i
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Commission File No. 0-20097
ARC CAPITAL
A California Corporation
IRS Employer Identification No. 33-0256103
2067 Commerce Drive
Medford, OR 97504
Telephone: (541) 776-7700
--------------------------------------
Indicate by checkmark 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 |_|
On September 30, 1996, registrant had 10,779,190 shares of Class A Common Stock,
and 110,168 shares of Class B Common Stock, all no par value, issued and
outstanding.
Exhibit Index at page 17
<PAGE>
INDEX
Page Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets.....................................1
Consolidated Statements of Operations...........................2 - 3
Consolidated Statements of Cash Flows...........................4
Notes to Unaudited Consolidated Financial Statements............5 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................10 - 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................18
Item 6. Exhibits and Reports on Form 8-K...............................19 - 20
Signature......................................................20
<PAGE>
4
1
- --------------------------------------------------------------------------------
ARC Capital
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
ASSETS (unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,467,000 $ 4,171,000
Accounts receivable, net 3,548,000 1,904,000
Inventories 9,265,000 3,810,000
Prepaid expenses 1,090,000 506,000
------------- -------------
Total current assets 15,370,000 10,391,000
Property, plant and equipment, net 6,804,000 4,693,000
Goodwill and other assets, net 7,846,000 2,544,000
------------- -------------
$ 30,020,000 $ 17,628,000
============= =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,999,000 $ 769,000
Accrued liabilities 1,589,000 845,000
Short-term borrowings 974,000 --
Customer deposits 2,500,000 1,083,000
Accrued payroll 760,000 374,000
Warranty reserve 470,000 408,000
Current portion of notes payable 2,352,000 22,000
------------- -------------
Total current liabilities 11,644,000 3,501,000
------------- -------------
Long-term liabilities:
Notes payable, less current portion 15,078,000 4,875,000
------------- -------------
Shareholders' equity:
Common stock:
ClassA - no par value: 60,000,000 shares authorized; 10,779,000 and
8,718,000 shares issued and outstanding at September 30, 1996, and
December 31, 1995,
respectively 24,988,000 22,966,000
Class B - no par value: 3,000,000 shares authorized, 110,000
and 705,000 shares issued and outstanding at
September 30, 1996, and December 31, 1995, respectively 71,000 458,000
Class E - no par value: 3,000,000 shares authorized, 0 and
497,000 shares issued and outstanding at September 30, 1996,
and December 31, 1995, respectively -- 326,000
Common stock warrants 2,403,000 3,112,000
Additional paid in capital 2,797,000 1,500,000
Accumulated deficit (26,994,000) (19,110,000)
Cumulative translation adjustment 33,000 --
------------- -------------
Total shareholders' equity 3,298,000 9,252,000
------------- -------------
$ 30,020,000 $ 17,628,000
============= =============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
ARC Capital
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30,
1996 1995
(unaudited)
<S> <C> <C>
Net sales $ 10,097,000 $ 6,548,000
Cost of sales 5,003,000 3,662,000
------------ ------------
Gross profit 5,094,000 2,886,000
------------ ------------
Operating expenses:
Selling and marketing 1,539,000 1,088,000
Research and development 988,000 583,000
General and administrative 1,093,000 422,000
Goodwill amortization 180,000 93,000
------------ ------------
3,800,000 2,186,000
Income from continuing operations before other income and expense 1,294,000 700,000
Other income and expense:
Investment and other income 35,000 61,000
Interest expense (344,000) (144,000)
------------- ------------
Income from continuing operations before income taxes 985,000 617,000
Provision for income taxes -- --
------------ ------------
Income from continuing operations 985,000 617,000
(Loss) from discontinued operations -- (53,000)
------------ ------------
Net income $ 985,000 $ 564,000
============ ============
Earnings (loss) per common and common equivalent share (Note 5):
Continuing operations $ 0.07 $ 0.07
Discontinued operations -- (0.01)
------------ ------------
Total $ 0.07 $ 0.06
============ ============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
ARC Capital
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
(unaudited)
<S> <C> <C>
Net sales $ 20,129,000 $ 14,252,000
Cost of sales 10,958,000 8,505,000
------------ ------------
Gross profit 9,171,000 5,747,000
------------ ------------
Operating expenses:
Selling and marketing 3,230,000 2,342,000
Research and development 2,931,000 1,367,000
General and administrative 3,157,000 1,393,000
Goodwill amortization 374,000 278,000
Charge for acquired in-process technology 6,088,000 --
Charge for royalty expense 647,000 --
------------ ------------
16,427,000 5,380,000
(Loss) income from continuing operations before other income and expense (7,256,000) 367,000
Other income and expense:
Gain on rescission of stock compensation -- 732,000
Investment and other income 139,000 156,000
Interest expense (768,000) (340,000)
------------- ------------
(Loss) income from continuing operations before income taxes (7,885,000) 915,000
Provision for income taxes -- --
------------ ------------
(Loss) income from continuing operations (7,885,000) 915,000
(Loss) from discontinued operations -- (22,000)
------------ ------------
Net (loss) income $ (7,885,000) $ 893,000
============= ============
Earnings (loss) per common and common equivalent share (Note 5):
Continuing operations $ (0.72) $ 0.09
Discontinued operations -- 0.00
------------ -----------
Total $ (0.72) $ 0.09
============= ===========
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
ARC Capital
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (7,885,000) $ 893,000
Loss from discontinued operations -- 22,000
------------ -------------
(Loss) income from continuing operations (7,885,000) 915,000
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Cash outflows related to discontinued operations -- (681,000)
Charge for in-process technology 6,088,000 --
Charge for royalty expense 247,000 --
Depreciation and amortization 825,000 622,000
Gain on rescission of stock compensation -- (732,000)
Changes in assets and liabilities (net of amounts purchased in
acquisition):
Accounts receivable (725,000) (548,000)
Inventories (1,660,000) 291,000
Prepaid expenses and other assets (548,000) (140,000)
Accounts payable, accrued liabilities, customer deposits
accrued payroll, and warranty reserve 1,940,000 1,254,000
Net cash provided by (used in) operating activities (1,718,000) 981,000
------------ -------------
Cash (used in) provided by investing activities:
Acquisition of Pulsarr/Ventek (5,797,000) --
Purchases of property and equipment (1,515,000) (315,000)
Repayments of notes receivable -- 187,000
------------ -------------
Net cash (used in) investing activities (7,312,000) (128,000)
------------- --------------
Cash (used in) provided by financing activities:
Notes payable to bank and others, net 4,690,000 2,143,000
Proceeds from common stock issuances 1,971,000 --
Proceeds from exercise of stock options 65,000 50,000
Debt issuance costs (400,000) --
------------ -------------
Net cash provided by financing activities 6,326,000 2,193,000
------------ -------------
Net (decrease) increase in cash (2,704,000) 3,046,000
Cash and cash equivalents, beginning of the period 4,171,000 790,000
------------ -------------
Cash and cash equivalents, end of the period $ 1,467,000 $ 3,836,000
============ =============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
<PAGE>
20
ARC CAPITAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Principles Of Consolidation
In the opinion of the management of ARC Capital (the "Company" or "ARC"),
the accompanying consolidated financial statements, which have not been
audited by independent accountants (except for the balance sheet as of
December 31, 1995), reflect all adjustments (consisting of normal recurring
accruals) necessary to present fairly the Company's financial position at
September 30, 1996, and December 31, 1995, the results of operations and
cash flows for the three and nine month periods ended September 30, 1996
and 1995. The financial statements include the accounts of the Company and
its four wholly-owned subsidiaries, Applied Laser Systems, Inc.
("ALS-Oregon"), SRC VISION, Inc. ("SRC"), Pulsarr Holding BV ("Pulsarr")
from its March 1, 1996, acquisition date, and Ventek, Inc. ("Ventek") from
its July 24, 1996, acquisition date. See Note 8 regarding the sale of
ALS-Oregon in October 1995.
Certain notes and other information are condensed or omitted in the interim
financial statements presented in this Quarterly Report on Form 10-Q. These
financial statements should be read in conjunction with the Company's 1995
annual report on Form 10-K.
Certain reclassifications have been made to the fiscal 1995 financial
statements to conform with the financial statement presentation for fiscal
1996. Such reclassifications had no effect on the Company's results of
operations or shareholders' equity.
2. Nature Of Operations
The Company's ALS-Oregon subsidiary, which designed, developed,
manufactured and marketed laser diode devices, incorporating its visible
laser module, and "no-light" products based on technology for illumination
with infrared laser systems, was sold in October 1995 (see Note 8).
In February 1994, the Company acquired all of the issued and outstanding
capital stock of SRC for $8,100,000 in cash. SRC designs, manufactures and
markets computer-aided vision sorting and defect removal equipment for use
in a variety of industries, including food processing, wood products and
recycling. SRC's systems combine optical and mechanical systems
technologies to perform diverse scanning, analytical sensing, measuring and
sorting applications on a variety of products such as food, wood, glass,
and plastic.
On March 1, 1996, the Company acquired all of the issued and outstanding
stock of Netherlands-based Pulsarr for approximately $7.8 million in cash
and notes and other securities. Pulsarr is a manufacturer and seller of
computer aided vision sorting and defect removal equipment similar to that
produced by SRC (see Note 6).
In July 1996, the Company acquired the business and certain assets, subject
to certain liabilities, of Ventek for approximately $5.1 million in notes
and other securities. Ventek manufacturers and markets computer-aided
vision defect detection systems used in the wood veneer industry (see Note
6).
3. Financing
In April 1995, the Company borrowed $2,160,000 pursuant to a convertible
subordinated secured note. Interest on the note is 10.25% and is payable
semi-annually. The note is secured by the issued and outstanding capital
stock of SRC. The note is convertible into the Company's Class A Common
Stock at $1.875 per share. In connection with the borrowing, the Company
paid a finders fee of $160,000 and issued 300,000 warrants to purchase
Class A Common Stock at $1.875 per share. In October 1996, $645,000
principal amount of the note was converted by the debtholders into 344,000
shares of Class A Common Stock. The remaining principal amount is due in
April 1997.
In April 1996, the Company borrowed $3,400,000 pursuant to a convertible
secured note. Interest on the note is 6.75% and is payable quarterly. The
interest rate may be adjusted upward on each anniversary date of the note
if the market price of the Company's Class A Common Stock fails to reach
certain levels. The maximum possible coupon interest rate is 11.25% if none
of the market price thresholds are met. The principal amount is due in
April 2001. The note is secured by 54% of the stock of ARC Netherlands bv,
a wholly owned subsidiary of the Company established to purchase Pulsarr.
The note is convertible into the Company's Class A Common Stock at $2.125
per share. In connection with the borrowing, the Company paid a finders fee
of $400,000 and issued 340,000 warrants to purchase Class A Common Stock at
$2.125 per share.
See Note 6 for a description of notes issued in connection with the
acquisition of Ventek.
4. Stock Transactions; Shares Eligible For Future Sale; Effect Of Warrants,
Options And Convertible Securities; Possible Dilution In February 1995,
Liviakis Financial Communications, Inc. returned approximately 668,000
previously issued and outstanding shares of ARC Class A Common Stock
pursuant to an award in arbitration in favor of the Company. A gain of
$732,000 was recorded in February 1995 relating to the shares recovered.
In March 1996, the Company sold 1,400,000 shares of its Class A Common
Stock in a private Regulation S offering to foreign investors at $1.625 per
share, the market price on the date the related Subscription Agreement was
entered into. In connection with the private placement, the Company paid
finders fees and other costs of $650,000 and issued 240,000 warrants to
purchase Class A Common Stock at $2.00 per share.
On February 15, 1996, the Company redeemed all 497,094 shares of its Class
E Common Stock for nominal consideration. Also on that date, the 3,002,906
Class E Warrants to purchase Class A Common Stock ceased to exist because
escrow conditions related to the warrants were not met.
Schedule of Outstanding Stock, Warrants, Units and Potential Dilution: The
following table summarizes, as of September 30, 1996, outstanding common
stock, potential dilution to the outstanding common stock upon exercise of
warrants, UPO Units and convertible debt, and proforma proceeds from the
exercise of warrants and UPO Units.
<PAGE>
<TABLE>
<CAPTION>
Proforma
Number or Principal Class A Common Proceeds
Amount Outstanding Conversion Stock After Conversion or Debt
Security at September 30, 1996 Factor Conversion Price Reduction
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock:
Class A 10,779,190 10,779,190
Class B 110,168 110,168
-------------
Total currently outstanding 10,889,358 Warrants (expiration date):
A (3/9/98) 2,941,963 1.4 4,118,748 $ 2.84 $ 11,697,000
B (3/9/98) 4,354,863 (A) 1.4 6,096,808 4.17 25,424,000
C (3/9/98) 846,250 1.4 1,184,750 2.21 2,618,000
D (6/30/98-7/31/98) 275,000 1 275,000 2.75 756,000
F (4/12/98) 300,000 1 300,000 1.88 564,000
G (2/28/99) 240,000 1 240,000 2.00 480,000
H (4/16/01) 340,000 1 340,000 2.13 724,000
I (7/23/01) 1,000,000 (B) 1 1,000,000 2.25 2,250,000
J (9/30/99) 300,000 1 300,000 2.03 608,000
Gerinda (8/97) 300,000 1 300,000 5.00 1,500,000
Laidlaw (4/1/97) 135,000 1 135,000 2.25 304,000
------------- ---------------
14,290,306 46,925,000
------------- ---------------
Unit Purchase Options: 188,400 6.38 1,187,000
Class A Common 376,800 1 376,800
A Warrants 376,800 1.4 527,520 2.84 1,498,000
B Warrants 565,200 1.4 791,280 4.17 3,300,000
------------- ---------------
1,695,600 5,985,000
------------- ---------------
Convertible Debt (due date):
10.25% Notes (4/13/97) $ 2,160,000 1,152,000 1.88 2,160,000
6.75% Notes (4/16/01) 3,400,000 1,600,000 2.13 3,400,000
6.75% Ventek Note (7/23/99) 2,250,000 1,000,000 2.25 2,250,000
6% Note (2/28/01) 980,000 441,486 2.22 980,000
Ventek Note (7/23/99) 1,125,000 (B) 1,800,000 1,125,000
------------- ---------------
5,993,486 9,915,000
------------- ---------------
Potentially outstanding shares and proforma proceeds
and reduction of debt 32,868,750 $ 62,825,000
============= ===============
<FN>
(A) Includes 1,412,900 outstanding plus 2,941,963 assuming exercise of the Class A Warrants.
(B) The Company issued the $1,125,000 note and Class I Warrant in
connection with the Ventek acquisition (see Note 6). The note is
payable, (a) at the Company's option, in cash or by delivery of up to
1,800,000 shares of Class A Common Stock on the third anniversary date
of the note; or (b) solely in cash in the event ARC Common Stock is
delisted from the Nasdaq Stock Market. The Warrant vests 25% in each of
the next four years if sales and earnings objectives are achieved.
</FN>
</TABLE>
The proforma amounts above are for illustrative purposes only. Unless the
market price of ARC's Class A Common Stock rises significantly above the
exercise or conversion prices, it is unlikely that any warrants or unit
purchase options will be exercised or that the debt will be converted.
In addition, on September 30, 1996, ARC had outstanding options to purchase
3,206,000 shares of Class A Common Stock, 2,844,000 of which are under its
stock option plans.
The existence of these outstanding warrants, options, and convertible debt,
including those granted or to be granted under ARC's Stock Option Plans or
otherwise, and potentially issuable shares pursuant to antidilution
provisions of warrant agreements could adversely affect ARC's ability to
obtain future financing. The price which ARC may receive for the Class A
Common Stock issued upon exercise of options and warrants, or amount of
debt forgiven in the case of conversion of debt, may be less than the
market price of Class A Common Stock at the time such options and warrants
are exercised or debt is converted. For the life of the warrants, options
and convertible debt, the holders are given, at little or no cost, the
opportunity to profit from a rise in the market price of their Class A
Common Stock without assuming the risk of ownership. Moreover, the holders
of the options and warrants might be expected to exercise them at a time
when ARC would, in all likelihood, be able to obtain needed capital by a
new offering of its securities on terms more favorable than those provided
for by the options and warrants.
5. Earnings (Loss) Per Common and Common Equivalent Share
Earnings (loss) per common and common equivalent share is computed based on
the weighted average number of common shares and dilutive common equivalent
shares outstanding during the period. Dilutive common equivalent shares
consist of the shares relating to a note and stock appreciation right
agreement, options and warrants.
As ARC Capital has outstanding options and warrants which, in the
aggregate, exceed 20% of the common stock currently outstanding (see Note
4), ARC is required to follow the provisions of Accounting Principles Board
(APB) Opinion No. 15, paragraph 38, in calculating earnings per share, if
dilutive. APB 15, paragraph 38, assumes the aggregate exercise of all
options and warrants. The assumed exercise of all of ARC's options and
warrants would result in aggregate proceeds of approximately $59,187,000
and $68,801,000 as of September 30, 1996 and 1995, respectively. These
proceeds are then assumed to be used in the following order:
a) Repurchase up to 20% of the number of ARC common shares currently
outstanding. This would result in the repurchase of 2,178,000 and
1,872,000 shares for the quarters ended September 30, 1996 and 1995,
respectively.
b) Reduce all short-term and long-term borrowings. This would result in
the reduction of interest expense of $318,000 and $144,000 for the
quarters ended September 30, 1996 and 1995, respectively.
c) Invest the remaining proceeds in US government securities or
commercial paper. This would result in investment income of $593,000
and $895,000 for the quarters ended September 30, 1996 and 1995,
respectively, at an assumed interest rate of six percent.
The computation of primary earnings per common and common equivalent share
for the three months ended September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------
<S> <C> <C>
Net income as reported $ 985,000 $ 564,000
Reduction in interest expense accreted to a non-
interest bearing note and stock appreciation
rights agreement payable by the issuance of up
to 1,800,000 shares of Class A Common Stock or,
at ARC's option, in cash in three years 26,000 --
Reduction in interest expense as the result of the
assumed retirement of all short-term and long-term
borrowing 318,000 144,000
Increase in interest income as the result of the
investment of excess cash generated from the
assumed exercise of all options and warrants 593,000 895,000
------------- -------------
Net income $ 1,922,000 $ 1,603,000
============= =============
Earnings per share $ 0.07 $ 0.06
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
1996 1995
--------------------------
<S> <C> <C>
Weighted average shares outstanding:
Common stock 10,887,000 9,362,000
Shares relating to a note and stock appreciation
rights agreement, issued on July 24, 1996 1,330,000 --
Assumed aggregate exercise of all stock
options and warrants 19,191,000 20,043,000
Assumed repurchase of common shares, limited
to 20% of currently outstanding common
shares (2,178,000) (1,872,000)
------------- -------------
Shares used in calculations 29,230,000 27,533,000
============= =============
</TABLE>
The computation of primary earnings per common and common equivalent share
for the nine months ended September 30, 1996 and 1995, as required by APB
Opinion No. 15, paragraph 38, was not dilutive and therefore, net income
(loss), as reported, and the weighted average shares outstanding of
10,997,000 and 9,468,000, respectively, were used in calculating earnings
per share.
Fully diluted and primary earnings (loss) per share are the same amounts
for each period presented.
6. Acquisitions Of Pulsarr and Ventek
On March 1, 1996, the Company acquired all of the outstanding capital stock
of Pulsarr for approximately $7.8 million in cash and notes payable. The
acquisition is accounted for under the purchase method of accounting. The
$7.8 million purchase price was allocated based on the fair values of the
identifiable assets of Pulsarr as follows: $1.3 million represents the net
assets of Pulsarr, $6.1 million represents acquired in-process technology
which was subsequently charged to operations in the quarter ending March
31, 1996, and the remainder of $0.4 million represents goodwill to be
amortized over 15 years. Goodwill amortization for the three and nine month
periods ended September 30, 1996, was $6,000 and $15,000 respectively.
On July 24, 1996, the Company acquired certain assets and the business of
Ventek, subject to certain liabilities. Ventek manufactures and markets
computer-aided vision defect detection systems used in the wood veneer
industry. The purchase price was approximately $5.1 million in notes and
other securities: (i) a 6.75% $1,000,000 note due in three years; (ii) a
6.75% $2,250,000 note due in three years convertible into the Company's
Class A Common Stock at $2.25 per share; and (iii) a note and stock
appreciation rights payable (a) by issuance of up to 1,800,000 shares of
Class A Common Stock or at the Company's option, in cash in three years, or
(b) solely in cash in the event ARC Common Stock is delisted from the
Nasdaq Stock Market. The Company also issued a warrant to purchase
1,000,000 shares of Class A Common Stock which vests over a four year
period subject to Ventek meeting specified sales and earnings goals. The
$5.1 million purchase price was allocated based on the fair values of the
identifiable assets of Ventek as follows: $0.2 million represents the net
assets of Ventek, and the remainder of $4.9 million represents goodwill to
be amortized over 15 years. Goodwill amortization for the three months
ended September 30, 1996, was $81,000.
The consolidated results of operations for the three and nine month periods
ended September 30, 1996, include Pulsarr's and Ventek's results of
operations beginning on March 1, 1996, and July 24, 1996, respectively.
The proforma condensed combined statements of operations, shown below as
supplemental information, assumes the acquisitions of Pulsarr and Ventek
occurred as of the beginning of the three and nine month periods. However,
the proforma combined balances are not necessarily indicative of balances
which would have resulted had the acquisitions occurred as of the beginning
of the three and nine month periods presented. Proforma condensed combined
statements of operations for the three and nine month periods are as
follows:
<PAGE>
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1996 1995 1996 1995
Actual Proforma Proforma Proforma
<S> <C> <C> <C> <C>
Sales $ 10,097,000 $ 10,396,000 $ 25,136,000 $ 26,180,000
Cost of sales 5,003,000 5,371,000 12,322,000 13,319,000
-------------- ------------- ------------- -------------
Gross profit $ 5,094,000 $ 5,025,000 $ 12,814,000 $ 12,861,000
============== ============= ============= =============
Net income (loss) $ 985,000 $ 812,000 $ 336,000 $ 1,949,000
============== ============= ============= =============
Earnings (loss) per share $ 0.07 $ 0.06 $ 0.03 $ 0.15
============= ============= ============ =============
</TABLE>
The $6.1 million charge for in-process technologies is excluded from the
above proforma statement of operations.
7. Inventories
Inventories are stated at the lower of cost or market and include material,
labor and related manufacturing overhead. The Company determines cost based
on the first-in, first-out (FIFO) method.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Raw materials $ 2,880,000 $ 1,242,000
Work-in-process 3,503,000 889,000
Finished goods 2,882,000 1,679,000
------------- -------------
$ 9,265,000 $ 3,810,000
============= =============
</TABLE>
The increase is due principally to the addition of Pulsarr and Ventek in
the current year.
8. Discontinued Operation
In October 1995, the Company sold the laser diode operations of its
ALS-Oregon subsidiary to Coherent, Inc. for approximately $1,052,000 in
cash, which represented the net book value of the operation. Operating
results for this discontinued business have been excluded from the
Consolidated Statements of Operations to present separately the results of
continuing operations. The results of ALS-Oregon for the three and nine
month periods ended September 30, 1995, are summarized as follows:
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, 1995 September 30, 1995
<S> <C> <C>
Net sales $ 640,000 $ 2,279,000
============= =============
(Loss) from operations of discontinued business $ (53,000) $ (22,000)
============= ============
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In October 1995, the Company sold its laser diode operation for cash in an
amount equal to the book value of net assets and liabilities sold. The
operations of ALS-Oregon have been classified as a discontinued business.
On March 1, 1996, the Company acquired Pulsarr. On July 24, 1996, the
Company acquired Ventek. The discussion below pertains to the ongoing
operations of ARC for the three and nine months ended September 30, 1996,
namely SRC, Pulsarr, Ventek and the holding company, with Pulsarr and
Ventek included from their respective acquisition dates.
The Company's backlog at September 30, 1996, was $13,598,000, an increase
of 142% when compared to the $5,626,000 backlog as of September 30, 1995.
The 1996 backlog is expected to be shipped within nine months.
Results of Operations - Comparison between three months ended September 30,
1996, and September 30, 1995
Sales for the three months ended September 30, 1996 ("Q3 1996") were
$10,097,000, up 54% when compared to sales for the three months ended
September 30, 1995 ("Q3 1995") of $6,548,000. The increase is due to the
inclusion of $4,790,000 of Pulsarr's and Ventek's sales, offset by lower
sales at SRC of $1,241,000.
Cost of sales was 50% of sales in Q3 1996 and 56% in Q3 1995.
Gross profit increased by 37% to $5,094,000 in Q3 1996 when compared to
$2,886,000 of gross profit in Q3 1995. In Q3 1996, gross profit was 50% as
compared to 44% in Q3 1995. The increase in gross profit as a percentage of
sales is primarily related to the higher margin Ventek products included in
Q3 1996, as well as an increase at SRC due to higher margin non-food
industry systems.
Selling and marketing expense increased 42% in Q3 1996 from Q3 1995 to
$1,539,000 amounting to 15% of sales in Q3 1996. Similar expenses in Q3
1995 were $1,088,000, or 17% of sales. The increase is due principally to
the addition of Pulsarr and Ventek in Q3 1996.
Research and development expenses were $988,000 and $583,000 in Q3 1996 and
Q3 1995, or 10% and 9% of sales, respectively. The larger research and
development level in Q3 1996 was due principally to $302,000 of Pulsarr and
Ventek expenses, the continuing development of SRC's Advanced Vision
Processor and projects in non-food industry sorting applications.
General and administrative expenses increased $671,000 to $1,093,000 in Q3
1996 from $422,000 in Q3 1995. The increase in general and administrative
expenses is due principally to the addition of Pulsarr and Ventek.
The increase in Goodwill amortization is due to the acquisitions of Pulsarr
and Ventek.
The decrease in investment and other income is the result of lower cash
balances available for investment.
The increase in interest expense is the result of the increase in debt
outstanding relating to the acquisitions of Pulsarr and Ventek.
Net income for Q3 1996 was $985,000 as compared to net income of $564,000
in Q3 1995, primarily as the result of inclusion of Ventek's operations
from the date of acquisition.
Results of Operations - Comparison between nine months ended September 30,
1996, and September 30, 1995
Sales for the nine months ended September 30, 1996 ("the "1996 Period")
were $20,129,000, up 41% when compared to sales for the nine months ended
September 30, 1995 (the "1995 Period") of $14,252,000. The increase is due
to the inclusion of $8,073,000 of Pulsarr's and Ventek's sales, offset by
lower sales at SRC of $2,196,000.
Cost of sales was 54% of sales in the 1996 Period and 60% in the 1995
Period.
Gross profit increased by 29% to $9,171,000 in the 1996 Period when
compared to $5,747,000 of gross profit in the 1995 Period. In the 1996
Period, gross profit was 46%, as compared to 40% in the 1995 Period. The
increase in gross profit as a percentage of sales is primarily related to
the higher margin Ventek products included in Q3 1996, as well as a change
in product mix at SRC to higher margin non-food industry systems.
Selling and marketing expense increased 38% in the 1996 Period to
$3,230,000 when compared to the 1995 Period due principally to the addition
of Pulsarr and Ventek. Selling and marketing expenses amounted to 16% of
sales. Similar expenses in the 1995 Period were $2,342,000 or 16% of sales.
Research and development expenses were $2,931,000 and $1,367,000 in the
1996 Period and the 1995 Period, or 15% and 10% of sales, respectively. The
larger research and development level in the 1996 Period was due
principally to the continuing development of SRC's Advanced Vision
Processor and projects in non-food industry sorting applications and
$585,000 for Pulsarr and Ventek.
General and administrative expenses increased $1,764,000 to $3,157,000 in
the 1996 Period from $1,393,000 in the 1995 Period. The increase in general
and administrative expenses is due to the addition of Pulsarr and Ventek as
well as an increase in personnel costs and legal fees at SRC and ARC.
The increase in Goodwill amortization is due to the acquisitions of Pulsarr
and Ventek.
As discussed in the Notes to the Financial Statements, on March 1, 1996,
the Company acquired Pulsarr for approximately $7.8 million. Approximately
$6.1 million of the purchase price was allocated to in-process technology,
which was subsequently charged to expense during the quarter ended March
31, 1996. This charge is not deductible for tax purposes. The Company will
need to invest in additional development related to the in-process
technology in order to make these technologies commercially viable. These
expenditures are expected to be paid out through 1997 and will be funded
primarily from cash generated from operations.
In Q1 1996, the Company wrote off $647,000 of deferred royalty expenses
relating to certain technologies, as all royalties have been earned and the
Company believes that no significant future economic life exists relating
to the royalty agreement, as the result of changing technologies. See
Liquidity and Capital Resources below.
In February 1995, Liviakis Financial Communications, Inc. returned
approximately 668,000 previously issued and outstanding shares of ARC Class
A Common Stock pursuant to an award in arbitration in favor of the Company.
A gain of $732,000 was recorded in February 1995 relating to the shares
recovered.
The increase in interest expense is due to the increase in debt outstanding
relating to the acquisitions of Pulsarr and Ventek.
The net loss for the 1996 Period was $7,885,000 as compared to net income
of $893,000 in the 1995 Period. The variation is due primarily to the
nonrecurring charges for in-process technology and royalty expense, the
increased level of research and development expenses, and the nonrecurring
gain in the 1995 Period relating to the shares of ARC Common Stock returned
pursuant to an arbitration award.
Liquidity and Capital Resources
In March 1996, in conjunction with the acquisition of Pulsarr, the Company
received $2,000,000 from the sale of 1,400,000 shares of Class A Common
Stock pursuant to a private placement. In April 1996, the Company received
$3,000,000 representing the net proceeds of a private placement of a
convertible debt. In October 1995, the Company received approximately
$1,052,000 from the sale of its laser diode operations. In April 1995, the
Company received $2,000,000 representing the net proceeds from a private
placement of convertible debt. The cash generated from these transactions
was used to finance the acquisition of Pulsarr and to provide funds for
working capital purposes.
The Company's principal sources of operating capital have been funds from
the above transactions, its overseas Regulation S offerings in September
and October 1993 and in 1994 and its initial public offering in March 1992.
As of September 30, 1996, the Company had $3,726,000 in working capital.
As a result of the settlement in July 1992 of a lawsuit alleging certain
patent infringements, SRC entered into a royalty agreement, pursuant to
which SRC will pay royalties of 7% of its vision system sales through the
earlier of June 30, 2003, and the date at which aggregate royalty payments
equal $1,600,000. Until aggregate royalty payments equal $1,600,000,
maximum annual royalty payments are $400,000 through 1996. The final
$400,000 installment was paid in July 1996. During the quarter ended March
31, 1996, the Company wrote off against income $647,000 of deferred royalty
expense related to the settlement as all royalties had been earned and no
significant future economic life is estimated to exist.
The Company intends to continue to market its vision systems technology and
products, and will evaluate selected acquisition opportunities. Additional
investments will be required for capital equipment, marketing and R & D for
the Company to remain competitive. For example, funds must be expended to
complete development of the Company's Advanced Vision Processor ("AVP") to
enhance the Company's ability to effectively compete in certain markets
with Key Technology Inc.'s (the Company's principal competitor) 1995
product introduction. Furthermore, if the Company consummates additional
technology intensive acquisitions, additional equipment and R & D
investments may be necessary, perhaps to a greater extent than for the
Company's existing operations.
The Company's ALS-Oregon operation, ARC's only business prior to the
February 1994 acquisition of SRC, had suffered losses since inception. The
operations of ALS-Oregon were sold in October 1995. In 1995, SRC generated
operating profits (before allocation of corporate overhead expenses). Even
though SRC reached operating profitability in four of the last six quarters
and had a history of profitable operations prior to its acquisition by ARC,
there can be no assurance that long term profitability will be realized.
Pulsarr has operated profitably since 1990. Ventek has operated profitably
since 1992. The Company operates in a highly competitive environment, and
delays and difficulties relating to technological changes and turnaround
situations often occur, any of which would materially and adversely affect
the Company's cash flow. Furthermore, operational and marketing
difficulties may occur relating to the integration of the recently
completed acquisitions of Pulsarr and Ventek.
The acquisition of Pulsarr occurred on March 1, 1996. In connection
therewith, the Company has paid approximately $6.3 million to the sellers.
Cash received from the March and April 1996 placements of stock and notes
detailed above generated approximately $5,000,000. The balance of the cash
payments of approximately $1,300,000, was paid from the Company's current
cash balances.
The acquisition of Ventek occurred in July 1996. Consideration for the
transaction was approximately $5.1 million in notes and other securities as
described in Note 6 in this Form 10-Q.
Prior to 1995, the Company had a history of negative operating cash flow.
The Company believes it will operate at a negative cash flow for at least
the next several months and during certain periods in the future due to
payment of notes issued in connection with prior financings, working
capital requirements, the need to fund certain development projects, cash
required to enter new market areas, and possible cash needed to fully
integrate Pulsarr's and Ventek's operations. To fulfill its operational
goals and to repay approximately $1.5 million in debt due in April 1997,
the Company will require approximately $1.5 million of additional
financing. Other than this financing need, management believes that the
Company has sufficient cash to enable the Company to sustain its operations
and to adequately fund the cash flow expected to be used in operating
activities for the next twelve months. Until the Company is able to
consistently generate sustained positive cash flow from operations, the
Company must rely on debt or equity financing.
In connection with the acquisition of Pulsarr, the Company wrote off
approximately $6.1 million of acquired in-process technology in the first
quarter of 1996. This non-recurring charge contributed to substantial
reported losses in that quarter and the nine months ended September 30,
1996, even though sales for such periods, including Pulsarr and Ventek from
their respective acquisition dates, increased from the same periods in the
prior year.
The Company is seeking additional financing; however, there can be no
assurance the Company will be able to obtain any additional financing on
terms satisfactory to the Company, if at all. The recent increases in (i)
outstanding shares of the Company's Class A Common Stock due to private
placements, (ii) the April 1995 and April 1996 private placements of
convertible debt, (iii) notes issued in connection with the acquisition of
Ventek, (iv) a substantial loss in the first nine months of 1996, and (v)
the number of securities issuable upon exercise of warrants and convertible
debt may limit the Company's ability to negotiate additional debt or equity
financing. Cautionary Statements and Risk Factors The Company may, from
time to time, make forward looking statements that involve risks and
uncertainties. Factors associated with the forward looking statements which
could cause actual results to differ materially from those stated appear
below. Readers should carefully consider the following cautionary
statements and risk factors.
History of Losses; Negative Cash Flow: Prior to 1995, the Company had a
history of losses and negative operating cash flow. The Company believes it
may operate at a negative cash flow in the future due to (i) the need to
fund certain development projects, such as the AVP, (ii) cash required to
enter new market areas, (iii) interest costs associated with recent
financings, (iv) cash required for the repayment of debt, especially $1.5
million due in April 1997, and (v) possible cash needed to fully integrate
Pulsarr's and Ventek's operations. Until the Company is able to
consistently generate sustained positive cash flow from operations, the
Company must rely on debt or equity financing.
Although the Company achieved profitability in 1995, there can be no
assurance as to the Company's profitability on a quarterly or annual basis
in the future. Furthermore, the non-recurring expenses in early 1996 will
result in a significant loss for the 1996 year.
Need for Additional Financing: The Company is seeking additional financing;
however, there can be no assurance the Company will be able to obtain any
additional financing on terms satisfactory to the Company, if at all. The
recent increases in (i) outstanding shares of the Company's Class A Common
Stock due to private placements, (ii) the April 1995 and April 1996 private
placements of convertible debt, (iii) a substantial loss in the first nine
months of 1996, (iv) debt incurred for the acquisition of Ventek, and (v)
the number of securities issuable upon exercise of warrants and convertible
debt may limit the Company's ability to negotiate additional debt or equity
financing.
Uncertain Ability to Manage Growth and Integrate Acquired Businesses: As
part of its business strategy, the Company intends to pursue rapid growth.
In March and July 1996, the Company acquired Pulsarr and Ventek,
respectively, which had sales in 1995 of approximately $11.4 million and
$4.4 million, respectively, and would have added approximately 80% to the
Company's 1995 sales on a pro forma basis. This growth strategy will
require the integration of new entities, such as Pulsarr and Ventek, the
establishment of distribution relationships in foreign countries, expanded
customer service and support, increased personnel throughout the Company
and the continued implementation and improvement of the Company's
operational, financial and management information systems. There is no
assurance that the Company will be able to attract qualified personnel or
to accomplish other measures necessary for its successful integration of
Pulsarr, Ventek or other acquired entities or for internal growth, or that
the Company can successfully manage expanded operations. As the Company
expands, it may from time to time experience constraints that will
adversely affect its ability to satisfy customer demand in a timely
fashion. Failure to manage growth effectively could adversely affect the
Company's financial condition and results of operations.
Rapid Technological Change; Product Development: The markets for the
Company's machine vision products are characterized by rapidly changing
technology, evolving industry standards and frequent new product
introductions and enhancements. For example, the Company believes that the
1995 introduction by Key Technology, Inc. of its new line of vision sorting
equipment adversely affected bookings in late 1995 and 1996. Sales of
products such as those offered by the Company depend in part on the
continuing development and deployment of emerging technology and new
services and applications based on such technology. The Company's success
will depend to a significant extent upon its ability to enhance its
existing products and develop new products that gain market acceptance.
There can be no assurance that the Company will be successful in selecting,
developing and manufacturing new products or enhancing its existing
products on a timely or cost-effective basis or that products or
technologies developed by others will not render the Company's products
noncompetitive or obsolete. Moreover, the Company may encounter technical
problems in connection with its product development that could result in
the delayed introduction of new products or product enhancements. Failure
to develop or introduce on a timely basis new products or product
enhancements that achieve market acceptance would materially and adversely
affect the Company's business, operating results and financial condition.
Market Acceptance of New Products: The Company's future operating results
will depend upon its ability to successfully introduce and market, on a
timely and cost-effective basis, new products and enhancements to existing
products. There can be no assurance that new products or enhancements, if
developed and manufactured, will achieve market acceptance. The Company is
currently in the initial prototype stage of development on its AVP, a high
speed software and digital signal processing technology designed to
significantly improve system performance. There can be no assurance that a
market for AVP systems will develop (i.e. that a need for AVP systems will
exist, that AVP will be favored over other products on the market, etc.)
or, if a market does develop, that the Company will be able, financially or
operationally, to market and support AVP systems successfully.
Dependence on Certain Markets and Expansion Into New Markets: The future
success and growth of the Company is dependent upon continuing sales in
domestic and international food processing market as well as successful
penetration of other existing and potential markets. A substantial portion
of the Company's historical sales has been in the potato and vegetable
processing markets. Reductions in capital equipment expenditures by such
processors due to commodity surpluses, product price fluctuations, changing
consumer preferences or other factors could have an adverse effect on the
Company's results of operations. The Company also intends to expand the
marketing of its processing systems in additional food markets such as meat
and granular food products, as well as nonfood markets such as plastics,
wood products and tobacco, and to expand its sales activities in foreign
markets. In the case of Ventek, the wood products market served is narrow,
and saturation of that market and the potential inability to identify and
develop new markets could adversely affect Ventek's growth rate. There can
be no assurance that the Company can successfully penetrate additional food
and nonfood markets or expand further in foreign markets.
Lengthy Sales Cycle: The sales cycle in the marketing and sale of the
Company's machine vision systems, especially in new markets or in a new
application, is lengthy and can be as long as three years. Even in existing
markets, due to the $100,000 to $450,000 price range for each system, the
purchase of a machine vision system can constitute a substantial capital
investment for a customer (which may need more than one machine for its
particular proposed application) requiring lengthy consideration and
evaluation. In particular, a potential customer must develop a high degree
of assurance that the product will meet its needs, successfully interface
with the customer's own manufacturing, production or processing system, and
have minimal warranty, safety and service problems. Accordingly, the time
lag from initiation of marketing efforts to final sales can be lengthy.
Competition: The markets for the Company's products are highly competitive.
A major competitor of the Company has recently made a new product
introduction which has increased the competition that the Company faces.
Some of the Company's competitors may have substantially greater financial,
technical, marketing and other resources than the Company. Important
competitive factors in the Company's markets include price, performance,
reliability, customer support and service. Although the Company believes
that it currently competes effectively with respect to these factors, there
can be no assurance that the Company will be able to continued to compete
effectively in the future.
Dependence upon Certain Suppliers: Certain key components and subassemblies
used in the Company's products are currently obtained from sole sources or
a limited group of suppliers, and the Company does not have any long-term
supply agreements to ensure an uninterrupted supply of these components.
Although the Company seeks to reduce dependence on sole or limited source
suppliers, the inability to obtain sufficient sole or limited source
components as required, or to develop alternative sources if and as
required, could result in delays or reductions in product shipments which
could materially and adversely affect the Company's results of operations
and damage customer relationships. The purchase of certain of the
components used in the Company's products require an 8 to 12 week lead time
for delivery. An unanticipated shortage of such components could delay the
Company's ability to timely manufacture units, damage customer relations,
and have a material adverse effect on the Company. In addition, a
significant increase in the price of one or more of these components or
subassemblies could adversely affect the Company's results of operations.
Dependence upon Significant Customers and Distribution Channel: The Company
sold equipment to two unaffiliated customers each totaling 20% of sales in
1995. Sales to a third unaffiliated customer totaled 15% of sales in 1994.
Ventek's sales have been to a relatively small number of multi-location
plywood manufacturers. The Company usually receives orders of from one to
several machine vision systems, but occasionally receives larger orders.
While the Company strives to create long-term relationships with its
customers and distributors, there can be no assurance that they will
continue ordering additional systems from the Company. The Company may
continue to be dependent on a small number of customers and distributors,
the loss of which would adversely affect the Company's business.
Risk of International Sales: Due to its export sales (from the U.S. in the
case of SRC and Ventek, or from the Netherlands in the case of Pulsarr),
the Company is subject to the risks of conducting business internationally,
including unexpected changes in regulatory requirements; fluctuations in
the value of the U.S. dollar or Dutch guilder, which could increase the
sales prices in local currencies of the Company's products in international
markets; delays in obtaining export licenses, tariffs and other barriers
and restrictions; and the burdens of complying with a variety of
international laws. In addition, the laws of certain foreign countries may
not protect the Company's intellectual property rights to the same extent
as do the laws of the United States or the Netherlands.
Fluctuations in Quarterly Operating Results; Seasonality: The Company has
experienced and may in the future experience significant fluctuations in
revenues and operating results from quarter to quarter as a result of a
number of factors, many of which are outside the control of the Company.
These factors include the timing of significant orders and shipments,
product mix, delays in shipment, capital spending patterns of customers,
competition and pricing, new product introductions by the Company or its
competitors, the timing of research and development expenditures, expansion
of marketing and support operations, changes in material costs, production
or quality problems, currency fluctuations, disruptions in sources of
supply, regulatory changes and general economic conditions. These factors
are difficult to forecast, and these or other factors could have a material
adverse effect on the Company's business and operating results. Moreover,
due to the relatively fixed nature of many of the Company's costs,
including personnel and facilities costs, the Company would not be able to
reduce costs in any quarter to compensate for any unexpected shortfall in
net sales, and such a shortfall would have a proportionately greater impact
on the Company's results of operations for that quarter. For example, a
significant portion of the Company's quarterly net sales depends upon sales
of a relatively small number of high-priced systems. Thus, changes in the
number of such high-priced systems shipped in any given quarter can produce
substantial fluctuations in net sales, gross profits, and net income from
quarter to quarter. In addition, in the event the Company's machine vision
systems' average selling price increases, of which there can be no
assurance, the addition or cancellation of sales may exacerbate quarterly
fluctuations in revenues and operating results.
The Company's operating results may also be affected by certain seasonal
trends. The Company typically experiences lower sales and order levels in
the first quarter when compared with the preceding fourth quarter due
primarily to the seasonality of certain harvested food items. The Company
expects these seasonal patterns to continue, though their impact on
revenues will decline as the Company continues to expand its presence in
nonagricultural and other markets which are less seasonal.
Risks Associated with Possible Acquisitions: The Company may pursue
strategic acquisitions or joint ventures in addition to the acquisitions of
Pulsarr and Ventek as part of its growth strategy. While the Company has no
understandings, commitments or agreements with respect to any further
acquisition, the Company anticipates that one or more potential
opportunities may become available in the future. Acquisitions and joint
ventures would require investment of operational and financial resources
and could require integration of dissimilar operations, assimilation of new
employees, diversion of management resources, increases in administrative
costs and additional costs associated with debt or equity financing. There
can be no assurance that any acquisition or joint venture by the Company
will not have an adverse effect on the Company's results of operations or
will not result in dilution to existing shareholders. If additional
attractive opportunities become available, the Company may decide to pursue
them actively. There can be no assurance that the Company will complete any
future acquisitions or joint ventures or that such a future transaction
will not materially and adversely affect the Company.
Dependence upon Key Personnel: The Company's success depends to a
significant extent upon the continuing contributions of its key management,
technical, sales and marketing and other key personnel. Except for William
J. Young, the Company's President and Chief Executive Officer, Alan R.
Steel, the Company's Chief Financial Officer, Dr. James Ewan, SRC's
President and Chief Executive Officer, Jan C. Scholt, Pulsarr's Managing
Director, and the four former stockholders of Ventek, the Company does not
have long-term employment agreements or other arrangements with such
individuals which would encourage them to remain with the Company. The
Company's future success also depends upon its ability to attract and
retain additional skilled personnel. Competition for such employees is
intense. The loss of any current key employees or the inability to attract
and retain additional key personnel could have a material adverse effect on
the Company's business and operating results. There can be no assurance
that the Company will be able to retain its existing personnel or attract
such additional skilled employees in the future.
Intellectual Property: The Company's competitive position may be affected
by its ability to protect its proprietary technology. Although the Company
has a number of United States and foreign patents, there can be no
assurance that any such patents will provide meaningful protection for its
product innovations. The Company may experience additional intellectual
property risks in international markets where it may lack patent
protection.
Product Liability and Other Legal Claims: From time to time, the Company
may be involved in litigation arising out of the normal course of its
business, including product liability and other legal claims. While the
Company has a general liability insurance policy which includes product
liability coverage up to an aggregate amount of $10 million, there can be
no assurance that the Company will be able to maintain product liability
insurance on acceptable terms or that its insurance will provide adequate
coverage against potential claims in the future. There can be no assurance
that third parties will not assert infringement claims against the Company,
that any such assertion of infringement will not result in litigation or
that the Company would prevail in such litigation. Furthermore, litigation,
regardless of its outcome, could result in substantial cost to and
diversion of effort by the Company. Any infringement claims or litigation
against the Company could materially and adversely affect the Company's
business, operating results and financial condition. If a substantial
product liability or other legal claim against the Company were sustained
that was not covered by insurance, there could be an adverse effect on the
Company's financial condition and marketability of the affected products.
Warranty Exposure and Performance Specifications: The Company generally
provides a one-year limited warranty on its products. In addition, for
certain custom-designed systems, the Company contracts to meet certain
performance specifications for a specific application. In the past, the
Company has incurred higher warranty expenses related to new products than
it typically incurs with established products. There can be no assurance
that the Company will not incur substantial warranty expenses in the future
with respect to new products, as well as established products, or with
respect to its obligations to meet performance specifications, which may
have an adverse effect on its results of operations and customer
relationships.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Ford & Cohn
In March 1993, Wilson Ford, Robert Paul and Maxwell Cohn (together
"Claimants") brought various claims against ARC and William Patridge, Asif
Ahmad and Nagaraj Murthy, past or current directors or employees of ARC, in
lawsuits in the Superior Courts for Los Angeles County and Orange County,
California. The lawsuits were consolidated in February, 1994, and were
litigated in Superior Court for Los Angeles County in September and
October, 1995.
Ford, a consultant to ARC, claims that ARC breached an agreement dated
September 17, 1987, and subsequently amended on August 16, 1988, by which
he was to receive 25,000 shares of stock of CNVS, Inc., predecessor to ARC,
at no cost and an option to purchase 25,000 additional shares in the future
upon the occurrence of specified events. Ford claims he was promised that
this total of 50,000 shares in the Company would amount to 5% of the
outstanding shares. Ford also claims ARC owes him royalties under a royalty
agreement for certain low light video camera technology. ARC contends that
Ford was never promised that his interest would amount to 5% of the
outstanding shares, that Ford failed to fulfill his obligations under the
royalty agreement, and that Ford's claims are barred under various legal
theories. Based on these allegations, Ford made claims for breach of
contract and breach of the covenant of good faith and fair dealing.
The Claimants contend that statements allegedly made by William Patridge
and Asif Ahmad to United States Alcohol Testing of America, Inc. ("USAT")
caused USAT to rescind an Asset Purchase Agreement with the Claimants. The
Claimants allege that the statements concerning outstanding lawsuits and
disputes between ARC and the Claimants were false and meant to disrupt the
business relationship between Prime Lasertech and USAT. The Claimants
allegedly would have benefited from the Asset Purchase Agreement as
shareholders and/or licensees. Based on these allegations, the Claimants
made claims for intentional and negligent interference with prospective
advantage, intentional and negligent infliction of emotional distress, and
civil conspiracy.
On October 2, 1995, a jury awarded $375,000 to the Claimants, which
included $281,000 of punitive damages for the breach of contract claim. The
Company has filed motions with the court to eliminate the punitive portion
of the award. ARC believes such damages are improper because (i) the
claimants did not ask for punitive damages in the contract claim, and (ii)
such damages cannot be awarded for breach of contract under applicable
state laws. ARC is also attempting to overturn the balance of the breach of
contract award based on the fact that the claim was made after the statute
of limitations had expired. ARC has made an appeal to overturn the verdict
on these factors and certain other irregularities that occurred during the
trial, which ARC believes unfairly affected the jury's decision. Due to the
fact that a verdict was rendered, a $93,000 loss on the breach of contract
claim was recorded as a liability in the fourth quarter of 1995.
Other
ARC is a party to several other suits in the ordinary course of its
business. ARC believes that the outcome of all such proceedings, even if
determined adversely to ARC, will not have a material adverse effect upon
its financial statements.
<PAGE>
Item 6. Exhibits And Reports On Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit
Number Description
<S> <C> <C>
10.1 Stock Purchase Agreement dated March 1, 1996 (without exhibits), between Meijn Beheer B.V. and
ARC Netherlands B.V., a wholly owned subsidiary of the Company. (1)
10.2 Stock Purchase Agreement dated March 1, 1996, between J. C. Scholt and ARC Netherlands B.V., a
wholly owned subsidiary of the Company. (1)
10.3 Convertible Note dated March 1, 1996, issued in connection with that certain Stock Purchase
Agreement dated March 1, 1996, between J. C. Scholt and ARC Netherlands b.v. (1)
10.4 Subscription Agreement dated January 18, 1996, between the Company and Swiss American
Securities, Inc. as agent for Credit Suisse related to the private placement of 1,400,000
shares of the Company's Class A Common Stock. (1)
10.5 Convertible Secured Note dated April 17, 1996, between the Company and Ilverton International,
Inc. (3)
10.6 Form of Class G Warrant Agreement. (2)
10.7 Form of Class H Warrant Agreement. (3)
10.8 Asset Purchase Agreement dated July 24, 1996, by and among ARC, Ventek and the shareholders of
Ventek. (4)
10.9 $1,000,000 Note dated July 24, 1996, between ARC and Ventek. (4)
10.10 $2.250,000 Convertible Note dated July 24, 1996, between ARC and Ventek. (4)
10.11 $1,125,000 Note dated July 24, 1996, between ARC and Ventek. (4)
10.12 Stock Appreciation Rights Agreement dated July 24, 1996, between ARC and Ventek. (4)
10.13 Class I Warrant agreement dated July 24, 1996, between ARC and Ventek. (4)
10.14 Form of Employment Agreement dated July 24, 1996, between each of the four stockholders of Ventek and
ARC. (4)
10.15 Pledge and Security Agreement dated July 24, 1996, by and among ARC, ARC Subsidiary, Inc., Ventek and
Solin and Associates, P.C. (4)
27 Financial Data Schedule
- -------------------------------
(1) Filed with the SEC on March 6, 1996, as an exhibit to the Company's Form 8-K dated March 1,
1996.
(2) Filed with the SEC on April 14, 1996, as an exhibit to the Company's Form 10-K for the year
ended December 31, 1995.
(3) Filed with the SEC on May 14, 1996, as an exhibit to the Company's Form 10-Q for the quarter
ended March 31, 1996.
(4) Filed with the SEC on July 25, 1996, as an exhibit to the Company's Form 8-K regarding the
acquisition of Ventek.
</TABLE>
(b) Reports on Form 8-K:
On July 25, 1996, a Form 8-K was filed regarding the
acquisition of Ventek and the resignation of a director.
On October 7, 1996, a Form 8-K-A was filed regarding the
acquisition of Ventek to include audited financial statements
of the business acquired and related pro forma financial
information.
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.
November 14, 1996 /s/ Alan R. Steel
------------------------------- --------------------------------
Alan R. Steel
Vice President - Finance
(Principal Financial and duly
Authorized Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
September 30, 1996 financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1467
<SECURITIES> 0
<RECEIVABLES> 3548
<ALLOWANCES> 0
<INVENTORY> 9265
<CURRENT-ASSETS> 15370
<PP&E> 7997
<DEPRECIATION> 1193
<TOTAL-ASSETS> 30020
<CURRENT-LIABILITIES> 11644
<BONDS> 15078
0
0
<COMMON> 25059
<OTHER-SE> (21761)
<TOTAL-LIABILITY-AND-EQUITY> 30020
<SALES> 20129
<TOTAL-REVENUES> 20129
<CGS> 10958
<TOTAL-COSTS> 20511
<OTHER-EXPENSES> 6735 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 768
<INCOME-PRETAX> (7885)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7885)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7885)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
<FN>
<F1>
Other expenses include a charge for acquired in-process technology of $6088 and
a charge for royalty expense of $647.
</FN>
</TABLE>
