<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, 1998.
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.
9301 Olive Boulevard
St. Louis, MO 63132
314/993-4700
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, 1998 was 1,000
shares.
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
three and six months ended June 30, 1998 and 1997
(Unaudited) 3
Consolidated Balance Sheet - June 30, 1998
(Unaudited) and December 31, 1997 4
Consolidated Statement of Cash Flows -
six months ended June 30, 1998 and
1997 (Unaudited) 5-6
Consolidated Statement of Net Investment
of Parent for the six months ended June 30,
1998 (Unaudited) 7
Notes to Consolidated Financial Statements
(Unaudited) 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-19
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
<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,
1998 1997 1998 1997
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 107,454 $ 90,746 $ 200,174 $ 174,483
Cost of goods sold 78,213 69,445 147,855 131,302
--------- -------- --------- ---------
Gross profit 29,241 21,301 52,319 43,181
Selling, general and administrative expenses 19,342 15,949 35,507 31,978
Research and development expenses 3,192 2,113 6,039 4,166
Write-off of purchased research and development costs 2,700 - 2,700 -
Restructuring costs - 15,284 - 15,284
Amortization expense 381 406 798 832
Other expense (income), net 55 14 (495) (7)
--------- -------- --------- ---------
Operating income (loss) 3,571 (12,465) 7,770 (9,072)
Interest expense 3,244 3,552 6,702 6,975
--------- -------- --------- ---------
Income (loss) before income taxes 327 (16,017) 1,068 (16,047)
Income tax expense (benefit) 553 (5,486) 878 (5,373)
--------- -------- --------- ---------
Net income (loss) $ (226) $(10,531) $ 190 $ (10,674)
--------- -------- --------- ---------
--------- -------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-3-
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,151 $ 3,142
Receivables:
Trade (less allowance for doubtful accounts of $2,477 and $1,818, respectively) 59,503 54,639
Unbilled and other 10,500 11,801
Accumulated costs and earnings in excess of billings on uncompleted contracts 10,706 12,885
Inventories:
Raw materials 12,169 14,297
Work in process 3,610 2,881
Deferred income taxes 12,913 12,307
Prepaid expenses and other assets 2,251 1,693
----------- ------------
Total current assets 116,803 113,645
Property, plant and equipment, net 35,967 35,459
Other assets 7,047 7,537
Goodwill, net 24,859 25,151
----------- ------------
$ 184,676 $ 181,792
----------- ------------
----------- ------------
LIABILITIES AND NET INVESTMENT OF PARENT
Current liabilities:
Current portion of long-term debt $ 314 $ 274
Accounts payable 30,455 33,066
Accrued expenses 41,505 41,849
Customer deposits 5,492 7,153
Billings in excess of accumulated costs and earnings on uncompleted contracts 35,085 23,585
Deferred revenues 4,639 3,134
Taxes payable 2,347 967
----------- ------------
Total current liabilities 119,837 110,028
Long-term debt 100,547 106,930
Other long-term liabilities 12,160 12,605
Deferred income taxes 462 757
Commitments and contingencies (Note 6)
Net investment of Parent (48,330) (48,528)
----------- ------------
$ 184,676 $ 181,792
----------- ------------
----------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-4-
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 190 $ (10,674)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and software amortization 2,863 2,320
Amortization 798 832
Write-off of purchased research and development costs 2,700 -
Other - 248
Deferred taxes, net of effect of acquisitions (378) (4,548)
(Increase) decrease in assets, excluding effect
of acquisitions:
Receivables (2,841) 2,847
Accumulated costs and earnings in excess of
billings on uncompleted contracts 2,179 2,430
Inventories 1,399 (63)
Other assets (202) 513
(Decrease) increase in liabilities, excluding
effect of acquisitions:
Accounts payable (2,790) (5,960)
Accrued expenses (832) 676
Customer deposits (1,661) (3,285)
Billings in excess of accumulated costs and
earnings on uncompleted contracts 11,500 6,354
Deferred revenues 930 (1,095)
Taxes payable 1,380 (2,258)
Other liabilities (295) 3,561
----------- ----------
Net cash provided by (used for) operating activities 14,940 (8,102)
----------- ----------
INVESTING ACTIVITIES:
Acquisitions of Software Architects, Inc. and Gagnon & Associates,
Inc., net of cash acquired of $198 (3,459) -
Payments for agreements not to compete (150) (150)
Cash payments to dispose of Diamond - (363)
Additions to property, plant and equipment (2,987) (3,006)
----------- ----------
Net cash used for investing activities (6,596) (3,519)
----------- ----------
</TABLE>
(continued)
See accompanying Notes to Consolidated Financial Statements.
-5-
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
FINANCING ACTIVITIES:
Proceeds of borrowings 36,910 55,600
Payments of debt and capital leases (43,253) (44,727)
Net contributions from (to) Parent 8 (103)
---------- ----------
Net cash provided by (used for) financing activities (6,335) 10,770
---------- ----------
Net increase (decrease) in cash and cash equivalents 2,009 (851)
Cash and cash equivalents, beginning of period 3,142 5,025
---------- ----------
Cash and cash equivalents, end of period $ 5,151 $ 4,174
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on financings $ 6,203 $ 6,400
Income taxes 382 1,383
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ATIVITIES:
Alvey Systems, Inc. purchased Software Architects, Inc. in April 1998 and
Gagnon & Associates, Inc. in May 1998. In conjunction with these
acquisitions, liabilities were assumed as follows:
Fair value of assets acquired (preliminary) $ 4,082
Fair value assigned to goodwill (preliminary) 409
Cash paid concurrent with the acquisition,
excluding cash acquired (3,459)
----------
Liabilities assumed $ 1,032
----------
----------
</TABLE>
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)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED NET INVESTMENT
JUNE 30, 1998 OF PARENT
<S> <C>
Balance December 31, 1997 $ (48,528)
Net income 190
Net contributions from Parent 8
--------------
Balance June 30, 1998 $ (48,330)
--------------
--------------
</TABLE>
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,
1997.
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 Company's financial
statements include the accounts of Alvey and Alvey's wholly-owned
subsidiaries: McHugh Software International, Inc. ("McHugh") and its
wholly-owned subsidiaries, Weseley Software Development Corp. ("Weseley"
or "WSDC"), Software Architects, Inc. ("SAI") and Gagnon & Associates,
Inc. ("Gagnon"); 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 Company's historical organization and capital structure,
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
<PAGE>
3. ACQUISITIONS
SAI ACQUISITION
On April 1, 1998, McHugh purchased all of the outstanding capital stock
of SAI for $1.5 million in cash. The acquisition was financed through
the Company's working capital facility. In addition, subject to their
continued employment, certain employees of SAI have an opportunity to
earn stay bonuses in the aggregate of $1,125,000 per year for each of
the next four years. At closing, McHugh also granted options to
purchase an aggregate number of shares of the common stock of McHugh
equal to 1.5% of the common stock of McHugh. Additional options in an
aggregate amount corresponding to 0.5% of the common stock of McHugh
will be awarded to certain SAI employees on the first through the fourth
anniversaries of the acquisition date, commencing April 1, 1999. The
exercise price of all such options is equal to the fair market value of
the common stock of McHugh on the option grant date. The options vest
ratably over four years, expire on the eighth anniversary of the date of
grant and are only exercisable upon the occurrence of certain trigger
events set forth in the option agreements. The excess of the cost of
the acquisition over the estimated fair value of net assets acquired
(including purchased in-process research and development, as further
described below) of $39,000 was recorded as goodwill and is being
amortized over a period of five years. The consolidated financial
statements of the Company include the results of operations and cash
flows of SAI from its date of acquisition.
On a preliminary basis, $1.0 million of the SAI purchase price was
allocated to in-process research and development costs at the date of
acquisition and was recorded as a write-off of purchased in-process
research and development in the Company's consolidated statement of
operations during the second quarter of 1998. An independent appraisal
to finalize the value of the in-process research and development is
being conducted and may result in a purchase accounting adjustment. Any
change in the value assigned to in-process research and development is
expected to correspondingly adjust the amount of goodwill from the SAI
acquisition.
GAGNON ACQUISITION
On May 15, 1998, McHugh purchased all of the outstanding capital stock
of Gagnon for $1.9 million in cash. The acquisition was financed
through the Company's working capital facility. In addition, subject to
their continued employment, certain employees of Gagnon have an
opportunity to earn stay bonuses in the aggregate of $600,000 per year
for each of the next three years. At closing, McHugh also granted
options to purchase an aggregate number of shares of the common stock of
McHugh equal to 0.25% of the common stock of McHugh. Additional options
in an aggregate amount corresponding to 0.25% of the common stock of
McHugh will be awarded to certain Gagnon employees on the first through
the third anniversaries of the acquisition date, commencing May
9
<PAGE>
15, 1999. The exercise price of all such options is equal to the fair
market value of the common stock of McHugh on the option grant date.
The options vest ratably over four years, expire on the eighth
anniversary of the date of grant and are only exercisable upon the
occurrence of certain trigger events as set forth in the option
agreements. The excess of the cost of the acquisition over the
estimated fair value of net assets acquired (including purchased
in-process research and development, as further described below) of
$370,000 was recorded as goodwill and is being amortized over a period
of five years. The consolidated financial statements of the Company
include the results of operations and cash flows of Gagnon from its date
of acquisition.
On a preliminary basis, $1.7 million of the Gagnon purchase price was
allocated to in-process research and development costs at the date of
acquisition and was recorded as a write-off of purchased in-process
research and development in the Company's consolidated statement of
operations during the second quarter of 1998. An independent appraisal
to finalize the value of the in-process research and development is
being conducted and may result in a purchase accounting adjustment. Any
change in the value assigned to in-process research and development is
expected to correspondingly adjust the amount of goodwill from the
Gagnon acquisition.
The pro-forma results of the Company would not have been materially
different had either or both of the SAI and Gagnon acquisitions taken
place on January 1, 1998 or 1997, respectively. Accordingly, pro forma
financial information for the SAI and Gagnon acquisitions is not
presented.
4. RESTRUCTURING CHARGES
During the second quarter of 1997, the Company established a
restructuring reserve which 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 Software Logistics Group ("SLG"). Costs to discontinue certain
proprietary software products consisted 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 1998
year-to-date reduction of accrued restructuring costs consisted
primarily of the recording of payroll and facility costs associated
with the discontinued software products, costs to complete projects
involving the discontinued products, severance, sales allowances and
other costs. It is anticipated that costs accrued as restructuring will
be fully paid by April 30, 2004.
10
<PAGE>
The following table displays a roll-forward of the liabilities, both
current and long- term, for restructuring from December 31, 1997 to
June 30, 1998 (unaudited) (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1997 Reductions/ 1998
Type of Cost Balance Payments Balance
------------ ----------- ----------- -----------
<S> <C> <C> <C>
Costs to discontinue
product offerings $2,922 ($2,147) $775
Corporate
reorganization 1,416 (581) 835
SLG reorganization 3,204 (161) 3,043
----------- ----------- -----------
Total $7,542 ($2,889) $4,653
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
5. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accrued expenses include the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1998 DECEMBER 31,
(unaudited) 1997
---------- ------------
<S> <C> <C>
Project expenses $ 8,326 $ 6,651
Bonuses, incentives and profit sharing 7,864 9,782
Wages and salaries 3,271 2,558
Vacation and other employee costs 7,420 7,484
Interest expense 4,814 4,867
Restructuring costs, current portion 1,950 4,707
Other expenses 7,860 5,800
---------- ------------
$ 41,505 $ 41,849
---------- ------------
---------- ------------
</TABLE>
6. 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.
On October 20, 1997, Mitchell J. Weseley, former President and Chief
Executive Officer of WSDC, filed an action in the state of Connecticut
against Pinnacle, Alvey and McHugh alleging fraudulent inducement,
tortious interference with a contractual relationship and violation of
the Connecticut Unfair Trade Practices Act ("CUTPA"). Pinnacle moved to
dismiss the claim, and on December 31, 1997, Mr. Weseley dismissed this
claim without prejudice. On January 13, 1998, Mr. Weseley commenced an
arbitration in Connecticut Superior Court against WSDC alleging breach
of contract and violation of CUTPA. Such arbitration
11
<PAGE>
proceedings concluded on June 3, 1998, related briefs have been filed
and a decision is pending. The Company believes such claims of Mr.
Weseley are without merit and is vigorously defending such action. On
January 28, 1998, WSDC filed counterclaims against Mr. Weseley
principally alleging that he had breached his contractual obligations
and fiduciary duty to WSDC by soliciting WSDC employees to resign from
WSDC, by disparaging the management of Pinnacle and McHugh and by
breaching the terms of a covenant not to compete contained in Mr.
Weseley's employment contract. Pursuant to the spin-off as discussed in
Note 7, McHugh has agreed to indemnify certain parties (primarily
Pinnacle and the Company) for any and all liabilities arising from this
dispute whether arising prior to, concurrent with or after the spin-off
On April 16, 1998, Mannesmann Dematic Rapistan Corp. ("Rapistan") filed
suit against Buschman in the United States District Court for the
Western District of Michigan alleging infringement of three Rapistan
patents relating to Buschman induction systems (the "Rapistan Dispute").
Rapistan is seeking to permanently enjoin Buschman from infringing
those patents and both compensatory and treble damages. The Company
believes Rapistan's claims are without merit and intends to vigorously
defend this action. Related to Buschman's counterclaims and affirmative
defenses raised in this litigation, on June 5, 1998 the Company filed a
separate suit against Mannesmann Corporation ("Mannesmann") in the
United States District Court for the Southern District of New York on
the basis of the representations, warranties and disclosure obligations
of Mannesmann with respect to the patents subject to the Rapistan
Dispute at the time the Company acquired Buschman from Mannesmann in
1992. Pursuant to the spin-off as discussed in Note 7, Pinnacle and the
Company have agreed to indemnify certain parties (primarily McHugh) for
any and all liabilities arising from the Rapistan Dispute whether
arising prior to, concurrent with or after the spin-off.
7. SUBSEQUENT EVENT
On July 27, 1998, the Company announced that it plans to spin-off the
common stock of McHugh to Pinnacle's stockholders (after an initial
spin-off of such stock from the Company to Pinnacle) and, in connection
therewith, sell a minority interest in McHugh. Subsequent to the
spin-off and sale of such minority interest, Alvey will receive a cash
payment from McHugh of approximately $17.4 million representing the
repayment of McHugh's intercompany debt to Alvey. As a part of these
transactions, the holders of Pinnacle Series A, Series B and Series C
Preferred Stock (collectively, the "Pinnacle Preferred Stock") will
enter into a Preferred Stock Exchange Agreement pursuant to which they
will agree to exchange $26.5 million of Pinnacle Preferred Stock for
shares of a newly created class of common stock in McHugh. The
consummation of these transactions is conditioned on receipt of consents
from holders of a majority in aggregate principal amount of Alvey's
$100.0 million of 11-3/8% Senior Subordinated Notes Due 2003 (the
"Notes"). Alvey is offering to pay a consent premium of $45.00 in cash
for each $1,000 principal amount of Notes for which a consent is
properly delivered prior to the expiration of the consent solicitation
on August 14, 1998.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
When used in the following discussion, the words "believes," "anticipates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation
to publicly release the result of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
GENERAL
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of Alvey Systems, Inc.
for the three and six months ended June 30, 1998 compared to the three and
six months ended June 30, 1997. 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, 1997.
The Company serves its major markets through three groups. The 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 the distribution logistics market. The SLG, which is
comprised of McHugh, Weseley, SAI and Gagnon, provides logistics solutions
for warehouse and transportation management needs.
See Note 7 to the Consolidated Financial Statements for a discussion of
certain strategic matters involving the Company.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, net sales,
categories of expenses and income data as a percentage of net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(unaudited) (unaudited)
---------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 72.8 76.5 73.9 75.3
------ ------ ------ -----
Gross profit 27.2 23.5 26.1 24.7
Selling, general & administrative
expenses 18.0 17.6 17.7 18.3
Research & development
expenses 3.0 2.3 3.0 2.4
Write-off of purchased R&D 2.5 - 1.3 -
Restructuring costs - 16.8 - 8.8
Amortization expense 0.4 0.5 0.4 0.4
Other expense (income), net 0.0 0.0 (0.2) 0.0
------ ------ ------ -----
Operating income (loss) 3.3 (13.7) 3.9 (5.2)
Interest expense 3.0 3.9 3.4 4.0
------ ------ ------ -----
Income (loss) before income
taxes 0.3 (17.6) 0.5 (9.2)
Income tax expense (benefit) 0.5 (6.0) 0.4 (3.1)
------ ------ ------ -----
Net income (loss) (0.2)% (11.6)% 0.1% (6.1)%
------ ------ ------ -----
------ ------ ------ -----
</TABLE>
COMPARISON OF THE QUARTER ENDED JUNE 30, 1998 TO THE QUARTER
ENDED JUNE 30, 1997
NET SALES were $107.5 million for the quarter ended June 30, 1998,
representing an increase of $16.7 million, or 18.4% over net sales of
$90.7 million for the quarter ended June 30, 1997. Excluding the second
quarter acquisitions of SAI and Gagnon, sales increased $15.3 million and
16.8% over the second quarter of 1997. Record sales at both the SLG and DLG
more than offset a decrease in sales at the CPG, and resulted in a record
sales quarter for the Company overall.
NEW ORDER BOOKINGS set a record at $125.7 million for the quarter ended
June 30, 1998, representing an increase of $27.2 million, or 27.7%, from
bookings in the quarter ended June 30, 1997. The SLG and DLG experienced
increases of 81.8% and 44.0%, respectively, in the second quarter of 1998 as
compared to the second quarter of 1997, while the CPG had a slight decrease
from the second quarter of 1997.
GROSS PROFIT was $29.2 million for the quarter ended June 30, 1998, an
increase of $7.9 million, or 37.3% over the quarter ended June 30, 1997. As
a percentage of sales, gross margins were 27.2% for the quarter, increasing
3.7 percentage points from the
14
<PAGE>
same period of 1997. Excluding the acquisitions of SAI and Gagnon, gross
profit increased $6.9 million or 32.4% over the second quarter of 1997 and as
a percentage of sales, gross margins increased 3.1 percentage points. Gross
profit increases were achieved in each group, but were particularly strong at
the DLG and SLG where increases of 76.1% and 33.8%, respectively, were
realized. Improvements at the DLG were attributable to both increased volume
and the absence of $2.2 million of asset write-down and related
non-recurring charges recorded in the second quarter of 1997. Increases at
the SLG were attributable to the addition of SAI and Gagnon and increased
volume in same store sales, offset in part by a lower level of high-margin
license fees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) were $19.3 million for
the quarter ended June 30, 1998, representing an increase of $3.4 million or
21.3% over the quarter ended June 30, 1997. As a percentage of sales, SG&A
was 18.0% or 0.4 percentage points higher than the second quarter of 1997.
Same store SG&A increased $2.9 million or 18.2% over the second quarter of
1997. Same store SG&A as a percentage of sales increased 0.2 percentage
points from the second quarter of 1997. Increases in SG&A, attributable to
increased staffing levels to support higher sales volumes, particularly at
the SLG and DLG, and to increasing the allowance for doubtful accounts
corresponding with increased sales levels, were offset by decreases in SG&A
resulting from the 1997 restructuring efforts.
RESEARCH AND DEVELOPMENT EXPENSES were $3.2 million for the second quarter of
1998, an increase of $1.1 million compared to $2.1 million for the second
quarter of 1997. This increase is the result of increased development
activities at the DLG and SLG, as well as the addition of SAI and Gagnon.
WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS was
$2.7 million in the second quarter of 1998. In connection with the
acquisitions of SAI and Gagnon during the second quarter of 1998,
$1.0 million and $1.7 million, respectively, of the related purchase prices
were preliminarily allocated to purchased in-process research and development
costs at the dates of acquisition and immediately expensed. (See Note 3 to
the Consolidated Financial Statements for further discussion.)
RESTRUCTURING COSTS were $15.3 million in the second quarter of 1997. 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, 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
15
<PAGE>
of the SLG by further consolidating the operations of McHugh and Weseley.
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 consisted 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 the SLG reorganization
charges were primarily severance costs. It is anticipated that costs accrued
as restructuring will be fully paid by April 30, 2004. (See Note 4 to the
Consolidated Financial Statements for further discussion.)
OPERATING INCOME for the quarter ended June 30, 1998 was $3.6 million as
compared to a loss of $12.5 million in the second quarter of 1997, an
increase of $16.0 million. However, excluding 1998 non-recurring charges for
the write-off of purchased in-process research and development costs of
$2.7 million and 1997 non-recurring restructuring charges of $15.3 million,
same store operating income would have been $5.9 million and $2.8 million for
the quarters ended June 30, 1998 and 1997, respectively. After exclusions,
same store operating income increased $3.1 million or 110.0% over the same
quarter of 1997. As a percentage of sales, and excluding such non-recurring
charges, same store operating income was 5.6% in the second quarter of 1998
compared to 3.1% for the same period of 1997. The increase in operating
income reflects the various factors described above.
INTEREST EXPENSE was $3.2 million in the second quarter of 1998 as compared
to $3.6 million in the second quarter of 1997. This decrease is primarily
attributable to decreased borrowings under the Company's working capital
facility.
INCOME TAX EXPENSE was $553,000 for the quarter ended June 30, 1998,
representing an increase of $6.0 million from the tax benefit of $5.5 million
for the second quarter of 1997. The significant differences between the
effective tax rate on income (loss) before income taxes and the expected
statutory rates are attributable to the non-deductibility of expenses related
to the write-off of purchased in-process research and development costs and
the amortization of goodwill.
NET LOSS was $226,000 for the quarter ended June 30, 1998, an improvement of
$10.3 million from the quarter ended June 30, 1997. This increase is the
result of the various factors discussed above.
16
<PAGE>
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX MONTHS
ENDED JUNE 30, 1997
NET SALES were $200.2 million for the six months ended June 30, 1998,
representing an increase of $25.7 million, or 14.7% over net sales of
$174.5 million for the six months ended June 30, 1997. Same store sales
increased $24.2 million or 13.9% in the first half of 1998 over the first
half of 1997. The DLG and SLG realized sales increases of $23.7 million, or
30.8%, and $13.7 million, or 44.1%, respectively, which were offset in part
by decreases at the CPG.
NEW ORDER BOOKINGS were $217.3 million for the six months ended June 30,
1998, $14.7 million, or 7.2% above the six months ended June 30, 1997.
Bookings at the DLG were particularly strong at $107.1 million, which
represents a 21.0% increase over the first six months of 1997.
GROSS PROFIT was $52.3 million for the six months ended June 30,1998, an
increase of $9.1 million, or 21.2% over the six months ended June 30, 1997.
As a percentage of sales, gross margins for the first half of 1998 were
26.1%, a 1.4 percentage point increase over the same period in 1997. In the
first half of 1998, same store gross profit increased $8.1 million or 18.8%
over the same period of 1997. For the same periods and as a percentage of
sales, same store gross margins increased 1.1 percentage points. Gross
profit increases were particularly strong at the DLG which were primarily
attributable to increased volume, but also due to the absence of $2.2 million
of asset write-down and related non-recurring charges recorded in the second
quarter of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) were $35.5 million for
the six months ended June 30, 1998, representing an increase of $3.5 million
or 11.0% over the six months ended June 30, 1997. This increase is primarily
attributable to increased staffing to support higher sales volumes within the
SLG and DLG and to increasing the allowance for doubtful accounts
corresponding with increased sales levels, offset by decreases resulting from
1997 restructuring efforts. As a percentage of sales, SG&A was 17.7% for the
first six months of 1998, a decrease of 0.6 percentage points over the same
period of 1997.
RESEARCH AND DEVELOPMENT EXPENSES were $6.0 million for the first half of
1998, an increase of $1.9 million compared to $4.2 million for the same
period of 1997. These increases are the result of increased development
activities in the SLG and DLG, as well as the additions of SAI and Gagnon.
WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS was
$2.7 million in the first half of 1998 as described in the comparison of the
quarter ended June 30, 1998 to the quarter ended June 30, 1997.
RESTRUCTURING COSTS totaling $15.3 million were recorded in the first half of
1997 as described in the comparison of the quarter ended June 30, 1998 to
the quarter ended June 30, 1997.
17
<PAGE>
OTHER INCOME, net was $495,000 for the six months ended June 30, 1998,
compared to $7,000 for the six months ended June 30, 1997. This increase of
$488,000 is almost entirely attributable to income recognized from the
proceeds of a life insurance settlement in the first quarter of 1998.
OPERATING INCOME (LOSS) for the first six months of 1998 was income of
$7.8 million compared to a loss of $9.1 million in the first half of 1997.
However, excluding non-recurring charges of $2.7 million resulting from the
write-off of purchased in-process research and development costs and 1997
restructuring charges of $15.3 million, operating income would have been
$10.5 million and $6.2 million for the six months ended June 30, 1998 and
1997, respectively. After exclusions, same store operating income for the six
months ended June 30, 1998 increased $3.9 million, or 62.8% compared to
operating income after exclusions for the six months ended June 30, 1997. As
a percentage of sales, and excluding such non-recurring charges, same store
operating income increased to 5.1% in the first six months of 1998 compared
to 3.6% for the same period of 1997. The increase in operating income
reflects the various factors described above.
INTEREST EXPENSE was $6.7 million in the first half of 1998 as compared to
$7.0 million in the first half of 1997. This decrease is primarily
attributable to decreased borrowings under the Company's working capital
facility.
INCOME TAX EXPENSE (BENEFIT) was expense of $878,000 for the six months ended
June 30, 1998, representing an increase of $6.3 million from the $5.4 million
tax benefit for the first half of 1997. The significant differences between
the effective tax rate on income (loss) before income taxes and the expected
statutory rates are attributable to the non-deductibility of expenses related
to the write-off of purchased in-process research and development costs and
the amortization of goodwill.
NET INCOME was $190,000 for the six months ended June 30, 1998, an increase
of $10.9 million from the six months ended June 30, 1997, as a result of the
various factors described above.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES. During the six months
ended June 30, 1998 and 1997, cash provided by (used for) operating
activities was $14.9 million and ($8.1) million, respectively. This
$23.0 million year-over-year improvement is primarily attributable to: the
significant year-over-year improvement in profitability; lower bonus and
profit sharing payments; lower project costs in 1998 as compared to the
significant use of cash to fund project overrun levels experienced in the
first half of 1997; the realization of 1997 tax benefits in 1998 and an
overall improvement in the management of working capital. First quarter
funding of annual profit sharing plan contributions, incentive compensation
and bonus plans, disproportionate tax withholding requirements and certain
professional services historically have resulted in a significant use of cash
in the first quarter.
18
<PAGE>
CASH FLOW FROM INVESTING ACTIVITIES. Capital expenditures for each of the
six months ended June 30, 1998 and 1997 were $3.0 million. Management
anticipates that current year capital expenditures (including McHugh for the
full year) will approximate $7.8 million. See Note 7 to Consolidated
Financial Statements for discussion of the spin-off of McHugh. See Note 3 to
Consolidated Financial Statements for discussion of the acquisitions of SAI
and Gagnon in the second quarter of 1998.
CASH FLOW FROM FINANCING ACTIVITIES. Net borrowings decreased by $6.3 million
and increased by $10.9 million in the six months ended June 30, 1998 and
1997, respectively. The increase in borrowings in the first half of 1997 was
primarily used to fund operating activities, while the year over year
decrease primarily reflects the significant improvement in cash provided by
operating activities.
ONGOING CASH FLOWS FROM OPERATIONS. The Company believes that its funds from
operations, together with available funds under its 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. See Note 7 to the Consolidated Financial Statements for a
discussion of certain strategic matters involving the Company.
BACKLOG. As of June 30, 1998 the Company had a backlog of $160.8 million, as
compared to $163.6 million and $143.7 million as of June 30, 1997 and
December 31, 1997, 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 Company's future operating performance. Additionally, certain backlog
orders may be subject to cancellation in certain circumstances. The Company
believes that substantially all orders in backlog at June 30, 1998 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 June 30, 1998.
19
<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.
/s/ J.A. Sharp
-------------------------------------
Date: August 11, 1998 James A. Sharp
Secretary and Senior Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
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<PERIOD-START> JAN-01-1998
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