FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 July 31, 1996: 18,897,012
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Number of Sequentially Numbered Pages: 13
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Exhibit Index at Page 12
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1
ALPHAREL, INC.
INDEX
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Notes to the Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION 11
2
ALPHAREL, INC.
PART 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
ASSETS
June 30, 1996 December 31, 1995
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(unaudited)
Current assets:
Cash and cash equivalents $ 901,000 $ 4,656,000
Short term investments 90,000 270,000
Receivables, net 8,157,000 4,207,000
Inventory, net 455,000 469,000
Other current assets 779,000 803,000
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Total current assets 10,382,000 10,405,000
Property and equipment, net 2,091,000 1,645,000
Computer software, net 1,767,000 1,549,000
Goodwill 4,607,000 4,945,000
Deposits and other assets 494,000 458,000
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Total assets $ 19,341,000 $ 19,002,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,501,000 $ 2,192,000
Accrued liabilities 2,305,000 3,211,000
Notes payable 200,000 1,834,000
Convertible note payable - 1,000,000
Deferred revenue 819,000 1,229,000
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Total current liabilities 4,825,000 9,466,000
Long term note payable 397,000 475,000
Other long term liabilities 774,000 945,000
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Total liabilities 5,996,000 10,886,000
Commitments
Shareholders' equity:
Preferred stock, $1 par value, 1,000,000 shares
authorized; 650,761 designated; 62,500 shares issued and
outstanding 1,229,000 3,306,000
Common stock, no par, 40,000,000 shares authorized;
18,544,464 and 16,950,902 issued and outstanding,
respectively 59,769,000 54,085,000
Foreign currency translation adjustment 70,000 -
Accumulated deficit (47,723,000) (49,275,000)
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Total shareholders' equity 13,345,000 8,116,000
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Total liabilities and shareholders' equity $ 19,341,000 $ 19,002,000
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See accompanying notes to the consolidated financial statements
3
ALPHAREL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands except per share data)
For the three months For the six months
ended June 30, ended June 30,
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1996 1995 1996 1995
------- ------- ------- ------
Revenues $ 6,106 $ 3,351 $12,167 $ 6,502
Cost of revenues 2,133 1,422 4,646 3,114
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Gross profit 3,973 1,929 7,521 3,388
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Operating expenses:
Research and development 849 335 1,756 560
Marketing and sales 1,394 778 2,647 1,471
General and administrative 854 399 1,565 721
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Total operating expenses 3,097 1,512 5,968 2,752
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Income from operations 876 417 1,553 636
Interest and other income 20 36 46 70
Interest and other expense (21) (26) (47) (54)
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Income before taxes 875 427 1,552 652
Provision for taxes - - - -
------- ------- ------- -------
Net income $ 875 $ 427 $ 1,552 $ 652
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------- ------- ------- -------
Net income per share $ .05 $ .03 $ .08 $ .05
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Weighted average shares outstanding 19,187 14,068 18,468 14,066
See accompanying notes to the consolidated financial statements.
4
ALPHAREL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the six months
ended June 30,
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1996 1995
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Cash flow from operating activities:
Net income $ 1,552,000 $ 652,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 956,000 335,000
Changes in assets and liabilities:
Receivables (3,950,000) (64,000)
Inventory 14,000 251,000
Other assets (49,000) (292,000)
Accounts payable (691,000) 2,000
Accrued liabilities (906,000) (49,000)
Deferred revenue (410,000) (91,000)
Other long term liabilities (171,000) -
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Net cash (used in) provided by operating activities (3,655,000) 744,000
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Cash flows from investing activities:
Short term investments maturing 180,000 1,129,000
Purchases of property and equipment (764,000) (186,000)
Proceeds from sale of property and equipment - 4,000
Purchases of software (15,000) (11,000)
Computer software capitalized (466,000) (404,000)
Cash paid to former Optigraphics shareholders - (171,000)
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Net cash (used in) provided by investing activities (1,065,000) 361,000
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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 (78,000) (28,000)
Proceeds from exercise of stock options 699,000 39,000
Net proceeds from issuance of preferred stock 1,908,000 -
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Net cash provided by financing activities 895,000 11,000
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Effects of exchange rate changes on cash 70,000 -
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Net (decrease) increase in cash and cash equivalents (3,755,000) 1,116,000
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 $ 901,000 $2,152,000
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Supplemental cash flow information:
Interest paid $ 37,000 $ 73,000
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Schedule of non-cash financing activity:
Conversion of Preferred Stock and note payable to Common
Stock $ 5,003,000 -
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See accompanying notes to the consolidated financial statements.
5
ALPHAREL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated balance sheet of Alpharel, Inc. (the
"Company") as of June 30, 1996 and the consolidated statement of operations
and of cash flows for the three and six month periods ended June 30, 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 June 30, 1996 and December 31, 1995, the Company's reserve
against excess quantities totaled $2,119,000.
NOTE 4 - NOTE 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 June 30, 1996,
$597,000 was outstanding on the revolving loan agreement and $403,000 was
unused. The maximum credit available under this facility declines by $200,000
in September of each year commencing in 1996. The loan balance is payable in
monthly installments of $16,667 with interest equal to the 30-day Commercial
Paper Rate plus 2.95% (8.39% at June 30, 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.
6
NOTE 5 - PREFERRED STOCK
In April 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 before expenses. 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. In June 1996, 37,500 shares of Series C Preferred Stock were
converted into 145,453 shares of common stock. In July 1996, the remaining
62,500 shares of Series C Preferred Stock were converted into 326,548 shares
of common 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, all of such shares of Series B Preferred Stock were converted into 813,234
shares of common stock.
7
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE THREE AND SIX MONTHS
ENDED JUNE 30, 1995.
Revenues
Revenue for the three and six months ended June 30, 1996 was $6,106,000 and
$12,167,000, respectively, as compared to $3,351,000 and $6,502,000 for the
three and six months ended June 30, 1995. The increase of 82% and 87%,
respectively, in revenue for the three and six months ended June 30, 1996 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.
For the three and six months ended June 30, 1996 revenue consisted of new
system revenue of $4,185,000 (69%) and $7,521,000 (62%), respectively, and
revenue related to system enhancements, expansion and maintenance of $1,921,000
(31%) and $4,646,000 (38%), respectively. This compares to 1995 revenue of
$1,841,000 (55%) and $3,566,000 (55%), respectively, in new system revenue and
revenue related to system enhancements, expansion and maintenance of $1,510,000
(45%) and $2,936,000 (45%), respectively. The increase in new system revenue in
second quarter 1996 is primarily due to large orders from several new customers
including Northeast Utilities, China Light & Power, Jacksonville Electric
Authority and Phase Metrics.
A small number of customers have typically accounted for a large
percentage of the Company's annual revenue. In the first six months of 1996,
one customer accounted for 15% of total revenue. During the first six months
of 1995, one customer accounted for 13% of total revenue. One consequence of
this dependence has been that revenue can fluctuate significantly on a
quarterly basis. The Company's reliance on relatively few customers could
have a material adverse effect on the results of its operations, particularly
in light of the current prevailing adverse conditions, which have affected
certain industries, including aerospace and defense-related manufacturing, in
which many of the Company's principal customers operate. Additionally, a
significant portion of the Company's revenues have historically been derived
from the sale of systems to new customers. The Company believes that the
sale of new systems as a percent of total revenues will decline with an
increase in its customer base and as a result of expanded revenue base from
system enhancements, expansion and maintenance.
Cost of Revenues
Gross profit was $3,973,000 or 65% and $7,521,000 or 62% for the three and
six months ended June 30, 1996. For the comparable periods in 1995, gross
profit was $1,929,000 or 58% and $3,388,000 or 52%, respectively. 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 $4,187,000 (69%) and $7,799,000 (64%) for the three and six months
ended June 30, 1996. This compares to $1,324,000 (40%) and $2,054,000 (32%) for
the same period in 1995. Gross profit percentage can fluctuate quarterly based
on the revenue mix of Company software, services, proprietary hardware and third
party software or hardware.
8
Operating Expenses
Research and development expense for the three and six months ended June
30, 1996 was $849,000 and $1,756,000 versus $335,000 and $560,000 for the same
periods 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. For the three and six months ended
June 30, 1996, technical expense included in cost of revenues was $741,000 and
$1,475,000, respectively, versus $510,000 and $1,123,000, respectively, for the
same period last year.
Marketing expense for the three and six months ended June 30, 1996 was
$1,394,000 and $2,647,000 as compared to $778,000 and $1,471,000 for the three
and six months ended June 30, 1995. This increase is primarily due to
additional personnel and other costs resulting from the addition of Trimco's
operations.
General and administrative expense for the three and six months ended June
30, 1996 increased to $854,000 and $1,565,000 from $399,000 and $721,000 for the
three and six months ended June 30, 1995. The increase in general and
administrative expense was due primarily to additional personnel and other
administrative costs resulting from the acquisition of Trimco.
Interest and Other Income
Interest and other income was $20,000 and $46,000 for the three and six
months ended June 30, 1996 as compared to $36,000 and $70,000 in the prior year.
The decrease is due primarily to reduced interest income resulting from lower
short term investment balances during the first half of 1996 versus 1995.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company's cash and cash equivalents totaled $901,000
as compared to $4,656,000 at December 31, 1995. Short term investments were
$90,000 at June 30, 1996 versus $270,000 at December 31, 1995. Short term
investments are comprised primarily of certificates of deposit and treasury
bills. At June 30, 1996, the Company's current ratio was 2 to 1.
For the first six months of 1996, the Company used cash of $3,655,000 in
operating activities, $1,065,000 in investing activities, and generated cash of
$895,000 in financing activities. A substantial portion of cash used in
operating activities was due to delays in collection of certain accounts
receivables, which resulted in a cash usage of $3,950,000. In July 1996, the
Company collected $2,288,000 in cash. 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 notes due to former
shareholders of Optigraphics Corporation which was acquired in 1993. During the
first six months of 1995, the Company generated cash of $744,000 in operating
activities, $361,000 in investing activities, and $11,000 in financing
activities.
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 which was due
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 over at least the next twelve
months; however, to accelerate the development and product positioning of a new
integrated product line of Alpharel and Trimco, the Company may explore
additional financing options.
9
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 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.
10
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The Annual Meeting of Shareholders was held May 20, 1996. At the meeting,
the shareholders approved a proposal to amend the Company's Articles of
Incorporation to increase the total number of authorized shares of the Company's
Common Stock from 20,000,000 to 40,000,000. The proposal was approved with
15,456,016 proxies voting for, 545,681 voting against, and 98,057 abstaining. A
proposal to amend the Company's Articles of Incorporation to increase the total
number of authorized shares of the Company's Preferred Stock from 1,000,000 to
5,000,000 did not receive 50% of the outstanding Common Stock and thus was not
adopted by the shareholders. The vote on this proposal was 6,679,435 proxies
voting for, 1,338,861 voting against, and 92,057 abstaining. The shareholders
approved a proposal for the Company's 1996 Stock Incentive Plan. The proposal
was approved with 8,697,982 proxies voting for, 648,125 voting against, and 95
abstaining.
In addition, at the meeting, the shareholders approved the election of the
following individuals as directors who will hold office until the next annual
meeting Robert T. Bruce, Dominic Chan, Stephen P. Gardner, D. Ross Hamilton,
Michael J. McGovern, Jay Tanna, and Larry D. Unruh. In May 1996, Mr. Gardner
resigned from the Board of Directors to pursue other interests.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits - See Exhibit Index on Page 12.
(b) There were no reports on Form 8-K filed for the three months ended
June 30, 1996.
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/ Jay Tanna
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Jay Tanna
President and Chief Executive Officer
By: /s/ John W. Low
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John W. Low
Chief Financial Officer
Dated: August 13, 1996
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11
EXHIBIT INDEX
Exhibit
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3.1 Restated Articles of Incorporation of Alpharel, Inc.
3.4 Amendment to Registrant's Articles of Incorporation
adopted May 24, 1988
3.5 Amendment to Registrant's Articles of Incorporation
adopted March 11, 1987
3.6 Amendment to Registrant's Articles of Incorporation
adopted May 28, 1996
10.14 Certificate of Determination of Series B Convertible
Preferred Stock adopted December 15, 1995
10.19 Certificate of Determination of Series C Convertible
Preferred Stock adopted April 5, 1996
11 Statement Re Computation of Net Income Per Share
12