<PAGE> 1
SECURITIES AND ECHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) September 1, 1998
-----------------
Alpha Microsystems
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
California 0-10558 95-3108178
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
2722 South Fairview Street, Santa Ana, California 92704
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 957-8500
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
------------------------------------------------------------------
(a) Financial Statements of Business Acquired
- Audited Consolidated Financial Statements of Delta CompuTec Inc
for the years ended October 31, 1997, 1996, 1995, except balance
sheet for 1995
- Unaudited Consolidated Financial Statements of Delta CompuTec Inc
for the three and six months ended April 30, 1998, except cash
flows for the three month periods
(b) Pro Forma Financial Information
- Unaudited Pro Forma Condensed Combined Balance Sheet as of May
24, 1998
- Unaudited Pro Forma Condensed Combined Statement of Operations
for the three months ended May 24, 1998
- Unaudited Pro Forma Condensed Combined Statement of Operations
for the fiscal year ended February 22, 1998
- Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
(c) Exhibits
10.1 Employment Agreement by and between the Registrant and John
T. DeVito dated September 1, 1998.
10.2 Amended and Restated Employment Agreement by and between the
Registrant and Douglas J. Tullio dated September 1, 1998.
<PAGE> 3
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 hereunto duly authorized.
Date: October 5, 1998 ALPHA MICROSYSTEMS
By: /s/ Douglas J. Tullio
---------------------------
Douglas J. Tullio
President and Chief
Executive Officer
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Delta Computec Inc.
Rochester, New York
We have audited the accompanying consolidated balance sheets of Delta
Computec Inc. and subsidiaries as of October 31, 1997 and 1996, and the related
consolidated statements of operations, changes in stockholders' investment
(deficit) and cash flows for each of the three years in the period ended October
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and preform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Delta Computec Inc. and
subsidiaries as of October 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1997 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE
Rochester, New York
January 9, 1998
<PAGE> 5
DELTA COMPUTEC INC.
-------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
OCTOBER 31, 1997 AND 1996
-------------------------
ASSETS
------
1997 1996
---- ----
CURRENT ASSETS:
Cash $ 18,944 $ 50,891
Accounts receivable, less allowance for
doubtful accounts of $124,199 and $263,808
in 1997 and 1996, respectively 1,673,643 2,634,039
Inventories 869,049 816,939
Prepaid expenses and other current assets 132,327 442,549
---------- ----------
Total current assets 2,693,963 3,944,418
FIELD SPARE PARTS, less accumulated
amortization of $ 769,322 and $ 216,746
in 1997 and 1996, respectively 2,756,169 2,546,133
PROPERTY AND EQUIPMENT:
Vehicles 74,614 74,614
Office furniture & equipment 229,564 228,311
Technical equipment 131,893 131,848
Purchased Software 56,405 32,472
Leasehold improvements 71,092 60,072
---------- ----------
563,568 527,317
Less: accumulated depreciation
and amortization 369,784 291,751
---------- ----------
Property and equipment, net 193,784 235,567
DEFERRED INCOME TAXES NON-CURRENT 150,000 150,000
OTHER ASSETS:
Goodwill, less accumulated amortization of
$333,966 and $286,256 in 1997 and 1996,
respectively 143,128 190,837
Other 89,185 104,431
---------- ----------
Total other assets 232,313 295,268
---------- ----------
Total assets $6,026,229 $7,171,386
========== ==========
See notes to consolidated financial statements.
<PAGE> 6
DELTA COMPUTEC INC.
-------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
OCTOBER 31, 1997 AND 1996
-------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
1997 1996
---- ----
CURRENT LIABILITIES:
Accounts payable $ 1,805,342 $ 2,526,884
Current portion of long-term debt - 75,000
Due to shareholder - -
Deferred service revenue 1,413,135 2,131,491
Accrued expenses:
Accrual for discontinuance of operations - 102,375
Payroll and payroll taxes 282,764 176,959
Sales taxes payable 210,197 499,782
Interest 64,658 96,563
Other 214,281 310,282
----------- -----------
Total current liabilities 3,990,377 5,919,336
LONG-TERM DEBT 750,000 750,000
DUE TO SHAREHOLDER 2,865,000 2,655,461
SUBORDINATED DEBENTURES 600,001 600,001
COMMITMENTS (Note 6) - -
SHAREHOLDERS' DEFICIT:
Preferred shares, $ .01 par value;
shares authorized 5,000,000 shares;
issued and outstanding: - -
none in 1997 and in 1996
Common shares, $ .01 par value;
shares authorized 20,000,000 shares; issued and
outstanding: 18,252,050 in 1997 and 6,811,575
in 1996 182,521 68,116
Additional paid-in capital 4,801,698 4,916,093
Accumulated deficit (7,163,368) (7,737,621)
----------- -----------
Total shareholders' deficit (2,179,149) (2,753,412)
----------- -----------
Total liabilities and shareholders' deficit $ 6,026,229 $ 7,171,386
=========== ===========
See notes to consolidated financial statements.
<PAGE> 7
DELTA COMPUTEC INC.
-------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
1997 1996 1995
---- ---- ----
REVENUES:
Service revenues $12,299,133 $10,911,153 $ 8,965,335
Equipment sales 1,077,001 1,302,780 1,326,935
----------- ----------- -----------
Total revenues 13,376,134 12,213,933 10,292,270
COSTS AND OPERATING EXPENSES:
Service costs 8,400,639 7,524,523 6,569,363
Cost of equipment sold 836,848 1,155,711 1,301,499
Selling, general and administrative 3,005,243 2,878,456 2,255,858
----------- ------------ -----------
Total costs and operating expenses 12,242,730 11,558,690 10,126,720
OTHER INCOME (EXPENSE), NET:
Interest expense (423,211) (87,241) (142,550)
Writedown of other assets - - (284,961)
Other, net 18,202 - 1,459
Total other (expense) (405,009) (87,241) (426,052)
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND EXTRAORDINARY GAIN 728,395 568,002 (260,502)
INCOME TAXES(BENEFIT) 36,000 7,489 (130,000)
----------- ----------- ----------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY GAIN 692,395 560,513 (130,502)
EXTRAORDINARY GAIN - 455,384 -
----------- ----------- ---------
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS 692,395 1,015,897 (130,502)
LOSS FROM DISCONTINUED OPERATIONS:
Loss from operations - (1,741,112) (3,632,417)
Loss on disposal (118,142) (102,375) -
Income taxes - - (1,333,000)
----------- ----------- ---------
Net loss from discontinued
operations (118,142) (1,843,487) (4,965,417)
NET EARNINGS (LOSS) $ 574,253 $ (827,590) $(5,095,919)
EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS $ .05 $ .08 $ (.02)
EXTRAORDINARY ITEM - .07 -
DISCONTINUED OPERATIONS (.01) (.27) (.73)
---- --- ---
LOSS $ .04 $ (.12) $ (.75)
=== === ===
See notes to consolidated financial statements.
<PAGE> 8
DELTA COMPUTEC INC.
-------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT (DEFICIT)
------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
<TABLE>
<CAPTION>
--- Common Stock --- Total
Additional Shareholders
Paid-in Accumulated Investment
Shares Amount Capital Deficit (Deficit)
---------- -------- ---------- ----------- -----------
<S> ` <C> <C> <C> <C> <C>
Balance, November 1, 1994................... 6,811,575 $ 68,116 $4,916,093 $(1,814,112) $ 3,170,097
Net loss fiscal 1995........................ - - - (5,095,919) (5,095,919)
---------- -------- ---------- ----------- -----------
Balance, October 31, 1995................... 6,811,575 68,116 4,916,093 (6,910,031) (1,925,822)
Net loss fiscal 1996........................ - - - (827,590) (827,590)
---------- -------- ---------- ----------- -----------
Balance, October 31, 1996................... 6,811,575 68,116 4,916,093 (7,737,621) (2,753,412)
Exercise of stock option.................... 11,440,475 114,405 (114,395) - 10
Net earnings fiscal 1997.................... - - - 574,253 574,253
---------- -------- ---------- ---------- -----------
Balance, October 31, 1997................... 18,252,050 182,521 4,801,698 (7,163,368) (2,179,149)
========== ======== ========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 9
DELTA COMPUTEC INC.
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 574,253 $ (827,590)$(5,095,919)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Extraordinary gain - (455,384) -
Accrual for loss on discontinued operations (102,375) 102,375 -
Depreciation & amortization 685,319 1,403,632 1,538,204
Deferred income taxes - - 1,202,000
Accounts receivable 960,397 2,116,373 712,144
Inventories (52,110) 864,866 519,534
Accounts payable & accrued expenses (743,645) (1,351,299) 1,284,493
Deferred service revenue (718,356) 466,783 (118,530)
Other - net 20,637 (226,441) 168,523
--------- ---------- -----------
Net cash provided by operating activities 624,120 2,093,318 210,449
--------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (36,252) (37,133) (292,441)
Additions to field spare parts (762,611) (1,044,973) (536,310)
Decrease in intangible assets 8,245 - -
--------- ---------- -----------
Net cash (used) by investing activities (790,618) 1,082,106 (828,751)
--------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder loans, net 209,539 539,130 571,670
Net (repayment) borrowings from note
payable to bank - (1,488,295) 66,136
Proceeds from sale of common shares 10 - -
Repayments on debt (75,000) (30,969) (12,500)
--------- ---------- -----------
Net cash (used)/provided by
financing activities 134,549 (980,134) 625,306
--------- ---------- -----------
NET INCREASE (DECREASE) IN CASH (31,948) 31,078 7,004
CASH - beginning of year 50,891 19,813 12,809
--------- ---------- -----------
CASH - end of year $ 18,943 $ 50,891 $ 19,813
========= ========== ===========
</TABLE>
See notes to consolidated financial statements.
SUPPLEMENTAL NONCASH FINANCING TRANSACTION
During 1996, the Company restructured its note payable to the bank resulting in
a non-cash reduction in the note payable, such reduction totaling $1,544,661,
and a corresponding increase in the amount due to its principal shareholder.
<PAGE> 10
DELTA COMPUTEC INC.
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
(1) General Description Of Business and Summary Of Significant Accounting
--------------------------------------------------------------------------
Policies
--------
Description of Business
-----------------------
The Company, by itself and through its wholly-owned subsidiary, SAI Delta,
Inc. ("SAI/Delta"), provides a wide array of Computer System, Data
Communication and Lan/Wan technical services and products to a customer
base which encompasses many industries and geographic locations. (See Note
2 below regarding the Company's Intronet Division and the closing of this
operation which was completed in December, 1996). The Company's customer
base includes large brokerage houses, banks, pharmaceutical companies,
major hospitals and long distance carriers, located principally in the
Northeast but reaching as far as Florida and the West Coast. Technical
services offered include, but are not limited to, design, product
procurement, installation, service, maintenance and on-site technical
management and consulting.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Delta Data Net, Inc. ("Data Net"), (see
Note 2), and SAI/Delta. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Presentation
---------------------
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company had net
earnings in Fiscal 1997. However, the Company incurred net losses in Fiscal
1996 and 1995, had a working capital deficit and a stockholders' deficit of
$1,296,414 and $2,179,149, respectively, as of October 31, 1997 and was in
default under certain loan agreements as of October 31, 1997. (See Note 3).
In view of the losses incurred in Fiscal 1996 and 1995 and related cash
flow difficulties, management initiated certain actions designed to return
the Company to its core business and profitability. Among these actions
were: (1) cost reductions associated with the centralization of operations
in its Teterboro, New Jersey location; (2) termination of operations of the
Data Net subsidiary; (3) the decision to terminate operations of the
Intronet Division, substantially accomplished at October 31, 1996, followed
by the closing of its office in December, 1996; (4) restructuring of its
primary lending relationship; (5) negotiation of a buy-out and settlement
of a debenture; (6) obtaining of an extension until November 1, 1998 in its
lending arrangement with its lenders; and (7) renegotiation of its lending
agreement with its commercial lenders whereby the maximum loan amounts have
been increased for the period October 1 through December 31, 1997 and
January 1 through June 30, 1998. These actions have resulted in the
realization of management's plan to improve profitability in the Company's
core business and increase cash flows in Fiscal 1997, enabling the Company
to maintain operations.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
<PAGE> 11
Reclassifications
-----------------
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current year's presentation.
Property and Equipment
----------------------
Property and equipment are stated at cost and are depreciated using the
straight-line method based on estimated useful lives which are as follows:
Estimated
Description Useful Life
----------- -----------
Technical equipment 5 - 7 years
Office furniture and equipment 3 - 7 years
Vehicles 2 - 3 years
Purchased software 2 - 3 years
Leasehold improvements 5 - 10 years
Maintenance and repairs are charged to expense as incurred. The cost of
renewals or improvements that increase the useful lives of the assets is
capitalized in the appropriate asset account. The gain or loss on property
retired or otherwise disposed of is credited or charged to operations and
the cost and accumulated depreciation are removed from the accounts.
The Company regularly assesses all of its long-lived assets for impairment
and recognizes a loss when the carrying value of an asset exceeds its fair
value.
The Company determined that no impairment loss need be recognized for
applicable assets in Fiscal 1997 or 1996.
Inventories
-----------
Inventories represent computer equipment and peripherals held for resale in
the normal course of business and consumable field spare parts. These
inventories are recorded at the lower of cost (first-in, first-out) or
market.
Field Spare Parts
-----------------
Field spare parts are stated at cost and are amortized using the
straight-line method over an estimated useful life of 5 years beginning in
the year after acquisition.
Goodwill
--------
Goodwill, representing the excess of the cost of acquired businesses over
the fair value of net assets acquired, is generally amortized on a
straight-line basis over periods ranging from ten to twenty years. On an
ongoing basis, the Company assesses impairment of such assets by reviewing
the operating performance of the underlying business or customer
relationships. In Fiscal 1995, this assessment resulted in recording
additional amortization expense of approximately $505,000 relating to such
impairment, $330,164 of which is included in the Fiscal 1995 Loss From
Discontinued Operations.
Deferred Service Revenue
------------------------
Service revenue is recognized ratably over the contract period. Deferred
service revenue represents billings in advance of the service period.
Revenue Recognition
-------------------
Service revenues: Contract service revenue is recognized ratably over the
contractual period or as services are provided. Revenue from service
rendered on a "time and materials" basis is recognized in the period the
work is performed.
Equipment sales: Revenue from equipment sales and the related cost of sales
are recognized when title to the equipment passes. Component repair revenue
and related costs are recognized upon completion of the repair.
<PAGE> 12
Income Taxes
------------
Income taxes are recognized for the amount of taxes payable or refundable
for the current year and deferred tax liabilities and assets for the future
tax consequence of events that have been recognized in the Company's
consolidated financial statements or tax returns.
Earnings Per Share
------------------
Earnings per common and common equivalent share are computed based upon the
weighted average of common shares outstanding during each year adjusted for
dilutive outstanding stock options and warrants using the Treasury Stock
Method. Weighted average shares outstanding for the years ended October 31,
1997, 1996 and 1995 totalled 14,741,548, 6,811,575 and 6,811,575,
respectively.
New Accounting Standards Pronouncements
---------------------------------------
1. EARNINGS PER SHARE
------------------
In March, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". The
new standard requires dual presentation of basic and diluted earnings per
share (EPS) on the face of the statement of operations and requires a
reconciliation of the numerators and denominators of basic and diluted EPS
calculations. The statement will be effective for periods ending after
December 15, 1997. Early adoption of the statement is not permitted. The
Company is currently evaluating what impact the adoption of this standard
will have on its disclosures.
2. Comprehensive Income
--------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and disclosure of comprehensive income and its components in
financial statement format and is effective for financial statements for
fiscal years beginning after December 15, 1997. 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. Items considered comprehensive income include foreign currency
items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. In the opinion
of management, SFAS No. 130 will not have a material effect on the
Company's financial statements.
Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of accounts receivable.
The Company's top ten customers accounted for approximately 65% of its
total revenues in Fiscal 1997, and one of these customers accounted for
approximately 12% of total revenues in Fiscal 1997. The Company does not
require collateral or other security to support customers' receivables.
(2) Discontinued Operations
-----------------------
As part of the Company's strategy of concentrating its focus on its core
business, Data Net terminated its business operations on March 8, 1996.
Prior to this termination, Data Net was in the business of the sale and
distribution of hardware and test equipment and the sale and assembly of
cables used in data communications applications.
In November, 1994, the Company acquired substantially all of the operating
assets of Intronet, Inc. These assets were acquired in exchange for
$337,000 in cash and the assumption of approximately $588,000 in
liabilities of Intronet, Inc. Subsequent to the acquisition and prior to
the termination of operations of the Intronet Division, the Intronet
Division designed, installed and supported advanced computer networks with
emphasis in large company and industrial facilities requiring network
hubbing integrated with fiber and copper cabling. In the fourth quarter of
Fiscal 1996, management decided to terminate operations of the Intronet
Division, which was substantially accomplished at October 31, 1996,
followed by the closing of its office in December, 1996.
<PAGE> 13
A loss of $118,142 on disposal of these discontinued operations was
recorded during the fiscal year ended October 31, 1997. A provision of
$1,843,487 for the loss on disposal of these discontinued operations was
recorded during the fiscal year ended October 31, 1996, consisting of a
$1,741,112 loss from operations and a $102,375 loss on disposal. Due to the
Company's accumulated deficit position, there was no tax benefit recorded.
The Company's operating results for all periods presented reflect
continuing operations, comprising the core business of providing computer
system, data communication and Lan/Wan technical services and products.
Interest expense allocated to discontinued operations for the fiscal years
ended October 31, 1996 and 1995 represents an allocation of corporate
interest expense and amounts directly related to the discontinued
businesses. The allocation of corporate interest expense was based, in
part, on a ratio of the net assets of the discontinued operations to the
sum of the consolidated net assets and consolidated debt, adjusted
accordingly. Amounts allocated for interest in Fiscal 1996 and 1995
totalled $367,892 and $299,585, respectively. Interest expense for the
fiscal year ended October 31, 1997, while almost wholly related to the
losses incurred in discontinued operations in prior fiscal years, was
absorbed in its entirety by the Company's core operations. Revenues from
discontinued operations were $3,996,507 and $20,064,694 in Fiscal 1996 and
1995, respectively. There were no remaining net assets of the discontinued
operations at October 31, 1997. However, additional expenses were incurred
in Fiscal 1997 above the amounts accrued in Fiscal 1996 related to the
discontinued operations.
(3) DEBT AND DEBT DUE TO SHAREHOLDER
--------------------------------
Long-term debt and Debt Due to Shareholder consist of the following at
October 31:
1997 1996
---- ----
Due to shareholder $ 2,865,000 $ 2,655,461
Term loan, due in full on October 10, 2001
with interest payable monthly at prime plus
1.0%, collateralized by field spare parts
(the "Term Loan") 750,000 750,000
Notes payable - 75,000
----------- -----------
$ 3,615,000 $ 3,480,461
Less: Current portion - 75,000
----------- -----------
$ 3,615,000 $ 3,405,461
=========== ===========
On October 10, 1996, the Company restructured the note payable to its bank,
which totalled $2,294,661 at that time. The bank, National Canada Finance
Corp. ("NCFC") was also its then primary lending institution. A portion of
the note payable to NCFC plus related fees and expenses, aggregating
$1,544,661, was assumed by the Company's principal stockholder, Joseph M.
Lobozzo II ("Lobozzo"), and the balance of the loan, in the amount of
$750,000, was restructured as a Term Loan. The Company has an Amended and
Restated Credit Agreement with Lobozzo (the "Lobozzo Credit Agreement", as
amended and as restated, which provides for the "Lobozzo Loan"), which
provides that: (1) the maximum amount was increased from $2,550,000 to
$2,950,000, and (a) from October 1, 1997 through December 31, 1997, up to
$3,650,000, and (b) from January 1, 1998 through June 30, 1998, up to
$3,350,000, provided, as to the maximum loan amounts in (1), (a) and (1),
(b), respectively, that the Company meets its Operating Budget Targets as
agreed between the Company and its Board of Directors; (2) the interest
rate is 1.75% above the prime lending rate; (3) the borrowing base shall be
equal to 100% of the eligible receivables from and after June 7, 1997 and
130% for those receivables which existed at June 6, 1997; (4) certain
financial covenant obligations with which the Company was in default under
its prior loan from NCFC were removed; (5) all assets of the Company, other
than field spare parts, were pledged as collateral for the Lobozzo Loan
with the pledged field spare parts being subordinated to the prior pledge
under the Term Loan; (6) for any loans provided in excess of the available
Borrowing Base, as defined in the Lobozzo Credit Agreement, the interest
rate is 5 percentage points above the prime lending rate; and (7) payment
<PAGE> 14
is due on June 30, 1998. In January, 1998, the lending agreement with its
commercial lenders was further amended to extend the terms of the lending
agreement from June 30, 1998 to November 1, 1998. A copy of the amendment
is annexed as Exhibit B to this Form 10-K Report. In January, 1998, the
Lender executed a waiver (the "January 1998 Waiver"), a copy of which is
annexed as Exhibit C to this Form 10-K Report, whereby the Lenders waived
any non-compliance by the Company with certain provisions of the First
Restated Credit Agreement, including Section 2.1 relating to maximum loan
amounts, borrowing amounts not supported by Eligible Receivables or
borrowing amounts permitted only if Operating Budget Targets are met,
without meeting those targets.
As of October 31, 1997 and October 31, 1996, there were principal balances
of $2,865,000 and $2,255,461, respectively, outstanding under the Lobozzo
Loan, both of which balances included advances totaling $633,600 ("Overline
Advances") received from Lobozzo prior to the loan restructuring referred
to above.
The agreement underlying the Term Loan requires the Company to maintain a
ratio of field spare parts to outstanding indebtedness of at least 2.5 to
1. The Company has been in compliance with this ratio requirement for all
periods since inception of the loan restructuring. Lobozzo has pledged
480,000 of the Company's common shares owned by him as additional
collateral for the Term Loan. Agreements have been made to provide NCFC
with additional equity in the Company (up to 17.5% of the Company's issued
and outstanding common shares) under certain circumstances. In February,
1997, Lobozzo transferred to his spouse, Joanne M. Lobozzo ("Joanne
Lobozzo") half of his interest in the Lobozzo Loan and Lobozzo and Joanne
Lobozzo are collectively referred to as the "Lender" under the Lobozzo
Credit Agreement.
In addition, as of October 31, 1996, the Company was obligated to Lobozzo
in the principal amount of $400,000 as a result of a May, 1995 Lobozzo
Commitment (the "Lobozzo Commitment") in the original amount of $400,000 to
provide additional financing to the Company (collectively with the amount
to be loaned by NCFC, the "Overadvance Facility"). In connection with the
agreement whereby Lobozzo provided the Lobozzo Commitment, the Company
issued a May, 1995 Option Agreement entitling Lobozzo to purchase
11,440,475 of the Company's common shares for an aggregate exercise price
of $10. In February, 1997, the May, 1995 Option Agreement, as amended and
restated, was exercised in full by the principal shareholder and by Joanne
Lobozzo, and 11,440,475 common shares were issued, of which 5,720,238
common shares were issued to Lobozzo and 5,720,237 common shares were
issued to Joanne Lobozzo. As a result of this transaction, Lobozzo and
Joanne Lobozzo are both now control persons of the Registrant. In May,
1997, the principal balance outstanding on the Lobozzo Commitment was paid
in full, and the documents upon which it was based were terminated.
Interest paid was as follows for the fiscal years ended October 31:
1997 1996 1995
---- ---- ----
$ 471,385 $ 405,869 $ 550,799
Interest paid to Lobozzo and Joanne Lobozzo for Fiscal 1997, and to Lobozzo
for Fiscal 1996 and 1995, was $401,797, $102,625 and $40,533, respectively.
(4) SUBORDINATED DEBENTURES
-----------------------
In November, 1992 the Company and Data Net jointly issued an 8%
subordinated debenture in the face amount of $475,000 due October 31, 1997
to the sellers ("the Sellers") of the assets acquired by Data Net on
November 1, 1992. As of October 31, 1996, the Sellers agreed to sell the
entire principal balance of the 8% subordinated debenture, together with
accrued interest of $55,384, to the Company for $75,000. This transaction,
which resulted in a $455,384 gain on purchase of debt, is reflected in the
Fiscal 1996 operating results as an extraordinary gain.
<PAGE> 15
The Company also has guaranteed an 8% subordinated debenture of Data Net in
the face amount of $600,001, as restated, to Lobozzo and Joanne Lobozzo
(the "Lobozzo Debenture"). The Lobozzo Debenture was due in annual
installments of $200,000 commencing January 31, 1996 and was issued in
connection with an option agreement entitling Lobozzo to purchase 1,304,350
shares of the Company's common shares at an exercise price of $.46 per
common share. The Restated Lobozzo Debenture and the Restated 1992 Lobozzo
Option Agreement were later further restated in February, 1997 when Lobozzo
transferred to Joanne Lobozzo half of the Restated Lobozzo Debenture and
the Restated 1992 Lobozzo Option Agreement, and those documents have been
reissued as the "Second Amended and Restated Lobozzo Debentures" and the
"Second Amended and Restated Lobozzo Option Agreements" (ee Item 13,
"Certain Transactions - Lobozzo Transactions"). No payments of principal
have been made on the Second Amended and Restated Lobozzo Debentures, and
the Second Amended and Restated Lobozzo Option Agreements remain
unexercised as of the date of this Form 10-K Report. The Second Restated
Lobozzo Debentures provided, with respect to each of the two debentures,
that $300,000.50 (an aggregate of $600,001) would be paid in full on
January 31, 1998. In January, 1998, the two Second Amended and Restated
Lobozzo Debentures were further amended to provide, with respect to each of
the two debentures, that $300,000.50 (an aggregate of $600,001) would be
paid in full on January 31, 1999. Copies of the two amended Second Amended
and Restated Lobozzo Debentures are annexed as Exhibits D and E to this
Form 10-K Report.
(5) INCOME TAXES
------------
The components of the income tax provision (benefit) are as follows:
<PAGE> 16
Year Ended October 31
---------------------
1997 1996 1995
---- ---- ----
Current:
Federal $11,000 $ - $ -
State 25,000 7,489 4,000
Deferred:
Federal - - 1,199,000
State - - -
------- ------ ----------
$36,000 $7,489 $1,203,000
======= ====== ==========
The income tax provision (benefit) is allocated as follows:
Year Ended October 31
---------------------
1997 1996 1995
---- ---- ----
Income taxes related
to continuing operations $36,000 $7,489 $ (130,000)
Income taxes related
to discontinued operations - - 1,333,000
------- ------ ----------
Total income taxes $36,000 $7,489 $1,203,000
======= ====== ==========
A reconciliation of the income tax provision (benefit) with tax at the
effective federal statutory rate is as follows:
Year Ended October 31
---------------------
1997 1996 1995
---- ---- ----
Federal provision (benefit)
based on statutory tax rate $ 214,000 $(279,000) $(1,324,000)
Permanent book-to-tax
differences:
Goodwill amortization 16,000 16,000 195,000
Other permanent items (72,000) (17,000) (74,000)
Increase (decrease) in
valuation allowance for
deferred taxes (138,000) 282,000 2,376,000
State provision net of
federal tax effect 16,000 5,489 30,000
--------- --------- ----------
$ 36,000 $ 7,489 $1,203,000
========= ========= ==========
<PAGE> 17
The components of the net deferred tax assets as of October 31 were as
follows:
- --------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------
Nondeductible inventory reserves $ 65,000 $ 75,000 $ 228,000
Nondeductible bad debt reserves 42,000 90,000 121,000
Nondeductible discontinued
operations reserves - 35,000 -
Tax loss carryforwards 2,225,000 2,461,000 1,898,000
Accelerated book amortization
of field spare parts 262,000 74,000 200,000
Investment tax credit carryforward 111,000 111,000 111,000
Other 3,000 - 6,000
Less allocable valuation allowance (2,558,000) (2,696,000) (2,414,000)
----------- ----------- -----------
Total $ 150,000 $ 150,000 $ 150,000
=========== =========== ===========
- --------------------------------------------------------------------------
At October 31,1997 the Company has recorded a deferred tax asset of
approximately $2,225,000 reflecting the benefit of approximately $6,544,000
in loss carryforwards, which expire in varying amounts between 2001 and
2011. Realization of this and other deferred assets is dependent on
generating sufficient taxable income in future periods. Management believes
that sufficient future income will exist to allow utilization of $150,000
of the deferred tax asset.
Income taxes paid were as follows for the fiscal years ended October 31:
1997 1996 1995
---- ---- ----
7,958 7,489 16,359
(6) Commitments
-----------
Operating Leases
----------------
The Company leases office space under various operating lease agreements
expiring through 2001. Net rental expense under these agreements was as
follows for the years ended October 31:
1997 1996 1995
---- ---- ----
Rental expense $329,109 $397,009 $427,473
Sub-lease income (41,120) (20,560) -
-------- -------- --------
Net Rental expense $287,989 $376,449 $427,473
As of October 31, 1997, the minimum future payments under non-cancelable
operating leases with initial or recurring terms for the next four years is
summarized as follows:
<PAGE> 18
Fiscal Year Amount
----------- --------
1998................... $307,014
1999................... $317,440
2000................... $307,440
2001................... $176,782
(7) Stockholders' Investment
------------------------
Incentive Stock Option Plan -
The Company has an incentive stock option plan under which options to
purchase up to 600,000 of the Company's common shares may be granted to key
employees. Such options expire five years from the date of grant. The
Company has adopted the disclosures-only provision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly no compensation cost, if required, would have
been recognized for the Stock Option Plan as it relates to employees.
However, because the various prices at which the applicable incentive stock
options are exercisable are, and have been, in excess of the market price
of the Company's common shares at October 31, 1996 and 1997, there would
have been no compensation cost for the Company's stock option plan, as
would have been determined based on the fair value at the date of grant for
awards consistent with the provisions of SFAS No. 123. Accordingly, the
Company's net earnings and net earnings per common and common share
equivalents would not have been affected by the provisions of SFAS No.
123.
The exercise price shall not be less than the fair market value of the
shares on the date of grant. The following summarizes the activity of the
stock options under the plan as of October 31.
1997 1996 1995
---- ---- ----
Outstanding - beginning of
year 345,500 230,500 344,000
Granted 153,000 159,000 100,000
Exercised - - -
Canceled (127,500) (44,000) (213,500)
------- ------- -------
Outstanding - end of year 371,000 345,500 230,500
======= ======= =======
Average exercise price of
outstanding and exercisable
options $.26 $.42 $.86
==== ==== ====
Director Stock Option Plan -
The Company has a non-qualified stock option plan for eligible Board of
Director members. Under this plan, options to purchase up to 100,000 of the
Company's common shares may be granted to eligible directors with a maximum
of 8,000 common shares each year available to an individual member. Options
granted become exercisable one year after the date of grant and expire five
years after the date of grant. The following summarizes the activity of the
stock options under the plan as of October 31:
1997 1996 1995
---- ---- ----
Outstanding - beginning of year - - 6,000
Granted - - -
Exercised - - -
Canceled - - 6,000
- - -----
Outstanding - end of year - - -
==== ==== =====
Average exercise price of
outstanding and exercisable
options - - -
==== ==== =====
<PAGE> 19
DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
April 30, October 31,
1998 1997
---------- -----------
Current Assets:
Cash $ 27,587 $ 18,944
Accounts receivable, less allowance for doubtful
accounts of $82,013 and $86,280 at April 30, 1998
and October 31, 1997, respectively 2,347,496 1,673,643
Inventories 788,433 869,049
Prepaid expenses and other current assets 402,402 132,327
---------- ----------
Total current assets 3,565,918 2,693,963
Field spare parts, net of accumulated amortization
of $1,118,840 and $769,322 at April 30, 1998 and
October 31, 1997, respectively 2,601,787 2,756,169
Property And Equipment, at cost:
Vehicles 95,517 74,614
Office furniture and equipment 232,735 229,564
Technical equipment 131,893 131,893
Software 57,300 56,405
Leasehold improvements 75,042 71,092
---------- ----------
592,487 563,568
Less: Accumulated depreciation 407,507 369,784
---------- ----------
184,980 193,784
Deferred Income Taxes 150,000 150,000
Other Assets:
Goodwill, less accumulated amortization of
$357,820 and $333,966 at April 30,
1998 and October 31, 1997
respectively 119,273 143,128
Other 144,320 89,185
---------- ----------
263,593 232,313
---------- ----------
Total Assets $6,766,278 $6,026,229
========== ==========
See notes to consolidated financial statements.
<PAGE> 20
DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS EQUITY
(Unaudited)
April 30, October 31,
1998 1997
---------- -----------
Current Liabilities:
Accounts payable $ 1,336,148 $ 1,805,342
Deferred service revenue 1,467,311 1,413,135
Accrued expenses
Payroll and payroll taxes 242,731 282,764
Interest 112,080 64,658
Sales tax payable 181,379 210,197
Other 191,856 214,281
----------- -----------
Total current liabilities 3,531,505 3,990,377
Long-Term Debt 769,754 750,000
Due to Shareholder 3,647,000 2,865,000
Subordinated Debenture 600,001 600,001
----------- -----------
Total long-term liabilities 5,016,755 4,215,001
Shareholders' Investment:
Preferred shares, $ .01 par value; shares authorized
5,000,000 shares; issued and outstanding: none at
January 31, 1998 and October 31, 1997 - -
Common stock, $ .01 par value; authorized
20,000,000 shares; issued and
outstanding 18,252,050 at April 30, 1998 and
October 31, 1997 respectively 182,521 182,521
Additional paid-in capital 4,801,698 4,801,698
Accumulated deficit, beginning (6,766,201) (7,163,368)
----------- -----------
Total Shareholders' Investment (1,781,982) (2,179,149)
----------- -----------
Total Liabilities And Shareholders Equity $ 6,766,278 $ 6,026,229
=========== ===========
See notes to consolidated financial statements.
<PAGE> 21
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
APRIL 30, APRIL 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Service revenues $ 3,235,992 3,126,940 $ 6,161,566 6,509,208
Equipment sales 248,867 206,871 571,569 521,239
--------- --------- --------- ---------
Total Revenues 3,484,859 3,333,811 6,733,135 7,030,447
Costs And Expenses:
Service costs 2,373,318 2,188,478 4,487,764 4,271,525
Cost of equipment sold 187,148 134,738 437,967 478,899
Selling, general and
administrative 651,205 856,902 1,275,578 1,737,761
--------- --------- --------- ---------
Total Operating Expenses 3,211,671 3,180,118 6,201,309 6,488,185
Other Income (Expense), Net (140,367) (117,389) (107,994) (205,384)
--------- --------- --------- ---------
Earnings From Continuing Operations
Before Income Taxes 132,821 36,304 423,832 336,878
Income Taxes / (Benefit) 537 - 537 -
--------- --------- --------- ---------
Earnings (Loss) From
Continuing Operations 132,284 36,304 423,295 336,878
--------- --------- --------- ---------
Gain (Loss) From
Discontinued Operations 941 0 (26,130) 0
--------- --------- --------- ---------
Net Earnings (Loss) $ 133,225 $ 36,304 $ 397,165 $ 336,878
========= ========= ========= =========
Earnings Per Common And Common
Equivalent Share:
Continuing Operations $ .01 $ - $ .02 $ .03
Discontinued Operations - - - -
--- --- --- ---
Combined $ .01 $ - $ .02 $ .03
=== === === ===
NOTE:
The number of weighted average common shares outstanding were: (1)
during the quarters ended April 30, 1998 and April 30, 1997, 18,252,050 and
15,681,157, respectively; and (2) during the six months ended April 30, 1998 and
April 30, 1997, 18,252,050 and 11,172,861, respectively. In February, 1997, the
Company issued an aggregate 11,440,475 common shares as a result of the exercise
of certain options. (See Note 2 to the Financial Statements).
See notes to consolidated financial statements.
<PAGE> 22
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
April 30,
1998 1997
---- ----
Cash Flow From Operating Activities:
Net earnings(loss) $ 397,166 $ 336,878
Adjustments to reconcile net earnings/(loss) to
net cash provided/(used) by
operating activities:
Depreciation & amortization 411,095 344,740
Expenses charged to accrual for discontinued
operations - (86,509)
Deferred taxes (31,099) -
Accounts receivable (673,853) 616,488
Inventories 80,616 (190,907)
Prepaid and other current assets (238,975) 309,455
Accounts payable and accrued expenses (484,230) (381,470)
Sales taxes payable (28,818) (127,995)
Deferred service revenue 54,176 (331,438)
--------- ---------
Net cash flow from operating activities (513,922) 489,242
--------- ---------
Cash Flow From Investing Activities:
Capital expenditures, including field spare parts (224,054) (470,187)
Investment in intangibles and other assets (55,135) (29,715)
--------- ---------
Net cash flow from investing activities (279,189) (499,902)
--------- ---------
Cash Flow From Financing Activities:
Proceeds from (payment on) shareholder debt 782,000 (140,000)
Net proceeds (payment) on note payable 19,754 -
(Payment) on subordinated debenture - (75,000)
--------- ---------
Net cash flow from financing activities 801,754 (215,000)
--------- ---------
Net Increase (Decrease) In Cash $ 8,643 $(225,660)
--------- ---------
Cash - beginning of period 18,944 50,891
--------- ---------
Cash - end of period $ 27,587 $(174,769)
========= =========
See notes to consolidated financial statements.
<PAGE> 23
DELTA COMPUTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED APRIL 30, 1998 AND 1997
(1) GENERAL DESCRIPTION OF BUSINESS & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company, by itself and through its wholly-owned subsidiary, SAI/Delta,
Inc. ("SAI/Delta"), provides a wide array of Computer System, Data
Communication and Lan/Wan technical services and products to a customer
base which encompasses many industries and geographic locations. The
Company's customer base includes large brokerage houses, banks,
pharmaceutical companies, major hospitals and long distance carriers,
located principally in the Northeast but reaching as far as Florida and the
West Coast. Technical services offered include, but are not limited to,
design, product procurement, installation, service, maintenance and on-site
technical management and consulting. Management has refocused the Company's
efforts on its core business of providing Integrated Technology Solutions
for computer systems, network environments and telecommunication systems.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Delta Data Net, Inc. ("Data Net"), and
SAI/Delta. All significant intercompany accounts and transactions have been
eliminated in consolidation. The unaudited interim financial statements
included herein reflect all normal and recurring adjustments that, in the
opinion of management, are necessary for a fair presentation of the results
for the interim periods.
As reported by the Company in the 1997 Form 10-K Report, the Company's Data
Net subsidiary terminated its business operations and ceased operations in
Fiscal 1996 due to economic conditions in its industry. As also reported in
the 1997 Form 10-K Report, in the fourth quarter of Fiscal 1996, the
Company decided to close its Intronet Division. Accordingly, the operating
results for continuing operations for the three months ended April 30, 1998
and 1997, and for the six months ended April 30, 1998 and 1997, are for the
Company's core business and do not include the losses on disposal for
either the Company's Data Net subsidiary or its Intronet Division during
those respective periods. The $25,000 loss on disposal incurred in
discontinued operations for the three months ended April 30, 1997 and the
$102,0375 loss on disposal incurred in discontinued operations for the six
months ended April 30, 1997 were charged to the accrual for losses on
discontinued operations established at October 31, 1996. For the three
months ended April 30, 1998, the Company realized a minor benefit due to a
recovery related to discontinued operations. For the six months ended April
30, 1998, the Company incurred $26,130 in expenses related to discontinued
operations that exceeded the amount of the aforementioned accrual. These
expenses were charged to Fiscal 1998's results and are shown under Losses
From Discontinued Operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
<PAGE> 24
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The audited
financial statements for Fiscal 1997, as set forth in this Form 10-Q
Quarterly Report, reflect a decrease in the shareholders' deficit, from
($2,753,412) as of October 31, 1996 to ($2,179,149) as of October 31, 1997,
essentially as a result of the $574,253 consolidated earnings reported for
the year ended October 31, 1997 ("Fiscal 1997"). The unaudited financial
statements contained in this Form 10-Q Quarterly Report show continued
improvement in the Company's financial position, with consolidated earnings
of $397,165 reported for the six months ended April 30, 1998 and a further
reduction in the shareholders' deficit, from ($2,179,149) as of October 31,
1997 to ($1,781,982) as of April 30, 1998. These improved figures are not a
guarantee that the improved financial position will continue into the
future.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current year's presentation.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method based on estimated useful lives which are as follows:
Estimated
DESCRIPTION USEFUL LIFE
----------- -----------
Vehicles 2 - 3 years
Office furniture and equipment 5 - 7 years
Technical equipment 5 - 7 years
Software 3 - 5 years
Leasehold improvements 5 - 10 years
Maintenance and repairs are charged to expense as incurred. The cost of
renewals or improvements that increase the useful lives of the assets is
capitalized in the appropriate asset account. The gain or loss on property
retired or otherwise disposed of is credited or charged to operations and
the cost and accumulated depreciation are removed from the accounts.
INVENTORIES
Inventories represent computer equipment and peripherals held for resale in
the normal course of business and consumable field spare parts. These
inventories are recorded at the lower of cost (first-in, first-out) or
market.
FIELD SPARE PARTS
Field spare parts are stated at cost and are amortized using the
straight-line method over an estimated useful life of 5 years, beginning in
the year after acquisition.
GOODWILL
Goodwill, representing the excess of the cost of acquired businesses over
the fair value of net assets acquired, is generally amortized on a
straight-line basis over ten years. On an ongoing basis, the Company
assesses impairment of such assets by reviewing the operating performance
of the underlying business or customer relationships.
DEFERRED SERVICE REVENUE
Service revenue is recognized ratably over the contract period. Deferred
service revenue represents the portion of billings to customers for which
service will be provided in future periods.
REVENUE RECOGNITION
Service revenues: Contract service revenue is recognized ratably over the
contractual period or as services are provided. Revenue from services
rendered on a "time and materials" basis and from projects is recognized in
the period the work is performed.
<PAGE> 25
Equipment sales: Revenue from equipment sales and the related cost of sales
are recognized when title to the equipment passes. Component repair revenue
and related costs are recognized upon completion of the repair.
INCOME TAXES
Income taxes are recognized for the amount of taxes payable or refundable
for the current year and deferred tax liabilities and assets for the future
tax consequence of events that have been recognized in the Company's
consolidated financial statements or tax returns.
EARNINGS PER SHARE
Earnings per common and common equivalent share are computed based upon the
weighted average of common shares outstanding during each year adjusted for
the dilutive effect of outstanding stock options and warrants using the
Treasury Stock Method. Weighted average shares outstanding for the three
months ended April 30, 1998 and 1997 totalled 18,252,050 and 15,681,157,
respectively.
NEW ACCOUNTING STANDARDS PRONOUNCEMENTS
1. EARNINGS PER SHARE
In March, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". The
new standard requires dual presentation of basic and diluted earnings per
share (EPS) on the face of the statement of operations and requires a
reconciliation of the numerators and denominators of basic and diluted EPS
calculations. The statement will be effective for periods ending after
December 15, 1997. Early adoption of the statement is not permitted. In the
opinion of management, the adoption of this standard will not have a
material impact on the Company's disclosures.
2. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and disclosure of comprehensive income and its components in
financial statement format and is effective for financial statements for
fiscal years beginning after December 15, 1997. 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. Items considered comprehensive income include foreign currency
items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. In the opinion
of management, SFAS No. 130 will not have a material effect on the
Company's financial statements.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of accounts receivable.
The Company's ten largest customers accounted for approximately 73% of its
total business in the six months ended April 30, 1998. The Company does not
require collateral or other security to support customers' receivables.
(2) REGISTRANT'S DEBT POSITION
Long-term debt and Debt Due to Shareholder consisted of the following at
April 30, 1998 and October 31, 1997, respectively:
APRIL 30, OCTOBER 31,
1998 1997
Due to shareholder $ 3,647,000 $ 2,865,000
Term loan, due in full on October 10, 2001,
with interest payable monthly at prime plus
1.0%, collateralized by field spare parts
(the "Term Loan") 750,000 750,000
Note payable 19,754 -
--------- ---------
4,416,754 3,615,000
Less: Current portion - 75,000
$ 4,416,754 $ 3,540,000
============ ===========
<PAGE> 26
On October 10, 1996, the Company restructured the note payable to its bank.
The bank, National Canada Finance Corp. ("NCFC") was also its then primary
lending institution. A portion of the note payable to NCFC plus related
fees and expenses, aggregating $1,544,661, was assumed by the Company's
principal stockholder, Joseph M. Lobozzo II ("Lobozzo"), and the balance of
the loan, in the amount of $750,000, was restructured as a Term Loan. The
Company has an Amended and Restated Credit Agreement with Lobozzo (the
"Lobozzo Credit Agreement", as amended and as restated, and, as of October
31, 1997, the First Restated Credit Agreement ("FRCA"), which provides for
the "Lobozzo Loan"), which provides that: (1) the maximum loan amount was
increased from $2,550,000 to $2,950,000, and (a) from October 1, 1997
through December 31, 1997, up to $3,650,000, and (b) from January 1, 1998
through June 30, 1998, up to $3,350,000, provided, as to the maximum loan
amounts in (1), (a) and (1), (b), respectively, that the Company meets its
Operating Budget Targets as agreed between the Company and its Board of
Directors; (2) the interest rate is 1.75% above the prime lending rate; (3)
the borrowing base shall be equal to 100% of the eligible receivables; (4)
certain financial covenant obligations with which the Company was in
default under its prior loan from NCFC were removed; (5) all assets of the
Company, other than field spare parts, were pledged as collateral for the
Lobozzo Loan with the pledged field spare parts being subordinated to the
prior pledge under the NCFC Term Loan; (6) for any loans made in excess of
the Available Borrowing Base, as defined in the Lobozzo Credit Agreement,
the interest rate is 5 percentage points above the prime lending rate; and
(7) payment was due on June 30, 1998.
In January, 1998, the lending agreement with its commercial lenders was
further amended ("Amendment No. 1 to the FRCA") to extend the terms of the
lending agreement from June 30, 1998 to November 1, 1998. Simultaneously
with the execution of Amendment No. 1 to the FRCA, in January, 1998, the
Lender executed a Waiver and Consent (the "January 1998 Waiver"), a copy of
which was annexed as an Exhibit to the 1997 Form 10-K Report, whereby the
Lenders waived any non-compliance, through and including the date of the
January 1998 Waiver, by the Company with certain provisions of the FRCA,
including Section 2.1 relating to maximum loan amounts, borrowing amounts
not supported by Eligible Receivables or borrowing amounts permitted only
if Operating Budget Targets are met, without the Company's meeting those
targets. Copies of both Amendment No. 1 to the FRCA and the January 1998
Waiver were annexed as Exhibits to the 1997 Form 10-K Report. In March,
1998, the FRCA was further amended ("Amendment No. 2 to the FRCA") to
extend its terms from November 1, 1998 to February 1, 1999. Simultaneously
with the execution of Amendment No. 2 to the FRCA, in March, 1998, the
Lender executed a further Waiver and Consent (the "March 1998 Waiver"),
whereby the Lenders waived any non-compliance, through and including the
date of the March 1998 Waiver, by the Company with certain provisions of
the FRCA, including Section 2.1 relating to maximum loan amounts, borrowing
amounts not supported by Eligible Receivables or borrowing amounts
permitted only if Operating Budget Targets are met, without the Company's
meeting those targets. Copies of Amendment No. 2 to FRCA and the March 1998
Waiver were annexed as Exhibits to the Company's Form 10-Q Quarterly Report
for the period ended January 31, 1998. In June, 1998, the FRCA was further
amended ("Amendment No. 3 to the FRCA") to extend its terms from February
1, 1999 to May 1, 1999. Simultaneously with the execution of Amendment No.
3 to the FRCA, in June, 1998, the Lender executed a further Waiver and
Consent (the "June 1998 Waiver"), whereby the Lenders waived any
non-compliance, through and including the date of the June 1998 Waiver, by
the Company with certain provisions of the FRCA, including Section 2.1
relating to maximum loan amounts, borrowing amounts not supported by
Eligible Receivables or borrowing amounts permitted only if Operating
Budget Targets are met, without the Company's meeting those targets. Copies
of Amendment No. 3 to FRCA and the June 1998 Waiver are annexed as Exhibits
A and B, respectively, to this Form 10-Q Quarterly Report.
As of May 31, 1998 and October 31, 1997, there were principal balances of
$3,429,000 and $2,865,000, respectively, outstanding under the Lobozzo
Loan.
The agreement underlying the Term Loan with NCFC requires the Company to
maintain a ratio of field spare parts inventory to outstanding indebtedness
of at least 2.5 to 1 with NCFC. The Company has been in compliance with
this ratio requirement for all periods since inception of the Term Loan
restructuring. Lobozzo has pledged 480,000 of his shares of the Company's
common shares as additional collateral for the Term Loan. Agreements have
been made to provide NCFC with additional equity in the Company (up to
17.5% of the Company's issued and outstanding common shares) under certain
circumstances. As described in Item 2, in February, 1997, the shareholder
transferred half of this debt obligation to, Joanne Lobozzo, his wife. (See
also "Exercise of Options", below).
<PAGE> 27
SUBORDINATED DEBENTURES
In November, 1992 the Company and Data Net jointly issued an 8%
subordinated debenture in the face amount of $475,000 due October 31, 1997
to the sellers ("the Sellers") of the assets acquired by Data Net on
November 1, 1992. As of October 31, 1996, the Sellers agreed to sell the
entire principal balance of the 8% subordinated debenture, together with
accrued interest of $55,384, to the Company for $75,000. This transaction,
which resulted in a $455,384 gain on purchase of debt, was reflected in the
Fiscal 1996 operating results as an extraordinary gain, and the payment of
the $75,000 to purchase the debenture was made in the first quarter of
Fiscal 1997.
The Company has also guaranteed an 8% subordinated debenture of Data Net in
the face amount of $600,001, as restated, to Lobozzo and Joanne Lobozzo
(the "Lobozzo Debenture"). The Lobozzo Debenture was due in annual
installments of $200,000 commencing January 31, 1996 and was issued in
connection with an option agreement entitling Lobozzo to purchase 1,304,350
shares of the Company's common shares at an exercise price of $.46 per
common share. The Restated Lobozzo Debenture and the Restated 1992 Lobozzo
Option Agreement were further restated in February, 1997 when Lobozzo
transferred to Joanne Lobozzo half of the Restated Lobozzo Debenture and
the Restated 1992 Lobozzo Option Agreement, and those documents have been
reissued as the "Second Amended and Restated Lobozzo Debentures" and the
"Second Amended and Restated Lobozzo Option Agreements". No payments of
principal have been made on the Second Amended and Restated Lobozzo
Debentures, as further amended, and the Second Amended and Restated Lobozzo
Option Agreements, as further amended, remain unexercised as of the date of
filing this Form 10-Q Quarterly Report. The Second Amended and Restated
Lobozzo Debentures provided, with respect to each of the two debentures,
that $300,000.50 (an aggregate of $600,001) would be paid in full on
January 31, 1998.
The following amendments have been executed with respect to the Lobozzo
Debentures and the two Second Amended and Restated Lobozzo Option
Agreements:
a) In January, 1998, the two Second Amended and Restated Lobozzo Debentures
were further amended ("Amendment No. 1 to Second Amended and Restated
Debentures") to provide that $300,000.50 (an aggregate of $600,001)
would be paid in full on January 31, 1999. Copies of Amendment No. 1 to
the Second Amended and Restated Lobozzo Debentures were annexed as
Exhibits to the 1997 Form 10-K Report. In January, 1998, the two Second
Amended and Restated Lobozzo Option Agreements were further amended
("Amendment No. 1 to Second Amended and Restated Option Agreements") to
provide that the exercise date of the options would be extended from
January 31, 1998 to January 31, 1999. Copies of Amendment No. 1 to the
Second Amended and Restated Option Agreements were annexed as Exhibits
to the 1997 Form 10-K Report.
b) In March, 1998, the two Second Amended and Restated Lobozzo Debentures
were further amended ("Amendment No. 2 to Second Amended and Restated
Debentures"), filed as Exhibits to the Company's Form 10-Q Quarterly
Report for the period ended January 31, 1998 (the "January, 1998 Form
10-Q Report"), to provide that $300,000.50 (an aggregate of $600,001)
would be paid in full on April 30, 1999. In March, 1998, the two Second
Amended and Restated Lobozzo Option Agreements were further amended
("Amendment No. 2 to Second Amended and Restated Option Agreements"),
which were filed as Exhibits to the January, 1998 Form 10-Q Report, to
provide that the exercise date of the options would be extended from
January 31, 1999 to April 30, 1999.
c) In June, 1998, the two Second Amended and Restated Lobozzo Debentures
were further amended ("Amendment No. 3 to Second Amended and Restated
Debentures"), which are filed as Exhibits C and D to this Form 10-Q
Quarterly Report, to provide that $300,000.50 (an aggregate of $600,001)
would be paid in full on July 31, 1999. In June, 1998, the two Second
Amended and Restated Lobozzo Option Agreements were further amended
("Amendment No. 3 to Second Amended and Restated Option Agreements"),
which are filed as Exhibits E and F to this Form 10-Q Quarterly Report,
to provide that the exercise date of the options would be extended from
April 30, 1999 to July 31, 1999.
<PAGE> 28
(3) EXERCISE OF OPTIONS
In February, 1997, Lobozzo and Joanne Lobozzo, principal shareholders,
control persons and commercial lenders to the Company (Lobozzo is also an
officer and director of the Company) exercised options to purchase,
respectively 5,720,238 and 5,720,237 common shares of the Company in return
for payment of an agregate exercise price of $10.00, all as described in
the Company's 1997 Form 10-K Report.
(4) INCOME TAXES
No income tax provision has been recorded for the three months ended April
30, 1998 and the six months ended April 30, 1998, respectively, because of
the tax benefits associated with the use of the Company's net operating
loss carry-forwards.
<PAGE> 29
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Alpha Microsystems (the Company) completed the purchase of all outstanding
common stock of Delta CompuTec Inc. (DCI) for a total purchase price of
approximately $3.6 million. Concurrent with this transaction the Company also
refinanced substantially all outstanding debt of DCI which totaled approximately
$5.0 million as of the pro forma balance sheet date. The Unaudited Pro Forma
Condensed Combined Balance Sheet is presented as if the DCI Acquisition had been
consummated on May 24, 1998. The following pro forma combined financial data of
the Company consists of an Unaudited Pro Forma Condensed Combined Balance Sheet,
a 1999 Three Month Unaudited Pro Forma Condensed Combined Statement of
Operations (unaudited) (the "1999 Three Month Pro Forma Statement of
Operations"), a 1998 Fiscal Year Unaudited Pro Forma Condensed Combined
Statement of Operations (the "1998 Fiscal Year Pro Forma Statement of
Operations") and together the "Pro Forma Statements". The Unaudited Pro Forma
Condensed Combined Balance Sheet reflects the combination of the balance sheets
of the Company as of May 24, 1998 and of DCI as of April 30, 1998.
The 1999 Three Month Pro Forma Statement of Operations reflects the combination
of the statement of operations for the Company for the three months ended May
24, 1998, and of Delta CompuTec, Inc. for the three months ended April 30, 1998.
The 1999 Three Month Pro Forma Statement of Operations is presented as if the
respective transactions were consummated on February 23, 1998.
The 1998 Fiscal Year Pro Forma Statement of Operations reflects the combination
of the statement of operations of the Company for the year ended February 22,
1998, and Delta CompuTec, Inc. for the year ended January 31, 1998. Delta
CompuTec's statement of operations for the year ended January 31, 1998 has been
derived from the audited 1997 fiscal year statement of operations adjusted to
(i) exclude its operating results for the three month period ended January 31,
1997 and (ii) include its operating results for the three month period ended
January 31, 1998. The 1998 Fiscal Year Pro Forma Statement of Operations is
presented as if the respective transactions were consummated on February 23,
1997.
The Pro Forma Statements reflect preliminary estimates of costs associated with
the ING Equity Partners, II financing transaction contemplated herein, and
purchase accounting adjustments for the DCI Acquisition. Such preliminary
adjustments are subject to change upon final determination of the fair market
value of DCI's assets and liabilities. The pro forma financial statements also
do not reflect any restructuring charges that may occur as a result of the
integration the Company's operations.
The Pro Forma Statements should be read in conjunction with the separate
historical financial statements of the Company and DCI, the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included therein. The Pro Forma Statements are based upon currently
available information and upon certain assumptions that the Company believes are
reasonable under the circumstances. The Pro Forma Statements do not purport to
represent what the Company's financial position or results of operations would
actually have been if the aforementioned transactions in fact had occurred on
such date or at the beginning of the periods indicated or to project the
Company's financial position or results of operations at any future date or for
any future periods.
<PAGE> 30
Unaudited Pro Forma Condensed Combined Balance Sheet
(In Thousands)
<TABLE>
<CAPTION>
Alpha Delta
Microsystems CompuTec Total
May 24, 1998 April 30, 1998 Adjustments Pro Forma
------------ -------------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents
$ 2,736 $ 28 $ 4,984 (b) $ 3,081
- - (4,667)(f) -
Accounts receivable 3,727 2,347 - 6,074
Notes receivable 161 - - 161
Net inventory 626 788 - 1,414
Other current assets 455 402 - 857
----------- --------- ---------- ---------
Total current assets 7,705 3,565 317 11,587
Fixed assets, net 1,644 185 - 1,829
Field spare parts, net 1,651 2,602 (2,094)(a) 2,159
Software, net 1,212 - - 1,212
Goodwill - 119 6,761 (a) 6,438
(119)(a)
(323)(f)
Service contracts, net 1,538 - 1,000 (a) 2,538
Other intangible assets, net 138 - - 138
Other 79 144 - 223
Deferred income taxes - 150 (150)(a) -
Investment in Delta CompuTec Inc. - - 3,616 (b) -
(3,616)(a)
Notes receivable 418 - - 418
----------- --------- ---------- ---------
Total assets $ 14,385 $ 6,765 $ 5,392 $ 26,542
=========== ========= ========== =========
Current liabilities:
Accounts payable $ 1,513 $ 1,334 $ - $ 2,847
Notes payable-short term 1,089 - 1,000 (b) 2,089
Accrued payroll expenses 183 243 - 426
Deferred revenue 1,845 1,467 - 3,312
Other current liabilities 390 485 - 875
----------- --------- ---------- ---------
Total current liabilities 5,020 3,529 1,000 9,549
Long term debt 60 5,017 (5,017)(f) 60
Preferred stock - - 7,346 (b) 6,946
(400)(b)
Equity:
Common stock 31,011 183 (183)(a) 31,011
Warrants - - 655 (b) 682
- - 27 (f)
Additional paid-in capital - 4,802 (4,802)(a) -
Retained earnings (deficit) (21,750) (6,766) 6,766 (a) (21,750)
Foreign currency translation 44 - - 44
----------- --------- ---------- ---------
Total equity 9,305 (1,781) 2,463 9,987
----------- --------- ---------- ---------
Total liabilities & equity $ 14,385 $ 6,765 $ 5,392 $ 26,542
=========== ========= ========== =========
</TABLE>
<PAGE> 31
1999 Three Month Pro Forma Condensed Combined Statement of Operations
(In Thousands)
<TABLE>
<CAPTION>
Alpha Delta CompuTec,
Microsystems Inc.
Quarter Quarter
ended ended
May 24, April 30, Pro Forma Pro Forma
1998 1998 Adjustments Consolidated
------------ --------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
IT services $ 4,064 $ 3,485 $ - $ 7,549
Product 1,382 - - 1,382
------------ ------------- ---------- -----------
Total revenue 5,446 3,485 - 8,931
Cost of sales:
IT services 3,655 2,560 36 (j) 6,146
- - (105)(k)
Product 854 - - 854
------------ ------------- ---------- -----------
Total cost of sales 4,509 2,560 (69) 7,000
Gross margin:
IT services 409 925 69 1,403
Product 528 - - 528
------------ ------------- ---------- -----------
Total gross margin 937 925 69 1,931
Operating expenses:
Selling, general
and administrative 1,601 651 79 (h) 2,319
(12)(i)
Engineering, research
and development 306 - - 306
------------ ------------- ---------- -----------
Total operating
expense 1,907 651 67 2,625
------------ ------------- ---------- -----------
Operating income (loss) (970) 274 2 (694)
Interest income 26 - - 26
Interest expense (26) (298) (28)(c) (54)
- - 298 (g)
Other income (expense) (7) 158 - 151
Income taxes expense /
(benefit) 12 1 - 13
------------ ------------- ---------- -----------
Net income (loss) from
continuing operations $ (989) $ 133 $ 272 $ (584)
============ ============= ========== ===========
Computation of net
income (loss) to
common shares:
Net income (loss) $ (989) $ 133 $ 272 $ (584)
Dividends on
Redeemable
Preferred stock - - (180)(d) (180)
Accretion of redemption
value on Redeemable
Preferred Stock - - (38)(e) (38)
------------ ------------- ---------- -----------
Net income (loss) to
common stock $ (989) $ 133 $ (54) $ (802)
============ ============= ========== ===========
Basic and diluted net
loss per share $ (0.09) $ (0.07)
============ ===========
Number of shares used in
the computation of net
loss per share $ 10,914 $ 10,914
============ ===========
</TABLE>
<PAGE> 32
1998 Fiscal Year Pro Forma Condensed Combined Statement of Operations
(In Thousands)
<TABLE>
<CAPTION>
Alpha Delta CompuTec,
Microsystems Inc.
Year ended Year ended
February 22, January 22, Pro Forma Pro Forma
1998 1998 Adjustments Consolidated
------------ --------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
IT services $ 13,223 $ 12,928 $ - $ 26,151
Product 6,104 - - 6,104
----------- ----------- --------- ---------
Total revenue 19,327 12,928 - 32,255
Cost of sales:
IT services 9,887 9,135 143 (j) 18,746
- - (419)(k)
Product 4,079 - - 4,079
----------- ----------- --------- ---------
Total cost of sales 13,966 9,135 (276) 22,825
Gross margin:
IT services 3,336 3,793 276 7,405
Product 2,025 - - 2,025
----------- ----------- --------- ---------
Total gross margin 5,361 3,793 276 9,430
Operating expenses:
Selling, general
and administrative 7,518 2,748 316 (h) 10,531
(51)(i)
Engineering, research
and development 1,411 - - 1,411
----------- ----------- --------- ---------
Total operating expense 8,929 2,748 265 11,942
Operating income (loss) (3,568) 1,045 11 (2,512)
Interest income 310 - - 310
Interest expense (7) (496) (110)(c) (117)
- - 496 (g)
Other income (expense) (53) 211 - 158
Income taxes expense /
(benefit) (21) 36 - 15
----------- ----------- --------- ---------
Net income (loss) from
continuing operations $ (3,297) $ 724 $ 397 $ (2,176)
=========== =========== ========= =========
Computation of net income
(loss) to common shares:
Net income (loss) $ (3,297) $ 724 $ 397 $ (2,176)
Dividends on
Redeemable
Preferred stock - - (720)(d) (720)
Accretion of
redemption value
on Redeemable
Preferred stock - - (151)(e) (151)
----------- ----------- --------- ---------
Net income (loss) to
common stock $ (3,297) $ 724 $ (474) $ (3,047)
=========== =========== ========= =========
Basic and diluted net
loss per share $ (0.30) $ (0.28)
=========== =========
Number of shares used in
the computation of net
loss per share $ 10,864 10,864
=========== =========
</TABLE>
<PAGE> 33
Alpha Microsystems
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. Acquisition of Delta CompuTec Inc.
On September 1, 1998, the Company completed the acquisition of Delta
CompuTec Inc ("DCI"). DCI provides management and consulting services,
as well as services that include network design, installation and
maintenance. The Agreement and Plan of Merger, dated September 1, 1998,
provided for the payment of $3.4 million in exchange for all of the
outstanding shares of DCI at the time of closing. Under the agreement,
DCI became a wholly-owned subsidiary of Alpha Microsystems. The
acquisition was accounted for as a purchase and has been recorded based
upon available information and certain assumptions that the Company
believes are reasonable in the circumstances. The purchase price has
been allocated to the acquired assets and assumed liabilities based on a
preliminary determination of the respective fair values.
The historical amounts included in the accompanying pro forma condensed
combined financial statements as of May 24, 1998 and for the three
months then ended and for the year ended February 22, 1998 reflect the
financial position and results of operations of Alpha Microsystems prior
to the acquisition of DCI. The total purchase price of the DCI
acquisition, including direct acquisition costs, was determined as
follows:
Cash $3,433
Other direct acquisition expenses 183
------
$3,616
======
(a) The preliminary allocation of the purchase price based on the
fair market value of the acquired assets and assumed liabilities
results in the following:
Net assets at historical amounts $(1,782)
Intangibles, including goodwill (119)
Field spares parts adjusted per
independent appraisal (2,094)
Deferred income taxes (150)
Service contracts 1,000
Costs in excess of net assets acquired 6,761
-------
$ 3,616
=======
<PAGE> 34
Alpha Microsystems
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(continued)
2. Purchase Price Financing
(b) The purchase price was financed with $1.0 million of cash
proceeds provided under a four year bank term loan and $8.0
million under a Securities Purchase Agreement (the "Purchase
Agreement"). Under the Purchase Agreement, ING Equity Partners
II, L.P. ("ING") agreed, subject to certain conditions, to invest
up to $20 million in redeemable exchangeable preferred stock (the
"Redeemable Preferred Stock") of the Company. The Purchase
Agreement provides for the purchase of Redeemable Preferred
Stock, Voting Preferred Stock, and Warrants by ING in three
tranches of $8 million, $7 million, and up to $5 million. The
first tranche was completed concurrent with the acquisition of
DCI. Funding of the second and third tranches by ING are subject
to approval by the Company's shareholders.
Proceeds from the bank term loan and Purchase Agreement have been
recorded as follows:
Proceeds from the sale of Redeemable Preferred Stock $7,346
Proceeds from the sale of warrants 655
Proceeds from bank term loan 1,000
Increase in cash (4,984)
Issuance costs of Redeemable Preferred Stock (400)
------
DCI acquisition proceeds $3,616
======
Dividends are payable on the Redeemable Preferred Stock purchased
by ING at an initial 9% cumulative annual dividend rate, which
increases to 11% on July 1, 2000 and thereafter increases an
additional 1% annually.
In connection with ING's initial $8 million investment in
Redeemable Preferred Stock, ING was granted warrants (the
"Initial Warrants") to purchase 2,181,448 shares for an initial
price $1.50 per share. In the event shareholder approval is
obtained and the closing of the second tranche of $7 million
(the "Second Closing") occurs, the price at which ING will be
permitted to purchase such stock will be increased to $2.50 per
share, and ING will be granted warrants (the "Second Closing
Warrants") to purchase for $2.50 per share additional shares of
common stock which, together with the shares purchasable pursuant
to the Initial Warrants, will total 5,833,188 shares. The Second
Closing must occur on or before October 30, 1998. If the Company
elects to close the third tranche (the "Third Closing"), subject
to certain conditions ING will invest up to an additional $5
million, the proceeds from which must be used for certain
acquisitions. In such event, ING will be granted warrants (the
"Third Closing Warrants") to purchase for $2.50 per share
additional shares of common stock which, together with the shares
<PAGE> 35
Alpha Microsystems
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(continued)
purchasable pursuant to the Initial Warrants and the Second
Closing Warrants will total up to 8,753,626 shares.
The Third Closing must occur, if at all, on or before June 30,
1999. If the Company elects to redeem the Redeemable Preferred
Stock prior to June 30, 2000, the shares purchasable pursuant to
the Warrants will be reduced by approximately 600,000 shares,
assuming all three tranches are closed.
There is no assurance that the second and third tranches of the
ING Transaction will be consummated, accordingly, no effect has
been reflected in the pro forma statements for the completion of
these tranches.
(c) Interest expense related to the $1.0 million bank term loan
incurred in connection with the transaction at an estimated
interest rate of 11%.
(d) To record dividend on Redeemable Preferred Stock to compute net
income attributable to common shareholders.
(e) To record accretion of discount on Redeemable Preferred Stock to
compute net income attributable to common shareholders.
3. Repayment of Delta CompuTec debt
Concurrent with the purchase the outstanding common stock of DCI, the
Company repaid substantially all of the outstanding debt of DCI. In
connection with this repayment the Company had previously granted a
warrant to purchase 108,317 shares of the Company's common stock at
$3.23 per share. The warrant vested upon completion of the DCI
acquisition and has an estimated fair value of $27,000. The warrant was
issued in satisfaction of $350,000 of DCI debt and the related gain from
this issuance has been recorded as a reduction in goodwill resulting
from the DCI acquisition. The following summarizes the related pro forma
adjustment.
(f) Use of cash proceeds to repay debt $4,667
Issuance of warrants 27
Gain of repayment of debt 323
------
Long-term debt repayment $5,017
======
(g) To eliminate interest expense related to debt repaid as of the
beginning of the period.
<PAGE> 36
Alpha Microsystems
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(continued)
4. Other Pro Forma Adjustments
(h) To record amortization of costs in excess of fair market value of
net assets acquired.
(i) To reverse amortization of previously recorded goodwill.
(j) Amortization of fair market value of acquired service contracts.
(k) To adjust depreciation expense related to write-down of the
recorded value of field spare parts.
5. Per share calculations
The aggregate weighted average common share amounts represent the
weighted average common shares of the Company. Common stock equivalents
have not been included in the calculation as they are anti-dilutive.
<PAGE> 37
EXHIBIT INDEX
10.1 Employment Agreement by and between the Registrant and John T. DeVito
dated September 1, 1998.
10.2 Amended and Restated Employment Agreement by and between the Registrant
and Douglas J. Tullio dated September 1, 1998.
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of this 1st
day of September, 1998 (the "Effective Date") between ALPHA MICROSYSTEMS, a
California corporation (the "Company") and John T. DeVito (the "Employee").
RECITALS
WHEREAS, on August 4, 1998, the Company executed a Merger Agreement
with, among others, Delta Computec Inc., a New York corporation ("DCI"),
pursuant to which DCI will become a wholly-owned subsidiary of the Company;
WHEREAS, in connection with the foregoing Merger Agreement, the Company
and the Employee desire to enter into this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
representations contained herein and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
BASIC EMPLOYMENT
1.1 Employment. The Company agrees to employ Employee and Employee
hereby agrees to be employed by the Company to perform the duties described
below for the compensation specified in this Agreement, as it may be amended
from time to time, subject to and upon all the terms and conditions set forth
herein. During Employee's employment hereunder, Employee hereby agrees to use
his best efforts and to devote his full professional time, energy and ability in
order to assure the proper and efficient performance of his work for the
Company. At all times during Employee's employment hereunder, Employee shall not
render services of a business, professional or commercial nature to any other
person or firm, whether for compensation or otherwise, without the prior written
express authorization of the Board of Directors of the Company (the "Board"),
which authorization shall describe the nature and duration of such services and
shall name the person or firm to whom such services may be rendered.
1.2 Term. Employee's employment hereunder shall commence as of the
Effective Date, and continue until the fourth anniversary of the Effective Date
(the "Employment Period").
<PAGE> 2
1.3 Duties. Employee shall devote his full time, energy and talents to
serving as the Vice President of the Professional Services Group of the Company,
and shall have such duties as are typically expected of such officers, subject
to the direction of the President of the Company. The Employee will have such
authority, power, responsibilities and duties as are inherent to his positions
and necessary to carry out his responsibilities and the duties required of him
hereunder.
1.4 Basic Compensation. The Company hereby agrees to pay Employee a
base salary (the "Base Salary") at the annual rate of One Hundred and Twenty
Thousand Dollars ($120,000), which rate may be amended from time to time in
accordance with the provisions of this paragraph, payable in equal payments with
such frequency as is the custom and practice of the Company, covering employment
during the immediately preceding period for all services rendered by Employee
during his Employment Period. On each anniversary of the Effective Date, the
Employee's Base Salary shall be adjusted by the Board or any duly constituted
committee thereof, to be an amount greater than the average salary but less than
the maximum salary for Vice Presidents of the Service/Professional Services
groups of comparable companies as determined by compensation surveys prepared by
the Economic Research Institute or other organization mutually acceptable to the
Company and the Employee. The Company shall deduct from any payment such social
security insurance, federal, state and other taxes, state disability insurance
and other withholdings as may be required by law.
1.5 Bonus Compensation.
(a) In addition to Base Salary, the Employee shall receive a
bonus in the form of cash, stock options, stock grants or other
non-cash compensation ("Bonus Compensation") in accordance with the
terms of this Section 1.5. The Company shall deduct from any payment of
Bonus Compensation social security insurance, federal, state and other
taxes, state disability insurance and other withholdings as may be
required by law. "DCI Net Operating Profit" for purposes of this
Section 1.5 shall mean the net operating profit, if any, generated by
DCI during the applicable period, calculated by the Company on a pro
forma basis in accordance with generally accepted accounting
principles.
(b) As of October 31, 1998, Employee shall receive Bonus
Compensation equal to 5% of DCI Net Operating Profit for the period
from November 1, 1997 through October 31, 1998, on a basis consistent
with the Employment Agreement between the Employee and DCI as in effect
immediately prior to the Company's acquisition of DCI.
(c) As of November 1, 1998, and as of each subsequent November
1 during the Employment Period, the Company shall adopt a new Annual
Plan for DCI, and such Annual Plan shall contain the Company's
projection of DCI Net Operating Profit during the upcoming fiscal year
(each, a "DCI fiscal year"). If DCI Net Operating Profit during the
applicable DCI fiscal year is less than 75% of the Company's projection
for such year, the Employee shall not be eligible to receive Bonus
Compensation. If DCI Net
-2-
<PAGE> 3
Operating Profit during the applicable DCI fiscal year equals or
exceeds 75% of the Company's projection for such year, the Employee
shall receive Bonus Compensation equal to 5% of the DCI Net Operating
Profit. If DCI Net Operating Profit during the applicable fiscal year
exceeds the Company's projection for such year, the Employee shall
receive additional Bonus Compensation equal to 1% of the DCI Net
Operating Profit. Notwithstanding the foregoing, in no event shall
Bonus Compensation paid to the Employee under this Section 1.5(c) for
any DCI fiscal year exceed 100% of the Employee's Base Salary.
1.6 Vacation and Illness. Employee shall be entitled to paid vacation
and sick leave in accordance with the policies established from time to time by
the Company.
1.7 Benefits. During the Employment Period, Employee will be eligible
to participate in all retirement, stock option or other benefit plans available
to officers and employees of the Company. Employee shall also receive employee
group medical, dental and life insurance benefits in accordance with the
policies established from time to time by the Company.
1.8 Expenses. Employee shall be entitled to reimbursement for all
approved reasonable travel and other business expenses incurred by Employee in
connection with his services to the Company pursuant to the terms of this
Agreement. All business expenses for which Employee seeks reimbursement from the
Company shall be adequately documented by Employee in accordance with the
Company's procedures covering expense reimbursement and in compliance with the
regulations of the Internal Revenue Service.
ARTICLE II
PROPRIETARY INFORMATION
2.1 Non-Disclosure of Proprietary Information. Employee agrees that,
during and after his employment with the Company, Employee will regard and
preserve as confidential all trade secrets pertaining to the Company's business
that have been or may be obtained by Employee by reason of his employment, and
Employee will not directly or indirectly disclose to any third person or use for
the benefit of anyone other than the Company or use for his own benefit or
purposes, any inventions, designs, improvements, processes, techniques, methods,
ideas, discoveries, developments, formulae, compounds, specifications,
specialized knowledge, data, records, trade secrets, confidential information,
customer lists, customer data, sales data, sales programs, development programs,
acquisition programs, computer code or other secrets or proprietary information
of the Company which he has encountered or originated in the course of or
arising out of his employment with the Company. The parties hereto acknowledge
and agree that the subject matter of the provisions of this Section 2.1 is of a
unique and special nature such that such provisions may be specifically enforced
by a court of equity in addition to whatever other remedies the Company may have
at law.
-3-
<PAGE> 4
2.2 Return of Documents and Materials. Employee agrees that any and all
documents and materials, including, without limitation, reports, drawings,
designs, tools, equipment, plans, proposals, marketing or sales plans,
specifications or materials made or prepared, in whole or in part, by Employee
or that may come into Employee's possession by reason of his employment are the
property of the Company and shall not be used by Employee in any way adverse or
competitive to the Company's interests. Employee acknowledges that Employee will
not deliver, reproduce or in any way allow such documents and materials to be
delivered or used by any third party without the specific written direction or
consent of the Company. The parties hereto acknowledge and agree that the
subject matter of the provisions of this Section 2.2 is of a unique and special
nature such that such provisions may be specifically enforced by a court of
equity in addition to whatever the remedies the Company may have at law.
2.3 Ownership of Inventions. Employee agrees that all inventions,
discoveries, improvements, and innovations, whether patentable or not
(hereinafter collectively referred to as "Inventions" or "Invention" as may be
appropriate), conceived or made by Employee, either solely or in concert with
others, during the period of employment with the Company, whether or not made or
conceived during working hours, which (a) relate in any manner to the existing
or contemplated business or research activities of the Company, or (b) are
suggested by or result from Employee's work for the Company, or (c) result from
the use of the Company's time, materials or facilities, shall be the exclusive
property of the Company.
2.4 Assignment of Rights. Employee further agrees:
(a) That Employee will promptly disclose in writing to the
Company all Inventions conceived or made by Employee, either solely or
in concert with others, during the period of employment by the Company;
and
(b) That Employee hereby assigns to the Company Employee's
entire right, title and interest in all Inventions which are the
property of the Company pursuant to Section 2.3 and will, on request,
execute specific assignments to any of such Inventions; and that
Employee will execute, acknowledge and deliver such documents and take
such further action considered necessary by the Company at any time on
its request during or subsequent to the period of employment with the
Company at the Company's expense, but without charge by Employee to the
Company, to obtain and defend letters patent and/or copyrights in any
and all countries and to vest title in such Inventions in the Company
or its assigns.
2.5 Statutory Right. Notwithstanding anything to the contrary herein
contained, in accordance with Section 2872 of the California Labor Code,
Employee hereby acknowledges that the provisions of this Agreement which relate
to the ownership of, and the assignment by Employee of Employee's right, title
and interest to, any Invention, will not be applicable to an
-4-
<PAGE> 5
Invention which is proved to fully qualify under Section 2870 of the California
Labor Code, a copy of which Employee has read and is attached hereto as Exhibit
A
2.6 Noncompetition; Non-Solicitation. For the period beginning on the
Effective Date and ending one year after the Termination Date (regardless of the
reason for the termination of employment), (a) the Employee shall not directly
or indirectly be employed or retained by, or render any services for, or be
financially interested in any manner, in any person, firm or corporation engaged
in any business which is competitive in any way as of the Termination Date with
any business in which the Company or any of its affiliates is engaged (including
any program of development or research), (b) the Employee shall not divert or
attempt to divert any business from the Company or any affiliate, (c) the
Employee shall not disturb or attempt to disturb any business or employment
relationships of the Company or any affiliate and (d) Employee shall not make
any derogatory and/or untruthful statements about the Company or any of its
affiliates. Notwithstanding the foregoing provisions of this Section 2.6, the
Employee shall be permitted to (i) invest in mutual funds which are diversified,
open-end management companies (as those terms are defined in Section 5 of the
Investment Company Act of 1940) that are registered under such Act; (ii) invest
in the outstanding stock of any corporation listed on the New York Stock
Exchange or American Stock Exchange or included in the National Association of
Securities Dealers Automated Quotation System (but only to the extent that the
Employee's interest in the stock of any such corporation does not exceed 5% of
the voting power of the outstanding stock of such corporation); and (iii)
purchase and hold any other investment to the extent the Board consents in
writing to such investment; and any investment described in clauses (i), (ii) or
(iii) next above shall not be considered to violate the requirements of this
Section 2.6.
2.7 Specific Performance. The parties hereto agree that the Company
would be damaged irreparably in the event any of the foregoing provisions of
this Article II were not performed by the Employee in accordance with their
respective terms or were otherwise breached and that money damages would be an
inadequate remedy for any such nonperformance or breach. Therefore, the Company
or its successors or assigns shall be entitled, in addition to any other rights
and remedies existing in their favor, to an injunction or injunctions to prevent
any breach or threatened breach of any such provisions and to enforce such
provisions specifically (without posting a bond or other security).
ARTICLE III
TERMINATION
3.1 Rights and Payments Upon Termination. The Employee's right to
benefits and payments, if any, for periods after the date on which his
employment with the Company terminates for any reason (his "Termination Date")
shall be determined in accordance with this Section 3.1:
-5-
<PAGE> 6
(a) Minimum Payment. The term "Minimum Payment" as used herein
shall mean:
(i) the Employee's earned but unpaid Base Salary for the
period ending on his Termination Date; and
(ii) the Employee's accrued but unpaid vacation pay for
the period ending with his Termination Date, as determined in
accordance with the Company's policy as in effect from time to
time.
Except as may be otherwise expressly provided to the contrary
in this Agreement, nothing in this Agreement shall be construed as
requiring the Employee to be treated as employed by the Company
following his Termination Date for purposes of any employee benefit
plan or arrangement in which he may participate at such time.
(b) Termination By Company for Cause. If the Employee's
Termination Date occurs during the Employment Period and is a result of
the Company's termination of the Employee's employment on account of
Cause (as defined below), then, except as agreed in writing between the
Employee and the Company, the Employee shall be entitled to receive the
Minimum Payment but shall have no other right to future payments or
benefits under this Agreement (and the Company shall have no obligation
to make any such future payments or provide any such future benefits)
for periods after the Employee's Termination Date. For purposes of this
Agreement, the term "Cause" shall mean (1) the continuous failure by
the Employee to substantially perform his duties under this Agreement
(following written notice by the Board and a reasonable opportunity to
cure not to exceed 30 days), (2) the willful engaging by the Employee
in conduct which is demonstrably and materially injurious to the
Company or its affiliates, (3) conduct by the Employee that involves
theft, fraud in connection with duties, dishonesty or moral turpitude;
or (4) the Employee's violation of any of the provisions of Article II
hereof.
(c) Termination for Death or Disability. If the Employee's
Termination Date occurs during the Employment Period on account of the
Employee's death or disability (as defined below), then the Employee
(or in the event of his death, his estate) shall be entitled to
continuing payments of his Base Salary then in effect for the period
commencing on his Termination Date and ending on the earliest of (i)
365 days following his Termination Date, (ii) the last day of the
Employment Period, or (iii) the date on which the Employee violates the
provisions of Article II of this Agreement. For purposes of this
Agreement, the term "disability" shall mean the inability of the
Employee to continue to perform his duties under this Agreement on a
full-time basis as a result of mental or physical illness, sickness or
injury for a period of 90 days within any 12-month period, as
determined in the sole and absolute discretion of the Board.
-6-
<PAGE> 7
(d) Termination by the Company for Reasons Other Than Cause.
Subject only to such rights, benefits and payments provided hereunder,
the Company retains the right to terminate the Employee's employment at
will at any time with or without cause, immediately upon giving the
Employee written notice of the Company's intention to terminate his
employment. If the Employee's Termination Date occurs during the
Employment Period and is a result of the Employee's termination of
employment by the Company for any reason other than Cause (and is not
on account of the Employee's death, disability, or voluntary
resignation, the mutual agreement of the parties or any other reason),
then the Employee shall be entitled to receive an amount equal to (i)
his Base Salary for the Company's immediately preceding fiscal year
plus, (ii) the average of his bonus compensation over the Company's two
immediately preceding fiscal years, payable in equal installments over
a twelve-month period beginning as soon as practicable after the
Termination Date. The assignment to the Employee of any duties
materially inconsistent with the Employee's position as Vice President
of the Professional Services Group, or the removal from the Employee of
the authority for any material responsibilities normally attendant to
the office of the Vice President of the Professional Services Group,
shall be deemed to be termination by the Company for reasons other than
for Cause.
(e) Termination for Voluntary Resignation, Mutual Agreement or
Other Reasons. If the Employee's Termination Date occurs during the
Employment Period on account of his voluntary resignation, mutual
agreement of the parties, or any reason other than those specified in
subparagraphs (b), (c) or (d) above then, except as agreed in writing
between the Employee and the Company, the Employee shall have no right
to future payments or benefits under this Agreement other than the
Minimum Payment (and the Company shall have no obligation to make any
such future payments or provide any such future benefits) for periods
after the Employee's Termination Date.
(f) Termination Upon Change-In-Control.
(i) Definition of Change-In-Control. For the purposes
of this Article III, each of the following shall be deemed to
be a "Change-In-Control":
(A) merger of consolidation of the Company;
(B) sale of all or substantially all of the
assets of the Company; or
(C) sale of more than fifty percent (50%) of
the outstanding common stock of the Company by any
person or persons.
-7-
<PAGE> 8
(ii) Termination. Employee shall be entitled to the
severance payments and other severance benefits set forth in
Sections 3.1(f)(iii), and (iv) hereof if Employee is
terminated under either of the following circumstances:
(A) if Employee delivers to the Company
written notice of resignation on or before the
effective date of a Change-In-Control (as defined in
Section 3.1(f)(i) hereinabove) that Employee
disapproves of the proposed Change-In-Control, which
resignation shall be effective upon the date of
Change-In-Control. Employee shall not be compelled to
set forth any reason or basis for Employee's
resignation under the circumstances of Section
3.1(f)(ii)(A). The Company shall be obligated to
personally deliver to Employee written notice of a
proposed Change-In-Control as soon as practicable
upon the Company's determination that a
Change-In-Control is likely to occur.
(B) if Employee does not resign upon a
Change-In-Control and if within 180 days following a
Change-In-Control, Employee is either involuntarily
terminated or Employee's responsibilities, duties, or
title as an employee of the Company are substantially
changed without Employee's consent, and as a result
thereof, Employee terminates his employment with the
Company. Notwithstanding the foregoing, Employee
shall not be entitled to any benefits (set forth in
Sections 3.1(f)(iii) and (iv)) if Employee's
termination is pursuant to Sections 3.1(b), (c), or
(d).
(iii) Calculation of Severance Payment. Upon
termination pursuant to Section 3.1(f), the Employee shall be
entitled to receive an amount equal to (i) his Base Salary for
the Company's immediately preceding fiscal year plus, (ii) the
average of his bonus compensation over the Company's two
immediately preceding fiscal years, payable in equal
installments over a twelve-month period beginning as soon as
practicable after the Termination Date.
(iv) Stock Option, Stock and Profit Sharing Plans.
Reference is made to the stock option, profit sharing and
similar plans listed on Schedule 3.1(f)(iv) for which Employee
is or may become eligible. Schedule 3.1(f)(iv) lists the
benefits Employee is currently entitled to with respect to
each such plan and shall be updated from time to time to
incorporate any additional plans for which Employee becomes
eligible. Upon termination pursuant to Section 3.1(f), unless
prohibited by the terms of the applicable plan and applicable
law, all of Employee's stock options shall become fully vested
and shall be exercisable on a cashless exercise basis.
-8-
<PAGE> 9
(g) Reduction for Withholding Taxes. With respect to any
payment made to the Employee under Article III, the Company shall
deduct from any such payment such social security insurance, state
disability insurance, and federal, state and other taxes and other
withholdings as may be required by law.
ARTICLE IV
MISCELLANEOUS
4.1 Miscellaneous. All notices provided for under this Agreement shall
be deemed to have been duly given if delivered by hand or, in the alternative,
if sent by registered or certified mail, with return receipt requested,
first-class postage prepaid, if to the Company, to Alpha Microsystems, 2722
South Fairview Street, Santa Ana, CA 92704; Attention: Chairman; if to Employee,
to John DeVito, 19 Amherst Drive, Yonkers, New York 10710, or to such other
address with respect to each party as such party shall notify the other in
writing. Delivery of any such communications so made by mail shall be deemed to
be complete on the date of delivery as shown by the addressee's registry or
certification receipt.
4.2 Assignability. The Company may assign its interest in this
Agreement in connection with a merger or sale of all or substantially all of the
assets of the Company and the provisions of this Agreement shall inure to the
benefit of the successors and assigns of the Company. Employee may not assign or
transfer this Agreement, it being deemed personal to Employee only; provided,
however, that upon Employee's death, Employee's heirs, executors and/or
administrators may seek collection of any sums that may have been due Employee
as of Employee's death (it being hereby acknowledged and agreed that no further
Severance Payments pursuant to Section 3.1(c) shall be due after Employee's
death). Subject to the above, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns. The provisions of this Section 4.2
shall survive the termination of this Agreement.
4.3 Entire Agreement; Amendments. This Agreement constitutes the entire
agreement between the parties pertaining to the subject matter herein and
supersedes all prior agreements, representations and understandings of the
parties and all prior agreements, representations and understandings between DCI
and the Employee. No modification or amendment to this Agreement shall be
effective unless in writing.
4.4 Captions. Any captions to or headings of the articles, sections,
subsections, paragraphs or subparagraphs of this Agreement are solely for the
convenience of the parties, are not a part of this Agreement and shall not be
used for the interpretation of determination of the validity of this Agreement
or any provisions hereof.
-9-
<PAGE> 10
4.5 Severability. In the event that any one or more provisions,
clauses, paragraphs, subclauses or subparagraphs contained in this Agreement
shall for any reason be held to be invalid, illegal, void or unenforceable, the
same shall not affect any other provision, paragraph, clause, subparagraph or
subclause of this Agreement, but this Agreement shall be construed as if such
invalid, illegal, void or unenforceable provision, clause, paragraph,
subparagraph or subclause had never been contained herein.
4.6 Waiver. The waiver by the Company or the Employee of any breach of
any term or condition of this Agreement shall not be deemed to constitute the
waiver of any other breach of the same or any other term or condition hereof.
4.7 Costs of Disputes. Each party shall bear his/its own costs in
connection with any controversy or dispute arising out of or relating to this
Agreement (or the breach thereof).
4.8 Amendment. This Agreement may be amended or cancelled only by
mutual agreement of the parties in writing without the consent of any other
person. So long as the Employee lives, no person, other than the parties hereto,
shall have any rights under or interest in this Agreement or the subject matter
hereof.
4.9 Survival of Agreement. Except as otherwise expressly provided in
this Agreement, the rights and obligations of the parties to this Agreement
shall survive the termination of the Employee's employment with the Company.
4.10 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
4.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
4.12 Arbitration. To the fullest extent allowed by law, any
controversy, claim or dispute between the Employee and the Company (and/or any
of its directors, officers, employees or agents) relating to or arising out of
the Employee's employment or the cessation of the Employee's employment will be
submitted to final and binding arbitration in Orange County, California, for
determination in accordance with the National Rules for the Resolution of
Employment Disputes of the American Arbitration Association as the exclusive
remedy for such controversy, claim or dispute. This means that both the Employee
and the Company give up all rights to a trial by jury. Possible disputes covered
by the above include (but are not limited to) wage, contract, tort,
discrimination, or other employment-related claims under laws known as Title VII
of the Civil Rights Act, the California Fair Employment and Housing Act, the
Americans With Disabilities Act, the 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 (or any other claims where
-10-
<PAGE> 11
mandatory arbitration is prohibited by law) are not covered by this arbitration
agreement, and such claims may be presented by the Employee or the Company to
the appropriate court or state agency as provided by California law. Judgment on
any award issued by the arbitrator may be entered in any court having
jurisdiction thereof.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date first above written.
"Company" ALPHA MICROSYSTEMS,
a California corporation
________________________________
By:_____________________________
Name:
Title:
"Employee" ________________________________
John T. DeVito
-12-
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") is entered
into as of this 1st day of September, 1998 (the "Effective Date") between ALPHA
MICROSYSTEMS, a California corporation (the "Company") and Douglas J. Tullio
(the "Employee").
RECITALS
WHEREAS, on January 3, 1990, the Company and Employee executed a letter
agreement with respect to the Company's offer of employment to Employee
containing certain severance benefits to be provided to Employee under certain
circumstances (the "Offer Letter");
WHEREAS, the Company has on January 8, 1990 entered into the Employment
Agreement (as amended, the "Old Employment Agreement") which incorporated the
terms of the Offer Letter and provided certain severance benefits to Employee
under certain other circumstances; and
WHEREAS, the Company and the Employee desire to amend and restate the
Old Employment Agreement in order to modify certain of its terms and to provide
for certain additional terms and conditions;
NOW, THEREFORE, in consideration of the mutual covenants and
representations contained herein and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
BASIC EMPLOYMENT
1.1 Employment. The Company agrees to employ Employee and Employee
hereby agrees to be employed by the Company to perform the duties described
below for the compensation specified in this Agreement, as it may be amended
from time to time, subject to and upon all the terms and conditions set forth
herein. During Employee's employment hereunder, Employee hereby agrees to use
his best efforts and to devote his full professional time, energy and ability in
order to assure the proper and efficient performance of his work for the
Company. At all times during Employee's employment hereunder, Employee shall not
render services of a business, professional or commercial nature to any other
person or firm, whether for compensation or otherwise, without the prior written
express authorization of the Board of Directors of the Company (the "Board"),
which authorization shall describe the nature
<PAGE> 2
and duration of such services and shall name the person or firm to whom such
services may be rendered.
1.2 Term. Employee's employment hereunder shall commence as of the
Effective Date, and continue until the fourth anniversary of the Effective Date
(the "Employment Period").
1.3 Duties. The Employee shall devote his full time, energy and talents
to serving as the President and Chief Executive Officer of the Company, and
shall have such duties as are typically expected of such officers, subject to
the direction of the Board. The Employee will have such authority, power,
responsibilities and duties as are inherent to his positions and necessary to
carry out his responsibilities and the duties required of him hereunder.
1.4 Basic Compensation. The Company hereby agrees to pay Employee a
base salary (the "Base Salary") at the annual rate of Three Hundred Thousand
Dollars ($300,000.00), which rate may be amended from time to time in accordance
with the provisions of this paragraph, payable in equal payments with such
frequency as is the custom and practice of the Company, covering employment
during the immediately preceding period for all services rendered by Employee
during his Employment Period. On each anniversary of the Effective Date, the
Employee's Base Salary shall be adjusted by the Board or any duly constituted
committee thereof, to be an amount greater than the average salary but less than
the maximum salary for Chief Executive Officers of comparable companies as
determined by compensation surveys prepared by the Economic Research Institute
or other organization mutually acceptable to the Company and the Employee. The
Company shall deduct from any payment such social security insurance, federal,
state and other taxes, state disability insurance and other withholdings as may
be required by law.
1.5 Bonus Compensation. In addition to Base Salary, at the end of each
fiscal year, Employee may be considered for a bonus in the form of cash, stock
options, stock grants or other non-cash compensation ("Bonus Compensation") of
up to 40% of Base Salary to be based upon Employee's performance during such
fiscal year, or applicable portion thereof. The amount of said Bonus
Compensation, if any, shall be determined in the sole and absolute discretion of
the Board. The Company shall deduct from any payment of Bonus Compensation
social security insurance, federal, state and other taxes, state disability
insurance and other withholdings as may be required by law.
1.6 Vacation and Illness. Employee shall be entitled to paid vacation
and sick leave in accordance with the policies established from time to time by
the Company.
1.7 Benefits.
(a) Standard Company Benefits. During the Employment Period, Employee
will be eligible to participate in all retirement, stock option or other benefit
plans available to officers and employees of the Company. Employee shall also
receive employee group medical, dental
<PAGE> 3
and life insurance benefits in accordance with the policies established from
time to time by the Company.
(b) Whole Life Insurance. The Company shall purchase One Million
dollars ($1,000,000) of life insurance for the Employee (the "Policy"). The
Policy will be funded annually by the Company for four (4) years at an annual
premium cost of $52,634. This level of funding will provide for the Employee a
paid up policy after four (4) years. If the Employee's Termination Date occurs
during the Employment Period and is a result of the Employee's death, the
Policy's $1,000,000 death benefit will be split evenly between the Company and
the Employee's estate, paying $500,000 to each. Upon completion of the
Employment Period, the Company agrees to transfer ownership of the policy to the
Employee and to expense him on an annual basis, as reflected on a Form 1099, for
the cash surrender value of the Policy over a ten (10) year period. The Employee
agrees to have the Company continue to have a Two Hundred Thousand dollar
($200,000) death benefit as long as the Policy is in effect.
1.8 Expenses. Employee shall be entitled to reimbursement for all
approved reasonable travel and other business expenses incurred by Employee in
connection with his services to the Company pursuant to the terms of this
Agreement. All business expenses for which Employee seeks reimbursement from the
Company shall be adequately documented by Employee in accordance with the
Company's procedures covering expense reimbursement and in compliance with the
regulations of the Internal Revenue Service.
ARTICLE II
PROPRIETARY INFORMATION
2.1 Non-Disclosure of Proprietary Information. Employee agrees that,
during and after his employment with the Company, Employee will regard and
preserve as confidential all trade secrets pertaining to the Company's business
that have been or may be obtained by Employee by reason of his employment, and
Employee will not directly or indirectly disclose to any third person or use for
the benefit of anyone other than the Company or use for his own benefit or
purposes, any inventions, designs, improvements, processes, techniques, methods,
ideas, discoveries, developments, formulae, compounds, specifications,
specialized knowledge, data, records, trade secrets, confidential information,
customer lists, customer data, sales data, sales programs, development programs,
acquisition programs, computer code or other secrets or proprietary information
of the Company which he has encountered or originated in the course of or
arising out of his employment with the Company. The parties hereto acknowledge
and agree that the subject matter of the provisions of this Section 2.1 is of a
unique and special nature such that such provisions may be specifically enforced
by a court of equity in addition to whatever other remedies the Company may have
at law.
-3-
<PAGE> 4
2.2 Return of Documents and Materials. Employee agrees that any and all
documents and materials, including, without limitation, reports, drawings,
designs, tools, equipment, plans, proposals, marketing or sales plans,
specifications or materials made or prepared, in whole or in part, by Employee
or that may come into Employee's possession by reason of his employment are the
property of the Company and shall not be used by Employee in any way adverse or
competitive to the Company's interests. Employee acknowledges that Employee will
not deliver, reproduce or in any way allow such documents and materials to be
delivered or used by any third party without the specific written direction or
consent of the Company. The parties hereto acknowledge and agree that the
subject matter of the provisions of this Section 2.2 is of a unique and special
nature such that such provisions may be specifically enforced by a court of
equity in addition to whatever the remedies the Company may have at law.
2.3 Ownership of Inventions. Employee agrees that all inventions,
discoveries, improvements, and innovations, whether patentable or not
(hereinafter collectively referred to as "Inventions" or "Invention" as may be
appropriate), conceived or made by Employee, either solely or in concert with
others, during the period of employment with the Company (including, but not
limited to, any period prior to the date of this Agreement when Employee was
employed by the Company), whether or not made or conceived during working hours,
which (a) relate in any manner to the existing or contemplated business or
research activities of the Company, or (b) are suggested by or result from
Employee's work for the Company, or (c) result from the use of the Company's
time, materials or facilities, shall be the exclusive property of the Company.
2.4 Assignment of Rights. Employee further agrees:
(a) That Employee will promptly disclose in writing to the
Company all Inventions conceived or made by Employee, either solely or
in concert with others, during the period of employment by the Company;
and
(b) That Employee hereby assigns to the Company Employee's
entire right, title and interest in all Inventions which are the
property of the Company pursuant to Section 2.3 and will, on request,
execute specific assignments to any of such Inventions; and that
Employee will execute, acknowledge and deliver such documents and take
such further action considered necessary by the Company at any time on
its request during or subsequent to the period of employment with the
Company at the Company's expense, but without charge by Employee to the
Company, to obtain and defend letters patent and/or copyrights in any
and all countries and to vest title in such Inventions in the Company
or its assigns.
2.5 Statutory Right. Notwithstanding anything to the contrary herein
contained, in accordance with Section 2872 of the California Labor Code,
Employee hereby acknowledges that the provisions of this Agreement which relate
to the ownership of, and the assignment by Employee of Employee's right, title
and interest to, any Invention, will not be applicable to an
-4-
<PAGE> 5
Invention which is proved to fully qualify under Section 2870 of the California
Labor Code, a copy of which Employee has read and is attached hereto as Exhibit
A
2.6 Noncompetition; Non-Solicitation. For the period beginning on the
Effective Date and ending one year after the Termination Date (regardless of the
reason for the termination of employment), (a) the Employee shall not directly
or indirectly be employed or retained by, or render any services for, or be
financially interested in any manner, in any person, firm or corporation engaged
in any business which is competitive in any way as of the Termination Date with
any business in which the Company or any of its affiliates is engaged (including
any program of development or research), (b) the Employee shall not divert or
attempt to divert any business from the Company or any affiliate, (c) the
Employee shall not disturb or attempt to disturb any business or employment
relationships of the Company or any affiliate and (d) Employee shall not make
any derogatory and/or untruthful statements about the Company or any of its
affiliates. Notwithstanding the foregoing provisions of this Section 2.6, the
Employee shall be permitted to (i) invest in mutual funds which are diversified,
open-end management companies (as those terms are defined in Section 5 of the
Investment Company Act of 1940) that are registered under such Act; (ii) invest
in the outstanding stock of any corporation listed on the New York Stock
Exchange or American Stock Exchange or included in the National Association of
Securities Dealers Automated Quotation System (but only to the extent that the
Employee's interest in the stock of any such corporation does not exceed 5% of
the voting power of the outstanding stock of such corporation); and (iii)
purchase and hold any other investment to the extent the Board consents in
writing to such investment; and any investment described in clauses (i), (ii) or
(iii) next above shall not be considered to violate the requirements of this
Section 2.6.
2.7 Specific Performance. The parties hereto agree that the Company
would be damaged irreparably in the event any of the foregoing provisions of
this Article II were not performed by the Employee in accordance with their
respective terms or were otherwise breached and that money damages would be an
inadequate remedy for any such nonperformance or breach. Therefore, the Company
or its successors or assigns shall be entitled, in addition to any other rights
and remedies existing in their favor, to an injunction or injunctions to prevent
any breach or threatened breach of any such provisions and to enforce such
provisions specifically (without posting a bond or other security).
ARTICLE III
TERMINATION
3.1 Rights and Payments Upon Termination. The Employee's right to
benefits and payments, if any, for periods after the date on which his
employment with the Company terminates for any reason (his "Termination Date")
shall be determined in accordance with this Section 3.1:
-5-
<PAGE> 6
(a) Minimum Payment. The term "Minimum Payment" as used
herein shall mean:
(i) the Employee's earned but unpaid Base Salary for
the period ending on his Termination Date; and
(ii) the Employee's accrued but unpaid vacation pay
for the period ending with his Termination Date, as determined
in accordance with the Company's policy as in effect from time
to time.
Except as may be otherwise expressly provided to the contrary
in this Agreement, nothing in this Agreement shall be construed as
requiring the Employee to be treated as employed by the Company
following his Termination Date for purposes of any employee benefit
plan or arrangement in which he may participate at such time.
(b) Termination By Company for Cause. If the Employee's
Termination Date occurs during the Employment Period and is a result of
the Company's termination of the Employee's employment on account of
Cause (as defined below), then, except as agreed in writing between the
Employee and the Company, the Employee shall be entitled to receive the
Minimum Payment but shall have no other right to future payments or
benefits under this Agreement (and the Company shall have no obligation
to make any such future payments or provide any such future benefits)
for periods after the Employee's Termination Date. For purposes of this
Agreement, the term "Cause" shall mean (1) the continuous failure by
the Employee to substantially perform his duties under this Agreement
(following written notice by the Board and a reasonable opportunity to
cure not to exceed 30 days), (2) the willful engaging by the Employee
in conduct which is demonstrably and materially injurious to the
Company or its affiliates, (3) conduct by the Employee that involves
theft, fraud in connection with duties, dishonesty or moral turpitude;
or (4) the Employee's violation of any of the provisions of Article II
hereof.
(c) Termination for Death or Disability. If the Employee's
Termination Date occurs during the Employment Period on account of the
Employee's death or disability (as defined below), then the Employee
(or in the event of his death, his estate) shall be entitled to
continuing payments of his Base Salary then in effect for the period
commencing on his Termination Date and ending on the earliest of (i)
365 days following his Termination Date, (ii) the last day of the
Employment Period, or (iii) the date on which the Employee violates the
provisions of Article II of this Agreement. For purposes of this
Agreement, the term "disability" shall mean the inability of the
Employee to continue to perform his duties under this Agreement on a
full-time basis as a result of mental or physical illness, sickness or
injury for a period of 90 days within any 12-month period, as
determined in the sole and absolute discretion of the Board.
-6-
<PAGE> 7
(d) Termination by the Company for Reasons Other Than Cause.
Subject only to such rights, benefits and payments provided hereunder,
the Company retains the right to terminate the Employee's employment at
will at any time with or without cause, immediately upon giving the
Employee written notice of the Company's intention to terminate his
employment. If the Employee's Termination Date occurs during the
Employment Period and is a result of the Employee's termination of
employment by the Company for any reason other than Cause (and is not
on account of the Employee's death, disability, or voluntary
resignation, the mutual agreement of the parties or any other reason),
then the Employee shall be entitled to receive an amount equal to (i)
his Base Salary for the Company's immediately preceding fiscal year
plus, (ii) the average of his bonus compensation over the Company's two
immediately preceding fiscal years, payable in a lump sum as soon as
practicable after the Termination Date. The assignment to the Employee
of any duties materially inconsistent with the Employee's position as
President and Chief Executive Officer, or the removal from the Employee
of the authority for any material responsibilities normally attendant
to the office of the President and Chief Executive Officer shall be
deemed to be termination by the Company for reasons other than for
Cause.
(e) Termination for Voluntary Resignation, Mutual Agreement or
Other Reasons. If the Employee's Termination Date occurs during the
Employment Period on account of his voluntary resignation, mutual
agreement of the parties, or any reason other than those specified in
subparagraphs (b), (c) or (d) above then, except as agreed in writing
between the Employee and the Company, the Employee shall have no right
to future payments or benefits under this Agreement other than the
Minimum Payment (and the Company shall have no obligation to make any
such future payments or provide any such future benefits) for periods
after the Employee's Termination Date.
(f) Termination Upon Change-In-Control.
(i) Definition of Change-In-Control. For the purposes
of this Article III, each of the following shall be deemed to
be a "Change-In-Control":
(A) merger of consolidation of the Company;
(B) sale of all or substantially all of the
assets of the Company; or
(C) sale of more than fifty percent (50%) of
the outstanding common stock of the Company by any
person or persons.
(ii) Termination. Employee shall be entitled to the
severance payments and other severance benefits set forth in
Sections 3.1(f)(iii) and (iv) hereof if Employee is terminated
under either of the following circumstances:
-7-
<PAGE> 8
(A) if Employee delivers to the Company
written notice of resignation on or before the
effective date of a Change-In-Control (as defined in
Section 3.1(f)(i) hereinabove) that Employee
disapproves of the proposed Change-In-Control, which
resignation shall be effective upon the date of
Change-In-Control. Employee shall not be compelled to
set forth any reason or basis for Employee's
resignation under the circumstances of Section
3.1(f)(ii)(A). The Company shall be obligated to
personally deliver to Employee written notice of a
proposed Change-In-Control as soon as practicable
upon the Company's determination that a
Change-In-Control is likely to occur.
(B) if Employee does not resign upon a
Change-In-Control and if within 180 days following a
Change-In-Control, Employee is either involuntarily
terminated or Employee's responsibilities, duties, or
title as an employee of the Company are substantially
changed without Employee's consent, and as a result
thereof, Employee terminates his employment with the
Company. Notwithstanding the foregoing, Employee
shall not be entitled to any benefits (set forth in
Sections 3.1(f)(iii) and (iv)) if Employee's
termination is pursuant to Sections 3.1(b), (c) or
(d).
(iii) Calculation of Severance Payment. Upon
termination pursuant to Section 3.1(f), the employee shall be
entitled to receive an amount equal to (i) his Base Salary for
the Company's immediately preceding eighteen (18) months plus,
(ii) the average of his bonus compensation over the Company's
two immediately preceding fiscal years, payable in a lump sum
as soon as practicable after the Termination Date.
(iv) Stock Option, Stock and Profit Sharing Plans.
Reference is made to the stock option, profit sharing and
similar plans listed on Schedule 3.1(f)(iv) for which Employee
is or may become eligible. Schedule 3.1(f)(iv) lists the
benefits Employee is currently entitled to with respect to
each such plan and shall be updated from time to time to
incorporate any additional plans for which Employee becomes
eligible. Upon termination pursuant to Section 3.1(f), unless
prohibited by the terms of the applicable plan and applicable
law, all of Employee's stock options shall become fully vested
and shall be exercisable on a cashless exercise basis.
(g) If the Employee is terminated pursuant to Section 3.1(d),
the Employee shall continue to receive the group medical, dental and
life insurance benefits set forth in Section 1.7(a) for a twelve-month
period immediately following the Termination Date. If the Employee is
terminated pursuant to Section 3.1(f), the Employee shall continue to
-8-
<PAGE> 9
receive the group medical, dental and life insurance benefits set forth
in Section 1.7(a) for an eighteen-month period immediately following
the Termination Date.
(h) Reduction for Withholding Taxes. With respect to any
payment made to the Employee under Article III, the Company shall
deduct from any such payment such social security insurance, state
disability insurance, and federal, state and other taxes and other
withholdings as may be required by law.
3.2 Outplacement Services. If Employee's termination pursuant to this
Article III is pursuant to Section 3.1(d) or 3.1(f)(ii) following the
Termination Date, the Company will pay for outplacement services for Employee
for up to twelve (12) months from the Termination Date and up to a maximum
aggregate amount of $35,000.
ARTICLE IV
MISCELLANEOUS
4.1 Miscellaneous. All notices provided for under this Agreement shall
be deemed to have been duly given if delivered by hand or, in the alternative,
if sent by registered or certified mail, with return receipt requested,
first-class postage prepaid, if to the Company, to Alpha Microsystems, 2722
South Fairview Street, Santa Ana, CA 92704; Attention: Chairman; if to Employee,
to Douglas J. Tullio, 1380 Temple Hills Drive, Laguna Beach, CA 92651, or to
such other address with respect to each party as such party shall notify the
other in writing. Delivery of any such communications so made by mail shall be
deemed to be complete on the date of delivery as shown by the addressee's
registry or certification receipt.
4.2 Assignability. The Company may assign its interest in this
Agreement in connection with a merger or sale of all or substantially all of the
assets of the Company and the provisions of this Agreement shall inure to the
benefit of the successors and assigns of the Company. Employee may not assign or
transfer this Agreement, it being deemed personal to Employee only; provided,
however, that upon Employee's death, Employee's heirs, executors and/or
administrators may seek collection of any sums that may have been due Employee
as of Employee's death (it being hereby acknowledged and agreed that no further
Severance Payments pursuant to Section 3.1(c) shall be due after Employee's
death). Subject to the above, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns. The provisions of this Section 4.2
shall survive the termination of this Agreement.
4.3 Entire Agreement; Amendments. This Agreement constitutes the entire
agreement between the parties pertaining to the subject matter herein and
supersedes all prior agreements, representations and understandings of the
parties. No modification or amendment to this Agreement shall be effective
unless in writing.
-9-
<PAGE> 10
4.4 Captions. Any captions to or headings of the articles, sections,
subsections, paragraphs or subparagraphs of this Agreement are solely for the
convenience of the parties, are not a part of this Agreement and shall not be
used for the interpretation of determination of the validity of this Agreement
or any provisions hereof.
4.5 Severability. In the event that any one or more provisions,
clauses, paragraphs, subclauses or subparagraphs contained in this Agreement
shall for any reason be held to be invalid, illegal, void or unenforceable, the
same shall not affect any other provision, paragraph, clause, subparagraph or
subclause of this Agreement, but this Agreement shall be construed as if such
invalid, illegal, void or unenforceable provision, clause, paragraph,
subparagraph or subclause had never been contained herein.
4.6 Waiver. The waiver by the Company or the Employee of any breach of
any term or condition of this Agreement shall not be deemed to constitute the
waiver of any other breach of the same or any other term or condition hereof.
4.7 Costs of Disputes. Each party shall bear his/its own costs in
connection with any controversy or dispute arising out of or relating to this
Agreement (or the breach thereof).
4.8 Amendment. This Agreement may be amended or cancelled only by
mutual agreement of the parties in writing without the consent of any other
person. So long as the Employee lives, no person, other than the parties hereto,
shall have any rights under or interest in this Agreement or the subject matter
hereof.
4.9 Survival of Agreement. Except as otherwise expressly provided in
this Agreement, the rights and obligations of the parties to this Agreement
shall survive the termination of the Employee's employment with the Company.
4.10 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
4.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
4.12 Rights Upon a Spin-Off. In the event of a spin-off of a portion of
the Company's business into a new operating entity which is not wholly-owned by
the Company, Employee shall have the option to allocate his existing equity
interests in the Company (including all stock and stock options) between the
Company and the new entity on a basis consistent with that of ING Equity
Partners II, L.P. ("Equity Partners") pursuant to Section 5.2(f) of the Warrants
issued by the Company to Equity Partners as of the date hereof.
-10-
<PAGE> 11
4.13 Arbitration. To the fullest extent allowed by law, any
controversy, claim or dispute between the Employee and the Company (and/or any
of its directors, officers, employees or agents) relating to or arising out of
the Employee's employment or the cessation of the Employee's employment will be
submitted to final and binding arbitration in Orange County, California, for
determination in accordance with the National Rules for the Resolution of
Employment Disputes of the American Arbitration Association as the exclusive
remedy for such controversy, claim or dispute. This means that both the Employee
and the Company give up all rights to a trial by jury. Possible disputes covered
by the above include (but are not limited to) wage, contract, tort,
discrimination, or other employment-related claims under laws known as Title VII
of the Civil Rights Act, the California Fair Employment and Housing Act, the
Americans With Disabilities Act, the 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 (or any other claims where mandatory arbitration is prohibited by law)
are not covered by this arbitration agreement, and such claims may be presented
by the Employee or the Company to the appropriate court or state agency as
provided by California law. Judgment on any award issued by the arbitrator may
be entered in any court having jurisdiction thereof.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date first above written.
"Company" ALPHA MICROSYSTEMS,
a California corporation
________________________________
By:_____________________________
Name:
Title:
"Employee" ______________________________
Douglas J. Tullio
-12-
