1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended NOVEMBER 24, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from - to -
----------- -----------
Commission File Number 0-10558
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ALPHA MICROSYSTEMS
------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3108178
- - ---------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2722 S. FAIRVIEW STREET, SANTA ANA, CA 92704
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(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 957-8500
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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
--- ---
As of January 3, 1997, there were 10,762,192 shares of the registrant's Common
Stock outstanding.
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ALPHA MICROSYSTEMS
INDEX
Page
Number
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PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at November 24, 1996 (Unaudited) and
February 25, 1996 3
Condensed Consolidated Statements of
Operations (Unaudited) for the Three
and Nine Months Ended November 24, 1996 and
November 26, 1995 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended November 24,
1996 and November 26, 1995 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II-- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
November 24, February 25,
1996 1996
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,688 $ 505
Accounts receivable, net of
allowance for doubtful
accounts of $195 and $927 at
November 24, 1996
and February 25, 1996,
respectively 3,263 5,241
Inventories 444 943
Notes receivable 247 159
Prepaid expenses and other current assets 583 351
-------- -----------
Total current assets 13,225 7,199
-------- -----------
Property and equipment at cost 16,289 16,710
Less accumulated depreciation and
amortization 12,932 12,435
-------- -----------
Net property and equipment 3,357 4,275
Service contracts, net 420 793
Software costs, net 802 535
Goodwill, net 15 170
Other assets, net 56 89
-------- -----------
$ 17,875 $ 13,061
======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ -- $ 500
Accounts payable 1,114 1,694
Deferred revenue 1,661 2,678
Other accrued liabilities 428 837
Accrued salaries and wages 126 476
Current portion of long-term debt 161 192
-------- -----------
Total current liabilities 3,490 6,377
Long-term debt 89 201
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000
shares authorized; none issued -- --
Common stock, no par value; 20,000,000 shares
authorized; 10,752,192 and 6,595,453 shares
issued and outstanding at November 24, 1996
and February 25, 1996, respectively 30,813 21,242
Accumulated deficit (16,579) (14,694)
Unamortized restricted stock plan expense (13) (18)
Foreign currency translation adjustment 75 (47)
-------- -----------
Total shareholders' equity 14,296 6,483
-------- -----------
$ 17,875 $ 13,061
======== ===========
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
November 24, November 26, November 24, November 26,
1996 1995 1996 1995
------------ ------------ ------------ ------------
Net sales:
Product $ 2,007 $ 3,666 $ 6,940 $ 11,490
Service 3,434 4,602 11,725 13,928
-------- ------- -------- --------
Total net sales 5,441 8,268 18,665 25,418
-------- ------- -------- --------
Cost of sales:
Product 1,110 2,401 3,716 6,962
Service 2,779 3,289 8,955 9,448
-------- ------- -------- --------
Total cost of sales 3,889 5,690 12,671 16,410
-------- ------- -------- --------
Gross Margin 1,552 2,578 5,994 9,008
Selling, general and administrative expense 2,189 2,716 6,730 8,277
Research and development expense 443 489 1,511 1,559
-------- ------- -------- --------
Total operating expenses 2,632 3,205 8,241 9,836
-------- ------- -------- --------
Loss from operations (1,080) (627) (2,247) (828)
Interest income (95) (22) (163) (72)
Interest expense 3 5 29 26
Other (income) expense, net (123) 4 (230) (221)
Foreign exchange (gain) loss 2 (17) (24) (57)
-------- ------- -------- --------
Total other income (213) (30) (388) (324)
-------- ------- -------- --------
Loss before taxes (867) (597) (1,859) (504)
Provision for income taxes 23 -- 28 --
-------- ------- -------- --------
Net Loss $ (890) $ (597) $ (1,887) $ (504)
======== ======= ======== ========
Net loss per share $ (0.08) $ (0.09) $ (0.19) $ (0.08)
======== ======= ======== ========
Number of shares used in the
computation of per share amounts 10,804 6,565 9,929 6,561
======== ======= ======== ========
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
-----------------------------
November 24, November 26,
1996 1995
------------ ------------
Cash flow from operating activities:
Net loss $(1,887) $ (504)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Gain (loss) on sale of fixed assets 1 (211)
Depreciation and amortization 1,689 1,612
Provision for losses on accounts receivable 62 (25)
Provision for inventories (44) 143
Other changes in operating assets and liabilities:
Accounts receivable 182 (802)
Inventories (147) 541
Prepaid expenses and current assets (367) (160)
Accounts payable and other
accrued liabilities 124 434
Accrued salaries and wages (240) (694)
Deferred revenue (515) (494)
Other, net (375) 46
------- -------
Net cash used in operating activities (1,517) (114)
------- -------
Cash flow from investing activities:
Proceeds from sale of fixed assets 10 280
Sale of subsidiary 1,489 --
Acquisition of businesses -- (80)
Acquisition of service assets -- (96)
Purchases of equipment (382) (1,552)
Capitalization of software costs (379) (745)
Other, net -- 3
------- -------
Net cash provided by (used in) investing activities 738 (2,190)
------- -------
Cash flows from financing activities:
Proceeds from borrowings -- 500
Issuance of common stock 9,486 19
Stock options exercised 90 --
Principal debt repayments (608) (343)
------- -------
Net cash provided by financing activities 8,968 176
------- -------
Effect of exchange rate changes on cash (6) (6)
------- -------
Increase (decrease) in cash and cash equivalents 8,183 (2,134)
Cash and cash equivalents at beginning of period 505 3,289
------- -------
Cash and cash equivalents at end of period $ 8,688 $ 1,155
======= =======
See accompanying notes.
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ALPHA MICROSYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTORY NOTE
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. These forward-looking statements include (i) the
ability of the Company to continue to meet its financial obligations and the
continued availability of financing, (ii) the market acceptance of the Company's
hardware and software products and services, including the recently announced
AlphaCONNECT (TM) family of products, (iii) the continued development of the
Company's technical, manufacturing, sales, marketing and management
capabilities, and (iv) anticipated competition.
Assumptions relating to the foregoing involve judgments with respect to,
among other things, future economic, competitive and market conditions, all of
which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. In addition, the business and operations of
the Company are subject to substantial risks which increase the uncertainty
inherent in the forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company, or any other person, that the objectives or plans of the Company will
be achieved.
1. INTERIM ACCOUNTING POLICY
In the opinion of management of Alpha Microsystems (the "Company" or
"Alpha Micro"), the accompanying unaudited condensed consolidated financial
statements contain all adjustments necessary to fairly present the consolidated
financial position of the Company at November 24, 1996, the consolidated results
of its operations for the three and nine month periods ended November 24, 1996
and November 26, 1995 and its cash flows for the nine month periods ended
November 24, 1996 and November 26, 1995. These condensed consolidated financial
statements do not include all disclosures normally presented annually under
generally accepted accounting principles and, therefore, they should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
February 25, 1996.
The results of operations for the nine month period ended November 24,
1996, are not necessarily indicative of the results to be expected for the full
fiscal year.
REVENUE RECOGNITION
The Company recognizes revenue on its hardware and software sales on
delivery, and recognizes revenue on its service sales and post contract customer
support on a straight line basis over the contract period. When significant
obligations remain after a software product has been delivered, revenue is not
recognized until obligations have been completed or are no longer significant.
The costs of any insignificant obligations are accrued when the related revenue
is recognized. Revenue is recognized only when collection of the resulting
receivable is probable.
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PER SHARE INFORMATION
Per share information is based upon the weighted average common shares
outstanding during the periods ended November 24, 1996 and November 26, 1995.
TRANSLATION OF FOREIGN CURRENCIES
The Company's foreign entities use the local currency as the functional
currency. The Company translates all foreign entity assets and liabilities at
quarter-end exchange rates, all income and expense accounts at average rates,
and records adjustments resulting from translation in a separate component of
shareholders' equity.
2. SALE OF SUBSIDIARY
On August 19, 1996, the Company sold its UK subsidiary, Alpha Microsystems
Great Britain ("AMGB"), to Sanderson Electronics PLC ("Sanderson"), for 907,792
ordinary shares of Sanderson. In conjunction with this sale, the Company and
Sanderson signed a three year hardware distribution agreement allowing Sanderson
to sell Alpha Microsystems hardware products in the United Kingdom and Eire. In
addition, as part of the sale agreement, the Company has agreed to negotiate in
good faith toward developing a strategic alliance with Sanderson, whereby
Sanderson would distribute and market the Company's AlphaCONNECT family of
products in the United Kingdom and potentially in Southeast Asia. The Company
recognized a gain of approximately $37,000 from this sale. On September 17,
1996, the Company sold the Sanderson shares for approximately (pound)1,350,000
or $2,100,000.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market. Inventories net of reserves for excess and obsolete inventories of
$83,000 and $1,726,000 at November 24, 1996 and February 25, 1996, respectively,
are comprised of the following:
(IN THOUSANDS)
------------------------------------
NOVEMBER 24, 1996 FEBRUARY 25, 1996
(UNAUDITED) (AUDITED)
----------------- -----------------
Raw materials $ 276 $ 116
Work in process 14 --
Finished goods 154 827
-------- --------
$ 444 $ 943
======== ========
The reserve for excess and obsolete inventory of the Company's UK subsidiary
AMGB at February 25, 1996 was $1,580,000.
4. DEBT
On October 11, 1996, the Company and its bank signed an amendment to the
Company's existing loan agreement extending its credit line to October 10, 1997.
Pursuant to the terms of the
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amendment, the Company has a revolving line of credit up to a maximum limit of
$2,000,000, based upon 50 percent of the eligible accounts receivable and under
which letters of credit and the foreign exchange portion shall not exceed in the
aggregate at any one time $500,000. Borrowings under the line of credit bear
interest at prime plus two and one half percent (2.5%). In addition, the Company
agreed to issue 25,000 warrants to the lender. The price of the new warrants is
at the market value of the Company's common stock as of the date of the loan.
The line of credit is secured by substantially all of the Company's
assets. Its availability is subject to financial covenants requiring that the
Company maintain a quick ratio not less than 3.0 to 1, a tangible net worth not
less than $12,750,000 and a ratio of total liabilities to tangible net worth no
more than 0.50 to 1. The covenants also require the Company's net losses for the
current fiscal year ending February 23, 1997 not exceed $2,200,000, and
thereafter the Company cannot incur any losses (after taxes) in any fiscal
quarter, other than for a loss (after taxes) in a single fiscal quarter during
any fiscal year if the amount of such loss does not exceed $250,000. At November
24, 1996, the Company had no outstanding bank borrowings.
5. NOTE RECEIVABLE
In April 1995, as part of the consideration for selling the Belgian
subsidiary to a member of local management, the Company received a note for
15,000,000 Belgian francs, payable over a two year period from the date of the
note, of which 7,000,000 Belgian francs has been paid.
6. COMMON STOCK
On May 14, 1996, the Company filed a Registration Statement to register
4,442,069 shares of Common Stock issuable upon the exercise of warrants issued
by the Company, of which 4,082,069 were issued in connection with its November
29, 1993 Shareholder Rights Offering and subsequent Public Offering, and the
remainder were issued in consideration of services rendered to the Company. The
Company's Redeemable Public Warrants were traded on the Nasdaq National Market
under the symbol "ALMIW."
The Company redeemed its Redeemable Public Warrants on June 17, 1996,
pursuant to its notice of redemption issued on May 14, 1996. Prior to the
redemption date, approximately 3,411,000 or 98.5 percent of the outstanding
Redeemable Public Warrants were exercised, resulting in gross proceeds to the
Company of approximately $8,528,000. Certain other warrants were also exercised
during the period, resulting in the additional issuance of 692,969 shares, and
approximately $1,574,000 of additional gross proceeds. Total shares issued from
the exercise of all warrants were 4,103,969 (including 50,000 shares redeemed by
the Company's bank), resulting in total gross proceeds of approximately
$10,102,000. The proceeds from the exercise of all warrants, net of underwriting
expense of $300,000, legal expenses of $119,000, and other expenses of $197,000
were $9,486,000.
The Redeemable Public Warrants traded on Nasdaq National Market under the
symbol "ALMIW" ceased trading at the close of the market on June 17, 1996.
7. INCOME TAXES
The Company is currently evaluating the effect from the redemption of
warrants on the change in the Company's ownership and therefore on the potential
utilization of the federal and state net operating loss carryforwards. Section
382 of the Internal Revenue Code restricts the utilization of net loss
carryforwards if the ownership change is greater than 50 percent during any
three year
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period. The Company had federal net operating loss carryforwards totaling
approximately $17,500,000 at February 25, 1996, which begin to expire in fiscal
year 2007.
8. GOODWILL AND INTANGIBLES
Management routinely evaluates events or conditions that might diminish
the fair market value of intangible assets. Intangible assets include acquired
service contracts, capitalized computer software costs and goodwill. The book
value of goodwill and acquired service contracts is associated with the
acquisition of companies or assets. Software cost is the accumulation of
capitalized development costs or the assigned value of software associated with
an acquisition.
9. CONTINGENCIES
LITIGATION
The Company's current involvement with litigation is as follows:
Carlos Garralda and Andre Warnier, employees of the Company's former
subsidiary, Alpha Microsystems Belgium, S.A. ("AMB"), filed an action in
November 1995 against AMB and the Company in Orange County Superior Court
alleging that AMB is in breach of its obligations under Belgium employment law
to pay salaries for a notice period of up to two years following termination of
employment. The Plaintiffs allege, among other things, that the Company has
alter ego liability for these obligations. The plaintiffs are claiming
compensatory damages in excess of $780,000 and unspecified punitive damages. The
Court has continued its temporary stay of this lawsuit in its entirety until
January 16, 1997 in order to await the outcome of virtually identical litigation
instituted by the plaintiffs against AMB in Belgium. A settlement of the case
between AMB and Andre Warnier in the Belgium action was effected on October 18,
1996. Five hundred thousand ($500,000) dollars of the compensatory damages in
the Orange County lawsuit were related to the claims by Mr. Warnier. This
settlement should result in a dismissial of the Warnier portion of the Orange
County lawsuit. Although no assurances as to the outcome of the litigation can
be given, management believes that its defenses to the litigation are
meritorious.
In December 1995, Phoenix Marketing, Inc. dba Electronic Business Systems,
Inc., in response to the Company's collection efforts for a past due account,
filed an amended cross-complaint alleging damages of $3,200,000 for defective
merchandise, loss of business reputation and loss of future business. In an
order dated November 14, 1996, the court referred this case to arbitration,
which arbitration must be completed on or before October 31, 1997. Although no
assurances as to the outcome of the litigation can be given, management believes
that the plaintiff's claims are without merit.
The Company is currently involved in certain other claims and litigation.
The Company does not consider any of these other claims or litigation to be
material. Management has made provisions in the Company's financial statements
for the settlement of lawsuits for which unfavorable outcomes are both probable
and estimable. In the opinion of management, results of known existing claims
and litigation will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
The following table was derived from the Condensed Consolidated Statements
of Operations as a percentage of net sales for the three and nine month periods
ended November 24, 1996, and November 26, 1995:
RELATIONSHIP TO NET SALES
-----------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
NOVEMBER 24, NOVEMBER 26, NOVEMBER 24, NOVEMBER 26,
1996 1995 1996 1995
------------ ------------ ------------ ------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 71.5 68.8 67.9 64.6
-------- -------- -------- --------
Gross margin 28.5 31.2 32.1 35.4
Selling general and 40.2 32.8 36.1 32.6
administrative expense
Research and development expense 8.1 5.9 8.1 6.1
Interest income (1.7) (0.3) (0.9) (0.3)
Interest expense 0.1 0.1 0.1 0.1
Other (income) expense, net (2.3) 0.1 (1.2) (0.9)
Foreign exchange (gain) loss 0.1 (0.2) (0.1) (0.2)
-------- -------- -------- --------
Loss from operations before taxes (16.0) (7.2) (10.0) (2.0)
Provision for income taxes 0.4 -- 0.1 --
-------- -------- -------- --------
Net loss (16.4)% (7.2)% (10.1)% (2.0)%
======== ======== ======== ========
GENERAL
On April 3, 1996, the Company released its new Internet and Intranet
software, AlphaCONNECT. AlphaCONNECT is a software and communications tool for
selectively mining and harvesting data from Internet sites and legacy
applications running on corporate Intranets. Harvested data can be used to
create dynamic self-updating Web pages, or converted and delivered to popular
applications that run under Microsoft Windows, Windows 95 or Windows NT.
AlphaCONNECT Messenger, an add-on E-Mail software system for use with
AlphaCONNECT, was introduced on May 15, 1996. On October 1, 1996, the Company
announced a new AlphaCONNECT based product called "StockVUE", which provides
automated stock quote, stock price, and trading volume line and alerts,
retrieval of company news and SEC filings. On November 13, 1996, the Company
announced the limited beta availability of its new Internet software
application, code-named AlphaCONNECT Advantage, an intelligent agent for online
research and analysis.
The Company has significantly expanded the level of its sales and
marketing resources for Internet and Intranet products. While it is unlikely
that revenues for these products will increase sufficiently in the short-term to
offset the additional investment, management believes that these products will
enhance the long-term outlook of the Company.
The Company had a net loss of $1,887,000 or $0.19 per share, during the
nine months ended November 24, 1996, compared to a net loss of $504,000, or
$0.08 per share, during the same period in the prior fiscal year. The results of
the two periods differed primarily due to investment in the Internet/Intranet
family of products, the absence of the UK subsidiary in comparison to the same
period in the previous year, increased losses incurred at AlphaHealthCare, and
decline in the Company's revenue from traditional products.
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RESULTS OF OPERATIONS
Nine Months Ended November 24, 1996 and November 26, 1995
Net sales decreased $6,753,000, or 26.6%, to $18,665,000 for the nine
month period ended November 24, 1996, from $25,418,000 for the nine month period
ended November 26, 1995.
Total product revenues declined $4,550,000, or 39.6% to $6,940,000 from
approximately $11,490,000 for the comparable period. Approximately 50% of the
decline in product revenues was attributable to the European market (including
$1,604,000 attributable to the absence of the UK subsidiary sold on August 19,
1996). The remaining decline was due to a decrease in the Company's domestic
traditional product revenues and the product revenues at its AlphaHealthCare
subsidiary.
Total service revenue for the nine months ended November 24, 1996,
declined $2,203,000, or 15.8%, to $11,725,000 from $13,928,000 for the same
period in the prior year. Approximately 64% of this decline was due to the
European market (including $836,000 attributable to the absence of the Company's
UK subsidiary). The remaining decline was due to a decrease in the Company's
traditional Alpha Micro Operating System ("AMOS") based service contracts, and a
decrease in support revenues from the Company's AlphaHealthCare subsidiary. The
Company has expanded its base of support services, including field maintenance
and networking, and intends to invest additional resources in this area. In
addition, the Company is expanding its domestic service sales and marketing
efforts to capitalize on its current base and further expand revenues from the
open systems generation market.
Total gross margin for the Company for the nine months ended November 24,
1996, decreased to 32.1% compared to 35.4% during the same period last year.
Product gross margin for the first nine months of fiscal 1997 increased to 46.5%
compared to 39.4% during the same period in the prior year. The increase in
product gross margin was primarily due to a relatively greater proportion of
higher margin AMOS products sold both in the domestic and European markets. In
addition, the move to a smaller corporate headquarters where most of the
manufacturing is housed, a reduction in headcount in the manufacturing area, and
a continued effort to control costs, also contributed to the improvement in
product gross margin.
Service business gross margin declined to 23.6% during the nine months
ended November 24, 1996 from 32.2% during the same period in the prior year. The
decline in gross margin was primarily due to lower service margins due to the
absence of the Company's UK subsidiary, reductions in cost of goods sold,
primarily labor costs, not fully offsetting the revenue decline in the domestic
service operations, and reduced support margins at the Company's AlphaHealthCare
subsidiary associated with lower revenues and severance expense. The domestic
service organization reduced selling, general and administrative expenses which
assisted in partially offsetting the overall impact of the service revenue
decline. To improve revenues, the service organization is focusing on obtaining
new contracts for its networking support services, supporting vertical markets
with services, and increasing third-party services. Revenues from these new
areas of focus generally produce lower margins than the Company's traditional
service business. The Company continues to evaluate potential service
acquisitions which meet its financial and marketing criteria.
Selling, general and administrative expenses decreased $1,547,000 to
$6,730,000 for the nine months ended November 24, 1996, from $8,277,000 for the
comparable period in the prior fiscal year. The absence of the UK subsidiary
during the last four months of the current period resulted in a decrease of
approximately $997,000 in selling, general and administrative expenses.
Additionally, a reduction in headcount and a more vigilant approach to expense
control in areas relating to the
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traditional business resulted in a reduction of $1,322,000 in selling, general
and administrative expenses. This was partially offset by increases in the
Company's investment in resources for the Internet and Intranet markets.
Research and development expenses (which include engineering support and
services) incurred for the nine months ended November 24, 1996 did not
materially change from the same period in the prior fiscal year. Additionally,
approximately $379,000 of new software development expenses have been
capitalized in the first nine months of the current fiscal year, as compared to
$745,000 in the comparable period of the prior fiscal year. Research and
development expenses as a percentage of product sales increased to 21.8 percent
in the nine months just ended from 13.6 percent during the comparable period in
the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended November 24, 1996, the Company's working
capital increased by $8,913,000 to $9,735,000 from $822,000 at February 25,
1996. Net cash and cash equivalents increased during the nine month period ended
November 24, 1996 by $8,183,000 to $8,688,000, primarily due to the redemption
of warrants. Net cash used in operating activities during the first nine months
of the current fiscal year was $1,517,000 compared to $114,000 during the same
period in the prior fiscal year primarily due to the Company's increased
investment in Internet and Intranet products.
On October 11, 1996, the Company and its bank signed an amendment to the
Company's existing loan agreement extending its credit line to October 10, 1997.
Pursuant to the terms of the amendment, the Company has a revolving line of
credit up to a maximum limit of $2,000,000, based upon 50 percent of the
eligible accounts receivable and under which letters of credit and the foreign
exchange portion shall not exceed in the aggregate at any one time $500,000.
Borrowings under the line of credit bear interest at prime plus two and one half
percent (2.5%). In addition, the Company agreed to issue 25,000 warrants to the
lender. The price of the new warrants is at the market value of the Company's
common stock as of the date of the loan.
The line of credit is secured by substantially all of the Company's
assets. Its availability is subject to financial covenants requiring that the
Company maintain a quick ratio not less than 3.0 to 1, a tangible net worth not
less than $12,750,000 and a ratio of total liabilities to tangible net worth no
more than 0.50 to 1. The covenants also require the Company's net losses for the
current fiscal year ending February 23, 1997 not exceed $2,200,000, and
thereafter the Company cannot incur any losses (after taxes) in any fiscal
quarter, other than for a loss (after taxes) in a single fiscal quarter during
any fiscal year if the amount of such loss does not exceed $250,000. At November
24, 1996, the Company had no outstanding bank borrowings.
The Company redeemed its Redeemable Public Warrants on June 17, 1996,
pursuant to its notice of redemption issued on May 14, 1996. Prior to the
redemption date, approximately 3,411,000 or 98.5 percent of the outstanding
Redeemable Public Warrants were exercised, resulting in gross proceeds to the
Company of approximately $8,528,000. Certain other warrants were also exercised
during the period, resulting in the additional issuance of approximately 692,969
shares and approximately $1,574,000 of additional gross proceeds. Total shares
issued from the exercise of all warrants were 4,103,969 (including 50,000 shares
redeemed by the Company's bank), resulting in total gross proceeds of
approximately $10,102,000. The proceeds from the exercise of all warrants, net
of underwriting expense of $300,000, legal expenses of $119,000, and other
expenses of $197,000 were $9,486,000.
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The Company believes that it has sufficient working capital to finance its
requirements for the next twelve months. The Company's capital requirements
depend on a variety of factors, including, but not limited to, the rate of
decline in the traditional business; the success, timing, and amount of
investment required to penetrate the Internet/Intranet markets; service revenue
growth or decline; and potential acquisitions.
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PART II. OTHER INFORMATION
6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) No Form 8K was filed during the quarter ended November 24,
1996.
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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.
ALPHA MICROSYSTEMS
(Registrant)
Date: January 7, 1997 By:/s/ Douglas J. Tullio
----------------------
President and
Chief Executive Officer
Date: January 7, 1997 By:/s/ James A. Sorensen
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Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Number Description of Documents
- - ------ ------------------------
10.73 Amendment to Loan Agreement by and between Alpha Microsystems and
Silicon Valley Bank dated October 11, 1996
10.74 Warrant to Purchase Stock issued to Silicon Valley Bank on November
22, 1996
10.75 Registration Rights Agreement by and between Alpha Microsystems and
Silicon Valley Bank dated November 22, 1996
10.76 Antidilution Agreement by and between Alpha Microsystems and
Silicon Valley Bank dated November 22, 1996
10.77 Employment Agreement by and between Alpha Microsystems and James A.
Sorensen dated November 7, 1996
27. Financial Data Schedule
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