FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-15935
ALPHAREL, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3634089
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9339 CARROLL PARK DRIVE, SAN DIEGO, CA 92121
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(Address of principal executive offices and zip code)
(619) 625-3000
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(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Number of shares of Common Stock outstanding at May 2, 1996: 18,277,886
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Number of Sequentially Numbered Pages: 12
Exhibit Index at Page 1
ALPHAREL, INC.
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INDEX
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Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet 2
Consolidated Statement of Operations 3
Consolidated Statement of Cash Flows 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION 10
1
ALPHAREL, INC.
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
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March 31, 1996 December 31, 1995
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(unaudited)
ASSETS
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Current assets:
Cash and cash equivalents $ 1,074,000 $ 4,656,000
Short term investments 90,000 270,000
Receivables, net 5,597,000 4,207,000
Inventory, net 444,000 469,000
Other current assets 864,000 803,000
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Total current assets 8,069,000 10,405,000
Property and equipment, net 1,613,000 1,645,000
Computer software, net 1,477,000 1,549,000
Goodwill 4,763,000 4,945,000
Deposits and other assets 435,000 458,000
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$16,357,000 $ 19,002,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,317,000 $ 2,192,000
Accrued liabilities 1,757,000 3,211,000
Notes payable 200,000 1,834,000
Convertible note payable - 1,000,000
Deferred revenue 806,000 1,229,000
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Total current liabilities 5,080,000 9,466,000
Long term note payable 435,000 475,000
Other long term liabilities 822,000 945,000
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Total liabilities 6,337,000 10,886,000
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Commitments
Shareholders' equity:
Preferred stock, $1 par value,
1,000,000 shares authorized;
650,761 designated; 172,500 shares
issued and outstanding - 3,306,000
Common stock, no par, 20,000,000 shares
authorized; 18,134,886 and
16,950,902 issued and outstanding,
respectively 58,601,000 54,085,000
Foreign currency translation adjustment 17,000 -
Accumulated deficit (48,598,000) (49,275,000)
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Total shareholders' equity 10,020,000 8,116,000
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$ 16,357,000 $ 19,002,000
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2
See accompanying notes to the consolidated financial statements.
ALPHAREL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
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(Unaudited)
For the three months
ended March 31,
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1996 1995
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Revenues $ 6,061,000 $ 3,151,000
Cost of revenues 2,513,000 1,692,000
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Gross profit 3,548,000 1,459,000
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Operating expenses:
Research and development 907,000 225,000
Marketing and sales 1,253,000 693,000
General and administrative 711,000 322,000
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Total operating expenses 2,871,000 1,240,000
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Income from operations 677,000 219,000
Interest and other income 26,000 34,000
Interest and other expense (26,000) (28,000)
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Income before taxes 677,000 225,000
Provision for taxes - -
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Net income $ 677,000 $ 225,000
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Net income per share $ .04 $ .02
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Weighted average shares outstanding 18,813,000 14,065,000
See accompanying notes to the consolidated financial statements
3
ALPHAREL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
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(Unaudited)
For the three months
ended March 31,
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1996 1995
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Cash flow from operating activities:
Net income $ 677,000 $ 225,000
Adjustments to reconcile net
income to net cash used by
operating activities:
Depreciation and amortization 605,000 164,000
Changes in assets and liabilities:
Receivables (1,390,000) 521,000
Inventory 25,000 200,000
Other assets 76,000 (22,000)
Accounts payable 125,000 (113,000)
Accrued liabilities (1,454,000) (37,000)
Deferred revenue (423,000) (92,000)
Other long term liabilities (123,000) -
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Net cash provided by (used in) operating
activities (1,882,000) 846,000
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Cash flows from investing activities:
Short term investments maturing 180,000 392,000
Purchases of property and equipment (192,000) (77,000)
Purchases of software (15,000) (9,000)
Computer software capitalized (226,000) (179,000)
Cash paid to former Optigraphics
shareholders - (169,000)
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Net cash used in investing activities (253,000) (42,000)
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Cash flows from financing activities:
Principal payment under cash
advanced by a bank related to
former Optigraphics shareholder
notes payable (1,634,000) -
Principal payments under note payable (40,000) (14,000)
Proceeds from exercise of stock options 210,000 -
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Net cash used in financing activities (1,464,000) (14,000)
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Effect of exchange rate changes on cash 17,000 -
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Net increase (decrease) in cash and cash
equivalents (3,582,000) 790,000
Cash and cash equivalents at beginning of
period 4,656,000 1,036,000
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Cash and cash equivalents at end of period $ 1,074,000 $ 1,826,000
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Supplemental cash flow information:
Interest paid $ 25,000 $ 36,000
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Schedule of non-cash financing activity:
Conversion of Series B Preferred
Stock to common stock $ 3,306,000 -
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Conversion of note payable to
common stock $ 1,000,000 -
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See accompanying notes to the consolidated financial statements.
4
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated balance sheet of Alpharel, Inc. (the
"Company") as of March 31, 1996 and the consolidated statement of operations and
of cash flows for the three month periods ended March 31, 1996 and 1995 are
unaudited. The consolidated financial statements and related notes have been
prepared in accordance with generally accepted accounting principles applicable
to interim periods. In the opinion of management, the consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the consolidated financial
position, operating results and cash flows for the periods presented.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
NOTE 2 - NET INCOME PER SHARE
Net income per share is computed on the basis of weighted average shares
and common stock equivalent shares outstanding for each period presented, if
dilutive.
NOTE 3 - INVENTORY
Inventory consists of parts, supplies, and subassemblies stated at the
lower of cost or market value. Cost is determined using the first-in, first-out
(FIFO) method. As of March 31, 1996 and December 31, 1995, the Company's
reserve against excess quantities totaled $2,119,000.
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 March 31,
1996, $635,000 was outstanding on the revolving loan agreement and $365,000 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% (8.30% at March 31, 1996). 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 in which the
balance was paid in January 1996. 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, 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.In February 1996,
the note was converted into 250,000 shares of the Company's common stock.
5
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. In February
1996, 172,500 shares of Series B Preferred Stock were converted into 813,234
shares of common stock.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS
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THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED MARCH 31,
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1995.
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Revenues
Revenues for the three months ended March 31, 1996 increased to $6,061,000
from $3,151,000 for the three months ended March 31, 1995. The 92% increase in
revenues is primarily due to revenues generated from significant new system
sales by the Company's new wholly-owned subsidiary, Trimco Group plc ("Trimco"),
which was acquired in December 1995.
First quarter 1996 revenues consisted of $3,336,000 (55%) in new system
revenues and $2,725,000 (45%) related to system enhancements, expansion and
maintenance. This compares to first quarter 1995 revenue of $1,725,000 (55%)
in new system revenues and $1,426,000 (45%) related to system enhancements,
expansion and maintenance. The percentage distribution is comparable to first
quarter 1995, in which new system sales also accounted for 45% of total
revenues.
A small number of customers have typically accounted for a large percentage
of the Company's annual revenue. In the first quarter of 1996, two customers
accounted for 14% and 11% of total revenue. During the first quarter of 1995,
one customer accounted for 19% of total revenues. One consequence of this
dependence has been that revenue can fluctuate significantly on a quarterly
basis. The Company's reliance on relatively few customers could have a material
adverse effect on the results of its operations on a quarterly basis.
Additionally, a significant portion of the Company's revenues has historically
been derived from the sale of systems to new customers. The acquisition of
Trimco in 1995 and Optigraphics in 1993 and sales of new systems have reduced
and are expected to continue to reduce the Company's dependence on a relatively
small number of customers by providing an increasing base of customers for
expansion, enhancement and maintenance service.
Cost of Revenues
Gross profit was $3,548,000 or 59% of revenues for the first quarter of
1996, as compared to $1,459,000 or 46% of revenues for the same period a year
ago. 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. The increase in the gross
profit percentage was due primarily to the significant increase in software
license revenue to $3,637,000 (60%) in the first quarter of 1996 compared to
$725,000 (23%) in the first quarter of 1995. Gross profit percentage can
fluctuate quarterly based on the revenue mix of Company software, services,
proprietary hardware and third party software or hardware.
Operating Expenses
Research and development expense for the three months ended March 31, 1996
was $907,000 versus $225,000 for the same period in the prior year. The
significant increase is primarily due to the addition of Trimco's research and
development activities to Alpharel's activities. Research and development
expense can vary year to year based on the amount of engineering service
contract work required for customers versus purely internal development
projects. Technical expenses on customer-funded projects are included in cost
of revenues, while expenses on internal projects are included in research and
development expense. Technical expense included in cost of revenue for the
quarter was $734,000 versus $613,000 in the first quarter of 1995.
Marketing expense for the three months ended March 31, 1996 increased to
$1,253,000 from $693,000 for the three months ended March 31, 1995. This
increase is primarily due to additional personnel and other costs resulting from
the addition of Trimco's operations versus Alpharel on a stand alone basis
before the acquisition of Trimco.
7
General and administrative expense was $711,000 for the three months ended
March 31, 1996 as compared to $322,000 for the three months ended March 31,
1995. The increase in general and administrative expense was due primarily to
additional personnel and other administrative costs resulting from the
acquisition of Trimco.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company's cash and cash equivalents totaled
$1,074,000 as compared to $4,656,000 at December 31, 1995. Short term
investments were $90,000 at March 31, 1996 versus $270,000 at December 31, 1995.
Short term investments are comprised primarily of time deposits and U.S.
Treasury securities. At March 31, 1996, the Company's current ratio was
approximately 1 to 1.
During the first quarter of 1996, the Company used cash of $1,882,000 in
operating activities, $253,000 in investing activities and $1,464,000 in
financing activities. A substantial portion of cash used in operating
activities was in connection with the acquisition of Trimco. The reduction in
accrued liabilities, which included accrued bonuses for Trimco employees,
resulted in a cash usage of $1,454,000. A substantial portion of the cash used
in financing activities was in connection with a $1,634,000 payment of cash
advanced by a bank which acted as paying agent for the notes due to former
Optigraphics shareholders. For the first quarter of 1995, the Company generated
cash of $846,000 in operating activities while using cash of $42,000 in
investing activities and $14,000 in financing activities.
In December 1995, the Company acquired Trimco. The cash portion of the
consideration paid 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.
The Company anticipates that its combination with 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 for at least the next twelve
months. Through a private offering of its convertible preferred stock, the
Company recently raised funds to be utilized to pursue certain opportunities to
accelerate the development and product positioning of a new integrated product
line of Alpharel and Trimco. See "Subsequent Event" below.
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 change of ownership of more than
50 percentage points 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
8
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, the 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.
Subsequent Event
On April 25, 1996, the Company issued 100,000 shares of a new series of
preferred stock, the Series C Convertible Preferred Stock (the "Series C
Preferred Stock") in a private placement to a purchaser who is not a resident of
the United States, in reliance on the exemption set forth in Regulation S of the
Securities and Exchange Commission. In consideration for the issuance and sale
of the Series C Preferred Stock, the Company received $2,000,000 in cash
proceeds. The Series C Preferred Stock bears a dividend of 8% per annum,
accruing quarterly, and is convertible into shares of the Company's common stock
after June 9, 1996, at the option of the holder, and after August 23, 1996, at
the Company's option. The conversion ratio will be a fraction, the numerator of
which is $20.00 plus accrued but unpaid dividends, and the denominator of which
is the lessor of $5.16 (the closing price on April 24, 1996, the date preceding
the date of issuance), and 80% of the average closing trading price 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 C Preferred Stock would equal or
exceed 500,000 shares, then the Company shall be obligated to convert only a
portion of such shares subject to a notice of conversion, and will be obligated
to redeem the remainder of the shares subject to such notice of conversion out
of funds legally available for such redemption. The Certificate of
Determination for the Series C Preferred Stock also contains customary anti-
dilution provisions.
9
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K:
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(a) Exhibits - See Exhibit Index on Page 13.
(b) Amendment No. 1 on Form 8-K/A, dated March 8, 1996 to Form 8-K, dated
December 27, 1995
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALPHAREL, INC.
By: /s/John W. Low
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John W. Low
Chief Financial Officer
Dated: May 14, 1996
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11
EXHIBIT INDEX
Exhibit
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4.1 Certificate of Determination of the Series C Convertible
Preferred Stock
4.2 Convertible Preferred Stock Purchase Agreement dated April 25, 1996
by and between the Company and Newsun Limited
4.3 Form of Certificate representing the Series C Convertible
Preferred Stock
11 Statement Re Computation of Net Income Per Share
12