<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 NOVEMBER 23,1997
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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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 December 30, 1997, there were 10,887,198 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 November 23, 1997 and
February 23, 1997 3
Condensed Consolidated Statements of
Operations (Unaudited) for the Three
and Nine Months Ended November 23, 1997 and
November 24, 1996 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended November 23,
1997 and November 24, 1996 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II-- OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
</TABLE>
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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>
November 23, February 23,
1997 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 1,337 $ 1,768
Short-term investments in U.S. treasury bills 3,830 6,812
Accounts receivable, net of allowance for
doubtful accounts of $154 and $139 at
November 1997 and February 1997,
respectively 3,682 3,028
Inventories 411 305
Notes receivable 122 232
Prepaid expenses and other current assets 191 233
------- -------
Total current assets 9,573 12,378
Property and equipment, net of accumulated
depreciation of $9,157 and $13,101 at
November 1997 and February 1997, respectively 2,533 2,932
Service contracts, net 539 364
Software costs, net 1,255 815
Notes receivable 565 598
Other assets, net 109 108
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$14,574 $17,195
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,124 $ 1,201
Deferred revenue 1,665 1,686
Accrued compensation 177 345
Other current liabilities 546 416
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Total current liabilities 3,512 3,648
Other long-term liabilities 119 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 November 23, 1997
and February 23, 1997, respectively 30,972 30,919
Accumulated deficit (20,087) (17,464)
Unamortized restricted stock plan expense -- (13)
Foreign currency translation adjustment 58 71
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Total shareholders' equity 10,943 13,513
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$14,574 $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 Nine Months Ended
------------------------------- ----------------------------------
November 23, November 24, November 23, November 24,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net sales:
Product $ 1,737 $ 2,007 $ 4,508 $ 6,940
Service 3,381 3,434 9,760 11,725
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Total net sales 5,118 5,441 14,268 18,665
------- ------- ------- -------
Cost of sales:
Product 1,091 1,110 2,943 3,716
Service 2,526 2,583 7,154 8,494
------- ------- ------- -------
Total cost of sales 3,617 3,693 10,097 12,210
------- ------- ------- -------
Gross margin 1,501 1,748 4,171 6,455
Selling, general and administrative expense 1,897 2,385 5,895 7,191
Engineering, research and development
expense 357 443 1,101 1,511
------- ------- ------- -------
Total operating expenses 2,254 2,828 6,996 8,702
------- ------- ------- -------
Loss from operations (753) (1,080) (2,825) (2,247)
Interest income (61) (95) (241) (163)
Interest expense 1 3 6 29
Other (income) expense, net 13 (123) 25 (230)
Foreign exchange (gain) loss (19) 2 (2) (24)
------- ------- ------- -------
Total other income (66) (213) (212) (388)
------- ------- ------- -------
Loss before taxes (687) (867) (2,613) (1,859)
Provision for income taxes 1 23 10 28
------- ------- ------- -------
Net loss $ (688) $ (890) $(2,623) $(1,887)
======= ======= ======= =======
Net loss per share $ (0.06) $ (0.08) $ (0.24) $ (0.19)
======= ======= ======= =======
Number of shares used in the
computation of per share amounts 10,887 10,804 10,848 9,929
======= ======= ======= =======
</TABLE>
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
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November 23, November 24,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,623) $ (1,887)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on sale of fixed assets -- 1
Depreciation and amortization 1,238 1,689
Provision for losses on accounts receivable 35 62
Provision for slow-moving inventory 55 (44)
Restricted stock plan expense amortization 13 --
Other changes in operating assets and liabilities:
Accounts receivable (733) 182
Inventories (150) (147)
Notes receivable 110 --
Prepaid expenses and current assets 35 (367)
Accrued compensation (168) (240)
Accounts payable and accrued liabilities (12) 124
Deferred revenue (62) (515)
Other, net (6) (375)
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Net cash used in operating activities (2,268) (1,517)
-------- --------
Cash flows from investing activities:
Purchase of short-term investments (7,405) (6,886)
Proceeds from sale of short-term investments 10,387 --
Proceeds from sale of fixed assets -- 10
Acquisition of service assets (70) --
Purchases of equipment (488) (382)
Capitalization of software costs (586) (379)
Purchases of intangible assets (65) --
Sale of subsidiary -- 1,489
Other, net 25 --
-------- --------
Net cash provided by (used in) investing activities 1,798 (6,148)
-------- --------
Cash flows from financing activities:
Issuance of stock 20 9,486
Stock options exercised 33 90
Principal debt repayments (10) (608)
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Net cash provided by financing activities 43 8,968
-------- --------
Effect of exchange rate changes on cash (4) (6)
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Increase (decrease) in cash and cash equivalents (431) 1,297
Cash and cash equivalents at beginning of period 1,768 505
-------- --------
Cash and cash equivalents at end of period $ 1,337 $ 1,802
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</TABLE>
See accompanying notes.
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ALPHA MICROSYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements (as such term is defined in the private Securities Litigation Reform
Act of 1995) and information relating to Alpha Microsystems (the "Company" or
"Alpha Micro") that are based on the beliefs of the management of the Company as
well as assumptions made by and information currently available to the
management of Alpha Micro. When used in this Report, the words "estimate,"
"project," "believe," "anticipate," "intend," "expect" and similar expressions
are intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
risks and uncertainties that could cause actual results to differ materially
from those contemplated in such forward looking statements, including (i)
projected revenues increases have been based on historical results that are not
necessarily indicative of the results expected in future periods, (ii) the
Company's ability to successfully complete and integrate acquisitions within the
services industry, (iii) the ability of the Company to successfully market its
services to its target markets, and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company does not undertake any obligation to
release publicly any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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 (consisting only of normal
recurring adjustments) to fairly present the consolidated financial position of
the Company at November 23, 1997, the consolidated results of its operations for
the three and nine month periods ended November 23, 1997 and November 24, 1996
and its cash flows for the nine month periods ended November 23, 1997 and
November 24, 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.
Certain amounts have been reclassified in prior periods to conform to
the current period presentation.
The results of operations for the nine month period ended November 23,
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 three and nine month periods ended November 23, 1997 and
November 24, 1996. Common stock equivalents were anti-dilutive in all periods
presented.
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 $65,000 and $41,000 at November 23, 1997, and
February 23, 1997, respectively, comprise the following:
(In thousands)
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NOVEMBER 23, 1997 FEBRUARY 23, 1997
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Raw materials $357 $263
Work in process 17 9
Finished goods 37 33
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$411 $305
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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 removed its temporary stay of this lawsuit in its entirety and set
March 10, 1998 for trial. The parties are negotiating a tolling agreement to
avoid the scheduled trial date. Although no assurances as to the outcome of the
litigation can be given, management believes that its defenses to the litigation
are meritorious.
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 has been
delayed due to the filing for relief under the Bankruptcy Code by Phoenix
Marketing. Although no assurances as to the outcome of the litigation can be
given, management believes that the plaintiff's claims are without merit.
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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.
4. STATEMENTS OF FINANCIAL STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." SFAS No. 128 requires companies to adopt its provisions for fiscal
years beginning after December 15, 1997 and requires restatement of all prior
period earnings per share ("EPS") data presented. Earlier application is not
permitted. SFAS No. 128 specifies the computation, presentation and disclosure
requirements for EPS. The implementation of SFAS No. 128 is not expected to have
a material effect on the EPS data presented by the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented,
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from non
owner sources. The implementation of SFAS No. 130 is not expected to have a
material effect on the Company's results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS No. 131, which is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented, established standards for the way that a public
enterprise reports information about key revenue-producing segments in the
annual financial statements and selected information in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The implementation of SFAS
No. 131 is not expected to have a material effect on the Company's current
reporting and disclosures.
5. SUBSEQUENT EVENT
On December 31, 1997, the Company acquired the service business of ATI
Communications, an operating division of Applied Cellular Technology, Inc. The
total purchase price, contingent on future operations, is approximately $2.2
million. The Company remitted $800,000 in cash at the closing and agreed to pay
$650,000 and $700,000 on subsequent anniversaries, respectively, subject to
certain operating performance criteria. The acquisition is accounted for as a
purchase.
-8-
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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 nine
month periods ended November 23, 1997, and November 24, 1996:
<TABLE>
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RELATIONSHIP TO NET SALES
----------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------------------------------------------
NOVEMBER 23, NOVEMBER 24, NOVEMBER 23, NOVEMBER 24,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net sales:
Product 33.9 % 36.9 % 31.6 % 37.2 %
Service 66.1 63.1 68.4 62.8
------ ------ ------ ------
Total net sales 100.0 100.0 100.0 100.0
Cost of sales:
Product 62.8 55.3 65.3 53.5
Service 74.7 75.2 73.3 72.4
------ ------ ------ ------
Total cost of sales 70.7 67.9 70.8 65.4
Gross margin:
Product 37.2 44.7 34.7 46.5
Service 25.3 24.8 26.7 27.6
------ ------ ------ ------
Total gross margin: 29.3 32.1 29.2 34.6
Selling general and administrative 37.1 43.8 41.3 38.5
expense
Engineering, research and development
expense 7.0 8.1 7.7 8.1
Other (income) expense, net 5.6 4.3 6.2 6.0
Loss from operations before taxes (13.4) (16.0) (18.3) (10.0)
Provision for income taxes -- 0.4 0.1 0.1
------ ------ ------ ------
Net loss (13.4)% (16.4)% (18.4)% (10.1)%
====== ====== ====== ======
</TABLE>
GENERAL
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During the second and third quarters of fiscal year 1998, the Company
continued to actively evaluate Information Technology ("IT") service business
acquisitions. Such efforts have resulted in the completion of the acquisition of
several IT service businesses. The IT service business is largely fragmented
with many smaller organizations lacking the infrastructure to meet the needs of
multiple-site, mid-size to large companies. The Company believes, combining its
nation-wide infrastructure and strategic acquisitions it will be able to take
advantage of economies of scale and leverage its nation-wide presence thereby
providing a competitive advantage over its competitors in the IT service
business.
On December 31, 1997, the Company acquired the service business of ATI
Communications ("ATI"), an operating division of Applied Cellular Technology,
Inc. The acquired business serves markets in Pennsylvania, Washington DC,
Baltimore and Northern Virginia and employs 60 personnel. ATI specializes in
providing direct service and support to telephony and related interconnect
customers. 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. 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. These acquisitions are a continuation
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of the strategic thrust within the Company's service division to target market
segments that are sustaining higher growth and / or higher margins than the
traditional service business.
Also during the same quarter the Company continued to monitor its
investment in its family of AlphaCONNECT software products for the Internet and
intranet market. 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 $2,623,000, or $0.24 per share, during
the nine months ended November 23, 1997, compared to a net loss of $1,887,000,
or $0.19 per share, during the same period in the prior fiscal year. This loss
reflects $1,879,000 relating to the marketing and launching of the AlphaCONNECT
product line, and a reduction in both product and service revenues, primarily
due to the divestiture of the Company's UK and domestic subsidiaries.
RESULTS OF OPERATIONS
Nine Months Ended November 23, 1997 and November 24, 1996
Total product revenues declined $2,432,000, or 35.0 percent, to
approximately $4,508,000 from approximately $6,940,000 for the comparable
period. An increase of $378,000 in revenues from domestic hardware products was
offset by the decline in product revenues of approximately $1,545,000, or 63.5
percent, attributable to the absence of the UK subsidiary that was sold in
August 1996. An additional $1,265,000 of decline was due primarily to the sale
of the Company's domestic vertical software product lines.
Total service revenue declined $1,965,000, or 16.8 percent, to
$9,760,000 for the nine month period just ended from $11,725,000 for the same
period in the prior year. Approximately 90.8 percent, or $1,784,000, 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. On December 31, 1997, the Company completed the
acquisition of the service business of ATI Communications, which is projected to
increase Alpha Micro's future service revenues by 20%, and the Company continues
to actively evaluate additional acquisitions within the service industry. 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.
Net sales decreased $4,397,000, or 23.6 percent, to $14,268,000 for the
nine month period ended November 23, 1997 from $18,665,000 for the nine month
period ended November 24, 1996. This decrease includes $4,594,000 relating to
product lines and subsidiaries sold during fiscal year 1997.
Total gross margin for the Company for the nine months ended November
23, 1997, decreased to 29.2 percent compared to 34.6 percent during the same
period last year, with declines for both product and service. Product gross
margin for the nine months ended November 23, 1997 decreased to 34.7 percent
compared to 46.5 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 nine months of fiscal year 1998.
Services business gross margin declined to 26.7 percent during the nine
months ended November 23, 1997, from 27.6 percent during the same period in the
prior year. The decline in gross
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margin was primarily due to 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. While 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 in order to improve revenues, the revenues from these new areas of
focus are expected in the aggregate to produce lower margins than the Company's
traditional service business. The recent acquisitions of ATI and other service
businesses during the year 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 $1,296,000 to
$5,895,000 for the nine months ended November 23, 1997, compared to $7,191,000
for the nine months ended November 24, 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 $2,051,000. This was partially offset by increases in the
Company's investment in resources for the Internet and intranet markets plus a
significant increase in the service sales force and increased advertising for
service operations.
Research and development expenses (which include engineering support
and services) incurred for the nine months ended November 23, 1997, decreased by
$410,000 to $1,101,000 from $1,511,000 during the same period in the prior
fiscal year. This decrease includes $295,0000 relating to vertical software
products sold in fiscal year 1997. Additionally, approximately $586,000 of new
software development expenses have been capitalized in the first nine months of
the current fiscal year, as compared to $379,000 in the comparable period in
fiscal year 1997. Research and development expenses as a percentage of product
sales increased to 24.4 percent for the nine months just ended from 21.8 percent
during the comparable period in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended November 23, 1997, the Company's working
capital decreased $2,669,000 to $6,061,000 from $8,730,000 at February 23, 1997.
Net cash and short-term investments in U.S. treasury bills decreased during the
nine months ended November 23, 1997 by $3,413,000 to $5,167,000. Net cash used
in operating activities for the nine months ended November 23, 1997 was
$2,268,000 compared to $1,517,000 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 increased approximately $654,000 to $3,682,000
at November 23, 1997 from $3,028,000 at February 23, 1997. The increase in
accounts receivable reflects an increase in third quarter revenues over each of
the two previous quarters of approximately $500,000 combined with a delay in
payments from European customers, which were collected subsequent to
quarter-end.
The Company believes that its current cash position, augmented by
operating activities, will provide it with sufficient resources to finance its
working capital requirements through fiscal year 1999. 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 5. Other Information.
Acquisition of ATI Communications Service Assets
On December 31, 1997, the Company acquired the service business of ATI
Communications, an operating division of Applied Cellular Technology, Inc. The
total purchase price, contingent on future operations, is approximately $2.2
million. The Company remitted $800,000 in cash at the closing and agreed to pay
$650,000 and $700,000 on subsequent anniversaries, respectively, subject to
certain operating performance criteria. The acquisition is accounted for as a
purchase.
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) No Form 8-K was filed during the third quarter ended
November 23, 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: January 6, 1998 By:/s/ Douglas J. Tullio
-------------------------
President and
Chief Executive Officer
Date: January 6, 1998 By:/s/ Jeffrey J. Dunnigan
---------------------------
Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Number Description of Documents
- ------ ------------------------
2.6 Agreement of Purchase and Sale by and between Alpha Microsystems
and Applied Cellular Technology, Inc. dated December 23, 1997
10.61 Amendment to Loan Agreement by and between Alpha Microsystems and
Silicon Valley Bank dated October 11, 1997
10.62 Employment Agreement by and between Alpha Microsystems and Jeffrey
J. Dunnigan dated November 15, 1997
27. Financial Data Schedule.
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EXHIBIT 2.6
AGREEMENT OF PURCHASE AND SALE
This Agreement is made and entered into as of the 23rd day of December,
1997 by and between ALPHA MICROSYSTEMS, a California corporation ("Buyer"), and
ADVANCED TELECOMM OF PITTSBURGH, a Pennsylvania Business Trust, ADVANCED
TELECOMM OF BUTLER, INC., a Pennsylvania corporation, ADVANCED TELECOMM OF
WASHINGTON, D.C., INC., a Pennsylvania corporation, and ADVANCED TELECOMM OF
MARYLAND, INC., a Pennsylvania corporation (collectively doing business as "ATI
Communications" and collectively referred to herein as "Seller") and APPLIED
CELLULAR TECHNOLOGY, INC., a Missouri corporation ("Parent"), with respect to
the following facts:
R E C I T A L S:
A. Seller is in the business of selling, installing and servicing
telephone systems. Parent directly or indirectly owns a controlling interest in
Seller.
B. Seller intends to continue to sell telephone systems and desires to
provide for enhanced service to existing and future customers by selling certain
of its assets relating to, and its business of, installing and servicing
telephone systems (including moving telephone systems, providing additional
equipment for telephone systems and making changes to telephone systems) (its
"Service Business") to Buyer.
C. Buyer desires to purchase Seller's Service Business upon the terms
and conditions set forth herein.
A G R E E M E N T
In consideration of their respective representations, warranties and
agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01 Agreement. The term "Agreement" herein will refer to this
"Agreement of Purchase and Sale."
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1.02 Annualized Installation Revenue. The term "Annualized Installation
Revenue" herein shall be equal to:
(i) the quotient of (A) the revenues received by Buyer for the
period from the Closing through the date of such calculation (or with
respect to the month immediately prior to the calculation, projected to
be received by Buyer) for installation of telephone systems and
equipment for customers who purchase telephone systems from Seller
subsequent to the Closing; divided by (B) the number of months between
the Closing through the date of such calculation; and
(ii) multiplied by twelve (12).
For the purposes of determining Annualized Installation Revenue, to the
extent any amounts are prepaid, revenues shall be deemed "received" when
booked by Buyer in accordance with generally accepted accounting
principles ("GAAP").
By way of example, if installation revenues received during
calendar 1998 were $1,500,000 and installation revenues received during
the first six months of 1999 were $900,000, the Annualized Installation
Revenue as of July 1, 1999 would be equal to $1,600,000 ($1,500,000 +
$900,000 = $2,400,000; $2,400,000/18 = $133,333.33; $133,333.33 x 12 =
$1,600,000).
1.03 Annualized Service Revenue. The term "Annualized Service Revenue"
herein shall be equal to:
(i) the quotient of (A) the revenues received by Buyer for the
period from the Closing through the date of such calculation (or with
respect to the month immediately prior to the calculation, projected to
be received by Buyer) for installation of telephone systems and
equipment and maintenance of telephone systems and equipment (including
services rendered on both a maintenance contract and a time and
materials basis, and including services such as moves, adds and changes)
for customers on the Customer List, and customers who purchase telephone
systems from Seller subsequent to the Closing; divided by (B) the number
of months between the Closing through the date of such calculation;
(ii) multiplied by twelve (12).
For the purposes hereof, to the extent any amounts are prepaid for annual or
other periodic maintenance or installation or other services, revenues shall be
deemed "received" when booked by Buyer in accordance with generally accepted
accounting principles ("GAAP").
1.04 Assumed Obligations. The term "Assumed Obligations" herein is
defined in Section 2.06(b).
1.05 Buyer. The term "Buyer" herein will refer to Alpha Microsystems, a
California corporation.
1.06 Closing or Closing Date. The term "Closing" or "Closing Date"
herein is as defined in Section 6.02 hereof.
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1.07 Customer List. The term "Customer List" herein is defined in
Section 2.05 hereof.
1.08 Leased Premises. The term "Leased Premises" herein shall refer to
the premises occupied prior to the Closing by Seller located at 4909 Library
Road, Bethel Park, PA 15102; 509 Taylor Street, New Castle, PA 16101; 119 Aster
Drive, Harrisburg, PA 17112; and 12401-B Kiln Court, Beltsville, MD 20705, all
or some portion of which shall be occupied after the Closing Date by Buyer,
either as a result of Buyer's assumption of an existing lease or the sublease or
license by Seller to Buyer of such premises.
1.09 Leases. The term "Leases" herein is defined in Section 3.09 hereof.
1.10 Parent. The term "Parent" herein will refer to Applied Cellular
Technology, Inc.
1.11 Prepaid Revenue. The term "Prepaid Revenue" herein is defined as
amounts invoiced and unearned as of the Closing by Seller related to Services to
be performed by Buyer subsequent to the Closing. All Prepaid Revenue shall
remain the property of Seller, whether received before or after the Closing
Date.
1.012 Purchase Price. The term "Purchase Price" herein is defined in
Section 2.02 hereof.
1.13 Seller. The term "Seller" herein will refer to collectively to
Advanced Telecomm of Pittsburgh, Advanced Telecomm of Butler, Inc., Advanced
Telecomm of Washington, D.C., Inc. and Advanced Telecomm of Maryland, Inc.
1.14 Service Business. The term "Service Business" herein is defined in
Recital "B".
1.15 Service Assets. The term "Service Assets" herein is defined in
Section 2.01 hereof.
1.16 Service Contracts. The term "Service Contracts" will refer all
contracts pursuant to which Seller agreed prior to Closing to provide
maintenance and repair services for telephone systems, which are not covered by
any manufacturer's warranty.
1.17 Services. The term "Services" shall refer to installation, routine
maintenance, repair, moves, adds and changes of and to telephone systems.
1.18 Spare Parts. The term "Spare Parts" herein is defined in Section
3.04 hereof.
1.19 Subleases. The term "Subleases" shall refer to the subleases and/or
licenses entered into as of the Closing between Seller as Landlord and Buyer as
Tenant in the form attached as Exhibit "J".
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1.20 Target Revenue. The term "Target Revenue" herein is defined in
Section 8.01(c)(ii)
1.21 Tools and Equipment. The term "Tools and Equipment" herein is
defined in Section 3.07 hereof.
1.22 Vehicles. The term "Vehicles" herein will refer to those Vehicles
listed on Exhibit "E" which are owned by Seller and will be leased to Buyer for
a two (2) month period commencing on the Closing Date.
1.23 Warranty Contracts. The term "Warranty Contracts" herein will refer
to all contracts pursuant to which Seller agreed prior to Closing to provide
maintenance and repair services for telephone systems which may or may not be
covered by a manufacturer's warranty, which will be assigned to and assumed by
Buyer pursuant hereto, subject to Seller's obligation to provide at no cost of
Buyer all parts required for repairs thereunder.
ARTICLE II
PURCHASE AND SALE
2.01 Purchase and Sale. At the Closing, and subject to all of the other
terms and conditions set forth herein (including those set forth in the
following sentence), Seller shall sell, transfer, convey and assign to Buyer,
and Buyer shall purchase from Seller, its entire right, title and interest in
and to the following assets used in the Seller's Service Business: the Spare
Parts listed on Exhibit "C", the Tools and Equipment listed on Exhibit "D", the
Customer List and associated goodwill, the Leases listed on Exhibit "F", the
right to use the name "ATI" and the Warranty Contracts and the Service Contracts
(collectively, the "Service Assets"). Notwithstanding the foregoing, and after
the Closing, Seller shall be entitled to continue to use the Customer List
solely for Seller's own use in its business of selling new telephone systems or
services not provided by Buyer. The entirety of the Service Assets shall be
conveyed free and clear of all liens, trusts, encumbrances, charges, claims,
security interests, community property or other interests, conditional sales
agreements and all other restrictions.
2.02 Purchase Price. The purchase price ("Purchase Price") for the
Service Assets shall be equal to fifty percent (50%) of the Annualized Service
Revenue as of the date eighteen (18) months after the Closing.
2.03 Payment of Purchase Price. Based upon past performance, Seller
estimates that the Purchase Price shall be approximately Two Million One Hundred
Fifty Thousand Dollars ($2,150,000). Subject to the terms and conditions set
forth herein, the Purchase Price shall be calculated and delivered to Seller by
wire transfer as follows:
(a) Buyer shall deliver at the Closing Date the sum of Eight
Hundred Thousand Dollars ($800,000).
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(b) Buyer shall deliver on the first anniversary of the Closing
Date the sum of Six Hundred Fifty Thousand Dollars ($650,000), less any
adjustments in accordance with Sections 2.04(a) and (b) below.
(c) Buyer shall deliver the remainder of the Purchase Price on
the date which is twenty-four (24) months after the Closing Date, less
any adjustments in accordance with Sections 2.04(a), (b) and (c) below.
Notwithstanding the foregoing, if the amount of the Purchase Price (as
calculated in accordance with Section 2.02 above) shall be determined to be less
than One Million Four Hundred Fifty Thousand Dollars ($1,450,000), Seller shall
repay Buyer the difference between the amount which Buyer theretofore delivered
as Purchase Price and the actual Purchase Price within thirty (30) days after
receipt of a written statement showing the calculation of the actual Purchase
Price certified by an officer of Buyer; provided that Seller shall have the
right to protest such calculation for a thirty (30) day period after receipt of
such written statement. If Seller protests such calculation and it cannot be
resolved within thirty (30) days thereafter, either party may invoke the
arbitration procedure in Section 10.05.
2.04 Adjustments to Purchase Price. The amounts payable pursuant to
Section 2.03 above shall be adjusted as set forth above as follows:
(a) Deduction for Claims. In the event there has been an
unresolved claim by any third party made to Buyer or Seller regarding
the Service Assets, which relates to a state of facts existing prior to
the Closing and which involves more than Ten Thousand Dollars ($10,000)
and remains unresolved after sixty (60) days or with respect to which a
lawsuit has been filed, Buyer shall be entitled to withhold from the
payments to be made pursuant to Section 2.03 the aggregate amount of
such claim(s). Subject to the provisions of Section 8.03 hereof, Buyer
may account for all said amounts claimed, until resolution of each
specified claim, by debiting the amount otherwise due Seller. Buyer
shall be entitled to compromise and settle the claim(s), and upon
settlement and payment, shall deduct any amounts paid by Buyer with
respect to each claim(s) from the amounts otherwise due Seller at the
time in which actual payment is otherwise due by Buyer to claimant.
Buyer may only compromise and settle such claims with the approval of
Seller, which approval shall not be unreasonably withheld.
(b) Deduction for Breach. In the event there has been a breach
of any agreement, representation or warranty in this Agreement by Seller
or other event which affords Buyer the right to indemnification pursuant
to the provisions of Section 8.03 hereof, Buyer shall be entitled to
deduct from the payments to be made to Seller pursuant to Section 2.03,
such amount as Buyer shall claim as the amount of its loss with respect
thereto pursuant to the claim notice delivered under Section 8.03 of
this Agreement.
(c) Deduction for Failure to Meet Target Revenues. If on the
second anniversary of the Closing Date Target Revenues have not been
achieved, Buyer shall be entitled to deduct all amounts theretofore paid
to Seller as commissions pursuant to
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<PAGE> 6
Section 8.01(c)(i) from the Purchase Price and the remaining payment due
pursuant to Section 2.03(c), in accordance with Section 8.01(c)(ii)(C).
In the event any proposed or actual adjustments are made pursuant to this
Section 2.04, Buyer shall deliver to Seller a written notice specifying each
ground for deduction of funds from or the addition of funds to the payments and
the dollars allocated thereto, and Seller shall have the right to protest any
proposed adjustment for a thirty (30) day period after receipt. If Seller
protests such proposal and adjustment and it cannot be resolved within thirty
(30) days, either party may invoke the arbitration procedure in Section 10.05.
In the event any deduction or adjustment shall exceed the payment from which it
is to be deducted, any excess shall be deducted against future payments, or if
none, promptly paid to Buyer by Seller.
2.05 Delivery of Customer List. At the Closing Seller shall deliver to
Buyer its complete customer list (the "Customer List") which shall consist of
two parts: (1) the names, addresses, and telephone numbers of all customers to
whom it has sold or leased (or the known lessees to whom purchasers from it have
leased) telephone systems or components within the past five (5) years; and (2)
a list of each Warranty Contract and Service Contract in effect as of the
Closing Date which includes the names, addresses and telephone numbers of the
contracting customers, the expiration date of each contract, the amounts paid
and prepaid thereunder, and the dates on which additional payments are due. Such
information shall be delivered to Buyer by Seller via quarter inch streamer tape
or other medium acceptable to Buyer.
2.06 No Assumption of Liabilities.
(a) Buyer is not assuming, nor shall it become liable for, any
debts, liabilities, taxes or any other obligations of any kind of
Seller, whether known or unknown, disclosed or undisclosed, with respect
to the business of Seller or the Service Assets existing as of the
Closing Date, except as set forth in Section 2.06(b) below.
(b) At the Closing, subject to the provisions of Section
2.06(c), Buyer shall assume and agree to pay, perform and discharge, to
the extent not paid, performed or discharged by Seller on or before the
Closing Date, (i) all obligations and liabilities of Seller under the
Warranty Contracts and the Service Contracts accruing after the Closing,
and (ii) all obligations and liabilities of Seller under the Leases
accruing after the Closing (the "Assumed Obligations").
(c) From and after the Closing, Buyer shall have complete
control over the payment, settlement or other disposition of the Assumed
Obligations and the right to commence, conduct and control all
negotiations and proceedings with respect thereto. Seller shall notify
Buyer promptly of any claim made with respect to any such Assumed
Obligations and shall not, except with Buyer's prior consent,
voluntarily make any payment of, settle or offer to settle, or consent
to any compromise or admit liability with respect to, any such Assumed
Obligation.
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2.07 Taxes. Buyer agrees to be responsible for any and all sales taxes
arising from its purchase of the Service Assets. Personal property taxes shall
be prorated between Buyer and Seller as of the Closing Date. Buyer shall be
responsible for filing necessary tax returns and reports with respect to such
taxes.
2.08 Allocation of Purchase Price: Reporting Requirements. For tax
purposes the parties hereby agree to (a) allocate the Purchase Price hereunder
(which for purposes of such allocation shall include all liabilities being
assumed by Buyer) in accordance with Exhibit "A" hereto, and (b) timely file
Internal Revenue Service Form 8594, Asset Acquisition Statement, and otherwise
report the transactions set forth herein in accordance with such allocation and
with the provisions of Internal Revenue Code Section 1060 and comparable
provisions of state law.
2.09 Delivery of Possession. At the Closing, Seller shall deliver
possession of the Service Assets to Buyer at the Leased Premises. Title and risk
of loss in and to the Service Assets shall pass to and be vested in Buyer
effective at the time of the Closing.
2.10 Consents to Assignment. Any other provision of this Agreement to
the contrary notwithstanding, this Agreement shall not constitute an agreement
to assign any concession, claim, contract, lease or order, or any benefit
arising thereunder or resulting therefrom, if an attempted assignment thereof,
without the consent required or necessary for such assignment, would constitute
a breach thereof or in any way materially adversely affect the rights of Buyer
or Seller thereunder. If such consent is not obtained, or if an attempted
assignment would be ineffective or would materially or adversely affect Seller's
rights thereunder so that Buyer would not in fact receive substantially all of
such rights, Seller shall cooperate in any arrangement Buyer may reasonably
request in writing to provide for Buyer the benefits under any such concession,
contract, lease or order, including enforcement for the benefit of Buyer of any
and all rights of Seller against any other party thereto arising out of the
breach or cancellation thereof by such party or otherwise; and any transfer or
assignment of any property, property right, contract or agreement which shall
require the consent or approval of any other party shall be made subject to such
consent or approval being obtained.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF SELLER
As an inducement to Buyer to enter into this Agreement, Parent and
Seller jointly and severally represent and warrant to Buyer and as to covenants
agree with Buyer that, effective on the date hereof and on the Closing Date,
except as disclosed in Exhibit "B" to this Agreement:
3.01 Organization. Applied Cellular Technology, Inc. is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Missouri Advanced Telecomm of Butler, Inc., Advanced Telecomm of
Washington, D.C., Inc. and Advanced Telecomm of Maryland, Inc. are corporations
duly organized, validly existing and in good standing under the laws of the
State of Pennsylvania. Advanced Telecomm of Pittsburgh is a Business Trust duly
organized, validly existing and in good standing under the laws of the State of
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Pennsylvania. Each Seller is duly qualified to do business in all states where
it operates the Service Business.
3.02 Authority. All corporate or other action necessary to authorize and
approve this Agreement has been taken, and this Agreement constitutes a valid
and binding agreement, enforceable against Seller and Parent in accordance with
its terms, and no authorizations, consents or approvals, whether of governmental
bodies, shareholders or otherwise, are necessary in order to enable Seller and
Parent to enter into and perform this Agreement. Consummation of the
transactions herein contemplated, and the fulfillment of the terms of this
Agreement will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any of the property or assets
of Seller pursuant to the terms of, or result in the acceleration of any
obligations or payment of a penalty under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which Seller is a
party or by which Seller may be bound or to which any of the property or assets
of Seller is subject, the Certificate of Incorporation or Bylaws of Seller, any
agreement of the shareholders, or any statute or any order, decree, judgment,
rule or regulation applicable to Seller of any court or of any regulatory
authority or other governmental body having jurisdiction over Seller.
3.03 Compliance with Law. Seller is not in violation of any federal,
state and local laws, regulations or orders which would cause a material adverse
effect upon its business.
3.04 Spare Parts. Seller shall deliver to Buyer at the Closing the spare
parts listed on Exhibit "C" (the "Spare Parts") free and clear of any liens or
encumbrances. Such Spare Parts are in good working condition and are not
obsolete.
3.05 Customer List. The Customer List delivered to Buyer pursuant to
Section 2.05 above includes as to Part 1, a true, complete and correct list of
the names, addresses and telephone numbers of all customers to which Seller has
provided Services whether by contract or on a time and materials basis during
the five (5) years prior to the Closing Date; and represents as to Part 2, a
true, complete and correct list of the Warranty and Service Contract customers
as contemplated by Section 3.06 (a) below.
3.06 Warranty Contracts and Service Contracts.
(a) Seller shall deliver a list (certified by Seller and
acknowledged by Buyer) of all existing verbal and written Warranty
Contracts (showing manufacturer warranty and contract expiration date)
and Service Contracts (showing expiration date) of Seller pursuant to
which Seller provides Services to customers which extend beyond the
Closing Date and which shall be assigned to and assumed by Buyer. Seller
has committed no breach and has received no notice of default which is
presently in effect under any Warranty Contract or Service Contract, nor
does Seller have actual knowledge of any event which has occurred which,
with notice or passage of time, could give rise to any such default. All
the Warranty Contracts and Service Contracts, together with any
amendments or modifications thereto, were duly authorized and executed
and are
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enforceable in accordance with their terms, except that Seller does not
represent and warrant as to matters which may relate to (a) the
enforceability as may be limited by applicable insolvency, bankruptcy,
reorganization, moratorium or other similar laws related to or affecting
creditors' rights generally, or (b) enforceability in any court of any
equitable remedies, specific performance and injunctive relief which are
subject to the discretion of the court before which any proceeding
therefor is brought (regardless of whether such enforceability is
considered a proceeding at law or equity). To the best of Seller's
knowledge, there is no reason to believe that any customer who is a
party to any such Service Contract is unable or unwilling to perform its
obligations under such contract.
(b) Seller will deliver to Buyer at the Closing the original or
a full, true and correct copy of each of the written Warranty Contracts
and Service Contracts, all proposed but not yet executed contracts, and
all modifications and amendments to the foregoing, in existence on the
Closing Date.
(c) Seller has no actual knowledge of any request for or need
for service under any Warranty Contract or Service Contract which has
not been performed prior to the Closing, other than routine service
calls, except as set forth on Exhibit "B".
(d) With respect to each Warranty Contract, Seller will cause
the manufacturer to supply to Seller at no cost to the customer or the
service provider replacement parts for defective parts for which the
Buyer has submitted an appropriate return authorization form.
3.07 Tools and Equipment. Attached as Exhibit "D" is a complete listing
of the tools and equipment (including test equipment) used by Seller in its
Service Business (the "Tools and Equipment"), all of which shall be transferred
to Buyer on the Closing Date, free of any liens or encumbrances, unless
otherwise designated on Exhibit "D". The said Tools and Equipment shall be
operable on the Closing Date.
3.08 Vehicles. Seller has the right to lease the Vehicles listed on
Exhibit "E" to Buyer in accordance with the terms of the Seller Vehicle Lease.
3.09 Leases. Attached as Exhibit "F" is a complete listing of (i) the
leases for vehicles used by Seller in its Service Business; (ii) the leases for
all other personal property used by Seller in its Service Business; and (iii)
the leases for offices and other facilities used by Seller for its Service
Business. Only those vehicle and personal property leases specifically
designated on Exhibit "F" will be assigned to Buyer (the assigned leases
hereafter referred to as the "Leases"). Seller has delivered to Buyer the
original or a full, true and correct copy of each Lease listed on Exhibit "F",
including all modifications and amendments thereto. Seller has, to the best
knowledge of Seller, committed no breach, and Seller has received no notice of
default which is presently in effect under any Lease, nor does Seller have
knowledge of any event which has occurred which, with notice or passage of time,
could give rise to any such default. Also set forth on Exhibit "F" is a complete
list of all security deposits paid by Seller with respect to the Leases,
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all of which are fully refundable upon termination of the respective Lease.
Seller has caused no damages to the leased premises or the leased equipment
which would entitle the lessor under such Leases to deduct any amounts from the
Security Deposits. Buyer shall not be required to obtain the release of any said
security deposits or to reimburse Seller for any such security deposits until
the termination of the respective Lease, at which time Buyer shall forward any
such returned security deposit to Seller.
3.10 Employees. Attached hereto as Exhibit "G" is a list of all of
Seller's employees who have been involved during the past year in performing
Services, or otherwise primarily involved during the past year in Seller's
Service Business. Seller agrees that Buyer shall have the right to solicit and
hire any of such employees. Any employees so hired shall be hired in accordance
with the terms of Buyer's standard offer letter. Seller agrees to cooperate and
assist Buyer in its efforts to hire such of Seller's employees listed on Exhibit
"G", as are designated on Exhibit "G". Seller acknowledges that notwithstanding
Buyer's efforts, certain of Seller's employees may refuse to accept Buyer's
offer of employment. Buyer shall have no liability for any termination costs or
liabilities arising by reason of the termination of any employees of Seller,
including payment of accrued vacation, regardless of whether they are hired by
Buyer. The employees listed on Exhibit "G" are not covered by any pension plan
or "employee welfare benefit plan" defined under the Employee Retirement Income
Security Act of 1974, as amended (commonly known as "ERISA") other than a 401(k)
plan. Buyer shall not be liable for and Seller shall indemnify Buyer against any
liability under any pension plan or "employee welfare benefit plan", regardless
of whether listed on Exhibit "G". Seller is not a party to any labor agreement
with respect to its employees with any labor organization, union, group or
association.
3.11 Litigation. There are no actions, suits, investigations or
proceedings by, against, involving or relating to Seller in which service of
process has been made, nor to the best of Seller's knowledge are there any
claims, actions, suits, investigations or proceedings contemplated, pending or
against, involving or relating to Seller, at law or in equity, or before any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, in which any claim has been made against the
Service Assets and there has been no garnishment, attachment or writ of
executions issued with reference to any of the Service Assets.
3.12 Judgments, Decrees and Orders in Restraint of Business. Seller is
not a party or subject to any judgment, decree or order entered in any suit or
proceeding brought by any governmental agency or by any other person enjoining
the Seller in respect of any of its business practices or the acquisition or
disposition of any property or the conduct of its business in any area.
3.13 Title to Service Assets. Seller has good and marketable title to
the Service Assets free and clear of all liens, claims and encumbrances,
including covenants, conditions and restrictions.
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3.14 Adverse Facts. To the best knowledge of Seller, there is no
material adverse fact or condition relating to the Service Assets or any portion
thereof (other than conditions relating to markets generally) which has not been
specifically disclosed on Exhibit "B".
3.15 No Misrepresentations or Omissions. To the best knowledge of
Seller, no material representation, warranty or statement of Seller in this
Agreement or in any document, exhibit, certificate or schedule furnished or to
be furnished to Buyer pursuant hereto or in connection with the transactions
contemplated hereby contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact necessary to make the
statements or facts contained herein or therein not materially misleading. No
financial statements or other records provided by Seller to Buyer in the course
of Buyer's due diligence are incomplete or inaccurate in any material respect.
Seller's financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
covered thereby.
3.16 Bulk Sales Laws. Seller represents and warrants that the
transactions contemplated hereunder do not require compliance with the bulk
sales laws of any jurisdiction.
3.17 Tax Returns and Liabilities. Within the times and in the manner
prescribed by law, Seller has filed all Federal, state and local tax returns
required by law in connection with the business of Seller and has paid or has
made provision for the taxes due and payable in connection therewith.
3.18 Compliance with Laws Regulating Environmental Quality. The
properties which are the subject of the Leases and the Subleases are, and at all
times have been, operated, used and occupied in compliance with all
Environmental Laws (as defined herein) and have been operated, used and occupied
in a manner which will not give rise to any liability under any Environmental
Laws. Seller has not received any notice at any time that it is or was claimed
to be in violation of or in non-compliance with any conditions of any permit or
Environmental Laws or that any of the current or past uses, operations or
conduct at the properties are or were in violation of or in non-compliance with
any conditions of any permit or Environmental Laws. There is not now pending or,
to the best of Seller's knowledge, threatened, nor any basis known to Seller
for, any action, claim, investigation, lawsuit, proceeding or order against
Seller the properties which are the subject of the Leases, under any
Environmental Laws or otherwise with respect to the use, storage, presence,
generation, manufacture or handling of any Hazardous Substance (as defined
herein) at the properties.
For purposes of this Section 3.18, "Environmental Laws" shall mean any
federal, state, regional, county, municipal, local laws, statutes, rules,
ordinances, regulations and codes, as well as policies, orders, decrees,
judgments, permits, directives, guidances, cleanup standards, injunctions and
binding interpretations issued, promulgated, approved or entered thereunder,
relating to pollution or protection of the environment, including, but not
limited to, those relating to the release or threatened release of Hazardous
Substances into the environment or otherwise relating to the presence,
manufacture, transfer, generation, production, refinement, pumping, processing,
distribution, use, treatment, storage, transport or handling of Hazardous
Substances.
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For purposes of this Section 3.18, "Hazardous Substance" shall mean any
toxic waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance or waste, petroleum or
petroleum-derived substance or waste, infectious or mutagenic or carcinogenic
substance or waste, radioactive substance or waste, or any constituent of any
such substance or waste, which is regulated under or defined by any
Environmental Law.
3.19 Brokers or Finders. Seller has not entered into any agreement or
incurred any obligation, directly or indirectly, for the payment of any broker's
commissions or finder's fees in connection with this transaction.
3.20 Name. Seller uses the name "ATI Communications" with respect to the
Service Business. Neither Seller nor any of its affiliates has a federal or
state registration or pending registration which includes the name "ATI", and
Seller has the right to grant to Buyer the right to use the name "ATI". No
person has a right to receive any royalty or similar payment in respect to the
use of the name "ATI" by Seller or Buyer, and to the best of Seller's knowledge,
the use of the name ATI is not infringing upon or otherwise violating the rights
of any third party. No proceedings have been instituted against or notices
received by any Seller alleging that Seller's use of the name "ATI" infringes
upon or otherwise violates any rights of a third party.
3.21 Survival of Representations and Warranties. The covenants,
representations, warranties and agreements contained in this Agreement by Seller
shall survive the Closing Date and shall terminate and expire on the close of
business on the third anniversary of the Closing Date and shall be of no force
or effect thereafter, except with respect to any claim with respect thereto
under Section 8.03 of this Agreement, written notice of which shall have been
delivered to Seller on or prior to the third anniversary of the Closing Date.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
As an inducement to Seller to enter into this Agreement, Buyer
represents and warrants to Seller, and as to covenants agrees with Seller, as
follows:
4.01 Incorporation. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of California.
4.02 Authority. This Agreement constitutes a valid and binding
agreement, enforceable against Buyer in accordance with its terms, and excepting
the approval of the Board of Directors of Buyer, no authorizations, consents or
approvals not already obtained, whether of governmental bodies or otherwise, are
necessary in order to enable Buyer to enter into and perform this Agreement.
Consummation of the transactions herein contemplated, and the fulfillment of the
terms of this Agreement will not conflict with or result in a breach of any of
the terms or provisions of, or constitute a default under, or result in the
creation or imposition of any
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lien, charge or encumbrance upon any of the property or assets of Buyer pursuant
to the terms of, or result in the acceleration of any obligations or payment of
a penalty under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which Buyer is a party or by which Buyer may be bound
or to which any of the property or assets of Buyer is subject, the Certificate
of Incorporation or Bylaws of Buyer, or any statute or any order, decree,
judgment, rule or regulation applicable to Buyer of any court or of any
regulatory authority or other governmental body having jurisdiction over Buyer.
4.03 Judgments, Decrees and Orders in Restraint of Business. Buyer is
not a party or subject to any judgment, decree or order entered in any suit or
proceeding brought by any governmental agency or any other person enjoining the
Buyer in respect of any of its business practices or the acquisition or
disposition of any property or the conduct of its business in any area.
4.04 Brokers or Finders. Buyer has not entered into any agreement or
incurred any obligation, directly or indirectly, for the payment of any broker's
commissions or finder's fees in connection with this Agreement.
4.05 Survival of Representations and Warranties. The covenants,
representations, warranties and agreements contained in this Agreement by Buyer
shall survive the Closing Date and shall terminate and expire on the close of
business on the third anniversary of the Closing Date and shall be of no force
or effect thereafter, except with respect to any claim with respect thereto
under Section 8.03 of this Agreement, written notice of which shall have been
delivered to Buyer on or prior to the third anniversary of the Closing Date.
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
5.01 Conditions Precedent to the Performance of Seller's Obligations.
The obligations of Seller to sell the Service Assets pursuant to this Agreement
are subject, at the option of Seller, to the fulfillment on or before the
Closing Date of each of the following conditions:
(a) Compliance with Terms. At the Closing Date, all of the
terms, conditions and agreements herein to be complied with and
performed by Buyer at or before the Closing Date shall have been
complied with or performed in all material respects.
(b) Accuracy of Representations and Warrants. Seller shall not
have acquired information that there is any material error, misstatement
or omission in any of the representations or warranties made herein by
Buyer. The representations and warranties made by Buyer in this
Agreement shall be correct and complete at and as of the Closing Date,
with only those exceptions which have been approved in writing by
Seller.
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(c) Delivery of Required Items. Buyer shall have delivered all
items set forth in Section 7.02 below.
(d) Transaction Legal. There shall be no order, decree or ruling
by any court or governmental agency or threat thereof or any other fact
or circumstance which might prohibit or render illegal the transactions
contemplated by this Agreement.
(e) Opinion of Counsel. Seller shall have received the favorable
opinion of counsel for Buyer, dated as of the date of the Closing, in
form and substance satisfactory to counsel for Seller, with respect to
the matters set forth in Sections 4.01 and 4.02 above; provided that
counsel shall not be required to opine with respect to the
enforceability of choice of law provisions or the enforceability of the
covenant not to compete delivered by Buyer. Such counsel may base that
portion of its opinion pertaining or based upon factual matters upon
certificates or letters signed by a principal officer or officers of the
Seller, and may rely as to such matters upon such certificates or
letters, provided such counsel, after reasonable inquiry, has no reason
to believe that such matters are untrue. Copies of such certificates and
opinions so relied upon shall be delivered to Seller at the Closing.
5.02 Conditions Precedent to the Performance of Buyer's Obligations. The
obligations of Buyer to purchase the Service Assets pursuant to this Agreement
are subject to the fulfillment on or before the Closing Date of each of the
following conditions:
(a) Compliance with Terms. At the Closing Date, all of the
terms, conditions and agreements herein to be complied with and
performed by Seller at or before the Closing Date shall have been
complied with or performed in all material respects.
(b) Warranty Contracts and Service Contracts. Buyer shall have
received copies of all of the Warranty Contracts and Service Contracts,
and all modifications and amendments thereof.
(c) Spare Parts, Vehicles, Tools and Equipment. Buyer shall have
been given reasonable access to conduct an inventory and inspection of
the Spare Parts, Vehicles, Tools and Equipment.
(d) Accuracy of Representations and Warranties. Buyer shall not
have acquired information that there is any material error, misstatement
or omission in any of the representations or warranties made herein by
Seller. The representations and warranties made by Seller in this
Agreement shall be correct and complete at and as of the Closing Date,
subject only to those exceptions which have been approved in writing by
Buyer, in its sole and absolute discretion.
(e) Delivery of Required Items. Seller shall have delivered all
items set forth in Section 7.01 below.
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(f) Transaction Legal. There shall be no order, decree or ruling
by any court or governmental agency or threat thereof or any other fact
or circumstance which might prohibit or render illegal the transactions
contemplated by this Agreement.
(g) Approval of Exhibits. The form and contents of each of the
Exhibits and related deliveries shall be satisfactory to Buyer.
(h) Approval By Board of Directors. Buyer's Board of Directors
shall have approved Buyer's purchase of the Service Assets.
(i) Opinion of Counsel. Buyer shall have received the favorable
opinion of counsel for Seller, dated as of the date of the Closing, in
form and substance satisfactory to counsel for Buyer, with respect to
the matters set forth in Sections 3.01 and 3.02 above (provided that
counsel shall not be required to opine with respect to the
enforceability of choice of law provisions or the enforceability of the
covenant not to compete delivered by Buyer), and to the effect that upon
delivery by Seller to Buyer of the Bill of Sale as set forth on Exhibit
"H" and the Blanket Assignment set forth on Exhibit "I", no consents,
authorizations, approvals, permits, filings or other actions or
governmental bodies or others (other than any provided or satisfied at
the Closing) are necessary in order to transfer title to the Service
Assets to Buyer. Such counsel may base that portion of its opinion
pertaining or based upon factual matters upon certificates or letters
signed by a principal officer or officers of the Seller, and may rely as
to such matters upon such certificates or letters, provided such
counsel, after reasonable inquiry, has no reason to believe that such
matters are untrue. Copies of such certificates and opinions so relied
upon shall be delivered to Buyer at the Closing.
ARTICLE VI
TERMINATION
6.01 Termination. Anything herein to the contrary notwithstanding, this
Agreement may be terminated and abandoned at any time:
(a) by mutual written consent of Buyer and Seller;
(b) by Buyer, on the Closing Date, if any one or more of the
conditions precedent to its obligations herein shall not have been
fulfilled or waived in writing by Buyer; and
(c) by Seller, on the Closing Date, if any one or more of the
conditions precedent to its obligations herein shall not have been
fulfilled or waived in writing by Seller.
If this Agreement is terminated pursuant to any of the foregoing
provisions, this Agreement shall become wholly void and of no effect, and there
shall be no liability on the part of
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either Buyer to Seller, Seller to Buyer, or their respective boards of directors
as a result of such termination (except such liability arising pursuant to the
indemnification provisions of Article VIII for, among other things, breach of
covenants, representations and warranties and existence of suits and other
actions), and in such event each party shall bear all expenses incurred by it in
connection with this Agreement and any transactions in connection therewith.
6.02 Closing. Provided that all of the conditions to Closing have been
fully satisfied, the transactions contemplated by this Agreement shall be deemed
consummated effective at 11:59 p.m. on December 31, 1997 (the "Closing Date"),
or at such other place or time as shall be mutually agreed upon in writing
between Buyer and Seller (the "Closing").
ARTICLE VII
DELIVERIES AT CLOSING
7.01 Deliveries of Seller. At the Closing, Seller shall deliver to Buyer
all of the following:
(a) Bill of Sale. Originally executed Bill of Sale for the
Certain Assets of Seller in form and content as set forth in Exhibit "H"
attached hereto, as well as any Vehicle bills of sale and transfer
documents necessary to transfer title to the Vehicles.
(b) Blanket Assignment. Blanket assignment by Seller to Buyer of
all right, title and interest to the Warranty Contracts, the Service
Contracts and the Leases in the form of Exhibit "I" as well as such
other assignments (including specific Lease Assignments) which Buyer
reasonably believes are necessary to vest in Buyer all of Seller's
right, title and interest in and to the Service Assets.
(c) Consents. Consent of the lessors under the Leases for the
Bethel Park Leased Premises.
(d) Customer List. True and correct copies of the Customer List
as of the Closing Date.
(e) Warranty and Service Contracts. The original of each
Warranty and Service Contract and any amendments thereto.
(f) Closing Certificate. A certificate certifying the amount of
Prepaid Revenues.
(g) Subleases. Subleases in the form of Exhibit "J" executed by
Seller.
(h) Seller Vehicle Lease. A Seller Vehicle Lease if the form of
Exhibit "L" executed by Seller.
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7.02 Deliveries of Buyer. At the Closing, Buyer shall deliver to Seller:
(a) Initial Payment. The initial payment required by Section
2.03(a).
(b) Subleases. Subleases in the form of Exhibit "J" executed by
Buyer.
(c) Seller Vehicle Lease. A Seller Vehicle Lease if the form of
Exhibit "L" executed by Buyer.
ARTICLE VIII
POST-CLOSING COVENANTS
8.01 Seller's Appointment of Buyer to Install and Service Telephone
Systems.
(a) Installation. Seller hereby appoints and gives Buyer on an
installation-by-installation basis the right of first refusal, for a
five (5) year period, effective upon the Closing Date, to install all
telephone systems sold or leased by Seller. Seller agrees that it will
not divest its business of selling telephone system to any affiliate
without such affiliate appointing and giving to Buyer such right of
first refusal with respect to its business. Seller agrees to pay to
Buyer for the installation of each such telephone system a fee equal to
twenty-five percent (25%) of the amount charged by Seller for such
telephone system; provided that the amount paid to Buyer for any
installation shall not be less than twenty-five percent (25%) of one and
seven tenths (1-7/10) of the cost to Seller of the installed system
without Buyer's approval. Such fee shall be due and paid within fifteen
(15) days after full payment is received by Seller from the customer or
a signed check-off list is received by Seller from the customer (subject
to credit to Seller for amounts that are determined to be
uncollectable).
(b) Service. Seller hereby agrees for five (5) years after the
Closing Date to exclusively recommend Buyer to service telephone systems
sold or leased by Seller, and not to recommend to its customers any
other service provider for warranty or other service needs (whether on a
contract or time and materials basis), including repair or moving of
telephone systems or additions to or changes to telephone systems.
(c) MACs and Maintenance.
(i) Commissions. Subject to the provisions of
subparagraph (ii) below, Buyer shall pay to Seller (i) ten
percent (10%) of the amount received from any past, present or
future customers of Seller for moves, adds, and changes, new
maintenance contracts not sold by Seller and the sale of data
cabling during the five (5) year period from and after the
Closing, which amounts shall be paid within fifteen (15) days
after the end of the month in which Buyer invoices the customer
(subject to credit to Buyer for amounts that are determined to
be uncollectable); and (ii) fifteen percent (15%) of the
contract price of any new maintenance contract sold by Seller
pursuant to which maintenance services will be provided by
Buyer) during such five (5) year period, which amounts shall be
paid
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within fifteen (15) days after the end of the month in which
Buyer invoices the customer (subject to credit to Buyer for
amounts that are determined to be uncollectible).
(ii) Target Revenues. The parties have established the
Purchase Price and the commission structure as set forth in
paragraph (a) above based upon the premise that either the
Annualized Installation Revenue shall be not less than Two
Million Three Hundred Dollars ($2,300,000) or the Annualized
Service Revenue shall be not less than Four Million Two Hundred
Thousand Dollars ($4,200,000)(each referred to as "Target
Revenues"). If neither of the Target Revenues have been met on
any date as set forth below, the Purchase Price and/or the
commission structure shall be modified as follows:
(A) If as of the first anniversary neither of
the Target Revenues have been met, no commissions shall
be due or payable to Seller pursuant to Section
8.01(c)(i) for the period commencing on the first
anniversary and for six (6) months thereafter.
(B) If as of the date eighteen months after the
Closing neither of the Target Revenues have been met, no
commissions shall be due or payable to Seller pursuant
to Section 8.01(c)(i) for the period commencing on such
date and for six (6) months thereafter.
(C) If as of the second anniversary neither of
the Target Revenues have been met, the total amount of
all commissions paid pursuant to Section 8.01(c)(i)
commencing from the Closing shall be deducted from the
Purchase Price and the amount paid by Buyer reduced
accordingly. If as of the second anniversary either of
the Target Revenues have been met and there has been any
period for which commission were not paid pursuant to
subparagraphs (A) or (B) above, such commissions shall
be retroactively paid.
(D) If as of the end of any subsequent calendar
quarter neither of the Target Revenues have been met, no
commissions shall be due Seller for such quarter, and
Buyer shall be entitled to offset amounts previously
paid Seller against amounts otherwise due Seller.
Notwithstanding the foregoing, if at the end of any
calendar year either of the Target Revenues have been
met and there has been any period during such year for
which commissions were not paid pursuant to this
subparagraph(D) above, such commissions shall be
retroactively paid. The elimination of the commissions
pursuant to this Subparagraph (D) shall not apply if
Target Revenues have been met as of the date eighteen
months after the Closing and as of the second
anniversary of the Closing. However, in such case, if in
any subsequent quarter neither of the Target Revenue has
been met, Buyer shall be entitled, upon sixty (60) days
prior written notice, to terminate any or all of the
Subleases and/or the License for the Leased Premises.
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(d) Quality of Services. Buyer agrees to render
installation and maintenance services in a consistent, timely,
professional and industry acceptable manner. Should Buyer not do
so, Seller shall give written notice to Buyer of such failure,
with detailed backup. Should Buyer fail to remedy any failure
within forty-five (45) days after its receipt of notice,
Seller's obligations under this Section 8.01 shall cease.
8.02 Parts for Warranty Repairs and Service; Designation as Authorized
Service Provider.
(a) Warranty Contract Repairs and Service. Seller agrees to
promptly supply to Buyer at no cost to Buyer all replacement parts
necessary for repairs required under Warranty Contracts and prepaid
Service Contracts assumed by Buyer, provided that, for Warranty
Contracts still under manufacturer's warranty, Buyer submits such
documentation as is reasonably required by the manufacturer with respect
to warranty replacement parts.
(b) Parts for Other Service (Including Additions to Telephone
Systems). Seller agrees to sell and promptly deliver to Buyer spare
parts and telephone equipment for system service, repairs and additions
at ten percent (10%) over Seller's cost. To the extent available in
Seller's inventory, Seller agrees to provide spare parts and telephone
equipment for system service, repairs and additions to Buyer prior to
any service call on an anticipated needs basis, and to accept the return
of any equipment not used within three (3) business days.
(c) Designation as Authorized Service Provider. Seller agrees to
use commercially reasonable efforts to assist Buyer to become an
authorized service provider for Toshiba and other necessary products.
8.03 Buyer Service Responsibility. From and after the Closing, Buyer
shall adhere to the provision of Section 11 of the Toshiba America dealer
agreement, a copy of which is attached as Exhibit "K".
8.04 Indemnification by Buyer and Seller.
(a) Indemnification by Seller. Seller hereby agrees to indemnify
and hold Buyer, its officers, directors, employees, agents, advisers,
affiliates and associates ("Buyer Indemnified Party") harmless, from all
loss, liability and expense (including reasonable attorneys' fees and
expenses in connection with the contest of any claim and interest on any
claim paid by Buyer), which Buyer may incur or sustain by reason of the
fact that (i) Seller should breach or fail to comply with any of the
terms, conditions, covenants or agreements or any exhibits attached
hereto or any of them contained herein, (ii) any representations or
warranties made by Seller in this Agreement, the Exhibits, or in any
certificates, lists or documents delivered pursuant hereto should prove
to be false or
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erroneous, (iii) any claims, actions, suits, investigations or
proceedings, pending or threatened, are or have been made or commenced
by, against, involving, relating to or affecting any part of the Service
Assets with respect to any state of facts existing or any event
occurring prior to the Closing Date except for the Assumed Liabilities,
or (iv) any action, arbitration, suit, proceeding, compromise,
settlement, assessment or judgment arising out of or incidental to any
of the matters indemnified against in this Section 8.01(a); provided,
however, that Seller shall not be obligated to indemnify Buyer and hold
it harmless with respect to any settlement of a claim to which Seller
has not consented, which consent by Seller shall not unreasonably be
withheld, provided that Seller's consent shall not be required for any
matters on any individual claims below $1,000.
(b) Indemnification by Buyer. Buyer hereby agrees to indemnify
and hold Seller, its officers, directors, employees, agents, advisers,
affiliates and associates ("Seller Indemnified Party"), harmless from
all loss, liability and expense (including reasonable attorneys' fees
and expenses in connection with the contest of any claim and interest on
any claim paid by Seller), which Seller may incur or sustain by reason
of the fact that (i) Buyer should breach or fail to comply with any of
the terms, conditions, covenants or agreements or any exhibits attached
hereto, or any of them contained herein, (ii) any representations or
warranties made by Buyer in this Agreement should prove to be false or
materially erroneous, (iii) any claims, actions, suits, investigations
or proceedings, pending or threatened, are or have been made or
commenced by, against, involving or arising out of (A) the Assumed
Obligations, or (B) attributable to any state of facts existing or any
event occurring after the Closing Date (to the extent included in the
Assumed Obligations), (iv) all claims, actions, suits, investigations or
proceedings, pending or threatened, are or have been made or commenced
by, against, involving or arising out of the operation by Buyer of the
Service Business of Seller acquired hereunder, or the sale, transfer or
other disposition by Buyer of all or any part of the Service Assets,
from and after the Closing Date, except, in each case, if such liability
arises in connection with the breach of any of the representations,
warranties, covenants or agreements made by Seller in this Agreement,
any Schedule or Exhibit hereto or any certificate or instrument
delivered in connection herewith, (v) any attempt (whether or not
successful) by any person to cause or require a Seller Indemnified Party
to pay or discharge any debt, obligation or liability of Seller assumed
by Buyer pursuant to this Agreement, notwithstanding the Closing, or
(vi) any action, suit, proceeding, compromise, settlement, assignment,
judgment or arbitration arising out of or incidental to any of the
matters indemnified against in this Section 8.01(b); provided, however,
that Buyer shall not be obligated to indemnify a Seller Indemnified
Party and hold it harmless under this Section 8.01(b) with respect to
any settlement of a claim to which Buyer has not consented, if such
consent has not been unreasonably withheld.
(c) Right to Defend, Etc. If the facts giving rise to any such
indemnification shall involve any actual claim or demand by any third
party against a Buyer Indemnified Party or a Seller Indemnified Party
(referred to hereinafter as an "Indemnified Party"), the indemnifying
parties shall be entitled to notice of and entitled
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(without prejudice to the right of any Indemnified Party to participate
at its own expense through counsel of its own choosing) to defend or
prosecute such claim at their expense and through counsel of their own
choosing if they give written notice of their intention to do so no
later than the time by which the interests of the Indemnified Party
would be materially prejudiced as a result of its failure to have
received such notice; provided, however, that if the defendants in any
action shall include both the indemnifying parties and Indemnified
Party, and the Indemnified Party shall have reasonably concluded that
counsel selected by the indemnifying parties have a conflict of interest
because of the availability of different or additional defenses, the
Indemnified Party shall have the right to select separate counsel to
participate in the defense of such action on its own behalf, at the
expense of the indemnifying parties. The Indemnified Party shall
cooperate fully in the defense of such claim and shall make available to
the indemnifying parties pertinent information under its control
relating thereto.
(d) Indemnification Basket. Notwithstanding anything contained
herein, neither party shall be entitled to indemnification hereunder
unless the aggregate of all amounts to which such party shall be
entitled hereunder exceeds Twenty-Five Thousand Dollars ($25,000), in
which case such party shall be entitled to an amount by which its
damages exceed Twenty-Five Thousand Dollars ($25,000).
8.05 Non-Competition.
(a) Noncompete By Seller and Parent.
(i) Business. Seller and Parent each hereby covenant and
agree that for five (5) years from and after the Closing Date,
it will not, directly or indirectly or through any subsidiary or
joint venture, engage in any Service Business which competes
with Buyer's Service Business in Pennsylvania, Maryland,
northern Virginia or Washington, D.C. Notwithstanding the
foregoing, neither Seller nor Parent shall be precluded from
operating any continuing Service Business which it acquires in a
bona fide business transaction provided that (i) such Service
Business is ancillary to and part of an integrated sales and
service business; (ii) such Service Business is not conducted
under the name "ATI"; and (iii) such Service Business shall not
result in a reduction, directly or indirectly, of the amount of
installations which Buyer would otherwise be entitled to
provided pursuant to Section 8.01(a) hereof.
(ii) Employees. Seller agrees to that it will not
solicit or offer employment to any employee hired by Buyer
pursuant to Section 3.09 for a period of at least three (3)
years after the date of the Closing unless such employee is not
at the time of such solicitation or offer and has not been at
any time during the immediately preceding six (6) month period
employed by Buyer.
(iii) Injunction. Seller acknowledges that compliance
with the covenants contained herein is necessary to protect the
goodwill that was acquired
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by Buyer pursuant to this Agreement. Seller further acknowledges
that any remedy at law for the breach of the foregoing covenants
will be inadequate, and that Alpha Micro and its successors and
assigns shall be entitled to injunctive relief as well as all
other remedies which may be available at law or in equity.
(iv) Separate Covenants. The parties intend that the
covenants contained in this Section 8.04(a) shall be construed
as a series of separate covenants, one for each county. Except
for geographic coverage, each such separate covenant shall be
deemed identical. If any one of the covenants is declared
invalid for any reason, this ruling shall not affect the
validity of the remainder of the covenants, which shall remain
in effect as if the provision had been executed without the
invalid covenants, and the covenant declared invalid shall be
construed, at the option of Buyer, by limiting or reducing it,
so as to be enforceable to the extent compatible with the
applicable law as it shall then appear.
(b) Noncompete by Buyer.
(i) Sale of Telephone Systems. Buyer hereby covenants
and agrees that for five (5) years from and after the Closing
Date, it will not, directly or indirectly or through any
subsidiary or joint venture, (i) engage in the business of
selling telephone systems in Pennsylvania, Maryland, northern
Virginia or Washington, D.C; or (ii) refer any person or entity
in the Pennsylvania, Maryland, northern Virginia or Washington,
D.C area to any other vender to purchase a telephone system.
Nothing herein, however, shall be deemed to preclude Buyer from
selling system replacement parts or additional equipment for
existing telephone systems.
(ii) Injunction. Buyer acknowledges that any remedy at
law for the breach of the foregoing covenants will be
inadequate, and that Seller and its successors and assigns shall
be entitled to injunctive relief as well as all other remedies
which may be available at law or in equity.
(iii) Separate Covenants. The parties intend that the
covenants contained in this Section 8.04(b) shall be construed
as a series of separate covenants, one for each county. Except
for geographic coverage, each such separate covenant shall be
deemed identical. If any one of the covenants is declared
invalid for any reason, this ruling shall not affect the
validity of the remainder of the covenants, which shall remain
in effect as if the provision had been executed without the
invalid covenants, and the covenant declared invalid shall be
construed, at the option of Seller, by limiting or reducing it,
so as to be enforceable to the extent compatible with the
applicable law as it shall then appear.
8.05 Right to Audit. To the extent payments are required hereunder, the
party making such payment shall include with such payment a statement detailing
the calculation of the amounts due. In order to verify the accuracy of the
amounts paid hereunder, either party shall
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have the right, from time to time, but no more often than twice in any eighteen
(18) month period, during normal business hours, to have access to and audit
those books and records of the other to perform such verification Such audit
shall be at the sole cost and expense of the party so electing, unless such
audit reveals an error of greater than five percent (5%) over reported amounts,
in which event the audited party shall reimburse the auditing party the expenses
of such Audit. The audited party shall make any appropriate corrective payment
and reimbursement of audit expenses to the auditing party within fifteen (15)
days after demand. Such right to audit shall terminate twelve (12) months after
the later of the date the last payment is required or made hereunder.
ARTICLE IX
CONDUCT OF BUSINESS PENDING THE CLOSING
9.01 The Seller covenants and agrees that, prior to the Closing Date or
the earlier termination of this Agreement pursuant to Section 6.01 hereof,
unless the Buyer shall otherwise agree in writing or as otherwise expressly
permitted by this Agreement:
(a) Preservation of Business. The business of Seller shall be
conducted only in the ordinary course of business and consistent with
past practice, and the Seller shall use its best efforts to maintain and
preserve its business, assets, prospects, employees, customers and other
advantageous business relationships. Without limiting the generality of
the foregoing, Seller shall (i) maintain the Service Assets in
substantially their current state of repair, excepting normal wear and
tear, (ii) through the Closing Date, maintain insurance covering the
Service Assets of the same nature and level as that in effect on the
date hereof, and (iii) make timely payments on accounts payable and
perform other obligations of the Seller (including under the Warranty
Contracts, the Service Contracts and the Leases) in accordance with the
Seller's past practice.
(b) Preservation of Assets. Seller shall not do any of the
following: (i) issue, sell, pledge, dispose of or encumber any capital
stock of the Seller; (ii) except in the ordinary course of business,
sell, pledge, dispose of or encumber any of the Service Assets; (iii)
whether or not in the ordinary course of business, sell, pledge, dispose
of or encumber any material portion of the Service Assets; or (iv)
authorize or propose any of the foregoing, or enter into any contract,
agreement, commitment or arrangement to do any of the foregoing.
ARTICLE X
GENERAL PROVISIONS
10.01 Notification of Changes. Each party will promptly notify the other
in writing of the existence or happening of any material fact, event or
occurrence which may tend to alter the accuracy or completeness of any
representation or warranty contained in this Agreement.
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<PAGE> 24
10.02 Notices. Except as otherwise expressly provided herein, any notice
herein required or permitted to be given shall be in writing and shall be
personally served or sent by overnight courier, by registered mail or certified
mail, postage prepaid, or by prepaid telex, telecopy or telegram and shall be
deemed to have been given when such writing is received by the intended
recipient thereof. For the purposes hereof, the addresses of the parties hereto
(until notice of a change thereof served as provided in this Section 10.02)
shall be as follows:
<TABLE>
<S> <C>
If to Buyer: Alpha Microsystems
2722 South Fairview Street
Santa Ana, California 92704
Attn: Chief Financial Officer
Fax No.: (714) 641-7678
With a copy to: Allen, Matkins, Leck, Gamble & Mallory LLP
515 South Figueroa Street, 7th Floor
Los Angeles, California 90071
Attn: Debra Dison Hall, Esq.
Fax No.: (213) 620-8816
If to Seller: ATI Communications
105 Broughton Road
Bethel Park, Pennsylvania 15102
Attn: Mark D. Jackson
Fax No.: (412) 831-1323
With copies to: Bryan Cave LLP
One Metropolitan Square, Suite 3600
St. Louis, MO 63102-2750
Attn: Llewellyn Sale III
Fax: (314) 259-2020
and Applied Cellular Technology, Inc.
400 Royal Palm Way, Suite 410
Palm Beach, FL 33480
Attn: Scott R. Silverman
Fax: _________________
</TABLE>
10.03 Entire Agreement. This Agreement, together with the Exhibits
hereto, constitutes the entire understanding between the parties with respect to
the subject matter hereof, superseding all negotiations, prior discussions and
preliminary agreements. This Agreement may not be changed except in writing
executed by Buyer and Seller.
10.04 Payment of Expenses. Buyer and Seller shall each be responsible to
pay all of its own respective expenses as incurred in connection with this
Agreement, the transactions contemplated hereby, the negotiations leading to the
same and the preparations made for carrying
-24-
<PAGE> 25
the same into effect, and no party shall be liable or responsible for the fees
or expenses incurred by any other party.
10.05 Arbitration. Any matter arising under, relating to or concerning
this Agreement (except as expressly set forth in this Section 10.05) shall be
resolved by final and binding arbitration by the local office of the
JAMS/Endispute ("JAMS") closest to Buyer or if JAMS is unavailable, by an
organization of similar nature agreed upon by Buyer and Seller. Such arbitration
shall be conducted according to the JAMS Rules of Practice and Procedure then in
effect, except that the parties shall be entitled only to such discovery as
permitted by C.C.P. Section 1283.05 and any amendment thereto, or successor
statute. Any party may seek to compel the other to comply with the terms of this
Section 10.05 by petition to any court of general jurisdiction. The prevailing
party in any proceeding to enforce this Section 10.05 shall be entitled to the
Court's order for payment of attorneys' fees and costs in connection with said
proceeding. In the case of a judgment on an arbitrator's award, any party may
seek to have the arbitrator's award entered by any court having jurisdiction
thereof. The prevailing party in any arbitration shall be entitled to have
included as part of the arbitrator's award the attorneys' fees and costs
incurred by such prevailing party in connection with the arbitration, including
amounts advanced.
Buyer and Seller agree that in the case of any dispute in which
extraordinary relief may be available, then and only then, a court of competent
jurisdiction shall be presented with, and make a determination of, the propriety
of granting and enforcing such extraordinary relief, upon such conditions as the
court shall determine as proper, and the provisions of this Section 10.05
Arbitration shall not be applicable.
10.06 Attorneys' Fees. Should any litigation be commenced between the
parties hereto or their representatives concerning any provision of this
Agreement or the rights and duties of any person or entity in relation thereto,
the party prevailing in such litigation shall be entitled, in addition to such
other relief as may be granted, to an award of all actual attorneys' fees and
costs incurred in such litigation, without regard to any schedule or rule of
court purporting to restrict such an award, including, without limitation,
actual attorneys' fees, costs and expenses incurred in connection with (i)
enforcing, perfecting and executing such judgment, (ii) post-judgment motions;
(iii) contempt proceedings; (iv) garnishment, levee, and debtor and third-party
examinations; (v) discovery; and (vi) bankruptcy litigation.
10.07 Waiver. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be or be construed as a further or continuing waiver of any such
term, provision or condition or as a waiver of any other term, provision or
condition of this Agreement.
10.08 Captions. The captions of the Sections of this Agreement are for
convenience only and shall not be considered or referred to in resolving
questions or interpretation.
-25-
<PAGE> 26
10.09 Counterparts. This Agreement may be executed in one or more
counterparts and counterparts signed in the aggregate by Buyer and Seller shall
constitute a single original instrument.
10.10 Assignment. This Agreement shall not be assignable by any party
without the consent of the other party. Notwithstanding the foregoing, Buyer may
assign this Agreement in whole or in part, to any subsidiary, affiliate or
parent corporation or any successor of Buyer by merger, consolidation or
acquisition of a substantial portion of its assets. In the case of any such
assignment, Buyer shall continue to remain liable for its obligations hereunder.
10.11 Severability. If any term or provision of this Agreement, or the
application thereof to any person or circumstance, shall to any extent be found
to be invalid, void or unenforceable, the remaining provisions and any
application thereof shall, nevertheless, continue in full force and effect
without being impaired or invalidated in any way.
10.12 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall be binding upon and shall inure to the benefit of the
parties hereto, their personal representatives, heirs, executors,
administrators, successors and/or assigns.
10.13 Further Actions. Each of the parties hereto agrees to take any and
all actions reasonably necessary in order to carry out the provisions of this
Agreement.
10.14 Gender and Number. As used in this Agreement, the masculine gender
includes the feminine and neuter, the feminine gender includes the masculine and
neuter, the singular number includes the plural, the plural number includes the
singular, and the term "person" includes both a corporation and a natural
person.
10.15 Time. Time is of the essence in each provisions of this Agreement
of which time is an element.
10.16 Construction. This Agreement shall be construed in accordance with
its plain meaning and not against either party.
10.17 Choice of Law. This Agreement shall be governed by, and construed
in accordance with, the internal laws (as opposed to conflicts of law
provisions) of the State of California, excepting that the parties expressly
agree that Section 8.05(b) shall be governed by, and construed in accordance
with, the internal laws (as opposed to conflicts of law provisions) of the State
of Pennsylvania.
10.18 Public Announcements. Neither party shall make any public
announcements or public statements regarding the transactions contemplated
herein until after the Closing, unless approved in writing by the other, or
unless the disclosing party reasonably believes that disclosure is required by
law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
-26-
<PAGE> 27
"BUYER" "SELLER"
ALPHA MICROSYSTEMS, ADVANCED TELECOMM OF PITTSBURGH,
a California corporation a Pennsylvania Business Trust
By: By:
-------------------------------- ---------------------------------
Its: Its:
--------------------------- ----------------------------
ADVANCED TELECOMM OF BUTLER, INC.,
a Pennsylvania corporation
By:
---------------------------------
Its:
----------------------------
ADVANCED TELECOMM OF
WASHINGTON, D.C., INC.,
a Pennsylvania corporation
By:
---------------------------------
Its:
----------------------------
ADVANCED TELECOMM OF MARYLAND, INC.,
PARENT a Pennsylvania corporation
APPLIED CELLULAR TECHNOLOGY, INC.,
a Pennsylvania corporation By:
---------------------------------
Its:
----------------------------
By:
--------------------------------
Its:
---------------------------
-27-
<PAGE> 28
LIST OF EXHIBITS
Exhibit "A" Allocation of Purchase Price
Exhibit "B" Exceptions to Representations and Warranties
Exhibit "C" Spare Parts
Exhibit "D" Tools & Equipment
Exhibit "E" Vehicles
Exhibit "F" Leases and Security Deposits
Exhibit "G" Employees and ERISA Plans
Exhibit "H" Bill of Sale
Exhibit "I" Blanket Assignment
Exhibit "J" Subleases/License for Leased Premises
Exhibit "K" Service Responsibility
Exhibit "L" Seller Vehicle Lease
<PAGE> 1
Exhibit 10.61
SILICON VALLEY BANK
AMENDMENT TO LOAN AGREEMENT
BORROWER: ALPHA MICROSYSTEMS
ADDRESS: 2722 SOUTH FAIRVIEW STREET
SANTA ANA, CALIFORNIA 92704
DATED: OCTOBER 11, 1997
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY
BANK ("Silicon") and the borrower named above (the "Borrower").
The Parties agree to amend the Loan and Security Agreement between them
(the "Loan Agreement") dated July 10, 1995, as amended from time to time,
effective as of the date hereof. (Capitalized terms used but not defined in this
Amendment, shall have the meanings set forth in the Loan Agreement.)
1. MODIFICATION TO MATURITY DATE. The Maturity Date as set forth in the
Schedule to the Loan Agreement is hereby amended to be "October 10, 1998".
2. FEE. Borrower shall pay to Silicon a facility fee in the amount of
$15,000 in connection with this Amendment, which shall be in addition to all
interest payable under the Loan Agreement and all other amounts due thereunder,
and which shall not be refundable.
3. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
4. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and the Borrower, and
the other written documents and agreements between Silicon and the Borrower set
forth in full all of the representations and agreements of the parties with
respect to the subject matter hereof and supersede all prior discussions,
representations, agreements and understandings between the parties with respect
to the subject hereof. Except as herein expressly amended, all of the terms and
provisions of the Loan Agreement, and all other documents and agreements between
Silicon and the Borrower shall continue in full force and effect and the same
are hereby ratified and confirmed.
BORROWER: SILICON:
ALPHA MICROSYSTEMS SILICON VALLEY BANK
BY BY
-------------------------------- -----------------------------
PRESIDENT OR VICE PRESIDENT TITLE
-----------------------------
BY
--------------------------------
SECRETARY OR ASS'T SECRETARY
<PAGE> 1
Exhibit 10.62
(Typed on Alpha Microsystems Letterhead)
November 15, 1997
Jeffrey J. Dunnigan, CPA
209 Tarocco
Irvine, California 92720
Dear Jeffrey:
Alpha Microsystems is pleased to offer you the position of Chief Financial
Officer and Vice President of Finance and Administration reporting to Doug
Tullio, President and Chief Executive Officer. Your projected start date is
Monday, December 1, 1997. The following sets forth the terms and conditions of
your employment:
* Monthly base salary of $10,000, payable on Alpha Microsystems regular
payroll schedule.
* Annual Bonus Incentive of 30% of your base salary at 100% of plan
achievement. The 1998 Fiscal Year Bonus Incentive will be prorated. The
measurement factors and basis for payment for this plan will be
determined by the Compensation Committee of Alpha Microsystems' Board
of Directors.
* Contingent upon approval by the Stock Option Committee of the Board of
Directors, you will receive Incentive Stock Options for 100,000 shares
based on the closing price on Monday, December 1, 1997. Vesting and
other terms will be set forth in a separate Incentive Stock Option
Agreement to be signed by you and Alpha Microsystems.
* All medical, dental, long term disability and life insurance benefits
applicable to employees generally commence on the first day of the
month following hire. Employee coverage of company paid life insurance
equals twice your annualized base pay. Medical and dental insurance for
you and your eligible dependents is provided. Employee contributions
for medical/dental coverage vary, depending on the type of plan.
* You will be eligible to participate in the Alpha Microsystems Profit
Sharing 401(k) Plan beginning July 1, 1997.
* This offer is conditional upon successful verification of prior
employment, references and approval by the Board of Directors.
* All employment with Alpha Microsystems is for an unspecified term, is
continued at the mutual consent of the parties, and may be terminated
by either party at any time.
In addition to your base compensation, you will be eligible for vacation,
holidays, sick leave, health insurance, and other employee benefits under the
terms and conditions of the then existing Alpha Microsystems policies,
commensurate with other Alpha Microsystems employees at the same level as you.
Except as required in the performance of your duties, you will not at any time
during or after your employment use, disclose or disseminate any confidential
information, or any other information of a secret, proprietary, confidential or
generally undisclosed nature, relating to Alpha Microsystems, or its products,
services, clients, methods or procedures. You shall deliver to Alpha
Microsystems any and all copies of
<PAGE> 2
confidential information, or other Alpha Microsystems property, upon the
termination of the employment relationship, or at other time upon Alpha
Microsystems' request.
To the fullest extent allowed by law, any controversy, claim or dispute between
you and Alpha Microsystems (and/or any of its owners, employees or agents)
relating to or arising out of your employment or the cessation of that
employment will be submitted to final and binding arbitration in Orange County,
California, for determination in accordance with the American Arbitration
Association's National Rules for the Resolution of Employment Disputes as the
exclusive remedy for such controversy, claim or dispute. Possible disputes
covered by the above include (but are not limited to) wage, contract,
discrimination, or other employment-related claims under laws known as Title
VII, Fair Employment and Housing Act, Americans and Disabilities Act, Age
Discrimination in Employment Act, and any other statutes or laws relating to an
employee's relationship with his employer. However, claims for workers'
compensation benefits and unemployment insurance are not covered by this
arbitration agreement, and such claims may be presented by you to the
appropriate court or state agency as provided by California law. Judgment on the
award issued by the arbitrator may be entered in any court having jurisdiction
thereof.
This letter and the terms and conditions of employment contained herein
supersede and replace any prior understandings or discussions between you and
Alpha Microsystems regarding your employment. This letter sets forth the
complete agreement between you and Alpha Microsystems regarding your employment,
and may only be amended by an instrument in writing signed by both parties.
Jeffrey, all of us at Alpha Microsystems are looking forward to your joining our
organization.
Sincerely,
- ------------------------------------- ---------------------------------
Doug Tullio Michelle A. Duggin
President and Chief Executive Officer Human Resources Manager
Please indicate your acceptance by signing on the line below and returning a
copy to me:
Accepted: Date:
-------------------------- --------------------------
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<FISCAL-YEAR-END> FEB-22-1998
<PERIOD-START> FEB-24-1997
<PERIOD-END> NOV-23-1997
<CASH> 1,337
<SECURITIES> 3,830
<RECEIVABLES> 3,836
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<INVENTORY> 411
<CURRENT-ASSETS> 9,573
<PP&E> 11,690
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<BONDS> 119
0
0
<COMMON> 30,972
<OTHER-SE> (20,029)
<TOTAL-LIABILITY-AND-EQUITY> 14,574
<SALES> 4,508
<TOTAL-REVENUES> 14,268
<CGS> 2,943
<TOTAL-COSTS> 10,097
<OTHER-EXPENSES> 6,996
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<INCOME-PRETAX> (2,613)
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