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 September 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 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 November 18, 1999, there were 11,629,820 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 September 30,
1999 (Unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three and Nine Months Ended September
30, 1999 and September 20, 1998 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended September 30,
1999 and September 20, 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 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)
September 30, 1999
(Unaudited) December 31, 1998
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 517 $ 4,930
Restricted cash 300 384
Accounts receivable, net of allowance for doubtful accounts of
$657 at September 30, 1999 and $700 at December 31, 1998 7,604 6,473
Prepaid expenses and other current assets 1,152 1,229
-------- --------
Total current assets 9,573 13,016
Property and equipment, net of accumulated depreciation of
$9,963 at September 30, 1999 and $9,281 at December 31, 1998 5,341 3,776
Intangibles, net 9,449 9,097
Other assets 487 542
-------- --------
$ 24,850 $ 26,431
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 2,250 $ 250
Accounts payable 2,577 3,686
Accrued compensation 1,028 1,530
Deferred revenue 3,814 3,142
Other accrued liabilities 1,074 1,480
-------- --------
Total current liabilities 10,743 10,088
Long-term debt 530 741
Other long-term liabilities 134 105
Commitments and contingencies
Redeemable preferred stock, no par value; 2,501 and 15,001 issued and
outstanding at September 30, 1999 and December 31, 1998,
respectively, forma; liquidation value $2,556 at September 30, 1999 2,170 12,824
Shareholders' equity:
Redeemable preferred stock, no par value; 5,000,000 shares authorized;
12,500 issued and outstanding at September 30, 1999, liquidation
value $12,781 at September 30, 1999 10,693 --
Common stock, no par value; 40,000,000 shares authorized;
11,629,820 and 11,193,952 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 32,825 31,632
Warrants 1,764 1,764
Accumulated deficit (34,046) (30,739)
Accumulated other comprehensive income 37 16
-------- --------
Total shareholders' equity 11,273 2,673
-------- --------
$ 24,850 $ 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 Nine Months Ended
---------------------------- ----------------------------
September 30, September 20, September 30, September 20,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net sales:
IT Services $ 7,892 $ 5,479 $ 24,050 $ 13,636
Product 1,073 1,075 3,578 3,553
-------- -------- -------- --------
Total net sales 8,965 6,554 27,628 17,189
-------- -------- -------- --------
Cost of sales:
IT Services 5,791 4,601 17,936 11,685
Product 848 844 2,632 2,592
-------- -------- -------- --------
Total cost of sales 6,639 5,445 20,568 14,277
-------- -------- -------- --------
Gross margin 2,326 1,109 7,060 2,912
Operating expenses:
Selling, general and administrative 2,485 2,227 8,414 5,446
Engineering, research and development 325 327 949 945
-------- -------- -------- --------
Total operating expenses 2,810 2,554 9,363 6,391
-------- -------- -------- --------
Loss from operations (484) (1,445) (2,303) (3,479)
Other (income) expense:
Interest income (10) (17) (60) (66)
Interest expense 82 38 133 69
Other expense (income), net 18 42 (196) 66
-------- -------- -------- --------
Total other (income) expense 90 63 (123) 69
-------- -------- -------- --------
Loss before taxes (574) (1,508) (2,180) (3,548)
Income tax expense (benefit) 50 -- 50 (19)
-------- -------- -------- --------
Net loss $ (624) $ (1,508) $ (2,230) $ (3,529)
======== ======== ======== ========
Net loss attributable to common shares $ (972) $ (1,520) $ (3,308) $ (3,541)
======== ======== ======== ========
Basic and diluted net loss per common share $ (0.08) $ (0.14) $ (0.29) $ (0.32)
======== ======== ======== ========
Number of shares used in computing
basic and diluted per share amounts 11,630 11,017 11,594 10,947
======== ======== ======== ========
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
-----------------------------------------
September 30, 1999 September 20, 1998
------------------ ------------------
Cash flows from operating activities:
Net loss $(2,230) $(3,529)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,212 1,569
Gain on sale of subsidiary (229) --
Provision for losses on accounts receivable (35) 155
Other changes in operating assets and liabilities, net of effects of
acquisitions and disposals:
Accounts receivable (1,929) (1,048)
Prepaid expenses and other current assets (129) (195)
Accounts payable and accrued liabilities (485) 731
Accrued compensation (484) 244
Deferred revenue 875 63
Other, net (79) 211
------- -------
Net cash used in operating activities (3,513) (1,799)
------- -------
Cash flows from investing activities:
Acquisition of DCI, net of cash acquired -- (3,557)
Acquisition of other IT Services assets (198) (1,598)
Purchases of equipment (2,342) (1,464)
Capitalization of software development costs (221) (399)
Proceeds from sale of short-term investments -- 3,829
Other, net (118) 24
------- -------
Net cash used in investing activities (2,879) (3,165)
------- -------
Cash flows from financing activities:
Issuance of preferred stock, net -- 6,958
Issuance of warrants to purchase common stock, net -- 654
Issuance of common stock 1,193 280
Line of credit, net 2,000 2,000
Principal repayments on debt (239) (77)
Repayments on debt assumed in acquisition of DCI -- (4,612)
Payment of preferred stock dividend (981) --
Other, net 3 --
------- -------
Net cash provided by financing activities 1,976 5,203
Effect of exchange rate changes on cash and cash equivalents 3 (14)
------- -------
(Decrease) increase in cash and cash equivalents (4,413) 225
Cash and cash equivalents at beginning of period 4,930 1,157
------- -------
Cash and cash equivalents at end of period $ 517 $ 1,382
======= =======
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 September 30, 1999, and the consolidated results of
its operations for the three- and nine-month periods ended September 30, 1999
and September 20, 1998, and its cash flows for the nine-month periods ended
September 30, 1999 and September 20, 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 September 30, 1999 are not necessarily
indicative of the results to be expected for any future period.
RE-INCORPORATION
Plans for the re-incorporation of the Company in Delaware have been postponed.
At the Company's Annual Meeting held on June 3, 1999, 96 percent of the holders
of common stock who voted, voted in favor of the re-incorporation into Delaware.
However, the number of favorable votes by holders of common stock did not exceed
50 percent of the Company's total outstanding Common Shares, which is required
by the state of California to pass such an initiative.
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 September 30,
1999 and September 20, 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 Nine Months Ended
---------------------------- -----------------------------
September 30, September 20, September 30, September 20,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net loss $(624) $(1,508) $(2,230) $(3,529)
Accretion on redeemable preferred stock (11) (12) (66) (12)
Dividends on redeemable preferred stock (337) -- (1,012) --
----- ------- ------- -------
Net loss to common shareholders $(972) $(1,520) $(3,308) $(3,541)
===== ======= ======= =======
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 September 30,
1999 and September 20, 1998, total comprehensive loss amounted to $624,000 and
$1,524,000, respectively. For the nine months ended September 30, 1999 and
September 20, 1998, total comprehensive loss amounted to $2,209,000 and
$3,565,000, 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.
Nine months ended
-----------------------------------------
September 30, 1999 September 20, 1998
------------------- ------------------
Total net sales $ 27,628 $ 26,641
Net loss (2,230) (3,505)
Basic and diluted net loss per common share $ (0.29) $ (0.32)
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
nine-month period ended September 30, 1999 include a gain of approximately
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$229,000 included in other income. The results from operations during the
nine-month period ended September 30, 1999, include a net loss of $163,000 or
$0.01 per share on $563,000 of revenue related to this business. The results
from operations during the nine-month period ended September 20, 1998, include a
net loss of $216,000 or $0.02 per share on $2,188,000 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 condensed consolidated balance sheet as of September
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.
Effective November 18, 1999, the holder of the Company's outstanding redeemable
preferred stock purchased an additional $5.0 million of exchangeable redeemable
preferred stock on essentially the same terms as the currently outstanding
redeemable preferred stock that is included in shareholders' equity as of
September 30, 1999, in the accompanying condensed consolidated balance sheet.
The preferred holder also received warrants to purchase an additional 2,971,620
shares of common stock at $2.50 per share. The investment constitutes the third
tranche of an agreement originally announced in August 1998, which has been
amended to permit the proceeds to be used to (i) repay the $2.5 million
currently outstanding balance under the Company's revolving line of credit
facility, (ii) provide $500,000 to fund the separation of the Company's internet
software business from its IT services business, and (iii) permit an additional
$1.9 million to be used as working capital. The Company will also seek a
strategic partner to provide additional funding for its internet software
business.
5. CONTINGENCIES
Restricted cash as of September 30, 1999, represents amounts deposited in
escrow on behalf of the Company to offset potential claims by the Company
arising from the acquisition of DCI (Note 2). In October 1999, the Company
entered into a settlement agreement wherein the DCI selling shareholders
received $90,000 of the escrowed funds with the balance, including all accrued
interest, being released back to the Company, in the approximate sum of
$300,000. Additional goodwill related to the acquisition of DCI in the amount of
approximately $84,000 was recorded in connection with the settlement.
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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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 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 nine months ended September 30, 1999 and September 20, 1998 follows:
Corporate
(In thousands) IT Services Product Expenses Consolidated
----------- ------- -------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers $ 7,892 $ 1,073 $ -- $ 8,965
Segment income (loss) 476 (404) (696) (624)
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers $ 24,050 $ 3,578 $ -- $ 27,628
Segment income (loss) 345 (785) (1,790) (2,230)
THREE MONTHS ENDED SEPTEMBER 20, 1998
Revenues from external customers $ 5,479 $ 1,075 $ -- $ 6,554
Segment loss (235) (421) (852) (1,508)
NINE MONTHS ENDED SEPTEMBER 20, 1998
Revenues from external customers $ 13,636 $ 3,553 $ -- $ 17,189
Segment loss (559) (1,068) (1,902) (3,529)
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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 achieve future positive
cash flows from operations; (iii) the Company's ability to fund its acquisition
strategy; (iv) the Company's ability to obtain a strategic partner to provide
additional funding for the Company's internet software business; and (v) 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 nine-month periods
ended September 30, 1999 and September 20, 1998:
RELATIONSHIP TO NET SALES
------------------------------------------------
Three Months Ended Nine Months Ended
----------------------- ---------------------
September September September September
30, 1999 20, 1998 30, 1999 20, 1998
--------- --------- --------- ---------
Net sales:
IT Services 88.0% 83.6% 87.0% 79.3%
Product 12.0 16.4 13.0 20.7
----- ----- ----- -----
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 74.1 83.1 74.4 83.1
----- ----- ----- -----
Gross margin 25.9 16.9 25.6 16.9
Selling, general and administrative expense 27.7 34.0 30.5 31.7
Engineering, research and development
Expense 3.6 5.0 3.4 5.5
Interest expense, net 0.8 0.3 0.3 --
Other (income) expense, net 0.2 0.6 (0.7) 0.3
----- ----- ----- -----
Loss before taxes (6.4) (23.0) (7.9) (20.6)
Provision (benefit) for income taxes 0.6 -- 0.2 (0.1)
----- ----- ----- -----
Net loss (7.0)% (23.0)% (8.1)% (20.5)%
===== ===== ===== =====
RE-INCORPORATION
Plans for the re-incorporation of the Company in Delaware have been postponed.
At the Company's Annual Meeting held on June 3, 1999, 96 percent of the holders
of common stock who voted, voted in favor of the re-incorporation into Delaware.
However, the number of favorable votes by holders of common stock did not exceed
50 percent of the Company's total outstanding Common Shares, which is required
by the state of California to pass such an initiative.
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 September 30,
1999 and September 20, 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 September 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 November 18, 1999, the holder of the Company's outstanding redeemable
preferred stock purchased an additional $5.0 million of exchangeable redeemable
preferred stock on essentially the same terms as the currently outstanding
redeemable preferred stock that is included in shareholders' equity as of
September 30, 1999, in the accompanying condensed consolidated balance sheet.
The investment constitutes the third tranche of an agreement originally
announced in August 1998, which has been amended to permit the proceeds to be
used to (i) repay the $2.5 million currently outstanding balance under the
Company's revolving line of credit facility, (ii) provide $500,000 to fund the
separation of the Company's internet software business from its IT services
business; and (iii) permit an additional $1.9 million to be used as working
capital. The Company will also seek a strategic partner to provide additional
funding for its internet software business.
The Company had negative earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $90,000 and $895,000 for the three- and nine-month
periods ended September 30, 1999 (including a negative EBITDA of $163,000 from
the telephone installation business for the nine-month period) compared to a
negative EBITDA of $908,000 and $1,976,000 during the same periods of the prior
year (including a negative EBITDA of $129,000 from the telephone installation
business for the nine months ending September 20, 1998). The Company also had
negative cash flows from investing activities of $2,879,000 for the nine-month
period ended September 30, 1999. As a result of the foregoing, and other
operating and financing activities, working capital decreased $4,098,000 during
the nine months ended September 30, 1999, from $2,928,000 at December 31, 1998,
to $(1,170,000) at September 30, 1999. (See discussion regarding Capital
Resources below.)
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
nine-month period ended September 30, 1999 include a gain of approximately
$229,000 included in other income. The results from operations during the
nine-month period ended September 30, 1999, include a net loss of $163,000 or
$0.01 per share on $563,000 of revenue related to this business. The results
from operations during the nine-month period ended September 20, 1998, include a
net loss of $216,000 or $0.02 per share on $2,188,000 of revenue related to this
business.
RESULTS OF OPERATIONS
Net Sales
Total net sales increased $10,439,000, or 60.7 percent, to $27,628,000 for the
nine-month period ended September 30, 1999 from $17,189,000 for the nine-month
period ended September 20, 1998. Net sales increased $2,411,000, or 36.8
percent, to $8,965,000 for the three-month period ended September 30, 1999 from
$6,554,000 for the three-month period ended September 20, 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 $10,414,000, or 76.4 percent, to $24,050,000
during the most recent nine-month period over the respective prior period and
increased $2,413,000, or 44.0 percent, to $7,892,000 during the most recent
three-month period over the respective prior period. The nine- and three-month
revenue increases include $10,266,000 and $2,853,000, respectively, from the DCI
acquired operations offset by a decrease of $1,497,000 and $881,000,
respectively, attributable to non-core businesses. The balance of the revenue
increase during the nine- and three-month periods of $1,645,000 and $441,000,
respectively, is attributable to organic growth.
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Product Sales
Total product revenues during the comparable nine-month periods increased
$25,000, or 0.7 percent, to $3,578,000 from $3,553,000. Total product revenues
decreased $2,000, or 0.2%, to $1,073,000 from $1,075,000 during the comparable
three-month periods. This includes increases in domestic product sales of
$149,000 and $14,000, respectively, offset by declines of $124,000 and $16,000,
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 nine and three months of 1999
increased to 25.6 percent and 25.9 percent, respectively, compared to 16.9
percent during each of the same periods last year.
IT Services Gross Margin
IT Services gross margin increased to 25.4 percent for the nine-month period
ended September 30, 1999 from 14.3 percent during the same period in the prior
year. The gross margin increased to 26.6 percent from 16.0 percent for the
comparable three-month periods. The current periods were positively affected by
the increase in professional on-site services revenues, which are primarily
attributable to the business acquired from DCI, that have a significantly higher
gross margin. The current nine-month period was also positively affected by the
sale of the telephone installation business, which had a negative gross margin.
Off-setting these gross margin improvements were continuing increased direct
operating costs related to new IT Services contracts with major distributors,
for which the related services revenue remain below 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 nine-month period decreased to 26.4% compared to
27.0% for the comparable prior year period and decreased to 21.0% compared to
21.5% for the comparable three-month periods. The current three-month period
gross margin was negatively affected by the mix of products sold, primarily
memory products.
Selling, General and Administrative
Selling, general and administrative expenses increased $2,968,000 to $8,414,000
for the nine-month period ended September 30, 1999 compared to $5,446,000 for
the nine-month period ended September 20, 1998, and increased $258,000 to
$2,485,000 for the three-month period ended September 30, 1999, compared to
$2,227,000 for the prior comparable period. These expenses increased primarily
due to additional general and administrative costs and goodwill amortization
associated with the DCI acquisition.
Research and Development
Research and development expenses (which include engineering support and
services) incurred for the nine-month period ended September 30, 1999 increased
by $4,000 to $949,000 from $945,000 during the same period in the prior year.
Research and development expenses as a percentage of product sales decreased to
26.5 percent from 26.6 percent from the prior comparable nine-month period.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999, the Company's working capital
decreased $4,098,000 from $2,928,000 at December 31, 1998 to a negative
$1,170,000 at September 30, 1999. Net cash generated from financing activities
of $1,976,000 was offset by: $198,000 of cash used for payments due for IT
Services companies
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acquired in the prior year; $221,000 of cash used for software capitalized,
including the further development of the Company's AlphaCONNECT technology; and
$2,342,000 of working capital to acquire equipment, including approximately
$1,032,000 to further the implementation of the Company's new integrated
information system, and equipment purchases to support new service capabilities.
The remaining decrease is due primarily to cash used by operating activities
aggregating $3,513,000, which includes an increase in accounts receivable of
$1,929,000. Delays associated with the implementation of the Company's new
billing system significantly contributed to the increase in accounts receivable.
During the nine months ended September 30, 1999, the Company used cash provided
under its bank credit facilities and from sales of equity securities to fund its
operating requirements. On November 18, 1999, the Company issued $5.0 million of
redeemable preferred stock to its existing preferred shareholder. Net proceeds
from this offering are expected to be used to (i) repay the outstanding balance
under the Company's revolving line of credit facility, (ii) provide $500,000 to
fund the separation of the Company's internet software business from its IT
services business, and (iii) provide an additional $1.9 million of operating
capital.
The Company has obtained a waiver for certain violations as of September 30,
1999, of covenants and conditions in its bank credit facilities. Completion of
the $5 million redeemable preferred stock financing cured the Company's covenant
violations as of September 30, 1999 on a proforma basis.
Management's operating plan for the year 2000 contemplates a return to
profitability and the realization of positive cash flows from operating
activities. The Company believes positive cash flows from operating activites
can ultimately be achieved by increasing revenues and controlling expenses.
Although management's goal is to reduce losses and, ultimately, return the
Company to profitability, there is no assurance that the Company will achieve
profitability.
Management believes the potential sources of funds to meet the Company's cash
requirements for at least the next twelve months are cash on hand, proceeds from
the $5 million redeemable preferred stock financing discussed above, borrowings
expected to be available under its existing revolving credit and term
facilities, and cash expected to be provided by future operating activities. The
Company believes these potential sources will provide sufficient cash to enable
the Company to meet its liquidity requirements. However, due to uncertainties
inherent in the achievement of management's strategic plan, there is no
assurance that the Company will attain planned levels of operations.
The Company will also need to obtain additional long-term financing to fund its
acquisition strategy and the separation of its internet software division from
its IT services business, however, there are no assurances that any financing
will be available on acceptable terms or otherwise.
Ultimately, the Company's long-term success is dependent upon its ability to
successfully execute its strategic plan, obtain additional long-term financing,
and ultimately attain sustained profitable operations.
The Company's future capital requirements depend on a variety of factors,
including, but not limited to: service revenue growth or decline; equipment
purchase requirements; potential acquisitions; and the success, timing, and
amount of investment to expand the Company's presence in the Internet/intranet
markets.
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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
has obtained 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 completed testing, replacing or enhancing its
internal applications to ensure that risks related to such software are
minimized. 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 has completed the modifications, upgrades, and replacements which it
believes to be required of these internal systems. However, the systems will
continue to be monitored and necessary actions taken as additional information
becomes available.
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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.
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 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 September
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: November 19, 1999 By: /s/ Douglas J. Tullio
---------------------------
Chairman, CEO and President
Date: November 19, 1999 By: /s/ Jeffrey J. Dunnigan
---------------------------
Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Number Description of Documents
- ------ ------------------------
3.8 Certificate of Reduction of Class A Cumulative, Redeemable and
Exchangeable Preferred Stock, Class B Cumulative, Redeemable and
Exchangeable Preferred Stock dated August 25, 1999
10.52 Amendment No. 3 to Securities Purchase Agreement by and between
Registrant and Hampshire Equity Partners II, L.P. dated November 18,
1999
27 Financial Data Schedule