<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
- -------- Securities Exchange Act of 1934.
For the quarterly period ended March 31, 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
I.R.S. Employment I.D. 43-0157210
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
----- -----
The number of shares of common stock outstanding at April 30, 1999 was 1,000
shares.
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I -- Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations -
three months ended March 31, 1999 and 1998
(Unaudited) 3
Consolidated Balance Sheet - March 31, 1999
(Unaudited) and December 31, 1998 4
Consolidated Statement of Cash Flows -
three months ended March 31, 1999 and 1998
(Unaudited) 5-6
Consolidated Statement of Net Investment
of Parent for the three months ended March 31,
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 11-17
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 17
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Net sales $ 77,535 $ 72,182
Cost of goods sold 57,865 54,775
------------ -------------
Gross profit 19,670 17,407
Selling, general and administrative expenses 12,290 11,767
Research and development expenses 1,047 873
Amortization expense 195 195
Operating loss (income) from divested operations (171) 921
Other expense (income), net 33 (548)
------------ -------------
Operating income 6,276 4,199
Interest expense 2,416 3,458
------------ -------------
Income before income taxes 3,860 741
Income tax expense 1,627 325
--------------- -------------
Net income $ 2,233 $ 416
--------------- -------------
--------------- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED)
---------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,559 $ 2,499
Receivables:
Trade (less allowance for doubtful accounts of $664 and $657, respectively) 47,764 29,782
Unbilled and other 2,682 3,607
Accumulated costs and earnings in excess of billings on uncompleted contracts 3,768 5,910
Inventories:
Raw materials 12,983 11,473
Work in process 5,919 5,217
Deferred income taxes 10,273 11,792
Net assets of divested operations 2,395 2,831
Prepaid expenses and other assets 1,863 2,056
---------------- ----------------
Total current assets 111,206 75,167
Property, plant and equipment, net 26,685 27,058
Other assets 3,102 3,229
Goodwill, net 18,210 18,381
---------------- ----------------
$ 159,203 $ 123,835
---------------- ----------------
---------------- ----------------
LIABILITIES AND NET INVESTMENT OF PARENT
Current liabilities:
Current portion of long-term debt $ 180 $ 185
Accounts payable 21,845 24,288
Accrued expenses 27,247 36,092
Customer deposits 10,110 5,399
Billings in excess of accumulated costs and earnings on uncompleted contracts 56,385 18,029
Deferred revenues 1,532 1,516
---------------- ----------------
Total current liabilities 117,299 85,509
Long-term debt 78,251 76,696
Other long-term liabilities 8,091 8,246
Deferred income taxes 428 466
Commitments and contingencies (Note 5)
Net investment of Parent (44,866) (47,082)
---------------- ----------------
$ 159,203 $ 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>
THREE MONTHS ENDED MARCH 31,
1999 1,998
-------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income, excluding operating income (loss)
from divested operations $ 2,062 $ 1,337
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,043 958
Amortization 195 195
Operating activities of divested operations 635 (3,447)
Deferred taxes 1,481 98
(Increase) decrease in assets:
Receivables (17,057) 6,463
Accumulated costs and earnings in excess of
billings on uncompleted contracts 2,142 2,698
Inventories (2,212) (808)
Other assets 296 (18)
(Decrease) increase in liabilities:
Accounts payable (2,443) (3,493)
Accrued expenses (8,845) (3,984)
Customer deposits 4,711 178
Billings in excess of accumulated costs and
earnings on uncompleted contracts 38,356 4,341
Deferred revenues 16 77
Other liabilities (155) (164)
-------------- ----------------
Net cash provided by operating activities 20,225 4,431
-------------- ----------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment, net (670) (1,067)
Investing activities of divested operations (15) (651)
-------------- ----------------
Net cash used for investing activities (685) (1,718)
-------------- ----------------
</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>
THREE MONTHS ENDED MARCH 31,
1999 1998
-------------- ----------------
<S> <C> <C>
FINANCING ACTIVITIES:
Proceeds of borrowings 28,500 27,910
Payments of debt and capital leases (26,950) (23,156)
Financing activities of divested operations (13) (12)
Net contributions to Parent (17) (13)
-------------- ----------------
Net cash provided by financing activities 1,520 4,729
-------------- ----------------
Net increase in cash and cash equivalents 21,060 7,442
Cash and cash equivalents, beginning of period 2,499 2,752
-------------- ----------------
Cash and cash equivalents, end of period $ 23,559 $ 10,194
-------------- ----------------
-------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on financings $ 4,217 $ 6,023
Income taxes 106 80
</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 THREE MONTHS ENDED NET INVESTMENT
MARCH 31, 1999 OF PARENT
<S> <C>
Balance December 31, 1998 $(47,082)
Net income 2,233
Net contributions to Parent (17)
------------
Balance March 31, 1999 $(44,866)
------------
------------
</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: McHugh Software International, Inc. ("McHugh") and its
wholly-owned subsidiaries, Weseley Software Development Corp.
("Weseley" or "WSDC"), Software Architects, Inc. ("SAI") and Gagnon &
Associates, Inc. ("Gagnon"); Busse Bros., Inc. ("Busse"); The Buschman
Company ("Buschman"); White Systems, Inc. ("White"); and Real Time
Solutions, Inc. ("RTS"). See Note 3 for a discussion of divested
operations which include the spin-off of McHugh and its subsidiaries
(effected on October 27, 1998) and the planned divestiture of Busse.
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. 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, during 1998 the Company decided that Busse
was not central to its strategic plan, and as a result, management
began the process to divest Busse.
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 months ended March 31,
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 March 31, 1999 and
December 31, 1998, respectively. Primary components of the operating
(loss) income from divested operations and net assets of divested
operations are reflected below.
Operating (loss) income from divested operations for the three months
ended March 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Net sales $3,607 $20,538
Cost of goods sold 2,523 14,867
-------------- -------------
Gross profit 1,084 5,671
Selling, general and administrative expenses 818 4,398
Research and development expenses 86 1,974
Amortization expense 9 222
Other income, net 0 2
-------------- -------------
Operating (loss) income from divested operations $ 171 $ (921)
-------------- -------------
-------------- -------------
</TABLE>
9
<PAGE>
Net assets of divested operations (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(unaudited) 1998
-------------------- -------------------
<S> <C> <C>
Current assets $ 2,527 $ 3,235
Property, plant and equipment, net 3,575 3,658
Goodwill, net 1,375 1,385
Other assets 181 182
Less:
Current liabilities 5,119 5,472
Other liabilities 144 157
-------- --------
Net assets of divested operations $ 2,395 $ 2,831
-------- --------
-------- --------
</TABLE>
4. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accrued expenses include the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(unaudited) 1998
------------------- -------------------
<S> <C> <C>
Project expenses $ 6,354 $ 6,058
Bonuses, incentives and profit sharing 3,353 9,244
Wages and salaries 1,237 1,315
Vacation and other employee costs 6,107 5,762
Interest expense 1,398 3,367
Accrued professional fees 1,314 2,118
Other expenses 7,484 8,228
--------- ---------
$ 27,247 $ 36,092
--------- ---------
--------- ---------
</TABLE>
5. 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.
On April 16, 1998, Mannesmann Dematic Rapistan Corp. ("Rapistan") filed
suit against Buschman in the United States District Court for the
Western District of Michigan alleging infringement of three Rapistan
patents relating to Buschman induction systems (the "Rapistan
Dispute"). Rapistan was seeking to permanently enjoin Buschman from
infringing those patents and both
10
<PAGE>
compensatory and treble damages. Related to Buschman's counterclaims
and affirmative defenses raised in this litigation, on June 5, 1998
the Company filed a separate suit against Mannesmann Corporation
("Mannesmann") in the United States District Court for the Southern
District of New York on the basis of the representations, warranties
and disclosure obligations of Mannesmann with respect to the patents
subject to the Rapistan Dispute at the time the Company acquired
Buschman from Mannesmann in 1992. A settlement agreement was executed
between Alvey, Buschman, Mannesmann and Rapistan on January 4, 1999.
On January 27, 1999, the court formally entered an order of dismissal
of the Rapistan litigation.
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
will file its answer by June 1, 1999 within the time required by the
federal rules. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
When used in the following discussion, the words "believes", "anticipates" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
GENERAL
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of Alvey Systems, Inc.
for the three months ended March 31, 1999 compared to the three months ended
March 31, 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.
11
<PAGE>
On October 27, 1998, McHugh was spun-off from Alvey to Pinnacle and from
Pinnacle to its common stockholders. In addition, the decision was made to
divest Busse in 1998. (See Note 3 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, net sales, categories
of expenses and income data in thousands of dollars and as a percentage of net
sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(unaudited)
1999 % 1998 %
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net sales $ 77,535 100.0% $ 72,182 100.0%
Cost of goods sold 57,865 74.6 54,775 75.9
-------- --------
Gross profit 19,670 25.4 17,407 24.1
Selling, general & administrative
expenses 12,290 15.9 11,767 16.3
Research & development
expenses 1,047 1.3 873 1.2
Amortization expense 195 0.3 195 0.3
Operating loss (income) from divested
operations (171) (0.2) 921 1.3
Other expense (income), net 33 0.0 (548) (0.8)
-------- --------
Operating income 6,276 8.1 4,199 5.8
Interest expense 2,416 3.1 3,458 4.8
-------- --------
Income before income taxes 3,860 5.0 741 1.0
Provision for income taxes 1,627 2.1 325 0.4
-------- --------
Net income $ 2,233 2.9% $ 416 0.6%
-------- --------
-------- --------
</TABLE>
COMPARISON OF THE QUARTER ENDED MARCH 31, 1999 TO THE QUARTER ENDED MARCH 31,
1998
NET SALES were $77.5 million for the quarter ended March 31, 1999,
representing an increase of $5.4 million, or 7.4%, over net sales of $72.2
million for the quarter ended March 31, 1998. Volume levels for palletizing
systems increased $7.5 million, which was offset in part by decreased sales
of storage and retrieval systems.
NEW ORDER BOOKINGS were $152.6 million for the quarter ended March 31, 1999,
representing an increase of $78.2 million, or 105%, from bookings in the
quarter ended March 31, 1998. Bookings for each of distribution systems,
paperless picking systems and palletizing systems increased in excess of 110%
for the first quarter of 1999 as compared to the same period of the prior
year, setting a new record for the corporation.
12
<PAGE>
GROSS PROFIT was $19.7 million for the quarter ended March 31, 1999, an increase
of $2.3 million, or 13.0%, over the quarter ended March 31, 1998. As a percent
of sales, gross margins were 25.4% for the first quarter of 1999, increasing 1.3
percentage points from the same period of 1998. Higher volume related to
palletizing systems was the primary contributor to the increase in gross profit.
Improved project performance and a shift in mix to products with higher profit
margins increased gross margins as a percent of sales for both distribution
systems and paperless picking systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) were $12.3 million for the
quarter ended March 31, 1999, representing an increase of $523,000, or 4.4%,
over the quarter ended March 31, 1998. As a percentage of sales, SG&A was 15.9%
or 0.4 percentage points lower than the first quarter of 1998. This dollar
increase was primarily driven by increased staffing related to distribution
systems where new direct sales offices have been established to support growing
sales volumes.
RESEARCH AND DEVELOPMENT EXPENSES were $1.0 million for the first quarter of
1999, an increase of $174,000 from $873,000 for the first quarter of 1998. This
change is primarily the result of increased activities related to the
development of the next generation of sortation equipment and systems
development to automate various aspects of the order/production cycle, both
related to distribution systems. This was offset by decreased spending in the
first quarter of 1999 related to paperless picking systems and palletizing
systems as R&D resources were temporarily diverted to meet production needs.
OPERATING LOSS (INCOME) FROM DIVESTED OPERATIONS was income of $171,000 for the
quarter ended March 31, 1999 as compared to a loss of $921,000 for the quarter
ended March 31, 1998. This increase is primarily attributable to the absence of
losses experienced by McHugh in the first quarter of 1998 as well as improved
volume and margins at Busse for the first quarter of 1999 when compared to the
same period of 1998.
OTHER EXPENSE (INCOME), NET was expense of $33,000 for the quarter ended March
31, 1999 compared to income of $548,000 for the quarter ended March 31, 1998.
This decrease of $581,000 is primarily attributable to income recognized from
the proceeds of a life insurance settlement in the first quarter of 1998.
OPERATING INCOME for the quarter ended March 31, 1999 was $6.3 million as
compared to $4.2 million in the first quarter of 1998, an increase of $2.1
million, or 49.5%. As a percentage of sales, operating income was 8.1% in the
first quarter of 1999 compared to 5.8% for the same period of 1998. The increase
in operating income reflects the various factors described above.
INTEREST EXPENSE was $2.4 million in the first quarter of 1999 representing a
decrease of $1.0 million, or 30.1%, from $3.5 million in the first quarter of
1998. This decrease reflects lower interest expense related to the Senior
Subordinated Notes attributable to the repurchase of $30.0 million of such Notes
in November 1998 and a decrease in non-cash charges as a result of the write-off
of debt issuance costs attributable to the refinancing in 1998.
13
<PAGE>
PROVISION FOR INCOME TAXES was $1.6 million for the quarter ended March 31,
1999, representing an increase of $1.3 million from the $325,000 of tax expense
for the first 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
amortization of goodwill.
NET INCOME was $2.2 million for the quarter ended March 31, 1999, an improvement
of $1.8 million from the quarter ended March 31, 1998. This increase is the
result of the various factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATING ACTIVITIES. During the three months ended March 31,
1999 and 1998, cash provided by operating activities was $20.2 million and $4.4
million, respectively. This $15.8 million year-over-year improvement is
primarily attributable to significant billings activity in the first quarter of
1999 resulting from the record bookings level, offset in part by increased bonus
payments in the first quarter of 1999 as compared to the first quarter of 1998.
First quarter funding of annual profit sharing plan contributions, incentive
compensation and bonus plans, disproportionate tax withholding requirements and
certain professional services historically have resulted in a significant use of
cash in the first quarter.
CAPITAL EXPENDITURES for the three months ended March 31, 1999 and 1998 were
$670,000 and $1.1 million, respectively. Management anticipates that current
year capital expenditures will approximate $6.0 million.
CASH FLOW FROM FINANCING ACTIVITIES. Net borrowings increased by $1.6 million
and $4.8 million in the three months ended March 31, 1999 and 1998,
respectively. The increase in borrowings in the first quarter of 1998 was
primarily used to fund operating activities, while the year over year decrease
reflects the significant improvement in cash provided by operating activities.
The Company typically borrows to fund short-term cash requirements using a
combination of LIBOR contracts of 30-day duration and daily borrowings at prime
plus 1-1/2%. At both March 31, 1999 and 1998, all of the Company's borrowings
under the revolving line of credit were under LIBOR commitments. Had the Company
elected to incur a penalty and terminate certain of the LIBOR contracts, cash
and long-term debt could have been reduced by $8.0 million and $4.0 million at
March 31, 1999 and 1998, respectively. Also, 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 the Company's credit facility,
will be sufficient to meet its currently anticipated operating, debt service and
capital expenditure requirements with minimal additional borrowings. In
addition, the Company continues to evaluate and consider business acquisition
candidates.
BACKLOG. At March 31, 1999 the Company had a backlog of $174.9 million, as
compared to $117.6 million at March 31, 1998 and $99.4 million at December 31,
1998.
14
<PAGE>
This significant increase is entirely attributable to record first quarter
1999 bookings. The Company's backlog is based upon firm customer commitments
that are supported by purchase orders, other contractual documents and cash
payments. While the level of backlog at any particular time may be an
indication of future sales, it is not necessarily indicative of the Company's
future operating performance. Additionally, certain backlog orders may be
subject to cancellation in certain circumstances. The Company believes that
substantially all orders in backlog at March 31, 1999 will be shipped within
one year.
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 appointed a Year 2000 Coordinator who
reports to the Director of Year 2000 and is leading the Y2K effort for that
subsidiary. Additionally, the Company has selected a law firm to consult on Y2K
issues. The Company has 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 underway, and while each subsidiary has unique issues, on
average the Company believes this phase is approximately 80% complete.
Renovations to many of the custom software packages are complete and customer
upgrades are underway or being scheduled. The Company expects completion of all
renovation to custom internal software packages to be complete by the end of the
second quarter 1999 and for customer upgrades to continue through the third
quarter. 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 is underway and significant progress has been made on custom
designed software packages supplied to our customers. Testing of hardware
devices, such as Programmable Logic Controllers and Human/Machine Interfaces,
utilized on the majority of our systems, is underway and has been completed on
numerous units. This testing will be ongoing throughout the year as new and
different versions of
15
<PAGE>
hardware are utilized. Testing of several customer systems has also been
completed with favorable results. Completion of testing on internal systems,
to the extent possible, is planned for June and July of 1999. This will
provide the second half of 1999 for re-testing and unanticipated renovations.
Phase V has begun at several subsidiaries and it is anticipated that much of
this planning will be shared by some or all of the subsidiaries, reducing the
overall Company effort. Completion by the end of the third quarter of 1999 is
expected for all subsidiaries.
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.
While no assurances can be given, because of Alvey's extensive efforts to
formulate and carry-out an effective Y2K program, the Company believes its
program will be completed on a timely basis and should effectively minimize
disruption to Alvey's operations due to Year 2000 issues, and that such issues
will not have a material adverse effect on the Company's consolidated results of
operation.
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
16
<PAGE>
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.
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 March 31
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 March 31, 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.
/s/ James A. Sharp
------------------
Date: May 10, 1999 James A. Sharp
Secretary and Senior Vice President
Chief Financial Officer
(Principal Financial and Accounting
Officer)
17
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