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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number 333-2600
ALVEY SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 43-0157210
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
9301 Olive Blvd.
St. Louis, Missouri 63132
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (314) 993-4700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K (229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN,
AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. X
The aggregate market value of the voting stock held by non-affiliates
of the Registrant is zero as all of the outstanding shares of the Company's
Common Stock, $0.01 par value per share (the "Common Stock"), are held by
Pinnacle Automation, Inc., a Delaware corporation.
The number of shares of Common Stock outstanding on March 12, 1998 was
1,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
See Exhibit Index.
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . .12
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . .13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . .13
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . .13
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . .14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . .16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . .28
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . .28
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . .28
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . .32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . .34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . .35
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . .37
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PART I
ITEM 1. BUSINESS
OVERVIEW
Alvey Systems, Inc., a Delaware corporation ("Alvey", or the
"Company") and a wholly-owned subsidiary of Pinnacle Automation, Inc., a
Delaware corporation ("Pinnacle"), together with its five operating
subsidiaries, is a materials handling and information systems company which
produces equipment and related software and controls that enable manufacturers,
wholesalers, distributors and retailers to operate their manufacturing plants,
distribution centers and warehouses more efficiently. In connection with
providing equipment and software, the Company's engineers and sales force work
closely with its customers to analyze their specific manufacturing, distribution
and warehousing needs and to design customized systems that improve efficiency
and reduce costs. As a full-service provider of materials and information
handling products and information services, the Company is uniquely positioned
to offer to its customers integrated systems comprised of combinations of
equipment, software and controls. The Company believes that its ability to offer
both engineering design services as well as the equipment and related software
necessary to implement integrated solutions to materials handling needs provides
a distinct competitive advantage.
The Company manufactures a broad range of materials handling equipment
such as palletizers, depalletizers, conveyors, carousels and sorters which
automate the physical acts of loading, unloading, sorting and transporting raw
materials and finished products. In addition to moving materials, the Company's
integrated systems incorporate advanced software and controls developed by the
Company to collect data, process information and provide real-time feedback with
respect to equipment performance and materials processing. While a significant
portion of the Company's revenues are attributable to the manufacture and sale
of equipment, approximately 59% of total revenues result from product support
functions and non-manufactured products delivered in connection with sales of
the Company's equipment. Such revenues are generated from engineering, software
license fees, computer support services, systems and equipment maintenance,
computer hardware and peripheral equipment, and the integration and installation
of these products.
For customers applying materials handling and information solutions to
manufacturing applications, the Company offers products designed to (i) automate
and accelerate the input of materials into a manufacturing line, (ii) track and
transport finished products within a manufacturing facility, distribution center
or warehouse and (iii) automate the palletizing of finished goods. The Company's
customers, in large part, use the Company's products to sort (as used herein,
the term "sort" and sortation mean the segregation of packages destined for
different locations), transport and palletize large quantities of relatively
small-sized products, such as beverages, canned and bottled goods and personal
consumer goods. For warehousing and distribution applications, the Company
offers conveyor and carousel systems to sort, track and transport goods, and
advanced software systems which monitor and optimize the movement and shipment
of products.
The Company's sales have increased from $72.3 million in 1989 to
$372.9 million for the year ended December 31, 1997. The principal factors
contributing to the Company's rapid growth in sales and operating performance
include, new product offerings, management initiatives, and acquisitions of
complementary businesses. EBITDA (See Item 6. "Selected Financial Data" for
definition) increased from $4.2 million in 1989 to $25.2 million for the year
ended December 31, 1997. As of December 31, 1997, the Company's backlog was
$143.7 million.
PRODUCTS
The Company believes that each of its operating entities is a leading
supplier in its principal markets. 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 Bros. Inc. ("Busse"), primarily
serves the food, beverage and manufacturing sector of the Company's market. The
Distribution Logistics Group ("DLG"), which is comprised of The Buschman Company
("Buschman"), White Systems, Inc. ("White") and Real Time Solutions, Inc.
("RTS"), primarily serves the distribution logistics market. The Software
Logistics Group ("SLG"),
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comprised of McHugh Software International, Inc. ("McHugh"), provides logistics
solutions for warehouse and transportation management needs. Primary entities
within each group are described below. (Less significant entities have not been
included in discussions throughout this document.)
CONSUMER PRODUCTS GROUP
ALVEY SYSTEMS, INC.: Alvey manufactures and sells conventional and
robotic case palletizers and depalletizers, case and pallet conveyors, related
custom products and software and controls through an international network of
direct sales personnel and independent representatives. Palletizers are large
machines, operated by programmable controls, that receive packaged products
(typically case goods) from a conveyor delivery system and deliver them to a
pallet conveyor "take away" system. The palletizer sequentially arranges
individual packages and groups them into rows and layers to form predetermined
patterns which are stacked onto a pallet or into a unit load, producing a stable
cube for efficient handling and shipping. Depalletizers unload palletized
products for further handling in the distribution process. Conveyor systems are
used to move products from one location to another and can be designed to sort,
feed or perform a number of different applications. Alvey primarily serves the
consumer products segment of the materials handling market that focuses on
manufacturers of food, beverages, paper, soap, electronic and other consumer
products.
Alvey's annual net sales have increased 188% since its acquisition by
Pinnacle in August 1988 and currently represent approximately 35% of the
Company's total net sales. The Company believes that this increased revenue is
principally attributable to management initiatives which include the development
and introduction of new or improved products. Management's primary initiative
was to increase revenues at Alvey. To accomplish this, the Company assembled
experienced and highly qualified sales and marketing personnel and developed the
necessary products to support this initiative. Management believed this would
provide Alvey the means to further penetrate its traditional manufacturing
market and provide the sales and consulting expertise to become a significant
competitor in the more rapidly growing warehousing and distribution segment of
the materials handling market. To better support marketing efforts, Alvey found
it necessary to re-engineer many of its conveyor products and develop new
equipment such as the case depalletizer used primarily in warehouse
applications. In addition, the engineering and manufacturing managers recruited
subsequent to 1988 brought new ideas and processes which have resulted in a
complete redesign of Alvey's entire palletizer and pallet conveyor product
lines. With the acquisition of Buschman in 1992, responsibility for marketing
major systems to the warehouse and distribution market segments was shifted from
Alvey to Buschman, and a number of senior marketing managers were transferred to
Buschman. This shift of responsibilities and transfer of personnel has resulted
in lower sales growth at Alvey, while increasing Buschman's sales growth for
1993 and each subsequent year. In 1996 and during 1997, Alvey retained a world
class consultant to reduce cycle times, improve first pass yields and lower
costs.
Alvey's EBITDA (as defined in Item 6. "Selected Financial Data") has
increased by approximately 136% since 1988. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
BUSSE BROS., INC.: Busse manufactures bulk palletizing and
depalletizing systems which are sold through its direct sales force and in
conjunction with Alvey's sales force. Busse's bulk palletizers accumulate and
arrange empty containers, such as cans and bottles, for shipment to consumer
product manufacturers, by building layers of containers separated by plastic or
paperboard sheets. The pallet load of containers is then strapped down to
secure and stabilize the load. When a pallet of containers arrives at the
filling location, containers must be removed from the pallet and fed into a
production line where they will be washed, filled and then capped or seamed.
Busse's bulk depalletizers accept the pallet of containers and systematically
sweep each layer of containers off the pallet and onto conveyors that take the
containers into the production line. Busse's products serve the consumer product
manufacturing phase of the industry segments to which Alvey serves the
distribution phase, and Busse also serves the container manufacturers that
supply these industries.
Busse's annual net sales have increased 76% since its acquisition in
April 1992 and currently represent approximately 3% of the Company's total net
sales. The Company believes that this significant sales growth is primarily
attributable to the recruitment of experienced marketing personnel at Busse and
utilizing Alvey's much larger sales force to offer Busse products to existing
customers of Alvey. Another factor
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contributing to this increase in sales was the introduction in 1993 of Busse's
redesigned bulk depalletizers which have accounted for approximately 38% of its
sales for the last three years.
During 1996, Busse consolidated three separate manufacturing and two
separate administrative facilities into a newly-constructed 62,000 square foot
plant. This provided the production and engineering capabilities to meet
customer demands. In addition, Busse retained independent consultants to assist
in reducing cycle times and lowering costs. The actions implemented in late
1996 and throughout 1997 have led to a significant increase in EBITDA in 1997
over 1996 levels.
The combination of the operations and management of Alvey and Busse
under one group of senior managers (i) focused marketing efforts in order to
better realize the synergy potential associated with marketing to a common
customer base, (ii) transferred the equipment design successes of Alvey to Busse
processes and (iii) reduced overall costs through elimination of redundant
support services. The president of Alvey is also president of the CPG.
DISTRIBUTION LOGISTICS GROUP
THE BUSCHMAN COMPANY: Buschman manufactures and sells a broad range of
case conveyors, controls, related products and software which are sold to end
users through its direct sales force, through independent distributors and
systems integrators and through the sales forces of Alvey and White. Buschman
sells standard conveyor and sortation products and modified conveyor equipment
as well as high-speed sortation systems, controls, outside-purchased subsystems
(such as bar code scanners), engineering and/or installation services. In
addition, Buschman sells materials flow systems for warehouses and distribution
centers which are more complex in design and include high-speed sortation,
sophisticated control software and involve engineering, project management and
installation services. These systems are designed to customer and/or consultant
specifications through Buschman's "design and build" process. Buschman primarily
serves the warehouse and distribution systems markets that perform the logistics
operations required to deliver a finished product from a warehouse or
distribution center to a retail store. Buschman also provides case conveyors
used in systems sold by White and provides case conveyors for systems sold by
Alvey to the extent the conveyors used in such systems are not directly
manufactured by Alvey.
Buschman's annual net sales have increased approximately 138% since
its acquisition in October 1992 and currently represent approximately 25% of the
Company's total net sales. The Company believes that this increase in net sales
has resulted primarily from management's initiative to reposition the Company as
a premier supplier of material handling solutions to the warehouse and
distribution market segment. This repositioning has been accomplished by an
aggressive marketing effort targeted at those customers requiring complex
solutions and ongoing services. Buschman's marketing efforts have benefited
from the transfer of senior managers from Alvey in 1992 and the recruitment of
additional highly qualified personnel. To support these marketing efforts and
provide superior solutions capabilities, Buschman redesigned its product line,
including products previously manufactured by Alvey, and introduced what it
believes to be state-of-the-art sortation equipment and systems software.
Buschman has realized record earnings in each of 1997, 1996 and 1995,
with levels well above those experienced before its 1992 acquisition, and
increased EBITDA by 35% in 1997 over 1996 record results. As a percentage of
gross sales, EBITDA increased to levels well above those realized before its
1992 acquisition. These results are primarily due to a focused strategic plan
implemented by management. In 1993 and 1994, the Company made significant
investments to initiate this plan, which included (i) consolidating the
manufacture of Alvey's conveyor products in Buschman's expanded facility,
(ii) redesigning and standardizing the product lines, (iii) recruiting
additional marketing personnel, (iv) recruiting and training approximately 200
additional production employees, net of turnover and (v) pursuing aggressive
marketing efforts, particularly with strategic national accounts. Favorable
results in recent years are particularly significant in that Buschman now
supplies large quantities of hardware sold at negotiated lower margins, which
supports Alvey's case conveyor requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
REAL TIME SOLUTIONS: RTS, which Alvey acquired in December 1996,
designs and sells paperless inventory picking systems to end users through its
direct sales force, through the sales forces of
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Buschman and White and through independent distributors. Paperless picking
systems are used to facilitate the retrieval (picking) and storage (puting) of
inventory in warehouses and distribution centers. Inventory quantities and
information are updated immediately upon input of completed transactions. RTS
believes its systems eliminate the need for paper picklists, increase the
productivity of a customer's work force and improve a customer's control over
its inventory. RTS markets its products under the trade names
EASYpick-Registered Trademark-, EASYput, EASYpick-DMS, and SORTpro.
EASYpick-Registered Trademark-, RTS' order-filling system and software
(known as a "pick-to-light system"), is currently installed in over 150 sites
and is RTS' leading product. RTS' EASYput product addresses the growing market
for put-to-light systems and EASYpick-DMS, a warehouse control software, enables
customers without sophisticated warehouse management systems to more easily
install automated systems, such as pick-to-light. Many of RTS' current
customers, including Auto Zone, Avon, Family Dollar Stores, Sears and Wal-Mart,
are also customers of White and Buschman.
RTS' annual net sales have decreased approximately 2% since its
acquisition in December 1996 and represent approximately 4% of the Company's
total net sales. RTS' 1997 EBITDA, however, is 66% above pre-acquisition levels
in 1996 and, as a percentage of sales, has increased from 6% in 1996 to 10% in
1997.
WHITE SYSTEMS, INC.: White manufactures and sells a broad line of
horizontal and vertical carousels, power columns, movable aisle systems and
related software and controls which are sold to end users through its direct
sales force and through a national dealer network. Horizontal carousels are
rotating storage devices which store and move parts to the point of need,
whether an operator workstation, an automated inserter/extractor or another
robotic interface device. Vertical carousels are similar to horizontal carousels
except that the carousel travels in a vertical plane, like a ferris wheel. The
power column is a modular automated vertical lift device within which an
inserter/extractor retrieves trays from internal shelving and delivers them to
an accessible location. Movable aisle storage systems double the storage density
of an area by enabling existing fixed shelving to move on rollers, allowing an
operator to open an aisle between any two rows of shelves. White also
manufactures a heavy duty pallet moveable aisle system for warehousing
applications which utilizes a customer's existing pallets or racking. White
serves the warehouse and distribution systems markets, and, in addition, its
storage and retrieval products are used in a broad range of manufacturing and
office applications.
White's net sales have decreased 25% since its acquisition in
December 1993 and currently represent approximately 12% of the Company's total
net sales. Prior to its acquisition by the Company, White purchased equipment
for resale to its customers and included the sales price of such purchased
equipment in its annual net sales. Subsequent to its acquisition by the Company,
various product and customer responsibilities have been realigned. This has
resulted in certain products previously purchased and resold by White to be
produced or otherwise furnished by other operating units of the Company.
Accordingly, the net annual sales of these products are now reflected at the
respective operating unit rather than White. Furthermore, in 1997, the effect
of change in product and customer responsibility accounted for the majority of
the reduction in White's annual net sales since its acquisition by the Company.
Since its acquisition in December 1993, earnings at White have
decreased as a result of lower sales volumes as discussed above, as well as
investments in additional resources and information systems undertaken during
this period. During 1996 and 1997, White experienced further deterioration of
its earnings resulting primarily from operating difficulties due to an
overcommitment of limited resources and implementing and maintaining outdated
software products. In 1996, Pinnacle management responded by reorganizing the
management of White. As a result, nine senior executives and managers were
recruited and the operating and reporting structure was realigned in a manner
consistent with that of the Company's other material handling companies.
Additionally, in connection with a 1997 corporate restructuring, the Company
focused on the elimination of products with continuing cost overruns and
discontinued or restructured certain non-strategic and less profitable products
throughout the Company, particularly at White. Due to the above issues, EBITDA
levels at White have decreased resulting in negative EBITDA in 1997 and 1996.
Although no assurances can be given, management believes the initiatives
introduced since the acquisition of White, particularly those initiatives
implemented in late 1996 and 1997, will ultimately produce a favorable earnings
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trend similar to those realized from the Company's other acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Distribution Logistics Systems, a group formed from White and Buschman
personnel which is focused on marketing, designing and selling major systems to
the distribution market, is a part of the DLG. The president of the DLG is the
former president of Buschman and the Chief Operating Officer of Pinnacle.
SOFTWARE LOGISTICS GROUP
MCHUGH SOFTWARE INTERNATIONAL, INC.: McHugh, comprised of the former
McHugh, Freeman & Associates, Inc. and Weseley Software Development Corp.
("Weseley" or "WSDC") develops, markets and supports warehouse management
software systems ("WMS") and transportation management software ("TMS") for the
logistics execution portion of the supply chain market.
Warehouse management systems manage the location and movement of goods
within a warehouse to facilitate the eventual shipment of such goods. These
systems track inventory on an interactive, real-time basis from the point of
receiving through shipping. The systems communicate with a central computer to
obtain and provide strategic data. Systems employ barcoded "license plate
numbers" which identify and allow the tracking of items, lot or model, storage
locations, employees and picking containers. The license plate numbers are read
by a bar code scanner and transmitted by a radio frequency terminal. McHugh
provided custom systems until late 1994, when it introduced its DMPLUS "standard
product". DMPLUS is a real-time, comprehensive software solution for businesses
with large-scale, high-volume warehouses and distribution centers. DMPLUS
tracks and manages inventory on an interactive real-time basis, from the point
of receiving to shipping, through the use of bar coding scanners and radio
frequency transmitters, providing users with real-time and precise information
as to the location of people, inventory and material handling equipment. DMPLUS
improves customer service by reducing fulfillment times and increasing
fulfillment accuracy and increases operational efficiencies by reducing downtime
and increasing human resource productivity throughout the warehouse.
Additionally, DMPLUS improves capital utilization through improved inventory
management, thereby reducing unnecessary overhead and improving space
utilization. For the twelve months ended December 31, 1997, custom and
"standard product" warehouse management systems represented 10% and 90%,
respectively, of McHugh's total WMS net sales. The Company anticipates that
"standard product" WMS sales will represent an even larger percentage of total
net sales in the future. McHugh has traditionally designed and installed
warehouse management software systems primarily for the consumer goods
distribution marketplace; however, the broad acceptance of its products has
created new and significant opportunities in additional market niches.
Transportation management software and related services are provided
by Weseley, which became a wholly-owned subsidiary of McHugh on January 29,
1996. TMS products and related services enable manufacturers, distributors,
wholesalers and third-party logistics companies to more effectively and
efficiently manage all aspects of the shipping process, from shipment planning
to operational execution and post-shipment administration. TRACS*, the
Company's TMS, is an open-systems, real-time client/server solution which
offers comprehensive, end-to-end transportation planning and management
functionality, employing sophisticated modeling and an architecture specifically
designed for the dynamic transportation execution environment. TRACS* evaluates
orders in real-time and determines the optimal way to consolidate, rate and
route orders, considering all available carriers and modes, enabling businesses
to significantly lower freight costs, gain greater control over shipping
operations, enhance customer service and improve overall transportation
efficiency.
The Company integrated its WMS and TMS technologies in 1996 to create
a software solution that enables users to both manage and execute the storage
and movement of goods in warehouses with the subsequent shipment of such goods.
The Company believes that its ability to offer an integrated DMPLUS/TRACS*
solution provides it with a significant competitive advantage as customers
increasingly demand a uniform logistics solution to warehouse and transportation
management. As of December 31, 1997, five companies have purchased the joint
solution offering. During 1997, the Company consolidated the sales forces, the
corporate administration and certain other administrative functions of McHugh
and Weseley to further integrate the two operations and realize additional cost
savings.
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McHugh's annual net sales have increased more than 29 times since its
acquisition in May 1989 and currently represent approximately 19% of the
Company's total net sales. The Company believes that this significant increase
in revenues has been attributable to management's efforts to position McHugh as
a provider of high quality, functional software to Fortune 500 customers
requiring systems at a number of locations. This strategy has allowed McHugh to
create customer-specific systems which can be implemented throughout an
organization while requiring less customization, thus leveraging McHugh's
resources. The development of DMPLUS (a standardized product requiring little
customization) has allowed McHugh to reduce the cost and time to deliver a
system which opens additional markets and improves McHugh's competitive
position. More recently, the acquisition of Weseley and the corresponding
addition and integration of the TMS product line has increased sales levels at
McHugh.
Since the acquisition of McHugh in 1989, EBITDA has grown at a rate
higher than sales. In the years immediately following its acquisition, the
growth in EBITDA was suppressed by significant costs incurred in connection with
the development of additional software offerings, the aggressive pursuit of
multi-site accounts and the training of new employees, as employment was
increasing at a rate of approximately 50% per year. From 1993 through 1995,
EBITDA, as a percentage of sales, significantly exceeded that of any of the
other manufacturing companies in the Pinnacle family. In 1996 and 1997, McHugh
EBITDA, as a percentage of sales, was within 0.1 and 0.9 percentage points,
respectively, of the highest of the Pinnacle companies as the Company increased
its spending in research and development, broadening its U.S. and worldwide
sales and marketing, and establishing partnerships with other software providers
and third party integrators. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
INTEGRATED SYSTEMS
For integrated systems, where the products and expertise of Alvey's
subsidiaries are combined, a conveyor is typically the "linkage" that permits
the movement of products through the manufacturing line or distribution system
and software is the "enabler" that drives the entire system and provides needed
information. The Company's systems typically include significant design and
engineering work and turnkey installation services. Examples of some of the
most common integrated systems sold by Alvey include:
CONSUMER PRODUCT MANUFACTURING LINES: Systems used by beverage
manufacturers including Coca-Cola, food manufacturers such as Kellogg and
consumer product manufacturers such as Motorola. These systems could include
Alvey case palletizers, AEC (a division of Alvey) robotic palletizers, Busse
bulk depalletizers, Buschman conveyors and related software designed by McHugh,
Alvey or Buschman. Revenues from such systems typically exceed $2 million and
may reach $10 million.
WAREHOUSE AND DISTRIBUTION SYSTEMS: Systems used by retailers
including Sears, Target and Wal-Mart by independent wholesalers or by
manufacturers in conjunction with a consumer product manufacturing line. A
typical system could include Buschman and/or Alvey conveyors, White carousels
and related software designed by McHugh, RTS, Alvey or Buschman. Revenues from
such systems typically exceed $2 million and may reach $15 million.
CONTAINER MANUFACTURING SYSTEMS: Systems used by can manufacturers
including Metal Container Corporation (an Anheuser-Busch subsidiary), or bottle
manufacturers including Ball-Foster Glass Container Co. These systems could
include Busse bulk palletizers and Alvey conveyors and related software. Such
systems typically range in price from $300,000 to $1 million.
MEAT PRODUCTION SYSTEMS: Systems used by each of the four industry
leaders in meat production. These specialized distribution systems could include
Alvey case palletizers and depalletizers, Buschman conveyors, White carousels
and related software designed by McHugh or Alvey. Such systems and
depalletizers typically range in price from $10 million to $15 million. The
Company's successful installation of a revolutionary frozen meat distribution
system for ConAgra's Monfort Beef division in 1994 is an example of the
opportunities available in integrated systems. After the development and
implementation of the integrated system for ConAgra, the Company has received
orders for approximately $40 million of similar systems from ConAgra and other
industry participants.
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CUSTOMER ONE PROTECTION
Through its Company-wide Customer One Protection ("COP") program, the
Company provides aggressive ongoing support and maintenance for its installed
base of equipment and integrated systems. COP provides the Company's customers
with comprehensive service and support including 24-hour assistance by phone,
on-site service, user training, replacement parts, maintenance programs and
equipment and systems upgrades. The COP program generated approximately $37.3
million of revenues during the year ended December 31, 1997.
ENGINEERING AND SUPPORT SERVICES
While a significant portion of the Company's revenues is attributable
to the manufacture and sale of equipment, approximately 59% of total revenues
result from product support functions and non-manufactured products delivered in
connection with sales of the Company's equipment. Such revenues are generated
from engineering, software license fees, computer support services, systems and
equipment maintenance, computer hardware and peripheral equipment, and the
integration and installation of these products. The Company's sales process
generally starts with a consultation between Company engineers and a customer
during which the Company assesses the customer's specific materials handling
needs and designs a system consisting of the Company's equipment, including
related software and controls, specifically tailored to meet such needs. The
Company typically installs the system and works with the customer to insure that
the system performs to the customer's expectations. After the system is
operational, the Company continues to provide ongoing support and maintenance
and works with the customer in response to changes in the customer's materials
handling needs. These services are regularly provided to the Company's
customers, including through the "value-added" partnerships the Company has
formed with certain large customers. See "Customers."
BUSINESS STRATEGY
The Company's business objective is to build on its position as a
full-service provider and integrator of materials handling and information
management products and services tailored to meet the individual needs of its
customers. To achieve this objective, the Company intends to further implement
the following strategies:
- Continue to build upon the Company's integrated project
capabilities. Each of the Company's operating companies was
previously a stand-alone enterprise, and management continually
modifies the ways in which the subsidiaries work together to
design, market and implement solutions. By combining the
expertise of its subsidiaries, the Company is able to provide
manufacturers and distribution companies with equipment and
systems which represent the next step in materials handling and
information systems applications. Integrated solutions exhibit a
high degree of creativity and represent a partnership with the
customer, incorporating flexibility in design and solution and a
thorough understanding of the customer's business. These
integrated solutions are also designed to meet the increasing
information needs of the Company's customers.
- Continue margin enhancement measures. While the margins of the
Company's early acquisitions have increased over time, the
margins of White are generally lower than those of the other
operating companies. The Company believes that as favorable
results are achieved from the 1997 restructuring and as White is
further integrated into the Company through its inclusion in the
DLG, margins at both White and the Company should improve.
7
<PAGE>
- Exploit the Company's strategic opportunity to expand its
information systems expertise and significantly increase the
Company's ability to provide integrated solutions to warehousing,
transportation and related demand-planning problems.
- Expand logistics execution software offerings and markets which
would include providing technology to reach the mid-tier market,
the addition of new software functionality and products for the
current market and the enhancement of existing products. The DLG
and CPG are developing the ability to integrate McHugh logistics
execution products for use with their systems. The Company
intends to develop affiliations with third party integrators and
software license partners to supplement the Company's resources
in implementing this strategy and to broaden the available
customer base. Additionally, McHugh may pursue acquisitions that
facilitate such growth.
- Exploit new and emerging market opportunities. The manufacturing
and distribution markets are constantly changing. The Company
intends to exploit new market opportunities through its ability
to create new and revised custom and standard products that
provide solutions to market changes. In particular, the Company
provides products that respond to third-party warehousing,
point-of-sale ordering, mixed-load requirements, mail order
purchasing, improved occupational safety measures and other
customer needs.
- Expand the Company's international business. The Company has
significant opportunities for such expansion through its
U.S.-based international customers, as well as through new
international customers. The Company believes that the
international markets present significant opportunities for Alvey
and Busse palletizer/depalletizer systems, for Buschman
distribution systems, for McHugh software systems and for White
storage and retrieval systems. The Company intends to focus
initially on South America, Asia and Europe, and intends to add
additional marketing personnel to support expanded geographical
areas as new order bookings and sales increase. The Company
established three sales, engineering and service centers in
Europe during 1996 and 1997. Costs associated with the startup
of these centers were minimized by "boot strapping" the
operations and providing services in Europe to existing
U.S.-based customers while marketing to new European customers.
INDUSTRY OVERVIEW
Constant changes in consumer demands and buying trends offer new
opportunities for materials handling and information systems applications as the
need for a quick response to supply consumer needs is heightened. Trends such as
third-party distribution, point-of-sale ordering, mixed-load shipments and more
frequent, smaller-quantity deliveries create new opportunities while enhancing
the need for advanced software and integrated systems. Similarly, changes in
packaging shapes and the elimination of secondary packaging create new
challenges for manufacturers and distributors alike. The Company believes that
the need to increase employee productivity, improve worker safety, improve
margins and meet customer demands are factors which lead manufacturers and
distributors to upgrade and replace their existing materials handling equipment.
The materials handling industry is highly fragmented with many small,
single-product companies providing storage, transportation, software and other
products and services. Customers increasingly seek to satisfy their materials
handling requirements through fully integrated solutions consisting of the
equipment necessary to load, unload, sort and transport raw materials and
finished products, as well as related software and controls to monitor, optimize
and execute the movement and shipment of products. Customers are also seeking
systems to manage manufacturing, warehousing and distribution logistics.
Companies that are able to provide complex, integrated systems to satisfy
materials handling and logistics management requirements are experiencing new
growth opportunities, and the Company believes that its broad range of products
and services provides it with a distinct competitive position.
8
<PAGE>
CUSTOMERS
The Company's product leadership has resulted in sales to a diverse
customer base which includes many of the largest corporations in the United
States. In addition, the Company has successfully forged important "value-added
partnerships" with customers such as Anheuser-Busch, ConAgra, Dollar General,
McKesson, Nike, Proctor & Gamble, Target and Wal-Mart. Many of the Company's
customers have reduced their engineering staffs and consequently look to the
Company for design and engineering services with respect to their materials
handling requirements. The Company has a large installed base of equipment and
systems with these customers which provides reference sites that are critical
for attracting potential new customers. The Company believes that these
value-added partnerships are a significant competitive advantage as they serve
as sources of new product ideas, generate ongoing, relatively high-margin sales
and demonstrate proven systems capabilities to potential new customers. The
Company expects to create additional value-added relationships as it extends its
product offerings and installs new, integrated systems which can serve as
additional reference sites.
Each of the customers listed below was one of the top 20 customers of
one of the Company's operating subsidiaries during the last three years. The
customers on the list accounted for approximately 49.5% and 50.2% of the
Company's sales in 1997 and 1996, respectively. While certain of the customers
listed below may not be current customers, the Company has no reason to believe
that all customers listed below will not continue to be customers in the future.
9
<PAGE>
The following table sets forth a list of selected customers of the
Company by industry group:
BREWING CONSUMER PRODUCTS
Anheuser-Busch Char-Broil
Labatts General Electric
Miller Brewing Motorola
Russell Corp
SOFT DRINKS Stanley
Coca-Cola Sunbeam-Oster
Pepsi-Cola
TOBACCO
FOOD Brown and Williamson
Campbell Philip Morris
Farmland
Hershey Foods THIRD PARTY DISTRIBUTION
Kellogg Conrail
M&M Mars Sealand
Nabisco USF Distribution Services, Inc.
Nestle
Quaker Oats WINE AND DISTILLED SPIRITS
Tropicana Gallo
INDUSTRIAL DISTRIBUTION/ GENERAL DISTRIBUTION/RETAIL
MANUFACTURING AAFES
Canadian Tire Corp. Avon
Chrysler BJ's Stores
Crown, Cork and Seal Consolidated Stores
DuPont Chanel
Intel Dollar General
Kent Electronics Dollar Tree
Libbey Glass Family Dollar
McKesson Famous Footwear
Reynolds Metal Footstar
Schering Plough J.C. Penney
Ball-Foster Glass Container Co. Liz Claiborne
Thomas & Betts Meijer
Warner Lambert Michaels Stores
Nike
CONSUMER GOODS Ross Stores
Boise Cascade Sears
Fort James Staples
Johnson & Johnson Tandy
Kimberly Clark Corp. Target Stores
Lever Bros. United Stationers
Procter & Gamble Wal-Mart
Woolworth
10
<PAGE>
For the years ended December 31, 1997 and 1996, the Company's largest
customer accounted for 5.2% and 5.5% of the Company's total sales, respectively.
The Company's ten largest customers represented 27.3% of total sales in 1997, as
compared to 27.5% in 1996.
The Company believes that it has excellent working relationships with
its customers. These relationships include proprietary accounts where projects
are generally awarded without a competitive bid process and non-proprietary
accounts where projects are typically awarded through a bid process among two or
three potential suppliers.
SALES AND DISTRIBUTION
The Company has developed strong domestic sales channels, including
approximately 90 direct salespeople and approximately 270 independent
distributors and independent manufacturer's representatives. This sales force
covers the entire United States, with especially strong coverage in the major
industrial centers. Management believes that the Company has the strongest
combination of direct and independent sales networks in the materials handling
industry.
International sales accounted for approximately $27.0 million or 7.2%
of the Company's sales for the year ended December 31, 1997, a 4.8% increase
from $25.8 million in international sales for the year ended December 31, 1996.
The Company is pursuing a strategy to significantly increase international sales
as a percentage of the Company's total net sales. During late 1996 and 1997, the
Company established three new international offices. The Company expects to
leverage its existing relationships with major multinational corporations in the
United States in order to support their activities throughout the global market.
BACKLOG
The Company's backlog is based upon firm customer orders that are
supported by purchase orders, other contractual documents and cash payments. As
of December 31, 1997, the Company's backlog was $143.7 million. 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 substantially all of its orders in
backlog at December 31, 1997 will be recorded as revenue within one year.
RESEARCH AND DEVELOPMENT
Strong research and development efforts are the basis of the Company's
product and market leadership. In the fiscal years ended December 31, 1997,
1996 and 1995, the Company incurred $9.1 million, $4.8 million and $2.1 million,
respectively, in research and development expenses. By utilizing customer
inputs, research with respect to competitors and research with respect to
externally available engineering to establish future product needs, the Company
focuses its research and development on key customers and applications. Based
on such data and subsequent analysis, the Company establishes product plans that
are continually reviewed and updated. To support the continuing growth in the
logistics execution software market and to facilitate an integrated solutions
approach, the Company's research and development activities address three
engineering disciplines: computer software, mechanical and controls.
In addition to the Company's research and development expenses
identified above, customers serve as a significant funding source for other
research and development efforts, with much of such costs funded through
customer contracts that focus on solving specific problems or technical
requirements. These contracts also provide the Company with opportunities to
enhance its competitive position without additional capital investments.
11
<PAGE>
The Company holds 31 active U.S. patents, 14 active foreign patents,
24 U.S. registered trademarks and 10 active foreign trademarks with 14 patent
applications and 20 trademark applications pending. In addition to its
extensive patent and trademark portfolio, the Company also licenses certain
intellectual property rights from third parties and owns a wide array of
unpatented proprietary engineering. The Company's U.S. patents have remaining
terms ranging from one to 16 years.
RAW MATERIALS AND COMPONENTS
The Company's principal raw materials and components purchased from
third parties are steel, electric motors and reducers. The Company minimizes
changing prices for these products by purchasing most of its requirements
through annual contracts. The Company does not rely on any single supplier for
these materials and believes it has the ability to quickly switch sources for
any of these materials should the need arise.
ENVIRONMENTAL MATTERS
The Company's operations are subject to a variety of federal, state
and local environmental laws and regulations which have become increasingly
stringent. The Company believes its current operations are in material
compliance with current environmental laws and regulations. However, the scope
of environmental laws is very broad and is subject to change.
COMPETITION
The materials handling and related information systems industry is
highly fragmented and very competitive. The industry includes numerous small
to medium size suppliers who focus on specific market niches and/or singular
applications. The suppliers in this group generally do not offer systems or
integrated solutions, but instead offer individual kits, machines and
applications. Certain other competitors offer materials handling systems and
integrated solutions. Although the Company believes it is one of the leading
suppliers of integrated materials handling systems, many of the Company's
competitors are large and have significant financial, marketing and technical
resources. In addition, the Company may encounter competition from new
market entrants.
EMPLOYEES
As of December 31, 1997, the Company had approximately 2,200
employees, approximately 1,100 of whom are engineers and other professional
staff. The Company operates through a decentralized organizational
structure, interconnected through operating groups headed by group presidents
who also serve as the senior executives of Pinnacle. The Company is subject
to collective bargaining agreements at all of its manufacturing facilities
except the Busse and RTS facilities. The Company has not experienced any work
stoppages related to labor matters for more than 20 years. The Company
considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company occupies over 1,200,000 square feet of manufacturing,
assembly and office space. Its primary production facilities are located in
Cincinnati, Ohio; St. Louis, Missouri; Kenilworth, New Jersey; and Randolph,
Wisconsin. The Company's primary software development facilities are located in
Waukesha, Wisconsin; Grand Rapids, Michigan; Shelton, Connecticut; Raleigh,
North Carolina; and Berkeley, California.
In order to meet customer demand and improve manufacturing
efficiencies, the Company completed two new manufacturing facilities in 1996: a
62,000 square foot addition to the Busse facility in Randolph, Wisconsin and an
82,000 square foot facility for Alvey in St. Louis, Missouri.
12
<PAGE>
The location and size of each of the Company's significant facilities
is summarized below:
<TABLE>
<CAPTION>
OPERATING COMPANY LOCATION SIZE (SQ. FT.) OWNED/LEASED LEASE EXPIRATION
- ----------------- -------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Alvey Olivette, MO 250,000 Owned -
Alvey St. Peters, MO 82,000 Owned -
Alvey Corsicana, TX 22,000 Leased December 2000
Busse Randolph, WI 122,000 Owned -
Buschman Cincinnati, OH 286,000 Owned -
Buschman Cincinnati, OH 44,000 Leased March 2000
RTS Napa, CA 21,000 Leased July 2003
RTS Berkeley, CA 9,000 Leased Monthly
White Kenilworth, NJ 263,000 Leased December 2006
McHugh Waukesha, WI 68,000 Leased October 2005
McHugh Shelton, CT 29,000 Leased December 2002
McHugh Raleigh, NC 6,000 Leased March 1998
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
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 Automation, Inc., Alvey Systems, Inc. and McHugh Software
International, Inc. alleging fraudulent inducement, tortuous 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. The Company believes such
claims are without merit and intends to vigorously defend 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.
The Company is involved in various other legal proceedings arising in
the ordinary course of business. None of the matters in which the Company is
currently involved, either individually or in the aggregate, is expected to have
a material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public market for the Company's Common Stock.
All of the Company's Common Stock is held by Pinnacle.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected historical consolidated financial data presented below at
and for the five years ended December 31, 1997 have been derived from the
historical Consolidated Financial Statements of Alvey which have been audited by
Price Waterhouse LLP, independent accountants. Alvey's historical consolidated
financial statements as of and for each of the three years ended December 31,
1997, 1996 and 1995 are included elsewhere in this Form 10-K.
The information below is qualified in its entirety by the detailed
information included elsewhere herein and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and related Notes to
Consolidated Financial Statements included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS (1):
Net sales . . . . . . . . . . . . . . . . . . . . . . . . $ 372,869 $ 331,247 $ 288,018 $ 248,177 $ 164,022
Cost of goods sold . . . . . . . . . . . . . . . . . . . 279,044 256,218 217,297 189,007 123,033
--------- --------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . 93,825 75,029 70,721 59,170 40,989
Selling, general and administrative expenses. . . . . . . 64,466 61,471 51,630 43,402 30,421
Write-off of purchased in-process research
and development costs (2) . . . . . . . . . . . . . . . - 12,700 - - -
Research and development expenses . . . . . . . . . . . . 9,063 4,797 2,051 2,538 1,436
Restructuring expense (3) . . . . . . . . . . . . . . . . 15,284 - - - -
Write-off of goodwill (4) . . . . . . . . . . . . . . . . - 11,491 - - -
Amortization expense. . . . . . . . . . . . . . . . . . . 1,663 1,703 1,737 1,836 1,479
Other expense (income), net (5) . . . . . . . . . . . . . 11 1,378 (108) 2,279 (11)
--------- --------- --------- --------- ---------
Operating income (loss) . . . . . . . . . . . . . . . . 3,338 (18,511) 15,411 9,115 7,664
Interest expense. . . . . . . . . . . . . . . . . . . . . 13,756 12,301 6,896 5,921 4,053
Discontinued public offering (6). . . . . . . . . .. . . 958 - - - -
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary losses. . . . . . . . . . . . . . . . . (11,376) (30,812) 8,515 3,194 3,611
Income tax expense (benefit) . . . . . . . . . . . . . . (4,057) (1,909) 4,109 1,516 1,560
--------- --------- --------- --------- ---------
Income (loss) before extraordinary losses . . . . . . . (7,319) (28,903) 4,406 1,678 2,051
Extraordinary losses, net (7) . . . . . . . . . . . . . . - 1,993 - - 6,203
--------- --------- --------- --------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . $(7,319) $(30,896) $ 4,406 $ 1,678 $ (4,152)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per share (8). . . . . . . . . . . . . . . . . . . - - - - -
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Working capital (deficit) . . . . . . . . . . . . . . $ 3,617 $ 604 $ (401) $ 7,152 $ 8,155
Total assets . . . . . . . . . . . . . . . . . . . . . 181,792 181,851 150,285 138,536 129,658
Long-term debt, less current maturities . . . . . . . 106,930 100,493 42,460 54,754 59,341
Redeemable preferred stock (9) . . . . . . . . . . . . - - 27,322 23,435 20,034
Net investment of Parent (10) . . . . . . . . . . . . (48,528) (41,129) (15,719) (16,332) (15,015)
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF ALVEY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED FINANCIAL DATA (1):
Depreciation expense (11) . . . . . . . . . . . . . $ 4,876 $ 4,259 $ 2,952 $ 2,752 $ 2,583
Capital expenditures, net (11) . . . . . . . . . . . 5,977 11,633 4,496 5,091 3,471
OTHER PERFORMANCE MEASURES (NON-GAAP) (12):
EBITDA (13) . . . . . . . . . . . . . . . . . . . . . 25,161 13,087 20,100 15,877 11,726
Ratio of EBITDA to cash interest expense (14) . . . . 1.99 1.16 3.27 2.77 3.17
Ratio of long-term debt to EBITDA . . . . . . . . . . 4.25 7.68 2.11 3.45 5.06
</TABLE>
(1) Results include various acquisitions from the date of such acquisition,
including White in 1993 and Weseley and RTS in 1996.
(2) Amount relates to $11.7 million and $1.0 million of the purchase price of
Weseley and RTS, respectively, which were allocated to purchased
in-process research and development and immediately expensed in the first
and fourth quarters of 1996, respectively.
(3) Amount reflects non-recurring restructuring charges as described in Note
4 to the Consolidated Financial Statements of Alvey.
(4) Amount represents the write-off of the remaining goodwill balance at one
subsidiary, which is considered to be impaired due to historical losses
and uncertainty regarding future income and cash flows. See Note 6 to
the Consolidated Financial Statements of Alvey.
(5) Amount in fiscal 1996 includes a $1.4 million one-time charge for the
termination of a management agreement. Amount in fiscal 1994 includes
the payment of a one-time stay bonus in the amount of $2.2 million to an
executive of White in connection with the acquisition of White.
(6) Amount reflects the write-off of legal and accounting costs associated
with a discontinued public offering as described in Note 4 to the
Consolidated Financial Statements of Alvey.
(7) Amount reflects the write-off of unamortized deferred financing fees, net
of applicable income tax benefits, resulting from the early
extinguishment of debt during 1996 and 1993. Amount in 1993 also includes
approximately $5.4 million, net of applicable income tax benefits, for
the accrual of operating losses and other related costs associated with
the disposal of a carousel manufacturing plant in Lewiston, Maine
pursuant to a Federal Trade Commission order in 1993.
(8) Given the historical organization and capital structure of Alvey,
earnings per share information is not considered meaningful or relevant
and therefore has not been presented.
(9) Amount represents redeemable preferred stock of Pinnacle. Due to the
exchangeable feature of the preferred stock which allows the holder to
exchange the preferred stock for subordinated notes of Alvey, the
preferred stock has been pushed down to the financial statements of Alvey
at December 31, 1995, 1994 and 1993. Outstanding redeemable preferred
stock of Pinnacle at December 31, 1997 and 1996 has not been pushed down
to the financial statements of Alvey as it is not exchangeable into debt
of Alvey.
(10) Net investment of Parent represents the basis of Pinnacle's investment
in Alvey, which has been pushed down to the financial statements of
Alvey, and includes cumulative contributions of capital and cumulative
losses before extraordinary losses, extraordinary losses and aggregate
accreted/paid preferred stock dividends. The historical amount at
December 31, 1997 consists of cumulative contributions of capital to
Alvey by Pinnacle of $8.6 million, cumulative losses of $42.9 million,
including extraordinary losses of $9.5 million, and an aggregate
accretion/payment of $14.3 million of paid-in-kind dividends on preferred
stock.
(11) Capital expenditures and related depreciation expense include amounts
related to investments in fixed assets and costs of software development.
In 1996, this includes $659,000 related to the write-off of capitalized
software costs (See Note 2 to the Consolidated Financial Statements of
Alvey).
(12) Other performance measures such as EBITDA (discussed further below)
should not be construed as an alternative to operating income or net
income calculated in accordance with generally accepted accounting
principles ("GAAP") or as an indicator of operating performance or
liquidity. However, the Company believes such non-GAAP performance
measures are commonly used to evaluate a company's ability to service
debt.
(13) EBITDA consists of earnings before interest, income taxes, extraordinary
items and depreciation and amortization expense. In 1997, EBITDA excluded
$15.3 million of restructuring charges and $958,000 of discontinued IPO
costs. (See Note 4 to the Consolidated Financial Statements of Alvey.)
In 1996, EBITDA excluded a $12.7 million one-time write-off of purchased
in-
15
<PAGE>
process research and development costs, an $11.5 million write-off of
goodwill and a $1.4 million one-time charge for the termination of a
management agreement which is included in "Other expense (income), net"
above. In 1994, EBITDA excluded a $2.2 million one-time payment of a
stay bonus in connection with the acquisition of White which is included
in "Other expense (income), net" above. Management fees reduced EBITDA by
$493,000, $502,000, $606,000, $502,000 and $665,000 for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
(14) For purposes of this computation, interest expense consists of interest
on indebtedness and does not include amortization of deferred financing
fees and other noncash charges to interest.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
When used in the following discussion, the words "believes",
"anticipates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
GENERAL OVERVIEW
The following discussion summarizes the significant factors affecting
the consolidated operating results and financial condition of the Company for
the three fiscal years in the period ended December 31, 1997.
Subsequent to the acquisition of Alvey by Pinnacle in August 1988,
Alvey, Pinnacle and their subsidiaries completed a succession of six
complementary acquisitions which has resulted in expanded product lines and an
ability to provide integrated solutions in a wide range of manufacturing and
distribution applications. Set forth below is certain information with respect
to the Company's acquisitions:
ACQUISITION ACQUISITION DATE
----------- ----------------
McHugh Software International, Inc. . . . . May 1989
Busse Bros., Inc. . . . . . . . . . . . . . April 1992
The Buschman Company . . . . . . . . . . . October 1992
White Systems, Inc. . . . . . . . . . . . . December 1993
Weseley Software Development Corp. . . . . January 1996
Real Time Solutions, Inc. . . . . . . . . . December 1996
The Company believes that its emphasis on complementary acquisitions
of companies serving either targeted markets or providing niche products has
enabled it to provide customers a single source for complete integrated
materials handling and information flow systems. Further, the Company believes
that it benefits from productivity and integration gains resulting from its
succession of complementary acquisitions combined with a strategy of integrating
the operations of each newly-acquired company with the operations of Alvey and
its other operating subsidiaries, which strategy is more fully described in the
next succeeding paragraph.
Shortly after acquiring each of its operating subsidiaries, management
reviewed each newly-acquired subsidiary with respect to the possible integration
of operations with Alvey and its other operating subsidiaries in order to
improve operating efficiencies. As a result of such previous reviews, the
Company initiated changes in each operating subsidiary's production processes
that were targeted at the improvement of manufacturing efficiencies, the
increase in facility capacity and ultimately the reduction of product cost.
Additionally, in recent years, management has undertaken a number of programs
targeted at reducing the cost to produce a specific product by simplifying and
standardizing components and assemblies, thereby improving the productivity of
the manufacturing process. The following is a brief summary of some of the
actions taken and
16
<PAGE>
programs initiated in order to improve operating efficiencies:
- Each of the manufacturing facilities of Alvey, Busse and Buschman
have been reorganized to modify the flow of product and raw
materials through the manufacturing process. Within three to 12
months after completing these changes, each of Alvey, Busse and
Buschman recorded meaningful improvements in labor productivity
and facility capacity.
- In 1993, Alvey began production of the series 920 palletizer,
which was designed to be manufactured in modules rather than a
single unit, thus reducing the labor requirements. As with most
new products, the manufacture of the initial units resulted in
cost overruns; however, by early 1994, Alvey produced these units
more efficiently than originally estimated. The result of this
engineering process was to produce a state-of-the-art machine
that could be sold at a price 15-25% below the machine it
replaced, yet generate a gross margin percentage significantly
higher than that of its predecessor.
- Alvey also began production of the series 880 palletizer in late
1994. This machine was redesigned to incorporate many of the
same assemblies used on the 920 series, resulting in labor
efficiencies and reduced inventories. While not as significant
as those realized in the production of the 920 palletizer, the
redesign of the series 880 has resulted in meaningful cost
improvements and efficiency trends.
- The Company has completed the process of combining the conveyor
product line of Alvey with that of Buschman. The best products
from each company were selected and then re-engineered to
incorporate current technologies and manufacturing capabilities.
The effect of this program was to greatly reduce the number of
parts required to support two separate products and to simplify
the manufacture of the new enhanced product. As a result of this
undertaking, and other programs targeted at specific issues,
productivity at Buschman began increasing in the last half of
1994 and has continued to do so through 1997. Buschman increased
1997 sales by 38% over 1994 with only a minimal increase in
factory employment.
- During 1995 and 1996 Alvey initiated efforts to improve
efficiency, productivity and the processing of information.
These efforts included incorporating internationally-recognized
quality standards necessary to obtain an ISO 9000 certification
and working with independent management consultants. The initial
ISO 9000 certification was received in May 1996. The process
associated with ISO 9000 requirements has provided a more
thorough, consistent documentation of information flow processes
throughout the Company which has increased productivity and
enhanced the decision-making process. The independent management
consultants have facilitated process changes that resulted in the
reduction of cycle times and increased yields.
- Over the last three years, the Company has increased spending on
state-of-the-art computer and manufacturing equipment and
technology targeted at improving its production capabilities and
reducing product costs. In addition, during this period, the
Company has spent $7.3 million to expand, construct and equip new
manufacturing and engineering facilities at Alvey and Busse.
These new facilities and equipment have allowed the Company to
expand capacity and improve processes, thereby eliminating
duplicate costs and increasing productivity. The Company expects
that the implementation of these processes and acquisition of
equipment will continue through 1998 and ultimately encompass the
entire Company.
17
<PAGE>
- The Company integrated its WMS and TMS technologies to create a
software solution that enables users to both manage and execute
the storage and movement of goods in warehouses with the
subsequent shipment of such goods. The Company believes that its
ability to offer an integrated DMPLUS/TRACS* solution provides it
with a significant competitive advantage as customers
increasingly demand a uniform logistics solution to warehouse and
transportation management. During 1997, the Company consolidated
the sales and marketing forces, the corporate administration and
certain other administrative functions of McHugh and Weseley to
further the integration of the two operations and realize
additional cost savings.
- 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 CPG serves the food, beverage
and manufacturing sector of the Company's market. The DLG serves
retailers, independent wholesalers and manufacturers in
conjunction with their distribution logistics requirements. The
SLG provides logistics solutions for warehouse and transportation
management needs. The formation of these groups provides a
better focus on aspects of the business specific to each of the
three customer groups and provides synergies in areas such as
marketing, equipment design and sales. In 1997, the Company
furthered its focus through a restructuring aimed at the
elimination or restructuring of less profitable and less
strategic products at White and the streamlining of both the
corporate and the SLG organizations.
While no assurance may be given with respect to future productivity
performance, management believes additional efficiencies will be realized from
these programs.
Each of the Company's acquisitions was accounted for under the
purchase method of accounting, with the purchase prices allocated to the
estimated fair market value of the assets acquired and liabilities assumed. In
each acquisition, the excess of the purchase price paid over the estimated fair
value of the net assets acquired was allocated to goodwill. The Company has
allocated an aggregate of $42.9 million to goodwill since 1988, $25.2 million of
which is recorded on Alvey's balance sheet at December 31, 1997. See Note 6 to
the Consolidated Financial Statements for a discussion of the $11.5 million of
goodwill that was written-off in 1996. Goodwill is generally amortized over a
period of 40 years; however, the Company is amortizing the goodwill associated
with the acquisitions of Weseley and RTS over ten years. Goodwill amortization
will result in future annual expense of approximately $1.3 million per year.
The Company financed the acquisitions primarily through borrowings, resulting in
increases in the Company's debt and interest expense. Results of operations of
each acquired company have been included in the Company's consolidated statement
of operations from the dates of the respective acquisition.
In February 1998, Pinnacle engaged a consulting firm to evaluate
various strategic alternatives available to Pinnacle and its affiliated
companies. One alternative would involve spinning-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, raising additional equity
capital in McHugh. This potential transaction, and any other similar
transaction, would be conditioned on a number of factors, including the possible
redemption or restructuring of the Company's outstanding Senior Subordinated
Notes (including the Company's ability to obtain suitable financing for any such
redemption or restructuring), the consent of the holders of Pinnacle's preferred
stock and certain other significant contingencies. As a result of these and
other contingencies, no assurances can be given that this transaction, or any
other similar strategic transaction, will be consummated in the near-term or at
all. No offer with respect to either the possible redemption or restructuring
of the Senior Subordinated Notes or equity investment in McHugh is made hereby.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, net
sales and categories of expenses, in thousands of dollars and as a percentage of
net sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . $372,869 100.0% $331,247 100.0% $288,018 100.0%
Cost of goods sold . . . . . . . . . . . . . . 279,044 74.8 256,218 77.3 217,297 75.4
-------- ----- -------- ----- -------- -----
Gross profit . . . . . . . . . . . . . . . . . 93,825 25.2 75,029 22.7 70,721 24.6
Selling, general & administrative expenses . . 64,466 17.3 61,471 18.6 51,630 17.9
Write-off of purchased in-process
research & development costs . . . . . . . - 0.0 12,700 3.8 - 0.0
Research & development
expenses . . . . . . . . . . . . . . . . . 9,063 2.4 4,797 1.5 2,051 0.7
Restructuring expense . . . . . . . . . . . . . 15,284 4.1 - 0.0 - 0.0
Write-off of goodwill . . . . . . . . . . . . . - 0.0 11,491 3.5 - 0.0
Amortization expense . . . . . . . . . . . . . 1,663 0.5 1,703 0.5 1,737 0.6
Other expense (income), net . . . . . . . . . . 11 0.0 1,378 0.4 (108) (0.0)
-------- ----- -------- ----- -------- -----
Operating income (loss) . . . . . . . . . . . 3,338 0.9 (18,511) (5.6) 15,411 5.4
Interest expense . . . . . . . . . . . . . . . 13,756 3.7 12,301 3.7 6,896 2.4
Discontinued public offering . . . . . . . . . 958 0.3 - 0.0 - 0.0
-------- ----- -------- ----- -------- -----
Income (loss) before income taxes
and extraordinary loss . . . . . . . . . . (11,376) (3.1) (30,812) (9.3) 8,515 3.0
Income tax expense (benefit) . . . . . . . . . (4,057) (1.1) (1,909) (0.6) 4,109 1.5
-------- ----- -------- ----- -------- -----
Income (loss) before extraordinary
loss . . . . . . . . . . . . . . . . . . . (7,319) (2.0) (28,903) (8.7) 4,406 1.5
Extraordinary loss, net . . . . . . . . . . . . - 0.0 1,993 0.6 - 0.0
-------- ----- -------- ----- -------- -----
Net income (loss) . . . . . . . . . . . . . . . $ (7,319) (2.0)% $(30,896) (9.3)% $ 4,406 1.5%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</TABLE>
19
<PAGE>
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
NET SALES were $372.9 million for the year ended December 31, 1997,
representing an increase of $41.6 million, or 12.6%, over net sales of $331.2
million for the year ended December 31, 1996. Excluding RTS, "same store" sales
increased $25.5 million or 7.7% over 1996. Revenues from the Company's DLG
increased by $21.7 million or 15.5% over 1996 and "same store" revenues at the
DLG increased $5.5 million despite a revenue decrease in the Company's storage
and retrieval products from the previous year. Revenues from the Company's SLG
increased $22.6 million or 48.2% over 1996 with license revenues increasing 128%
and service revenues increasing 46%. These increases reflect the continuing
success of the Company's WMS product and the significant services provided to
convert the WMS software for use in foreign languages. These increases were
offset in part by a $2.6 million decrease at the CPG due to a depressed order
backlog entering 1997.
NEW ORDER BOOKINGS were $381.7 million for 1997, an increase of $65.4
million or 20.7% from 1996. For each of the three operating groups, 1997
bookings reflect improvements over 1996. Bookings at the DLG and CPG were
particularly strong, up 29.5% and 16.9%, respectively, over 1996. CPG increases
are attributable to numerous new and enhanced products introduced in late 1996,
cycle-time reductions and improved world-wide sales coverage resulting in record
bookings in terms of dollars and units. RTS contributed $19.0 million to the
overall growth in bookings, while "same store" bookings at the DLG increased
15.6%.
The Company realized a $7.6 million increase in consolidated backlog
at year-end 1997 compared to year-end 1996. An increase of $15.0 million at the
DLG was offset by decreases of $6.4 million and $1.0 million at the SLG and CPG,
respectively. Increases at the DLG are primarily attributable to record 1997
bookings. Decreases at the SLG are attributable to a 48.2% growth rate for sales
offset by a moderate 8.0% growth in bookings. Decreases in CPG backlog are
attributable to management initiatives to improve engineering productivity and
reduce project cycle times. The Company believes that the successful
implementation of these initiatives should continue to result in a reduction in
backlog relative to historical measures.
GROSS PROFIT was $93.8 million in 1997, an increase of $18.8 million,
or 25.1% over $75.0 million of gross profit in 1996. The gross profit margin,
as a percentage of sales, increased to 25.2% from 22.7% in 1996. Excluding the
effects of the first-time inclusion of RTS, gross profit increased $13.9 million
and as a percentage of sales, was 24.9% or 2.2 percentage points above 1996
levels. 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 described below, "same store" gross profit for 1997 was
$91.1 million, or 25.5% of sales. This represents an increase of 21.5% and 2.8
percentage points, as a percent of sales, over 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. "Same
store" margins excluding the one-time asset write-down and the other
non-recurring charges at the DLG increased $5.4 million or 22.2% over 1996 due
primarily to increased volume combined with continuing engineering and
productivity gains at Buschman. Gross profit was significantly improved at the
SLG, which realized an increase of 56.5% over 1996 as a result of increased
volume and slightly improved margins as a percent of sales. At the CPG, gross
profit as a percentage of sales increased from 23.2% in 1996 to 24.4% in 1997.
While no assurance may be made with respect to future productivity
performance, the Company believes the recent productivity gains at Buschman are
sustainable and may be further improved. The ability of the Company to increase
productivity performance depends primarily upon (i) the ability of White to
realize the benefits of restructuring efforts and organizational changes, (ii)
the utilization of additional capacity at Alvey and Busse and (iii) the ability
to hire and retain critical engineering resources.
20
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $64.5 million in
1997, representing an increase of $3.0 million, or 4.9% over $61.5 million of
such expenses in 1996. As a percentage of sales, selling, general and
administrative (SG&A) expenses decreased to 17.3% in 1997 from 18.6% in 1996.
Excluding RTS, "same store" SG&A increased by $58,000 from 1996, and as a
percentage of sales, was 17.2% or 1.4 percentage points lower than 1996. Lower
charges for annual bonus and profit sharing expense combined with favorable
impacts from the June 1997 restructuring were offset by increased staffing,
travel and incentives to support higher sales volumes.
RESEARCH AND DEVELOPMENT EXPENSES were $9.1 million for 1997,
representing an increase of $4.3 million or 88.9%, compared to $4.8 million in
1996. This increase is primarily the result of increased development activities
in the SLG to support continuing growth in the WMS and TMS markets, 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 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 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.
OTHER EXPENSE (INCOME), NET was expense of $11,000 in 1997, compared
to expense of $1.4 million in 1996. This improvement of $1.4 million is
primarily attributable to a one-time charge related to the termination of a
management agreement in 1996. (See Note 12 to the Consolidated Financial
Statements for further discussion.)
OPERATING INCOME (LOSS) improved to income of $3.3 million in 1997
from a loss of $18.5 million in 1996. As a percentage of net sales, operating
income increased to 0.9% in 1997 from (5.6%) in 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 was $20.9 million. Additionally,
excluding non-recurring charges of $26.3 million resulting from the $12.7
million write-off of purchased in-process research and development costs
associated with the acquisitions of Weseley and RTS, an $11.5 million write-off
of goodwill, the $1.4 million expense associated with the termination of a
consulting agreement and the $0.7 million related to the write-off of
capitalized software costs (See Note 2 to the Consolidated Financial Statements
for further discussion), 1996 operating income was $7.8 million. Operating
income in 1997, after exclusions, represents an increase of $13.1 million, or
169%, compared to operating income after exclusions in 1996. As a percentage of
sales, and excluding the non-recurring charges, operating income increased to
5.6% in 1997 compared to 2.3% in 1996. The increase in operating income
reflects the various factors described above.
21
<PAGE>
DISCONTINUED PUBLIC OFFERING was $958,000 in 1997 compared to $0 in
1996. In the fourth quarter of 1997, legal, accounting and various other
charges related to a planned initial public offering of common stock by the SLG
were charged to income as the Company decided not to proceed with the initial
public offering at this time. (See Note 4 to the Consolidated Financial
Statements.)
INTEREST EXPENSE was $13.8 million in 1997 representing an increase
of $1.5 million, or 11.8%, from $12.3 million in 1996. This increase
reflects the issuance of the Company's $100 million Senior Subordinated Notes
on January 24, 1996, the higher interest rate on these notes for an
additional month in 1997 as compared to 1996, 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 BENEFIT was $4.1 million in 1997, representing an increase
of $2.1 million from $1.9 million in 1996. The related effective income tax
rate increased to 35.7% in 1997 from 6.2% in 1996, primarily as a result of the
absence of the $25.5 million of nondeductible expenses related to the
amortization and write-off of goodwill and the write-off of purchased in-process
research and development costs incurred in 1996.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31,
1995
NET SALES were $331.2 million for the year ended December 31, 1996,
representing an increase of $43.2 million, or 15.0%, over net sales of $288.0
million for the year ended December 31, 1995. Excluding Weseley and RTS, "same
store" sales increased $37.2 million or 12.9% over 1995 as sales increases were
realized at each of the Company's operating groups.
The most significant growth was produced by the CPG where sales
increased $22.1 million or 18.1% over 1995. This strong growth resulted from
the delivery of large in-process production and storage systems and the
continuing market demand for the Company's mid-range and high-speed palletizing
systems. Revenues from the Company's DLG increased $9.1 million or 6.2% over
1995 despite a revenue decrease in the Company's storage and retrieval products
from the prior year. Within the DLG, the demand for integrated and major
warehouse systems continued as revenues from these products increased $11.0
million or 12.8% over 1995. Revenues from the Company's SLG increased $6.7
million or 16.7% over 1995, attributable primarily to the inclusion of Weseley
and its TRACS* product line. However, the Company believes the overall revenue
growth of this group was adversely affected during 1996 as the Company was
presented with significant strategic opportunities that involved enhancing the
functionality of DMPLUS to address the needs of the retail apparel segment of
the WMS market. Accordingly, the Company deployed certain of its marketing,
development and implementation efforts to enter this significant market segment.
While the Company believes it has and will continue to realize the benefits from
these efforts, such efforts involved revising certain marketing processes and
devoting significant time to designing additional functionality, which
activities resulted in a delay in the recognition of license revenues during
this period with the results for the fourth quarter of 1996 being adversely
affected. Also during 1996, the Company substantially completed the migration
of TRACS* from a DOS-based application system to an open-systems, client/server
solution. The Company believes that some potential TRACS* customers may have
deferred licensing TRACS* during the first half of 1996 in anticipation of the
open systems, client/server release that became available in the second half of
1996. The Company further believes that many customers that deferred licensing
TRACS* in the first half of 1996 subsequently licensed TRACS* prior to year-end;
however, certain of these potential customers may have opted instead to purchase
competing TMS products rather than waiting for the completion of the migration
of TRACS* to an open systems, client/server system, thereby adversely affecting
TRACS* license fees in 1996. In addition, hardware revenues within the SLG
decreased $4.9 million from 1995 as a significant one-time purchase by a single
customer in 1995 did not repeat in 1996. Furthermore, one strategy of the SLG
is to grow license and maintenance revenues through the increased usage of
third party implementation services. To the extent these efforts are
successful, hardware revenues will continue to decline as a percentage of
revenues.
New order bookings were $316.3 million for 1996, a decrease of $2.6
million or 0.8% from
22
<PAGE>
record levels in 1995. This decrease is primarily attributable to the CPG and,
in particular, to Alvey where new order bookings decreased $20.2 million from
1995 record bookings of $125.5 million. This decrease generally reflects a
reduction in the amount of major in-process production and storage systems
booked in 1995 but not repeated in 1996. The lack of new orders is attributable
to customer-driven delays on new projects with existing customers and the loss
of a potential new customer to competition. The Company believes that firm
contracts for these previously delayed projects will be awarded during 1997.
Despite the decrease in year-over-year bookings at Alvey and on a consolidated
basis, 1996 bookings were 14.4% and 17.8% above 1994 levels, respectively.
The slight year-over-year decrease in bookings, combined with the
significant increase in sales, has resulted in a $7.7 million decrease in the
consolidated backlog at year-end 1996 compared to year-end 1995. This decrease
is entirely attributable to the CPG as backlog for the other groups increased
approximately $16.1 million. The decrease in the backlog of the CPG can be
explained by the shortfall in new orders and the significant increase in sales.
Portions of the CPG sales increase and resulting decrease in backlog are
attributable to management initiatives undertaken during 1996 to improve
engineering productivity and reduce project cycle times. The Company believes
that the successful implementation of these initiatives should result in a
reduction in backlog relative to historical measures.
GROSS PROFIT was $75.0 million in 1996, an increase of $4.3 million,
or 6.1% over $70.7 million of gross profit in 1995. The gross profit margin, as
a percentage of sales, decreased to 22.7% from 24.6% in 1995. Excluding the
effects of the first-time inclusion of Weseley, gross profit decreased $683,000,
or 1.0% and, as a percentage of sales, was 21.5% or 3.1 percentage points below
1995 levels. Gross profit, in both dollars and as a percentage of sales, was
adversely affected at three of the Company's manufacturing operations, as
project overruns were incurred due to (i) the cost of outsourcing production,
the use of temporary facilities, overtime premiums and production
inefficiencies, all due to a lack of capacity and over-committed resources, (ii)
the implementation of first-time product applications and (iii) significant
increases in start-up and commissioning efforts resulting from the preceding
items (i) and (ii). These overruns were partially offset by continuing
engineering and manufacturing productivity gains at Buschman where gross profit
increased $5.3 million and 3.3 percentage points over 1995 and 10.0 percentage
points over 1994 results. Management believes that the recent completion of two
new production facilities, the addition of new equipment and resources, the
integration of various systems and processes, the management reorganization at
White, the operational focus to result from the creation of distinct operating
groups and the productivity and engineering programs initiated during 1996
should produce manufacturing efficiencies, productivity gains and eliminate or
greatly reduce the project overruns incurred during 1996.
Gross profit from the SLG increased $5.3 million or 42.5% over 1995.
Although the first-time inclusion of Weseley accounted for the largest portion
of this increase, gross profit margins also increased at MFA despite the
reduction in hardware revenues discussed above. These margin gains were
achieved through engineering productivity improvements and volume increases in
higher-margin license fees and services. Additional growth in 1996 gross
margins was sacrificed for long-term gains as the Company deployed a number of
its product implementation teams to perform pre-contract services related to
changes in the marketing programs and the development efforts associated with
pursuing and acquiring license agreements in the retail apparel market, as
discussed above. As a result, license fee revenues resulting from these efforts
have not been fully recognized. As costs were incurred without the full benefit
of matching revenues, management estimates that gross profit in 1996 was
adversely affected by approximately $1.0 million. Also during 1996, the Company
installed the first release of its TRACS* client/server software product as it
migrated TRACS* from its earlier DOS-based version. Initial installations of
this new version of TRACS* required greater implementation resources and costs
than previously associated with the sale and implementation of earlier versions
of TRACS*. Furthermore, the significant increase in the number of DMPLUS and
TRACS* installations has resulted in, and the Company believes will continue to
result in, an increasing demand for software maintenance and support contracts.
To meet this demand, the Company has invested significantly in staffing and
equipping dedicated product support groups. As revenue from these services
grow, management believes that gross profit margins will increase accordingly.
23
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $61.5 million in
1996, representing an increase of $9.8 million, or 19.1% over $51.6 million of
such expenses in 1995. As a percentage of sales, selling, general and
administrative (SG&A) expenses increased to 18.6% in 1996 compared to 17.9% in
1995. Excluding Weseley, where due to the nature of its business SG&A is
significantly higher as a percentage of sales, the "same store" increase in SG&A
was $5.7 million or a 11.1% increase over 1995. As a percentage of sales, "same
store" SG&A was 17.6% or 0.3 percentage points lower than 1995. The most
significant year-over-year increase, in both dollars and as a percentage of
sales, was at MFA and is attributable to the addition of sales and marketing
personnel and professional staff to support current product demand and to
generate future growth in licensee fee revenue and the international marketing
of the DMPLUS and TRACS* products. SG&A expenses of the DLG increased $2.3
million or 10.9% over 1995 expenses as a result of the Company's investment to
further develop its "Design and Build" capabilities, improve its project
concepting and estimating resources and open a direct sales office to replace an
independent distributor.
WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT was $12.7
million in 1996 compared to $0 in 1995. In connection with the acquisitions of
Weseley and RTS during 1996, $11.7 million and $1.0 million, respectively, of
the related purchase price was allocated to purchased in-process research and
development costs at the dates of acquisition and immediately expensed as
write-offs of purchased research and development costs. (See Note 3 to the
Consolidated Financial Statements for further discussion.)
RESEARCH AND DEVELOPMENT EXPENSES were $4.8 million for 1996,
representing an increase of $2.7 million, or 134%, compared to $2.1 million in
1995. Of this increase, $976,000 is attributable to the inclusion of Weseley in
1996. In addition, substantial increases were recorded (i) at MFA as it
continues to develop and broaden the functionality of its DMPLUS software
product and improve the interface between DMPLUS and TRACS*, (ii) at Buschman as
it develops new conveyor products and applications and (iii) at Busse for the
development of enhanced palletizer and depalletizer offerings.
WRITE-OFF OF GOODWILL was $11.5 million in 1996 compared to $0 in
1995. In 1996, remaining goodwill of one of the Company's subsidiaries was
written-off as it was considered to be impaired due to historical losses and
uncertainty regarding future income and cash flows. (See Note 6 to the
Consolidated Financial Statements for further discussion.)
OTHER EXPENSE (INCOME), NET was $1.4 million of expense in 1996,
representing an increase of $1.5 million over 1995. This increase is almost
entirely attributable to the $1.4 million charge associated with the first
quarter termination of a consulting agreement in connection with the refinancing
and recapitalization transactions, described below in the section entitled
"Liquidity and Capital Resources".
OPERATING INCOME (LOSS) decreased to a loss of $18.5 million in 1996
from income of $15.4 million in 1995. As a percentage of net sales, operating
income decreased to (5.6%) in 1996 from 5.4% in 1995. However, excluding
non-recurring charges of $26.3 million resulting from the $12.7 million
write-off of purchased in-process research and development costs associated with
the acquisitions of Weseley and RTS, an $11.5 million write-off of goodwill,
the $1.4 million expense associated with the termination of a consulting
agreement and the $0.7 million related to the write-off of capitalized software
costs (See Note 2 to the Consolidated Financial Statements for further
discussion), operating income would have been $7.8 million, representing a
decrease of $7.6 million compared to 1995 operating income. As a percentage of
sales, and excluding the non-recurring charges described above, operating income
decreased to 2.3% in 1996 compared to 5.4% for 1995. This decrease is a result
of the increases in SG&A and R&D exceeding the growth in gross profit, as
described above.
INTEREST EXPENSE increased to $12.3 million in 1996, representing an
increase of $5.4 million, or 78.4%, from $6.9 million in 1995. This increase
reflects the higher level of borrowings resulting from the issuance of the $100
million of 11.375% Senior Subordinated Notes (the "Debt Offering") in January
1996, the higher interest rate on these notes and the $836,000 increase in
non-cash amortization charges relating to the debt
24
<PAGE>
issuance costs associated with the Debt Offering.
INCOME TAX EXPENSE (BENEFIT) was a benefit of $1.9 million in 1996,
representing a change of $6.0 million from an expense of $4.1 million in 1995.
The related effective income tax rate decreased to 6.2% in 1996 from 48.3% in
1995, primarily as a result of the $25.5 million of nondeductible expenses
related to the amortization and write-off of goodwill and the write-off of
purchased in-process research and development.
EXTRAORDINARY LOSS, NET was $2.0 million in 1996 and there was no
extraordinary loss in 1995. This extraordinary loss represents the write-off
of debt issuance cost and related debt prepayment penalties, net of tax,
resulting from the early extinguishment of the Company's debt as part of the
recapitalization. (See the "Liquidity and Capital Resources" section.)
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the three years ended December 31, 1997, the
Company generated $28.7 million of cash from operations, which combined with
funds from the revolving line of credit has been sufficient to fund the
Company's ongoing working capital, capital expenditures and debt service
requirements. As the Company's business has expanded internally and through
acquisitions during this period, increases in working capital requirements
(primarily related to accounts receivable and inventory) were significantly
offset by funds the Company received from its customers in the form of deposits
and progress billings and enhanced cash management techniques.
CASH PROVIDED (USED) BY OPERATIONS. Cash flows from (for) operations
were ($1.5) million, $11.3 million and $18.9 million for the years ended
December 31, 1997, 1996 and 1995, respectively. The $12.8 million increase in
the use of cash during 1997 is primarily attributable to an interest payment of
$5.7 million on the $100 million Senior Subordinated Notes, the payment of $4.5
million associated with the previously described 1997 restructuring and the
payment of a $625,000 stay bonus at Weseley, all of which occurred in 1997, but
were not present in 1996. Improved management of working capital experienced in
recent years has leveled in 1997, eliminating initial increases to cash flow.
Additionally, expenditures for bonuses, profit sharing and project costs related
to 1996 accruals had a detrimental impact on cash flow. Offsetting these
decreases, earnings improvements 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.
LEWISTON OPERATION. In connection with the acquisition of Buschman in
1992, the Company made a decision to close Buschman's carousel manufacturing
plant in Lewiston, Maine. In connection with the acquisition of White in
December 1993, the Company was ordered by the Federal Trade Commission to hold
Buschman's Lewiston operation separate and to find a suitable buyer for the
business. In the course of pursuing a buyer and pursuant to the FTC order, the
Company was required to fund the Lewiston operation and, as a result, has
incurred expenditures of $421,000, $588,000, and $2.3 million for the years
ended December 31, 1997, 1996 and 1995, respectively. The Lewiston operation was
divested on July 31, 1995, at which time the Company agreed to assist in funding
the operation through July 31, 1997. As of December 31, 1997, no remaining
expenditures to assist in the funding are expected. Upon its initial decision to
close the Lewiston plant, the Company accrued losses of $1.4 million at
December 31, 1992, net of applicable tax benefits, with respect to plant closure
costs and the write-off of related assets, with an offsetting charge to
goodwill. As a result of the Federal Trade Commission intervention, all
subsequent losses, including those anticipated through ultimate disposal of the
facility, were charged to earnings as an extraordinary loss, net of tax
benefits, in 1993.
CAPITAL EXPENDITURES. Capital expenditures, including capitalized
software development costs, for the years ended December 31, 1997, 1996 and
1995 were approximately $6.0 million, $11.6 million and $4.5 million,
respectively. These expenditures were used primarily to finance a new facility
for Alvey (1995 and 1996), plant expansion at Busse (1995 and 1996), software
development, computer systems and equipment at
25
<PAGE>
McHugh (1995) and normal recurring replacements of machinery and equipment.
RESEARCH AND DEVELOPMENT COSTS. As described in Note 3 to the
Company's Consolidated Financial Statements, approximately $11.7 million of the
Weseley purchase price and $1.0 million of the RTS purchase price were allocated
to purchased in-process research and development and charged to expense in 1996.
The purchased research and development at Weseley relates to the TRACS* Version
3.0.
ACQUISITIONS AND DIVESTITURES. The Company expended $19.0 million of
cash for the acquisitions of Weseley and RTS in 1996. These acquisitions were
financed primarily with proceeds from the Debt Offering.
DEBT AND EQUITY INFUSIONS. On January 3, 1995, the Company issued $2.0
million principal amount of 11.95% Unsecured Subordinated Notes to certain
shareholders of Pinnacle. The 11.95% Unsecured Subordinated Notes were repaid
in January 1996 with a portion of the proceeds received in the Debt Offering
discussed below.
DEBT OFFERING AND RECAPITALIZATION OF PINNACLE. Concurrently with the
Debt Offering in January 1996, 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 December 31, 1997, there was $6.5
million outstanding 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, 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 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 from Alvey and Alvey's operating
subsidiaries, to satisfy cash requirements relative to these preferred shares.
USE OF PROCEEDS. The Company applied the net proceeds of the Debt
Offering in the following manner: (i) approximately $46.2 million was used to
repay the Company's outstanding senior indebtedness; (ii) approximately $2.3
million was used to repay the Company's outstanding 11.95% 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
26
<PAGE>
consummate the Weseley acquisition in January 1996.
ONGOING CASH FLOWS FROM OPERATIONS. Based on its ability to generate
funds from operations, the Company believes that it will have sufficient funds
available to meet its currently anticipated operating, debt service and capital
expenditure requirements with minimal additional borrowings. In addition, the
Company expects to continue to evaluate and consider business acquisition
candidates, 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 $8.7
million of these charges require future cash payments. It is anticipated that
approximately $4.7 million of these payments will occur in 1998 and $1.6 million
in 1999, with the remaining payments in 2000 or beyond. The Company believes
that its funds from operations, together with available funds under the
Revolving Credit Facility, will be sufficient to meet its capital requirements
for the forseeable future. The Company's belief regarding its capital
requirements is forward-looking and involves risks and uncertainties that could
significantly impact the Company's expected liquidity requirements in the short
and long term.
BACKLOG. As of December 31, 1997, the Company had a backlog of $143.7
million, as compared to $136.1 million as of December 31, 1996. 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 substantially all orders in backlog at
December 31, 1997 will be recognized as revenue within one year.
YEAR 2000. The Company utilizes computer information systems to
internally record and track information, as well as interact with customers,
suppliers, financial institutions and other organizations. The Company also
sells software through the SLG and incorporates software and computerized
functions in products throughout the Company. Management has preliminarily
assessed risks and costs related to addressing Year 2000 issues as they pertain
to the Company and its information systems. Based on this assessment,
management does not believe that the modification of the Company's systems to
address such issues will have a material impact on the Company's financial
position or results of operations. However, there are numerous uncertainties
related to addressing Year 2000 issues, including actual implementation of
measures to address these issues, impact of outside parties appropriately
addressing these issues and other factors, some of which may be out of the
Company's control, and all of which may cause results to be different than
currently anticipated by Management.
SEASONALITY AND QUARTERLY RESULTS
The price of certain of the Company's systems can exceed several
million dollars, and therefore a relatively small number of orders can
constitute a significant percentage of the Company's revenues in any one period.
Similarly, a relatively small reduction in the number of large orders can have a
material impact on the Company's revenues in any one quarter or year. The timing
of shipments and product revenue recognition could affect the Company's
operating results for a particular period. In addition, most of the Company's
revenues come from fixed price contracts. To the extent that the original cost
estimates prove to be inaccurate, profitability from a particular contract may
be adversely affected. As a result, the Company's operating results can vary
significantly from quarter to quarter, and the financial results for any
particular quarter are not necessarily indicative of results in any subsequent
quarter or fiscal year.
EFFECT OF INFLATION
Fluctuations in commodity prices may periodically affect the results
of the Company's operations. However, inflation has not had a material effect on
the Company's business or results of operations.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this
item are included on pages F-1 through F-24 hereof.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning Alvey's
directors and executive officers.
<TABLE>
<CAPTION>
YEARS IN
NAME AGE INDUSTRY POSITION WITH ALVEY
- ---- --- -------- -------------------
<S> <C> <C> <C>
Stephen J. O'Neill (1) 56 27 President, Chief Executive
Officer and Director
James A. Sharp 50 14 Senior Vice President,
Secretary, Chief Financial
Officer and Assistant
Treasurer
William R. Michaels (1) 63 23 Chairman of the Board
Christopher C. Cole 42 8 Director
Frederick R. Ulrich, Jr. (1) 54 - Director
Prakash A. Melwani (1) 39 - Director
Daniel S. O'Connell (2) 44 - Director
Charles A. Dill (2) 58 - Director
</TABLE>
28
<PAGE>
The following table sets forth certain information concerning
executive officers and directors of Pinnacle and the Company. Each of Alvey and
its five subsidiaries are managed by Pinnacle.
<TABLE>
<CAPTION>
YEARS IN PRINCIPAL POSITION IN
NAME AGE INDUSTRY PINNACLE ORGANIZATION
- ---- --- -------- ---------------------
<S> <C> <C> <C>
Stephen J. O'Neill (1) 56 27 President, Chief Executive
Officer and Director, each
of Alvey and Pinnacle
Christopher C. Cole 42 8 Senior Executive Vice
President, Chief Operating
Officer and Director of
Pinnacle; Director of
Alvey, Chief Executive
Officer and Chairman of
Buschman
James A. Sharp 50 14 Executive Vice President, Chief
Financial Officer,
Treasurer and Secretary of
Pinnacle; Senior Vice
President, Secretary,
Chief Financial Officer
and Assistant Treasurer of
Alvey
Ritch J. Durheim 50 26 Executive Vice President of
Pinnacle, President and
Chief Executive Officer of
McHugh
William R. Michaels (1) 63 23 Chairman of the Board and
Director, both of Alvey
and Pinnacle
Frederick R. Ulrich, Jr. (1) 54 - Director of Alvey and Pinnacle
Prakash A. Melwani (1) 39 - Director of Alvey and Pinnacle
Daniel S. O'Connell (2) 44 - Director of Alvey and Pinnacle
Charles A. Dill (2) 58 - Director of Alvey and Pinnacle
</TABLE>
- -----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
STEPHEN J. O'NEILL has served as Chief Executive Officer and Director
of both Alvey and Pinnacle since June 1997; as President of Pinnacle since June
1997; as President of Alvey since November 1992; as Executive Vice President of
Pinnacle from September 1988 until June 1997; as Vice President and Director of
McHugh since May 1989; as Director of Weseley and Busse since 1996; and as
Director for each of the other subsidiaries of the Company since June 1997.
Previously, Mr. O'Neill served as Senior Vice President of Alvey from
September 1988 to November 1992. Prior to joining Alvey, Mr. O'Neill served as
a Vice President of Rapistan Corp. from April 1986 to September 1988.
Mr. O'Neill earned a B.S. degree in Electrical Engineering from Rose Polytechnic
Institute. Mr. O'Neill currently serves on the board of directors of AAIM, a
Quality Institute and Education Center in Missouri.
CHRISTOPHER C. COLE has served as Senior Executive Vice President,
Chief Operating Officer and Director of Pinnacle since June 1997; as Chief
Executive Officer of Buschman since March 1994; as Executive Vice President of
Buschman from March 1994 until June 1997; as Director of Buschman since February
1996; as Chief Executive Officer of White since February 1998; as Executive Vice
President of White from October 1996 through February 1998; as Director of White
since October 1996; as Secretary of White since June 1997; as Executive Vice
President of Pinnacle from 1994 until June 1997; as Chief Executive Officer and
Director of RTS since its acquisition and as Director for each of the other
subsidiaries of the Company since June 1997. Previously, Mr. Cole served as
President of Buschman from March 1994 to January 1997. Prior to joining
Buschman, Mr. Cole served in a variety of executive positions at Cincinnati
Milacron, Inc. since 1979. Mr. Cole graduated from Wesleyan University with a
B.A. degree and received a M.B.A. degree from Harvard University. Mr. Cole has
served on the board of directors of the Cincinnati chapter of the American Red
Cross since 1989 and is currently a member of the executive committee of such
board.
JAMES A. SHARP has served as Secretary and Senior Vice President of
Alvey since June 1997; as Secretary and Executive Vice President of Pinnacle
since June 1997; as Chief Financial Officer of Alvey since
29
<PAGE>
April 1994; as Chief Financial Officer and Treasurer of Pinnacle since April
1994; as Assistant Treasurer of Alvey since April 1994; as Vice President and
Assistant Secretary of Alvey from April 1994 until June 1997; as Vice President
and Assistant Secretary of Pinnacle from April 1994 through June 1997; as Chief
Financial Officer of each of Alvey's subsidiaries; as Treasurer of Busse, White
and Weseley since June 1997; as Secretary and Senior Vice President of Buschman
since June 1997; as Vice President of RTS from June 1997 to February 1998 and as
director of Weseley since February 1998; as Director of McHugh from June 1997 to
February 1998 and as Director of Weseley since February 1998. Previously,
Mr. Sharp held various accounting and financial positions with Pinnacle and its
subsidiaries, including Controller and Treasurer of Alvey, since 1983. Mr. Sharp
graduated from Southern Illinois University with a B.S. degree in Accounting and
is a Certified Public Accountant in Missouri.
RITCH J. DURHEIM has served as Chief Executive Officer of McHugh since
May 1995; as President of McHugh since June 1997 and from May 1995 to December
1996; as Director of McHugh since May 1989; as Executive Vice President of
Pinnacle since May 1995; as President of Weseley since July 1997; as Director of
Weseley since January 1996; as Senior Vice President of Weseley from January
1996 until July 1997; Director of McHugh UK Ltd. and McHugh NV since October
1996 and as Director of Busse, RTS and White since June 1997. From April 1994
to May 1995, Mr. Durheim served as President and Chief Operating Officer of
McHugh . Prior to 1994, Mr. Durheim held various positions with McHugh since
1977. Mr. Durheim graduated from Marquette University with a B.S. degree.
WILLIAM R. MICHAELS has served as Chairman of the Board of both Alvey
and Pinnacle since September 1988; as Chief Executive Officer of Alvey from 1988
until June 1997; as President and Chief Executive Officer of Pinnacle from 1988
until June 1997; and as Chairman of the Board and Director of each of Alvey's
subsidiaries until June 1997. From 1984 to 1988, Mr. Michaels served as the
President and Chief Executive Officer of Rapistan Corp., a manufacturer of
distribution conveyor systems. Mr. Michaels is Vice Chairman of the Board of
Governors of the Material Handling Institute of America, the materials handling
industry's trade association. In addition to his Pinnacle duties, from
July 1989 to January 1992 Mr. Michaels was the Chairman of the Board of
Holophane Company, Inc., a Columbus, Ohio company in the lighting industry.
Mr. Michaels continues as a director of Holophane. Mr. Michaels is a graduate
of the State University of New York.
FREDERICK R. ULRICH, JR. has been a Director of Alvey and Pinnacle
since August 1988. Mr. Ulrich has served as Chief Executive Officer of
Buttonwood Capital, Inc. since 1992 and as Chief Executive Officer of Mammoth
Capital, Inc. since 1996. Previously, Mr. Ulrich served as Chairman of the
Board and Chief Executive Officer of Raebarn Corporation from 1988 to 1995. Mr.
Ulrich is a director of Paul Sebastian, Incorporated and RC Distribution, Inc.
Mr. Ulrich is a graduate of the United States Military Academy and holds a
M.B.A. degree from Harvard University.
PRAKASH A. MELWANI has served as a director of Alvey and Pinnacle
since January 1996. He is a Managing Director of Vestar Capital Partners
("Vestar"), an affiliate of which is a significant stockholder of Pinnacle and
with whom Mr. Melwani has been associated since its founding in 1988.
Mr. Melwani is a director of Argo-Tech Corporation and International AirParts
Corporation and a member of the Advisory Board of Insight Communications
Company, L.P. Mr. Melwani graduated from Cambridge University with a B.A.
degree and received a M.B.A. degree from Harvard University.
DANIEL S. O'CONNELL has served as a director of Alvey and Pinnacle
since January 1996. Mr. O'Connell has served as the Chief Executive Officer of
Vestar since its founding in 1988. Mr. O'Connell also serves as a Director of
Advanced Organics, Inc., Aearo Corporation, Clark-Schwebel, Inc., Remington
Products Corporation, L.L.C., Reid Plastics Holdings, Inc., Sun Apparel, Inc.
and Russell-Stanley Corporation. Mr. O'Connell graduated from Brown University
with an A.B. degree and Yale University with an M.P.P.M. degree.
30
<PAGE>
CHARLES A. DILL became a director of Alvey and Pinnacle in February
1996. Mr. Dill is currently a General Partner in Gateway Associates, L.P., a
leading St. Louis-based equity management partnership. Previously, from April
1991 through April 1995, Mr. Dill was President and, from October 1992 through
April 1995, Chief Executive Officer of Bridge Information Systems, Inc. (a
leading provider of on-line financial information and databases to institutional
securities markets). From February 1988 to September 1990, he was President and
a Director of AVX Corporation (a ceramic electronic devices manufacturer). Mr.
Dill serves as a director of Stifel Financial, a securities brokerage and
investment banking firm; of Zoltek, a specialty producer of carbon fiber
composite materials; of Transact Technologies, a manufacturer of
transaction-based printers for point-of-sale terminals and of D. T. Industries,
a manufacturer of automated production equipment. Mr. Dill graduated from Yale
University with a B.S. degree in mechanical engineering and received a M.B.A.
degree from Harvard University.
31
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth, for the three years ended December 31,
1997, the earned compensation of the Chief Executive Officer (both current and
former) and the four other most highly compensated executive officers of Alvey
(the "Named Executive Officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------
ANNUAL COMPENSATION
--------------------------------------------------
COMPENSATION
AWARDS -
OTHER ANNUAL STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (a) COMPENSATION (b) (# OF SHARES) (c)
- ------------------------------------------------- ----- --------- --------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
WILLIAM R. MICHAELS
Chairman of Pinnacle and Alvey 1997 $ 333,550 $ - $ 46,837 -
1996 317,650 - 47,062 -
1995 302,500 301,200 - -
STEPHEN J. O'NEILL
President and Chief Executive 1997 253,625 180,000 - -
Officer of Pinnacle and Alvey 1996 205,675 100,000 - -
1995 191,750 187,040 - -
CHRISTOPHER C. COLE
Senior Executive Vice President 1997 236,958 180,000 - -
and Chief Operating Officer of 1996 194,250 168,000 - -
Pinnacle, Chief Executive Officer of 1995 185,000 216,800 75,268 -
Buschman
RITCH J. DURHEIM
Chief Executive Officer of McHugh 1997 211,250 30,000 33,297 -
1996 194,500 233,250 - 9,000
1995 173,750 287,022 - -
JAMES A. SHARP
Executive Vice President, Chief 1997 157,500 125,000 - -
Financial Officer, Treasurer and 1996 150,000 - 18,982 4,000
Secretary of Pinnacle; Senior Vice 1995 127,500 125,300 - 1,400
President, Secretary and Chief Financial
Officer of Alvey
- ------------------
</TABLE>
(a) Reflects amount earned in 1997, 1996 and 1995, respectively. All amounts
are paid in subsequent years, including portions which are deferred subject
to continued employment.
(b) Perquisites or other personal benefits which in the aggregate were less
than the lesser of $50,000 and 10% of an officer's annual salary and bonus
in 1997, 1996 and 1995, respectively, have been omitted. When listed,
these items include costs for insurance, auto, accounting fees, club dues,
non-qualified profit sharing contributions and gross ups for income tax
purposes. The 1995 expense total for Mr. Cole includes amounts that were
reimbursed in 1997.
(c) The figures set forth in this column represent the number of options
granted in 1997, 1996 and 1995, respectively, to purchase the Common Stock
of the Company's parent, Pinnacle.
32
<PAGE>
PENSION PLAN
The Company maintains 401(k) savings plans for virtually all employees
who meet certain eligibility requirements, except certain union employees who
participate in multi-employer pension plans. Under the plans, the employees may
defer receipt of a portion of their eligible compensation, with the Company
matching a defined percentage of the employees' deferral. The Company's matching
contributions were $801,000, $701,000, and $614,000 for the years ended 1997,
1996 and 1995, respectively. The Company may also elect to make discretionary
profit sharing contributions for virtually all employees, except those union
employees who participate in multi-employer pension plans.
EMPLOYMENT AGREEMENTS
On June 2, 1997, Alvey, Pinnacle and William R. Michaels entered into
a second amended and restated employment agreement pursuant to which
Mr. Michaels will serve as Chairman of the Board. The agreement entitles
Mr. Michaels to an automobile through March 1998; an annual bonus for 1997; and
club membership, disability, health insurance and other benefit plans provided
by Alvey and Pinnacle to their employees through December 31, 1997. The
agreement also provides for deferred compensation, whereby Pinnacle and Alvey
will pay to Mr. Michaels, for at least 10 years and during the remainder of his
life, an annual amount of $237,500 commencing January 31, 1998. In addition,
the agreement requires Pinnacle and Alvey to provide to Mr. Michaels a
$3,000,000 life insurance policy for the remainder of his lifetime.
On May 10, 1989, McHugh entered into an employment agreement with
Ritch Durheim. Pursuant to the agreement, Mr. Durheim serves as President and,
subsequently, Chief Executive Officer of McHugh for an annual base salary of
$77,400. The base salary will be reviewed annually to consider an upward
adjustment for each subsequent year. The agreement entitles Mr. Durheim to an
automobile allowance, club membership, an annual bonus, life, disability and
health insurance and to other benefit plans provided by McHugh to its other
employees. The agreement contains a non-disclosure and non-competition
provision which is effective for the term of Mr. Durheim's employment with
McHugh.
On June 27, 1995, Alvey entered into an amended and restated
employment agreement with Stephen J. O'Neill. Pursuant to the agreement,
Mr. O'Neill will continue to serve as President of Alvey at a base salary of
$191,750. His base salary will be reviewed annually to consider an upward
adjustment for each subsequent year. The agreement entitles Mr. O'Neill to an
automobile, club membership, an annual bonus, life, disability and health
insurance and to other benefit plans provided by Alvey to their other employees.
In addition, Alvey is obliged to provide a $1,000,000 life insurance policy for
Mr. O'Neill for the remainder of his lifetime, unless he voluntarily terminates
his employment with Alvey to accept a comparable position, at which time
Alvey's obligation to pay such premiums will cease.
On March 9, 1994, Buschman entered into an employment agreement with
Christopher C. Cole, pursuant to which Mr. Cole agreed to serve as President and
Chief Executive Officer of Buschman and Executive Vice President of Pinnacle at
a base annual salary of $175,000. Mr. Cole's base salary will be reviewed
annually to consider an upward adjustment for each subsequent year during the
term of the agreement. The agreement entitles Mr. Cole to an automobile, club
membership, an annual bonus, life, disability and health insurance,
reimbursement of legal and accounting services and to other benefit plans
provided by Buschman to its other employees. The agreement with Mr. Cole
contains a non-disclosure and non-competition provision which is effective for
the term of his employment with Buschman. Upon execution of the agreement,
Mr. Cole was granted an option to purchase 18,700 shares of Pinnacle Common
Stock at an exercise price of $31.28 per share.
BOARD OF DIRECTORS COMMITTEES AND COMPENSATION
Alvey and Pinnacle each have a Compensation Committee and an Audit
Committee. During 1997, Alvey and Pinnacle paid to non-employee directors,
except directors elected or nominated by certain
33
<PAGE>
significant investors in Pinnacle, an annual fee of $25,000, and reimbursed each
of its directors for their out-of-pocket expenses incurred in connection with
serving as a director. Directors who are employed by Pinnacle or the Company do
not receive a fee for serving as directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pinnacle owns 100% of the outstanding capital stock of Alvey. The following
table sets forth certain information regarding the beneficial ownership of
Pinnacle Common Stock as of March 12, 1998 (i) by each person who is known by
the Company to own beneficially more than 5% of Pinnacle Common Stock, (ii) by
each of the directors of Alvey and Pinnacle, (iii) by each Named Executive
Officer and (iv) by all directors and executive officers as a group.
<TABLE>
<CAPTION>
PINNACLE COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2) FULLY-DILUTED
- -------------------------------------------
SHARES OWNED PERCENTAGE (3) PERCENTAGE (4)
------------ -------------- --------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
- --------------------------------
Prakash A. Melwani (5)(6) . . . . . . . . . . . . . . . . . . . . . . 179,252 27.2% 22.3%
Daniel S. O'Connell (5)(6). . . . . . . . . . . . . . . . . . . . . . 179,252 27.2 22.3
William R. Michaels (7) . . . . . . . . . . . . . . . . . . . . . . . 72,187 15.0 9.0
Frederick R. Ulrich, Jr. (8). . . . . . . . . . . . . . . . . . . . . 27,517 5.7 3.4
Charles A. Dill (9) . . . . . . . . . . . . . . . . . . . . . . . . . 333 0.1 0
Christopher C. Cole (10). . . . . . . . . . . . . . . . . . . . . . . 20,000 4.0 2.5
Ritch J. Durheim (11) . . . . . . . . . . . . . . . . . . . . . . . . 6,740 1.4 0.8
Stephen J. O'Neill (12) . . . . . . . . . . . . . . . . . . . . . . . 48,902 10.2 6.1
James A. Sharp (13) . . . . . . . . . . . . . . . . . . . . . . . . . 9,160 1.9 1.1
OTHER BENEFICIAL OWNERS
- -----------------------
Vestar Equity Partners, L.P. (6)(14). . . . . . . . . . . . . . . . . 179,252 27.2 22.3
Chase Equity Associates,
A California Limited Partnership Limited Partnership (14)(15) . . . 57,617 10.7 7.2
Michael J. Tilton (16) . . . . . . . . . . . . . . . . . . . . . . . 47,170 9.8 5.9
Mark R. Allison (17). . . . . . . . . . . . . . . . . . . . . . . . . 33,678 7.0 4.2
All Executive Officers and Directors as a
Group (9 Persons). . . . . . . . . . . . . . . . . . . . . . . . . 364,091(18) 52.3 45.2
</TABLE>
- ------------
(1) Unless otherwise noted, the address of each of the foregoing is c/o
Pinnacle at 9301 Olive Blvd., St. Louis, Missouri 63132.
(2) Unless otherwise noted, sole voting and dispositive power are possessed
with respect to all shares shown.
(3) The percentages under the heading "Percentages" are based upon 480,149
shares of Pinnacle Common Stock outstanding and takes into account all
derivative securities held by such Beneficial Owner that are exercisable
for shares of Pinnacle Common Stock within 60 days.
(4) The percentages under the heading "Fully-Diluted Percentages" are based
upon 805,065 shares of Pinnacle Common Stock outstanding, which gives
effect to the exercise of outstanding (i) options exercisable within 60
days to purchase 54,024 shares of Pinnacle Common Stock and (ii) warrants
exercisable within 60 days to purchase 270,891 shares of Pinnacle Common
Stock.
(5) Includes 179,252 shares issuable upon exercise of warrants held by Vestar
Equity Partners, L.P., as to which Messrs. Melwani and O'Connell disclaim
beneficial ownership.
(6) Address is c/o Vestar Capital Partners, 245 Park Avenue, 41st Floor, New
York, New York 10167-4098.
(7) Includes 601 shares of Pinnacle Common Stock issuable upon exercise of
outstanding warrants.
(8) Includes 401 shares of Pinnacle Common Stock issuable upon exercise of
outstanding warrants. Includes the following number of
34
<PAGE>
shares held by or in trust for Mr. Ulrich's children: 705 shares of
Pinnacle Common Stock held by the Lauren T. Ulrich Trust '89;
706 shares of Pinnacle Common Stock held by the Farrell Ulrich
Trust '89; 700 shares of Pinnacle Common Stock held by the Frederick
Ulrich III Trust '92; and 505 shares of Pinnacle Common Stock held
by Amy C. Ulrich.
(9) Includes 333 shares of Pinnacle Common Stock issuable upon exercise of
outstanding options.
(10) Includes 18,700 shares of Pinnacle Common Stock issuable upon exercise of
outstanding options.
(11) Includes 235 shares of Pinnacle Common Stock issuable upon exercise of
outstanding warrants and 1,333 shares of Pinnacle Common Stock issuable
upon exercise of outstanding options.
(12) Includes 902 shares of Pinnacle Common Stock issuable upon exercise of
outstanding warrants.
(13) Includes 94 shares of Pinnacle Common Stock issuable upon exercise of
outstanding warrants and 4,067 shares of Pinnacle Common Stock issuable
upon exercise of outstanding options.
(14) All of such shares are issuable upon exercise of warrants.
(15) c/o Chase Venture Partners, 270 Park Avenue, New York, New York 10017.
(16) Includes 2,800 shares held by the Julie C. Tilton Trust and 2,800 shares
held by the Tracy L. Tilton Trust.
(17) Includes 501 shares of Pinnacle Common Stock issuable upon exercise of
outstanding warrants.
(18) The 179,252 shares of Pinnacle Common Stock issuable upon exercise of
warrants held by Vestar Equity Partners, L.P., as to which Messrs.
Melwani and O'Connell disclaim beneficial ownership, are counted once in
this total.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT AND REGISTRATION RIGHTS
In connection with the 1988 acquisition of Alvey by Pinnacle (the
"1988 Acquisition"), entities affiliated with Acadia (the "Acadia
Stockholders"), individuals affiliated with Raebarn Corporation (the "Raebarn
Stockholders"), certain management stockholders and Pinnacle entered into a
Stock Purchase and Stockholders Agreement which has been amended and restated
several times through the date hereof (the "Initial Stockholders Agreement"). In
January 1996, the Initial Stockholder Agreement was amended and restated again
pursuant to the Amended and Restated Stockholders Agreement by and among
Pinnacle, the Management Stockholders (as defined therein), the Raebarn
Stockholders (as defined therein) and the Investors (the "Amended and Restated
Stockholders Agreement").
The following is a summary of the Amended and Restated Stockholders
Agreement (certain terms used herein are defined therein):
VESTING OF MANAGEMENT STOCKHOLDER SHARES. Shares of Pinnacle Common
Stock issued to Management Stockholders (as defined in the Amended and Restated
Stockholders Agreement) vest in equal installments over a period generally
ranging between three and five years (depending on the terms set by the Board of
Directors at the time of issuance). Any shares of Pinnacle Common Stock held by
a Management Stockholder that are unvested at the time of death, permanent
disability, resignation or termination (for whatever reason) of such Management
Stockholder will remain unvested and will not vest; provided, however, that in
the event of the death or permanent disability of the holder, 50% of the shares
which are unvested at that time will become vested. In addition, all unvested
shares will become vested upon the acquisition of all of the outstanding shares
of Pinnacle by any third party or upon the sale of all of the assets of
Pinnacle.
REPURCHASE OF MANAGEMENT STOCKHOLDER SHARES. In the event of the
termination of any Management Stockholder's employment with Pinnacle, whether by
reason of death, permanent disability, termination for cause or without cause,
retirement or for any other reason, Pinnacle will have the right to repurchase
all or any portion of the unvested shares. To the extent that Pinnacle elects
not to repurchase all of the unvested shares held by a terminated Management
Stockholder, the other stockholders will have the right to
35
<PAGE>
purchase the remaining shares on a PRO RATA basis.
RESTRICTIONS ON TRANSFER; RIGHT OF FIRST REFUSAL. Unvested shares may
not be transferred under any circumstances. With respect to vested shares,
Pinnacle and, to the extent that Pinnacle fails to exercise its first refusal
right in full, the other Management Stockholders and Raebarn Stockholders, have
a right of first refusal if any Management Stockholder or Raebarn Stockholder
receives a bona fide offer from an independent unrelated third party that such
stockholder wishes to accept. Despite the general restrictions on transfers by
Management Stockholders and Raebarn Stockholders, transfers to affiliates,
officers, directors, certain family members or family trusts and pledges of the
shares to a bank as security for a loan used to buy the shares are expressly
permitted.
TAG-ALONG RIGHTS. The Amended and Restated Stockholders Agreement
provides that stockholders have a right to "tag along" upon the sale of Pinnacle
Common Stock or Pinnacle Warrants by any stockholder or holder of Pinnacle
Warrants prior to an initial public offering by Pinnacle and provides the
stockholders with "tag-along" rights with respect to a sale of a significant
amount of Pinnacle Common Stock or Pinnacle Warrants after an initial public
offering by Pinnacle. In addition, in the event any such sales would result in a
change of control of Pinnacle, the holders of the Pinnacle Investor Preferred
Stock and the Pinnacle Series B Preferred Stock have the right to cause any such
stock which is not redeemed by Pinnacle in accordance with its terms to be
purchased by the purchaser of such Pinnacle Common Stock or Pinnacle Warrants.
PRIORITY SUBSCRIPTION RIGHTS. If Pinnacle decides to effect a private
placement of shares of Pinnacle Common Stock or securities convertible into
Pinnacle Common Stock for less than Fair Market Value (as defined in the Amended
and Restated Stockholders Agreement) at any time prior to its initial public
offering, the stockholders will have a right, subject to certain exceptions
including the issuance of financing warrants to institutional lenders), to
purchase their respective pro rata portions of the shares to be sold by
Pinnacle.
VOTING AGREEMENT. The Amended and Restated Stockholders Agreement
provides that the Board of Directors of Pinnacle shall initially consist of
seven members, subject to increase or decrease upon certain specified events.
Per the Certificate of Designations for the Pinnacle 9% Cumulative Series A
Preferred Stock, in the event the Company has earnings levels lower than that
defined in the Certificate of Designations, the holder of the Pinnacle 9%
Cumulative Series A Preferred Stock may appoint a majority of the Board of
Directors of Pinnacle. This event occurred with respect to 1997, however, the
related stockholder, Vestar Equity Partners, L.P., has chosen not to appoint
additional directors at this time and reserves the right to do so in the future.
The stockholders are required to vote their shares to elect specified nominees
to the Board of Directors.
On and after the eighth anniversary of the date of issuance of the
Pinnacle Investor Preferred Stock and Pinnacle Warrants, if any shares of
Pinnacle Series A Preferred Stock and any Pinnacle Warrants are outstanding, the
number of directors of Pinnacle shall be increased by the Control Number (as
defined below), with such additional directors to be nominated by the holders of
the Pinnacle Warrants. In addition, if such directors are required to be
elected, from and after such date, each stockholder who is a party to the
Amended and Restated Stockholders Agreement has agreed to (i) vote all shares
held by such stockholder to ratify, approve and adopt all actions adopted or
approved by the Board of Directors of Pinnacle and (ii) subject to certain
conditions, be "dragged along" in the event that the holders of the Pinnacle
Warrants desire to accept a third party offer for all of the outstanding shares
of Pinnacle Common Stock.
REGISTRATION RIGHTS. Management Stockholders shall be entitled to a
single "demand" and certain "piggyback" registration rights, subject to
customary conditions.
TERMINATION AGREEMENT WITH LAFARICK
Alvey, Pinnacle and Raebarn terminated a consulting agreement with
Raebarn Corporation or a predecessor entity ("Raebarn"), each of which is or was
beneficially owned by Mr. Ulrich and a former director of
36
<PAGE>
Pinnacle, in its entirety in January 1996. In connection with such termination,
Pinnacle and Alvey agreed to make termination payments to Raebarn or its
designees in the amount of $250,000 per year through January 2004. In April
1995, Raebarn changed its name to Lafarick, Inc. Pinnacle and Alvey expensed the
payments of $2.0 million ($1.2 million net of tax), less $555,000 already
accrued at December 31, 1995, in the first quarter of 1996.
CONSULTING AGREEMENT WITH MAMMOTH CAPITAL INC.
On December 31, 1995, Pinnacle and Alvey entered into a consulting
agreement with Mammoth Capital Inc., a corporation owned by Mr. Ulrich, pursuant
to which Pinnacle and Alvey agreed to pay an annual fee of $200,000, subject to
an annual increase at a rate of 3%, in addition to the reimbursement for its
out-of-pocket expenses (the "Mammoth Agreement"). The Mammoth Agreement also
provides for the payment of a transaction fee in the amount of 1% of the
aggregate consideration paid or received in connection with specified merger and
acquisition transaction (the "M&A Fee") and 1/2 of 1% of the gross proceeds
received in connection with financing transactions involving the public or
private offering of debt or equity securities of Pinnacle and Alvey or the
incurrence of bank debt, other than financing transactions solely involving
amendments, modifications or extensions of the Credit Agreement or the Notes
(the "Financing Fee"); provided, however, that the Financing Fee shall not
exceed $250,000. Pinnacle and Alvey are not obliged to pay duplicate M&A Fees
and Financing Fees in connection with any single transaction or series of
related transactions. The Mammoth Agreement will terminate on the earlier to
occur of (i) January 24, 2004, (ii) the sale of all or substantially all of the
capital stock or assets of either Pinnacle or Alvey or (iii) the death or
retirement of Mr. Ulrich. In addition, the Mammoth Agreement will be terminable
by Pinnacle and Alvey in the event that Mr. Ulrich fails, or is otherwise
unwilling, to perform the services required by such agreement in a manner
reasonably acceptable to Pinnacle and Alvey and consistent with past practices.
CONSULTING AGREEMENT WITH VESTAR
On January 24, 1996, Pinnacle and Alvey entered into a consulting
agreement with Vestar Capital Partners ("Vestar Capital"), an affiliate of
Vestar, pursuant to which Pinnacle and Alvey agreed to pay an annual fee of
$150,000 to Vestar Capital (the "Vestar Agreement"). The Vestar Agreement
terminates on the earlier to occur of (i) the completion of an initial public
offering by Pinnacle of the Pinnacle Common Stock, (ii) the occurrence of a
change of control (as defined) or (iii) the date on which the Investors or
certain specified transferees cease to meet a certain minimum investment level.
In addition, upon consummation of the Pinnacle Preferred Stock and Warrants
Offering, Pinnacle paid to Vestar Capital a one-time fee of $750,000 and
reimbursed the Investors for all reasonable out-of-pocket costs and expenses
(including reasonable attorneys' fees and related expenses) incurred by the
Investors in connection with the Pinnacle Preferred Stock and Warrants Offering.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM
10-K
1. FINANCIAL STATEMENTS. The consolidated financial statements
identified on the index to consolidated financial statements and schedules on
page F-1 hereof are filed as part of this Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES. Rule 12-09 Valuation and
Qualifying Accounts and Reserves of Registrant. See the Report of Independent
Accountants on Financial Statement Schedules.
All other schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.
37
<PAGE>
3. EXHIBITS. The following are filed as exhibits to this Annual
Report on Form 10-K:
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION REFERENCE PAGE
- ------- ----------- --------- ------------
<S> <C> <C> <C>
3.1 Certificate of Incorporation of Alvey
Systems, Inc. (i)
3.2 Bylaws of Alvey Systems, Inc. (i)
10.1 Recapitalization Agreement, dated as of
September 28, 1995, by and among Pinnacle
Automation, Inc., Alvey Systems, Inc. and
the Selling Stockholders listed on
Schedule A thereto (i)
10.2 Equity Purchase and Sale Agreement, dated
as of December 13, 1995, by and among
Pinnacle Automation, Inc., Alvey Systems,
Inc., James M. Schloeman and each of the
other persons or entities listed on
Schedule A thereto (i)
10.3 Equity Purchase and Sale Agreement, dated
as of January 24, 1996, by and among
Pinnacle Automation, Inc., Alvey Systems,
Inc. and Atlantic Equity Corporation (i)
10.4 Amended and Restated Stockholders
Agreement, dated as of January 11, 1996,
by and among Pinnacle Automation, Inc.,
each of the Management Stockholders (as
defined therein), the Raebarn Stockholders
(as defined therein), the Series C Holders
(as defined therein) and the Warrant
holders (as defined therein) (i)
10.5 Consulting Agreement, dated as of December
31, 1995, by and among Pinnacle
Automation, Inc., Alvey Systems, Inc. and
Mammoth Capital Inc. (i)
10.6 Termination Agreement, dated as of
December 31, 1995, by and among Pinnacle
Automation, Inc., Alvey Systems, Inc., and
Lafarick, Inc. (i)
10.7 Investment Agreement, dated as of December
12, 1995, by and among Pinnacle
Automation, Inc., Vestar Equity Partners,
L.P., Chemical Equity Associates and
Hancock Venture Partners IV--Direct Fund,
L.P., as amended (i)
10.8 Registration Rights Agreement, dated as of
January 24, 1996, by and among Pinnacle
Automation, Inc., Vestar Equity Partners,
L.P., Chemical Equity Associates, Hancock
Venture Partners IV--Direct Fund, L.P.,
and the other persons listed on the
schedules thereto (i)
10.9 Consulting Agreement, dated as of January
24, 1996, by and among Pinnacle
Automation, Inc., Alvey Systems, Inc. and
Vestar Capital Partners (i)
10.10 Purchase Agreement, dated January 19,
1996, by and among Alvey Systems, Inc.,
Pinnacle Automation, Inc. and NationsBanc
Capital Markets, Inc. (i)
10.11 Indenture, dated as of January 24, 1996,
by and between Alvey Systems, Inc. and The
Bank of New York (i)
10.12 Registration Rights Agreement, dated as of
January 24, 1996, by and among Alvey
Systems, Inc., Pinnacle Automation, Inc.
and NationsBanc Capital Markets, Inc. (i)
10.13 Credit Agreement, dated as of January 24,
1996, among Alvey Systems, Inc., the
lenders named therein and NationsBank N.A. (i)
10.14 Amendment No. 1 to the Credit Agreement,
dated May 15, 1996, among Alvey Systems,
Inc., the lenders named therein and
NationsBank N.A. (ii)
10.15 Amendment No. 2 to the Credit Agreement,
dated March 14, 1997, among Alvey Systems,
Inc., the lenders named therein and
NationsBank N.A. (ii)
10.16 Amendment No. 3 to the Credit Agreement,
dated August 12, 1997, among Alvey
Systems, Inc., the lenders named therein
and NationsBank, N.A. (iii)
10.17 Pledge and Security Agreement, dated as of
January 24, 1996, by Alvey Systems, Inc.,
as pledgor, in favor of NationsBank, N.A. (i)
38
<PAGE>
10.18 Pledge and Security Agreement, dated as of
January 24, 1996, by Pinnacle Automation,
Inc., as pledgor, in favor of NationsBank,
N.A. (i)
10.19 Security Agreement, dated as of January
24, 1996, by Alvey Systems, Inc., and its
subsidiaries, in favor of NationsBank,
N.A. (i)
10.20 Non-Competition, Working Capital Guarantee
and Security Agreement, dated April 15,
1992, by and among the Company, Busse
Bros, Inc., Eugene H. Busse and First
Wisconsin Trust Company (i)
10.21 Non-Competition, Working Capital Guarantee
and Security Agreement, dated April 15,
1992, by and among the Company, Busse
Bros, Inc., Sheldon C. Busse and First
Wisconsin Trust Company (i)
10.22 Non-Competition, Working Capital Guarantee
and Security Agreement, dated April 15,
1992, by and among the Company, Busse
Bros, Inc., Lois B. Biel and First
Wisconsin Trust Company (i)
10.23 Stock Purchase Agreement by and among
Pinnacle Automation, Inc., Alvey Systems,
Inc., McHugh, Freeman & Associates, Inc.,
Weseley Software Development Corp. and the
other signatories thereto, dated December
20, 1995, as amended by Amendment No. 1
thereto dated January 29, 1996 (i)
10.24 Stock Purchase Agreement dated as of
December 16, 1996 by and between Alvey
Systems, Inc. and UNR Industries, Inc. (ii)
10.25 Asset Purchase Agreement dated as of May
9, 1995 by and among Pinnacle Automation,
Inc., Alvey Systems, Inc., The Buschman
Company, Diamond Machine Co. and IMH of
Lynchburg, Inc. (i)
10.26 Second Amended and Restated Employment
Agreement, dated June 2, 1997, by and
among Pinnacle Automation, Inc., Alvey
Systems, Inc. and William R. Michaels. (iii)
10.27 Separation Agreement and General and
Special Release dated June 2, 1997, by and
among Pinnacle Automation, Inc., Alvey
Systems, Inc. and Michael J. Tilton (iii)
10.28 Amended and Restated Employment Agreement,
dated June 27, 1995, by and among Pinnacle
Automation, Inc. and Stephen J. O'Neill (i)
10.29 Employment Agreement, dated March 9, 1994,
by and among The Buschman Company and
Christopher C. Cole (i)
10.30 Termination Agreement with Donald J. Weiss,
dated April 26, 1996, by and among Pinnacle
Automation, Inc., Alvey Systems, Inc., White
Storage & Retrieval Systems, Inc. and Donald
J. Weiss (iv)
21 List of Subsidiaries (ii)
27 Financial Data Schedule
</TABLE>
____________________________
(i) Filed as an exhibit to the Company's Registration Statement on Form S-4 (No.
333-2600) and incorporated herein by reference.
(ii) Filed as an exhibit to the Company's Annual Report on Form 10K filed for
the year ended December 31, 1996 (No. 333-2600) and incorporated herein by
reference.
(iii) Filed as an exhibit to the Company's Form 10Q filed for the quarter ended
June 30, 1997 (No. 333-2600) and incorporated herein by reference.
(iv) Filed as an exhibit to the Company's Form 10Q filed for the quarter ended
March 31, 1996 (No. 333-2600) and incorporated herein by reference.
39
<PAGE>
(b) REPORTS ON FORM 8-K. The Company did not file any Reports on
Form 8-K during 1997.
(c) Refer to (a)(3) above.
(d) Refer to (a)(2) above.
40
<PAGE>
INDEX TO ALVEY SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants F-2
Consolidated Balance Sheet as of December 31, 1997 and 1996 F-3
Consolidated Statement of Operations for the fiscal years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statement of Cash Flows for the fiscal years ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statement of Net Investment of Parent for the
fiscal years ended December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and
Board of Directors of
Alvey Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of net investment of
parent present fairly, in all material respects, the financial position of Alvey
Systems, Inc. and its subsidiaries at December 31, 1997 and 1996 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
St. Louis, Missouri
February 18, 1998
F-2
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 3,142 $ 5,025
Receivables:
Trade (less allowance for doubtful accounts of
$1,818 and $1,206, respectively) 54,639 53,189
Unbilled and other 11,801 7,909
Accumulated costs and earnings in excess of
billings ($46,208 and $47,194,
respectively) on uncompleted contracts 12,885 15,647
Inventories:
Raw materials 14,297 14,634
Work in process 2,881 3,909
Deferred income taxes 12,307 8,509
Prepaid expenses and other assets 1,693 3,189
--------- ---------
Total current assets 113,645 112,011
Property, plant and equipment, net 35,459 34,367
Other assets 7,537 8,963
Goodwill (net of amortization of $5,390 and $4,073,
respectively) 25,151 26,510
--------- ---------
$ 181,792 $ 181,851
--------- ---------
--------- ---------
LIABILITIES AND NET INVESTMENT OF PARENT:
Current liabilities:
Current portion of long-term debt $ 274 $ 280
Accounts payable 33,066 34,405
Accrued expenses 41,849 40,377
Customer deposits 7,153 11,232
Billings in excess of accumulated costs and
earnings ($95,391 and $91,902,
respectively) on uncompleted contracts 23,585 20,426
Deferred revenues 3,134 4,379
Taxes payable 967 308
--------- ---------
Total current liabilities 110,028 111,407
Long-term debt 106,930 100,493
Other long-term liabilities 12,605 9,125
Deferred income taxes 757 1,955
Commitments and contingencies (Notes 3 and 12)
Net investment of Parent (48,528) (41,129)
--------- ---------
$ 181,792 $ 181,851
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 372,869 $ 331,247 $ 288,018
Cost of goods sold 279,044 256,218 217,297
--------- --------- ---------
Gross profit 93,825 75,029 70,721
Selling, general and administrative expenses 64,466 61,471 51,630
Write-off of purchased in-process research and development costs 12,700
Research and development expenses 9,063 4,797 2,051
Restructuring expense 15,284
Write-off of goodwill 11,491
Amortization expense 1,663 1,703 1,737
Other expense (income), net 11 1,378 (108)
--------- --------- ---------
Operating income (loss) 3,338 (18,511) 15,411
Interest expense 13,756 12,301 6,896
Write-off of costs associated with a discontinued public offering 958
--------- --------- ---------
Income (loss) before income taxes and extraordinary loss (11,376) (30,812) 8,515
Income tax expense (benefit) (4,057) (1,909) 4,109
--------- --------- ---------
Income (loss) before extraordinary loss (7,319) (28,903) 4,406
Extraordinary loss, net of income tax benefit of $1,328 1,993
--------- --------- ---------
Net income (loss) $ (7,319) $ (30,896) $ 4,406
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (7,319) $ (30,896) $ 4,406
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation 4,876 4,259 2,952
Amortization 1,663 1,703 1,737
Write-off of purchased in-process research and development costs 12,700
Write-off of goodwill 11,491
Deferred taxes, net of effect of acquisitions (5,145) (2,616) 2,660
Write-off of unamortized debt issue costs included in
extraordinary loss 2,963
Other 198
(Increase) decrease in current assets, excluding effect of
acquisitions:
Receivables (5,342) (10,745) (5,979)
Accumulated costs and earnings in excess of billings on
uncompleted contracts 2,762 (7,330) (1,732)
Inventories 1,365 2,146 (5,636)
Other assets 2,387 (384) (259)
(Decrease) increase in current liabilities, excluding effect
of acquisitions:
Accounts payable (1,339) 9,447 4,983
Accrued expenses 2,043 10,912 5,201
Customer deposits (4,079) (929) 5,469
Billings in excess of accumulated costs and earnings
on uncompleted contracts 3,365 6,522 4,911
Deferred revenues (1,245) 1,641 (681)
Taxes payable 644 (1,773) 452
Other liabilities 3,630 2,178 455
-------- --------- ---------
Net cash provided by (used for) operating activities (1,536) 11,289 18,939
-------- --------- ---------
INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired of $61 (18,997)
Payments for agreements not to compete (300) (300) (300)
Cash payments to dispose of Diamond (421) (588) (2,347)
Software development costs 0 (237) (582)
Additions to property, plant and equipment, net (5,977) (11,396) (3,914)
-------- --------- ---------
Net cash used for investing activities (6,698) (31,518) (7,143)
-------- --------- ---------
-------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds of borrowings $ 100,425 $ 132,319 $ 27,728
Payments of debt and capital leases (93,994) (80,921) (38,538)
Redemption of preferred stock (27,593)
Net contributions from (to) Parent (80) 5,757 59
Treasury preferred stock issuances 35
Payments of debt issuance costs (7,713) (255)
--------- --------- ---------
Net cash provided by (used for) financing activities 6,351 21,849 (10,971)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (1,883) 1,620 825
Cash and cash equivalents, beginning of year 5,025 3,405 2,580
--------- --------- ---------
Cash and cash equivalents, end of year $ 3,142 $ 5,025 $ 3,405
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on financings $ 12,674 $ 6,777 $ 6,851
Income taxes 422 1,281 997
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Alvey Systems, Inc. purchased Weseley Software Development
Corp. and Real Time Solutions, Inc. in 1996. In conjunction
with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 17,196
Fair value assigned to goodwill 7,286
Cash paid concurrent with acquisitions, including payments of debt of
acquired companies and excluding cash acquired (18,997)
---------
Liabilities assumed $ 5,485
---------
---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET INVESTMENT OF PARENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 OF PARENT
--------------
<S> <C>
Balance December 31, 1994 $ (16,332)
Net income 4,406
Net investment of Parent 59
Preferred stock dividend declared (Note 8) (3,852)
--------
Balance December 31, 1995 (15,719)
Net loss (30,896)
Net investment of Parent 5,757
Preferred stock dividend declared (Note 8) (271)
--------
Balance December 31, 1996 (41,129)
Net loss (7,319)
Net contribution to Parent (80)
--------
Balance December 31, 1997 $ (48,528)
--------
--------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Alvey Systems, Inc. ("Alvey") is a wholly-owned subsidiary of Pinnacle
Automation, Inc. ("Pinnacle" or "Parent"). Pinnacle has no operations and
no assets other than its investment in Alvey. Alvey, with its subsidiaries
(the "Company"), is a leading materials handling and information systems
company which provides integrated solutions to a wide range of
manufacturing and distribution applications. The Company develops software
and controls for materials handling systems and manufactures a broad range
of industrial equipment such as conveyors, palletizers, depalletizers,
carousels, sorters and robotics which carry out the physical acts of
loading and unloading, sorting and transporting raw materials and finished
products.
The accompanying financial statements of the Company include the
accounts of Alvey and its five operating subsidiaries which include:
McHugh Software International, Inc. ("McHugh"), comprised of the former
McHugh Freeman & Associates, Inc. and Weseley Software Development Corp.
("Weseley" or "WSDC"), located in Waukesha, Wisconsin; Busse Bros., Inc.
("Busse"), located in Randolph, Wisconsin; The Buschman Company
("Buschman"), located in Cincinnati, Ohio; White Systems, Inc. ("White")
located in Kenilworth, New Jersey and Real Time Solutions, Inc. ("RTS"),
located in Napa, California, which was acquired in December 1996. Weseley
is located in Shelton, Connecticut and was acquired in January 1996 by
McHugh. See Note 3 for additional information in the Weseley and RTS
acquisitions.
Effective January 16, 1996, Alvey reincorporated in the State of
Delaware under the name Alvey Systems, Inc. The Company historically
conducted business as a Missouri corporation under the name Alvey, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by the Company in the preparation of the
consolidated financial statements conform to generally accepted accounting
principles, and require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from these
estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Alvey
and Alvey's wholly-owned subsidiaries: McHugh, Busse, Buschman, White and
RTS. All significant intercompany transactions, which primarily consist of
sales, have been eliminated.
NET INVESTMENT OF PARENT
Net investment of Parent represents the net capital contributed by
Pinnacle as a result of the sales of its common stock, options and warrants
or awards of its common stock and options to certain employees of the
Company as well as cumulative results of operations and payment of
preferred stock dividends. The basis of Pinnacle's investment in Alvey has
been pushed down to the accompanying consolidated financial statements of
Alvey.
At December 31, 1997, the net investment of Parent consists of
cumulative contributions of capital to Alvey by Pinnacle of $8.6 million,
cumulative losses before extraordinary losses of $33.4 million,
extraordinary losses of $9.5 million and an aggregate accretion/payment of
$14.3 million of paid-in-kind dividends on preferred stock. At December 31,
1996, the net investment of Parent consists of cumulative contributions of
capital to Alvey by Pinnacle of $8.8 million, cumulative losses before
extraordinary losses of $26.1 million, extraordinary losses of $9.5
million and an aggregate accretion/payment of $14.3 million of paid-in-kind
dividends on preferred stock.
F-8
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
For purposes of financial reporting, the Company has determined that
the fair value of financial instruments approximates book value at December
31, 1997 and 1996, based on terms available to the Company in financial
markets.
REVENUE RECOGNITION
The Company utilizes the percentage-of-completion method of accounting
to recognize revenue and profits on virtually all non-software customer
contracts. For certain contracts related to equipment sales, the
percentage of completion is determined based on the ratio of the cost of
equipment shipped to date to the total estimated cost of the equipment to
be shipped under the contract. For other equipment contracts and all
consulting contracts, typically for larger machines and integrated systems,
as well as the installation phase of contracts, the percentage of
completion is determined based on the ratio of total costs incurred to date
to the estimated total costs to be incurred under the contracts. Any
revisions in the estimated total costs of the contracts during the course
of the work are reflected when the facts that require the revisions become
known. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined. Revenues from
maintenance and support contracts are deferred and recognized ratably over
the life of the related contract.
The Company recognizes software license fee revenue upon the later to
occur of (i) the execution of a software license agreement and (ii)
delivery of the standardized software to the customer. The Company
licenses its software to customers on a perpetual, non-exclusive basis.
Implementation, training and consulting revenues are recognized as the
services are rendered (fixed-fee revenues are recognized on a
percentage-of-completion basis). Annual maintenance and support revenues
consist of ongoing support and product updates and are recognized ratably
over the term of the particular maintenance agreement in place with a
customer. Revenues for the Company's hardware and peripheral sales are
recognized upon shipment.
SOFTWARE DEVELOPMENT COSTS
Certain costs incurred in developing software products for resale were
previously capitalized and amortized on a product-by-product basis using
the greater of the ratio that current gross revenues for a product bear to
the current and anticipated future gross revenues for that product or the
straight-line method over the estimated five year economic life of the
product. The costs consist of salaries, computer expenses and other
overhead costs directly related to the development and/or major enhancement
of software products. Such costs are capitalized, to the extent they are
recoverable through future sales, from the time the product's technological
feasibility is established up to its general release to customers.
Costs incurred before or after this period are expensed as incurred except
for major product improvements, which are capitalized as described above.
Net unamortized capitalized software development costs were $414,000 and
$603,000 at December 31, 1997 and 1996, respectively. Amortization of
capitalized software costs totaled $189,000, $1,053,000 and $257,000 in
1997, 1996 and 1995, respectively, and is included in cost of goods sold in
the accompanying financial statements. In 1996, the amortization of
software costs includes the write-off of $659,000 of capitalized software
development costs that are not expected to be recoverable through future
sales.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
F-9
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposit accounts, cash on
hand and time deposits with original maturities of less than 90 days. Such
amounts are carried at cost, which approximates market.
INVENTORY VALUATION
Work-in-process inventories consist principally of in-process
palletizing and depalletizing machines, conveyor and carousel systems,
other materials handling equipment and parts manufactured by the Company
for use in these products. Raw materials include steel, purchased parts
and other materials used in the manufacturing process. These inventories
are valued at the lower of cost (first-in, first-out) or market. Obsolete
or unsalable inventories are reflected at their estimated realizable
values.
PROGRESS BILLINGS
The Company bills its customers based on the terms set forth in a
sales contract. The billing schedule does not necessarily match the stage
of completion of a customer's order for installation. As such, costs,
earnings and billings are accumulated for jobs in progress at period end
and to the extent costs and earnings exceed billings and billings exceed
costs and earnings for such jobs, an asset or liability is recorded.
Unbilled receivables are those amounts recognized in revenues for
completed portions of manufacturing contracts and software license fees
which have not been billed to the customer under the specific billing terms
of the contract or license agreement. Customer deposits represent cash
received from customers in payment of billings for equipment for which no
associated revenue or cost has been recognized.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Costs assigned to
property, plant and equipment are based on estimated fair value at the date
of acquisition. Upon sale, retirement or other disposition, the cost and
related accumulated depreciation are removed from the respective accounts
and any resulting gain or loss is included in income.
Depreciation of property, plant and equipment, including equipment
under capital lease agreements, is charged to expense over the estimated
useful lives of the related assets using the straight-line method.
Useful lives by major asset category are as follows:
Building and improvements. . . . . . . . . . . 7 to 25 years
Machinery and equipment. . . . . . . . . . . . 3 to 12 years
Office furniture and equipment . . . . . . . . 3 to 7 years
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of cost over the fair market value of net assets acquired
in purchase business transactions has been recorded as goodwill to be
amortized over a period of 40 years, except for goodwill related to RTS and
Weseley which is amortized over 10 years. The carrying value of goodwill is
assessed for recoverability by management based on an analysis of future
expected undiscounted cash flows from the underlying operations.
F-10
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996 the company recorded a charge of $11.5 million for the
write-off of goodwill at one of its subsidiaries. This write-off
represents the entire amount of remaining goodwill at December 31, 1996
recorded by that subsidiary which is considered to be impaired due to
historical losses and uncertainty regarding future income and cash flows.
See Note 6 for further discussion.
Debt issuance costs and agreements not to compete are amortized over
the life of the related agreements. All intangible assets are amortized
using the straight-line method.
INCOME TAXES
As a subsidiary of Pinnacle, the Company's results of operations are
included in consolidated federal income tax returns which include the
Company and its subsidiaries; the Company could be considered jointly and
severally liable for assessments of additional tax on the consolidated
group. The Company's provision for income taxes has been presented based
on income taxes the Company would have provided on a separate company basis
which approximate those of Pinnacle as a consolidated entity.
Income taxes are based upon income for financial reporting purposes.
Deferred income taxes are provided for the temporary differences between
the financial reporting bases and the income tax bases of the Company's
assets and liabilities. The tax rates expected to be in effect when such
differences are reflected in the Company's income tax returns are used in
calculating the deferred tax asset or liability. The major temporary
differences that give rise to deferred taxes include retainage,
depreciation, warranty and inventory costs, deferred compensation,
restructuring and various other reserves. See Note 9 for additional
information.
CONCENTRATIONS OF CREDIT RISK
The Company sells its products to a wide range of companies in the
food, beverage, national retailing and distribution industries, as well as
certain government entities. The Company performs ongoing credit
evaluations of its customers and generally does not require specific
collateral as many customers pay deposits to the Company prior to
commencement of production in accordance with terms of the sales contract.
The Company maintains reserves for potential credit losses based upon
factors surrounding the credit risk of specific customers, historical
trends and other information; historically, such losses have been within
management's expectations.
EARNINGS PER SHARE INFORMATION
Given the historical organization and capital structure of the
Company, earnings per share information is not considered meaningful or
relevant and has not been presented in the accompanying consolidated
financial statements or the notes thereto.
3. ACQUISITIONS
WESELEY ACQUISITION
In January 1996, Pinnacle, Alvey and McHugh purchased all of the
outstanding capital stock of Weseley for a purchase price of $15 million in
cash. The acquisition, which was recorded pursuant to the purchase method
of accounting, was financed with a portion of the proceeds of the Debt
Offering as described in Note 7. The excess of the cost of the acquisition
over the fair value of net assets acquired (including purchased in-process
research and development, as further described below) of $5.1 million was
recorded as goodwill and is being amortized over a period of 10 years. The
consolidated financial statements of the Company include the results of
operations and cash flows of Weseley from its date of acquisition.
Based on the results of an independent appraisal, $11.7 million of the
Weseley 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
F-11
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
first quarter of 1996. Such amount has been excluded from the pro forma
information below as it represents a non-recurring charge to income which
resulted directly from the Weseley acquisition.
Under the terms of the purchase agreement, subject to the continued
employment of the former principal shareholder of Weseley and certain other
conditions, certain employees of Weseley have an opportunity to earn stay
bonuses in the aggregate of $625,000 per year for each of eight years
immediately following the acquisition of Weseley which will be charged to
income in the year earned and employee incentive compensation up to an
aggregate maximum of $13 million, based on Weseley's achievement of defined
levels of earnings before interest, income tax, depreciation, amortization,
management fees and extraordinary losses, which will be charged to income
when such amounts are estimable and payment thereof is deemed probable.
During 1997, the employment of the former principal shareholder of Weseley
terminated. As a result, annual amounts payable under the stay bonus
decreased to $275,000 and the maximum incentive compensation payable
decreased to $6.5 million. Also, see discussion in Note 12. During 1997
and 1996, $275,000 and $625,000, respectively, were charged to income
related to the stay bonus. No expense was recognized in 1997 or 1996
related to the employee incentive compensation agreement.
In the quarter ended December 31, 1995 (prior to the purchase of
Weseley by the Company), Weseley received and recorded as deferred revenue
$2.5 million in fees in connection with a distribution contract with a
large manufacturing company; $1.8 million and $2.1 million remained
deferred at December 31, 1997 and 1996, respectively. On December 31, 1995
(prior to the purchase of Weseley by the Company), Weseley paid and charged
to income an aggregate of $3.0 million in bonuses for certain of its
employees, which are included in selling, general and administrative
expenses in the pro forma information presented below.
F-12
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth pro forma information for the Company
as if the Weseley acquisition had taken place on January 1, 1995. This
information is unaudited and does not purport to represent actual operating
results had the acquisition actually occurred on January 1, 1995. The pro
forma results of operations for 1996 would not have been materially
different from reported results had the Weseley acquisition taken place on
January 1, 1996. Pro forma information for the twelve months ended
December 31, 1995 (in thousands) (unaudited) is as follows:
<TABLE>
<CAPTION>
<S> <C>
Net sales $ 291,415
Cost of goods sold 218,232
--------
Gross profit 73,183
Selling, general and administrative expenses 56,793
Research and development expenses 2,666
Amortization expense 2,253
Other income, net (108)
--------
Operating income 11,579
Interest expense 8,583
--------
Income before income taxes
and extraordinary loss 2,996
Income tax expense 2,072
--------
Income before extraordinary loss $ 924
--------
--------
</TABLE>
RTS ACQUISITION
In December 1996, Pinnacle and Alvey purchased all of the outstanding
capital stock of RTS for a purchase price of $4.1 million in cash. The
acquisition, which was recorded pursuant to the purchase method of
accounting, was financed through borrowings under the Credit Agreement (as
defined in Note 7). The excess of the cost of the acquisition over the
fair value of net assets acquired (including purchased in-process research
and development, as further described below) of $2.2 million was recorded
as goodwill and is being amortized over a period of 10 years. The
consolidated financial statements of the Company include the results of
operations and cash flows of RTS from its date of acquisition.
Based on the results of an independent appraisal, $1.0 million of the
RTS 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 fourth quarter of 1996.
The pro forma results of the Company for 1996 and 1995 would not have
been materially different had the RTS acquisition taken place on January 1,
1996 or 1995, respectively. Accordingly, pro forma financial information
for the RTS acquisition is not presented.
F-13
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. 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 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"),
consisting of McHugh and Weseley, by further consolidating their
operations.
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 the
SLG reorganization charges are primarily severance costs. The subsequent
1997 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
remaining costs accrued as restructuring, consisting primarily of severance
costs, will be fully paid by April 30, 2004.
The following table presents a roll-forward of the liabilities, both
current and long-term, for restructuring from the initial accrual to
December 31, 1997:
<TABLE>
<CAPTION>
INITIAL REDUCTIONS/ DECEMBER 31,
TYPE OF COST ACCRUAL PAYMENTS 1997
------------------------------ ------- ----------- ------------
<S> <C> <C> <C>
Cost to discontinue $ 8,566 $ (5,644) $ 2,922
product offerings
Corporate reorganization 2,768 (1,352) 1,416
SLG reorganization 3,950 (746) 3,204
------- ------- -------
Total $15,284 $(7,742) $ 7,542
------- ------- -------
------- ------- -------
</TABLE>
In addition, 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 to operating income
primarily include a write-down in the carrying value of inventory at a
restructured subsidiary, employee moving costs associated with exiting
certain product offerings and costs associated with bringing restructured
production facilities up to Company standards.
In the fourth quarter of 1997, legal, accounting and other charges
totaling $958,000 related to a planned initial public offering of common
stock of McHugh were charged to income as the Company decided not to
proceed with the initial public offering at this time.
F-14
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
------- -------
<S> <C> <C>
Land $ 3,148 $ 3,148
Buildings and improvements 21,106 20,608
Machinery and equipment 9,350 8,249
Office and other equipment 20,958 16,577
Property held under capital lease 833 1,327
------- -------
55,395 49,909
Less: Accumulated depreciation and amortization,
including $266 and $657, respectively, related
to property held under capital lease 19,936 15,542
------- -------
$35,459 $34,367
------- -------
------- -------
</TABLE>
Depreciation expense for leased equipment was $126,000, $114,000 and
$103,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Future minimum lease payments under the capital leases and
the present value of the net minimum lease payments at December 31, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 211
1999 96
2000 194
--------
Total minimum lease payments 501
Less: Amount representing interest 63
--------
Present value of minimum lease payments at December 31,
1997, including current portion of $180 $ 438
--------
--------
</TABLE>
Certain other office equipment, automobiles and office space are
utilized by the Company under operating leases which resulted in rental
expense of $6.0 million, $3.9 million and $3.4 million in 1997, 1996 and
1995, respectively. Commitments under these leases total $5.1 in 1998,
$4.3 million in 1999, $3.6 million in 2000, $3.4 million in 2001, $3.1
million in 2002 and $7.7 million in the aggregate in years thereafter.
F-15
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. GOODWILL
Goodwill is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Goodwill $ 30,541 $ 42,074
Less: Write-off of goodwill (11,491)
Less: Accumulated amortization (5,390) (4,073)
----------- -----------
$ 25,151 $ 26,510
----------- -----------
----------- -----------
</TABLE>
The write-off of $11.5 million in 1996 represents the full amount of
remaining goodwill at one subsidiary which was considered to be impaired due to
historical losses, uncertainty regarding future income and uncertainty regarding
future cash flows. This impairment was determined by analyzing future expected
undiscounted cash flows from the underlying operations. The amount of the
write-off was determined using future expected discounted cash flows from the
underlying operations.
7. LONG-TERM DEBT
The detail of long-term debt follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
11 3/8% Senior Subordinated Notes due
January 31, 2003 $ 100,000 $ 100,000
Revolving Credit Facility - weighted average
rate of 8.84% at December 31, 1997, due
January 24, 2001 6,500
Capital lease obligations and other 704 773
--------- ---------
107,204 100,773
Less: Current portion 274 280
--------- ---------
$ 106,930 $ 100,493
--------- ---------
--------- ---------
</TABLE>
On January 24, 1996, Alvey issued and sold $100 million of 11 3/8%
Senior Subordinated Notes due 2003 (the "Debt Offering"). The proceeds of
the Debt Offering were used to repay all of the Company's outstanding
senior indebtedness and certain other indebtedness, fund the acquisition of
Weseley, pay transaction fees, fund a dividend to Pinnacle of $21.6 million
and provide working capital for ongoing operations. As a result of the
repayment of the outstanding senior indebtedness, the Company recorded an
extraordinary loss of approximately $2 million representing the write-off
of related debt issuance costs and debt repayment penalties, net of tax.
In accordance with the terms of the Debt Offering, Alvey filed a
registration statement with the Securities and Exchange Commission with
respect to an offer to exchange the 11 3/8% Senior Subordinated Notes for a
new issue of debt securities of Alvey registered under the Securities Act
of 1933 with terms substantially identical to those of the 11 3/8% Senior
Subordinated Notes. Such registration statement was
F-16
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Concurrent with the consummation of the Debt Offering, Alvey entered
into a credit agreement (the "Credit Agreement") for a $30 million
revolving credit facility (the "Revolving Credit Facility") which is
guaranteed by Pinnacle and each direct and indirect subsidiary of Alvey.
Indebtedness of Alvey under the Credit Agreement is secured by
substantially all of the personal property of Alvey and its subsidiaries,
all capital stock of Alvey and 100% of the capital stock of its domestic
subsidiaries (other than the portion of the shares of capital stock of
Busse which are pledged to secure certain non-compete payments).
Indebtedness under the Revolving Credit Facility bears interest at a rate
based upon, at Alvey's option, (i) the Base Rate (as defined in the
Revolving Credit Facility) plus 1.5% or (ii) the Euro-dollar Rate (as
defined in the Revolving Credit Facility) for one, two, three, six or, if
available, nine or twelve months, plus 2.5%; provided, however, the
interest rate margins are subject to 0.25% reductions in the event Alvey
meets certain performance targets. Commitment fees accrue on the average
daily unused portion of the Revolving Credit Facility at 0.5% per annum and
are payable quarterly. The Revolving Credit Facility expires January 24,
2001. At December 31, 1997, $13.2 million of borrowing capacity within
the current debt covenant limitations remained available under the
Revolving Credit Facility.
Debt issuance costs totaling $7.5 million were incurred in
establishing the $100 million Senior Subordinated Notes and the Revolving
Credit Facility on January 24, 1996 and are being amortized over the
weighted-average life of the facilities.
Under the Credit Agreement, the Company has provided standby letters
of credit at December 31, 1997 in the amount of $1.3 million as security
for payment of the Company's workers' Compensation claims. Outstanding
letters of credit bear a 2.5% per annum fee which is payable quarterly.
Virtually all of the tangible assets of the Company are pledged as
collateral under the Credit Agreement. Restrictive covenants of
outstanding debt instruments include the maintenance of certain key ratios
as well as limitations on capital expenditures, incurrence of additional
debt, stock issuances and the payment of cash dividends. The Company was
in compliance with such financial covenants at December 31, 1997.
8. REDEEMABLE PREFERRED STOCK AND RECAPITALIZATION OF PINNACLE
Concurrent with the consummation of the Debt Offering (see Note 7),
Pinnacle sold redeemable preferred stock and warrants to purchase its
common stock to an investor group for $30 million in cash proceeds (the
"Preferred Stock Offering"). The proceeds of the Preferred Stock Offering,
together with a dividend from Alvey to Pinnacle, were used to repurchase
certain shares of Pinnacle's outstanding common stock and to redeem
Pinnacle's Series A Senior Cumulative Exchangeable Preferred Stock ("Series
A Preferred") and Cumulative Exchangeable Preferred Stock ("Cumulative
Preferred"). While Alvey has not guaranteed, nor is it contingently
obligated with respect to the redeemable preferred stock and warrants
issued in the Preferred Stock Offering, Pinnacle has no financial
resources, other than from its subsidiaries' operations, to satisfy cash
requirements relative to these shares. The redeemable preferred stock and
warrants from the Preferred Stock Offering have not been pushed down to
Alvey's consolidated financial statements as such redeemable preferred
stock and warrants are not exchangeable into securities of Alvey. At
December 31, 1997 and 1996, accumulated dividends on the redeemable
preferred stock totaled $11.6 million and $5.3 million.
Under terms of the related stockholder agreements, Pinnacle was
required to pay dividends quarterly on the Series A Preferred and the
Cumulative Preferred and could pay such dividends in cash (at 13%) or stock
(at 15.5%) at its option through December 31, 1996. Dividends declared in
1996 and 1995 were paid in the form of stock. Pinnacle declared stock
dividends of $271,000 and $3.9 million in 1996 and 1995, respectively
(2,705 and 38,522 shares, respectively, at a liquidating value of $100),
all of which served to decrease the net investment
F-17
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of Parent of the Company.
The following table sets forth the changes in redeemable preferred stock
for the years ended December 31, 1995 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
SERIES A CUMULATIVE TOTAL
PREFERRED STOCK PREFERRED STOCK REDEEMABLE
----------------------- ---------------------- PREFERRED
SHARES AMOUNT SHARES AMOUNT STOCK
-------- -------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 180,645 $ 18,065 53,704 $ 5,370 $ 23,435
Treasury stock sales 350 35 35
Stock dividend declared 29,702 2,970 8,820 882 3,852
-------- -------- ------- ------- --------
Balance December 31, 1995 210,697 21,070 62,524 6,252 27,322
Stock dividend declared 2,086 209 619 62 271
Redemption of stock (212,783) (21,279) (63,143) (6,314) (27,593)
-------- -------- ------- ------- --------
Balance December 31, 1996 0 $ 0 0 $ 0 $ 0
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
</TABLE>
9. INCOME TAXES
Income tax expense (benefit) relative to income (loss) from continuing
operations (before extraordinary loss) is comprised of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ----- -------
<S> <C> <C> <C>
Current
Federal $ 243 $ 211 $ 1,001
State 715 496 448
Foreign 130
-------- ------- -------
1,088 707 1,449
Deferred, principally federal (5,145) (2,616) 2,660
-------- ------- -------
$ (4,057) $(1,909) $ 4,109
-------- ------- -------
-------- ------- -------
</TABLE>
F-18
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the income tax expense (benefit) per the statutory
federal income tax rate to the reported income tax expense (benefit) on
income (loss) before extraordinary loss is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- -------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $ (3,868) $ (10,476) $ 2,896
Expense (benefit) resulting from:
Write-off of nondeductible purchased
in-process research and development 4,318
Write-off of nondeductible goodwill 3,907
State taxes (net of federal tax benefit) (852) (226) 366
Nondeductible goodwill amortization 433 448 282
Meals and entertainment 240 197 216
Other (10) (77) 349
-------- -------- -------
$ (4,057) $ (1,909) $ 4,109
-------- -------- -------
-------- -------- -------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Accrued insurance claims $ 2,676 $ 2,437
Inventory reserves 2,877 2,662
Warranty reserves 2,025 2,587
Employee cost accruals 3,305 3,637
Revenue timing differences 2,925 2,511
Restructuring costs 3,202
Other 3,565 2,214
-------- --------
Total deferred tax assets 20,575 16,048
-------- --------
Revenue timing differences 1,804 3,190
Property related items 5,624 5,402
Other 1,597 902
-------- --------
Total deferred tax liabilities 9,025 9,494
-------- --------
Net deferred tax asset $ 11,550 $ 6,554
-------- --------
-------- --------
</TABLE>
In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", management has determined that based on
expected future operating plans and tax planning strategies available to
the Company, the net deferred tax assets at December 31, 1997 will be
utilized to offset future taxes. Therefore, no valuation reserve related
to such deferred tax assets has been recorded at December 31, 1997 and
1996, respectively.
During 1997, the Company established a Foreign Sales Corporation
subsidiary organized under the provisions of the Tax Reform Act of 1984.
F-19
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EMPLOYEE BENEFIT AND STOCK OWNERSHIP PLANS
The Company maintains 401(k) savings plans for virtually all employees
who meet certain eligibility requirements, except those certain union
employees who participate in multi-employer pension plans. Under the
plans, the employees may defer receipt of a portion of their eligible
compensation with the Company matching a defined percentage of the
employees' deferral. The Company's matching contributions were $801,000,
$701,000 and $614,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company may also elect to make discretionary profit
sharing contributions for virtually all employees, except those union
employees who participate in multi-employer pension plans, for which a
provision of $3.2 million, $2.7 million and $2.2 million is included in
the consolidated financial statements in 1997, 1996 and 1995,
respectively.
Contributions under the multi-employer pension plans are based on
amounts per employee as defined in the union labor agreement. Pension
expense for the union employees' pension plans was $685,000, $593,000 and
$629,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company may be obligated, under the Multi-Employer
Pension Plan Amendment Act of 1980, for a part of these plans' unfunded
vested benefits if there is a withdrawal or partial withdrawal from a plan,
as defined within the Act. There is no intention on the part of management
to withdraw their participation from a plan.
Alvey also provides a deferred compensation plan for its former Chief
Executive Officer. Beginning January 1998, the Company will pay an annual
benefit to this individual of $237,500 for the remainder of his life or for
at least 10 years. At December 31, 1997, an amount of $2.2 million is
accrued for such benefits, $1.9 million of which is classified as a
long-term obligation, and expense of $373,000, $260,000 and $299,000 was
recorded in 1997, 1996, and 1995, respectively.
During 1995, certain employees of the Company purchased shares of
Pinnacle common stock at estimated fair value totaling $409,000; these
purchases were effected with cash of $30,000 and employee notes receivable
of $379,000. Employee notes receivable outstanding to Pinnacle at December
31, 1997 and 1996 totaled $1.3 million and $1.4 million, respectively,
and are reflected as a reduction of the net investment of Parent.
F-20
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management employees of the Company have received options to
purchase Pinnacle common stock which were granted at exercise prices
which approximated fair market value of the shares at the dates of
grant. Certain of these shares vest based on performance while others
vest over a period of employment (generally over a period of three
years). The option terms expire eight to ten years subsequent to the
grant date. At December 31, 1997, exercise prices of options
outstanding generally ranged between $20 and $40 per share with 11,991
options at $1.20 per share which approximated estimated fair value at
the dates of grant. The weighted average remaining life to expiration
at December 31, 1997 of options exercisable between $20 and $40 is six
years and for those at $1.20 is five years. At December 31, 1997,
48,391 of the outstanding options have vested. These options are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE SHARES
EXERCISE SUBJECT
PRICE TO OPTION
--------- ---------
<S> <C> <C>
Outstanding at January 1, 1995 $ 22.06 33,691
Options granted in 1995 20.00 3,000
-------
Outstanding at December 31, 1995 21.02 36,691
Options granted in 1996 29.60 78,825
Options forfeited in 1996 20.00 (5,000)
-------
Outstanding at December 31, 1996 27.18 110,516
Options granted in 1997 25.45 5,500
Options forfeited in 1997 40.00 (3,839)
-------
Outstanding at December 31, 1997 $ 26.66 112,177
-------
-------
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), which
addresses accounting for stock option, purchase and award plans. SFAS 123
specifies that companies utilize either the "fair value based method" or
the "intrinsic value based method" for valuing stock options granted. The
Company adopted FAS 123 in 1996, and is continuing to utilize the
"intrinsic value based method" for valuing stock options granted.
F-21
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Had the Company utilized the "fair value based method" to value stock
options granted, the Company's net income (loss) for 1997 and 1996 would
not have been materially different from reported net income (loss) for
those years. The weighted average fair value of option granted is
estimated on the date of grant using the Black Scholes option-pricing model
with the following assumptions:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSUMPTIONS
Weighted average risk-free interest rate 6.2% 6.2%
Weighted average expected life of option 6 years 7 years
</TABLE>
The Company also has agreed to provide life insurance policies, in
amounts ranging from $1 million to $3 million, for three of its executive
officers and two former executive officers for the remainder of their lives
or until such officers voluntarily resign to accept a comparable position.
Costs relative thereto are not material to the Company's consolidated
financial statements.
11. SIGNIFICANT CUSTOMERS
In 1997, 1996 and 1995, no single customer comprised more than 10% of
sales.
12. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
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 at December 31, 1997 for losses 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.
The Company utilizes computer information systems to internally record
and track information, as well as interact with customers, suppliers,
financial institutions and other organizations. The Company also sells
software through McHugh and incorporates software and computerized
functions in products throughout the Company. Management has preliminarily
assessed risks and costs related to addressing Year 2000 issues as they
pertain to the Company and its information systems. Based on this
assessment, management does not believe that the modification of the
Company's systems to address such issues will have a material impact on the
Company's financial position or results of operations. However, there are
numerous uncertainties related to addressing Year 2000 issues, including
actual implementation of measures to address these issues, impact of
outside parties appropriately addressing these issues and other factors,
some of which may be out of the Company's control, and all of which may
cause results to be different than currently anticipated by Management.
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 Automation, Inc., Alvey Systems, Inc. and McHugh Software
International, Inc. alleging fraudulent inducement, tortuous 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. The Company believes such claims are without merit and intends to
vigorously defend 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.
F-22
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of January 24, 1996, the Company established consulting agreements
with two related parties whereby the Company is obligated to make annual
payments of $350,000 plus expenses, with one contract providing for annual
increases of up to 3%. Additionally, the Company is obligated to
compensate one related party for certain merger, acquisition and financing
transactions. Concurrent with the Debt Offering (see Note 7) and the
Preferred Stock Offering (see Note 8), $750,000 was paid to one related
party in January 1996. At December 31, 1995, the Company had two
agreements with related parties under which the Company received investment
banking and other consulting services. These agreements were to terminate
in the years 2000 and 2002, respectively, however, the agreements were
terminated in January 1996, concurrent with the Debt Offering (see Note 7),
at a cost of $1.4 million. The agreements required annual payments by the
Company totaling $500,000 plus expenses. In addition, the Company was
required to pay an aggregate 2% investment banking fee on the total amount
of consideration paid or received through a merger, consolidation or sale
of more than 10% of Alvey's assets or outstanding securities, or the
acquisition of assets or stock of another company. Costs of these
agreements, including the termination fee, are included in other expense
(income), net in the accompanying consolidated financial statements.
In conjunction with the acquisition of Busse, a covenant not to
compete was signed by the former owners of Busse. The covenant requires
the Company to make twelve semi-annual payments of $150,000 to the former
owners commencing October 1992 and continuing through April 1998. A
portion of the Busse shares acquired by Alvey are pledged to secure
payments under the covenant not-to-compete.
Pursuant to the terms of an operating lease, the Company paid $0.9
million in each of 1996 and 1995, respectively, to a related party.
The Company has entered into employment agreements with several
members of executive management. The agreements require the Company to
pay the executive's salary for a period of up to one year should the
executive's employment be terminated. In addition, the agreements
provide for annual bonuses of up to 125% of the executive's annual
salary based upon the achievement of pre-established performance
targets.
13. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accrued expenses include the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- ---------
<S> <C> <C>
Project expenses $ 6,651 $ 8,476
Bonuses, incentives and profit sharing 9,782 10,642
Wages and salaries 2,558 2,147
Vacation and other employee costs 7,484 8,171
Interest expense 4,867 4,927
Restructuring costs 4,707
Other expenses 5,800 6,014
-------- --------
$ 41,849 $ 40,377
-------- --------
-------- --------
</TABLE>
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly financial information for the two years ended
December 31, 1997 is unaudited. However, in the opinion of management,
such information has been prepared on the same basis as the audited
F-23
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial statements and includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
results for the periods presented. The quarterly results however, are not
necessarily indicative of results for any future period.
Summarized quarterly financial data for fiscal 1997 and 1996 appear below
(in thousands):
<TABLE>
<CAPTION>
NET INCOME
NET SALES GROSS PROFIT (LOSS)
--------- ------------ ----------
<S> <C> <C> <C>
1997
First quarter $ 83,737 $ 21,880 $ (143)
Second quarter 90,746 21,301 (10,531)
Third quarter 95,824 24,806 1,730
Fourth quarter 102,562 25,838 1,625
-------- -------- --------
$372,869 $ 93,825 $ (7,319)
-------- -------- --------
-------- -------- --------
1996
First quarter $ 80,717 $ 19,482 $(14,548)
Second quarter 83,338 20,229 474
Third quarter 79,347 20,009 (217)
Fourth quarter 87,845 15,309 (16,605)
-------- -------- --------
$331,247 $ 75,029 $(30,896)
-------- -------- --------
-------- -------- --------
</TABLE>
The 1997 second quarter net loss includes a one-time restructuring
charge of $9.2 million, net of applicable income tax benefits, and one-time
asset write-down and other non-recurring charges totaling $1.4 million, net
of applicable income tax benefits (see Note 4).
The 1996 first quarter net loss includes one-time non-cash charges of
$11.7 million for the write-off of purchased in-process research and
development related to the acquisition of Weseley (see Note 3) and $2.0
million for the write-off of unamortized deferred financing fees, net of
applicable income tax benefits, resulting from the early extinguishment of
debt during January 1996 (see Note 7), as well as a one-time charge of
$840,000, net of applicable income tax benefits, for the termination of a
management agreement (see Note 12). The 1996 fourth quarter net loss
includes one-time non-cash charges of $1.0 million for the write-off of
purchased in-process research and development related to the acquisition of
RTS (see Note 3), $11.5 million for the write-off of goodwill (see Note 6)
and $400,000, net of applicable income tax benefits, for the write-off of
capitalized software (see Note 2).
15. SUBSEQUENT EVENT
Effective November 21, 1997, McHugh signed a letter of intent to
acquire Software Architects Incorporated, a provider of warehouse
management systems based in Brookfield, Wisconsin. The Company continues
to negotiate the terms of a definitive purchase agreement which is expected
to be complete by April 15, 1998.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Olivette, State of Missouri, on March 12, 1998
ALVEY SYSTEMS, INC.
By: /s/ Stephen J. O'Neill
-----------------------
Stephen J. O'Neill
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Stephen J. O'Neill President and Chief Executive Officer March 12, 1998
- ------------------------------ (Principal Executive Officer)
Stephen J. O'Neill
/s/ James A. Sharp Senior Vice President, Chief Financial March 12, 1998
- ------------------------------ Officer, Secretary and Assistant Treasurer
James A. Sharp (Principal Financial and Accounting Officer)
/s/ William R. Michaels Chairman of the Board March 12, 1998
- ------------------------------
William R. Michaels
/s/ Stephen J. O'Neill Director March 12, 1998
- ------------------------------
Stephen J. O'Neill
/s/ Christopher C. Cole Director March 12, 1998
- ------------------------------
Christopher C. Cole
/s/ Frederick R. Ulrich, Jr. Director March 12, 1998
- ------------------------------
Frederick R. Ulrich, Jr.
/s/ Prakash A. Melwani Director March 12, 1998
- ------------------------------
Prakash A. Melwani
/s/ Daniel S. O'Connell Director March 12, 1998
- ------------------------------
Daniel S. O'Connell
/s/ Charles A. Dill Director March 12, 1998
- ------------------------------
Charles A. Dill
</TABLE>
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Valuation Balance at Charged to Charged to Balance at
and Reserve Beginning Costs and Other End of
Accounts of Period Expenses Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1995
Accounts Receivable Reserve $595 $546 $0 ($317) $824
Inventory Reserve $1,474 $1,362 $0 ($784) $2,052
FOR THE YEAR ENDED DECEMBER 31, 1996
Accounts Receivable Reserve $824 $743 $242(1) ($603) $1,206
</TABLE>
(1) Reflects increase to Accounts Receivable Reserves due to
acquisitions of Weseley and RTS.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Inventory Reserve $2,052 $557 $176(1) ($386) $2,399
</TABLE>
(1) Reflects increase to Inventory Reserves due to acquisition of RTS.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1997
Accounts Receivable Reserve $1,206 $3,609 $0 ($2,997) $1,818
Inventory Reserve $2,399 $1,176 $0 ($609) $2,966
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholder and
Board of Directors of
Alvey Systems, Inc.
Our audits of the consolidated financial statements of Alvey Systems, Inc.
and its subsidiaries, referred to in our report dated February 18, 1998,
appearing on page F-2 of this Annual Report on Form 10-K, also included an audit
of the Financial Statement Schedule of Alvey Systems, Inc. listed at item 14(2)
of this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
St. Louis, Missouri
February 18, 1998
S-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3142
<SECURITIES> 0
<RECEIVABLES> 66440
<ALLOWANCES> 1818
<INVENTORY> 17178
<CURRENT-ASSETS> 113645
<PP&E> 55395
<DEPRECIATION> 19936
<TOTAL-ASSETS> 181792
<CURRENT-LIABILITIES> 110028
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (48528)
<TOTAL-LIABILITY-AND-EQUITY> 181792
<SALES> 372869
<TOTAL-REVENUES> 372869
<CGS> 279044
<TOTAL-COSTS> 279044
<OTHER-EXPENSES> 87836
<LOSS-PROVISION> 3609
<INTEREST-EXPENSE> 13756
<INCOME-PRETAX> (11376)
<INCOME-TAX> (4057)
<INCOME-CONTINUING> (7319)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7319)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
