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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 MAY 25,1997
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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
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ALPHA MICROSYSTEMS
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(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
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(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 957-8500
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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 July 1, 1997, there were 10,821,897 shares of the registrant's Common
Stock outstanding.
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ALPHA MICROSYSTEMS
TABLE OF CONTENTS
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Page
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) at 3
May 25, 1997 and February 23, 1997
Condensed Consolidated Statements of Operations 4
(Unaudited) for the Three Months Ended May 25, 1997
and May 26, 1996
Condensed Consolidated Statements of Cash Flows 5
(Unaudited) for the Three Months Ended May 25, 1997
and May 26, 1996
Notes to Condensed Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
May 25, February 23,
1997 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 779 $ 1,768
Short-term investments in U.S. treasury bills 6,791 6,812
Accounts receivable, net of allowance for
doubtful accounts of $138 and $139 at May 1997
and February 1997, respectively 2,694 3,028
Inventories 398 305
Notes receivable 828 830
Prepaid expenses and other current assets 295 233
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Total current assets 11,785 12,976
Property and equipment, net of accumulated
depreciation of $13,396 and $13,101 at May 1997
and February 1997, respectively 2,761 2,932
Service contracts, net 311 364
Software costs, net 1,022 815
Other assets, net 108 108
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$ 15,987 $ 17,195
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,442 $ 1,201
Deferred revenue 1,612 1,686
Accrued compensation 195 345
Other accrued liabilities 289 381
Current portion of long-term debt 35 35
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Total current liabilities 3,573 3,648
Long-term debt 30 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;
10,821,897 shares issued and outstanding at May 25, 1997
and February 23, 1997, respectively 30,920 30,919
Accumulated deficit (18,601) (17,464)
Unamortized restricted stock plan expense (4) (13)
Foreign currency translation adjustment 69 71
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Total shareholders' equity 12,384 13,513
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$ 15,987 $ 17,195
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</TABLE>
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
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May 25, May 26,
1997 1996
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<S> <C> <C>
Net sales:
Product $ 1,376 $ 2,798
Service 3,173 4,278
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Total net sales 4,549 7,076
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Cost of sales:
Product 953 1,495
Service 2,602 3,234
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Total cost of sales 3,555 4,729
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Gross margin 994 2,347
Selling, general and administrative expense 1,861 2,199
Engineering, research and development expense 364 557
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Total operating expenses 2,225 2,756
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Loss from operations (1,231) (409)
Interest income (98) (4)
Interest expense 1 16
Other (income) expense, net 1 (75)
Foreign exchange gain (7) (7)
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Total other income (103) (70)
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Loss before taxes (1,128) (339)
Provision for income taxes 9 5
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Net loss $ (1,137) $ (344)
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Net loss per share $ (0.11) $ (0.05)
======== ========
Number of shares used in the
computation of per share amounts 10,822 6,869
======== ========
</TABLE>
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
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May 25, May 26,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,137) $ (344)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 398 574
Gain on sale of fixed assets -- (4)
Provision for losses on accounts receivable 10 33
Provision for slow-moving inventory 9 2
Restricted stock plan expense amortization 9 --
Other changes in operating assets and liabilities:
Accounts receivable 327 843
Inventories (99) 87
Notes receivable 2 --
Prepaid expenses and current assets (64) (67)
Accrued compensation (150) (229)
Accounts payable and accrued liabilities 149 (231)
Deferred revenue (74) (369)
Other, net (8) 2
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Net cash provided by (used in)
operating activities (628) 297
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Cash flows from investing activities:
Purchase of short-term investments (3,949) --
Proceeds from sale of short-term investments 3,970 --
Proceeds from sale of fixed assets -- 9
Purchases of equipment (127) (109)
Capitalization of software costs (251) (134)
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Net cash used in investing activities (357) (234)
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Cash flows from financing activities:
Issuance of stock 1 1,170
Principal debt repayments (4) (51)
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Net cash provided by (used in)
financing activities (3) 1,119
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Effect of exchange rate changes on cash (1) (14)
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Increase (decrease) in cash and cash equivalents (989) 1,168
Cash and cash equivalents at beginning of period 1,768 505
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Cash and cash equivalents at end of period $ 779 $ 1,673
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</TABLE>
See accompanying notes.
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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 May 25, 1997, and the consolidated results
of operations and cash flows for the quarters ended May 25, 1997 and May 26,
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 quarter ended May 25, 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.
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PER SHARE INFORMATION
Per share information is based upon the weighted average common shares
outstanding during the quarters ended May 25, 1997 and May 26, 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 $44,000 and $41,000 at May 25, 1997, and
February 23, 1997, respectively, comprise the following:
<TABLE>
<CAPTION>
(In thousands) MAY 25, 1997 FEBRUARY 23, 1997
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Raw materials $337 $263
Work in process 9 9
Finished goods 52 33
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$398 $305
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</TABLE>
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. 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. This settlement should result in a dismissal or the Warnier portion
of the Orange County lawsuit. The Court has continued its temporary stay of this
lawsuit in its entirety until July 1997 in order to await the outcome of
virtually identical litigation instituted by the plaintiffs 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.
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<PAGE> 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 must be
completed on or before October 31, 1997. 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 quarters ended May
25, 1997 and May 26, 1996:
<TABLE>
<CAPTION>
RELATIONSHIP TO NET SALES
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THREE MONTHS ENDED
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MAY 25, MAY 26,
1997 1996
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Net sales 100.0% 100.0%
Cost of sales 78.1 66.8
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Gross margin 21.9 33.2
Selling, general and administrative expense 40.9 31.1
Engineering, research and development expense 8.0 7.9
Interest income (2.1) --
Interest expense -- 0.2
Other income, net -- (1.1)
Foreign exchange gain (0.1) (0.1)
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Loss from operations before taxes (24.8) (4.8)
Provision for income taxes 0.2 0.1
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Net loss (25.0)% (4.9)%
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</TABLE>
GENERAL
During the first 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 June 9,
1997, the Company announced the availability of a pre-release version of
AlphaCONNECT BusinessVue, which provides end-users with a feed of filtered,
corporate, and business information.
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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 $1,137,000, or $0.11 per share, during
the first quarter ended May 25, 1997, compared to a net loss of $344,000, or
$0.05 per share, during the same period in the prior fiscal year. The current
quarter loss includes $825,000 relating to the marketing and launching of the
AlphaCONNECT product line and a reduction in both product and service revenues.
RESULTS OF OPERATIONS
Three Months Ended May 25, 1997 and May 26, 1996
Net sales decreased $2,527,000, or 35.7 percent, to $4,549,000 for the
quarter ended May 25, 1997 from $7,076,000 for the quarter ended May 26, 1996.
This decrease includes $2,469,000 relating to product lines and subsidiaries
sold during fiscal year 1997.
Total product revenues declined $1,422,000, or 50.8 percent, to
approximately $1,376,000 from approximately $2,798,000 for the comparable
period. Approximately 80.5 percent, or $1,145,000, 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 $1,105,000, or 25.8 percent, to
$3,173,000 in the quarter just ended from $4,278,000 for the same period in the
prior year. Approximately 69.2 percent, or $765,000, of this decline was due to
the sale of the Company's UK subsidiary. The remaining decline was due primarily
to a decrease in the Company's traditional Alpha Micro Operating System ("AMOS")
based service contracts, and a decrease in support revenues from the Company's
AlphaHealthCare subsidiary that was sold in January 1997. 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 quarter ended May 25, 1997,
decreased to 21.9 percent compared to 33.2 percent during the same period last
year, with declines for both product and service. Product gross margin for the
quarter ended May 25, 1997 decreased to 30.7 percent compared to 46.6 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
quarter of fiscal year 1998.
Services business gross margin declined to 18.0 percent during the
quarter ended May 25, 1997, from 24.4 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
on the traditional AMOS-based service contracts. To improve revenues, the
service organization is focusing on obtaining new contracts for its networking
support services, supporting vertical markets with services, and increasing
third-party services. Revenues from these new areas of focus generally produce
lower margins than the Company's traditional service business. The Company
continues to evaluate potential service acquisitions that meet its financial and
market criteria.
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<PAGE> 10
Selling, general and administrative expenses decreased $338,000 to
$1,861,000 for the quarter ended May 25, 1997, compared to $2,199,000 in the
quarter ended May 26, 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 $1,203,000, 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 quarter ended May 25, 1997, decreased by $193,000
to $364,000 from $557,000 during the same period in the prior fiscal year.
Additionally, approximately $251,000 of new software development expenses have
been capitalized in the current fiscal quarter, as compared to $134,000 in the
comparable period in fiscal year 1997. Research and development expenses as a
percentage of product sales increased to 26.4 percent in the quarter just ended
from 19.9 percent during the comparable period in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended May 25, 1997, the Company's working
capital decreased $1,116,000 to $8,212,000 from $9,328,000 at February 23, 1997.
Net cash and short-term investments in U.S. treasury bills decreased during the
quarter ended May 25, 1997 by $1,010,000 to $7,570,000. Net cash used in
operating activities for the quarter ended May 25, 1997 was $628,000 compared to
$297,000 provided by operations 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 $334,000 to $2,694,000
at May 25, 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.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) 27 -- Financial Data Schedule
(b) No Form 8-K was filed during the first quarter ended May 25, 1997.
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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: July 3, 1997 By: /s/ Douglas J. Tullio
-------------------------
President and Chief
Executive Officer
Date: July 3, 1997 By: /s/ James A. Sorensen
-------------------------
Vice President and
Chief Financial Officer
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-22-1998
<PERIOD-START> FEB-24-1997
<PERIOD-END> MAY-25-1997
<CASH> 779
<SECURITIES> 6,791
<RECEIVABLES> 2,832
<ALLOWANCES> 138
<INVENTORY> 398
<CURRENT-ASSETS> 11,785
<PP&E> 16,157
<DEPRECIATION> 13,396
<TOTAL-ASSETS> 15,987
<CURRENT-LIABILITIES> 3,573
<BONDS> 30
0
0
<COMMON> 30,920
<OTHER-SE> (18,536)
<TOTAL-LIABILITY-AND-EQUITY> 15,987
<SALES> 1,376
<TOTAL-REVENUES> 4,549
<CGS> 953
<TOTAL-COSTS> 3,555
<OTHER-EXPENSES> 2,225
<LOSS-PROVISION> 9
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