<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- -------- Exchange Act of 1934.
For the quarterly period ended June 30, 1999.
Transition report pursuant to Section 13 or 15(d) of the Securities
- -------- Exchange Act of 1934.
For the transition period from to .
--------------------- --------------------
Commission File Number 333-2600
ALVEY SYSTEMS, INC.
9301 Olive Boulevard
St. Louis, MO 63132
314/993-4700
IRS Employment I.D. 43-0157210
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
----------------- -----------------
The number of shares of common stock outstanding at July 31, 1999 was 1,000
shares.
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
three and six months ended June 30, 1999 and 1998
(Unaudited) 3
Consolidated Balance Sheet - June 30, 1999
(Unaudited) and December 31, 1998 4
Consolidated Statement of Cash Flows -
six months ended June 30, 1999 and
1998 (Unaudited) 5-6
Consolidated Statement of Net Investment
of Parent for the six months ended June 30,
1999 (Unaudited) 7
Notes to Consolidated Financial Statements
(Unaudited) 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 20
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signature 20
</TABLE>
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 87,838 $ 77,941 $ 165,373 $ 150,123
Cost of goods sold 64,233 58,250 122,098 113,025
---------------- ---------------- --------------- ---------------
Gross profit 23,605 19,691 43,275 37,098
Selling, general and administrative expenses 14,542 12,974 26,832 24,741
Research and development expenses 1,083 1,301 2,130 2,174
Amortization expense 195 195 390 390
Operating loss (income) from divested operations 74 1,595 (97) 2,516
Other expense (income), net (4) 55 29 (493)
---------------- ---------------- --------------- ---------------
Operating income 7,715 3,571 13,991 7,770
Interest expense 2,012 3,244 4,428 6,702
---------------- ---------------- --------------- ---------------
Income before income taxes 5,703 327 9,563 1,068
Income tax expense 2,282 553 3,909 878
---------------- ---------------- --------------- ---------------
Net income (loss) $ 3,421 $ (226) $ 5,654 $ 190
================ ================ =============== ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,722 $ 2,499
Receivables:
Trade (less allowance for doubtful accounts of $682 and $657, respectively 48,136 29,782
Unbilled and other 4,257 3,607
Accumulated costs and earnings in excess of billings on uncompleted contracts 4,098 5,910
Inventories:
Raw materials 16,358 11,473
Work in process 6,023 5,217
Deferred income taxes 8,841 11,792
Net assets of divested operations - 2,831
Prepaid expenses and other assets 1,917 2,056
------------ -------------
Total current assets 115,352 75,167
Property, plant and equipment, net 27,994 27,058
Other assets 3,755 3,229
Goodwill, net 18,032 18,381
------------ -------------
$ 165,133 $ 123,835
============ =============
LIABILITIES AND NET INVESTMENT OF PARENT
Current liabilities:
Current portion of long-term debt $ 182 $ 185
Accounts payable 42,951 24,288
Accrued expenses 31,199 35,382
Customer deposits 6,646 5,399
Billings in excess of accumulated costs and earnings on uncompleted contracts 44,173 18,029
Deferred revenues 1,618 1,516
Taxes payable 1,588 710
------------ -------------
Total current liabilities 128,357 85,509
Long-term debt 70,205 76,696
Other long-term liabilities 7,755 8,246
Deferred income taxes 395 466
Commitment and contingencies (Note 6)
Net investment of Parent (41,579) (47,082)
------------ -------------
$ 165,133 $ 123,835
============ =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
-------------- ---------------
<S> <C> <C>
Operating activities:
Net income, excluding operating income (loss)
from divested operations $ 5,557 $ 2,706
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,092 1,933
Amortization 390 390
Operating activities of divested operations 515 (378)
Deferred taxes 2,880 (62)
(Increase) decrease in assets:
Receivables (19,004) 4,744
Accumulated costs and earnings in excess of
billings on uncompleted contracts 1,812 1,475
Inventories (5,691) 1,345
Other assets 357 444
(Decrease) increase in liabilities:
Accounts payable 18,663 (6,618)
Accrued expenses (4,481) (1,427)
Customer deposits 1,247 (1,977)
Billings in excess of accumulated costs and
earnings on uncompleted contracts 26,144 10,049
Deferred revenues 102 360
Taxes payable 878 1,325
Other liabilities (476) (334)
-------------- ---------------
Net cash provided by operating activities 30,985 13,975
-------------- ---------------
Investing Activities:
Cash received from the sale of Busse, net of related costs 1,963 --
Additions to property, plant and equipment, net (3,028) (1,809)
Investing activities of divested operations (26) (4,787)
-------------- ---------------
Net cash used for investing activities (1,091) (6,596)
-------------- ---------------
</TABLE>
(continued)
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
-------------- ----------------
<S> <C> <C>
Financing activities:
Proceeds of borrowings $ 29,500 $ 36,910
Payments of debt and capital leases (35,994) (43,231)
Financing activities of divested operations (26) (22)
Net contributions from (to) Parent (151) 8
-------------- ----------------
Net cash used for financing activities (6,671) (6,335)
-------------- ----------------
Net increase in cash and cash equivalents 23,223 1,044
Cash and cash equivalents, beginning of period 2,499 2,752
-------------- ----------------
Cash and cash equivalents, end of period $ 25,722 $ 3,796
============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on financings $ 4,359 $ 6,203
Income taxes 288 382
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET INVESTMENT OF PARENT
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED NET INVESTMENT
JUNE 30, 1999 OF PARENT
<S> <C>
Balance December 31, 1998 $ (47,082)
Net income 5,654
Net contributions to Parent (151)
------------------
Balance June 30, 1999 $ (41,579)
==================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Alvey
Systems, Inc. ( "Alvey" or the "Company") have been prepared in
accordance with the instructions for Form 10-Q and do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, in
the opinion of management, such information includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for the periods presented.
Operating results for any quarter are not necessarily indicative of the
results for any other quarter or for the full year. These statements
should be read in conjunction with the consolidated financial
statements and notes to the consolidated financial statements thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
2. PRINCIPLES OF CONSOLIDATION, EARNINGS PER SHARE INFORMATION
Alvey is a wholly-owned subsidiary of Pinnacle Automation, Inc.
("Pinnacle" or "Parent"). Pinnacle does not have any operations
or assets other than its investment in Alvey. The Company's
financial statements include the accounts of Alvey and its five
operating subsidiaries: The Buschman Company ("Buschman");
White Systems, Inc. ("White"); Real Time Solutions, Inc.
("RTS"); McHugh Software International, Inc. ("McHugh") and its
wholly-owned subsidiaries, Weseley Software Development Corp.
("Weseley" or "WSDC"), Software Architects, Inc. ("SAI") and
Gagnon & Associates, Inc. ("Gagnon"); and Busse Bros., Inc.
("Busse"). See Notes 3 and 4 for a discussion of divested
operations which include the sale of Busse (on June 29, 1999) and
the spin-off of McHugh and its subsidiaries (on October 27,
1998).
All significant intercompany transactions, which primarily consist of
sales, have been eliminated. The operating results of divested
operations, including McHugh in 1998 and Busse in 1998 and 1999, are
reflected in the Company's consolidated statement of operations as
operating loss (income) from divested operations. The net assets of
divested operations are presented as a separate line item in the
Company's consolidated balance sheet. The financial statements of prior
years have been reclassified to be consistent with the current year
with respect to divested operations.
Given the Company's historical organization and capital structure,
earnings per share information is not considered meaningful or relevant
and has not been presented in the accompanying unaudited consolidated
financial statements or notes thereto.
8
<PAGE>
3. SALE OF BUSSE BROS., INC.
On June 29, 1999, the Company sold all of the outstanding common stock
of Busse to a third party for approximately $3.5 million which was
comprised of $2.5 million in cash, $785,000 in the form of a note
receivable and $200,000 through the assumption of debt. Approximately
$236,000 of the note is due on June 29, 2001, with the remainder due
June 29, 2002. The purchase price is subject to further adjustment
based upon the balance of working capital at the date of sale, which is
required to be determined within 60 days of the sale date. Any purchase
price adjustments will be made through a combination of cash and an
adjustment to the aforementioned note receivable balance. Under the
terms of the sale agreement, Alvey will provide certain transitional
information services to Busse for a one year period from the closing
date.
The president of Busse is a shareholder in the acquiring company. Just
prior to the sale of Busse, the Company paid the president of Busse
approximately $632,000 to settle certain employment related matters.
Under the terms of a settlement agreement, if prior to April 15, 2000,
Pinnacle enters into certain binding agreements pertaining to the sale
of stock or assets or an initial public offering, Pinnacle may be
obligated to pay this individual an additional sum as defined in the
agreement.
During the fourth quarter of 1998, the Company recorded a potential
loss on the sale of Busse totaling $3.2 million. Of such total, $2.9
million has been recognized and the balance remains accrued pending any
final purchase price adjustments.
4. DIVESTED OPERATIONS
During October 1998, the Company issued as a dividend its previously
held shares in McHugh to Pinnacle. On October 27, 1998, Pinnacle
effected a spin-off of the common stock of McHugh to Pinnacle's
stockholders. Additionally, on June 29, 1999, and as described in Note
3, the Company sold Busse to a third party.
The operating loss (income) of McHugh and Busse is reflected in the
Company's consolidated statement of operations as operating loss
(income) from divested operations for the three and six months ended
June 30, 1999 and 1998, with the 1999 results related solely to Busse.
The net assets of Busse are reflected in the Company's consolidated
balance sheet as net assets of divested operations at December 31,
1998. Primary components of the operating (loss) income from divested
operations and net assets of divested operations are reflected on the
next page.
9
<PAGE>
Operating (loss) income from divested operations for the three and six
months ended June 30 (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 2,221 $ 29,582 $ 5,828 $ 50,120
Cost of goods sold 1,517 20,032 4,040 34,899
-------------- -------------- -------------- ---------------
Gross profit 704 9,550 1,788 15,221
Selling, general and
administrative expenses 649 6,368 1,467 10,766
Research and development
expenses 107 1,891 193 3,865
Amortization expense 10 186 19 408
Write-off of purchased R&D --- 2,700 --- 2,700
Other (income) expense, net 12 --- 12 (2)
-------------- -------------- -------------- ---------------
Operating (loss) income
from divested operations $ (74) $ (1,595) $ 97 $ (2,516)
============== ============== ============== ===============
Net assets of divested operations (in thousands):
DECEMBER 31,
1998
-------------
Current assets $ 3,235
Property, plant and equipment, net 3,658
Goodwill, net 1,385
Other assets 182
Less:
Current liabilities 5,472
Other liabilities 157
-------------
Net assets of divested operations $ 2,831
=============
</TABLE>
10
<PAGE>
5. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accrued expenses include the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(unaudited)
-------------- ------------
<S> <C> <C>
Project expenses $ 5,776 $ 6,058
Bonuses, incentives and profit sharing 5,580 9,244
Wages and salaries 1,399 1,315
Vacation and other employee costs 6,285 5,762
Interest expense 3,357 3,367
Accrued professional fees 1,408 2,118
Other expenses 7,394 7,518
-------------- ------------
$ 31,199 $ 35,382
============== ============
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation consisting almost
entirely of product and general liability claims arising in the normal
course of its business. After deduction of a per occurrence
self-insured retention, the Company is insured for losses of up to $52
million per year for products and general liability claims. The Company
has provided reserves for the estimated cost of the self-insured
retention; accordingly, these actions, when ultimately concluded, are
not expected to have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
In February 1999, the Chapter 7 Trustee for Foxmeyer Corporation,
Foxmeyer Drug Company, Healthcare Transportation System, Inc.,
Merchandise Coordinator Services Corporation, Foxmeyer Software, Inc.,
and Health Mart, Inc. (collectively, "Foxmeyer") filed suit against
Buschman, White, Pinnacle, Alvey and McHugh in the United States
District Court for the District of Delaware alleging fraud, negligence
and breach of contract relating to conveyor, carousel and warehouse
management systems delivered and installed in Foxmeyer's distribution
warehouse at Washington Court House, Ohio. Only McHugh and Buschman
(with White as its subcontractor) had contracts with Foxmeyer. The
monetary relief sought by the Foxmeyer complaint is unspecified;
however compensatory and punitive damages are claimed. The Company has
filed a motion to dismiss on numerous counts. Foxmeyer opposition
briefs are scheduled to be filed before the court in August 1999.
Discovery has not commenced and a trial date has not been set, but the
Company intends to contest the allegations made and vigorously defend
the matter.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
When used in the following discussion, the words "believes", "anticipates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. The Company undertakes no obligation
to publicly release the result of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
GENERAL
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of Alvey Systems, Inc.
for the three and six months ended June 30, 1999 compared to the three and
six months ended June 30, 1998. This discussion should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
On October 27, 1998, McHugh was spun-off from Alvey to Pinnacle and from
Pinnacle to its common stockholders. In addition, on June 29, 1999 Busse was
sold to a third party. (See Notes 3 and 4 to the consolidated financial
statements.) The operating results of divested operations, including McHugh
in 1998 and Busse in 1998 and 1999, are reflected in the Company's
consolidated statement of operations as operating loss (income) from divested
operations. Financial information of prior years has been reclassified to be
consistent with the current year with respect to divested operations.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, net sales and
categories of expense (income) as a percentage of net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(unaudited) (unaudited)
----------------------------------- ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 73.1 74.7 73.8 75.3
Gross profit 26.9 25.3 26.2 24.7
Selling, general & administrative
expenses 16.6 16.6 16.2 16.4
Research & development
expenses 1.2 1.7 1.3 1.4
Amortization expense 0.2 0.3 0.2 0.3
Operating loss (income) from
divested operations 0.1 2.0 (0.0) 1.7
Other expense (income), net (0.0) 0.1 0.0 (0.3)
Operating income 8.8 4.6 8.5 5.2
Interest expense 2.3 4.2 2.7 4.5
Income before income taxes 6.5 0.4 5.8 0.7
Income tax expense 2.6 0.7 2.4 0.6
Net income (loss) 3.9 % (0.3)% 3.4 % 0.1 %
</TABLE>
COMPARISON OF THE QUARTER ENDED JUNE 30, 1999 TO THE QUARTER
ENDED JUNE 30, 1998
NET SALES were $87.8 million for the quarter ended June 30, 1999,
representing an increase of $9.9 million, or 12.7%, over net sales of $77.9
million for the quarter ended June 30, 1998. This change was led by sales of
systems for consumer goods producers, which increased $8.3 million. Increased
volume levels in all other areas were offset in part by decreased sales of
storage and retrieval systems. Revenues attributable to the delivery of
e-commerce fulfillment systems continue to grow and represent in excess of
20% of second quarter revenues.
NEW ORDER BOOKINGS were $84.1 million for the quarter ended June 30, 1999,
representing a decrease of $9.2 million, or 9.9%, from bookings in the
quarter ended June 30, 1998 (which represented the second highest quarterly
bookings for the Company). Bookings of consumer goods systems decreased $8.3
million from the second quarter of 1998, a quarter that represented 36% of
total consumer goods system bookings for that year.
13
<PAGE>
GROSS PROFIT was $23.6 million for the quarter ended June 30, 1999, an
increase of $3.9 million, or 19.9%, over the quarter ended June 30, 1998. As
a percent of sales, gross margins were 26.9% for the second quarter of 1999,
increasing 1.6 percentage points from the same period of 1998. Higher volume
related to consumer goods systems was the primary contributor to the increase
in gross profit. Additionally, improved project performance and a mix shift
in distribution system revenues to subsystems and products with higher profit
margins increased gross margins as a percent of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) were $14.5 million for
the quarter ended June 30, 1999, representing an increase of $1.6 million, or
12.1%, over the quarter ended June 30, 1998. As a percentage of sales, SG&A
was 16.6% in both the second quarter of 1999 and 1998. This dollar increase
was primarily driven by increased bonus, incentive and profit sharing expense
resulting from record bookings and rising income levels as well as increased
staffing related to selling distribution systems through new direct sales
offices.
RESEARCH AND DEVELOPMENT EXPENSES were $1.1 million for the second quarter of
1999, a decrease of $218,000 from $1.3 million for the second quarter of
1998. Spending was temporarily reduced as R&D resources were diverted to meet
production needs.
OPERATING LOSS FROM DIVESTED OPERATIONS was $74,000 for the quarter ended
June 30, 1999 as compared to a loss of $1.6 million for the quarter ended
June 30, 1998. This improvement is primarily attributable to the absence of
losses experienced by McHugh in the second quarter of 1998, which included a
$2.7 million write-off of purchased research and development attributable to
the acquisitions of SAI and Gagnon. Additionally, improved margins and lower
SG&A costs at Busse for the second quarter of 1999 when compared to the same
period of 1998 contributed to this improvement.
OPERATING INCOME for the quarter ended June 30, 1999 was $7.7 million as
compared to $3.6 million in the second quarter of 1998, an increase of $4.1
million, or 116%. Excluding divested operations, operating income was $7.8
million in the second quarter of 1999 as compared to $5.2 million for the
same period of 1998. As a percentage of sales and excluding divested
operations, operating income was 8.9% in the second quarter of 1999 compared
to 6.6% for the same period of 1998. The increase in operating income
reflects the various factors described above.
INTEREST EXPENSE was $2.0 million in the second quarter of 1999 representing
a decrease of $1.2 million, or 38.0%, from $3.2 million in the second quarter
of 1998. This decrease reflects the repurchase of $30.0 million of Senior
Subordinated Notes in November 1998, lower borrowings under the Company's
revolving credit facility and a decrease in non-cash charges as a result of
the write-off of debt issuance costs attributable to the refinancing in 1998.
14
<PAGE>
INCOME TAX expense was $2.3 million for the quarter ended June 30, 1999,
representing an increase of $1.7 million from $553,000 for the second quarter
of 1998. The significant difference between the effective tax rate on income
before income taxes and the expected statutory rates is primarily
attributable to the non-deductibility of expenses related to the write-off of
purchased in-process research and development and the amortization of
goodwill.
NET INCOME was $3.4 million for the quarter ended June 30, 1999, an
improvement of $3.6 million from the quarter ended June 30, 1998. This
increase is the result of the various factors discussed above.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS ENDED
JUNE 30, 1998
NET SALES were $165.4 million for the six months ended June 30, 1999,
representing an increase of $15.3 million, or 10.2%, over net sales of $150.1
million for the six months ended June 30, 1998. Increased volume related to
consumer goods systems was offset in part by decreased sales of storage
systems. For the first half of 1999, more than 15% of total net sales were
associated with e-commerce fulfillment systems.
NEW ORDER BOOKINGS were $236.7 million for the six months ended June 30,
1999, $69.0 million, or 41.2%, above the six months ended June 30, 1998.
Bookings for both distribution systems and paperless picking systems
increased in excess of 60%, while bookings of consumer goods systems
increased 25.8% for the first half of 1999 as compared to the first half of
1998.
GROSS PROFIT was $43.3 million for the six months ended June 30,1999, an
increase of $6.2 million, or 16.7%, over the six months ended June 30, 1998.
As a percentage of sales, gross margins for the first half of 1999 were
26.2%, a 1.5 percentage point increase over the same period in 1998. This
increase was led by increased volume related to consumer goods systems and
secondly attributable to improved profitability related to distribution
systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) were $26.8 million for
the six months ended June 30, 1999, representing an increase of $2.1 million,
or 8.5%, over the six months ended June 30, 1998. As a percentage of sales,
SG&A was 16.2% for the first six months of 1999, a decrease of 0.2 percentage
points over the same period of 1998. This dollar increase was driven by
increased bonus and incentive expense related to record bookings and
increasing income levels as well as increased staffing and expenses related
to new field offices for distribution systems.
OPERATING LOSS (INCOME) FROM DIVESTED OPERATIONS was income of $97,000 for
the six months ended June 30, 1999 as compared to a loss of $2.5 million for
the six months ended June 30, 1998. This increase is primarily attributable
to the absence of losses experienced by McHugh in the first six months of
1998 which included a $2.7 million write-off of purchased research and
development as well as improved volume and margins at Busse for the first
half of 1999 when compared to the same period of 1998.
15
<PAGE>
OTHER EXPENSE (INCOME), net was expense of $29,000 for the six months ended
June 30, 1999, compared to income of $493,000 for the six months ended June
30, 1998. This change is almost entirely attributable to the absence of
income recognized from the proceeds of a life insurance settlement in the
first quarter of 1998.
OPERATING INCOME for the first six months of 1999 was $14.0 million compared
to $7.8 million for the first half of 1998. Excluding divested operations,
operating income was $13.9 million and $10.3 million for the six months ended
June 30, 1999 and 1998, respectively. As a percentage of sales, and excluding
divested operations, operating income increased to 8.4% in the first six
months of 1999 compared to 6.9% for the same period of 1998. The increase in
operating income reflects the various factors described above.
INTEREST EXPENSE was $4.4 million in the first half of 1999 as compared to
$6.7 million in the first half of 1998. This decrease reflects the repurchase
of $30.0 million of Senior Subordinated Notes in November 1998, lower
borrowings under the Company's revolving credit facility and a decrease in
non-cash charges as a result of the write-off of debt issuance costs
attributable to the refinancing in 1998.
INCOME TAX EXPENSE was $3.9 million for the six months ended June 30, 1999,
representing an increase of $3.0 million from the $878,000 for the first half
of 1998. The significant difference between the effective tax rate on income
before income taxes and the expected statutory rates is attributable to the
non-deductibility of expenses related to the write-off of purchased
in-process research and development costs and the amortization of goodwill.
NET INCOME was $5.7 million for the six months ended June 30, 1999, an
increase of $5.5 million from the six months ended June 30, 1998, as a result
of the various factors described above.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATING ACTIVITIES. During the six months ended June 30,
1999 and 1998, cash provided by operating activities was $31.0 million and
$14.0 million, respectively. This $17.0 million year-over-year improvement is
primarily attributable to significant billings activity in the first half of
1999 resulting from the record bookings level and the Company's improved
profitability. Other changes in the Company's working capital components
primarily reflect the increasing volume of business in the current year
period. Although cash provided by operating activities in the first half of
1998 was primarily utilized to fund investing and financing activities, the
cash provided by operating activities in the first half of 1999 exceeded the
requirement for these activities and has resulted in a significant increase
in the cash and cash equivalents balance. Of the $25.7 million of cash and
cash equivalents at June 30, 1999, $23.2 million was invested in short-term
commercial paper.
16
<PAGE>
CAPITAL EXPENDITURES for the six months ended June 30, 1999 and 1998 were
$3.0 million and $1.8 million, respectively. Management anticipates that
current year capital expenditures will approximate $6.0 million.
CASH FLOW FROM FINANCING ACTIVITIES. Net borrowings decreased by $6.5 million
and $6.3 million in the six months ended June 30, 1999 and 1998,
respectively. Such decreases reflect the application of cash provided by
operating activities against the revolving credit facility. For a discussion
of the Company's credit facilities, see Note 8 to the consolidated financial
statements included in the Company's annual report on Form 10-K for the year
ended December 31, 1998.
ONGOING CASH FLOWS FROM OPERATIONS. The Company believes that its funds from
operations, together with available funds under its credit facility, will be
sufficient to meet its currently anticipated operating, debt service and
capital expenditure requirements with minimal additional borrowings. The
Company continues to evaluate and consider business acquisition candidates.
BACKLOG. At June 30, 1999 the Company had a backlog of $171.1 million, as
compared to $133.0 million at June 30, 1998 and $99.4 million at December 31,
1998. This significant increase is entirely attributable to record bookings
in the first half of 1999. The Company's backlog is based upon firm customer
commitments that are supported by a combination of purchase orders, other
contractual documents and cash payments. While the level of backlog at any
particular time may be an indication of future sales, it is not necessarily
indicative of the Company's future operating performance. Additionally,
certain backlog orders may be subject to cancellation in certain
circumstances. The Company believes that substantially all orders in backlog
at June 30, 1999 will be shipped within one year.
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.
17
<PAGE>
YEAR 2000. The Company utilizes computer information systems to internally
record and track information and interact with customers, suppliers,
financial institutions and other organizations. The Company also incorporates
software and computerized functions in products sold throughout the Company.
The Company has appointed a Director of Year 2000 Issues to coordinate and
lead the Year 2000 ("Y2K") project. Each Alvey subsidiary has a Year 2000
Coordinator who reports to the Director of Year 2000 and leads the Y2K effort
for that subsidiary. Additionally, the Company has selected a law firm to
consult on Y2K issues. The Company established a corporate definition of Y2K
Readiness, and incorporated it into a position statement now being used in
response to customers' Y2K inquiries as well as in new business proposals.
All subsidiaries have developed detailed implementation plans based on
a five phase resolution process that includes Phase I (Awareness), Phase
II (Assessment), Phase III (Renovation), Phase IV (Validation) and Phase
V (Contingency Planning). Company systems have been separated into
three areas: 1) internal, 2) business partners and 3) external
customers. These areas have been subdivided to address specific issues
with: A) internally engineered systems, B) purchased systems and C)
embedded systems.
Phase I and II are complete at all companies. Throughout the assessment
phase, several of the subsidiaries have found that the types of equipment
supplied to their customers typically do not utilize date functions, and
therefore, present only minimal Y2K issues. The exceptions are the
computer-based systems supplied with commercially available and
custom-designed software packages.
Phase III work is complete for all mission critical systems. These systems
have either been corrected or replaced at all subsidiaries. Renovations to
personal computers will most likely continue throughout 1999 as many "off the
shelf" software manufacturers continue to review and upgrade their products.
Phase IV testing has been completed on mission critical systems. The testing
identified only minor issues, which have subsequently been corrected. We have
performed system-wide tests, where applicable, and continue to test other
systems to help ensure that no new date-related problems are introduced into
previously tested or newly developed systems. Testing of hardware devices,
such as Programmable Logic Controllers and Human/Machine Interfaces, utilized
on the majority of the Company's systems, is underway and has been completed
on numerous units. This testing will be ongoing throughout the year as new
and different versions of hardware are utilized. Testing of several customer
systems has also been completed with favorable results.
Phase V, contingency planning, has begun at several subsidiaries and is now
becoming the primary focus of the Company's Y2K efforts. The contingency
plans that have been prepared are being reviewed for completeness, and will
be used as guidelines for development of plans in other areas of the
companies. Completion of all contingency plans is expected by the end of the
third quarter of 1999.
18
<PAGE>
Alvey and its subsidiaries are actively pursuing compliance statements from
suppliers and business partners. Questionnaires have been mailed to all
critical vendors and responses have been received from most. Where no
response was received or the response was unacceptable, second requests have
or are being mailed.
Based on our findings to-date, the Company believes its costs for the Year
2000 project will be between $2.0 million and $2.5 million, all of which have
been or are expected to be charged to operations. Approximately 40% of these
costs are considered incremental, while the remaining 60% are a utilization
of current Company employees or expenditures that would have been made in the
normal course of business but may be accelerated due to Y2K issues.
Alvey is dependent upon its own internal computer technology, relies upon
timely performance by its business partners and provides computerized
functions to customers. A large-scale internal Year 2000 failure could, while
believed to be remote, impair the Company's ability to timely deliver
products and services to customers, resulting in potential lost sales
opportunities and additional expenses. Significant computer failures by
critical vendors could disrupt the Company's ability to produce and timely
deliver products or services. However, given the nature of the products and
services provided, the Company believes any such disruption can be minimized
through the utilization of readily available alternative sources. In the
event computerized functions provided by Alvey to its customers encounter a
Y2K failure, those customers may look to Alvey to provide assistance or
services. A large scale failure could exceed the Company's ability to timely
respond to the needs of these customers, resulting in additional expenses and
potential loss of customers. The Company's Y2K program seeks to identify and
minimize this risk and includes testing of its systems to ensure, to the
extent feasible, all such systems will function properly before and after the
Year 2000. Alvey is continually refining its understanding of the risks posed
by the Year 2000, and will continue to do so throughout 1999.
Almost every company in today's business world will be affected by the Year
2000 in some way. Because there are many indirect relationships and external
factors over which the Company has little or no control, it is impossible to
guarantee that all of the Company's systems will perform perfectly. The
Company believes, however, that its analysis and efforts to identify and
correct potential Y2K problems will enable it to resolve effectively any
date-related systems issues in a timely manner and that such issues will not
have a material adverse effect on the Company's consolidated results of
operation.
19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of business and to the extent short-term borrowings
are utilized, the Company is exposed to interest rate risks by way of changes
in short-term interest rates. The Company does not have any significant
amount of export sales denominated in foreign currencies, and acquires its
raw material supply needs in U. S. dollar-denominated transactions.
Therefore, the Company is not viewed as being exposed to foreign currency
fluctuation market risks.
The Company has no material derivative financial instruments as of June 30,
1999, and does not enter into derivative financial instruments for trading
purposes. Market risks that the Company has currently elected not to hedge
primarily relate to its floating rate debt.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are required to be filed herewith.
(b) No current reports on Form 8-K were filed during the quarter
ended June 30, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALVEY SYSTEMS, INC.
Date: August 9, 1999 /s/ JAMES A. SHARP
--------------------------------------------
James A. Sharp
Secretary and Senior Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
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