<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-15935
ALPHAREL, INC.
--------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3634089
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9339 CARROLL PARK DRIVE, SAN DIEGO, CA 92121
-----------------------------------------------------
(Address of principal executive offices and zip code)
(619) 625-3000
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(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Number of shares of Common Stock outstanding
at October 16, 1995: 14,082,347
-------------------
Number of Sequentially Numbered Pages: 13
----
Exhibit Index at Page 12
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1
<PAGE>
ALPHAREL, INC.
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Notes to the Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION 11
2
<PAGE>
ALPHAREL, INC.
PART 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------ -----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,246,000 $ 1,036,000
Short term investments 450,000 1,585,000
Short term investments, restricted - 219,000
Receivables, net 3,559,000 2,973,000
Inventory, net 405,000 726,000
Other current assets 564,000 373,000
-------------- ------------
Total current assets 7,224,000 6,912,000
Property and equipment, net 935,000 770,000
Computer software, net 1,923,000 1,336,000
Other assets 1,026,000 753,000
-------------- ------------
Total assets $ 11,108,000 $ 9,771,000
-------------- ------------
-------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,032,000 $ 959,000
Accrued liabilities 815,000 750,000
Payable to former Optigraphics shareholders 21,000 192,000
Notes payable to former Optigraphics shareholders 1,634,000 1,734,000
Billings in excess of cost 22,000 -
Deferred revenue 255,000 419,000
Note payable 200,000 59,000
-------------- ------------
Total current liabilities 3,979,000 4,113,000
Long term note payable 500,000 -
Commitments
Shareholders' equity:
Common stock, 20,000,000 shares authorized;
14,082,347 and 13,740,847 issued and
outstanding, respectively 43,193,000 43,103,000
Accumulated deficit (36,564,000) (37,445,000)
-------------- ------------
Total shareholders' equity 6,629,000 5,658,000
-------------- ------------
Total liabilities and shareholders' equity $ 11,108,000 $ 9,771,000
-------------- ------------
-------------- ------------
</TABLE>
See accompanying notes to the consolidated financial statements
3
<PAGE>
ALPHAREL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 3,127 $ 2,002 $ 9,629 $ 6,928
Cost of revenue 1,276 1,127 4,390 3,501
-------- -------- -------- --------
Gross profit 1,851 875 5,239 3,427
-------- -------- -------- --------
Operating expenses:
Research and development 326 58 886 490
Marketing and sales 942 647 2,413 1,954
General and administrative 357 286 1,078 815
-------- -------- -------- --------
Total operating expenses 1,625 991 4,377 3,259
-------- -------- -------- --------
Income (loss) from operations 226 (116) 862 168
Interest and other income 31 78 101 173
Interest and other expense (28) (25) (82) (86)
-------- -------- -------- --------
Income (loss) before taxes 229 (63) 881 255
Provision for taxes - - - -
-------- -------- -------- --------
Net income (loss) $ 229 $ (63) $ 881 $ 255
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share $ .02 $ - $ .06 $ .02
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares outstanding 14,993 13,743 14,364 13,958
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
ALPHAREL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
----------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 881 $ 255
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 508 440
Changes in assets and liabilities:
Receivables (586) (468)
Inventory 321 22
Other assets (593) (223)
Accounts payable 73 28
Accrued liabilities 65 (897)
Billings in excess of costs 22 (231)
Deferred revenue (164) (495)
------- -------
Net cash provided by (used in) operating activities 527 (1,569)
------- -------
Cash flows from investing activities:
Short term investments maturing 1,354 250
Purchases of property and equipment (448) (187)
Proceeds from sale of property and equipment 4 -
Purchases of software (67) (154)
Computer software capitalized (720) (642)
Cash paid to former Optigraphics shareholders (171) (130)
------- -------
Net cash used in investing activities (48) (863)
------- -------
Cash flows from financing activities:
Principal payments under capital lease obligations - (72)
Principal payments under note payable to bank (59) (47)
Net borrowings under revolving loan agreement 700 -
Retirement of note payable to former Optigraphics shareholder - (36)
Proceeds from exercise of stock options 90 26
------- -------
Net cash provided by (used in) financing activities 731 (129)
------- -------
Net increase (decrease) in cash and cash equivalents 1,210 (2,561)
Cash and cash equivalents at beginning of period 1,036 3,373
------- -------
Cash and cash equivalents at end of period $ 2,246 $ 812
------- -------
------- -------
Supplemental cash flow information:
Interest paid $ 83 $ 85
------- -------
------- -------
Schedule of noncash financing activity:
Indemnification obligations applied against notes payable to
former Optigraphics shareholders $ 100 $ -
------- -------
------- -------
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated balance sheet of Alpharel, Inc. (the
"Company") as of September 30, 1995 and the consolidated statement of operations
and of cash flows for the three and nine month periods ended September 30, 1995
and 1994 are unaudited. The consolidated financial statements and related notes
have been prepared in accordance with generally accepted accounting principles
applicable to interim periods. In the opinion of management, the consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the consolidated
financial position, operating results and cash flows for the periods presented.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
NOTE 2 - NET INCOME PER SHARE
Net income (loss) per share is computed on the basis of weighted average
shares and common stock equivalent shares outstanding for each period presented,
if dilutive.
NOTE 3 - INVENTORY
Inventory consists of parts, supplies, and subassemblies stated at the
lower of cost or market value. Cost is determined using the first-in, first-out
(FIFO) method. As of September 30, 1995 and December 31, 1994, the Company's
reserve against excess quantities totaled $2,119,000 and $2,323,000,
respectively.
NOTE 4 - BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1995 1994
---- ----
<S> <C> <C>
OTHER CURRENT ASSETS:
Current portion of net sales lease receivable $ 77,000
Prepaid maintenance contracts 154,000 $ 54,000
Prepaid expenses and other 333,000 319,000
----------- ----------
Total $ 564,000 $ 373,000
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----------- ----------
OTHER ASSETS:
Long term portion of net sales lease receivable $ 330,000
Goodwill, net 320,000 $ 369,000
Other intangible assets, net 90,000 106,000
Other 286,000 278,000
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Total $ 1,026,000 $ 753,000
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ACCRUED LIABILITIES:
Employee compensation and related expenses $ 287,000 $ 113,000
Accrued vacation 247,000 215,000
Deferred rent 170,000 184,000
Other 111,000 238,000
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Total $ 815,000 $ 750,000
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----------- ----------
</TABLE>
6
<PAGE>
NOTE 5 - NOTES PAYABLE
In September 1995, the Company entered into a revolving loan and security
agreement, which provides for borrowings of up to $1,000,000, for refinancing
notes payable to former Optigraphics shareholders and to finance capital
equipment and software purchases. At September 30, 1995, $700,000 was
outstanding on the revolving loan agreement and $300,000 was unused. The
maximum credit available under this facility declines by $200,000 in September
of each year hereafter. The loan balance is payable in monthly installments of
$16,667 with interest at the rate of the 30-day Commercial Paper Rate plus 2.95%
(8.78% at September 30, 1995). Total borrowings under the revolving loan
agreement are collateralized by the Company's assets.
At September 30, 1995, the Company has outstanding notes payable to former
Optigraphics shareholders having a principal balance of $1,634,000. The notes
which had interest payable quarterly at 6% per annum were issued as part of the
total consideration paid in connection with the acquisition of Optigraphics
Corporation. The principal balance was due September 24, 1995, upon
presentation of the notes by former Optigraphics shareholders in accordance with
the agreement. At September 30, 1995, no notes have been presented for payment.
7
<PAGE>
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH THE THREE AND NINE
MONTHS ENDED SEPTEMBER, 1994.
Revenue
Revenue for the three and nine months ended September 30, 1995 was
$3,127,000 and $9,629,000, respectively, as compared to $2,002,000 and
$6,928,000 for the three and nine months ended September 30, 1994. The increase
of 56% and 39%, respectively, in revenue for the three and nine months ended
September 30, 1995 is primarily due to revenues generated from new system sales.
The Company's increased system sales resulted primarily from increased demand
for imaging systems in the marketplace which management believes is due to the
reduction in the cost of client servers and workstations which, combined with
imaging software, has brought about a more cost effective solution to customers.
Revenue derived from new systems varies depending on number of users, features
and complexity of the system. Revenue fluctuations will vary based on the
demands for and timing of new system orders.
For the three and nine months ended September 30, 1995 revenue consisted of
new system revenue of $1,683,000 (54%) and $5,249,000 (55%), respectively, and
revenue related to system enhancements, expansion and maintenance of $1,444,000
(46%) and $4,380,000 (45%), respectively. This compares to revenue in the
comparable periods of 1994 of $634,000 (32%) and $2,530,000 (37%), respectively,
in new system revenue and revenue related to system enhancements, expansion and
maintenance of $1,368,000 (68%) and $4,398,000 (63%), respectively. The
difference from 1994 to 1995 is primarily due to the fact that in 1995 the
Company has sold over 20 new systems, while in 1994 a higher percentage of
revenue was generated from system expansions.
In the past, a small number of customers have typically accounted for a
large percentage of the Company's annual revenue. In the first nine months of
1995, no customers accounted for over 10% of total revenue. During the first
nine months of 1994, one customer accounted for 11% of total revenue. Although
the Company's dependence on a small number of customers on an annual basis has
been reduced as a result of a wider customer base, revenue can still fluctuate
significantly on a quarterly basis. The Company's reliance on relatively few
customers could have a material adverse effect on the results of its quarterly
operations, particularly in light of the current prevailing adverse general
economic conditions, which have adversely affected certain industries, including
aerospace and defense-related manufacturing, in which many of the Company's
principal customers operate. Additionally, a significant portion of the
Company's revenues has historically been derived from the sale of systems to new
customers. The addition of over 20 new systems in 1995 has reduced the
Company's dependence on a small number of customers. As additional new systems
are installed the future dependence on new system sales will continue to
decrease.
Gross Profit
Gross profit was $1,851,000 or 59% and $5,239,000 or 54% for the three and
nine months ended September 30, 1995. For the comparable periods in 1994, gross
profit was $875,000 or 44% and $3,427,000 or 50%, respectively. During the
third quarter of 1995 the significant increase in gross profit was attributable
to a higher percentage of software sales as opposed to 1994. Gross profit
percentage can fluctuate quarterly based on the revenue mix of Company software,
services, proprietary hardware, and third party software or hardware. Third
party products are resold at a lower gross profit percentage in order for the
Company to remain competitive in the market place.
8
<PAGE>
Operating Expenses
Research and development expense for the three and nine months ended
September 30, 1995 was $326,000 and $886,000 versus $58,000 and $490,000 for the
same periods in the prior year. This increase resulted from the expansion of
the Company's engineering workforce in connection with its efforts to continue
to enhance and expand the current product suite. Technical expenses on
customer-funded projects are included in cost of revenues, while expenses on
internal projects are included in research and development expense. For the
three and nine months ended September 30, 1995, technical expense included in
cost of revenues was $512,000 and $1,635,000, respectively, versus $288,000 and
$1,454,000, respectively, for the same period last year. The increase in
technical expense is due to the added resources required to implement the
increase in new system orders. Research and development expense can vary year
to year based on the amount of engineering service contract work required for
customers versus purely internal development projects.
Marketing expense for the three and nine months ended September 30, 1995
was $942,000 and $2,413,000 as compared to $647,000 and $1,954,000 for the three
and nine months ended September 30, 1994. The increase in 1995 is primarily due
to additional sales and support personnel hired along with additional costs
associated with the Company's revenue growth. During the nine months ended
September 30, 1995, the Company opened new sales offices in Detroit in January,
Chicago in May and Washington, D.C. in July.
General and administrative expense for the three and nine months ended
September 30, 1995 increased to $357,000 and $1,078,000 from $286,000 and
$815,000 for the three and nine months ended September 30, 1994. The increase
in general and administrative expense was due primarily to costs associated with
three additional personnel as compared to 1994.
Interest and Other Income
Interest and other income was $31,000 and $101,000 for the three and nine
months ended September 30, 1995 as compared to $78,000 and $173,000 in the prior
year. The decrease is due primarily to reduced interest income resulting from
lower short term investment balances during 1995 versus 1994.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company's cash and cash equivalents totaled
$2,246,000 as compared to $1,036,000 at December 31, 1994. Short term
investments were $450,000 at September 30, 1995 versus $1,804,000 at December
31, 1994. Short term investments are comprised primarily of certificates of
deposit and treasury bills. At September 30, 1995, the Company's current ratio
was nearly 2 to 1.
For the first nine months of 1995, the Company generated cash of $527,000
in operating activities, used $48,000 in investing activities, and generated
$731,000 in financing activities. During the first nine months of 1994, the
Company used cash of $1,569,000 in operating activities, $863,000 in investing
activities, and $129,000 in financing activities.
In September 1993, the Company acquired Optigraphics Corporation. As part
of the transaction, the Company issued notes that became due in September 1995
totaling $1,634,000 with interest payable quarterly at 6% per annum. The
principal balance is payable upon presentation of the notes by the former
Optigraphics shareholders in accordance with the agreement. As of September 30,
1995, no notes had been presented for payment. In September 1995, the Company
entered into a revolving loan and security agreement with Merrill Lynch for the
borrowing of up to $1,000,000 to re-finance the principal balance due on notes
payable to former Optigraphics shareholders and to finance capital equipment and
software purchases. As of September 30, 1995, the Company borrowed $700,000
under the credit facility and $300,000 remained unused. The maximum credit
available under this facility declines by $200,000 in September of each year
hereafter. The Company believes that current working capital and funds
generated from operations will be adequate to meet expected needs for working
capital and capital expenditures over the next twenty-four months.
9
<PAGE>
Net Operating Loss Tax Carryforwards
As of December 31, 1994, the Company had a net operating loss carryforward
("NOL") for Federal income tax purposes of $36,400,000. In addition, the
Company generated but has not used research and investment tax credits for
Federal income tax purposes of approximately $600,000. Under the Internal
Revenue Code of 1986, as amended (the "Code"), the Company generally would be
entitled to reduce its future Federal income tax liabilities by carrying unused
NOL forward for a period of 15 years to offset future taxable income earned, and
by carrying unused tax credits forward for a period of 15 years to offset future
income taxes. The Company's ability to utilize any NOL and credit carryforwards
in future years may be restricted, however, in the event the Company undergoes
an "ownership change," generally defined as a more than 50 percentage point
change of ownership by one or more statutorily defined "5-percent stockholders"
of a corporation, as a result of future issuances or transfers of equity
securities of the Company within a three-year testing period. In the event of
an ownership change, the amount of NOL attributable to the period prior to the
ownership change that may be used to offset taxable income in any year
thereafter generally may not exceed the fair market value of the Company
immediately before the ownership change (subject to certain adjustments)
multiplied by the applicable long-term, tax-exempt rate announced by the
Internal Revenue Service in effect for the date of the ownership change. A
further limitation would apply to restrict the amount of state NOL and credit
carryforwards that might be used in any year after the ownership change. As a
result of these limitations, in the event of an ownership change, the Company's
ability to use its NOL and credit carryforwards in future years may be delayed
and, to the extent the carryforward amounts cannot be fully utilized under these
limitations within the carryforward periods, these carryforwards will be lost.
Accordingly, the Company may be required to pay more Federal income taxes or to
pay such taxes sooner than if the use of its NOL and credit carryforwards were
not restricted.
Over the past three years the Company has issued equity securities in
connection with the Optigraphics acquisition in September 1993, and through
traditional stock option grants to employees. This activity, combined with the
liquidity available to stockholders as a result of the Company's common stock
trading on the NASDAQ National Market System, increases the potential for an
ownership change" for income tax purposes.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits - See Exhibit Index on Page 12.
(b) There were no reports on Form 8-K filed for the three months
ended September 30, 1995.
SIGNATURES
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.
ALPHAREL, INC.
By: /s/ John W. Low
-----------------------------
John W. Low
Chief Financial Officer
By: /s/ Stephen P. Gardner
------------------------------
Stephen P. Gardner
President and Chief Executive Officer
Dated: October 19, 1995
---------------------------
11
<PAGE>
EXHIBIT INDEX
Exhibit Page Number
- ------- -----------
11 Statement Re Computation of 13
Net Income Per Share
27 Financial Data Schedule 14
12
<PAGE>
Exhibit 11
ALPHAREL, INC.
STATEMENT RE COMPUTATION OF NET INCOME (LOSS) PER SHARE
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------ --------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) per consolidated
financial statements $ 229 $ (63) $ 881 $ 255
Primary net income (loss) per share:
Weighted average common shares 14,057 13,743 13,892 13,709
Common stock equivalents:
Common stock options 796 - 425 249
Common stock warrants 140 - 47 -
--------- ---------- -------- --------
Weighted average shares outstanding 14,993 13,743 14,364 13,958
--------- ---------- -------- --------
Fully diluted net income (loss) per share:
Weighted average common shares 14,057 13,743 13,892 13,709
Common stock equivalents:
Common stock options 796 - 425 249
Common stock warrants 140 - 47 -
--------- ---------- -------- --------
Weighted average shares outstanding 14,993 13,743 14,364 13,958
--------- ---------- -------- --------
Net income (loss) per share:
Primary $ .02 $ - $ .06 $ .02
--------- ---------- -------- --------
Fully diluted $ .02 $ - $ .06 $ .02
--------- ---------- -------- --------
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE 9/30/95 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,246
<SECURITIES> 0
<RECEIVABLES> 3,559
<ALLOWANCES> 0
<INVENTORY> 405
<CURRENT-ASSETS> 7,224
<PP&E> 3,277
<DEPRECIATION> (2,342)
<TOTAL-ASSETS> 11,108
<CURRENT-LIABILITIES> 3,979
<BONDS> 500
<COMMON> 43,193
0
0
<OTHER-SE> (36,564)
<TOTAL-LIABILITY-AND-EQUITY> 11,108
<SALES> 9,629
<TOTAL-REVENUES> 9,629
<CGS> 4,390
<TOTAL-COSTS> 4,390
<OTHER-EXPENSES> 886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82
<INCOME-PRETAX> 881
<INCOME-TAX> 0
<INCOME-CONTINUING> 881
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 881
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
