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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 March 31, 1999
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
incorporation or organization) Identification No.)
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 May 4, 1999, there were 11,593,882 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 March 31,
1999 (Unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months Ended March 31,
1999 and March 22, 1998 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Three Months Ended March 31,
1999 and March 22, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II-- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, 1999 December 31,
(Unaudited) 1998
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,152 $ 4,930
Restricted cash 384 384
Accounts receivable, net of allowance for doubtful accounts
of $668 at March 31, 1999 and $700 at December 31, 1998 7,094 6,473
Prepaid expenses and other current assets 1,288 1,229
-------- --------
Total current assets 11,918 13,016
Property and equipment, net of accumulated depreciation of
of $9,539 at March 31, 1999 and $9,281 at December 31, 1998 4,030 3,776
Intangibles, net 9,266 9,097
Other assets 413 542
-------- --------
$ 25,627 $ 26,431
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 250 $ 250
Accounts payable 3,485 3,686
Accrued compensation 1,393 1,530
Deferred revenue 3,356 3,142
Other accrued liabilities 981 1,480
-------- --------
Total current liabilities 9,465 10,088
Long-term debt 674 741
Other long-term liabilities 113 105
Commitments and contingencies
Redeemable preferred stock, no par value; 2,501 and 15,001 issued and
outstanding at March 31, 1999 and December 31, 1998, respectively,
liquidation value $2,556 2,149 12,824
Shareholders' equity:
Redeemable preferred stock, no par value; 5,000,000 shares
authorized; 12,500 issued and outstanding at March 31, 1999,
liquidation value $12,781 10,694 --
Common stock, no par value; 40,000,000 shares authorized;
11,558,882 and 11,193,952 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively 32,684 31,632
Warrants 1,764 1,764
Accumulated deficit (31,939) (30,739)
Accumulated other comprehensive income 23 16
-------- --------
Total shareholders' equity 13,226 2,673
-------- --------
$ 25,627 $ 26,431
======== ========
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
--------------------------
March 31, March 22,
1999 1998
--------- ---------
Net sales:
IT Services $ 8,391 $ 3,906
Product 1,214 1,229
-------- --------
Total net sales 9,605 5,135
-------- --------
Cost of sales:
IT Services 6,356 3,303
Product 888 942
-------- --------
Total cost of sales 7,244 4,245
-------- --------
Gross margin 2,361 890
Operating expenses:
Selling, general and administrative 2,861 1,733
Engineering, research and development 321 299
-------- --------
Total operating expenses 3,182 2,032
-------- --------
Loss from operations (821) (1,142)
Other (income) expense:
Interest income (40) (54)
Interest expense 27 9
Other expense (income), net 11 46
-------- --------
Total other (income) expense (2) 1
-------- --------
Loss before taxes (819) (1,143)
Income tax expense (benefit) -- (32)
-------- --------
Net loss $ (819) $ (1,111)
======== ========
Net loss attributable to common shares $ (1,201) $ (1,111)
======== ========
Basic and diluted net loss per share $ (0.10) $ (0.10)
======== ========
Number of shares used in computing
basic and diluted per share amounts 11,549 10,909
======== ========
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
-------------------------
March 31, March 22,
1999 1998
--------- ---------
Cash flows from operating activities:
Net loss $ (819) $(1,111)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 420 487
Provision for losses on accounts receivable (23) 167
Other changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (598) (389)
Prepaid expenses and other current assets (19) (139)
Accounts payable and accrued liabilities (692) 369
Accrued compensation (137) 186
Deferred revenue 214 45
Other, net 31 130
------- -------
Net cash used in operating activities (1,623) (255)
------- -------
Cash flows from investing activities:
Acquisition of IT Services assets (196) (1,511)
Purchases of equipment (507) (366)
Capitalization of software development costs (64) (235)
Proceeds from sale of short-term investments -- 3,829
Other, net (12) 24
------- -------
Net cash (used in) provided by investing activities (779) 1,741
------- -------
Cash flows from financing activities:
Issuance of common stock 1,052 39
Line of credit, net -- 1,000
Principal repayments on debt (108) (43)
Payment of preferred stock dividend (306) --
Other, net (16) --
------- -------
Net cash provided by financing activities 622 996
Effect of exchange rate changes on cash and cash equivalents 2 (2)
------- -------
(Decrease) increase in cash and cash equivalents (1,778) 2,480
Cash and cash equivalents at beginning of period 4,930 1,157
------- -------
Cash and cash equivalents at end of period $ 3,152 $ 3,637
======= =======
See accompanying notes.
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ALPHA MICROSYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 1999, and the consolidated results of its
operations for the three-month periods ended March 31, 1999 and March 22, 1998,
and its cash flows for the three-month periods ended March 31, 1999 and March
22, 1998. 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
Transition Report on Form 10-K for the ten months ended December 31, 1998.
Certain prior period amounts have been reclassified to conform to the current
period presentation. The results of operations for the period ended March 31,
1999 are not necessarily indicative of the results to be expected for any future
period.
FISCAL YEAR
Historically, the Company's fiscal year ended in the month of February. On
December 17, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year to a calendar year-end. The periods ended March 31, 1999
and March 22, 1998 include the same number of weeks.
REVENUE RECOGNITION
The Company recognizes revenue on its IT Services sales and post contract
customer support on a straight-line basis over the contract period and
recognizes revenue on its product sales on shipment. When significant
obligations remain after a 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 net loss per share is based on the weighted average common
shares outstanding during the periods presented and excludes the anti-dilutive
effects of options and warrants. The net loss has been adjusted to reflect
dividends earned and accretion related to redeemable preferred shares
outstanding, as shown below:
Three Months Ended
---------------------------
March 31, March 22,
1999 1998
--------- ---------
Net loss $ (819) $(1,111)
Accretion on redeemable preferred stock (44) --
Dividends on redeemable preferred stock (338) --
------- --------
Net loss to common shareholders $(1,201) $(1,111)
======= =======
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COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130") requires foreign currency translation adjustments to be
included in other comprehensive income. For the three months ended March 31,
1999 and March 22, 1998, total comprehensive loss amounted to $812,000 and
$1,109,000, respectively.
2. 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
Agreement and Plan of Merger ("Merger Agreement") provided for the payment of
$3.4 million in exchange for all of the outstanding shares of DCI at the time of
closing, and a net payment of DCI's then outstanding debt in the amount of $4.6
million. Under the Merger Agreement, DCI became a wholly-owned subsidiary of
Alpha Micro. 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.
The pro forma financial information below reflects the acquisition of DCI and
the related purchase price financing through the sale of redeemable preferred
stock, warrants and term loan borrowings as if the acquisition occurred as of
December 22, 1997.
Three months ended
-----------------------------
March 31, March 22,
1999 1998
--------- ---------
Revenue $ 9,605 $ 8,542
Net loss (819) (685)
Basic and diluted net loss per common share $ (0.10) $ (0.08)
3. DIVESTITURE OF TELEPHONE INSTALLATION BUSINESS
Effective April 1, 1999, the Company sold its telephone installation business
for $650,000. As a result of this sale, the results of operations during the
second quarter ending June 30, 1999 is expected to include a gain of
approximately $150,000 to $250,000. The results from operations during the
quarter ended March 31, 1999 includes a net loss of $172,000 or $0.01 per share
on $560,000 of revenue related to this business. The results from operations
during the quarter ended March 22, 1998, includes net loss of $93,000 or $0.01
per share on $640,000 of revenue related to this business.
4. REDEEMABLE PREFERRED STOCK
During February 1999, the Company restructured $12.5 million liquidation value
of its outstanding $15.0 million liquidation value redeemable preferred stock.
The restructured redeemable preferred stock carry the same terms as the
originally issued redeemable preferred stock, except that each share is
automatically converted at maturity into one share of a new class of
non-redeemable preferred stock with a 40% annual dividend rate. Accordingly, the
restructured redeemable preferred stock is reflected as a component of
shareholders' equity on the balance sheet as of March 31, 1999. The remaining
originally issued redeemable preferred stock, not presented as a component of
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shareholders' equity, is being accreted over seven years to its redemption value
of $2.5 million.
5. CONTINGENCIES
The Company is currently involved in certain claims and litigation. The Company
does not consider any of these 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.
6. INDUSTRY SEGMENT INFORMATION
The Company operates in two business segments: the servicing of computer
systems, networks and related products and the manufacture and sale of computer
systems, software and related products. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies except that certain expenses, such as interest,
amortization of certain intangibles, special charges and general corporate
expenses are not allocated to the segments. In addition, certain assets
including cash and cash equivalents, deferred taxes and certain intangible
assets are held at corporate. The effect of capitalizing software costs is
included in the product segment.
Selected financial information for the Company's reportable segments for the
three months ended March 31, 1999 and March 22, 1998 follows:
Corporate
(In thousands) IT Services Product Expenses Consolidated
----------- ------- ---------- ------------
THREE MONTHS ENDED MARCH 31, 1999
Revenues from external customers $ 8,391 $ 1,214 $ -- $ 9,605
Segment income (loss) 1 (221) (599) (819)
THREE MONTHS ENDED MARCH 22, 1998
Revenues from external customers $ 3,906 $ 1,229 $ -- $ 5,135
Segment income (loss) (14) (591) (506) (1,111)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 the Company 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 major distributors; (ii) the
Company's ability to fund its acquisition strategy; (iii) the estimated gain
from the sale of the telephone installation business; and (iv) the discussion of
the Company's efforts, and management's expectations, relating to Year 2000
compliance.
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 information technology ("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, that 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, (x) the Company's ability to
manage its expenses commensurate to its revenues, and (xi) the Company's ability
to achieve Year 2000 compliance and the level of incremental costs associated
therewith, that could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' ability to
modify proprietary software, and unanticipated problems identified in the
ongoing compliance review and (xii) 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.
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SUMMARY
The following table was derived from the Condensed Consolidated Statements of
Operations as a percentage of net sales for the three-month periods ended March
31, 1999 and March 22, 1998:
Relationship to Net Sales
---------------------------
Three Months Ended
---------------------------
March 31, March 22,
1999 1998
--------- ---------
Net sales:
IT Services 87.4% 76.1%
Product 12.6 23.9
------ ------
Total net sales 100.0 100.0
Cost of sales 75.4 82.7
------ ------
Gross margin 24.6 17.3
Selling, general and administrative expense 29.8 33.7
Engineering, research and development
expense 3.3 5.8
Interest (income) expense, net (0.1) (0.9)
Other (income) expense, net 0.1 0.9
------ ------
Loss before taxes (8.5) (22.2)
Provision for income taxes -- (0.6)
------ ------
Net loss (8.5)% (21.6)%
====== ======
FISCAL YEAR
Historically, the Company's fiscal year ended in the month of February. On
December 17, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year to a calendar year-end. The periods ended March 31, 1999
and March 22, 1998 include the same number of weeks.
GENERAL
During February 1999, the Company restructured $12.5 million liquidation value
of its outstanding $15.0 million liquidation value redeemable preferred stock.
As a result of this restructuring, total shareholders' equity was increased
$10.7 million. The restructured redeemable preferred stock carry the same terms
as the preferred stock originally issued except that each share is automatically
converted at maturity into one share of a new class of non-redeemable preferred
stock with a 40% annual dividend rate. Accordingly, the restructured redeemable
preferred stock is reflected as a component of shareholders' equity on the
accompanying March 31, 1999 balance sheet. The remaining originally issued
redeemable preferred stock, not presented as a component of shareholders'
equity, will be accreted over seven years to its redemption value of $2.5
million.
Effective April 1, 1999, the Company sold its telephone installation business
for $650,000. As a result of this sale, the results of operations during the
second quarter ending June 30, 1999 is expected to include a gain of
approximately $150,000 to $250,000. The results from operations during the
quarter ended March 31, 1999 includes a net loss of $172,000 or $0.01 per share
on $560,000 of revenue related to this business. The results from operations
during the quarter ended March 22, 1998 includes a net loss of $93,000 or $0.01
per share on $640,000 of revenue related to this business. The results from
operations during the quarter ended March 22, 1998, includes net loss of $93,000
or $0.01
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per share on $640,000 of revenue related to this business.
The Company had negative earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $415,000 (including a negative EBITDA of $167,000
from the telephone installation business), during the quarter ended March 31,
1999 compared to a negative EBITDA of $701,000 (including a negative EBITDA of
$64,000 from the telephone installation business) during the same period of the
prior year.
RESULTS OF OPERATIONS
Net Sales
Total net sales increased $4,470,000, or 87.0 percent, to $9,605,000 for the
three-month period ended March 31, 1999 from $5,135,000 for the three-month
period ended March 22, 1998. The increase in total net sales is due to increases
in IT Services revenues, primarily resulting from the acquisition of DCI.
IT Services Sales
IT Services revenue increased $4,485,000, or 114.8 percent, to $8,391,000 during
the most recent three-month period over the respective prior period. The
three-month revenue increase includes $3,999,000 from the DCI acquired
operations offset by a decrease of $150,000 attributable to non-core businesses.
The balance of the revenue increase during the three-month period of $636,000 is
attributable to organic growth.
Product Sales
Total product revenues during the comparable three-month periods declined
$15,000, or 1.2 percent, to approximately $1,214,000 from approximately
$1,229,000. This decline includes $86,000 of European product sales, offset by
an increase in domestic product sales of $71,000. 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 three months of 1999 increased
to 24.6 percent compared to 17.3 percent during the same period last year.
IT Services Gross Margin
IT Services gross margin increased to 24.3 percent for the three-month period
ended March 31, 1999 from 15.4 percent during the same period in the prior year.
The current quarter was positively effected by the increase in professional
on-site services revenues which have a significantly higher gross margin.
Off-setting this gross margin improvement were continuing increased direct
operating costs related to new IT Services contracts with major distributors,
for which the related services revenue has yet to achieve current capacity.
Further, a continuing shift from proprietary to third-party IT Services is
expected to continue to negatively impact gross margins in future periods.
Product Gross Margin
Product gross margin during the three-month period increased to 26.9% compared
to 23.4% for the comparable prior year period. The product gross margin increase
is also due to an increase in sales of the Company's proprietary AMOS products
combined with decreased operating expenses.
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Selling, General and Administrative
Selling, general and administrative expenses increased $1,128,000 to $2,861,000
for the three-month period ended March 31, 1999 compared to $1,733,000 for the
three-month period ended March 22, 1998. While total selling, general and
administrative expense decreased as a percentage of revenue, such expenses
increased due to additional general and administrative costs and goodwill
amortization associated with the DCI acquisition. The current quarter also
includes expenditures made in support of the Company's organic IT Services
growth plan and the development of the Company's new website.
Research and Development
Research and development expenses (which include engineering support and
services) incurred for the three-month period ended March 31, 1999 increased by
$22,000 to $321,000 from $299,000 during the same period in the prior year.
Research and development expenses as a percentage of product sales increased to
26.4 percent for the three months just ended from 24.3 percent during the
comparable period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999, the Company's working capital
decreased $475,000 from $2,928,000 at December 31, 1998 to $2,453,000. Net cash
generated from financing activities of $622,000 was offset by: $196,000 of cash
used for payments due for IT Services companies acquired in the prior year;
$64,000 of cash used for software capitalized, including the further development
of the Company's AlphaCONNECT technology; $507,000 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;
and the remaining decrease due primarily to cash used by operations.
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 next twelve months. 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. The
Company's agreement with Hampshire Equity Partners II, L.P. (formerly known as
ING Equity Partners II, L.P.) provides up to an additional $5 million as an
equity investment, subject to certain conditions. 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.
YEAR 2000 COMPLIANCE
Background
Most pre-1998 computers, software, and other equipment that utilize programming
code, contain calendar year data that is abbreviated to only two digits. As a
result of these design decisions, many of these systems could fail to operate or
fail to produce correct results if "00" is not interpreted to mean 2000. These
problems may not be fully recognized, either as to frequency or severity until
the year 2000 arrives. These problems are commonly referred to as the
"Millennium Bug" or "Year 2000 Problems".
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Assessment
The Year 2000 Problem affects certain of the computers, software, and other
equipment used, operated, or maintained by the Company. Accordingly, the Company
has undertaken a review of such computer programs and systems to attempt to
ascertain which are or will be Year 2000 compliant. The Company presently
believes that its necessary and essential computer systems, software and
equipment will be Year 2000 compliant in a timely manner. However, while the
estimated cost of these efforts are not expected to be material to the Company's
financial position or any year's results of operations, there can be no
assurance to this effect.
Software Sold to Customers
The Company has been engaged for some time in the process of identifying and
resolving potential Year 2000 Problems with the software products that it has
developed and currently markets. However, management believes that it is not
possible to determine with complete certainty if all Year 2000 Problems
affecting the Company's software products will be identified or corrected due to
the complexity of these products and the fact that these products interact with
other third-party vendor products and operate on computer systems that are not
under the Company's control.
Internal Infrastructure
The Company is engaged in reviewing its major computers, software applications,
and related equipment used in connection with its internal operations for Year
2000 Problems; however, the majority of the computer programs used by the
Company are off-the-shelf, recently developed programs from third-party vendors.
The Company is in the process of obtaining assurances from such vendors as to
the Year 2000 compliance of their products. Although some vendors make verbal
assurances of Year 2000 compliance, there can be no certainty that the systems
utilized by the Company will not be affected. The Company intends to continue
confirming with vendors, testing, replacing or enhancing its internal
applications to ensure that risks related to such software are minimized. This
process is expected to be completed in mid-1999.
Systems Other than Information Technology Systems
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, photocopiers, telephone switches,
security systems, elevators, and other common devices may be affected by the
Year 2000 Problem. The Company is currently assessing the potential effect of,
and costs of, remediating the Year 2000 Problem on its office and facilities
equipment. The Company estimates that the total cost to the Company of
completing any required modifications, upgrades, or replacements of these
internal systems will not have a material adverse effect on the Company's
business or results of operations and anticipates that this process will be
completed by mid-1999. These estimates are being monitored and will be revised
as additional information becomes available.
Suppliers
The Company has initiated communications with third-party suppliers of products
or services used, operated, or maintained by the Company to identify and, to the
extent possible, to resolve issues involving any Year 2000 Problems. However,
the Company has limited or no control over the actions of these third-party
suppliers. Thus, while the Company expects that it will not be impacted by any
significant Year 2000 Problems experienced by its suppliers, there can be no
assurance that its suppliers will resolve any or all Year 2000 Problems with
these systems before the occurrence of a material disruption to the business of
the Company or any of its customers. Any failure of these third parties to
resolve Year 2000 Problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition, and
results of operation.
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Most Likely Consequences of Year 2000 Problems
The Company expects to identify and resolve the Year 2000 Problems that could
materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting the Company have been or will be identified or
corrected. The number of devices that are affected and the interactions among
these devices are simply too numerous. In addition, accurate predictions of Year
2000 Problem-related failures that will occur or the severity, duration, or
financial consequences of such failures cannot be made. As a result, management
expects that the Company could likely suffer the following consequences:
1. a number of operational inconveniences and inefficiencies for the Company
and its clients that may consume management's time and attention as well as
financial and human resources normally devoted to its ordinary business
activities; and
2. a lesser number of serious system failures that may require significant
efforts by the Company or its customers to prevent or alleviate material
business disruptions.
Costs
The Company has thus far performed the analysis described above using existing
personnel. The Company does not separately track internal costs incurred in
connection with analysis, investigation and implementation of Year 2000
compliance plans. The Company has not made any material expenditure to address
the Year 2000 Problem and at present does not anticipate that it will be
required to make any such material expenditures in the future.
Contingency Plans
The Company is currently in the process of developing contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Company expects to complete its contingency
plans by the end of the second quarter of 1999. Depending on the systems
affected, these plans could include accelerated replacement of affected
equipment or software, short- to medium-term use of backup equipment and
software, increased work hours for Company personnel or use of contract
personnel to correct on an accelerated schedule any Year 2000 Problems that
arise, development of manual workarounds for information systems, and similar
approaches. If the Company is required to implement any of these contingency
plans, it could have a material adverse effect on the Company's financial
condition and results of operations.
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15
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 March 17, 1999
announcing the engagement of investment bankers.
A Current Report on Form 8-K was filed by the Company on March 19, 1999
announcing the establishment of the Record Date for the Annual Meeting
of Shareholders.
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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: May 14, 1999 By:/s/ Douglas J. Tullio
-------------------------
Chairman, CEO and President
Date: May 14, 1999 By:/s/ Jeffrey J. Dunnigan
-------------------------
Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Number Description of Documents
- ------ ------------------------
2.11 Agreement of Purchase and Sale by and between Alpha Technology
Interconnect, Inc. and ADSI Telecom Services, Inc. dated March
31, 1999
27 Financial Data Schedule
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