<PAGE> 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 March 31, 2000 Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
COMMISSION FILE NUMBER 0-10558
ALPHA MICROSYSTEMS
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3108178
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2722 S. FAIRVIEW STREET, SANTA ANA, CA 92704
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 957-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 5, 2000, there were 14,138,129 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 March 31,
2000 (Unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months Ended March 31,
2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Three Months Ended March 31,
2000 and 1999 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 15
SIGNATURES 16
EXHIBIT INDEX 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
(Unaudited)
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,674 $ 1,160
Marketable securities 6,970 --
Stock subscription receivable 3,838 --
Accounts receivable, net of allowance for doubtful accounts
of $62 and $40 at March 31, 2000 and December 31, 1999, respectively 2,329 3,391
Prepaid expenses and other current assets 330 221
Net assets held for sale to R.E. Mahmarian Enterprises 250 500
-------- --------
Total current assets 16,391 5,272
Property and equipment, net of accumulated depreciation of $544
at March 31, 2000 and $385 at December 31, 1999 2,286 2,025
Intangibles, net 8,475 8,543
Other assets 493 469
-------- --------
Total assets $ 27,645 $ 16,309
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ -- $ 688
Accounts payable 1,485 $ 1,615
Accrued compensation 568 444
Other accrued liabilities 1,590 1,189
Deferred revenue 794 1,013
-------- --------
Total current liabilities 4,437 4,949
Other long-term liabilities 274 274
Deferred gain on sale of Businesses to R.E. Mahmarian Enterprises 1,719 2,726
Commitments and contingencies
Redeemable preferred stock, no par value; 2,501 issued and
outstanding at March 31, 2000 and December 31, 1999;
liquidation value $2,578 at March 31, 2000 2,203 2,190
Other shareholders' equity:
Exchangeable redeemable preferred stock, no par value; 5,000,000 shares
authorized; 17,891 issued and outstanding at March 31, 2000 and
December 31, 1999; liquidation value $18,450 at March 31, 2000 15,498 15,395
Common stock, no par value; 40,000,000 shares authorized;
14,112,129 and 11,678,025 shares issued and outstanding at
March 31, 2000 and December 31, 1999, respectively 46,643 32,914
Warrants 2,655 2,655
Accumulated deficit (45,823) (44,832)
Accumulated other comprehensive income 39 38
-------- --------
Total other shareholders' equity 19,012 6,170
-------- --------
Total liabilities and shareholders' equity $ 27,645 $ 16,309
======== ========
</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
-------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net sales:
IT Services $ 4,357 $ 8,391
Product 262 1,214
-------- --------
Total net sales 4,619 9,605
-------- --------
Cost of sales:
IT Services 3,361 6,356
Product 256 888
-------- --------
Total cost of sales 3,617 7,244
-------- --------
Gross margin 1,002 2,361
Operating expenses:
Selling, general and administrative 1,939 2,861
Engineering, research and development 171 321
-------- --------
Total operating expenses 2,110 3,182
-------- --------
Loss from operations (1,108) (821)
Other expense (income):
Interest income (7) (40)
Interest expense 20 27
Gain on dispositions of businesses (884) --
Other expense (income), net (12) 11
-------- --------
Total other expense (income) (883) (2)
-------- --------
Loss before taxes (225) (819)
Income tax expense 13 --
-------- --------
Net loss (238) (819)
Accretion on redeemable preferred stock (116) (44)
Dividends on redeemable preferred stock (637) (338)
-------- --------
Net loss attributable to common shareholders $ (991) $ (1,201)
======== ========
Basic and diluted net loss per share $ (0.08) $ (0.10)
======== ========
Number of shares used in computing
basic and diluted per share amounts 11,787 11,549
======== ========
</TABLE>
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
March 31, 2000 March 31, 1999
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (238) $ (819)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of businesses, net (884) --
Depreciation and amortization 345 420
Provision for losses on accounts receivable 22 (23)
Other changes in operating assets and liabilities,
net of effects of acquisitions and disposals:
Accounts receivable 976 (598)
Prepaid expenses and other current assets (61) (19)
Accounts payable and accrued liabilities (358) (692)
Accrued compensation 125 (137)
Deferred revenue (220) 214
Other, net (61) 31
-------- -------
Net cash used in operating activities (354) (1,623)
-------- -------
Cash flows from investing activities:
Investment in marketable securities (6,970) --
Purchases of equipment (453) (507)
Sale of Businesses 250 --
Capitalization of software development costs (61) (64)
Acquisition of IT Services assets -- (196)
Other, net (1) (12)
-------- -------
Net cash used in investing activities (7,235) (779)
-------- -------
Cash flows from financing activities:
Issuance of common stock, net 9,861 1,052
Principal repayments on debt (734) (108)
Payment of preferred stock dividends -- (306)
Other, net (24) (16)
-------- -------
Net cash provided by financing activities 9,103 622
Effect of exchange rate changes on cash and cash equivalents -- 2
-------- -------
(Decrease) increase in cash and cash equivalents 1,514 (1,778)
Cash and cash equivalents at beginning of period 1,160 4,930
-------- -------
Cash and cash equivalents at end of period $ 2,674 $ 3,152
======== =======
</TABLE>
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 March 31, 2000, and the consolidated results of its
operations and its cash flows for the three-month periods ended March 31, 2000
and 1999. 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 December 31, 1999. Certain prior
period amounts have been reclassified to conform to the current period
presentation. The results of operations for the period ended March 31, 2000 are
not necessarily indicative of the results to be expected for any future period.
The balance sheet at December 31, 1999 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
REVENUE RECOGNITION
The Company recognizes revenue on its information technology service 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.
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 March 31,
2000 and 1999, total comprehensive loss amounted to $237,000 and $812,000,
respectively.
MARKETABLE SECURITIES
Marketable securities are classified as available for sale and recorded at
current market value. Net unrealized gains and losses on marketable securities
available for sale are credited or charged to Other Comprehensive Income.
LINE OF CREDIT
As of December 31, 1999, the Company had a loan facility with a bank under which
a $4 million accounts receivable line of revolving credit was designated for
working capital and $1 million was designated to finance acquisitions. The loan
facility was secured by substantially all of the Company's assets. On March 28,
2000, the Company terminated the revolving line of credit and, on March 31,
2000, the Company repaid in full the loan
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designated for acquisitions. The Company is currently in negotiations with
another bank to obtain a new revolving line of credit with terms which the
Company anticipates will be more favorable than those contained in the recently
terminated facility. There is no assurance that the Company will obtain this new
revolving line of credit or that the terms will, in fact, be more favorable than
those contained in the recently terminated facility.
PENDING ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes new standards
for recording derivatives in interim and annual financial reports requiring that
all derivative instruments be recorded as assets or liabilities, measured at
fair value. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000, and therefore we will adopt the new requirements effective with the filing
of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. We do
not anticipate that the adoption of SFAS No. 133 will have a significant impact
on our results of operations, financial position or cash flow.
2. DIVESTITURES
On January 31, 2000, the Company completed the sale of substantially all of its
assets associated with its Alpha Micro Services Division ("AMSO") and its Alpha
Micro Operating System ("AMOS") computer hardware manufacturing division
(collectively the "Businesses") to R.E. Mahmarian Enterprises, LLC ("R.E.
Mahmarian Enterprises") for consideration of approximately $3.2 million,
consisting primarily of liabilities of the Businesses that were assumed by R.E.
Mahmarian Enterprises. The Company also received a ten percent contingent
interest in gross cash and non-cash proceeds that may be received by R.E.
Mahmarian Enterprises upon the occurrence of certain liquidity events, as
defined, following R.E. Mahmarian Enterprises' acquisition of the Businesses.
R.E. Mahmarian Enterprises is owned by Richard E. Mahmarian, a current member of
the Company's Board of Directors.
Assets of the Businesses initially sold to R.E. Mahmarian Enterprises include
certain accounts receivable, prepaid expenses, other current and non-current
assets, inventories, fixed assets, information technology service contracts and
capitalized software development costs. The Company has (i) granted R.E.
Mahmarian Enterprises the right to use the name "Alpha Microsystems" and
associated logos, marks and trade dress, (ii) transferred the rights to the
trade names, logos and trademarks associated with the Businesses that were sold,
and (iii) entered into a five year license agreement providing R.E. Mahmarian
Enterprises the right to use the Company's NQL Solutions technology for R.E.
Mahmarian Enterprises' internal use in continuing operations of the Businesses.
Additionally, the Company has agreed to sublease to R.E. Mahmarian Enterprises
the portion of the Santa Ana, California facility presently occupied by the
Businesses at amounts equal to cost.
This sale indicates the assets sold to R.E. Mahmarian Enterprises were impaired
and, accordingly, as of December 31, 1999, the Company recognized a loss on the
sale of $6,728,000 and reclassified $2,726,000, representing deferred revenue at
December 31, 1999 related to contractual service obligations assumed by R.E.
Mahmarian Enterprises for which performance continues to be guaranteed by the
Company, to deferred gain on sale of Businesses to R.E. Mahmarian Enterprises.
As of March 31, 2000, the deferred gain had been reduced to $1,719,000 due to
the operations of R.E.
Mahmarian Enterprises.
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On March 15, 2000, the Company entered into another agreement whereby R.E.
Mahmarian Enterprises, in exchange for $500,000 cash (recorded as net assets
held for sale to R.E. Mahmarian Enterprises as of December 31, 1999) and the
assumption of the remaining outstanding accounts payable of the Businesses,
purchased the remaining net accounts receivable of the Businesses it acquired in
the sale completed on January 31, 2000. $250,000 of the $500,000 cash payment
was received on March 20, 2000 while the $250,000 balance is due in full by May
20, 2000.
The results from operations during the quarter ended March 31, 2000, include a
net loss of $301,000 or $0.03 per share on $1,563,000 of revenue related to the
Businesses. The results from operations during the quarter ended March 31, 1999
include a net loss of $530,000 or $0.05 per share on $5,008,000 of revenue
related to the Businesses.
Effective April 1, 1999, the Company sold its telephone installation business
for $650,000. The results from operations during the quarter ended March 31,
1999, include a net loss of $172,000 or $0.01 per share on $560,000 of revenue
related to the telephone installation business.
3. PRIVATE PLACEMENT OF COMMON STOCK
On March 30, 2000, the Company completed a private placement of 2,342,000 shares
of common stock which were sold at $6.25 per share, generating gross proceeds to
the Company of $14,637,500 with net proceeds of approximately $13,500,000.
Approximately $3,838,000 of the net proceeds were received in early April 2000
and are recorded as stock subscription receivable as of March 31, 2000.
Hampshire Equity Partners II, L.P. , the Company's preferred stockholder,
purchased 995,400 of the shares of the Company's common stock issued in the
private placement. The Company intends to use the net proceeds from this
offering for marketing and further product enhancement in our NQL Solutions
technology division and for general corporate purposes.
4. CONTINGENCIES
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.
5. INDUSTRY SEGMENT INFORMATION
The Company operates in two business segments: (i) the servicing of computer
systems, networks and related products; and (2) 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 year ended December
31, 1999, 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, marketable securities, deferred taxes and certain intangible assets
are held at corporate. The effect of capitalizing software costs is included in
the product segment.
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Selected financial information for the Company's reportable segments for the
three months ended March 31, 2000 and 1999 follows:
<TABLE>
<CAPTION>
Corporate
(In thousands) IT Services Product Expenses Consolidated
----------- ------- --------- ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000
Revenues from external customers $ 4,357(1) $ 262(1) $ -- $ 4,619
Segment income (loss) (245)(1) (277)(1) 284(2) (238)
THREE MONTHS ENDED MARCH 31, 1999
Revenues from external customers $ 8,391 $ 1,214 $ -- $ 9,605
Segment loss 1 (221) (599) (819)
</TABLE>
(1) In January 2000, the Company closed the sale of a significant portion of
the Company's operations to R.E. Mahmarian Enterprises.
(2) Includes $884 gain from the sale of Businesses to R.E. Mahmarian
Enterprises.
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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
which involve risks and uncertainties, and our actual results may differ from
our expectations. These forward looking statements include (i) the Company's
ability to use the net proceeds from the private placement offering for
marketing, for further product enhancement and for general corporate purposes;
(ii) the Company's ability to increase information technology services revenue
in the last six months of 2000; (iii) the market acceptance of our products,
including, but not limited to, our Network Query Language based Internet and
intranet technology, and our information technology services; (iv) the Company's
ability to obtain a new revolving line of credit; (v) the continued development
of our technical, manufacturing, sales, marketing and management capabilities;
(vi) the Company's ability to achieve future positive cash flows from its
information technology professional services division; (vii) the discussion of
the Company's efforts, and management's expectations, relating to Year 2000
compliance; and (viii) any future performance, achievements, or industry results
expressed or implied by such forward-looking statements.
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) the Company's
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 sufficiently 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 ability of the Company to maintain required covenants under
future credit facilities, and (xi) 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.
GENERAL
After the sale of our historical principal business lines as described below, we
now focus exclusively on our two remaining operating divisions - our NQL
Solutions technology division, which focuses on Internet products and services
based on our Network Query Language, and our information technology professional
services division, which was acquired on September 1, 1998 and provides
management and consulting services, as well as network design, installation and
maintenance. Our NQL technology is also known by the name AlphaCONNECT.
NQL Solutions Technology Division
The NQL Solutions technology division serves the growing needs of e-commerce
businesses and other commercial Internet users for improved bot and intelligent
agent technologies. This division created and developed Network Query
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Language(TM) (NQL(TM)), a proprietary scripting programming language that
streamlines the development of intelligent agents, bots and Web applications.
NQL can also be used to convert data on the Web into desired formats for other
databases and documents. Currently, we believe NQL is the only programming
language designed exclusively for the development of bots and intelligent
agents. NQL provides an efficient development environment for bots, intelligent
agents and Web applications in much the same way as Structured Query Language
("SQL") provided a common development environment for database applications. As
a result, the NQL technology delivers substantial added value to information
management, one of the most critical needs on the Internet.
We license the NQL technology to businesses so they can quickly create and use
their own bots and intelligent agents in real time. The current target market
for NQL based bot and intelligent agent technology includes Internet
integrators, information technology departments of Fortune 1000 and other large
companies, Internet communities and marketplaces (portals and vortals), and
independent software vendors. These businesses use NQL technology to quickly
create their own intelligent agents to search the Web for specific information
and then gather and organize that information for internal or external use.
Information Technology Professional Services Division
Our information technology professional services division provides Internet and
intranet consulting, networking, design implementation, circuit procurement,
installation, maintenance, help desk services, premise wiring services, network
administration and on-site technical management and consulting, and also
cross-markets NQL based products and services to our customers. Additionally,
this division provides a wide array of computer systems, data communications and
LAN/WAN information technology services and products to a customer base
encompassing many industries. Specifically, this division serves large financial
institutions, major accounting firms, pharmaceutical companies, hospitals and
universities. Most customers are located in the Northeast, but our customer base
also reaches as far as Florida and the West Coast.
Sale of Our Historic Principal Lines of Business
On January 31, 2000, we completed the sale of substantially all of our assets
associated with our Alpha Micro Services Division ("AMSO") and our Alpha Micro
Operating System ("AMOS") computer hardware manufacturing division (collectively
the "Businesses") to R.E. Mahmarian Enterprises, LLC ("R.E. Mahmarian
Enterprises") for consideration of approximately $3.2 million, consisting
primarily of liabilities of the Businesses that were assumed by R.E. Mahmarian
Enterprises. We also received a ten percent contingent interest in gross cash
and non-cash proceeds that may be received by R.E. Mahmarian Enterprises upon
the occurrence of certain liquidity events, as defined, following R.E. Mahmarian
Enterprises' acquisition of the Businesses. R.E. Mahmarian Enterprises is owned
by Richard E. Mahmarian, a current member of the Company's Board of Directors.
On March 15, 2000, we entered into another agreement whereby R.E. Mahmarian
Enterprises, in exchange for $500,000 cash (recorded as net assets held for sale
to R.E. Mahmarian Enterprises as of December 31, 1999) and the assumption of the
remaining outstanding accounts payable of the Businesses, purchased the
remaining net accounts receivable of the Businesses it acquired in the sale
completed on January 31, 2000. The results from operations during the quarter
ended March 31, 2000, include a net loss of $301,000 or $0.03 per share on
$1,563,000 of revenue related to the Businesses. The results from operations
during the quarter ended March 31, 1999 include a net loss of $530,000 or $0.05
per share on $5,008,000 of revenue related to the Businesses.
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EBITDA
We had earnings before interest, taxes, depreciation and amortization ("EBITDA")
of $133,000 (including a negative EBITDA of $267,000 from the managed services
division and a gain on sale of Businesses of $884,000) during the quarter ended
March 31, 2000 compared to a negative EBITDA of $415,000 (including a negative
EBITDA of $548,000 from the managed services division and the telephone
installation business) during the same period of the prior year.
RESULTS OF OPERATIONS
Net Sales
Our total net sales decreased $4,986,000, or 51.9 percent, to $4,619,000 for the
three-month period ended March 31, 2000 from $9,605,000 for the three-month
period ended March 31, 1999. The decrease in total net sales is primarily due to
the January 31, 2000 sale of our managed services and computer hardware
manufacturing divisions and the April 1, 1999 sale of our telephone installation
business.
Information Technology Services Revenue
Our information technology service revenue decreased $4,034,000, or 48.1
percent, to $4,357,000 during the three-month period from $8,391,000 for the
respective prior period. The revenue decrease includes $3,024,000 attributable
to the sales of our managed services division on January 31, 2000 and our
telephone installation business on April 1, 1999. The balance of the revenue
decrease of $1,010,000 occurred at DCi, our information technology services
division, due to delays in technology services and projects resulting mainly
from customer concerns over Y2K problems. We expect that information technology
services revenue will increase in the last six months of 2000.
Product Sales
Our total product revenues during the comparable three-month periods decreased
$952,000, or 78.4 percent, to $262,000 from $1,214,000. The decline is due to
the January 31, 2000 sale of our computer hardware manufacturing division. No
assurances can be made as to future product sales as our NQL Solutions products
and services are all in early stages of commercialization and, as a result, it
is difficult to predict the level of market acceptance that our NQL based
products and services will attain.
Gross Margin
Our total gross margin for the first three months of 2000 decreased to 21.7
percent compared to 24.6 percent during the same period last year.
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Information Technology Services Gross Margin
Our information technology services gross margin decreased to 22.9 percent for
the three-month period ended March 31, 2000 from 24.3 percent during the same
period in the prior year. The current period was negatively affected by the
decrease in professional on-site services revenues at DCi due to delays in
technology services and projects resulting from customer concerns over Y2K
problems. Partially off-setting this decrease in gross margin, the current
period was positively affected by the sale of the telephone installation
business, which had a negative gross margin in the three months ended March 31,
1999.
Product Gross Margin
Our product gross margin during the three-month period decreased to 2.3 percent
compared to 26.8 percent for the comparable prior year period primarily due to
negative gross margin realized by our computer hardware manufacturing division
prior to its sale on January 31, 2000.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses decreased $922,000 to
$1,939,000 for the three-month period ended March 31, 2000 compared to
$2,861,000 for the three-month period ended March 31, 1999. The decrease in
selling, general and administrative expenses is due to the January 31, 2000 sale
of our managed services and computer hardware manufacturing divisions, the April
1, 1999 sale of our telephone installation business, and reductions in selling
expenses at DCi.
Research and Development Expenses
Our research and development expenses (which include engineering support and
services) incurred for the three-month period ended March 31, 2000 decreased by
$150,000 to $171,000 from $321,000 during the same period in the prior year. The
decrease is due to the sale of our computer hardware manufacturing division.
Research and development expenses are expected to increase in the future as we
develop and introduce our new NQL products.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2000, the Company's working capital
increased $11,631,000 from $323,000 at December 31, 1999 to $11,954,000 at March
31, 2000. This increase was primarily the result of the completion of a private
placement of 2,342,000 shares of common stock sold at $6.25 per share generating
net proceeds of approximately $13,500,000 offset by repayments of indebtedness
of $734,000 and purchases of equipment of $453,000.
On March 30, 2000, we completed a private placement of 2,342,000 shares of
common stock which were sold at $6.25 per share, generating gross proceeds to us
of $14,637,500 with net proceeds of approximately $13,500,000. Approximately
$3,838,000 of the net proceeds were received in early April 2000 and are
included as stock subscription receivable on the balance sheet as of March 31,
2000. Hampshire Equity Partners II, L.P. , our preferred stockholder, purchased
995,400 of the shares of our common stock issued in the private placement.
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As of December 31, 1999, we had a loan facility with a bank under which a $4
million accounts receivable line of revolving credit was designated for working
capital and $1 million was designated to finance acquisitions. The loan facility
was secured by substantially all of our assets. On March 28, 2000, we terminated
the revolving line of credit and, on March 31, 2000, we repaid in full the loan
designated for acquisitions. We are currently in negotiations with another bank
to obtain a new revolving line of credit with terms which we anticipate will be
more favorable than those contained in the recently terminated facility. There
is no assurance that we will obtain this new revolving line of credit or that
the terms will, in fact, be more favorable than those contained in the recently
terminated facility.
Our NQL Solutions based products and services are all in early stages of
commercialization and, as a result, it is difficult to predict the level of
market acceptance that our NQL based products and services will attain. We
expect to continue to incur significant costs (i) developing and introducing
enhancements to our NQL Solutions based products and technologies, (ii)
improving and expanding our information technology professional services and
(iii) expanding our sales and marketing activities. We expect this strategy to
result in losses for our NQL Solutions technology division and the Company on a
consolidated basis at least through the next five to seven quarters.
We believe that our current cash and marketable securities balances combined
with cash expected to be generated by our information technology professional
services division will provide sufficient resources to finance our working
capital requirements through at least March 31, 2001. After that date, we may
need to obtain additional capital, and we cannot be certain that we will be able
to obtain additional financing on favorable terms, if at all. If we cannot raise
additional capital on acceptable terms, we may not be able to develop or enhance
our products and services, take advantage of future opportunities or respond
favorably to competitive pressures or unanticipated events.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) A Current Report on Form 8-K was filed by the Company on January 14,
2000 regarding the sale of certain assets associated with its managed
services and proprietary hardware business divisions to R.E. Mahmarian
Enterprises, LLC.
A Current Report on Form 8-K was filed by the Company on February 15,
2000 presenting the financial statements and pro forma financial
information applicable to the sale of assets to R.E. Mahmarian
Enterprises, LLC.
A Current Report on Form 8-K/A was filed by the Company on March 13,
2000 amending and restating in its entirety the Company's Current
Report on Form 8-K which was filed on February 15, 2000.
-15-
<PAGE> 16
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: May 15, 2000 By: /s/ Douglas J. Tullio
---------------------------------------
Chairman, CEO and President
Date: May 15, 2000 By: /s/ Robert O. Riiska
---------------------------------------
Vice President and
Chief Financial Officer
-16-
<PAGE> 17
EXHIBIT INDEX
Number Description of Documents
- ------ ------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,674
<SECURITIES> 6,970
<RECEIVABLES> 2,391
<ALLOWANCES> 62
<INVENTORY> 0
<CURRENT-ASSETS> 16,391
<PP&E> 2,830
<DEPRECIATION> 544
<TOTAL-ASSETS> 27,645
<CURRENT-LIABILITIES> 4,437
<BONDS> 0
17,701
0
<COMMON> 46,643
<OTHER-SE> (43,129)
<TOTAL-LIABILITY-AND-EQUITY> 27,645
<SALES> 262
<TOTAL-REVENUES> 4,619
<CGS> 256
<TOTAL-COSTS> 3,617
<OTHER-EXPENSES> 2,110
<LOSS-PROVISION> 22
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> (225)
<INCOME-TAX> 13
<INCOME-CONTINUING> (238)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (238)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
