1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended AUGUST 23, 1998
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
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
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 957-8500
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 October 1, 1998, there were 11,066,321 shares of the registrant's Common
Stock outstanding.
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ALPHA MICROSYSTEMS
TABLE OF CONTENTS
PAGE NUMBER
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PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at August 23, 1998 (Unaudited) and
February 22, 1998 3
Condensed Consolidated Statements of
Operations (Unaudited) for the Three
And Six Months Ended August 23, 1998 and
August 24, 1997 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Six Months Ended August 23, 1998
and August 24, 1997 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
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
(Unaudited)
(In thousands, except share data)
August 23, February 22,
1998 1998
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,612 $ 5,003
Accounts receivable, net of allowance for
doubtful accounts of $244 and $294 at
August 23, 1998 and February 22, 1998,
respectively 3,944 3,781
Inventories 534 580
Notes receivable 164 161
Prepaid expenses and other current assets 652 229
--------- --------
Total current assets 6,906 9,754
Property and equipment, net of accumulated
depreciation of $10,139 and $9,479 at
August 23, 1998 and February 22, 1998,
respectively 3,538 3,186
IT Service contracts, net 1,471 1,192
Software costs, net 1,152 1,067
Notes receivable 390 417
Other assets, net 211 172
--------- --------
$ 13,668 $ 15,788
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 1,000 $ 1,000
Accounts payable 1,774 1,699
Deferred revenue 1,892 1,888
Accrued compensation 436 386
Other current liabilities 357 356
Current portion of long-term debt 117 92
--------- --------
Total current liabilities 5,576 5,421
Long-term debt -- 60
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; 10,940,071 and
10,914,112 shares issued and
outstanding at August 23, 1998 and
February 22, 1998, respectively 31,037 31,011
Accumulated deficit (22,957) (20,761)
Foreign currency translation adjustment 12 57
--------- --------
Total shareholders' equity 8,092 10,307
--------- --------
$ 13,668 $ 15,788
========= ========
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
---------------------------- ---------------------------
August 23, August 24, August 23, August 24,
1998 1997 1998 1997
------------- ------------- ------------ --------------
Net sales:
IT Services $ 4,627 $ 3,172 $ 8,691 $ 6,221
Product 1,062 1.428 2,444 2,928
------------ ------------- ------------ --------------
Total net sales 5,689 4,600 11,135 9,149
------------ ------------- ------------ --------------
Cost of sales:
IT Services 4,019 2,237 7,674 4,456
Product 842 975 1,696 2,024
------------ ------------- ------------ --------------
Total cost of sales 4,861 3,212 9,370 6,480
------------ ------------- ------------ --------------
Gross Margin 828 1,388 1,765 2,669
Operating expenses:
Selling, general and administrative 1,709 1,849 3,310 3,998
Engineering, research and development 330 381 636 744
------------ ------------- ------------ --------------
Total operating expenses 2,039 2,230 3,946 4,742
------------ ------------- ------------ --------------
Loss from operations (1,211) (842) (2,181) (2,073)
Other (income) expense:
Interest income (18) (82) (44) (181)
Interest expense 26 3 52 4
Other expense, net 15 11 31 12
Foreign exchange (gain) loss (27) 24 (36) 17
------------ ------------- ------------ --------------
Total other (income) expense (4) (44) 3 (148)
------------ ------------- ------------ --------------
Loss before taxes (1,207) (798) (2,184) (1,925)
Provision for income taxes 1 -- 13 10
------------ ------------- ------------ --------------
Net loss $ (1,208) $ (798) $ (2,197) $ (1,935)
============ ============= ============ ==============
Basic and diluted net loss per share $ (0.11) $ (0.07) $ (0.20) $ (0.18)
============ ============= ============ ==============
Number of shares used in the computation
of basic and diluted per share
amounts 10,931 10,834 10,923 10,828
============ ============= ============ ==============
See accompanying notes
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
---------------------------
August 23, August 24,
1998 1997
---------- ----------
Cash flows from operating activities:
Net loss $ (2,197) $ (1,935)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 1,027 802
Provision for losses on accounts receivable -- 21
Provision for slow-moving inventory (11) 29
Other changes in operating assets and liabilities:
Accounts receivable (162) 39
Inventories 46 (61)
Notes receivable 24 33
Prepaid expenses and current assets (423) (54)
Accrued compensation 50 (57)
Accounts payable and accrued liabilities 78 (137)
Deferred revenue (141) (160)
Other, net (15) --
---------- ----------
Net cash used in operating activities (1,724) (1,480)
Cash flows from investing activities:
Purchase of short-term investments -- (6,417)
Proceeds from sale of short-term investments -- 7,918
Acquisition of IT service assets (460) (265)
Purchases of equipment (961) (492)
Capitalization of software costs (221) (245)
Purchase of intangible assets -- (5)
---------- ----------
Net cash provided by (used in) investing
activities (1,642) 494
Cash flows from financing activities:
Issuance of common stock 26 53
Principal repayments on debt (36) (7)
---------- ----------
Net cash provided by (used in) financing
activities (10) 46
Effect of exchange rate changes on cash (15) (3)
---------- ----------
Decrease in cash and cash equivalents (3,391) (943)
Cash and cash equivalents at beginning of period 5,003 1,768
---------- ----------
Cash and cash equivalents at end of period $ 1,612 $ 825
========== ==========
See accompanying notes.
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ALPHA MICROSYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
(as such term is defined in the private Securities Litigation Reform Act of 1995
(the "Reform Act")) and information relating to Alpha Microsystems (the
"Company" or "Alpha Micro") that are based on the beliefs of the management of
the Company as well as assumptions made by and information currently available
to the management of Alpha Micro, and the Company intends that such
forward-looking statements be subject to the safe harbors created by the Reform
Act. These forward looking statements include (i) revenues to be recognized
from contracts with Ingram Micro and ATS Money Systems; (ii) the ability of the
Company to generate positive gross margins from the acquired ATI operations
through reductions in operating expenses; (iii) the Company's ability to fund
its acquisition strategy; and (iv) the outcome of litigation will not have a
material adverse effect.
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. The forward-looking statements are dependent
on a number of factors, including (i) the economic and competitive environment
of the computer maintenance and IT support services industry in general, and in
the Company's specific market areas, (ii) its ability to identify acquisition
candidates, (iii) the Company's ability to successfully integrate acquired
operations with its existing operations, (iv) the Company's ability to develop,
produce, and market products and services that incorporate new technology, are
priced competitively, and achieve significant market acceptance, (v) whether the
Company's products and IT services will be commercially successful or
technically advanced due to the rapid improvements in computer technology and
resulting product obsolescence, (vi) changes in the cost of IT services (vii)
the Company's ability to deliver commercial quantities of new products in a
timely manner, (viii) the Company's ability to manage risks associated with its
operating strategies, (ix) changes in the Company's operating strategy and
capital expenditure plans and (x) the Company's ability to manage its expenses
commensurate to its revenues and other factors. In addition, the business and
operations of the Company are subject to substantial risks that increase the
uncertainty 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 (consisting only of normal recurring
adjustments) to fairly present the consolidated financial position of the
Company at August 23, 1998, and the consolidated results of its operations for
the three and six month periods ended August 23, 1998 and August 24, 1997 and
its cash flows for the six month periods ended August 23, 1998 and August 24,
1997. 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 22, 1998.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
The results of operations for the quarter ended August 23, 1998 are not
necessarily indicative of the results to be
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expected for the full fiscal year.
REVENUE RECOGNITION
The Company recognizes revenue on its product sales on shipment, and recognizes
revenue on its IT 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.
PER SHARE INFORMATION
Basic and diluted earnings per share is based on the weighted average common
shares outstanding during the periods presented and excludes any dilutive
effects of options and warrants. For the periods presented, the effect of
options and warrants has been excluded from diluted earnings per share as their
effect is anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
As of February 23, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. For the
first six months of 1999 and 1998, total comprehensive loss amounted to
$2,242,000 and $1,942,000, respectively.
The Company adopted SOP 97-2, which supersedes SOP 91-1 and provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. SOP 97-2 contains more restrictive revenue recognition
provisions for software arrangements containing multiple elements (i.e.
upgrades, enhancements, implementation and other services) similar to the
arrangements entered into by the Company. The adoption of this statement had no
impact on the Company's consolidated financial position, results of operations
or cash flows.
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2. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined on the
first-in, first-out method. Inventories, net of reserves for excess and obsolete
inventories of $96,000 and $98,000 at August 23, 1998 and February 22, 1998,
respectively, comprise the following:
(In thousands)
August 23, February 22,
1998 1998
--------- ------------
Raw materials $ 506 $ 568
Work in process 12 4
Finished goods 16 8
--------- --------
$ 534 $ 580
========= ========
3. CONTINGENCIES
The Company's current involvement with litigation is as follows:
In December 1995, Phoenix Marketing, Inc. d.b.a. 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. The Iowa
court has referred this case to arbitration, which arbitration is now scheduled
to begin in November 1998. 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.
4. SUBSEQUENT EVENTS
ACQUISITION OF DELTA COMPUTEC INC.
On September 1, 1998, the Company completed the acquisition of Delta CompuTec
Inc ("DCI"). DCI provides management and consulting services, as well as
services that include network design, installation and maintenance. The Merger
Agreement provided for the payment of $3.4 million in exchange for all of the
outstanding shares of Delta CompuTec Inc. (DCI) at the time of closing, and a
net payment of DCI's debt in the amount of $4.6 million. Under the agreement,
DCI became a wholly-owned subsidiary of Alpha Microsystems. The acquisition was
accounted for as a purchase and is reflected in the pro forma information below
based upon available information and upon certain assumptions that the Company
believes are reasonable in the circumstances. The Company's initial purchase
price allocation is preliminary and subject to change as the Company obtains
all the information necessary to complete the allocation process.
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SALE OF PREFERRED STOCK AND WARRANTS
The acquisition of DCI was financed with $1.0 million of cash proceeds provided
under a four year bank term-loan (see below) and $8.0 million under a Securities
Purchase Agreement (the "Purchase Agreement"). Under the Purchase Agreement, ING
Equity Partners II, L.P. ("ING") agreed, subject to certain conditions, to
invest up to $20 million in redeemable exchangeable preferred stock (the
"Redeemable Preferred Stock") of the Company. The Purchase Agreement provides
for the purchase of Redeemable Preferred Stock, Voting Preferred Stock, and
Warrants by ING in three tranches of $8 million, $7 million, and up to $5
million, respectively. The first tranche was completed concurrent with the
acquisition of DCI. Funding of the second and third tranches by ING are subject
to, among other things, approval by the Company's shareholders.
Dividends are payable on the Redeemable Preferred Stock purchased by ING at an
initial 9% cumulative annual dividend rate, which increases to 11% on July 1,
2000 and thereafter increases an additional 1% annually.
In connection with ING's initial $8 million investment in Redeemable Preferred
Stock, ING was granted warrants (the "Initial Warrants") to purchase 2,181,448
shares for an initial price $1.50 per share. In the event shareholder approval
is obtained and the closing of the second tranche of $7 million (the "Second
Closing") occurs, the price at which ING will be permitted to purchase such
stock will be increased to $2.50 per share, and ING will be granted warrants
(the "Second Closing Warrants") to purchase for $2.50 per share additional
shares of common stock which, together with the shares purchasable pursuant to
the Initial Warrants, will total 5,833,188 shares. The Second Closing must occur
on or before October 30, 1998. If the Company elects to close the third tranche
(the "Third Closing"), subject to certain conditions ING will invest up to an
additional $5 million, the proceeds from which must be used for certain
acquisitions. In such event, ING will be granted warrants (the "Third Closing
Warrants") to purchase for $2.50 per share additional shares of common stock
which, together with the shares purchasable pursuant to the Initial Warrants and
the Second Closing Warrants will total up to 8,753,626 shares.
The Third Closing must occur, if at all, on or before June 30, 1999. If the
Company elects to redeem the Redeemable Preferred Stock prior to June 30, 2000,
the shares purchasable pursuant to the Warrants will be reduced by approximately
600,000 shares, assuming all three tranches are closed.
There is no assurance that the second and third tranches of the ING transaction
will be consummated, accordingly no effect has been reflected in the pro forma
information below for the completion of these tranches.
ACQUISITION TERM LOAN
A portion of the DCI acquisition was financed with $1.0 million of cash proceeds
under a four year term loan provided by its bank. The term loan facility
provides for interest to be payable at the bank prime rate plus 2.5% (11% as of
the acquisition date) and is subject to certain financial covenants including
tangible net worth, debt to tangible net worth and quick ratio minimum
requirements.
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PRO FORMA FINANCIAL INFORMATION
The pro forma financial information reflects the acquisition of DCI and the
related purchase price financing through the sale of redeemable preferred stock
and term loan as of the beginning of the periods presented below. The pro forma
information includes the results of operations for the six month periods ended
July 31, 1998 and 1997, respectively.
Six month Six month
period ended period ended
August 23, 1998 August 24, 1997
--------------- ---------------
Revenue $18,226 $15,648
======= =======
Net loss $(1,696) $(1,415)
======= =======
Basic and diluted net loss
per common share $ (0.18) $ (0.17)
======= =======
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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 six month periods
ended August 23, 1998 and August 24, 1997:
RELATIONSHIP TO NET SALES
--------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------------------
AUGUST 23, AUGUST 24, AUGUST 23, AUGUST 24,
1998 1997 1998 1997
---------- ----------- ----------- ----------
Net sales:
IT Service 81.3 % 69.0 % 78.1 % 68.0 %
Product 18.7 31.0 21.9 32.0
---------- ----------- ----------- ----------
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 85.4 69.8 84.1 70.8
---------- ----------- ----------- ----------
Gross margin 14.6 30.2 15.9 29.2
Selling, general and administrative
expense 30.0 40.2 29.7 43.7
Engineering, research and
development expense 5.8 8.3 5.7 8.1
Interest (income) expense, net 0.1 (1.7) 0.1 (1.9)
Other (income) expense, net (0.2) 0.7 -- 0.3
---------- ----------- ----------- ----------
Loss before taxes (21.1) (17.3) (19.6) (21.0)
Net loss (21.1) % (17.3) % (19.7) % (21.1) %
========== =========== =========== ==========
GENERAL
During the most recent quarter, the Company focused on the completion of the
Delta CompuTec (DCI) acquisition and the related sale of redeemable preferred
stock and warrants, while continuing to pursue and invest in its long-term
organic IT service growth strategies. This organic growth is demonstrated by a
new IT service relationship with Ingram Micro and expansion of its relationship
with ATS Money Systems to include TJ Maxx; revenues from both of these
relationships are expected to be recognized beginning in September 1998. While
these relationships are expected to be accretive to future results of
operations, the second quarter results of operations were negatively impacted as
additional IT service costs of sales were incurred without significant related
revenues.
Additionally, the Company continued its AlphaCONNECT development and marketing
efforts. While revenues during the most recent quarter have not been
significant, the Company recently introduced the AC Knowledge Management Suite
and delivered a customized beta version of that product to Microsoft for use in
its internal executive intranet. Costs related to the Company's internet
business approximated $290,000 ($250,000 excluding capital expenditures) for the
quarter ended August 23, 1998 and $550,000 ($450,000 excluding capital
expenditures) for the six-month period then ended.
Also significant to the comparative results of operations is net interest
expense. During the three- and six-month periods ended August 23, 1998, the
Company incurred net interest expense of $8,000 in each of the periods, as
compared to net interest income during the three and six months ended August 24,
1997 of $79,000 and $177,000, respectively. Accordingly, the change in net
interest expense during the most recent three- and six-month periods
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increased net loss by $87,000 and $185,000, respectively. The Company had
negative earnings before interest, taxes, depreciation and amortization
("EBITDA") of $676,000, during the second quarter ended August 23, 1998,
compared to a negative EBITDA of $473,000 during the same period of the prior
fiscal year. The Company had negative EBITDA of $1,149,000, for the six-month
period ended August 23, 1998, compared to a negative EBITDA of $1,300,000 during
the same period of the prior fiscal year.
RESULTS OF OPERATIONS
Net Sales
Total net sales increased $1,986,000, or 21.7 percent, to $11,135,000 for the
six-month period ended August 23, 1998 from $9,149,000 for the six-month period
ended August 24, 1997. Net sales increased $1,089,000, or 23.7 percent, to
$5,689,000 for the three-month period ended August 23, 1998 from $4,600,000 for
the three-month period ended August 24, 1997. The increase in total net sales is
due to increases in IT service revenues, offset by declines in product sales.
IT Services Sales
IT service revenue increased $2,470,000, or 39.7 percent, to $8,691,000 during
the most recent six-month period over the respective prior fiscal period, and
increased $1,455,000 or 45.9 percent, to $4,627,000 during the most recent
three-month period over the respective prior fiscal period. The six- and
three-month increases include $1,547,000 and $791,000 attributable to ATI,
respectively, not included in the prior periods.
Product Sales
Total product revenues during the comparable six-month periods declined
$484,000, or 16.5 percent, to approximately $2,444,000 from approximately
$2,928,000. Total product revenues during the comparable three-month periods
declined $366,000, or 25.6 percent, to approximately $1,062,000 from
approximately $1,428,000. While both domestic and European product sales
declined, a majority of the decline was due to the loss of sales to a large
European customer, which represented in the past a significant portion of the
Company's product revenues. No assurances can be made as to future product sales
levels whether domestic or international.
Gross Margin
Total gross margin for the Company for the first half of fiscal 1999 decreased
to 15.9 percent compared to 29.2 percent during the same period last year, and
for the most recent three months of fiscal 1999 decreased to 14.6 percent
compared to 30.2 percent during the same period last year. While product gross
margin did not change significantly, IT services gross margin declined to 11.7
percent for the six-month period ended August 23, 1998, from 28.4 percent during
the same period in the prior year and declined to 13.1 percent for the
three-month period ended August 23, 1998, from 29.5 percent during the same
period in the prior year. The principal factor contributing to the margin
decline during the periods include the negative gross margins from the acquired
ATI operations of approximately 13 percent during the six-month period. The
Company has reduced the operating expenses of the acquired ATI business in order
for the business to generate a positive gross margin in future periods against
projected revenues. Additionally, the gross margin was negatively impacted
during the six- and three-month periods due to increased depreciation related to
other IT service business acquisitions and increased operating costs related to
new IT service contracts, for which no significant service revenue was
recognized. Further, due to the continuing shift from proprietary to third-party
IT services, the Company does not expect gross margins to remain at historic
levels.
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Selling, general and administrative expenses decreased $688,000 to $3,310,000
for the six-month period ended August 23, 1998, compared to $3,998,000 for the
six-month period ended August 24, 1997, and decreased $140,000 to $1,709,000
from $1,849,000 for the comparable three-month periods. The decline in costs for
both of these periods is primarily due to reduced spending related to the
AlphaCONNECT internet technology. The second quarter of the current year
includes discretionary expenditures made in support of the Company's organic IT
service growth plan and the development of the Company's new website.
Research and development expenses (which include engineering support and
services) incurred for the six-month period ended August 23, 1998, decreased by
$108,000 to $636,000 from $744,000 during the same period in the prior fiscal
year. Research and development expenses as a percentage of product sales
increased to 26.0 percent for the six months just ended from 25.4 percent during
the comparable period in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended August 23, 1998, the Company's working capital
decreased $3,003,000 to $1,330,000 from $4,333,000 at February 22, 1998. This
decline includes anticipated working capital requirements as follows: $460,000
in direct acquisition costs; $221,000 of working capital for software
capitalized, including the further development of the Company's AlphaCONNECT
technology; $961,000 of working capital to acquire equipment, including the
further implementation of the Company's new integrated information system, and
equipment purchases to support new service capabilities such as AS-400, Sun
Microsystems and other products.
The Company believes that its current cash position, augmented by future
operating activities, and working capital available through its Imperial Bank
revolving credit facility, will provide sufficient resources to finance its
working capital requirements through the end of fiscal year 1999. Advances under
the bank facility are subject to availability based on eligible accounts
receivable and certain financial covenants, including tangible net worth, debt
to tangible net worth and quick ratio minimum requirements. In order to fund its
acquisition strategy, the Company expects that additional capital will be
necessary. Subject to shareholder approval on October 15, 1998, the Company has
entered into an agreement with ING Equity Partners II, L.P. to provide up to an
additional $12 million as an equity investment. The Company is also pursuing
additional financing from other sources to support its acquisition strategy,
although there can be no assurances that any financing will be available on
acceptable terms. The Company's future capital requirements depend on a variety
of factors, including, but not limited to, the rate of decline in the
traditional proprietary 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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See Exhibit Index.
(b) A Current Report on Form 8-K was filed by the Company on July 7, 1998
regarding a definitive agreement to acquire Delta CompuTec Inc.
A Current Report on Form 8-K was filed by the Company on August 10, 1998
regarding the execution of a Securities Purchase Agreement with ING
Equity Partners II, L.P.
A Current Report on Form 8-K was filed by the Company on August 13, 1998
announcing the establishment of the Record Date for the Annual Meeting
of Shareholders.
A Current Report on Form 8-K was filed by the Company on September 15,
1998 regarding the acquisition of Delta CompuTec Inc. and the funding of
an equity investment by ING Equity Partners II, L.P.
A Current Report on Form 8-K/A was filed by the Company on October 5,
1998 presenting the financial statements and pro forma financial
information applicable to the acquisition of Delta CompuTec Inc.
A Current Report on Form 8-K/A-2 was filed by the Company on October 6,
1998.
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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: October 7, 1998 By: /s/ Douglas J. Tullio
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President and
Chief Executive Officer
Date: October 7, 1998 By: /s/ Jeffrey J. Dunnigan
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Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Number Description of Documents
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10.68 Promissory Note by and between Registrant and Imperial Bank dated
September 11, 1998
27. Financial Data Schedule
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