<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 June 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 July 31, 1995: 14,046,347
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Number of Sequentially Numbered Pages: 12
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Exhibit Index at Page 11
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1
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ALPHAREL, INC.
INDEX
PAGE NUMBER
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 7
PART II. OTHER INFORMATION 10
<PAGE>
ALPHAREL, INC.
PART 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION> June 30, 1995 December 31, 1994
------------- -----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,152,000 $1,036,000
Short term investments 450,000 1,585,000
Short term investments, restricted 225,000 219,000
Receivables, net 3,037,000 2,973,000
Inventory, net 475,000 726,000
Other current assets 537,000 373,000
----------- ---------
Total current assets 6,876,000 6,912,000
Property and equipment, net 779,000 770,000
Computer software, net 1,641,000 1,336,000
Deposits and other assets 829,000 753,000
----------- ----------
Total assets $ 10,125,000 $9,771,000
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 31,000 $ 59,000
Accounts payable 961,000 959,000
Accrued liabilities 701,000 750,000
Deferred revenue 328,000 419,000
Payable to former Optigraphics shareholders 21,000 192,000
Notes payable to former Optigraphics shareholders 1,734,000 1,734,000
----------- ----------
Total current liabilities 3,776,000 4,113,000
Commitments and contingencies
Shareholders' equity:
Common stock, 20,000,000 shares authorized;
14,003,347 and 13,740,847 issued and
outstanding, respectively 43,142,000 43,103,000
Accumulated deficit (36,793,000) (37,445,000)
----------- -----------
Total shareholders' equity 6,349,000 5,658,000
----------- -----------
Total liabilities and shareholders' equity $10,125,000 $ 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 six months
ended June 30, ended June 30,
-------------------- ------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 3,351 $ 2,315 $ 6,502 $ 4,926
Cost of revenues 1,422 1,072 3,114 2,374
------- ------- ------- -------
Gross profit 1,929 1,243 3,388 2,552
------- ------- ------- -------
Operating expenses:
Research and development 335 215 560 432
Marketing and sales 778 685 1,471 1,307
General and administrative 399 262 721 529
------- ------- ------ -------
Total operating expenses 1,512 1,162 2,752 2,268
------- ------- ------ -------
Income from operations 417 81 636 284
Interest and other income 36 50 70 95
Interest and other expense (26) (30) (54) (61)
------- ------ ------ -------
Income before taxes 427 101 652 318
Provision for taxes - - - -
------- ------ ------ -------
Net income $ 427 $ 101 $ 652 $ 318
======= ====== ====== =======
Net income per share $ .03 $ .01 $ .05 $ .02
======= ====== ====== =======
Weighted average shares 14,068 14,073 14,066 14,065
outstanding
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
ALPHAREL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended June 30,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 652,000 $ 318,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 335,000 288,000
Changes in assets and liabilities:
Receivables (64,000) (247,000)
Inventory 251,000 (31,000)
Other assets (292,000) (138,000)
Accounts payable 2,000 (21,000)
Accrued liabilities (49,000) (504,000)
Billings in excess of cost - (173,000)
Deferred revenue (91,000) (382,000)
-------- --------
Net cash provided by (used in) operating activities 744,000 (890,000)
-------- --------
Cash flows from investing activities:
Increase in short term investments - (381,000)
Short term investments maturing 1,129,000 -
Purchases of property and equipment (186,000) (145,000)
Proceeds from sale of property and equipment 4,000 -
Purchases of software (11,000) (141,000)
Computer software capitalized (404,000) (347,000)
Cash paid to former Optigraphics shareholders (171,000) (132,000)
-------- --------
Net cash provided by (used in) investing activities 361,000 (1,146,000)
-------- ---------
Cash flows from financing activities:
Principal payments under capital lease obligations - (65,000)
Principal payments under note payable (28,000) (33,000)
Proceeds from exercise of stock options 39,000 22,000
-------- --------
Net cash provided by (used in) financing activities 11,000 (76,000)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,116,000 (2,112,000)
Cash and cash equivalents at beginning of period 1,036,000 3,373,000
--------- ---------
Cash and cash equivalents at end of period $2,152,000 $1,261,000
========== ==========
</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 June 30, 1995 and the consolidated statement of operations
and of cash flows for the three and six month periods ended June 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 include all adjustments necessary for a
fair presentation of the financial position and the results of operations 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 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 June 30, 1995 and December 31, 1994, the
Companys reserve against excess quantities totaled $2,279,000 and $2,323,000,
respectively.
NOTE 4 - NOTE PAYABLE
At June 30, 1995, the Company had an outstanding note payable to a
bank having a principal balance of $31,000, payable in monthly installments
of $5,000 plus interest at prime plus 1.35% (10.35% at June 30, 1995). Under
the terms of the agreement with the bank, the Company is required to maintain
a minimum of $200,000 on deposit with the bank securing the note payable.
At June 30, 1995, the Company has outstanding notes payable to
former Optigraphics shareholders having a principal balance of $1,734,000.
The notes were issued as part of the total consideration paid in connection
with the acquisition of Optigraphics Corporation. The principal balance is
payable on September 24, 1995 with interest payable quarterly at 6% per
annum. The notes are subject to offset for certain indemnification
obligations of Optigraphics shareholders.
6
<PAGE>
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH THE THREE AND SIX
MONTHS ENDED JUNE, 1994.
Revenue
Revenue for the three and six months ended June 30, 1995 was
$3,351,000 and $6,502,000, respectively, as compared to $2,315,000 and
$4,926,000 for the three and six months ended June 30, 1994. The increase of
45% and 32%, respectively, in revenue for the three and six months ended June
30, 1995 is primarily due to revenues generated from significant new system
sales.
For the three and six months ended June 30, 1995 revenue consisted
of new system revenue of $1,841,000 (55%) and $3,566,000 (55%), respectively,
and revenue related to system enhancements, expansion and maintenance of
$1,510,000 (45%) and $2,936,000 (45%), respectively. This compares to 1994
revenue of $747,000 (32%) and $1,897,000 (39%), respectively, in new system
revenue and revenue related to system enhancements, expansion and maintenance
of $1,568,000 (68%) and $3,029,000 (61%), respectively. The difference from
1994 to 1995 is primarily due to the fact that in 1995 the Company sold over
20 new systems, while in 1994 a higher percentage of revenue was generated
from system expansions.
A small number of customers have typically accounted for a large
percentage of the Company's annual revenue. In the first six months of 1995,
one customer accounted for 13% of total revenue. During the first six months
of 1994, two customers accounted for 15% and 10% of total revenue. One
consequence of this dependence has been that revenue can 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
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 has reduced the
Companys 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 $1,929,000 or 58% and $3,388,000 or 52% for the
three and six months ended June 30, 1995. For the comparable periods in 1994,
gross profit was $1,243,000 or 54% and $2,552,000 or 52%, respectively.
During the second 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.
7
<PAGE>
Operating Expenses
Research and development expense for the three and six months ended
June 30, 1995 was $335,000 and $560,000 versus $215,000 and $432,000 for the
same periods in the prior year. 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.
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 six months ended June 30, 1995,
technical expense included in cost of revenues was $510,000 and $1,123,000,
respectively, versus $530,000 and $1,166,000, respectively, for the same
period last year.
Marketing expense for the three and six months ended June 30, 1995
was $778,000 and $1,471,000 as compared to $685,000 and $1,307,000 for the
three and six months ended June 30, 1994. The increase in 1995 is primarily
due to additional sales and support personnel hired. During the first half
of 1995, the Company opened two new sales offices, resulting in additional
sales offices across the United States. An office was opened in Detroit in
January and Chicago in May.
General and administrative expense for the three and six months
ended June 30, 1995 increased to $399,000 and $721,000 from $262,000 and
$529,000 for the three and six months ended June 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 $36,000 and $70,000 for the three and
six months ended June 30, 1995 as compared to $50,000 and $95,000 in the
prior year. The decrease is due primarily to reduced interest income
resulting from lower short term investment balances during the first half of
1995 versus 1994.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Company's cash and cash equivalents totaled
$2,152,000 as compared to $1,036,000 at December 31, 1994. Short term
investments were $675,000 at June 30, 1995 versus $1,804,000 at December 31,
1994. Short term investments are comprised primarily of certificates of
deposit and treasury bills. At June 30, 1995, the Company's current ratio
was nearly 2 to 1.
For the first six months of 1995, the Company generated cash of
$744,000 in operating activities, $361,000 in investing activities, and
$11,000 in financing activities. During the first six months of 1994, the
Company used cash of $890,000 in operating activities. The Company used
$1,146,000 in investing activities, with $76,000 used in financing activities.
In the past, the Company has generally limited the number of
contracts sought from customers requiring substantial bonds or deposits;
however, such bonds or deposits are often required by state and local
governments, and occasionally by other types of potential customers. Bond or
deposit amounts required are generally a percentage of the total contract
price. Such bonds or deposits generally must remain in place from the award
of the contract until acceptance of the work performed, which in the absence
of a dispute typically occurs within six to nine months after award of the
contract. The Company does not expect that the posting of such bonds or
deposits in the future will have a material adverse effect on the Company's
ability to meet its needs for liquidity and working capital.
8
<PAGE>
In September 1993, the Company acquired Optigraphics Corporation.
As part of the transaction, the Company issued notes due in September 1995
totaling $1,734,000 with interest payable quarterly at 6% per annum. The
Company believes working capital and funds generated from operations will be
sufficient to meet the principal balances due at expiration. However, the
Company will explore all of its options for additional financing before the
due date of the principal balance of the notes. From a total operations
standpoint, 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.
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
through a unit offering 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 Companys common stock trading on the NASDAQ National Market
System, increases the potential for an "ownership change" for income tax
purposes.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The Annual Meeting of Shareholders was held June 15, 1995. At the
meeting, the shareholders approved the election of the following individuals
as directors who will hold office until the next annual meeting: Walter F.
Bauer, Robert T. Bruce, Stephen P. Gardner, D. Ross Hamilton, Michael J.
McGovern, and Larry D. Unruh.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits - See Exhibit Index on Page 11.
(b) There were no reports on Form 8-K filed for the three
months ended June 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
Dated: August 11, 1995
_____________________________________
10
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EXHIBIT INDEX
Exhibit Page Number
------- -----------
11 Statement Re Computation of 12
Net Income Per Share
11
<PAGE>
EXHIBIT 11
ALPHAREL, INC.
STATEMENT RE COMPUTATION OF NET INCOME PER SHARE
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
--------------------- ------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income per consolidated
financial statements $ 427 $ 101 $ 652 $ 318
====== ====== ====== ======
Primary net income per share:
Weighted average common shares 13,913 13,713 13,827 13,691
Common stock equivalents:
Common stock options 155 360 239 374
Common stock warrants - - - -
------ ------ ------ ------
Weighted average shares outstanding 14,068 14,073 14,066 14,065
====== ====== ====== ======
Fully diluted net income per share:
Weighted average common shares 13,913 13,713 13,827 13,691
Common stock equivalents:
Common stock options 155 360 239 374
Common stock warrants - - - -
------ ------ ------ ------
Weighted average shares outstanding 14,068 14,073 14,066 14,065
====== ====== ====== ======
Net income per share:
Primary $ .03 $ .01 $ .05 $ .02
====== ====== ====== ======
Fully diluted $ .03 $ .01 $ .05 $ .02
====== ====== ====== ======
</TABLE>
12
<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 6/30/95 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 2,152
<SECURITIES> 0
<RECEIVABLES> 3,037
<ALLOWANCES> 0
<INVENTORY> 475
<CURRENT-ASSETS> 6,876
<PP&E> 3,016
<DEPRECIATION> (2,237)
<TOTAL-ASSETS> 10,125
<CURRENT-LIABILITIES> 3,776
<BONDS> 0
<COMMON> 43,142
0
0
<OTHER-SE> (36,793)
<TOTAL-LIABILITY-AND-EQUITY> 10,125
<SALES> 6,502
<TOTAL-REVENUES> 6,502
<CGS> 3,114
<TOTAL-COSTS> 3,114
<OTHER-EXPENSES> 560
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> 652
<INCOME-TAX> 0
<INCOME-CONTINUING> 652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 652
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
