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 June 30, 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 August 6, 1999, there were 11,629,827 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 June 30,
1999 (Unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three and Six Months Ended June 30,
1999 and June 21, 1998 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Six Months Ended June 30,
1999 and June 21, 1998 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 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, 1999 December 31,
(Unaudited) 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,048 $ 4,930
Restricted cash 384 384
Accounts receivable, net of allowance
for doubtful accounts of $797 at June 30, 1999
and $700 at December 31, 1998 5,778 6,473
Prepaid expenses and other current assets 1,183 1,229
-------- --------
Total current assets 10,393 13,016
Property and equipment, net of accumulated depreciation
of $9,736 at June 30, 1999 and $9,281
at December 31, 1998 5,152 3,776
Intangibles, net 9,322 9,097
Other assets 425 542
-------- --------
$ 25,292 $ 26,431
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 1,250 $ 250
Accounts payable 2,779 3,686
Accrued compensation 1,486 1,530
Deferred revenue 3,663 3,142
Other accrued liabilities 1,001 1,480
-------- --------
Total current liabilities 10,179 10,088
Long-term debt 607 741
Other long-term liabilities 121 105
Commitments and contingencies
Redeemable preferred stock, no par value; 2,501 and 15,001
issued and outstanding at June 30, 1999
and December 31, 1998, liquidation value $2,556
at June 30, 1999 2,160 12,824
Shareholders' equity:
Redeemable preferred stock, no par value; 5,000,000 shares
authorized; 12,500 issued and outstanding at June 30, 1999,
liquidation value $12,781 at June 30, 1999 10,693 --
Common stock, no par value; 40,000,000 shares authorized;
11,624,820 and 11,193,952 shares issued and
outstanding at June 30, 1999 and
December 31, 1998, respectively 32,806 31,632
Warrants 1,764 1,764
Accumulated deficit (33,075) (30,739)
Accumulated other comprehensive income 37 16
-------- --------
Total shareholders' equity 12,225 2,673
-------- --------
$ 25,292 $ 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 Six Months Ended
------------------------- -------------------------
June 30, June 21, June 30, June 21,
1999 1998 1999 1998
-------- -------- -------- --------
Net sales:
IT Services $ 7,767 $ 4,251 $ 16,158 $ 8,157
Product 1,291 1,249 2,505 2,478
-------- -------- -------- --------
Total net sales 9,058 5,500 18,663 10,635
-------- -------- -------- --------
Cost of sales:
IT Services 5,789 3,781 12,145 7,084
Product 896 806 1,784 1,748
-------- -------- -------- --------
Total cost of sales 6,685 4,587 13,929 8,832
-------- -------- -------- --------
Gross margin 2,373 913 4,734 1,803
Operating expenses:
Selling, general and administrative 3,068 1,486 5,929 3,219
Engineering, research and development 303 319 624 618
-------- -------- -------- --------
Total operating expenses 3,371 1,805 6,553 3,837
-------- -------- -------- --------
Loss from operations (998) (892) (1,819) (2,034)
Other (income) expense:
Interest income (10) (19) (50) (73)
Interest expense 24 26 51 35
Other expense (income), net (225) (2) (214) 44
-------- -------- -------- --------
Total other (income) expense (211) 5 (213) 6
-------- -------- -------- --------
Loss before taxes (787) (897) (1,606) (2,040)
Income tax expense (benefit) -- 13 -- (19)
-------- -------- -------- --------
Net loss $ (787) $ (910) $ (1,606) $ (2,021)
======== ======== ======== ========
Net loss attributable to common shares $ (1,135) $ (910) $ (2,336) $ (2,021)
======== ======== ======== ========
Basic and diluted net loss per common share $ (0.10) $ (0.08) $ (0.20) $ (0.19)
======== ======== ======== ========
Number of shares used in computing
basic and diluted per share amounts 11,602 10,914 11,576 10,911
======== ======== ======== ========
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
-------------------------------
June 30, 1999 June 21, 1998
-------------- --------------
Cash flows from operating activities:
Net loss $(1,606) $(2,021)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 800 990
Gain on sale of subsidiary (232) --
Provision for losses on accounts receivable (35) 155
Other changes in operating assets and liabilities,
net of effects of acquisitions and disposals:
Accounts receivable (102) (560)
Prepaid expenses and other current assets (156) (304)
Accounts payable and accrued liabilities (313) 493
Accrued compensation (26) (74)
Deferred revenue 726 106
Other, net (30) 107
------- -------
Net cash used in operating activities (974) (1,108)
------- -------
Cash flows from investing activities:
Acquisition of IT Services assets (196) (1,573)
Purchases of equipment (1,888) (878)
Capitalization of software development costs (155) (326)
Proceeds from sale of short-term investments -- 3,829
Other, net (22) 24
------- -------
Net cash (used in) provided by
investing activities (2,261) 1,076
------- -------
Cash flows from financing activities:
Issuance of common stock 1,174 39
Line of credit, net 1,000 1,000
Principal repayments on debt (175) (61)
Payment of preferred stock dividend (644) --
Other, net (7) --
------- -------
Net cash provided by financing activities 1,348 978
Effect of exchange rate changes on cash and cash equivalents 5 (9)
------- -------
(Decrease) increase in cash and cash equivalents (1,882) 937
Cash and cash equivalents at beginning of period 4,930 1,157
------- -------
Cash and cash equivalents at end of period $ 3,048 $ 2,094
======= =======
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 June 30, 1999, and the consolidated results of its
operations for the three- and six-month periods ended June 30, 1999 and June 21,
1998, and its cash flows for the six-month periods ended June 30, 1999 and June
21, 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 periods ended June 30,
1999 are not necessarily indicative of the results to be expected for any future
period.
RE-INCORPORATION
The re-incorporation of the Company in Delaware was approved by shareholders at
the Company's Annual Meeting held on June 3, 1999. The re-incorporation is
expected to be completed through the merger of Alpha Microsystems, a California
corporation with and into a wholly owned Delaware subsidiary of Alpha
Microsystems, during the quarter ended September 30, 1999. The Company's common
stock will continue to trade on the Nasdaq National Market under the symbol
ALMI.
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 June 30, 1999
and June 21, 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
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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 Six Months Ended
------------------------ ------------------------
June 30, June 21, June 30, June 21,
1999 1998 1999 1998
-------- -------- -------- --------
Net loss $ (787) $ (910) $ (1,606) $ (2,021)
Accretion on redeemable preferred stock (11) -- (55) --
Dividends on redeemable preferred stock (337) -- (675) --
-------- -------- -------- --------
Net loss to common shareholders $ (1,135) $ (910) $ (2,336) $ (2,021)
======== ======== ======== ========
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 six months ended June 30, 1999
and June 21, 1998, total comprehensive loss amounted to $1,585,000 and
$2,038,000, 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 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.
Six months ended
------------------------------------
June 30, 1999 June 21, 1998
------------- -------------
Total net sales $ 18,663 $ 17,608
Net loss (1,606) (1,375)
Basic and diluted net loss per common share $ (0.20) $ (0.17)
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 ended June 30, 1999 include a gain of approximately $232,000.
The results from operations during the six-month period ended June 30, 1999,
include a net loss of $168,000 or $0.02 per share on $558,000 of revenue related
to this business. The results from operations during the six-month period ended
June 21, 1998, include a net loss of $281,000 or $0.03 per share on $1,352,000
of revenue related to this business.
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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 condensed consolidated balance sheet as of June 30,
1999. The remaining originally issued redeemable preferred stock, not presented
as a component of shareholders' equity, is being accreted over seven years to
its redemption value of $2.5 million.
5. CONTINGENCIES
On July 2, 1998, the Company entered into a merger agreement with Delta
Computec, Inc. wherein the Company acquired the interests of Delta Computec. One
aspect of that transaction included an escrow agreement wherein the selling
shareholders agreed to a deposit by the Company of $384,749 of the proceeds
otherwise due the selling shareholders and has been recorded as restricted cash
by the Company. The escrow account represented an offset for potential claims
arising out of the merger agreement by the Company, as purchaser.
On or about May 1, 1999, the Company filed a claim with the escrow agent for the
sum held in the escrow account. The selling shareholders have disputed the claim
and the matter will proceed to arbitration.
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.
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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 in the annual consolidated financial statements
included in the Company's Annual Report on Form 10-K for the transition period
ended December 31, 1998, 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 and six months ended June 30, 1999 and June 21, 1998 follows:
Corporate
(In thousands) IT Services Product Expenses Consolidated
----------- -------- ---------- ------------
THREE MONTHS ENDED JUNE 30, 1999
Revenues from external customers $ 7,767 $ 1,291 $ -- $ 9,058
Segment loss (132) (160) (495) (787)
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers $ 16,158 $ 2,505 $ -- $ 18,663
Segment loss (131) (381) (1,094) (1,606)
THREE MONTHS ENDED JUNE 21, 1998
Revenues from external customers $ 4,251 $ 1,249 $ -- $ 5,500
Segment loss (310) (56) (544) (910)
SIX MONTHS ENDED JUNE 21, 1998
Revenues from external customers $ 8,157 $ 2,478 $ -- $ 10,635
Segment loss (324) (647) (1,050) (2,021)
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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)
the impact on gross margin from the continuing shift from proprietary to
third-party IT Services; (ii) the Company's ability to fund its acquisition
strategy; (iii) future positive cash flows from operations; 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) changes in the Company's operating
strategy and capital expenditure plans, (ix) the Company's ability to manage its
expenses commensurate to its revenues, (x) 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, (xi) the ability of the Company to maintain required covenants under its
existing credit facilities 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- and six-month periods
ended June 30, 1999 and June 21, 1998:
RELATIONSHIP TO NET SALES
-----------------------------------------------------------
Three Months Ended Six Months Ended
----------------------- -----------------------
June 30, June 21, June 30, June 21,
1999 1998 1999 1998
-------- -------- -------- --------
Net sales:
IT Services 85.7% 77.3% 86.6% 76.7%
Product 14.3 22.7 13.4 23.3
------ ------ ------ ------
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 73.8 83.4 74.6 83.0
------ ------ ------ ------
Gross margin 26.2 16.6 25.4 17.0
Selling, general and administrative expense 33.9 27.0 31.8 30.3
Engineering, research and development expense 3.3 5.8 3.3 5.8
Interest (income) expense, net 0.2 0.1 -- (0.4)
Other (income) expense, net (2.6) -- (1.1) 0.5
------ ------ ------ ------
Loss before taxes (8.6) (16.3) (8.6) (19.2)
Provision (benefit) for income taxes -- 0.2 -- (0.2)
------ ------ ------ ------
Net loss (8.6)% (16.5)% (8.6)% (19.0)%
====== ====== ====== ======
RE-INCORPORATION
The re-incorporation of the Company in Delaware was approved by shareholders at
the Company's Annual Meeting held on June 3, 1999. The re-incorporation is
expected to be completed through the merger of Alpha Microsystems, a California
corporation with and into a wholly owned Delaware subsidiary of Alpha
Microsystems, during the quarter ended September 30, 1999. The Company's common
stock will continue to trade on the Nasdaq National Market under the symbol
ALMI.
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 June 30, 1999
and June 21, 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 June 30, 1999 condensed consolidated balance sheet. The remaining
originally issued redeemable preferred stock, not presented as a component of
shareholders' equity, is being accreted over seven years to its redemption value
of $2.5 million.
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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 ended June 30, 1999 include a gain of approximately $232,000
included in other income. The results from operations during the six-month
period ended June 30, 1999 include a net loss of $168,000 or $0.02 per share on
$558,000 of revenue related to this business. The results from operations during
the six-month period ended June 21, 1998, include net loss of $281,000 or $0.03
per share on $1,352,000 of revenue related to this business.
The Company had negative earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $388,000 and $805,000 for the three- and six-month
periods ended June 30, 1999 (including a negative EBITDA of $163,000 from the
telephone installation business for the six month period) compared to a negative
EBITDA of $390,000 and $1,088,000 during the same periods of the prior year
(including a negative EBITDA of $224,000 from the telephone installation
business for the six months ending June 21, 1998).
RESULTS OF OPERATIONS
Net Sales
Total net sales increased $8,028,000, or 75.5 percent, to $18,663,000 for the
six-month period ended June 30, 1999 from $10,635,000 for the six-month period
ended June 21, 1998. Net sales increased $3,558,000, or 64.7 percent, to
$9,058,000 for the three-month period ended June 30, 1999 from $5,500,000 for
the three-month period ended June 21, 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 $8,001,000, or 98.1 percent, to $16,158,000 during
the most recent six-month period over the respective prior period and increased
$3,516,000 or 82.7 percent, to $7,767,000 during the most recent three-month
period over the respective prior period. The six- and three-month revenue
increases include $7,413,000 and $3,414,000, respectively, from the DCI acquired
operations offset by a decrease of $617,000 and $767,000, respectively,
attributable to non-core businesses. The balance of the revenue increase during
the six- and three-month periods of $1,205,000 and $869,000, respectively, is
attributable to organic growth.
Product Sales
Total product revenues during the comparable six-month periods increased
$27,000, or 1.1 percent, to $2,505,000 from $2,478,000. Total product revenues
increased $42,000, or 3.4%, to $1,291,000 from $1,249,000 during the comparable
three-month periods. This includes increases in domestic product sales of
$137,000 and $66,000, respectively, offset by declines of $110,000 and $24,000,
respectively, in European product sales. 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 six and three months of 1999
increased to 25.4 percent and 26.2 percent, respectively, compared to 17.0
percent and 16.6 percent during the same periods last year.
IT Services Gross Margin
IT Services gross margin increased to 24.8 percent for the six-month period
ended June 30, 1999 from 13.2 percent during the same period in the prior year.
The gross margin increased to 25.5 percent from 11.1 percent for the comparable
three-month periods. The current periods were positively affected by the
increase in professional on-
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site services revenues which have a significantly higher gross margin and the
sale of the telephone installation business which had a negative 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 expected levels.
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 six-month period decreased to 28.8% compared to
29.5% for the comparable prior year period and decreased to 30.6% compared to
35.5% for the comparable three-month periods. The current three month period
gross margin was negatively affected by the mix of products sold.
Selling, General and Administrative
Selling, general and administrative expenses increased $2,710,000 to $5,929,000
for the six-month period ended June 30, 1999 compared to $3,219,000 for the
six-month period ended June 21, 1998, and increased $1,582,000 to $3,068,000 for
the three-month period compared to $1,486,000 for the prior comparable period.
These expenses increased primarily due to additional general and administrative
costs and goodwill amortization associated with the DCI acquisition. The current
periods also include 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 six-month period ended June 30, 1999 decreased by
$6,000 to $624,000 from $618,000 during the same period in the prior year.
Research and development expenses as a percentage of product sales remained at
24.9 percent for the comparable six-month periods.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, the Company's working capital
decreased $2,714,000 from $2,928,000 at December 31, 1998 to $214,000. Net cash
generated from financing activities of $1,348,000 was offset by: $196,000 of
cash used for payments due for IT Services companies acquired in the prior year;
$155,000 of cash used for software capitalized, including the further
development of the Company's AlphaCONNECT technology; $1,888,000 of working
capital to acquire equipment, including approximately $700,000 to further the
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 operating activities aggregating $974,000.
During the six months ended June 30, 19999, the Company has continued to have
negative cash flows from recurring operating activities, investing activities
and from debt service activities. The Company believes that its current cash
position must be augmented by future positive cash flows from operating
activities and working capital available through its Imperial Bank revolving
credit facility, in order to provide sufficient resources to finance its working
capital requirements through the next twelve months. While not immediately, the
Company believes positive cash flows from operating activities can ultimately be
achieved by increasing revenues and controlling expenses. If the Company is
unable to generate positive cash flows from operations, alternative sources of
working capital will be necessary, although there can be no assurances that any
working capital sources will be available on acceptable terms.
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In order to fund its acquisition strategy, the Company expects that additional
capital will be necessary. The Company is 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.
Advances under the bank revolving credit 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. Currently, total borrowings of approximately $2.5 million are
available under this facility which expires in June 2001. 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'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 to expand
the Company's presence in the Internet/intranet markets; equipment purchase
requirements; 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".
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.
Products Sold to Customers
The Company has been engaged for some time in the process of identifying and
resolving potential Year 2000 Problems with the 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 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 has reviewed 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
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enhancing its internal applications to ensure that risks related to such
software are minimized. This process has been completed, however, the
infrastructure will continue to be monitored and necessary actions taken as
additional information becomes available.
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 has assessed 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. This process has been completed, however, the these systems will
continue to be monitored and necessary actions taken 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 operations.
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 customers 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.
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Contingency Plans
The Company has completed initial contingency plans to be implemented and
continues to revise such plans as part of its efforts to identify and correct
Year 2000 Problems affecting its internal systems. Depending on the systems
affected, these plans 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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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Alpha Micro was held on June 3, 1999. At
the Annual Meeting, all of management's nominees for directors listed in the
Proxy Statement were elected and there was no solicitation in opposition to such
nominees. Voting was as follows:
WITHHOLD
DIRECTORS FOR AUTHORITY ABSTAIN
--------- ---------- --------- -------
Carlos D. De Mottos 16,675,470 287,730 N/A
Benjamin P. Giess 16,675,370 287,830 N/A
Rockell N. Hankin 16,676,071 287,129 N/A
Richard E. Mahmarian 16,676,120 287,080 N/A
Clarke E. Reynolds 16,665,770 297,430 N/A
Douglas J. Tullio 16,668,859 294,341 N/A
Sam Yau 16,669,258 293,942 N/A
The proposal to approve the Company's re-incorporation in Delaware as
AlphaServ.com, through the merger of Alpha Microsystems, a California
corporation, with and into a wholly-owned Delaware subsidiary of Alpha
Microsystems was approved, receiving 9,609,918 votes for approval and 106,166
votes against approval, with 33,765 abstentions and 7,213,351 broker non-votes.
The proposal to approve an amendment to the Company's 1998 Stock Option and
Award Plan to increase the number of shares of Common Stock authorized for
issuance under such plan by 500,000 shares to an aggregate of 2,500,000 shares
was approved, receiving 16,104,001 votes for approval and 652,085 votes against
approval, with 43,982 abstentions and 163,132 broker non-votes. The proposal to
ratify the appointment of Ernst & Young LLP, as independent auditors of the
Company and its subsidiaries for the year ending December 31, 1999 was approved,
receiving 16,873,612 votes for approval and 34,695 votes against approval, with
54,893 abstentions and zero broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) No Form 8-K was filed by the Company during the quarter ended June 30,
1999.
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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: August 13, 1999 By: /s/ Douglas J. Tullio
-------------------------------------
Chairman, CEO and President
Date: August 13, 1999 By: /s/ Jeffrey J. Dunnigan
-------------------------------------
Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Number Description of Documents
- ------ ------------------------
10.49 Amendment No. 1 to Securities Purchase Agreement by and between
Registrant and ING Equity Partners II, L.P. dated February 1999
10.50 Amendment No. 2 to Securities Purchase Agreement by and between
Registrant and Hampshire Equity Partners II, L.P. dated June 28,
1999
10.51 Third Amendment to Security and Loan Agreement by and between
Registrant and Imperial Bank dated July 2, 1999
27 Financial Data Schedule
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