
representing an increase of $504,000 from $322,000 for the third quarter of
1996. The significant difference between the 1996 effective tax rate on
income before income
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<PAGE>
taxes and extraordinary loss and the expected statutory rates is attributable
to the non-deductibility of expenses related to the amortization of goodwill.
NET INCOME was $1.7 million for the quarter ended September 30, 1997, as
compared to a loss of $217,000 for the quarter ended September 30, 1996.
This increase is attributable to improved operating margins and the reduction
in the effective tax rate.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996
NET SALES were $270.3 million for the nine months ended September 30, 1997,
representing an increase of $26.9 million, or 11.1%, over net sales of $243.4
million for the nine months ended September 30, 1996. Excluding the
first-time inclusion of RTS, "same store" sales increased $15.5 million, or
6.4%, over the same period of 1996. The DLG and SLG realized sales increases
of 16.3% and 38.9%, respectively. These increases were offset in part by a
$3.3 million decrease at the CPG due to a depressed order backlog entering
1997. The CPG backlog has increased 15.5% since 1996 year end.
NEW ORDER BOOKINGS were $290.9 million for the nine months ended September
30, 1997, representing an increase of $39.0 million, or 15.5%, over the nine
months ended September 30, 1996. For each of the three operating groups,
year-to-date bookings reflect improvements over the same period of 1996.
Bookings at the CPG were particularly strong at 14.0% above the first nine
months of 1996. CPG increases are attributable to numerous new and enhanced
products offered in late 1996, cycle-time reductions and improved world-wide
sales coverage. RTS contributed $13.7 million to the overall growth in
bookings, while "same store" bookings at the DLG increased 9.6%.
GROSS PROFIT was $68.0 million for the nine months ended September 30, 1997,
an increase of $8.3 million, or 13.8%, over the nine months ended September
30, 1996. As a percentage of sales, gross profit for the first three
quarters of 1997 was 25.2%, a 0.7 percentage point increase over the same
period of 1996. Excluding the effects of RTS, gross profit increased $4.7
million or 7.9% and, as a percentage of sales, was 24.9% or 0.4 points above
the first three quarters of 1996. Gross margins at the DLG were adversely
affected by asset write-down and other non-recurring charges totaling $2.2
million, which primarily included a write-down in the carrying value of
inventory at a restructured subsidiary, employee moving costs associated with
exiting certain product offerings and the costs associated with bringing
restructured production facilities up to Company standards. Additionally,
gross margins were adversely affected by project overruns primarily
attributable to supporting customer production during the start-up and
commissioning phase of a number of major projects. Despite the high level of
project overruns and excluding the one-time asset write-down and other
non-recurring charges, "same store" gross profit for the nine months ended
September 30, 1997 was
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$66.6 million, or 25.7 percent of sales. This represents an increase of
11.6% and 1.2 percentage points, as a percent of sales, over the same period
of 1996. Gross profit was significantly improved at the SLG, which realized
an increase of 39.9% over the first nine months of 1996 as a result of
increased volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $48.2 million for the nine
months ended September 30, 1997, representing an increase of $3.6 million or
8.1% over the nine months ended September 30, 1996. As a percentage of
sales, SG&A was 17.8% for the first nine months of 1997, a decrease of 0.5
percentage points from the same period of 1996. Excluding RTS, the "same
store" increase in SG&A was only $1.4 million, or a 3.1% increase, while SG&A
as a percentage of sales was 17.8% or 0.5 percentage points below the first
nine months of 1996. This "same store" increase is primarily attributable to
increased staffing, travel and commissions to support higher sales volumes,
offset by lower charges for annual bonus and profit sharing expense.
RESEARCH AND DEVELOPMENT EXPENSES were $6.5 million for the first three
quarters of 1997, $3.3 million higher than the same period of 1996. This
increase is primarily the result of increased development activities in the
SLG, as well as the first-time inclusion of the results of RTS.
RESTRUCTURING COSTS totaling $15.3 million were recorded in the second
quarter of 1997. During this quarter, the Board of Directors initiated a
plan to reorganize and streamline the Company's corporate structure and to
restructure certain business entities within Pinnacle. In connection with
this plan, Stephen J. O'Neill, President of Alvey, was elected to the
additional positions of President of Pinnacle and CEO of both companies.
Christopher C. Cole, CEO of Buschman, was appointed to the newly created
position of COO of Pinnacle. In addition, both Messrs. O'Neill and Cole were
elected to the Boards of both Pinnacle and Alvey. Furthermore, the Board
established management priorities as (1) satisfactory completion and
elimination of specific projects with continuing cost overruns primarily
related to products which will be discontinued, (2) restructure or eliminate,
when appropriate, products that are not strategic or profitable, (3)
restructure and streamline the Company's corporate organization and (4)
eliminate redundancies and streamline the organizational structure of the SLG
by further consolidating the operations of McHugh. The restructuring charge
included costs to discontinue offering certain proprietary systems software
products at one subsidiary, to reorganize and reduce the size of the
Company's corporate organization and to restructure and streamline the
executive and marketing functions at the SLG. Costs to discontinue certain
proprietary software products consist primarily of costs to complete certain
projects incorporating this software, payroll and facility charges during the
phase-out of the product, severance charges, sales returns and allowances
(relative to prior period sales) anticipated as a result of the
discontinuance, the write-off of assets that became obsolete or slow-moving
as a result of the discontinuance and other miscellaneous restructuring
costs. The corporate reorganization and SLG reorganization charges are
primarily severance costs. It is anticipated that costs accrued as
restructuring will be fully paid by April 30, 2004.
-15-
<PAGE>
OTHER EXPENSE (INCOME), NET was income of $124,000 for the nine months ended
September 30, 1997, compared to expense of $1.5 million for the nine months
ended September 30, 1996. This improvement of $1.7 million is primarily
attributable to a one-time charge related to the termination of a management
agreement in the first quarter of 1996.
OPERATING LOSS for the first nine months of 1997 was $3.1 million compared to
$2.5 million for the first three quarters of 1996. However, excluding 1997
non-recurring charges of $17.6 million comprised of the $15.3 million
restructuring charge and $2.3 million of asset write-down and other
non-recurring charges, 1997 operating income for the first nine months was
$14.5 million. Additionally, excluding non-recurring charges of $13.1 million
resulting from the $11.7 million write-off of purchased research and
development costs associated with the acquisition of Weseley and the $1.4
million expense associated with the termination of a consulting agreement,
1996 operating income for the first nine months was $10.6 million. Operating
income for the nine months ended September 30, 1997, after exclusions,
represents an increase of $3.8 million, or 35.8%, compared to operating
income after exclusions for the nine months ended September 30, 1996. As a
percentage of sales, and excluding the non-recurring charges, operating
income increased to 5.3% in the first nine months of 1997 compared to 4.4%
for the same period of 1996. The increase in operating income reflects the
various factors described above.
INTEREST EXPENSE increased to $10.4 million for the first three quarters of
1997, representing a $1.3 million, or 14.7%, increase as compared to $9.1
million of interest expense for the period ended September 30, 1996. 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, the increase in non-cash charges related to the
amortization of debt issuance costs and increased borrowings under the
Company's credit facility.
INCOME TAX EXPENSE (BENEFIT) was a benefit of $4.5 million for the nine
months ended September 30, 1997, representing a decrease of $5.3 million from
the $742,000 tax expense for the first three quarters of 1996. The
significant difference between the 1996 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 and the amortization of goodwill.
EXTRAORDINARY LOSS, net of tax benefit of $1.3 million, was $2.0 million for
the nine months ended September 30, 1996. This extraordinary loss represents
the write-off of debt issuance costs and related debt prepayment penalties,
net of tax, resulting from the early extinguishment of the Company's debt as
part of a recapitalization in January 1996.
-16-
<PAGE>
NET INCOME was a loss of $8.9 million for the nine months ended September 30,
1997, an improvement of $5.3 million from the nine months ended September 30,
1996, as a result of the various factors described above.
LIQUIDITY AND CAPITAL RESOURCES
CASH USED FOR OPERATING ACTIVITIES. During the nine months ended September
30, 1997 and 1996, cash used for operating activities was $9.1 million and
$1.2 million, respectively. This $7.9 million increase in the use of cash is
primarily attributable to an interest payment of $5.7 million on the $100
million Senior Subordinated Notes, the payment of $3.2 million associated
with the previously described 1997 restructuring and the payment of a
$625,000 stay bonus at Weseley, all of which occurred in the first three
quarters of 1997, but were not present in the first three quarters of 1996.
Additionally, improved management of working capital as well as earnings
improvements have had a positive impact on cash flow. 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 nine months ended September 30, 1997 and 1996
were $4.5 million and $7.9 million, respectively. Management anticipates
that current year capital expenditures will approximate $6.5 million,
including amounts required 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 upon the achievement of 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 September 30, 1997 and 1996, borrowings outstanding
under the Revolving Credit Facility were $11.2 million and $1.0 million,
respectively. At September 30, 1997, $11.5 million of borrowing capacity
remained available under the Revolving Credit Facility.
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,
-17-
<PAGE>
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. Semi-annual interest payments on such notes 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 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 then 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 significant
acquisitions are pending or contemplated. Of the $17.6 million restructuring
cost and asset write-down and other non-recurring charges recorded in the
second quarter of 1997, approximately $10.1 million of these charges require
future cash payments. It is anticipated that approximately $2.6 million of
these payments will occur during the last quarter of 1997, $3.6 million in
1998 and $1.6 million in 1999, with the remaining payments in 2000 or beyond.
BACKLOG. As of September 30, 1997, the Company had a backlog of $155.5
million, as compared to $154.3 million and $136.1 million as of September 30,
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
-18-
<PAGE>
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 September 30, 1997 will be
shipped within one year.
ITEM 3. LEGAL PROCEEDINGS
On October 20, 1997, Mitchell J. Weseley, former President and Chief Executive
Officer of Weseley Software Development Corp., filed an action in the state of
Connecticut against Pinnacle Automation, Inc., Alvey Systems, Inc. and McHugh
Software International, Inc. alleging fraudulent inducement, tortious
interference with a contractual relationship and violation of the Connecticut
Unfair Trade Practices Act. The Company believes such claims are without merit
and intends to vigorously defend such action.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No reports are required to be filed herewith.
(b) No current reports on Form 8-K were filed during the quarter ended
September 30, 1997.
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/ J.A. Sharp
--------------------------------------
Date: November 10, 1997 James A. Sharp
Secretary and Senior Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting Officer)
-19-
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