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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1995,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from __________ to ________
Commission file number 0-15935
ALPHAREL, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3634089
State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9339 CARROLL PARK DRIVE, SAN DIEGO, CA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 625-3000
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK
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(Title of class)
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
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(Cover page continues on next page)
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock on March 25, 1996, held by
non-affiliates* of the Registrant, based upon the last price reported on The
Nasdaq National Market on such date was $89,020,170.
The number of shares outstanding of the Registrant's Common Stock at the
close of business on March 25, 1996, was 18,134,386.
*Without acknowledging that any individual director of Registrant is an
affiliate, all directors have been included as affiliates with respect to shares
owned by them.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement, which is to be filed
pursuant to Regulation 14A within 120 days after the end of Registrant's fiscal
year ended December 31, 1995, are incorporated by reference in Part III of this
Form 10-K.
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PART I
ITEM 1. BUSINESS
Alpharel, Inc. (the "Company") is a leader in delivering enterprise-wide
electronic document management and automation systems, also known as imaging
systems, to the global marketplace. These document management systems are
installed in manufacturing, utilities, government, banking and finance,
transportation, telecommunications and other industries. Documents of all
sizes, from letter-size pages to large-scale engineering drawings, are
handled cost-effectively by Alpharel designed and integrated systems.
Alpharel products are marketed under the Alpharel/Trimco marketing
identity, to reflect our global scope and capability to serve customers,
which has been considerably enhanced through the Company's acquisition of
Trimco Group plc ("Trimco") of the United Kingdom in December 1995.
Alpharel/Trimco provides software products and services which deal with the
needs of customers to bridge a variety of needs throughout their business
enterprises. The Company focuses on document management software to bridge
the processes of creating, capturing, managing, distributing, and using
complex information throughout a business and among businesses through global
commerce. The Company links document management software to workflow
processes and business applications to provide tools to improve productivity
and competitive position for our customers.
Alpharel/Trimco provides multiple platform support, allowing customers
to effectively use the best available computers, networks and applications.
The Company also holds patents for raster manipulation and network load
reduction technologies. (See "Glossary of Selected Technical Terms" on page
11 for an explanation of certain technical terms used herein.)
HISTORY
Upon its organization in 1981, the Company began efforts to develop
document management systems. Throughout the early and mid 1980's the Company
focused on the development and manufacture of proprietary hardware
components, as well as software, for electronic document management systems.
The Company's systems included a significant portion of imaging hardware
components developed and manufactured by the Company, including devices for
scanning, compressing and decompressing data.
As a result of its early success and the need for additional capital to
finance expected future growth, the Company completed an initial public
offering of its common stock in June 1987, raising net proceeds of
$19,617,000. From 1986 through 1988 the Company experienced declining sales.
In subsequent years, the Company moved from proprietary hardware components
for electronic document management systems to open client/server software
systems, while also providing system integration services. As part of this
change, the Company implemented a restructuring program that reduced costs
and consolidated operations to a level consistent with sales.
In December 1991, the Company issued common stock and warrants through a
unit offering. The Company received net proceeds of approximately $2,600,000
upon issuing 750,000 units at a unit price of $4.25. In January 1992, the
underwriter in the unit offering exercised its over-allotment option and the
Company sold an additional 112,500 units for net proceeds of $365,000. Each
unit consisted of two shares of the Company's common stock and one warrant to
purchase one share of common stock at an exercise price of $4.25. In 1995,
the underwriter exercised warrants which were issued to it in connection with
the offering for total proceeds of $382,500. Also in 1995, 918,900 warrants
were exercised for total proceeds of $3,848,000.
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In September 1993 the Company acquired Optigraphics Corporation
("Optigraphics") for consideration valued at $8,400,000, comprised of
$2,700,000 in cash, 2,241,117 shares of Alpharel common stock and $1,734,000
in notes which became due in September 1995 and were paid. Optigraphics,
which was founded in 1982, provides software imaging solutions and enterprise
systems, along with traditional departmental systems. The Company's
attraction for acquiring Optigraphics was the technology behind its
sophisticated workstation products, strong engineering organization, broad
customer base, including customers in the telecommunications industry,
experienced national sales force and international reseller distribution
capabilities.
On December 27, 1995, the Company acquired Trimco Group plc. ("Trimco")
for total consideration of $14,165,000. The purchase price was comprised of
$5,550,000 in cash, 1,614,189 shares of Alpharel common stock and a
convertible promissory note having a total principal amount of $1,000,000 due
September 27, 1996 with interest payable at 7% per annum. In addition, the
purchase price included obligations assumed which were to be paid to Trimco
employees in connection with the acquisition, consisting of cash of
$1,051,000 and 100,599 shares of Alpharel common stock. Trimco was
incorporated in 1988 in the United Kingdom and has its principal offices in
Ealing, London. Trimco has developed a line of software products for the
capture, viewing, mark-up editing, storage, distribution and workflow
management of documents. Trimco's products focus on applications involving
technical documents such as engineering drawings and blueprints and are
marketed primarily through Value-Added Resellers, distributors and systems
integrators. The Company's purchase of Trimco brings a combined total of
approximately 1,500 worldwide customers, representing major markets in
utilities, transportation, oil and gas, manufacturing, construction,
telecommunications and media, government and financial services.
THE INDUSTRY
Many companies today are evaluating document management technology for
potential application in their operations. The specific factors that motivate
companies to adopt document management technology are as varied as the
industries that stand to benefit from the technology. However, the Company
believes that they share common characteristics, namely, the requirement to
maintain an extensive document storage and retrieval system, the drive to
improve productivity, quality and competitiveness through effective use of
documents and the need to reduce costs associated with maintaining document
archives and services.
An essential part of a company's evaluation of document management is a
review of the value the technology adds and the costs it removes. The Company's
customers, approximately 1,500 worldwide, have a unique perspective on the
benefits derived from integrating document management technology into their
enterprise. They cite the following as examples of this technology's
contribution to their corporate goals:
- Reduction of business operating costs by eliminating all tasks
associated with a system based on physical data copies on microfilm,
aperture cards and paper.
- Improved time-to-market by greatly reducing and streamlining the process
of moving ideas from concept to implementation.
- Enhanced product and service quality by ensuring that current, accurate
information is readily available to allow better, error-free products to
be made and to permit rapid retrieval of relevant information during a
customer service event.
- Improved productivity and morale by providing employees with timely and
accurate information.
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The Company believes that the implementation of a document management
system generally produces quantifiable productivity gains by providing users
with controlled, timely and simultaneous access to up-to-date documentation.
The time it takes to access a document that is stored and managed
electronically is typically measured in seconds, as compared to the hours or
days spent using manual processes. On-line document storage, accessible by
networked workstations, avoids misfiling costs and reduces the need for
document management clerical staff and storage space. On-line documents are
assured to be at the correct revision level, eliminating a major source of
rework cost and customer disatisfaction. On-line documents can be secure
against unauthorized use, eliminating both inappropriate use and piracy of
information.
Based on an independent industry analysis, the Company believes that the
overall market for electronic document management systems totaled over $4
billion in 1995. The overall market includes two primary segments,
engineering document management systems and office document management
systems. The Company competes in both market segments, expanding since 1993
from its original focus primarily on the engineering document segment.
The engineering document management segment serves utilities, process
plants, manufacturing companies, the government, telecommunication firms,
transportation companies, and engineering firms. These organizations
typically work with large collections of engineering documents and drawings
of various sizes, from microfilm and aperture cards up to large E-size
documents (34"x44") or larger. Engineering document management has evolved
from storage and retrieval applications to a more complete automated document
access and revision control process, often with associated Product Data
Management (PDM) solutions integrated with the Electronic Document Management
(EDM) solution. The Company offers both integrated document management for
the leading PDM providers in the global market, as well as its own
specialized integrated EDM/PDM solution. The Company's original focus on the
demands of this market led it to develop unique and patented approaches to
dealing with the problem of accessing very large documents, or information
objects, over wide and local area networks. This technology has now been
expanded to address the needs of very large networks of both engineering and
office document users to be able to deal with increasingly large volumes of
documents, large and small format, and other complex information objects
(X-ray photos, color JPEG files, etc.).
Office document image management is used by a wide variety of
organizations. Financial and insurance agencies have found that electronic
document control improves claims processing, customer service and accounts
receivable processing. Health care providers have applied imaging to patient
records, and certain governmental agencies use it for tracking tax returns
and unemployment, Social Security and welfare benefit records. The driving
need behind many systems purchased in the office market is the automation of
specific business processes using "workflow" tools. The Company has aligned
itself with leading workflow suppliers such as Staffware, Wang and Digital
Equipment to allow its integrated EDM solutions to operate with the most
appropriate workflow solution for a given customer. The Company is a funding
member of the Workflow Management Coalition.
Increasingly, Alpharel/Trimco customers are finding that departmental
EDM systems must be linked together to bridge all the business processes
inside a company. Hence, companies are now selecting EDM providers based
upon the ability to provide a consistent range of products which span the
engineering and office document management needs of an organization. The
Company now offers a full Enterprise Document Management solution to address
this market requirement.
Furthermore, the marketplace is now rapidly moving toward demanding that
all corporate information, both structured and unstructured, simple and
complex, be managed as consistent and interconnected Global Enterprise
Networked Intelligence. This trend demands that products and services look
across technology platforms, business processes and geographic locations to
establish real-time information systems and document management capabilities.
The need to manage Global Enterprise Networked Intelligence encompasses many
forms of information, including documents, and demands ready access over
increasingly simple access paths, such as the Internet or Intranet. The
Company is responding to this market evolution with both immediate products,
such as WISDOM, and on-going research and development activity.
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STRATEGY
The Company strives to provide software and related services which offer
the customer an electronic document management system with flexible features
and a high level of performance at a cost-effective price. Above all, the
Company is focused on providing a high return on investment for its
customers. In order to help achieve these goals, the Company has adopted the
following strategies:
- UTILIZE BOTH EXISTING CLIENT ASSETS AND LEADING EDGE TECHNOLOGIES - The
Alpharel/Trimco client and server software components operate in very
diverse corporate computing environments. Multiple communications
architectures, such as Ethernet, Token Ring, and wide area networks are
supported. A wide variety of platforms are also supported, including
Hewlett-Packard (HP), Sun Microsystems, International Business Machines
(IBM), Silicon Graphics Inc. (SGI), Data General (DG), and Digital
Equipment Corp. (DEC) UNIX, in UNIX server operating environments and
client workstations on Apple Macintosh, PC, Windows and X Window OSF/Motif.
Microsoft NT is supported by both advanced Server and Client products.
- DOCUMENT-ENABLE EXISTING APPLICATIONS - From a software perspective,
Alpharel/Trimco acknowledges that many companies have installed
applications that meet most user needs. Rather than replace these
applications, Alpharel offers the option of "document-enabling" them, often
extending the life of the asset. Document-enabling means that the power of
the EDM system is integrated directly with the business applications,
allowing users to have a rich set of information at their disposal as they
make business decisions.
- MATCH CLIENT NEED FOR PROJECT SERVICES - Alpharel recognizes that
different companies have different expectations and needs in the area of
customization and integration. Some customers want to develop their own
applications, others want to integrate existing applications, and still
others want Alpharel/Trimco to perform the integration tasks and deliver a
complete system. The Company is prepared, both from a personnel resource
and a product standpoint, to accept any of these scenarios. However, the
Company's strategy is to move an increasing amount of service and systems
integration work to its value-added channel partners and systems
integration partners, while expanding the technical resources available to
allow the Company to ensure that its partners have expertise available to
them as needed. The Company is also committed to seeking continual
improvement of the tailoring and customization features inherent within the
Company's core product set, using the most advanced technologies available
in the market.
- BE THE GLOBAL ENTERPRISE BRIDGE - Alpharel/Trimco strives to provide
bridging software and services for document management technologies,
business processes and global commerce requirements of our customers. Our
document management products are designed to bridge the processes of
document creation, capture, library management, distribution, use,
connection to workflow and business applications and change management.
Our solutions are designed to be able to transcend office and engineering
requirements across an enterprise, linking business processes in design,
manufacturing, finance, service and sales. Alpharel/Trimco provides
emerging technologies to permit customers to securely link design and
product documents with external suppliers, manufacturers, customers and
partners - an important trend in global commerce.
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SYSTEM SOLUTIONS
The Company offers complete enterprise document management systems to allow
customers to:
- Replace manual archives with electronic document libraries.
- Provide centralized management and storage for image, CAD design, ASCII
text, multi-media, and other data files.
- Enhance document access via existing application search mechanisms and
electronic delivery.
- Replace manual drawing modifications with electronic drafting, editing
and revision.
- Produce hard copies using new electronic technologies.
- Distribute documents electronically across local or wide area networks.
- Streamline the drawing review process through on-line markup and review.
- Replace manual digitizing or CAD redraw with sophisticated CAD
conversion and raster editing tools.
The Company's product family includes a wide variety of related software
modules which can be deployed either as shipped or with tailoring by value-added
resellers, systems integrators, or the customer. Major members of the product
family include:
- WINTRACK: A full Enterprise Document Management system with a set of
modular components to provide library, capture, distribution, security,
printing and other core document management functions.
- TARGET: A variation of Wintrack which is specifically adapted for the
highly competitive office document management market.
- TIE-MAIN: A product set aimed at utilizing powerful Targeted Image
Extraction (TIE) technology to allow rapid manipulation of even the most
complex documents over wide and local area networks.
- ENABLER: A product set specifically aimed at providing EDM features and
functions as add-on capabilities to existing applications and business
processes.
- RIPS: A variation of Enabler, adapted specifically to the needs of the
Product Data Management (PDM) market, and enhanced to work with the
Metaphase product, one of the leaders in that market.
- FLEXFOLDER: A full EDMS product complete with the ability to create a
stand-alone document management application, with variable file indexing
and the ability to incorporate multimedia objects as well as standard
document types.
- WISDOM: An Internet and Intranet document management access product
designed to provide access to document repositories using standard Web
Browser products such as Netscape and MOSAIC.
Orders for these system solutions can vary substantially in price based
upon peripheral device content, i.e., scanners, printers, workstations, etc.
While pilot systems begin at a price of approximately $15,000 for a small
Target system, the price of full-scale enterprise systems using Wintrack or
FlexFolder can range up to several million dollars. In the past, most
systems ordered from the Company have ranged from $150,000 to $1,500,000.
Once an electronic document management system is installed, the Company
generally receives ongoing revenues from the customer as a result of
enhancements, expansion and maintenance. Enhancements can modify a system in
order to, among other things, accommodate more documents or users, interface
with different peripheral devices, update the system with recently developed
improvements including improvements which increase the speed of the system,
or implement other changes in response to changes in the customer's general
data processing environment. Variations in both the size and timing of orders
can result in significant fluctuations in the Company's revenues on a
quarterly basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Revenues."
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PRODUCT INTEGRATION
The Company provides document management software solutions in
client/server (HP, Sun, IBM, SGI, DG, Windows NT) and mainframe (IBM)
environments. The Company offers an array of document management products
that operate on a variety of platforms, networks and workstations allowing
comprehensive document management solutions in a customer's environment.
Multiple peripheral devices, such as scanners, printers, optical jukeboxes
and RAID storage subsystems are supported from a variety of manufacturers.
The Company's products seek to provide cost-effective, open, enterprise
solutions that accommodate multiple computer environments, applications and
networks. Client applications run in MS-Windows, Windows 95, Windows NT, DOS,
Macintosh Apple System 7 and X Window OSF/Motif environments.
MARKETING AND SALES
The Company's marketing efforts focus on market segments with certain
common characteristics including the need to manage, archive and retrieve a
high volume of documentation, change control requirements and the need to
increase productivity, reduce costs and increase utilization of existing
computing power.
Based on these criteria, the Company's marketing efforts are focused on the
following market segments:
Industrial manufacturers
Utilities
Telecommunications
Department of Defense (DOD)
Electrical/Electronic equipment manufacturers
Government agencies (other than DOD)
Petrochemical
Transportation
Engineering and Construction
Finance
Property management, construction and architecture
The Company has a direct sales organization in North America and the
United Kingdom, plus a group of value-added resellers. With the acquisition
of Trimco, an increasing amount of the Company's revenue is expected to come
from indirect sales through value-added partners and systems integrators.
Sales through indirect channels range from individual components to complete
systems. The Company has entered into cooperative sales arrangements with:
- SHL SYSTEMHOUSE. The Company participates in joint world-wide sales
with SHL Systemhouse. SHL Systemhouse is a world-wide systems integrator,
recently acquired by MCI Communications, with over 5,000 employees and
revenues exceeding $1 billion. SHL Systemhouse is an industry leader in
client/server systems integration and technology outsourcing.
- SYSTEM DEVELOPMENT RESEARCH CORPORATION (SDRC). The Company's
partnership with SDRC allows SDRC to remarket the Company's imaging
products with SDRC's PDM software. In addition, the Company can resell
SDRC's PDM software.
- PERSITEL. The Company accesses the South African market through its
partnership with Persitel.
- LASCOM. LASCOM has represented the company in the French market since
1989.
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- DATA GENERAL CORPORATION. Data General remarkets a number of the
Company's products under the AV/Image brand name on a world-wide basis.
AV/Image has won numerous industry awards and appears to be gaining
rapid market acceptance.
- OTHERS The Company has over 70 marketing partners around the world,
both in geographic and vertical markets, including Cad Capture in the
UK, Octagon in the Netherlands, Unisys, and others.
PRODUCTS
MANAGEMENT/CONTROL AND LIBRARY FUNCTIONS
FLEXFOLDER is a client/server solution for managing business and technical
documents organized in a hierarchical manner (folder, documents, pages).
FlexFolder allows the implementation of a comprehensive, network-based solution
for managing applications such as personnel records, accounts payable, health
and safety information, corporate communications and engineering documentation.
WINTRACK is a client/server solution for rapid development of enterprise-
wide document management systems. Wintrack can act either as a document-
enabling product for other business applications or as a self-contained document
management solution.
ALPHAIQ AND FTR integrated with FlexFolder and Wintrack provide the
ability to conduct a word and subject sensitive full-text search for the
required information. AlphaIQ and FTR provide integration of such industry
leading products as Dataware BRS, Fulcrum, and Excalibur into the
Alpharel/Trimco product set.
API TOOLKIT SETS assist customers with the task of document-enabling
their own applications. The API provides documented entry points into the
software for the integrator or customer. Using the API, the integrator or
customer can create links between an existing application and the imaging
system.
DISTRIBUTION
TIE AND DP/NETBUS technology is provided to create the unique ability to
work with very large documents with many users in enterprise-wide networks.
Using Alpharel/Trimco-developed Targeted Image Extraction (TIE) and/or
patented Tiled TIFF algorithms over the Company's DP/Netbus network
connection software, the client and server interact to send a steady traffic
of small packets over the network, even when using extremely large documents.
This provides for the ability of the customer to predict network traffic loads,
have hundreds or thousands of users on-line and provide very fast response
times from the system under even the most challenging conditions. All
Alpharel/Trimco distribution technologies support industry standard networks
and open systems, while providing unique advantages to the customer.
VIEWING/MARKUP/EDITING
WISDOM is a document management access tool designed to run in
conjunction with popular Internet WEB Browsers such as Netscape and MOSAIC.
WISDOM adds functionality to the WEB Browsers by encompassing such features
as pan and zoom, document management library navigation and the ability to
download mark-up capability as needed.
ALPHAVIEW is a high-speed viewer, providing a user-friendly interface to
drawings and documents. AlphaVIEW enables MS-DOS, MS-Windows 3.1, Apple
Macintosh, and UNIX workstations (X Window OSF/Motif) to view and manipulate
documents with a wide range of functionality.
ALPHAVIEW PLUS provides all the capabilities of AlphaVIEW plus full
markup, red-line and annotation capability.
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ALPHAEDIT provides image restoration functions, including the removal of
background speckles, area erasure and geometry creation. The workstation also
supports raster revision, employing functions such as cut and paste, copy,
create and erase.
CAPTURE/SCANNING/IMPORT
ALPHASCAN provides a graphical user interface for capturing images from
pages, aperture cards and large documents (A-J size). Scan, Index and Quality
Control (QC) functions as well as complete batch processing controls are
provided.
ALPHAQC provides the capability to quality control, crop, rotate, deskew
and clean-up documents scanned from film or other sources.
ALPHAOCR is used to build a full-text search database allowing users to
find information more rapidly and accurately.
ALPHAFAX was developed to integrate facsimile capability with database
and network services to allow users to send and receive faxes without ever
having to touch paper.
PRINTING
ALPHAPRINT provides system interface to a wide variety of industry
standard A-size lasers to E-size (or larger) printers and plotters.
AlphaPRINT provides collation, scaling and banner printing of requested image
documents.
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on providing
customers the most cost-effective solution to their document management
needs. The Company believes it can achieve this goal by improving performance
response times and increasing the capabilities of its products to operate on
industry standard open architecture platforms and to comply with all
published standards which pertain to electronic document processing.
In 1995, 1994, and 1993, the Company's research and product development
expenditures were $1,402,000, $769,000, and $1,108,000, respectively.
Development is also conducted within the scope of a customer contract if a
customer requires additional functionality not provided by the Company's
present systems. Technical expenses included in cost of revenues were
$2,140,000, $2,313,000, and $1,847,000, for 1995, 1994, and 1993,
respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Operating Expenses."
In 1995, the Company spent considerable efforts in unifying product
lines acquired in its acquisition of Optigraphics in late 1993. The Company
capitalized approximately $1,021,000 in costs associated with these efforts.
In 1996, a substantial portion of the Company's development efforts will
encompass utilizing the added engineering resources from Trimco in an effort
to accelerate the introduction of the new generation document management
products.
The Company operates in an industry that is subject to rapid
technological change. The Company's ability to compete successfully will
depend, among other things, on its ability to anticipate and react to such
change, the success of its development efforts, the technical competence and
creative skills of its personnel and its financial resources.
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COMPETITION
The document management industry is highly competitive. The Company's
competitors operate with differing market strategies and technological bases
so that the Company encounters different competitors depending upon the
nature of the project and industry segment. The strategic points of
differentiation among competitive offerings are the type of hardware on which
the system runs (IBM, DEC, etc.), the size and scope of the system
(enterprise versus departmental) and capability to handle engineering, office
or both types of documents. The Company's principal competitors in the
engineering document management market are Documentum, Inc., FileNet
Corporation and its Saros subsidiary, Formtek, Inc. (a subsidiary of Lockheed
Martin Corporation) and Cimage (a division of Tarmac in the UK). The
Company's principal competitors in the office document market are FileNet
Corp., ViewStar Corp. and Documentum.
The Company believes that the most significant factors to a potential
customer in selecting a document management system are cost savings,
increased productivity, reduced storage space requirement, improved control
and timely access to critical documents. The principal distinguishing
features of the technology are:
- Ability to work both with the customer's existing computers and network
infrastructures as well as leading edge technologies as they are added
to the customer's information technology infrastructure.
- Enterprise-level software design, with sophisticated document management
and library functions, enabling high-volume data storage, network
traffic management, access management and multi-site capability.
- Document-enabling design allowing customers to add an efficient document
management framework to existing corporate assets, existing and new
workflows and existing and new business applications.
- Complete and flexible solutions, capable of integrating best-of-breed
elements from a variety of suppliers as appropriate within a consistent
user and administrative interface.
PRODUCT BACKLOG AND CURRENT CONTRACTS
The Company's contract backlog consists of the aggregate anticipated
revenue remaining to be earned at a given time from the uncompleted portions
of its existing contracts. It does not include revenues that may be earned
if customers exercise options to make additional purchases.
At December 31, 1995, the Company's contract backlog (including that of
Trimco which was acquired in December 1995) was $4,132,000, as compared to
$3,739,000 at December 31, 1994. The Company expects substantially all of
the December 31, 1995 backlog to be completed in the current fiscal year.
The amount of contract backlog is not necessarily indicative of future
contract revenues because short-term contracts, modifications to or
terminations of present contracts and production delays can provide
additional revenues or reduce anticipated revenues. The Company's backlog is
typically subject to large variations from time to time when new contracts
are awarded. Consequently, it is difficult to make meaningful comparisons of
backlog.
The Company's contracts with its customers customarily contain
provisions permitting termination at any time at the convenience of the
customer (or the U.S. Government if the Company is awarded a subcontract
under a prime contract with the U.S. Government), upon payment of costs
incurred plus a reasonable profit on the goods and services provided prior to
termination. To the extent the Company deals directly or through prime
contractors with the U.S. Government or other governmental sources, it is
subject to the business risk of changes in governmental appropriations. In
order to reduce its risks in competing for business with the U.S. Government,
the Company has directed its government contracts marketing efforts
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toward teaming with large corporations, who typically have existing
government contracts, can alleviate the cash flow burdens often imposed by
government contracts and have more extensive experience in and resources for
administering government contracts. The Company does not have any
contractual arrangements regarding such joint marketing efforts. In the
past, such efforts have been pursued when deemed appropriate by the Company
and such corporations in response to opportunities for jointly providing
systems or services to potential government agency customers.
PATENTS AND TECHNOLOGY
The Company owns certain U.S. and foreign patents covering certain
aspects of its document management systems technology including two patents
concerning the technology used to present the raster data to the view, markup
or edit user very quickly which involve data storage/transmission and scaling
algorithms. The Company also owns a patent on technology to allow edit users
to make changes to hybrid raster and vector documents without having to
specify whether they are working on raster or vector data. The Company's
fourth patent is a cinematic revisory capability that allows users to modify
and store drawing changes in raster and vector format for subsequent review
of the original document and each sequential revision. For its protection,
the Company also relies upon copyrights, trade secrets and confidentiality
agreements with its employees and others.
There can be no assurance that the Company's patents will be found valid
if challenged or, if valid, will provide meaningful protection against
competition. While the Company believes that the protection afforded by the
patents will have value, the rapidly changing technology in the industry
makes the Company's success largely dependent on the technical competence and
creative skills of its personnel and its ability to compete in the
marketplace.
The Company is engaged in developing and marketing high technology
software and systems integration services. There are certain risks inherent
in the Company's business, including the risk that the Company could be
charged with infringement of the patents and trade secrets of others. The
Company believes that these risks are reasonable and are customarily assumed
by similarly situated high-technology companies.
The Company has entered into agreements with certain of its customers
whereby if the Company defaults on its contract or becomes insolvent, then
the customer will acquire a non-exclusive license to software and related
system support documentation. The license and documentation is limited to
internal use only by the customer on a designated host computer.
In April 1986, the Company entered into a cross license agreement with
Lockheed Corporation, whereby Lockheed Corporation acquired the right to
enhance, improve and modify the Company's technology and to sell products
based thereon subject to the payment of a 12% royalty fee to the Company.
Additionally, the Company acquired the right to use any such enhancements,
improvements and modifications developed by Lockheed Corporation. To date,
Lockheed Corporation has not sold any products under this agreement.
EMPLOYEES
As of March 1, 1996, the Company had 193 full-time employees of whom 70
were engaged in engineering and research and development activities, 51 in
operations, program management and field support, 46 in marketing and sales
and 26 in administration. The Company also utilizes consultants for specific
projects. The Company believes that its future success will depend, in large
measure, on its ability to continue to attract and retain qualified employees
and consultants. The Company's employees are not subject to any collective
bargaining agreement, and the Company believes its employee relations are
good.
10
<PAGE>
GLOSSARY OF SELECTED TECHNICAL TERMS
API: Application Programming Interface, provided as application development
tools with certain of the Company's products to allow customers and third
parties to develop and customize their own commercial applications.
CLIENT/SERVER: Any application in which the requestor of action is on one
system and the supplier of action is potentially on another. The goal is to
distribute processing across a network between the desktop and a server,
reducing network traffic and preventing the desktop and server computers from
getting overloaded.
ELECTRONIC DOCUMENT MANAGEMENT SYSTEM: A computer system which has been
designed to execute a combination of automated and operator-invoked processes
that allow the capture, storage, retrieval, display, routing and maintenance
of information comprising or concerning electronically stored documents.
HARDCOPY: Any document in paper or other full-size form. A printed copy of
machine output in a readable form, for example, output from a computer
printer or an enlarged reproduction from microfilm usually on paper.
HARDWARE: Equipment, such as computers, printers, scanners or modems.
HOST: A mainframe computer or minicomputer which provides a multi-user
environment and serves in the coordination of activities of its different
users.
IMAGING: The utilization of an electronic image or representation of paper,
micrographics or other computer-generated documents.
INTERFACE: The place at which two systems meet and interact with each other.
The interface can be a piece of hardware equipment, a common area of computer
storage or some common instruction shared by two or more programs. The
device can also be hardware, including device driver software, that connects
peripheral devices to computer platforms and to networks. Interfacing can
imply network and operating protocols, codes and operating standards.
LOCAL AREA NETWORK (LAN): A data communications system that offers
high-speed communication channels optimized for connecting information
processing equipment over short distances.
NETWORK: A system of computers, terminals and databases connected by
communications lines.
OPEN ARCHITECTURE: The incorporation of standard interfacing features in
both the hardware and software of a computer system, allowing communication
with other components that incorporate the same standard interfacing features.
OPERATING SYSTEM: The software that supports or complements the hardware of
a computer system and allows users to give and receive computer commands.
Examples of operating systems include MS-DOS, Windows, MVS, VM and VMS.
PLATFORM: A combination of computer hardware and an operating system.
RASTER: A two-dimensional array of black and white cells, called pixels or
picture elements, which when displayed on a screen or paper form an image or
representation of an original document.
SCANNER: The optical device that converts hard copy drawings into digital
data that a computer can manipulate, store and retrieve.
SERVER: A computer that provides one or more services, such as database,
file-sharing or electronic mail, to a number of users.
11
<PAGE>
GLOSSARY OF SELECTED TECHNICAL TERMS (CONTINUED)
TIFF: Tagged Image File Format. An industry standard raster file format,
which consists of the image and header information.
UNIX: A computer operating system generally associated with open
architecture systems and which incorporates the ability to move programs more
easily from one UNIX-based computer to another. Originally licensed by the
American Telephone and Telegraph Company (AT&T), UNIX has been adapted to
many computer systems.
VECTOR: An electronic or computer-readable image format incorporating a
formula representation of graphical line art. The use of a formula
representation allows vector images to be more easily manipulated or modified
than raster images.
WIDE AREA NETWORK (WAN): A communications network that links broad
geographic areas.
WORKSTATION: A computer which can serve only one operator at a time and
which commonly uses specialized software designed for engineering or other
scientific applications, e.g., computer-aided drafting ("CAD").
ITEM 2. PROPERTIES
The Company's headquarters are located in San Diego, California. The
Company leases 31,016 square feet of a 40,000 square foot building in San
Diego. The term of the lease is through April 2001, at a monthly rent of
$15,818, with annual increases of approximately 4%.
The Company also has an engineering and sales office in Camarillo,
California, approximately 50 miles northwest of Los Angeles, where the
Company now occupies 19,400 square feet of a 40,000 square foot building.
The term of the lease is through April 2001. The Company has a right of
first refusal on an additional 10,268 square feet of the building. The
monthly rent is $11,663, subject to annual adjustments not to exceed 4% in
any year. The lessor waived five months rent during the lease term.
The Company's Trimco subsidiary leases a facility which occupies 9,800
square feet in Ealing, London in the United Kingdom. The term of the lease
is through March 2003, with an option to cancel the lease in March 1998 with
six months notice. The monthly rent is $9,620.
In addition, the Company's Trimco subsidiary is the lessee under a lease
for facilities previously occupied by Trimco which are currently subleased.
The lease covers 1,600 square fee and expires in August 2006. The monthly
rent is $3,875.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market on
The Nasdaq National Market under the symbol "AREL." The following table shows,
for the calendar quarters indicated, the high and low sale prices of the
Common Stock on The Nasdaq National Market:
YEAR ENDED DECEMBER 31, 1993 HIGH LOW
First Quarter............................... $2.13 $1.25
Second Quarter.............................. 2.25 1.25
Third Quarter............................... 2.38 1.62
Fourth Quarter.............................. 2.00 1.38
YEAR ENDED DECEMBER 31, 1994
First Quarter............................... $1.75 $1.19
Second Quarter.............................. 2.44 1.19
Third Quarter............................... 1.88 1.38
Fourth Quarter.............................. 2.16 1.31
YEAR ENDED DECEMBER 31, 1995
First Quarter............................... $2.13 $1.31
Second Quarter.............................. 1.75 1.19
Third Quarter............................... 7.38 1.50
Fourth Quarter.............................. 6.00 4.06
On March 14, 1996, there were approximately 530 holders of record of the
Company's Common Stock and the last sale price of the Common Stock as reported
on The Nasdaq National Market on March 14, 1996 was $5.50 per share.
DIVIDEND POLICY
The Company has never paid a dividend on its Common Stock, and the
current policy of its Board of Directors is to retain all earnings to provide
funds for the operation and expansion of the Company's business.
Consequently, the Company does not anticipate that it will pay cash dividends
on its Common Stock in the foreseeable future.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
the Company. The financial data for each of the five years in the period
ended December 31, 1995 have been derived from the audited Consolidated
Financial Statements. The results of Trimco are included below since
December 27, 1995, the date of acquisition. (See Note 2 of the Notes to the
Consolidated Financial Statements.)
The data set forth below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
Consolidated Statement of Operations Data 1995 1994 1993 1992 1991
(In thousands except per share data) -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 12,731 $ 9,547 $ 8,354 $ 6,273 $ 6,583
Cost of revenues 5,791 4,822 4,444 4,275 3,199
-------- ------- ------- -------- -------
Gross profit 6,940 4,725 3,910 1,998 3,384
-------- ------- ------- -------- -------
Operating expenses:
Research and development 1,402 769 1,108 435 1,000
Charge for purchased research and
development 10,595 - 4,920 - -
Marketing and sales 3,570 2,627 1,361 763 555
General and administrative 1,581 1,146 907 696 686
Write down of assets to net
realizable value 1,664
Restructuring expense - - 3,447 - -
-------- ------- ------- -------- -------
18,812 4,542 11,743 1,894 2,241
-------- ------- ------- -------- -------
Income (loss) from operations (11,872) 183 (7,833) 104 1,143
Interest and other income 137 207 183 179 325
Interest and other expense (95) (115) (54) (61) (85)
-------- ------- ------- -------- -------
Income (loss) before income taxes (11,830) 275 (7,704) 222 1,383
Provision for income taxes - - - - -
-------- ------- ------- -------- -------
Net income (loss) ($11,830) $ 275 ($7,704) $ 222 $ 1,383
-------- ------- ------- -------- -------
-------- ------- ------- -------- -------
Net income (loss) per share $ (.84) $ .02 $ (.64) $ .02 $ .14
Weighted average shares outstanding 14,052 13,983 11,972 11,848 10,124
<CAPTION>
At December 31,
------------------------------------------------------------
Consolidated Balance Sheet Data 1995 1994 1993 1992 1991
(In thousands) -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Working capital $ 939 $2,799 $ 5,007 $ 5,997 $ 5,730
Total assets 19,002 9,771 11,087 10,554 10,062
Capital lease obligations - - - 81 169
Long-term obligations 1,420 - 1,770 - 260
Shareholders' equity 8,116 5,658 5,364 9,101 8,494
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Consolidated Financial Data and the Consolidated Financial Statements, including
the Notes thereto.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues of items included in the Company's Consolidated Statement of Operations
for each of the last three fiscal years:
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 45.5 50.5 53.2
------ ------ ------
Gross profit 54.5 49.5 46.8
------ ------ ------
Operating expenses:
Research and development 11.0 8.1 13.3
Charge for purchased research and
development 83.2 - 58.9
Marketing and sales 28.0 27.5 16.3
General and administrative 12.4 12.0 10.8
Write down of assets to net realizable value 13.1 - -
Restructuring expense - - 41.3
------ ------ ------
147.7 47.6 140.6
------ ------ ------
Income (loss) from operations (93.2) 1.9 (93.8)
Interest and other income 1.0 2.2 2.2
Interest and other expense (.7) (1.2) (.6)
------ ------ ------
Income (loss) before income taxes (92.9) 2.9 (92.2)
Provision for income taxes - - -
------ ------ ------
Net income (loss) (92.9)% 2.9% (92.2)%
------ ------ ------
------ ------ ------
</TABLE>
REVENUES
Revenues for 1995 were $12,731,000 as compared to $9,547,000 for 1994.
The increase of 33% in 1995 was due primarily to revenues generated by new
system sales and sales of enhancements, expansions and maintenance to an
expanded customer base. The Company's increased system sales resulted
primarily from increased demand for document management systems in the
marketplace which management believes is due to the reduction in the cost of
client servers and workstations which, combined with document management
software, has brought about a more cost effective solution to customers.
Revenue derived from each new system varies depending on the number of users,
features and complexity of the system. The increase of 14% from 1993 to 1994
was due primarily to revenues generated by devoting greater resources to
marketing and sales and acquiring an expanded customer base as a result of the
Company's acquisition of Optigraphics in September 1993.
New systems revenues in 1995, 1994, and 1993 were $6,285,000 (49%),
$4,074,000 (43%) and $4,354,000 (52%), respectively, while revenues from
system enhancements, expansion and maintenance were $6,446,000 (51%),
$5,473,000 (57%) and $4,000,000 (48%), respectively. System enhancements
are changes to a system previously installed by the Company in order to,
among other things, accommodate more documents or users, interface with
different peripheral devices, update the system with recently developed
improvements including improvements which increase the speed of the system
or implement other changes in response to the customer's general data
processing environment. See "Business - Marketing and Sales."
15
<PAGE>
In 1995, new system revenues increased $2,211,000 from 1994, while revenues
from system enhancements, expansion and maintenance increased $973,000. The
increase in new system revenue was primarily due to sales of more large
systems in 1995 as compared to 1994. The increase in revenues from system
expansions, enhancements and maintenance was due to continued expansions and
enhancements by the Company's growing installed customer base, offset in part
by reduced maintenance revenues.
In 1994, new system revenues decreased $280,000 from 1993, while
revenues from system enhancements, expansion and maintenance increased
$1,473,000. The Company sold 19 new systems in 1994, of which 9 were smaller
initial systems. The decrease in new system revenue in 1994 was attributable
to the timing of orders and the lower revenue earned on smaller systems. The
increase in revenues from system expansions, enhancements and maintenance was
due to continued expansions and enhancements by the Company's installed
customer base. Also, maintenance revenue increased due primarily to the
inclusion of twelve months of revenue in 1994 from the Company's new
subsidiary, Optigraphics, versus only three full months in 1993.
A small number of customers have typically accounted for a large
percentage of the Company's annual revenues. One consequence of this
dependence has been that revenues 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 automotive, aerospace,
utilities and defense-related manufacturing, in which many of the Company's
principal customers operate. Management believes that the acquisition of
Trimco will assist in reducing the Company's dependence on a relatively small
number of customers by providing a larger base of customers for expansion,
enhancement and maintenance services.
COST OF REVENUES
Gross profit as a percentage of revenues was 55% for 1995, 50% for 1994,
47% for 1993. The improvement in 1995 compared to 1994 was due primarily to
the significant increase in software license revenue to $5,369,000 in 1995 from
$2,551,000 in 1994. The higher margin of the software sales was offset
partially by lower margin hardware sales which increased from $1,354,000 in
1994 to $2,333,000 in 1995. Services revenue, which includes maintenance,
training and consulting services decreased to $5,029,000 in 1995 from $5,641,000
in 1994. In 1994 the increase in gross profit from the prior year was
attributable to the fact that the Company's revenues had a greater content of
services and software than in 1993. The gross profit percentage can fluctuate
quarterly based on the revenue mix of Company software, services and third
party software or hardware. Software and services are sold at a significantly
higher margin than third party products which are resold at a lower gross
profit percentage in order for the Company to remain competitive in the
marketplace.
OPERATING EXPENSES
Research and development expense was $1,402,000, $769,000 and
$1,108,000 for 1995, 1994 and 1993, respectively. Research and development
costs increased $633,000 in 1995 from 1994 primarily due to expansion of the
Company's engineering staff in connection with the Company's efforts to
continue to enhance and expand its current product suite. Research and
development expense decreased from 1993 to 1994 due to the fact that a
significant portion of engineering resources were dedicated to projects
combining Alpharel and Optigraphics products into one unified architecture for
which the Company capitalized $806,000 as internally developed software.
Research and development expense can vary based on the amount of engineering
service contract work required for customers versus purely internal development
projects. It may also vary based on internal development projects in which
technological feasibility and marketability of a product are established.
These costs are capitalized as incurred and then amortized when the product
is available for general release to customers. Technical expenses on
customer-funded projects are included in cost of revenues, while expenses on
internal projects are included in research and development expense. See
"Business - Product Development." Technical expenses on customer-funded
projects were $2,140,000 in 1995, $2,313,000 in 1994 and $1,847,000 in 1993.
16
<PAGE>
In connection with the acquisition of Trimco, the Company allocated a
significant portion of the purchase price to purchased research and
development resulting in a charge of $10,595,000 in 1995. See Note 2 of the
Notes to the Consolidated Financial Statements. The charge relates to
research and development projects in process relating to Trimco's next
generation of document management products. At the date of acquisition the
technological feasibility of acquired technology had not yet been established
and the technology has no future alternative uses. The Company anticipates
expending a significant portion of its own development resources on the
completion of this technology for anticipated new product offerings late 1996.
As part of the acquisition of Optigraphics, the Company allocated a
significant portion of the purchase price to purchased research and
development which resulted in a charge of $4,920,000 in 1993. See Note 2 of
the Notes to the Consolidated Financial Statements. Optigraphics had spent
considerable efforts on research and development projects which included
improvements to its workstation products for tiled viewing, markup and
editing, tools for integrating third party databases, and expanding its
client server products for implementation on an enterprise scale versus
previously being a departmental solution only.
Marketing and sales expense was $3,570,000, $2,627,000, and $1,361,000
for 1995, 1994 and 1993, respectively. The increase from 1994 to 1995 was
primarily due to additional sales and support personnel hired along with
additional costs associated with the Company's revenue growth. During 1995,
the Company opened new sales offices in Detroit, Chicago and Washington, DC.
In addition, the Company significantly increased its presence at trade shows
and expenses for advertising materials. The increase from 1993 to 1994 was
due to the inclusion of twelve months of marketing expenditures for the
combined operations of Alpharel and Optigraphics in 1994 versus only three
months in 1993.
General and administrative expense was $1,581,000, $1,146,000, and
$907,000 for 1995, 1994 and 1993, respectively. The increase from 1994 to
1995 was due primarily to costs associated with additional personnel and
associated costs in 1995 compared to 1994. The increase from 1993 to 1994
was due primarily to the inclusion of twelve months of additional personnel
and other administrative costs in 1994 versus three months in 1993 as a
result of the Optigraphics acquisition.
In connection with the acquisition of Trimco, the Company wrote down
certain intangible assets to their net realizable value resulting in a
$1,664,000 charge to operations. The write down was a result of the
acceleration of the Company's plans to introduce a next generation suite of
products. Management believes that the Company will be able to complete the
development of these new products sooner using the resources of the combined
companies, thus reducing the likelihood of recovering existing capitalized
software costs associated with the Company's current generation of products.
In addition, the costs of certain software development tools which will not
be utilized in the development of next generation products and certain
software products to be replaced were also written off.
In connection with the acquisition of Optigraphics, the Company incurred
a restructuring charge of $3,447,000 in 1993. Included in the restructuring
charge was a write-off of approximately $2,000,000 relating to the remaining
balance of the Company's DDTMS Technology and certain capitalized software
and equipment which was deemed not recoverable based on the technological
direction of the new combined entity. The Company also accrued costs of
almost $1,100,000 associated with consolidating operating departments and
facilities along with severance costs for personnel reductions. The
remainder of the restructuring charge related to an increase in reserve for
excess inventory based on quantities on hand as compared to forecasted sales
based on the direction of the combined companies.
17
<PAGE>
INTEREST AND OTHER INCOME
Interest and other income was $137,000, $207,000 and $183,000 for 1995,
1994, and 1993, respectively. The decrease in 1995 from 1994 was primarily
the result of lower short term investment balances. The increase in 1994
from 1993 was primarily due to a gain recognized on the early retirement of a
note payable to a former Optigraphics shareholder.
INTEREST AND OTHER EXPENSE
Interest and other expense totaled $95,000, $115,000 and $54,000 for
1995, 1994 and 1993, respectively. The decrease in 1995 from 1994 was due to
lower interest expense incurred on the Company's debt. The notes payable to
former Optigraphics shareholders became due on September 24, 1995. These
notes were partially refinanced by a revolving loan agreement. The increase
in 1994 from 1993 is due to interest expense on the notes payable to former
Optigraphics shareholders.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995 the Company's cash and cash equivalents totaled
$4,656,000 as compared to $1,036,000 at December 31, 1994. At December 31,
1995, the Company's current ratio was 1.1 to 1. The Company also had short
term investments totaling $270,000 which were comprised of time deposits.
The Company has a revolving loan and security agreement which provides
borrowings of up to $1,000,000. At December 31, 1995, $675,000 was
outstanding on the revolving loan agreement and $325,000 was unused. See
Note 4 of the Notes to the Consolidated Financial Statements.
In 1995, cash generated by operating and financing activities totaled
$1,191,000 and $8,340,000, respectively, while cash used in investing
activities totaled $5,911,000. Cash generated from financing activities in
1995 was primarily through the issuance of Series B Preferred Stock totaling
$3,306,000 and the exercise of warrants totaling $4,230,000. A substantial
portion of the cash used in investing activities was used in connection with
the acquisition of Trimco and the payoff of the remaining payable to former
Optigraphics shareholders which totaled $5,785,000.
In 1994, cash used in operating activities totaled $1,391,000. A $497,000
cash outlay in 1994 related to the restructuring charge taken in 1993 primarily
for the relocation and combining of facilities in connection with the
Optigraphics acquisition. Accounts receivable increased $625,000 in 1994 due
to the timing of orders received at the end of the year. In 1994, the Company
used $786,000 in investing activities. The Company used $465,000 for investing
in equipment and software for development. In addition, the Company invested
$806,000 in internally generated software due to unifying the product lines
acquired in the acquisition of Optigraphics. In 1994, the Company also paid
off the remaining balance of its capital lease obligations, while reducing the
principal balance on the notes payable to a bank and former Optigraphics
shareholders. The use of cash was partially offset by $635,000 from short
term investments maturing.
On December 27, 1995, the Company acquired Trimco. See Note 2 to the
Consolidated Financial Statements. The cash portion of the consideration to
Trimco shareholders totaled $5,550,000. As part of the transaction, the
Company also issued a convertible note payable in September 1996, having a
principal balance of $1,000,000 with interest payable at 7% per annum. In
February 1996, the note was converted into 250,000 shares of the Company's
common stock. In addition, in connection with the transaction, the Company
assumed an accrued liability for $1,051,000 payable to Trimco employees in
January 1996.
The Company anticipates that the combination of the Company and Trimco
and the integration of the workforce and products of the combined companies
will require a significant use of working capital. 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 at
least the next twelve months; however, to expedite the integration process
the Company may explore additional financing options.
18
<PAGE>
NET OPERATING LOSS TAX CARRYFORWARDS
As of December 31, 1995, the Company had a net operating loss
carryforward ("NOL") for Federal income tax purposes of $34,000,000. 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 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 Trimco acquisition in December 1995, Optigraphics
acquisition in September 1993, and through traditional stock option grants to
employees. Although there was no "ownership change" in 1995, this activity,
combined with the liquidity available to stockholders as a result of the
Company's common stock trading on The Nasdaq National Market, increases the
potential for an "ownership change" for income tax purposes.
In connection with the acquisition of Trimco, the Company acquired
deferred tax assets of approximately $926,000. The Company has
recorded a $626,000 valuation allowance, offsetting the deferred tax assets.
Any future recognition of acquired tax benefits will be used first to reduce
any remaining goodwill and other intangible assets related to the
acquisition; once those assets are reduced to zero, the benefit will be
included as a reduction of the Company's income tax provision.
In connection with the acquisition of Optigraphics, the Company acquired
Optigraphics' NOL of $9,500,000 for federal income tax purposes. As a result
of the change in ownership of Optigraphics, $8,000,000 of the NOL is limited
whereby the Company may only utilize approximately $500,000 annually to
offset future taxable income of Optigraphics. The remaining portion of
Optigraphics' NOL does not have any annual limitation.
INFLATION
The Company believes that inflation has not had a material effect on its
operations to date. Although the Company enters into fixed-price contracts,
management does not believe that inflation will have a material impact on its
operations for the foreseeable future, as the Company takes into account
expected inflation in its contract proposals and is generally able to project
its costs based on forecasted contract requirements.
19
<PAGE>
QUARTERLY DATA (UNAUDITED)
The following table contains unaudited quarterly financial data for each
quarter of fiscal 1994 and 1995.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------
Mar 31, June 30, Sept 30, Dec 31, Mar 31, June 30, Sept 30, Dec 31,
1994 1994 1994 1994 1995 1995 1995 1995
(In thousands except per share data) ------- -------- -------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 2,611 $2,315 $2,003 $2,618 $3,151 $3,351 $3,127 $ 3,102
Gross profit 1,309 1,243 875 1,298 1,459 1,929 1,851 1,701
Operating expenses 1,106 1,162 991 1,283 1,240 1,512 1,625 14,435
Income (loss) from operations 203 81 (116) 15 219 417 226 (12,734)
Net income (loss) 217 101 (63) 20 225 427 229 (12,711)
Net income (loss) per share .02 .01 - - .02 .03 .02 (.88)
</TABLE>
Because the Company sells large systems and has a long sales cycle and
relatively few customers, one or a few customers may account for a
substantial percentage of the Company's revenues in any particular period.
As a result, timing of customer requirements and contract execution may cause
revenues and profitability to fluctuate significantly from period to period.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Alpharel, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) and (2) on page 39 present fairly, in all
material respects, the financial position of Alpharel, Inc. and its
subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
February 29, 1996
21
<PAGE>
ALPHAREL, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,656,000 $1,036,000
Short term investments 270,000 1,585,000
Short term investments, restricted - 219,000
Receivables, net 4,207,000 2,973,000
Inventory, net 469,000 726,000
Other current assets 803,000 373,000
----------- ----------
Total current assets 10,405,000 6,912,000
Property and equipment, net 1,645,000 770,000
Computer software, net 1,549,000 1,336,000
Goodwill 4,945,000 369,000
Deposits and other assets 458,000 384,000
----------- ----------
$19,002,000 $9,771,000
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,192,000 $ 959,000
Accrued liabilities 3,211,000 942,000
Notes payable 1,834,000 1,793,000
Convertible note payable 1,000,000 -
Deferred revenue 1,229,000 419,000
----------- ----------
Total current liabilities 9,466,000 4,113,000
Long term note payable 475,000 -
Other long term liabilities 945,000 -
----------- ----------
Total liabilities 10,886,000 4,113,000
----------- ----------
Commitments
Shareholders' equity:
Preferred stock, $1 par value,
1,000,000 shares authorized; 650,761 designated;
172,500 shares issued and outstanding 3,306,000 -
Common stock, no par, 20,000,000 shares authorized;
16,950,902 and 13,740,847 issued and outstanding,
respectively 54,085,000 43,103,000
Accumulated deficit (49,275,000) (37,445,000)
----------- ----------
Total shareholders' equity 8,116,000 5,658,000
----------- ----------
$19,002,000 $ 9,771,000
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
22
<PAGE>
ALPHAREL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Revenues $ 12,731,000 $ 9,547,000 $ 8,354,000
Cost of revenues 5,791,000 4,822,000 4,444,000
------------ ----------- -----------
Gross profit 6,940,000 4,725,000 3,910,000
------------ ----------- -----------
Operating expenses:
Research and development 1,402,000 769,000 1,108,000
Charge for purchased research and
development 10,595,000 - 4,920,000
Marketing and sales 3,570,000 2,627,000 1,361,000
General and administrative 1,581,000 1,146,000 907,000
Write down of assets to net realizable value 1,664,000 - -
Restructuring expense - - 3,447,000
------------ ----------- -----------
Total operating expenses 18,812,000 4,542,000 11,743,000
------------ ----------- -----------
Income (loss) from operations (11,872,000) 183,000 (7,833,000)
Interest and other income 137,000 207,000 183,000
Interest and other expense (95,000) (115,000) (54,000)
------------ ----------- -----------
Income (loss) before income taxes (11,830,000) 275,000 (7,704,000)
Provision for income taxes - - -
------------ ----------- -----------
Net income (loss) $(11,830,000) $ 275,000 $(7,704,000)
------------ ----------- -----------
------------ ----------- -----------
Net income (loss) per share $ (.84) $ .02 $ (.64)
------------ ----------- -----------
------------ ----------- -----------
Weighted average shares
outstanding 14,052,000 13,983,000 11,972,000
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
23
<PAGE>
ALPHAREL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- ------------------- Stock Accumulated
Shares Amount Shares Amount Warrants Deficit
------- -------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 11,350,831 $39,117,000 902,500 $(30,016,000)
Exercise of stock options 63,650 45,000
Expiration of warrants (40,000)
Issuance in connection with
acquisition - Optigraphics 2,241,117 3,922,000
Net loss (7,704,000)
---------- ---------- -------- ------------
Balance at December 31, 1993 13,655,598 43,084,000 862,500 (37,720,000)
Exercise of stock options 85,249 19,000
Net income 275,000
---------- ---------- -------- ------------
Balance at December 31, 1994 13,740,847 43,103,000 862,500 (37,445,000)
Exercise of stock options 426,375 188,000
Exercise of underwriter
unit warrants 150,000 382,000 75,000
Exercise of warrants 918,892 3,848,000 (918,892)
Expiration of warrants (18,608)
Issuance in connection with
acquisition - Trimco 1,714,788 6,564,000
Issuance of Series B
Preferred Stock 172,500 $3,306,000
Net loss (11,830,000)
-------- ---------- ---------- ----------- --------- ------------
Balance at December 31, 1995 172,500 $3,306,000 16,950,902 $54,085,000 - $(49,275,000)
-------- ---------- ---------- ----------- --------- ------------
-------- ---------- ---------- ----------- --------- ------------
</TABLE>
See accompanying notes to the consolidated financial statements.
24
<PAGE>
ALPHAREL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(11,830,000) $ 275,000 $(7,704,000)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 797,000 621,000 568,000
Charge for purchased research and development 10,595,000 - 4,920,000
Write down of assets to net realizable value 1,664,000 - -
Non-cash restructuring costs - - 3,092,000
Changes in assets and liabilities, net of effect of acquisitions:
Receivables, net (422,000) (625,000) 307,000
Inventory, net 303,000 (164,000) 377,000
Other assets (161,000) (217,000) 10,000
Accounts payable (73,000) 317,000 (144,000)
Accrued liabilities 145,000 (932,000) 47,000
Billings in excess of costs - (351,000) (538,000)
Deferred revenue 28,000 (315,000) 396,000
Other long term liabilities 145,000 - -
----------- ----------- ----------
Net cash provided (used in) by operating activities 1,191,000 (1,391,000) 1,331,000
----------- ----------- ----------
Cash flows from investing activities:
Short term investments maturing 1,534,000 635,000 778,000
Purchases of property and equipment (504,000) (295,000) (245,000)
Purchases of software (135,000) (170,000) (150,000)
Computer software capitalized (1,021,000) (806,000) (245,000)
Cash paid for acquisitions, net of cash acquired (5,785,000) (150,000) (2,973,000)
----------- ----------- ----------
Net cash used in investing activities (5,911,000) (786,000) (2,835,000)
----------- ----------- ----------
Cash flows from financing activities:
Principal payments under capital lease obligations - (81,000) (88,000)
Principal payments under notes payable (84,000) (62,000) (9,000)
Net borrowings under revolving loan agreement 700,000 - -
Retirement of note payable to former
Optigraphics shareholder - (36,000) -
Proceeds from issuance of preferred stock 3,306,000 - -
Proceeds from exercise of warrants 4,230,000 - -
Proceeds from exercise of stock options 188,000 19,000 45,000
----------- ----------- ----------
Net cash provided (used in) by financing activities 8,340,000 (160,000) (52,000)
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 3,620,000 (2,337,000) (1,556,000)
Cash and cash equivalents at beginning of period 1,036,000 3,373,000 4,929,000
----------- ----------- ----------
Cash and cash equivalents at end of period $ 4,656,000 $ 1,036,000 $ 3,373,000
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
25
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Alpharel, Inc. (the "Company") designs, develops, integrates and markets
electronic document management systems that provide a means of electronically
storing and managing documents and drawings for industrial, commercial and
governmental applications. The Company's document management systems are
software-based and provide the capability to handle document sizes ranging
from small office documents to large engineering drawings.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
FOREIGN CURRENCY
The functional currency of the Company's United Kingdom subsidiary is
the local currency. Assets and liabilities are translated into U.S. dollars
at end-of-period exchange rates. Revenues and expenses are translated at
average exchange rates in effect for the period. Net gains and losses
resulting from foreign exchange transactions, which are not significant, are
included in the Consolidated Statement of Operations.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates made by management include realizability of deferred
income tax assets, capitalized software costs, valuation of stock issued in
acquisitions, allowance for doubtful accounts and reserves for excess or
obsolete inventory.
REVENUE RECOGNITION
The Company's revenues are derived from sales of its document management
systems that are primarily composed of software and services, including
maintenance, training and consulting services, and third party hardware. The
Company recognizes revenue in accordance with Statement of Position 91-1
"Software Revenue Recognition". License and third party hardware revenues
are recognized upon shipment of the product if no significant vendor
obligations remain. In cases where a significant vendor obligation exists,
revenue recognition is delayed until the obligation has been satisfied.
Annual maintenance revenues consist of ongoing support and product updates
and are recognized on a straight-line basis over the term of the contract.
Payments received in advance of performance of the related service for
maintenance contracts are recorded as deferred revenue. Revenues from
training and consulting services are recognized when the services are
performed. Contract revenues for long term contracts or programs requiring
specialized systems are recognized using the percentage-of-completion method
of accounting. Management has prepared the estimates of costs to complete
using a systematic basis, and all known losses which would require
recognition in the consolidated financial statements have been recognized.
Contracts are billed based on the terms of the contract. There are no
retentions in billed contract receivables. Unbilled contract receivables
relate to revenues earned but not billed at the end of the period. Billings
in excess of costs incurred and related earnings are included in current
liabilities.
26
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FAIR VALUE OF FINANCIAL INVESTMENTS
It is management's belief that the carrying amounts shown for the
Company's financial instruments are reasonable estimates of their related
fair values.
STOCK-BASED COMPENSATION ACCOUNTING
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation." The Company has not elected early adoption of FAS
123. Upon adoption of FAS 123, the Company will continue to measure
compensation expense for its stock-based employee compensation plans using
the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and will provide pro forma disclosures as if the
fair value based method prescribed by FAS 123 had been utilized. The
disclosures under this standard will be required beginning in 1996.
SHORT TERM INVESTMENTS
Short term investments consist of time deposits and U.S. Treasury
securities which are stated at amortized cost, adjusted for amortization of
premiums and accretion of discounts to maturity. All debt securities are
classified as held-to-maturity as the Company has the positive intent and
ability to hold the securities to maturity. As of December 31, 1995 and 1994
the amortized cost of the Company's held-to-maturity securities was $270,000
and $505,000, respectively. Unrealized gains and losses were not significant
in 1995 and 1994.
CONCENTRATION OF CREDIT RISK
The Company provides products and services to customers in a variety of
industries worldwide, including automotive, aerospace, communication,
utilities and defense-related manufacturing. Concentration of credit risk
with respect to trade receivables is limited due to the geographic and
industry dispersion of the Company's customer base.
INVENTORY
Inventory consists of parts, supplies and subassemblies and is stated at
the lower of cost or market value. Cost is determined using the first-in,
first-out (FIFO) method. As of December 31, 1995 and 1994, the Company's
reserve against excess quantities totaled $2,119,000 and $2,323,000,
respectively.
27
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated by the
straight-line method over useful lives of two to seven years.
Leasehold improvements are amortized on a straight-line basis over the
shorter of their useful life or the term of the related lease. Expenditures
for ordinary repairs and maintenance are expensed as incurred while major
additions and betterments are capitalized.
GOODWILL
Goodwill represents the excess of cost of purchased businesses over the
fair value of tangible and identifiable intangible net assets at the date of
acquisition and is amortized over its estimated useful life of seven years.
Accumulated amortization of goodwill was $146,000 and $80,000 at December 31,
1995 and 1994, respectively. The related amortization expense was $66,000,
$66,000 and $14,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company evaluates the carrying values of goodwill at each
balance sheet date as well as the amortization periods to determine whether
adjustments are required. No such adjustments have been recorded by the
Company.
DDTMS TECHNOLOGY
DDTMS Technology was acquired in 1985 from Alpharel Technology Partners,
Ltd. (a limited partnership) and was recorded at the estimated fair market
value of the common stock exchanged as determined by an independent valuation
consulting firm. During 1993, the Company wrote off the remaining balance of
$1,657,000 which was deemed not recoverable based on the technological
direction of the Company after the acquisition of Optigraphics Corporation
(Note 2). Amortization expense relating to the technology for the year ended
December 31, 1993 was $111,000.
SOFTWARE DEVELOPMENT COSTS
Software development and purchased software costs are capitalized when
technological feasibility and marketability of the related product have been
established. Software development costs incurred solely in connection with a
specific contract are charged to cost of revenues. Capitalized software
costs are amortized on a product-by-product basis, beginning when the product
is available for general release to customers. Annual amortization expense
is calculated using the greater of the ratio of each product's current gross
revenues to the total of current and expected gross revenues or the straight
line method. Accumulated amortization of capitalized software costs was
$470,000 and $529,000 at December 31, 1995 and 1994, respectively. The
related amortization expense was $325,000, $191,000 and $144,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. The Company
evaluates the carrying value of unamortized capitalized software costs at
each balance sheet date to determine whether any net realizable value of
adjustments are required (Note 2).
28
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences resulting from the
differences in the financial reporting and tax basis of assets and
liabilities. Deferred income tax expense is the change during the year in
the deferred income tax asset or liability (Note 8). Investment tax credits
arising from qualified capital expenditures prior to December 31, 1985 are
carried forward to be utilized as a reduction of income tax expense in the
period they become available for federal income tax reporting purposes.
NET INCOME (LOSS) 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.
STATEMENT OF CASH FLOWS
Cash and cash equivalents are comprised of cash on hand and short-term
investments with original maturities less than 90 days.
In 1995 cash and non-cash investing and financing activities relating to
the acquisition of Trimco Group plc (Note 2) were as follows:
Purchased research and development $ 10,595,000
Fair market value of assets acquired, excluding cash 8,195,000
Liabilities assumed (5,046,000)
Common stock issued (6,564,000)
Note payable issued (1,000,000)
Accrued acquisition costs (587,000)
-------------
Cash paid for acquisition of Trimco $ 5,593,000
-------------
-------------
In 1993 cash and non-cash investing and financing activities relating to
the acquisition of Optigraphics (Note 2) were as follows:
Purchased research and development $ 4,920,000
Fair market value of assets acquired, excluding cash 6,049,000
Liabilities assumed (1,962,000)
Common stock issued (3,922,000)
Notes payable issued (1,770,000)
Payable to Optigraphics shareholders (342,000)
-------------
Cash paid for acquisition of Optigraphics $ 2,973,000
-------------
-------------
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental cash flow information:
Interest paid $ 86,000 $115,000 $ 27,000
-------- --------- ---------
-------- --------- ---------
Schedule of noncash financing activity:
Indemnification obligations applied against
notes payable to former Optigraphics shareholders $100,000 $ - $ -
-------- --------- ---------
-------- --------- ---------
</TABLE>
29
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITIONS AND RESTRUCTURING
TRIMCO GROUP PLC:
On December 27, 1995, the Company entered into a Sale and Purchase
Agreement to acquire all of the outstanding stock of Trimco Group plc
("Trimco") for total consideration of $14,165,000 before acquisition costs of
$630,000. The purchase price was comprised of $5,550,000 in cash, 1,714,788
shares of Alpharel common stock with a valuation of $6,564,000 (based on a
$3.83 per share as of November 20, 1995), a convertible note payable having a
total principal amount of $1,000,000 due September 27, 1996. The purchase
price also included obligations assumed which are to be paid to Trimco
employees in connection with the acquisition, consisting of cash of
$1,051,000.
The acquisition was accounted for using the purchase method. A portion
of the purchase price relates to research and development projects that
Trimco had undertaken, resulting in a charge of $10,595,000 to the Company's
operations. At the date of acquisition the technological feasibility of
acquired technology had not yet been established and the technology has no
future alternative uses. The Company anticipates expending a significant
portion of its own development resources on the completion of this technology
for anticipated new product offerings late 1996. The excess of the purchase
price over the fair value of the tangible and identifiable intangible assets
acquired after allocation of the purchased research and development totals
$4,640,000 and has been recorded as goodwill. The goodwill is being
amortized over its estimated useful life of seven years. Trimco's operating
results have been included in the consolidated financial statements from the
date of acquisition.
The Company also wrote down certain software development and purchased
software costs to net realizable value. These costs were deemed not to be
recoverable due to the Company's plan to accelerate the introduction of the
next generation of software products as a result of the greater development
resources now available. In addition, the costs of certain software
development tools which will not be utilized in the development of the next
generation of software products and certain software products to be replaced
were also written off. Included in the Company's operating results is a
$1,664,000 charge related to these write offs.
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisition had occurred on January 1, 1994,
after giving effect to certain adjustments, including amortization of
goodwill and interest expense on the convertible note payable. The pro forma
results have been prepared for comparative purposes only and do not purport
to indicate the results of operations which may have actually occurred had
the combination been in effect during the periods presented, or which may
occur in the future. The pro forma results are as follows:
( Unaudited )
(000's except per share data)
For the year ended December 31,
-------------------------------
1995 1994
------------ ------------
Total revenue $20,752 $ 16,305
Net loss $(1,117) $(11,312)
Net loss per share $ (.07) $ (.72)
Shares used in per share calculation 15,748 15,698
30
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Optigraphics Corporation:
On September 24, 1993, the Company purchased all of the outstanding
equity securities of Optigraphics Corporation ("Optigraphics") for total
consideration of $8,401,000 before expenses of $606,000. The purchase price
was comprised of $2,709,000 in cash, 2,241,000 shares of Alpharel common
stock with a valuation of $3,922,000 (based on $1.75 per share as of
September 24, 1993) and notes having a principal balance of $1,770,000 due on
September 24, 1995 with interest payable quarterly at 6% per annum. The
notes were subject to offset for certain indemnification obligations of
Optigraphics' shareholders.
The acquisition was accounted for using the purchase method. A portion
of the purchase price related to the research and development projects
Optigraphics had undertaken, resulting in a charge to the Company's
operations of $4,920,000. The $449,000 excess of the purchase price over the
fair value of the tangible and identifiable intangible net assets acquired
has been recorded as goodwill and is being amortized over its useful life of
seven years. Optigraphics' operating results have been included in the
consolidated financial statements from the date of acquisition.
The Company also incurred a restructuring charge of $3,447,000 in
connection with combining Optigraphics and Alpharel. Included in the
restructuring charge is a write-off of approximately $2,000,000 relating to
the remaining balance of DDTMS Technology and certain capitalized software
and equipment which was deemed not to be recoverable based on the
technological direction of the new combined entity. The Company also incurred
costs of almost $1,100,000 associated with consolidating operating
departments and facilities into one location along with severance costs for
personnel reductions. The remainder of the restructuring charge related to
the new technological direction of the new combined entity, and was
specifically to reserve for excess inventory based on quantities on hand in
excess of forecasted sales. The non-cash portion of the restructuring charge
was $2,500,000, while cash expenditures of $497,000 and $355,000 were made in
1994 and 1993, respectively. At December 31, 1994, all restructuring costs
had been paid.
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisition had occurred on January 1, 1992,
after giving effect to certain adjustments, including amortization of
goodwill and interest expense on notes to former Optigraphics shareholders.
The pro forma results have been prepared for comparative purposes only and do
not purport to indicate the results of operations which may have actually
occurred had the combination been in effect during the periods presented, or
which may occur in the future. The pro forma results are as follows:
( Unaudited )
(000's except per share data)
For the year ended December 31,
-----------------------------
1993 1992
------- -------
Total revenue $13,121 $15,817
Net loss $(1,765) $(9,834)
Net loss per share $ (.13) $ (.72)
Shares used in per share calculation 13,615 13,573
31
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
RECEIVABLES, NET:
Billed receivables $ 4,287,000 $ 2,551,000
Unbilled receivables 45,000 584,000
Less allowance for doubtful accounts (125,000) (162,000)
----------- -----------
$ 4,207,000 $ 2,973,000
----------- -----------
----------- -----------
OTHER CURRENT ASSETS:
Prepaid maintenance contracts $ 92,000 $ 54,000
Prepaid expenses and other 711,000 319,000
----------- -----------
$ 803,000 $ 373,000
----------- -----------
----------- -----------
PROPERTY AND EQUIPMENT, NET:
Machinery and equipment $ 574,000 $ 408,000
Computer equipment 4,885,000 2,241,000
Furniture and fixtures 419,000 168,000
Leasehold improvements 177,000 30,000
----------- -----------
6,055,000 2,847,000
Less accumulated depreciation
and amortization (4,410,000) (2,077,000)
----------- -----------
$ 1,645,000 $ 770,000
----------- -----------
----------- -----------
ACCRUED LIABILITIES:
Employee compensation and related expenses $ 1,333,000 $ 113,000
Accrued vacation 233,000 215,000
Accrued acquisition costs 447,000 -
Other 1,198,000 614,000
----------- -----------
$ 3,211,000 $ 942,000
----------- -----------
----------- -----------
OTHER LONG TERM LIABILITIES:
Accrual for unfavorable leases assumed $ 622,000 $ -
Other 323,000 -
----------- -----------
$ 945,000 $ -
----------- -----------
----------- -----------
</TABLE>
The Company assumed leases for facilities of Trimco for which no future
benefit is anticipated. The accrual for unfavorable leases assumed relates
to a liability for the minimum lease payments less estimated sublease rental
income on these leases.
32
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - 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. At
December 31, 1995, $675,000 was outstanding on the revolving loan agreement
and $325,000 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 equal to the
30-day Commercial Paper Rate plus 2.95% (8.79% at December 31, 1995). Total
borrowings under the revolving loan agreement are collateralized by the
Company's assets. The revolving loan and security agreement contains certain
restrictive covenants including debt to tangible net worth ratio.
At December 31, 1995, the Company had an outstanding payable for cash
advanced by a bank which acted as paying agent for the notes due to former
Optigraphics shareholders having a principal balance of $1,634,000 payable on
demand. The notes with an original maturity of September 1995 provided for
interest payable quarterly at 6% per annum and were issued as part of the
total consideration paid in connection with the acquisition of Optigraphics
Corporation. At December 31, 1994, the balance of notes due to former
Optigraphics shareholders was $1,734,000.
At December 31, 1995, the Company had an outstanding convertible note in
connection with the acquisition of Trimco having a principal balance of
$1,000,000 payable at 7% per annum, due on September 27, 1996. The note was
convertible into common stock at a rate of $4.00 per share, or an aggregate
of 250,000 shares. The note was secured by a second-priority lien on the
Company's assets, subject to the first-priority lien of the Company's
existing revolving loan agreement. In February 1996, the note was converted
into 250,000 shares of the Company's common stock.
At December 31, 1994, the Company had an outstanding note payable to a
bank having a principal balance of $59,000, payable in monthly installments
of $5,000 plus interest at prime plus 1.35% (9.85% at December 31, 1994).
The remaining balance was paid in 1995.
NOTE 5 - PREFERRED STOCK:
In December 1995 the Company issued 172,500 shares of a new series of
preferred stock, the Series B Convertible Preferred Stock (the "Series B
Preferred Stock") for total proceeds of $3,450,000 before expenses. The
Series B Preferred Stock bears a dividend of 8% per annum, accruing
quarterly, and is convertible into shares of the Company's common stock after
February 10, 1996, at the option of the holders, and after April 18, 1996, at
the option of the Company. The conversion ratio is a fraction, the numerator
of which is $20.00 plus accrued but unpaid dividends, and the denominator of
which is the lesser of $5.19 and 82.5% of the average closing trading prices
on the three trading days immediately preceding the date of conversion. In
the event that, on any conversion date, the applicable conversion price then
in effect is such that the aggregate number of shares of common stock that
would then be issuable upon conversion of all shares of the Series B
Preferred Stock would equal or exceed 1,070,000 shares, then the Company is
obligated to convert only a portion of such shares subject to a notice of
conversion, and is obligated to redeem the remainder of the shares subject to
such notice of conversion out of funds legally available for such
redemption. In February 1996, the 172,500 shares of Series B Preferred Stock
were converted into 813,234 shares of common stock.
33
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - UNIT OFFERING:
In December 1991, the Company issued common stock and warrants through a
unit offering. The Company received net proceeds of approximately $2,600,000
upon issuing 750,000 units at a unit price of $4.25. In January 1992, the
underwriter exercised its over-allotment option and the Company sold an
additional 112,500 units for net proceeds of $365,000. Each unit consists of
two shares of common stock of the Company and one warrant to purchase one
share of common stock at an exercise price of $4.25. The warrants, which
were due to expire on December 12, 1994, were extended to December 12, 1995.
In connection with this offering, the underwriter received warrants to
purchase 75,000 units at $5.10 per unit for a period of four years commencing
one year from the date of the offering. In November 1995, the underwriter
exercised its option to purchase the 75,000 units for net proceeds of
$382,000. Also in 1995, warrants were exercised for 918,892 shares of common
stock for net proceeds of $3,848,000.
NOTE 7 - COMMON STOCK OPTIONS:
In 1987, the Company adopted its 1987 Stock Option Plan (the "Plan").
In June 1993 and June 1994, the shareholders approved an increase in the
number of authorized shares for issuance under the plan by 200,000 and
700,000 shares, respectively. Remaining authorized shares subject to grants
but unissued are 93,725. Options granted to employees under the Plan may be
either incentive stock options or nonqualified options. Only nonqualified
options may be granted to nonemployee directors and consultants.
The option vesting period is determined by the Stock Option Committee
and usually provides that 25% of the options granted can be exercised 90 days
from the date of grant, and thereafter, these options become exercisable in
additional cumulative annual installments of 25% commencing on the first
anniversary of the date of grant. Options granted are generally due to
expire upon the sooner of five years from date of grant, thirty days after
termination of services other than by reason of convenience of the Company,
disability or death, three months after disability, or one year after the
date of the option holder's death. The option exercise price is equal to the
fair market value of the common stock on the date of grant.
The following table summarizes stock option activity for the three years
ended December 31, 1995:
<TABLE>
<CAPTION>
Shares Under Option
--------------------------
Incentive Non
Options Stock Qualified
Price Range Options Options
------------- --------- -----------
<S> <C> <C> <C>
At December 31, 1992 $0.13 - $2.31 934,650 60,000
Granted $1.50 - $1.91 415,000 -
Exercised $0.13 - $1.50 (63,650) -
Expired $1.50 - $2.00 (210,000) -
--------- ---------
At December 31, 1993 $0.13 - $2.31 1,076,000 60,000
Granted $1.38 - $1.63 140,000 20,000
Exercised $0.13 - $0.38 (65,500) (20,000)
Expired $1.63 - $1.69 (22,000) -
--------- --------
At December 31, 1994 $0.13 - $2.31 1,128,500 60,000
Granted $1.50 - $6.13 542,800 20,000
Exercised $0.13 - $2.31 (386,400) (40,000)
Expired $1.63 - $5.31 (11,350) -
---------- --------
At December 31, 1995 $1.50 - $6.13 1,273,550 40,000
---------- --------
---------- --------
</TABLE>
34
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMON STOCK OPTIONS (CONTINUED):
At December 31, 1995, 745,825 incentive stock options and 15,000
nonqualified stock options were exercisable.
NOTE 8 - INCOME TAXES:
For the years ended 1995, 1994 and 1993, the Company did not record a
provision (or benefit) for income taxes, as a result of having tax losses in
those years without the ability to carryback such losses. The Company's tax
loss position in 1995 is due primarily to the amortization expense associated
with capitalized research and development costs for tax purposes. In
addition, the Company expensed for tax purposes inventory scrapped which had
been fully reserved for book purposes in prior years. At December 31, 1995
the Company has recorded deferred tax assets of $16,000,000 and $1,900,000
for federal and state purposes, respectively, before the valuation allowance.
The principle components of the deferred tax assets are deductible temporary
differences, net operating loss carryforwards, and tax credit carryforwards.
Deductible temporary differences relate to differences in the timing of
income and expense recognition for book and tax purposes, primarily the
provision to write down certain assets to their net realizable value, to
differences in the fair market value of assets acquired from Optigraphics and
their tax basis, to the Company's election to capitalize research and
development expenditures for tax purposes, and other miscellaneous items. In
connection with the acquisition of Trimco, the Company acquired a deferred
tax asset of $926,000.
The Company has net operating loss carryforwards of $34,000,000 and
$14,400,000 for federal and state tax purposes, respectively, which expire in
1996 through 2010. Net operating losses acquired from Optigraphics are
limited to offset that entity's future taxable income and are subject to
annual limitations. In addition, if certain substantial changes in the
Company's ownership should occur, there would be a limitation on the amount
of the consolidated net operating loss carryforwards and tax credits which
can be utilized. The Company has investment and research activity credit
carryforwards aggregating $600,000, which will substantially expire in the
years 2000 through 2004.
As of December 31, 1995 and 1994, the Company recorded deferred tax
asset valuation allowances of $17,600,000 and $16,300,000, respectively, for
net deferred tax assets which more likely than not, will not be realized
based on recent and expected trends in operating results. Any future
recognition of acquired tax benefits will be used first to reduce any
remaining goodwill and other intangible assets related to the acquisitions;
once those assets are reduced to zero, the benefit will be included as a
reduction of the Company's income tax provision.
35
<PAGE>
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS:
The Company leases its principal facilities under a long-term operating
lease which includes rent escalations of 4% per annum. The Company also has
a long-term operating lease for another facility that includes rent
escalations not to exceed 4% in any year. The lease expires in April 2001.
The Company recognizes rental expense on a straight line basis over the term
of the leases.
The Company's Trimco subsidiary leases a facility which occupies 9,800
square feet in Ealing, London in the United Kingdom. The lease expires in
March 2003 and Trimco has the option to terminate the lease in March 1998
with six months notice.
Future minimum lease payments under operating lease agreements at
December 31, 1995 are as follows:
Operating
Lease
------------
1996 $ 473,000
1997 445,000
1998 380,000
1999 391,000
2000 399,000
Thereafter 275,000
----------
Total minimum lease payments $2,363,000
----------
----------
Rent expense under operating leases was $479,000, $268,000 and $189,000
for the years ended December 31, 1995, 1994 and 1993, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
36
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position
---- ---- ---------
Stephen P. Gardner 42 President and Chief Executive Officer
Jay V. Tanna 56 Executive Vice President and
Chief Operating Officer
Roger H. Erickson 39 Vice President Alliances and General
Manager PDM Business Unit
Richard J. Kennedy 55 Vice President, Operations
John W. Low 39 Chief Financial Officer and Secretary
Garrett W. Stowell 47 Vice President and Chief Technology
Officer
Terrence P. Theobald 40 Vice President Engineering
Mr. Gardner became President and Chief Executive Officer effective March
8, 1995. Until joining the Company, he had served as Corporate Vice
President of Data General since October 1993. Previously, Mr. Gardner was
Vice President of Marketing for AViiON, a Data General business unit from
March 1993. Prior to Data General, Mr. Gardner was President of Integris, an
independent division of Groupe Bull, since October 1991. Before heading
Integris, Mr. Gardner held the positions of Vice President, North American
Marketing and Vice President, Small Systems Product Line Management at Groupe
Bull. Mr. Gardner earned his MBA from Harvard Graduate School of Business
Administration in 1981 and his A.B. from Princeton University in 1975.
Mr. Tanna has served as a Director of the Company since the acquisition
of Trimco by the Company in December 1995. Mr. Tanna also became the
Executive Vice President of the Company at such time, and was appointed Chief
Operating Officer of the Company in February 1996. Prior to the Trimco
acquisition, Mr. Tanna served as Managing Director of Trimco, beginning in
1988. Before joining Trimco, Mr. Tanna held the positions of Managing
Director at Sorco Engineering Ltd, a construction engineering firm from 1985
to 1987, and Director of Projects at Lummus Co. Ltd, a construction
engineering firm from 1979 to 1985. Mr. Tanna earned a B.S.C. degree in
Engineering with Honors from London University in 1963.
Mr. Erickson has served as Vice President, Alliances and General Manager
PDM Business Unit since February 1996. Previously, he served as Executive
Vice President, Sales and Marketing since September 1993 and was a Director
of the Company from July 1990 to June 1995. From October 1991 to August 1993
Mr. Erickson served as Chief Executive Officer and President of the Company.
From June 1990 to October 1991, Mr. Erickson served as Vice President,
Engineering. From March to May 1990, Mr. Erickson was Director of Technical
Marketing at West Coast Information Systems, Inc. From 1984 until March
1990, Mr. Erickson served the Company in several positions including Senior
Systems Engineer and Director of Technical Projects. Mr. Erickson earned a
M.S. degree in Computer Science from the University of California, Santa
Barbara in 1982 and a B.A. degree in Mathematics from Westmont College in
1978.
Mr. Kennedy became Vice President, Operations effective August 1995.
Prior to joining the Company, Mr. Kennedy was Vice President of Operations at
Integris, a business unit of Groupe Bull. From 1968-1991 Mr. Kennedy held
various positions at Bull HN Information Systems, the latest as Director of
Product Management. Mr. Kennedy earned a M.S. degree in Engineering from
Northwestern University in 1962 and a B.S. degree in Engineering in 1969 from
Merrimack College.
37
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Mr. Low has served as Chief Financial Officer and Secretary since June
1990. Previously, Mr. Low had served as Corporate Controller since joining
the Company in August 1987. From 1980 until joining the Company, Mr. Low was
with Price Waterhouse, most recently as a Manager working with middle-market
and growing companies. Mr. Low, who is a certified public accountant, earned
a B.A. degree in Economics from the University of California, Los Angeles in
1978.
Dr. Stowell has served as Vice President and Chief Technology Officer
since April 1995. Previously, he served as Vice President, Product
Development since the acquisition of Optigraphics in September 1993. For
Optigraphics Dr. Stowell served as Vice President of Engineering from
September 1985 until September 1993. Prior to joining Optigraphics, he was
Vice President of Research and Development at Synercom Corporation and held
similar engineering management positions at Megatek Corporation. He received
his doctorate in Engineering from Purdue University in 1975, and was a member
of the teaching and research faculty, specializing in computer graphics. Dr.
Stowell also earned a M.S. degree in Mechanical Engineering in 1971 and a
B.S. degree in Electrical Engineering in 1970, both from Purdue University.
Mr. Theobald has served as Vice President, Engineering since January
1996. Prior to being promoted, Mr. Theobald served as Director, Projects and
Services since September 1993, and Director of Engineering from December 1992
to September 1993. Mr. Theobald joined the Company in July 1992 as a Project
Manager. Before joining Alpharel, Mr. Theobald spend 14 years at Northrop
Corporation, most recently as Manager of Information Systems Development.
Mr. Theobald earned his MBA from Pepperdine University in 1982, and his B.S.
degree in Biology from Loyola Marymount University in 1977.
All executive officers hold office at the pleasure of the Board of
Directors.
Information relating to Directors is set forth in the Company's
definitive proxy statement which is to be filed pursuant to Regulation 14A
within 120 days after the end of the Company's fiscal year ended December 31,
1995, and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to Executive Compensation is set forth in the
Company's definitive proxy statement which is to be filed pursuant to
Regulation 14A within 120 days after the end of the Company's fiscal year
ended December 31, 1995, and such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to Security Ownership of Certain Beneficial Owners
and Management is set forth in the Company's definitive proxy statement which
is to be filed pursuant to Regulation 14A within 120 days after the end of
the Company's fiscal year ended December 31, 1995, and such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Certain Relationships and Related Transactions is
set forth in the Company's definitive proxy statement which is to be filed
pursuant to Regulation 14A within 120 days after the end of the Company's fiscal
year ended December 31, 1995, and such information is incorporated herein by
reference.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES, AND EXHIBITS
(1) FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 1995 and 1994
Consolidated Statement of Operations for the years ended December 31,
1995, 1994 and 1993
Consolidated Statement of Changes in Shareholders' Equity for the
years ended December 31, 1995, 1994 and 1993
Consolidated Statement of Cash Flows for the years ended December 31,
1995, 1994, and 1993
Notes to the Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) EXHIBITS:
3.1* Registrant's Articles of Incorporation, as amended
3.2* Registrant's Bylaws
3.3* Amendment to Registrant's Bylaws adopted January 19, 1988
3.4* Amendment to Registrant's Articles of Incorporation adopted
May 24, 1988
3.5* Amendment to Registrant's Articles of Incorporation adopted
March 16, 1987
4.1* Specimen Certificate of Common Stock
4.2* Specimen Certificate of Redeemable Common Stock Purchase Warrant
10.1* Purchase Agreement dated as of April 10, 1986, between
Registrant and Lockheed Corporation, including form of Cross
License Agreement and Shareholder Agreement
10.2* Purchase Agreement dated as of August 26, 1986, between
Registrant and Lockheed Corporation
10.3* Forms of Incentive Stock Option Agreement and Nonstatutory
Stock Option Agreement
10.4* Form of Indemnification Agreement with officers and
directors
39
<PAGE>
10.5* 1987 Stock Option Plan, as amended April 27, 1994
10.6* Warrant Agreement dated December 12, 1991 between the
Company and Security Pacific National Bank.
10.7* Sublease Agreement dated August 31, 1992 between the Company
and Unisys Corporation
10.8* Agreement and Plan of Merger and Reorganization dated as of
July 7, 1993 by and among the Company, AO Acquisition
Corporation and Optigraphics Corporation
10.9* Amendment No. 1 to Agreement and Plan of Merger and
Reorganization dated as of September 15, 1993 by and among the
Company, AO Acquisition Corporation and Optigraphics Corporation
10.10* WCMA and Term Loan Agreement dated July 6, 1994 between
Optigraphics Corporation and Merrill Lynch Business Financial
Services, Inc.
10.11* Standard Industrial Lease dated April 1, 1994 between
the Company and Utah State Retirement Fund, a common trust
fund
10.12* Purchase and Sale Agreement dated December 27, 1995 by and
between the Company, Mr. Tanna and the shareholders of Trimco
Group plc (filed as Exhibit 2.1 to the Company's Current Report
on Form 8-K dated December 27, 1995 and incorporated herein by
this reference).
10.13* Convertible Loan Note dated December 27, 1995 issued by the
Company (filed as Exhibit 2.2 to the Company's Current Report on
Form 8-K dated December 27, 1995 and incorporated herein by this
reference).
10.14* Certificate of Determination of the Series B Convertible
Preferred Stock (filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K dated December 27, 1995 and incorporated
herein by this reference).
10.15* Convertible Preferred Stock Purchase Agreement dated
December 20, 1995 by and between the Company and Newsun Limited
(filed as Exhibit 4.2 to the Company's Current Report on Form
8-K dated December 27, 1995 and incorporated herein by this
reference).
10.16* Convertible Preferred Stock Purchase Agreement dated
December 20, 1995 by and between the Company and THC, Inc.
(filed as Exhibit 4.3 to the Company's Current Report on
Form 8-K dated December 27, 1995 and incorporated herein by
this reference).
10.17* Form of Certificate representing the Series B Convertible
Preferred Stock (filed as Exhibit 4.4 to the Company's Current
Report on Form 8-K dated December 27, 1995 and incorporated
herein by this reference).
10.18* Letter Agreement dated January 2, 1996 by and among the
Company, Newsun Limited and THC, Inc. (filed as Exhibit 4.5 to
the Company's Current Report on Form 8-K dated December 27, 1995
and incorporated herein by this reference).
40
<PAGE>
11 Statement Re Computation of Per Share Earnings
21 Subsidiaries of Registrant
23 Consent of Price Waterhouse LLP
27 Requirements for the Format and Input of Financial
Data Schedules
(b) Current Reports on Form 8-K
Form 8-K, dated November 20, 1995
Form 8-K, dated December 27, 1995
Amendment No. 1 on Form 8-K/A, dated March 8, 1996 to Form 8-K, dated
December 27, 1995
- -------------------
* Incorporated herein by this reference from previous filings with the
Securities and Exchange Commission.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 29, 1996
By: /s/ STEPHEN P. GARDNER
-----------------------------------
Stephen P. Gardner
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Robert T. Bruce
- ---------------------------- Chairman of the Board and Director March 29, 1996
Robert T. Bruce
/s/ Stephen P. Gardner
- ---------------------------- President and Chief Executive Officer March 29, 1996
Stephen P. Gardner (Principal Executive Officer) and Director
/s/ Jay V. Tanna
- ---------------------------- Executive Vice President and March 29, 1996
Jay V. Tanna Chief Operating Officer and Director
/s/ John W. Low
- ---------------------------- Chief Financial Officer and Secretary March 29, 1996
John W. Low (Principal Financial and Accounting Officer)
/s/ Dominic K. Chan
- ---------------------------- Director March 29, 1996
Dominic K. Chan
- ---------------------------- Director March 29, 1996
D. Ross Hamilton
/s/ Michael J. McGovern
- ---------------------------- Director March 29, 1996
Michael J. McGovern
/s/ Larry D. Unruh
- ---------------------------- Director March 29, 1996
Larry D. Unruh
</TABLE>
42
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALPHAREL, INC.
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------
Additions
---------------------------
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts- Deductions- End of
Description of Period Expenses Describe Describe Period
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 162,000 $ 35,000 $ (72,000)(a) $ 125,000
Excess inventory reserve $ 2,323,000 $ (204,000)(b) $ 2,119,000
Tax benefit reserve $16,300,000 $1,300,000(c) $17,600,000
- ------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts $ 161,000 $ 50,000 $ (49,000)(a) $ 162,000
Excess inventory reserve $ 2,540,000 $ (217,000)(b) $ 2,323,000
Tax benefit reserve $16,400,000 $ (100,000)(d) $16,300,000
- ------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1993:
Deducted from asset accounts:
Allowance for doubtful accounts $ 45,000 $116,000 $ 161,000
Excess inventory reserve $ 2,201,000 $362,000 $ (23,000)(b) $ 2,540,000
Tax benefit reserve $11,100,000 $5,300,000(c) $16,400,000
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amount written off
(b) Inventory scrapped or sold at less than cost
(c) Valuation allowance against benefit recorded
(d) Adjustment relating to tax provision
43
<PAGE>
EXHIBIT 11
ALPHAREL, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss) per consolidated
financial statements $(11,830,000) $ 275,000 $(7,704,000)
------------ ----------- -----------
Primary net income (loss) per share:
Weighted average common shares 14,052,000 13,714,000 11,972,000
Common stock equivalents:
Common stock options - 269,000 -
Common stock warrants - - -
------------ ----------- -----------
Weighted average shares outstanding 14,052,000 13,983,000 11,972,000
------------ ----------- -----------
------------ ----------- -----------
Fully diluted net income (loss) per share:
Weighted average common shares 14,052,000 13,714,000 11,972,000
Common stock equivalents;
Common stock options - 269,000 -
Common stock warrants - - -
------------ ----------- -----------
Weighted average shares outstanding 14,052,000 13,983,000 11,972,000
------------ ----------- -----------
------------ ----------- -----------
Net income (loss) per share:
Primary $ (.84) $ .02 $ (.64)
Fully diluted $ (.84) $ .02 $ (.64)
</TABLE>
44
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF REGISTRANT
Trimco Group plc
Trimco Enterprises, Ltd.
Trimco International, Ltd.
Alpharel International, Ltd.
Imagen Enterprises Ltd.
Trimco America, Inc., a Florida corporation
Micro Synergy Associates, Inc. a Florida corporation
Trimco Document Management, Inc.
Optigraphics Corporation, a California corporation
Optigraphics International Corporation, a California corporation
(a subsidiary of Optigraphics Corporation)
Alphamation Incorporated, a California corporation
45
<PAGE>
EXHIBIT 23
ALPHAREL, INC.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-43451, No. 33-77224 and No. 33-83330) of
Alpharel, Inc. of our report dated February 29, 1996, appearing on page 21 of
this Form 10-K.
PRICE WATERHOUSE LLP
San Diego, California
March 29, 1996
46
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Consolidated
Balance Sheet and Consolidated Statement of Operations found on pages 22 and 23
of the Company's Form 10-K for the year ended December 31, 1995 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,656
<SECURITIES> 0
<RECEIVABLES> 4,207
<ALLOWANCES> 0
<INVENTORY> 469
<CURRENT-ASSETS> 10,405
<PP&E> 6,055
<DEPRECIATION> (4,410)
<TOTAL-ASSETS> 19,002
<CURRENT-LIABILITIES> 9,466
<BONDS> 0
0
3,306
<COMMON> 54,085
<OTHER-SE> (49,275)
<TOTAL-LIABILITY-AND-EQUITY> 19,002
<SALES> 12,731
<TOTAL-REVENUES> 12,731
<CGS> 5,791
<TOTAL-COSTS> 5,791
<OTHER-EXPENSES> 13,661<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95
<INCOME-PRETAX> (11,830)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,830)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,830)
<EPS-PRIMARY> (.84)
<EPS-DILUTED> (.84)
<FN>
<F1>Amount includes $10,595 charge for purchased R & D related to the Company's
acquisition of Trimco and a $1,664 charge related to the writedown of certain
software costs to net realizable value. See Note 2 of the Consolidated financial
stmts.
</FN>
</TABLE>
