-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M0EZDEUud4cwXgldHpg4ptmY8tGz9QocsdHmZmTwQTMWwTaVLzj7PQyH6dlwVsta 0G7nP0dTrQyPKyniEqyvSQ== 0000892569-97-002725.txt : 19971006 0000892569-97-002725.hdr.sgml : 19971006 ACCESSION NUMBER: 0000892569-97-002725 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970824 FILED AS OF DATE: 19971003 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALPHA MICROSYSTEMS CENTRAL INDEX KEY: 0000352869 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 953108178 STATE OF INCORPORATION: CA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10558 FILM NUMBER: 97690191 BUSINESS ADDRESS: STREET 1: 3511 W SUNFLOWER AVE CITY: SANTA ANA STATE: CA ZIP: 92704 BUSINESS PHONE: 7149578500 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended AUGUST 24,1997 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) 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 September 29, 1997, there were 10,887,198 shares of the registrant's Common Stock outstanding. 2 ALPHA MICROSYSTEMS TABLE OF CONTENTS
Page ---- PART I-- FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) at August 24, 1997 and February 23, 1997 3 Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended August 24, 1997 and August 25, 1996 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended August 24, 1997 and August 25, 1996 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II-- OTHER INFORMATION Item 4. Submission of Matters to a vote of Security-Holders 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12
-2- 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ALPHA MICROSYSTEMS CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (IN THOUSANDS, EXCEPT SHARE DATA)
August 24, February 23, 1997 1997 ---------- ------------ ASSETS Current assets: Cash and cash equivalents $ 825 $ 1,768 Short-term investments in U.S. treasury 5,311 6,812 bills Accounts receivable, net of allowance for doubtful accounts of $124 and $139 at August 1997 and February 1997, respectively 2,969 3,028 Inventories 346 305 Notes receivable 797 830 Prepaid expenses and other current assets 282 233 -------- -------- Total current assets 10,530 12,976 Property and equipment, net of accumulated depreciation of $8,855 and $13,101 at August 1997 and February 1997, respectively 2,649 2,932 Service contracts, net 514 364 Software costs, net 1,154 815 Other assets, net 111 108 -------- -------- $ 14,958 $ 17,195 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 891 $ 1,201 Deferred revenue 1,526 1,686 Accrued compensation 288 345 Other accrued liabilities 554 381 Current portion of long-term debt 34 35 -------- -------- Total current liabilities 3,293 3,648 Long-term debt 28 34 Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 5,000,000 shares authorized; none issued - - Common stock, no par value; 20,000,000 shares authorized; 10,887,198 and 10,821,897 shares issued and outstanding at August 24, 1997 and February 23, 1997, respectively 30,972 30,919 Accumulated deficit (19,399) (17,464) Unamortized restricted stock plan expense - (13) Foreign currency translation adjustment 64 71 -------- -------- Total shareholders' equity 11,637 13,513 -------- -------- $ 14,958 $ 17,195 ======== ========
See accompanying notes. -3- 4 ALPHA MICROSYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended ------------------------ ------------------------ August 24, August 25, August 24, August 25, 1997 1996 1997 1996 --------- ---------- ---------- ---------- Net sales: Product $ 1,394 $ 2,135 $ 2,770 $ 4,933 Service 3,206 4,013 6,379 8,291 --------- --------- ---------- --------- Total net sales 4,600 6,148 9,149 13,224 --------- --------- ---------- --------- Cost of sales: Product 899 1,111 1,853 2,606 Service 2,562 2,942 5,164 6,176 --------- --------- ---------- --------- Total cost of sales 3,461 4,053 7,017 8,782 --------- --------- ---------- --------- Gross Margin 1,139 2,095 2,132 4,442 Selling, general and administrative 1,600 2,342 3,461 4,541 expense Engineering, research and development expense 381 511 744 1,068 --------- --------- ---------- --------- Total operating expenses 1,981 2,853 4,205 5,609 --------- --------- ---------- --------- Loss from operations (842) (758) (2,073) (1,167) Interest income (82) (64) (181) (68) Interest expense 3 10 4 26 Other (income) expense, net 11 (33) 12 (108) Foreign exchange (gain) loss 24 (19) 17 (26) --------- --------- ---------- --------- Total other income (44) (106) (148) (176) --------- --------- ---------- --------- Loss before taxes (798) (652) (1,925) (991) Provision for income taxes - - 10 5 --------- --------- ---------- --------- Net loss $ (798) $ (652) $ (1,935) $ (996) ========= ========= ========= ========= Net loss per share $ (0.07) $ (0.06) $ (0.18) $ (0.11) ========= ========= ========= ========= Number of shares used in the computation of per share amounts 10,834 10,939 10,828 9,183 ========= ========= ========= =========
See accompanying notes. -4- 5 ALPHA MICROSYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (IN THOUSANDS)
Six Months Ended ---------------------------- August 24, August 25, 1997 1996 ---------- ---------- Cash flows from operating activities: Net loss $ (1,935) $ (996) Adjustments to reconcile net loss to net cash used in operating activities: Gain on sale of subsidiary/product lines - (45) Loss on sale of fixed asset - 1 Depreciation and amortization 802 1,126 Provision for losses on accounts receivable 21 35 Provision for slow-moving inventory 29 (57) Restricted stock plan expense amortization 13 - Other changes in operating assets and liabilities: Accounts receivable 39 410 Inventories (61) (106) Notes receivable 33 - Prepaid expenses and current assets (54) (253) Accrued compensation (57) 22 Accounts payable and accrued liabilities (137) 390 Deferred revenue (160) (396) Other, net (13) (174) --------- --------- Net cash used in operating activities (1,480) (43) --------- --------- Cash flows from investing activities: Purchase of short-term investments (6,417) (6,000) Proceeds from sale of short-term investments 7,918 - Proceeds from sale of fixed assets - 9 Acquisition of service assets (265) - Purchases of equipment (304) (245) Capitalization of software costs (433) (290) Purchase of intangible assets (5) - Sale of subsidiary - (599) --------- --------- Net cash provided by (used in) investing activities 494 (7,125) --------- --------- Cash flows from financing activities: Issuance of stock 20 9,510 Stock options exercised 33 87 Principal debt repayments (7) (576) --------- --------- Net cash provided by financing activities 46 9,021 --------- --------- Effect of exchange rate changes on cash (3) (5) --------- --------- Increase (decrease) in cash and cash equivalents (943) 1,848 Cash and cash equivalents at beginning of period 1,768 505 --------- --------- Cash and cash equivalents at end of period $ 825 $ 2,353 ========= =========
See accompanying notes. -5- 6 ALPHA MICROSYSTEMS NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INTRODUCTORY NOTE This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include (i) the market acceptance of the Company's hardware and software products and services, including its AlphaCONNECT Internet/intranet product, (ii) the continued development of the Company's technical, manufacturing, sales, marketing and management capabilities, and (iii) anticipated competition. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. In addition, the business and operations of the Company are subject to substantial risks that increase the uncertainty inherent in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person that the objectives or plans of the Company will be achieved. 1. INTERIM ACCOUNTING POLICY In the opinion of management of Alpha Microsystems (the "Company" or "Alpha Micro"), the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the consolidated financial position of the Company at August 24, 1997, the consolidated results of its operations for the three and six month periods ended August 24, 1997 and August 25, 1996 and its cash flows for the six month periods ended August 24, 1997 and August 25, 1996. These condensed consolidated financial statements do not include all disclosures normally presented annually under generally accepted accounting principles and, therefore, they should be read in conjunction with the Company's annual report on Form 10-K for the year ended February 23, 1997. The results of operations for the six month period ended August 24, 1997 are not necessarily indicative of the results to be expected for the full fiscal year. REVENUE RECOGNITION The Company recognizes revenue on its hardware and software sales on shipment, and recognizes revenue on its service sales and post contract customer support on a straight-line basis over the contract period. When significant obligations remain after a software product has been delivered, revenue is not recognized until obligations have been completed or are no longer significant. The costs of any insignificant obligations are accrued when the related revenue is recognized. Revenue is recognized only when collection of the resulting receivable is probable. -6- 7 PER SHARE INFORMATION Per share information is based upon the weighted average common shares outstanding during the period ended August 24, 1997 and August 25, 1996. Common stock equivalents were anti-dilutive in all periods presented. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share", which is required to be adopted in the fourth quarter of fiscal 1998. The Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. The impact of the adoption is not expected to materially impact basic earnings per share. The Company has not yet determined what the impact of Statement No. 128 will be on the calculation of fully diluted earnings per share. 2. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out method. Inventories, net of reserves for excess and obsolete inventories of $56,000 and $41,000 at August 24, 1997, and February 23, 1997, respectively, comprise the following: (In thousands)
AUGUST 24, 1997 FEBRUARY 23, 1997 --------------- ----------------- Raw materials $ 242 $ 263 Work in process 63 9 Finished goods 41 33 -------------- --------------- $ 346 $ 305 ============== ===============
3. CONTINGENCIES LITIGATION The Company's current involvement with litigation is as follows: Carlos Garralda and Andre Warnier, employees of the Company's former subsidiary, Alpha Microsystems Belgium, S.A. ("AMB"), filed an action in November 1995 against AMB and the Company in Orange County Superior Court alleging that AMB is in breach of its obligations under Belgium employment law to pay salaries for a notice period of up to two years following termination of employment. The Plaintiffs allege, among other things, that the Company has alter ego liability for these obligations. The plaintiffs are claiming compensatory damages in excess of $780,000 and unspecified punitive damages. In September 1995, the plaintiffs instituted virtually identical litigation against AMB in Belgium. A settlement of the case between AMB and Andre Warnier in the Belgium action was effected on October 18, 1996. Five hundred thousand dollars ($500,000) of the compensatory damages in the Orange County lawsuit are related to the claims by Mr. Warnier. As a result of this settlement, the Company and Mr. Warnier have a tentative agreement to mutually release each other in the Orange County litigation with a dismissal with prejudice to be filed by Mr. Warnier upon execution of the Agreement, without payment by Alpha Microsystems. The Court has continued its temporary stay of this lawsuit in its entirety until November 1997 in order to await the outcome of the litigation instituted by Mr. Garralda against AMB in Belgium. Although no assurances as to the outcome of the litigation can be given, management believes that its defenses to the litigation are meritorious. -7- 8 In December 1995, Phoenix Marketing, Inc. d.b.a. Electronic Business Systems, Inc., in response to the Company's collection efforts for a past due account, filed an amended cross-complaint alleging damages of $3,200,000 for defective merchandise, loss of business reputation and loss of future business. The Iowa court has referred this case to arbitration, which arbitration is scheduled to begin on January 12, 1998. Significant discovery is presently being conducted by both parties. Although no assurances as to the outcome of the litigation can be given, management believes that the plaintiff's claims are without merit. The Company is currently involved in certain other claims and litigation. The Company does not consider any of these other claims or litigation to be material. Management has made provisions in the Company's financial statements for the settlement of lawsuits for which unfavorable outcomes are both probable and estimable. In the opinion of management, results of known existing claims and litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations SUMMARY The following table was derived from the Condensed Consolidated Statements of Operations as a percentage of net sales for the three and six month periods ended August 24, 1997, and August 25, 1996:
RELATIONSHIP TO NET SALES -------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------------------------- AUGUST 24, AUGUST 25, AUGUST 24, AUGUST 25, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 75.2 65.9 76.7 66.4 ----- ----- ----- ----- Gross margin 24.8 34.1 23.3 33.6 Selling, general and administrative expense 34.8 38.1 37.8 34.3 Engineering, research and development expense 8.3 8.3 8.1 8.1 Interest income (1.8) (1.0) (2.0) (0.5) Interest expense 0.1 0.1 - 0.2 Other (income) expense, net 0.2 (0.5) 0.2 (0.8) Foreign exchange (gain) loss 0.5 (0.3) 0.2 (0.2) ----- ----- ----- ----- Loss from operations before taxes (17.3) (10.6) (21.0) (7.5) Provision for income taxes - - 0.1 - ----- ----- ----- ----- Net loss (17.3)% (10.6)% (21.1)% (7.5)% ===== ===== ===== =====
GENERAL During the second quarter of fiscal year 1998, the Company continued to focus on the development, marketing and distribution of its family of AlphaCONNECT software products for the Internet and intranet market. On July 22, 1997, the Company announced first shipments of AlphaCONNECT BusinessVue, which provides end-users with a feed of filtered corporate and business information. -8- 9 The Company intends to significantly expand its sales and marketing resources for Internet and intranet products. While it is unlikely that revenues for these products will increase sufficiently to offset the additional investment in the short-term, management believes that these products will enhance the long-term outlook of the Company. The Company had a net loss of $1,935,000, or $0.18 per share, during the six months ended August 24, 1997, compared to a net loss of $996,000, or $0.11 per share, during the same period in the prior fiscal year. This loss reflects $1,326,000 relating to the marketing and launching of the AlphaCONNECT product line and a reduction in both product and service revenues. In August 1997, the Company acquired the assets of Data Enhancement International Inc. (DEI), an enterprise integration firm that specializes in client and server development, along with local and wide area Internet/intranet networking technologies. This acquisition is a continuation of the strategic thrust within the Company's service division to target market segments that are sustaining higher growth and higher margins than the traditional service business. In September 1997, the Company acquired from Atlantic Systems Inc. certain service business assets associated with point-of-sale systems in the Baltimore, Maryland area. RESULTS OF OPERATIONS Six Months Ended August 24, 1997 and August 25, 1996 Net sales decreased $4,075,000, or 30.8 percent, to $9,149,000 for the six month period ended August 24, 1997 from $13,224,000 for the six month period ended August 25, 1996. This decrease includes $2,728,000 relating to product lines and subsidiaries sold during fiscal year 1997. Total product revenues declined $2,163,000, or 43.8 percent, to approximately $2,770,000 from approximately $4,933,000 for the comparable period. Approximately 71.4 percent, or $1,545,000, of the decline in product revenues was attributable to the absence of the UK subsidiary that was sold in August 1996. The remaining decline was due primarily to the sale of the Company's remaining vertical software product lines. Total service revenue declined $1,912,000, or 23.1 percent, to $6,379,000 for the six month period just ended from $8,291,000 for the same period in the prior year. Approximately 83.6 percent, or $1,598,000, of this decline was due to the sale of both the Company's UK and domestic AlphaHealthCare subsidiaries. The remaining decline was due primarily to a decrease in the Company's traditional Alpha Micro Operating System ("AMOS") based service contracts. The Company has expanded its base of support services, including field maintenance and networking, and intends to invest additional resources in this area. In addition, the Company is expanding its domestic service sales and marketing efforts to capitalize on its current base and further expand revenues from the open systems generation market. Total gross margin for the Company for the six months ended August 24, 1997, decreased to 23.3 percent compared to 33.6 percent during the same period last year, with declines for both product and service. Product gross margin for the six months ended August 24, 1997 decreased to 33.1 percent compared to 47.2 percent during the same period in the prior year. The decrease in product gross margin was primarily due to a relatively lower proportion of higher margin AMOS products sold, combined with higher inventory and warranty reserves in the first half of fiscal year 1998. -9- 10 Services business gross margin declined to 19.0 percent during the half year ended August 24, 1997, from 25.5 percent during the same period in the prior year. The decline in gross margin was primarily due to a significant increase in the service sales force and the sale of the Company's UK subsidiary that generated higher service margins than the domestic service organization. Additionally, the third-party service contracts contributed lower margins than the traditional AMOS-based service contracts. To improve revenues, the service organization is focusing on obtaining new contracts for its networking support and consulting services, supporting vertical markets with services, and increasing third-party services. Revenues from these new areas of focus are expected in the aggregate to produce lower margins than the Company's traditional service business. The acquisitions of DEI and Atlantic Systems Inc. will support this effort. The Company continues to evaluate additional potential service acquisitions that meet its financial and market criteria. Selling, general and administrative expenses decreased $1,080,000 to $3,461,000 for the six months ended August 24, 1997, compared to $4,541,000 for the six months ended August 25, 1996. The sale of the UK and AlphaHealthCare subsidiaries and the remaining vertical software product resulted in a decrease in selling, general and administrative expenses of approximately $1,858,000, which was partially offset by increases in the Company's investment in resources for the Internet and intranet markets. Research and development expenses (which include engineering support and services) incurred for the six months ended August 24, 1997, decreased by $324,000 to $744,000 from $1,068,000 during the same period in the prior fiscal year. Additionally, approximately $433,000 of new software development expenses have been capitalized in the first half of the current fiscal year, as compared to $290,000 in the comparable period in fiscal year 1997. Research and development expenses as a percentage of product sales increased to 26.9 percent for the six months just ended from 21.7 percent during the comparable period in the prior fiscal year. LIQUIDITY AND CAPITAL RESOURCES During the six months ended August 24, 1997, the Company's working capital decreased $2,091,000 to $7,237,000 from $9,328,000 at February 23, 1997. Net cash and short-term investments in U.S. treasury bills decreased during the six months ended August 24, 1997 by $2,445,000 to $6,135,000. Net cash used in operating activities for the first half ended August 24, 1997 was $1,480,000 compared to $43,000 for the same period in the previous fiscal year. This is primarily due to the Company's increased investment in Internet and intranet products. Net accounts receivable decreased approximately $59,000 to $2,969,000 at August 24, 1997 from $3,028,000 at February 23, 1997. The decline in accounts receivable was mainly due to revenue decline and improved collections. The Company believes that its current cash position, augmented by operating activities, will provide it with sufficient resources to finance its working capital requirements for the remainder of the fiscal year. The Company's future capital requirements depend on a variety of factors, including, but not limited to, the rate of decline in the traditional business; the success, timing, and amount of investment required to penetrate the Internet/intranet markets; service revenue growth or decline; and potential acquisitions. -10- 11 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security-Holders The Annual Meeting of Shareholders of Alpha Microsystems was held on August 13, 1997. 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 --------- --- --------- ------- Clarke E. Reynolds 9,925,556 549,921 N/A Douglas J. Tullio 9,896,256 579,221 N/A Rockell N. Hankin 9,934,106 541,371 N/A John F. Glade 9,938,106 537,371 N/A Richard E. Mahmarian 9,934,056 541,421 N/A
The proposal to ratify the appointment of Ernst & Young, LLP, as independent auditors of the Company and its subsidiaries for the year ending February 22, 1998 was approved, receiving 10,175,349 votes for approval and 239,935 votes against approval, with 60,193 abstentions. The proposal to reincorporate the Company in Delaware was not approved, receiving 3,883,843 votes for approval, 657,919 votes against approval and 48,580 abstentions. This proposal required the affirmative votes of a majority of the outstanding shares of common stock. Item 6. Exhibits and Reports on Form 8-K. Exhibit No. ----------- 27 Financial Data Schedule (b) No Form 8-K was filed during the second quarter ended August 24, 1997. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALPHA MICROSYSTEMS (Registrant) Date: October 2, 1997 By: /s/ Douglas J. Tullio ------------------------- President and Chief Executive Officer Date: October 2, 1997 By: /s/ James A. Sorensen ------------------------- Vice President and Chief Financial Officer -12- 13 INDEX TO EXHIBITS Exhibit No. Description ----------- ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 3-MOS FEB-22-1998 FEB-24-1997 AUG-24-1997 1 825 5,311 3,093 124 346 10,530 11,504 8,855 14,958 3,293 28 0 0 30,972 (19,335) 14,958 2,770 9,149 1,853 7,017 4,205 21 4 (1,925) 10 (1,935) 0 0 0 (1,935) (.18) (.18)
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