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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT #1
TO
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 23, 1998
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 October 1, 1998, there were 11,066,321 shares of the registrant's Common
Stock outstanding.
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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 23, 1998 and August 24, 1997:
<TABLE>
<CAPTION>
RELATIONSHIP TO NET SALES
-------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
AUGUST 23, AUGUST 24, AUGUST 23, AUGUST 24,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales:
IT Service 81.3 % 69.0 % 78.1 % 68.0 %
Product 18.7 31.0 21.9 32.0
----- ----- ----- -----
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 85.4 69.8 84.1 70.8
----- ----- ----- -----
Gross margin 14.6 30.2 15.9 29.2
Selling, general and administrative expense 30.0 40.2 29.7 43.7
Engineering, research and development
expense 5.8 8.3 5.7 8.1
Interest (income) expense, net 0.1 (1.7) 0.1 (1.9)
Other (income) expense, net (0.2) 0.7 -- 0.3
----- ----- ----- -----
Loss before taxes (21.1) (17.3) (19.6) (21.0)
Net loss (21.1)% (17.3)% (19.7)% (21.1)%
===== ===== ===== =====
</TABLE>
GENERAL
During the most recent quarter, the Company focused on the completion of the
Delta CompuTec (DCI) acquisition and the related sale of redeemable preferred
stock and warrants, while continuing to pursue and invest in its long-term
organic IT service growth strategies. This organic growth is demonstrated by a
new IT service relationship with Ingram Micro and expansion of its relationship
with ATS Money Systems to include TJ Maxx; revenues from both of these
relationships are expected to be recognized beginning in September 1998. While
these relationships are expected to be accretive to future results of
operations, the second quarter results of operations were negatively impacted as
additional IT service costs of sales were incurred without significant related
revenues.
Additionally, the Company continued its AlphaCONNECT development and marketing
efforts. While revenues during the most recent quarter have not been
significant, the Company recently introduced the AC Knowledge Management Suite
and delivered a customized beta version of that product to Microsoft for use in
its internal executive intranet. Costs related to the Company's internet
business approximated $290,000 ($250,000 excluding capital expenditures) for the
quarter ended August 23, 1998 and $550,000 ($450,000 excluding capital
expenditures) for the six-months period then ended.
Also significant to the comparative results of operations is net interest
expense. During the three- and six-month periods ended August 23, 1998, the
Company incurred net interest expense of $8,000 in each of the periods, as
compared to net interest income during the three and six months ended August 24,
1997 of $79,000 and $177,000, respectively. Accordingly, the change in net
interest expense during the most recent three- and six-month periods increased
net loss by $87,000 and $185,000, respectively.
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The Company had negative earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $676,000, during the second quarter ended August 23,
1998, compared to a negative EBITDA of $473,000 during the same period of the
prior fiscal year. The Company had negative EBITDA of $1,149,000, for the
six-month period ended August 23, 1998, compared to a negative EBITDA of
$1,300,000 during the same period of the prior fiscal year.
RESULTS OF OPERATIONS
Net Sales
Total net sales increased $1,986,000, or 21.7 percent, to $11,135,000 for the
six-month period ended August 23, 1998 from $9,149,000 for the six-month period
ended August 24, 1997. Net sales increased $1,089,000, or 23.7 percent, to
$5,689,000 for the three-month period ended August 23, 1998 from $4,600,000 for
the three-month period ended August 24, 1997. The increase in total net sales is
due to increases in IT service revenues, offset by declines in product sales.
IT Services Sales
IT service revenue increased $2,470,000, or 39.7 percent, to $8,691,000 during
the most recent six-month period over the respective prior fiscal period, and
increased $1,455,000 or 45.9 percent, to $4,627,000 during the most recent
three-month period over the respective prior fiscal period. The six- and
three-month increases include $1,547,000 and $791,000 attributable to ATI,
respectively, not included in the prior periods.
Product Sales
Total product revenues during the comparable six-month periods declined
$484,000, or 16.5 percent, to approximately $2,444,000 from approximately
$2,928,000. Total product revenues during the comparable three-month periods
declined $366,000, or 25.6 percent, to approximately $1,062,000 from
approximately $1,428,000. While both domestic and European product sales
declined, a majority of the decline was due to the loss of sales to a large
European customer, which represented in the past a significant portion of the
Company's product revenues. 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 half of fiscal 1999 decreased
to 15.9 percent compared to 29.2 percent during the same period last year, and
for the most recent three months of fiscal 1999 decreased to 14.6 percent
compared to 30.2 percent during the same period last year. While product gross
margin did not change significantly, IT services gross margin declined to 11.7
percent for the six-month period ended August 23, 1998, from 28.4 percent during
the same period in the prior year and declined to 13.1 percent for the
three-month period ended August 23, 1998, from 29.5 percent during the same
period in the prior year. The principal factor contributing to the margin
decline during the periods include the negative gross margins from the acquired
ATI operations of approximately 13 percent during the six-month period. The
Company has reduced the operating expenses of the acquired ATI business in order
for the business to generate a positive gross margin in future periods against
projected revenues. Additionally, the gross margin was negatively impacted
during the six- and three-month periods due to increased depreciation related to
other IT service business acquisitions and increased operating costs related to
new IT service contracts, for which no significant service revenue was
recognized. Further, due to the continuing shift from proprietary to third-party
IT services, the Company does not expect gross margins to remain at historic
levels.
Selling, general and administrative expenses decreased $688,000 to $3,310,000
for the six-month period ended
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August 23, 1998, compared to $3,998,000 for the six-month period ended August
24, 1997, and decreased $140,000 to $1,709,000 from $1,849,000 for the
comparable three-month periods. The decline in costs for both of these periods
is primarily due to reduced spending related to the AlphaCONNECT internet
technology. The second quarter of the current year includes discretionary
expenditures made in support of the Company's organic IT service growth plan and
the development of the Company's new website.
Research and development expenses (which include engineering support and
services) incurred for the six-month period ended August 23, 1998, decreased by
$108,000 to $636,000 from $744,000 during the same period in the prior fiscal
year. Research and development expenses as a percentage of product sales
increased to 26.0 percent for the six months just ended from 25.4 percent during
the comparable period in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended August 23, 1998, the Company's working capital
decreased $3,003,000 to $1,330,000 from $4,333,000 at February 22, 1998. This
decline includes anticipated working capital requirements as follows: $460,000
in direct acquisition costs; $221,000 of working capital for software
capitalized, including the further development of the Company's AlphaCONNECT
technology; $961,000 of working capital to acquire equipment, including the
further implementation of the Company's new integrated information system, and
equipment purchases to support new service capabilities such as AS-400, Sun
Microsystems and other products.
The Company believes that its current cash position, augmented by future
operating activities, and working capital available through its Imperial Bank
revolving credit facility, will provide sufficient resources to finance its
working capital requirements through the end of fiscal year 1999. Advances under
the bank facility are subject to availability based on eligible accounts
receivable and certain financial covenants, including tangible net worth, debt
to tangible net worth and quick ratio minimum requirements. In order to fund its
acquisition strategy, the Company expects that additional capital will be
necessary. Subject to shareholder approval on October 15, 1998, the Company has
entered into an agreement with ING Equity Partners II, L.P. to provide up to an
additional $12 million as an equity investment. The Company is also pursuing
additional financing from other sources to support its acquisition strategy,
although there can be no assurances that any financing will be available on
acceptable terms. The Company's future capital requirements depend on a variety
of factors, including, but not limited to, the rate of decline in the
traditional proprietary business; the success, timing, and amount of investment
required to penetrate the Internet/intranet markets; service revenue growth or
decline; and potential acquisitions.
YEAR 2000 COMPLIANCE
Background
Some computers, software, and other equipment include programming code in which
calendar year data is abbreviated to only two digits. As a result of this design
decision, some of these systems could fail to operate or fail to produce correct
results if "00" is interpreted to mean 1900, rather than 2000. These problems
are widely expected to increase in frequency and severity as the year 2000
approaches, and are commonly referred to as the "Millennium Bug" or "Year 2000
Problem".
Assessment
The Year 2000 Problem could affect computers, software, and other equipment
used, operated, or maintained by the Company. Accordingly, the Company is
reviewing its internal computer programs and systems to ensure that the
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programs and systems will be Year 2000 compliant. The Company presently believes
that its computer systems will be Year 2000 compliant in a timely manner.
However, while the estimated cost of these efforts are not expected to be
material to the Company's financial position or any year's results of
operations, there can be no assurance to this effect.
Software Sold to Consumers
The Company is in the process of identifying and resolving all potential Year
2000 Problems with any of the software products which it develops and markets.
However, management believes that it is not possible to determine with complete
certainty that all Year 2000 Problems affecting the Company's software products
will be identified or corrected due to the complexity of these products and the
fact that these products interact with other third party vendor products and
operate on computer systems which are not under the Company's control.
Internal Infrastructure
The Company believes that its major computers, software applications, and
related equipment used in connection with its internal operations are not
subject to significant Year 2000 problems, because the majority of the computer
programs used by the Company are off-the-shelf, recently developed programs from
third-party vendors. The Company is in the process of obtaining assurances from
such vendors as to the Year 2000 compliance of their products. Although some
vendors make verbal assurances of Year 2000 compliance, there can be no
certainty that the systems utilized by the Company will not be affected. The
Company intends to continue confirming with vendors, testing, replacing or
enhancing its internal applications to ensure that risks related to such
software are minimized. This process is expected to be completed in mid-1999.
Systems Other than Information Technology Systems
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, photocopiers, telephone switches,
security systems, elevators, and other common devices may be affected by the
Year 2000 Problem. The Company is currently assessing the potential effect of,
and costs of remediating, the Year 2000 Problem on its office and facilities
equipment. The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on the Company's business or results of
operations. This estimate is being monitored and will be revised as additional
information becomes available.
Suppliers
The Company has initiated communications with third party suppliers of the major
computers, software, and other equipment used, operated, or maintained by the
Company to identify and, to the extent possible, to resolve issues involving the
Year 2000 Problem. However, the Company has limited or no control over the
actions of these third party suppliers. Thus, while the Company expects that it
will be able to resolve any significant Year 2000 Problems with these systems,
there can be no assurance that these suppliers will resolve any or all Year 2000
Problems with these systems before the occurrence of a material disruption to
the business of the Company or any of its customers. Any failure of these third
parties to resolve Year 2000 problems with their systems in a timely manner
could have a material adverse effect on the Company's business, financial
condition, and results of operation.
Most Likely Consequences of Year 2000 Problems
The Company expects to identify and resolve all 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 identified or corrected. The
number of devices that could be affected and the interactions among these
devices are simply too numerous. In addition, one cannot accurately
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predict how many Year 2000 Problem-related failures will occur or the severity,
duration, or financial consequences of these perhaps inevitable failures. As a
result, management expects that the Company could likely suffer the following
consequences:
1. a significant number of operational inconveniences and inefficiencies for
the Company and its clients that may divert management's time and attention
and financial and human resources from 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.
Contingency Plans
The Company is currently developing contingency plans to be implemented as part
of its efforts to identify and correct Year 2000 Problems affecting its internal
systems. The Company expects to complete its contingency plans by the end of the
second quarter of 1999. Depending on the systems affected, these plans could
include accelerated replacement of affected equipment or software, short to
medium-term use of backup equipment and software, increased work hours for
Company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide 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. Based on
the activities described above, the Company does not believe that the Year 2000
Problem will have a material adverse effect on the Company's business or results
of operations.
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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: February 11, 1999 By: /s/ Douglas J. Tullio
----------------------
President and Chief Executive Officer
Date: February 11, 1999 By: /s/ Jeffrey J. Dunnigan
------------------------
Vice President and Chief Financial
Officer
