<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
COMMISSION FILE NUMBER 0-10558
ALPHA MICROSYSTEMS
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3108178
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2722 S. FAIRVIEW STREET, SANTA ANA, CA 92704
---------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 957-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of November 18, 1999, there were 11,629,820 shares of the registrant's Common
Stock outstanding.
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ALPHA MICROSYSTEMS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30,
1999 (Unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three and Nine Months Ended September
30, 1999 and September 20, 1998 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended September 30,
1999 and September 20, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II-- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1999
(Unaudited) December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 517 $ 4,930
Restricted cash 300 384
Accounts receivable, net of allowance for doubtful accounts of
$657 at September 30, 1999 and $700 at December 31, 1998 7,604 6,473
Prepaid expenses and other current assets 1,152 1,229
-------- --------
Total current assets 9,573 13,016
Property and equipment, net of accumulated depreciation of
$9,963 at September 30, 1999 and $9,281 at December 31, 1998 5,341 3,776
Intangibles, net 9,449 9,097
Other assets 487 542
-------- --------
$ 24,850 $ 26,431
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 2,250 $ 250
Accounts payable 2,577 3,686
Accrued compensation 1,028 1,530
Deferred revenue 3,814 3,142
Other accrued liabilities 1,074 1,480
-------- --------
Total current liabilities 10,743 10,088
Long-term debt 530 741
Other long-term liabilities 134 105
Commitments and contingencies
Redeemable preferred stock, no par value; 2,501 and 15,001 issued and
outstanding at September 30, 1999 and December 31, 1998,
respectively, forma; liquidation value $2,556 at September 30, 1999 2,170 12,824
Shareholders' equity:
Redeemable preferred stock, no par value; 5,000,000 shares authorized;
12,500 issued and outstanding at September 30, 1999, liquidation
value $12,781 at September 30, 1999 10,693 --
Common stock, no par value; 40,000,000 shares authorized;
11,629,820 and 11,193,952 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 32,825 31,632
Warrants 1,764 1,764
Accumulated deficit (34,046) (30,739)
Accumulated other comprehensive income 37 16
-------- --------
Total shareholders' equity 11,273 2,673
-------- --------
$ 24,850 $ 26,431
======== ========
</TABLE>
See accompanying notes
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 20, September 30, September 20,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales:
IT Services $ 7,892 $ 5,479 $ 24,050 $ 13,636
Product 1,073 1,075 3,578 3,553
-------- -------- -------- --------
Total net sales 8,965 6,554 27,628 17,189
-------- -------- -------- --------
Cost of sales:
IT Services 5,791 4,601 17,936 11,685
Product 848 844 2,632 2,592
-------- -------- -------- --------
Total cost of sales 6,639 5,445 20,568 14,277
-------- -------- -------- --------
Gross margin 2,326 1,109 7,060 2,912
Operating expenses:
Selling, general and administrative 2,485 2,227 8,414 5,446
Engineering, research and development 325 327 949 945
-------- -------- -------- --------
Total operating expenses 2,810 2,554 9,363 6,391
-------- -------- -------- --------
Loss from operations (484) (1,445) (2,303) (3,479)
Other (income) expense:
Interest income (10) (17) (60) (66)
Interest expense 82 38 133 69
Other expense (income), net 18 42 (196) 66
-------- -------- -------- --------
Total other (income) expense 90 63 (123) 69
-------- -------- -------- --------
Loss before taxes (574) (1,508) (2,180) (3,548)
Income tax expense (benefit) 50 -- 50 (19)
-------- -------- -------- --------
Net loss $ (624) $ (1,508) $ (2,230) $ (3,529)
======== ======== ======== ========
Net loss attributable to common shares $ (972) $ (1,520) $ (3,308) $ (3,541)
======== ======== ======== ========
Basic and diluted net loss per common share $ (0.08) $ (0.14) $ (0.29) $ (0.32)
======== ======== ======== ========
Number of shares used in computing
basic and diluted per share amounts 11,630 11,017 11,594 10,947
======== ======== ======== ========
</TABLE>
See accompanying notes.
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ALPHA MICROSYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------
September 30, 1999 September 20, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,230) $(3,529)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,212 1,569
Gain on sale of subsidiary (229) --
Provision for losses on accounts receivable (35) 155
Other changes in operating assets and liabilities, net of effects of
acquisitions and disposals:
Accounts receivable (1,929) (1,048)
Prepaid expenses and other current assets (129) (195)
Accounts payable and accrued liabilities (485) 731
Accrued compensation (484) 244
Deferred revenue 875 63
Other, net (79) 211
------- -------
Net cash used in operating activities (3,513) (1,799)
------- -------
Cash flows from investing activities:
Acquisition of DCI, net of cash acquired -- (3,557)
Acquisition of other IT Services assets (198) (1,598)
Purchases of equipment (2,342) (1,464)
Capitalization of software development costs (221) (399)
Proceeds from sale of short-term investments -- 3,829
Other, net (118) 24
------- -------
Net cash used in investing activities (2,879) (3,165)
------- -------
Cash flows from financing activities:
Issuance of preferred stock, net -- 6,958
Issuance of warrants to purchase common stock, net -- 654
Issuance of common stock 1,193 280
Line of credit, net 2,000 2,000
Principal repayments on debt (239) (77)
Repayments on debt assumed in acquisition of DCI -- (4,612)
Payment of preferred stock dividend (981) --
Other, net 3 --
------- -------
Net cash provided by financing activities 1,976 5,203
Effect of exchange rate changes on cash and cash equivalents 3 (14)
------- -------
(Decrease) increase in cash and cash equivalents (4,413) 225
Cash and cash equivalents at beginning of period 4,930 1,157
------- -------
Cash and cash equivalents at end of period $ 517 $ 1,382
======= =======
</TABLE>
See accompanying notes.
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ALPHA MICROSYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM ACCOUNTING POLICY
In the opinion of management of Alpha Microsystems (the "Company" or "Alpha
Micro"), the accompanying unaudited condensed consolidated financial statements
contain all adjustments necessary to fairly present the consolidated financial
position of the Company at September 30, 1999, and the consolidated results of
its operations for the three- and nine-month periods ended September 30, 1999
and September 20, 1998, and its cash flows for the nine-month periods ended
September 30, 1999 and September 20, 1998. These condensed consolidated
financial statements do not include all disclosures normally presented annually
under generally accepted accounting principles and, therefore, they should be
read in conjunction with the Company's Transition Report on Form 10-K for the
ten months ended December 31, 1998. Certain prior period amounts have been
reclassified to conform to the current period presentation. The results of
operations for the periods ended September 30, 1999 are not necessarily
indicative of the results to be expected for any future period.
RE-INCORPORATION
Plans for the re-incorporation of the Company in Delaware have been postponed.
At the Company's Annual Meeting held on June 3, 1999, 96 percent of the holders
of common stock who voted, voted in favor of the re-incorporation into Delaware.
However, the number of favorable votes by holders of common stock did not exceed
50 percent of the Company's total outstanding Common Shares, which is required
by the state of California to pass such an initiative.
FISCAL YEAR
Historically, the Company's fiscal year ended in the month of February. On
December 17, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year to a calendar year-end. The periods ended September 30,
1999 and September 20, 1998 include the same number of weeks.
REVENUE RECOGNITION
The Company recognizes revenue on its IT Services sales and post contract
customer support on a straight-line basis over the contract period and
recognizes revenue on its product sales on shipment. When significant
obligations remain after a product has been delivered, revenue is not recognized
until obligations have been completed or are no longer significant. The costs of
any insignificant obligations are accrued when the related revenue is
recognized. Revenue is recognized only when collection of the resulting
receivable is probable.
PER SHARE INFORMATION
Basic and diluted net loss per share is based on the weighted average common
shares outstanding during the periods
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<PAGE> 7
presented and excludes the anti-dilutive effects of options and warrants. The
net loss has been adjusted to reflect dividends earned and accretion related to
redeemable preferred shares outstanding, as shown below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 20, September 30, September 20,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $(624) $(1,508) $(2,230) $(3,529)
Accretion on redeemable preferred stock (11) (12) (66) (12)
Dividends on redeemable preferred stock (337) -- (1,012) --
----- ------- ------- -------
Net loss to common shareholders $(972) $(1,520) $(3,308) $(3,541)
===== ======= ======= =======
</TABLE>
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130") requires foreign currency translation adjustments to be
included in other comprehensive income. For the three months ended September 30,
1999 and September 20, 1998, total comprehensive loss amounted to $624,000 and
$1,524,000, respectively. For the nine months ended September 30, 1999 and
September 20, 1998, total comprehensive loss amounted to $2,209,000 and
$3,565,000, respectively.
2. 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 ("Merger Agreement") provided for the payment of
$3.4 million in exchange for all of the outstanding shares of DCI at the time of
closing, and a net payment of DCI's then outstanding debt in the amount of $4.6
million. Under the Merger Agreement, DCI became a wholly owned subsidiary of
Alpha Micro. The acquisition was accounted for as a purchase and is reflected in
the pro forma information below based upon available information and upon
certain assumptions that the Company believes are reasonable in the
circumstances. The Company's initial purchase price allocation is subject to
change as the Company obtains all the information necessary to complete the
allocation process.
The pro forma financial information below reflects the acquisition of DCI and
the related purchase price financing through the sale of redeemable preferred
stock, warrants and term loan borrowings as if the acquisition occurred as of
December 22, 1997.
<TABLE>
<CAPTION>
Nine months ended
-----------------------------------------
September 30, 1999 September 20, 1998
------------------- ------------------
<S> <C> <C>
Total net sales $ 27,628 $ 26,641
Net loss (2,230) (3,505)
Basic and diluted net loss per common share $ (0.29) $ (0.32)
</TABLE>
3. DIVESTITURE OF TELEPHONE INSTALLATION BUSINESS
Effective April 1, 1999, the Company sold its telephone installation business
for $650,000. As a result of this sale, the results of operations during the
nine-month period ended September 30, 1999 include a gain of approximately
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<PAGE> 8
$229,000 included in other income. The results from operations during the
nine-month period ended September 30, 1999, include a net loss of $163,000 or
$0.01 per share on $563,000 of revenue related to this business. The results
from operations during the nine-month period ended September 20, 1998, include a
net loss of $216,000 or $0.02 per share on $2,188,000 of revenue related to this
business.
4. REDEEMABLE PREFERRED STOCK
During February 1999, the Company restructured $12.5 million liquidation value
of its outstanding $15.0 million liquidation value redeemable preferred stock.
The restructured redeemable preferred stock carry the same terms as the
originally issued redeemable preferred stock, except that each share is
automatically converted at maturity into one share of a new class of
non-redeemable preferred stock with a 40% annual dividend rate. Accordingly, the
restructured redeemable preferred stock is reflected as a component of
shareholders' equity on the condensed consolidated balance sheet as of September
30, 1999. The remaining originally issued redeemable preferred stock, not
presented as a component of shareholders' equity, is being accreted over seven
years to its redemption value of $2.5 million.
Effective November 18, 1999, the holder of the Company's outstanding redeemable
preferred stock purchased an additional $5.0 million of exchangeable redeemable
preferred stock on essentially the same terms as the currently outstanding
redeemable preferred stock that is included in shareholders' equity as of
September 30, 1999, in the accompanying condensed consolidated balance sheet.
The preferred holder also received warrants to purchase an additional 2,971,620
shares of common stock at $2.50 per share. The investment constitutes the third
tranche of an agreement originally announced in August 1998, which has been
amended to permit the proceeds to be used to (i) repay the $2.5 million
currently outstanding balance under the Company's revolving line of credit
facility, (ii) provide $500,000 to fund the separation of the Company's internet
software business from its IT services business, and (iii) permit an additional
$1.9 million to be used as working capital. The Company will also seek a
strategic partner to provide additional funding for its internet software
business.
5. CONTINGENCIES
Restricted cash as of September 30, 1999, represents amounts deposited in
escrow on behalf of the Company to offset potential claims by the Company
arising from the acquisition of DCI (Note 2). In October 1999, the Company
entered into a settlement agreement wherein the DCI selling shareholders
received $90,000 of the escrowed funds with the balance, including all accrued
interest, being released back to the Company, in the approximate sum of
$300,000. Additional goodwill related to the acquisition of DCI in the amount of
approximately $84,000 was recorded in connection with the settlement.
The Company is currently involved in certain claims and litigation. The Company
does not consider any of these claims or litigation to be material. Management
has made provisions in the Company's financial statements for the settlement of
lawsuits for which unfavorable outcomes are both probable and estimable. In the
opinion of management, results of known existing claims and litigation will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
-8-
<PAGE> 9
6. INDUSTRY SEGMENT INFORMATION
The Company operates in two business segments: the servicing of computer
systems, networks and related products and the manufacture and sale of computer
systems, software and related products. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies in the annual consolidated financial statements
included in the Company's Annual Report on Form 10-K for the transition period
ended December 31, 1998, except that certain expenses, such as interest,
amortization of certain intangibles, special charges and general corporate
expenses are not allocated to the segments. In addition, certain assets
including cash and cash equivalents, deferred taxes and certain intangible
assets are held at corporate. The effect of capitalizing software costs is
included in the product segment.
Selected financial information for the Company's reportable segments for the
three and nine months ended September 30, 1999 and September 20, 1998 follows:
<TABLE>
<CAPTION>
Corporate
(In thousands) IT Services Product Expenses Consolidated
----------- ------- -------- ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers $ 7,892 $ 1,073 $ -- $ 8,965
Segment income (loss) 476 (404) (696) (624)
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers $ 24,050 $ 3,578 $ -- $ 27,628
Segment income (loss) 345 (785) (1,790) (2,230)
THREE MONTHS ENDED SEPTEMBER 20, 1998
Revenues from external customers $ 5,479 $ 1,075 $ -- $ 6,554
Segment loss (235) (421) (852) (1,508)
NINE MONTHS ENDED SEPTEMBER 20, 1998
Revenues from external customers $ 13,636 $ 3,553 $ -- $ 17,189
Segment loss (559) (1,068) (1,902) (3,529)
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
(as such term is defined in the private Securities Litigation Reform Act of 1995
(the "Reform Act") and information relating to the Company that are based on the
beliefs of the management of the Company as well as assumptions made by and
information currently available to the management of Alpha Micro, and the
Company intends that such forward-looking statements be subject to the safe
harbors created by the Reform Act. These forward looking statements include (i)
the impact on gross margin from the continuing shift from proprietary to
third-party IT services; (ii) the Company's ability to achieve future positive
cash flows from operations; (iii) the Company's ability to fund its acquisition
strategy; (iv) the Company's ability to obtain a strategic partner to provide
additional funding for the Company's internet software business; and (v) the
discussion of the Company's efforts, and management's expectations, relating to
Year 2000 compliance.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. The forward-looking statements are dependent on a
number of factors, including (i) the economic and competitive environment of the
computer maintenance and information technology ("IT") support services industry
in general, and in the Company's specific market areas, (ii) its ability to
identify acquisition candidates, (iii) the Company's ability to successfully
integrate acquired operations with its existing operations, (iv) the Company's
ability to develop, produce, and market products and services that incorporate
new technology, that are priced competitively, and achieve significant market
acceptance, (v) whether the Company's products and IT Services will be
commercially successful or technically advanced due to the rapid improvements in
computer technology and resulting product obsolescence, (vi) changes in the cost
of IT Services (vii) the Company's ability to deliver commercial quantities of
new products in a timely manner, (viii) changes in the Company's operating
strategy and capital expenditure plans, (ix) the Company's ability to manage its
expenses commensurate to its revenues, (x) the Company's ability to achieve Year
2000 compliance and the level of incremental costs associated therewith, that
could be adversely impacted by, among other things, the availability and cost of
programming and testing resources, vendors' ability to modify proprietary
software, and unanticipated problems identified in the ongoing compliance
review, (xi) the ability of the Company to maintain required covenants under its
existing credit facilities and (xii) other factors. In addition, the business
and operations of the Company are subject to substantial risks that increase the
uncertainty inherent in the forward-looking information included herein. The
inclusion of such information should not be regarded as a representation by the
Company, or any other person that the objectives or plans of the Company will be
achieved.
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SUMMARY
The following table was derived from the Condensed Consolidated Statements of
Operations as a percentage of net sales for the three- and nine-month periods
ended September 30, 1999 and September 20, 1998:
<TABLE>
<CAPTION>
RELATIONSHIP TO NET SALES
------------------------------------------------
Three Months Ended Nine Months Ended
----------------------- ---------------------
September September September September
30, 1999 20, 1998 30, 1999 20, 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales:
IT Services 88.0% 83.6% 87.0% 79.3%
Product 12.0 16.4 13.0 20.7
----- ----- ----- -----
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 74.1 83.1 74.4 83.1
----- ----- ----- -----
Gross margin 25.9 16.9 25.6 16.9
Selling, general and administrative expense 27.7 34.0 30.5 31.7
Engineering, research and development
Expense 3.6 5.0 3.4 5.5
Interest expense, net 0.8 0.3 0.3 --
Other (income) expense, net 0.2 0.6 (0.7) 0.3
----- ----- ----- -----
Loss before taxes (6.4) (23.0) (7.9) (20.6)
Provision (benefit) for income taxes 0.6 -- 0.2 (0.1)
----- ----- ----- -----
Net loss (7.0)% (23.0)% (8.1)% (20.5)%
===== ===== ===== =====
</TABLE>
RE-INCORPORATION
Plans for the re-incorporation of the Company in Delaware have been postponed.
At the Company's Annual Meeting held on June 3, 1999, 96 percent of the holders
of common stock who voted, voted in favor of the re-incorporation into Delaware.
However, the number of favorable votes by holders of common stock did not exceed
50 percent of the Company's total outstanding Common Shares, which is required
by the state of California to pass such an initiative.
FISCAL YEAR
Historically, the Company's fiscal year ended in the month of February. On
December 17, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year to a calendar year-end. The periods ended September 30,
1999 and September 20, 1998 include the same number of weeks.
GENERAL
During February 1999, the Company restructured $12.5 million liquidation value
of its outstanding $15.0 million liquidation value redeemable preferred stock.
As a result of this restructuring, total shareholders' equity was increased
$10.7 million. The restructured redeemable preferred stock carry the same terms
as the preferred stock originally issued except that each share is automatically
converted at maturity into one share of a new class of non-redeemable preferred
stock with a 40% annual dividend rate. Accordingly, the restructured redeemable
preferred stock is reflected as a component of shareholders' equity on the
accompanying September 30, 1999 condensed consolidated balance sheet. The
remaining originally issued redeemable preferred stock, not presented as a
component of shareholders' equity, is being accreted over seven years to its
redemption value of $2.5 million.
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<PAGE> 12
Effective November 18, 1999, the holder of the Company's outstanding redeemable
preferred stock purchased an additional $5.0 million of exchangeable redeemable
preferred stock on essentially the same terms as the currently outstanding
redeemable preferred stock that is included in shareholders' equity as of
September 30, 1999, in the accompanying condensed consolidated balance sheet.
The investment constitutes the third tranche of an agreement originally
announced in August 1998, which has been amended to permit the proceeds to be
used to (i) repay the $2.5 million currently outstanding balance under the
Company's revolving line of credit facility, (ii) provide $500,000 to fund the
separation of the Company's internet software business from its IT services
business; and (iii) permit an additional $1.9 million to be used as working
capital. The Company will also seek a strategic partner to provide additional
funding for its internet software business.
The Company had negative earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $90,000 and $895,000 for the three- and nine-month
periods ended September 30, 1999 (including a negative EBITDA of $163,000 from
the telephone installation business for the nine-month period) compared to a
negative EBITDA of $908,000 and $1,976,000 during the same periods of the prior
year (including a negative EBITDA of $129,000 from the telephone installation
business for the nine months ending September 20, 1998). The Company also had
negative cash flows from investing activities of $2,879,000 for the nine-month
period ended September 30, 1999. As a result of the foregoing, and other
operating and financing activities, working capital decreased $4,098,000 during
the nine months ended September 30, 1999, from $2,928,000 at December 31, 1998,
to $(1,170,000) at September 30, 1999. (See discussion regarding Capital
Resources below.)
Effective April 1, 1999, the Company sold its telephone installation business
for $650,000. As a result of this sale, the results of operations during the
nine-month period ended September 30, 1999 include a gain of approximately
$229,000 included in other income. The results from operations during the
nine-month period ended September 30, 1999, include a net loss of $163,000 or
$0.01 per share on $563,000 of revenue related to this business. The results
from operations during the nine-month period ended September 20, 1998, include a
net loss of $216,000 or $0.02 per share on $2,188,000 of revenue related to this
business.
RESULTS OF OPERATIONS
Net Sales
Total net sales increased $10,439,000, or 60.7 percent, to $27,628,000 for the
nine-month period ended September 30, 1999 from $17,189,000 for the nine-month
period ended September 20, 1998. Net sales increased $2,411,000, or 36.8
percent, to $8,965,000 for the three-month period ended September 30, 1999 from
$6,554,000 for the three-month period ended September 20, 1998. The increase in
total net sales is due to increases in IT Services revenues, primarily resulting
from the acquisition of DCI.
IT Services Sales
IT Services revenue increased $10,414,000, or 76.4 percent, to $24,050,000
during the most recent nine-month period over the respective prior period and
increased $2,413,000, or 44.0 percent, to $7,892,000 during the most recent
three-month period over the respective prior period. The nine- and three-month
revenue increases include $10,266,000 and $2,853,000, respectively, from the DCI
acquired operations offset by a decrease of $1,497,000 and $881,000,
respectively, attributable to non-core businesses. The balance of the revenue
increase during the nine- and three-month periods of $1,645,000 and $441,000,
respectively, is attributable to organic growth.
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<PAGE> 13
Product Sales
Total product revenues during the comparable nine-month periods increased
$25,000, or 0.7 percent, to $3,578,000 from $3,553,000. Total product revenues
decreased $2,000, or 0.2%, to $1,073,000 from $1,075,000 during the comparable
three-month periods. This includes increases in domestic product sales of
$149,000 and $14,000, respectively, offset by declines of $124,000 and $16,000,
respectively, in European product sales. No assurances can be made as to future
product sales levels whether domestic or international.
Gross Margin
Total gross margin for the Company for the first nine and three months of 1999
increased to 25.6 percent and 25.9 percent, respectively, compared to 16.9
percent during each of the same periods last year.
IT Services Gross Margin
IT Services gross margin increased to 25.4 percent for the nine-month period
ended September 30, 1999 from 14.3 percent during the same period in the prior
year. The gross margin increased to 26.6 percent from 16.0 percent for the
comparable three-month periods. The current periods were positively affected by
the increase in professional on-site services revenues, which are primarily
attributable to the business acquired from DCI, that have a significantly higher
gross margin. The current nine-month period was also positively affected by the
sale of the telephone installation business, which had a negative gross margin.
Off-setting these gross margin improvements were continuing increased direct
operating costs related to new IT Services contracts with major distributors,
for which the related services revenue remain below expected levels. Further, a
continuing shift from proprietary to third party IT Services is expected to
continue to negatively impact gross margins in future periods.
Product Gross Margin
Product gross margin during the nine-month period decreased to 26.4% compared to
27.0% for the comparable prior year period and decreased to 21.0% compared to
21.5% for the comparable three-month periods. The current three-month period
gross margin was negatively affected by the mix of products sold, primarily
memory products.
Selling, General and Administrative
Selling, general and administrative expenses increased $2,968,000 to $8,414,000
for the nine-month period ended September 30, 1999 compared to $5,446,000 for
the nine-month period ended September 20, 1998, and increased $258,000 to
$2,485,000 for the three-month period ended September 30, 1999, compared to
$2,227,000 for the prior comparable period. These expenses increased primarily
due to additional general and administrative costs and goodwill amortization
associated with the DCI acquisition.
Research and Development
Research and development expenses (which include engineering support and
services) incurred for the nine-month period ended September 30, 1999 increased
by $4,000 to $949,000 from $945,000 during the same period in the prior year.
Research and development expenses as a percentage of product sales decreased to
26.5 percent from 26.6 percent from the prior comparable nine-month period.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999, the Company's working capital
decreased $4,098,000 from $2,928,000 at December 31, 1998 to a negative
$1,170,000 at September 30, 1999. Net cash generated from financing activities
of $1,976,000 was offset by: $198,000 of cash used for payments due for IT
Services companies
-13-
<PAGE> 14
acquired in the prior year; $221,000 of cash used for software capitalized,
including the further development of the Company's AlphaCONNECT technology; and
$2,342,000 of working capital to acquire equipment, including approximately
$1,032,000 to further the implementation of the Company's new integrated
information system, and equipment purchases to support new service capabilities.
The remaining decrease is due primarily to cash used by operating activities
aggregating $3,513,000, which includes an increase in accounts receivable of
$1,929,000. Delays associated with the implementation of the Company's new
billing system significantly contributed to the increase in accounts receivable.
During the nine months ended September 30, 1999, the Company used cash provided
under its bank credit facilities and from sales of equity securities to fund its
operating requirements. On November 18, 1999, the Company issued $5.0 million of
redeemable preferred stock to its existing preferred shareholder. Net proceeds
from this offering are expected to be used to (i) repay the outstanding balance
under the Company's revolving line of credit facility, (ii) provide $500,000 to
fund the separation of the Company's internet software business from its IT
services business, and (iii) provide an additional $1.9 million of operating
capital.
The Company has obtained a waiver for certain violations as of September 30,
1999, of covenants and conditions in its bank credit facilities. Completion of
the $5 million redeemable preferred stock financing cured the Company's covenant
violations as of September 30, 1999 on a proforma basis.
Management's operating plan for the year 2000 contemplates a return to
profitability and the realization of positive cash flows from operating
activities. The Company believes positive cash flows from operating activites
can ultimately be achieved by increasing revenues and controlling expenses.
Although management's goal is to reduce losses and, ultimately, return the
Company to profitability, there is no assurance that the Company will achieve
profitability.
Management believes the potential sources of funds to meet the Company's cash
requirements for at least the next twelve months are cash on hand, proceeds from
the $5 million redeemable preferred stock financing discussed above, borrowings
expected to be available under its existing revolving credit and term
facilities, and cash expected to be provided by future operating activities. The
Company believes these potential sources will provide sufficient cash to enable
the Company to meet its liquidity requirements. However, due to uncertainties
inherent in the achievement of management's strategic plan, there is no
assurance that the Company will attain planned levels of operations.
The Company will also need to obtain additional long-term financing to fund its
acquisition strategy and the separation of its internet software division from
its IT services business, however, there are no assurances that any financing
will be available on acceptable terms or otherwise.
Ultimately, the Company's long-term success is dependent upon its ability to
successfully execute its strategic plan, obtain additional long-term financing,
and ultimately attain sustained profitable operations.
The Company's future capital requirements depend on a variety of factors,
including, but not limited to: service revenue growth or decline; equipment
purchase requirements; potential acquisitions; and the success, timing, and
amount of investment to expand the Company's presence in the Internet/intranet
markets.
-14-
<PAGE> 15
YEAR 2000 COMPLIANCE
Background
Most pre-1998 computers, software, and other equipment that utilize programming
code, contain calendar year data that is abbreviated to only two digits. As a
result of these design decisions, many of these systems could fail to operate or
fail to produce correct results if "00" is not interpreted to mean 2000. These
problems may not be fully recognized, either as to frequency or severity until
the year 2000 arrives. These problems are commonly referred to as the
"Millennium Bug" or "Year 2000 Problems".
Assessment
The Year 2000 Problem affects certain of the computers, software, and other
equipment used, operated, or maintained by the Company. Accordingly, the Company
has undertaken a review of such computer programs and systems to attempt to
ascertain which are or will be Year 2000 compliant. The Company presently
believes that its necessary and essential computer systems, software and
equipment will be Year 2000 compliant in a timely manner. However, while the
estimated cost of these efforts are not expected to be material to the Company's
financial position or any year's results of operations, there can be no
assurance to this effect.
Products Sold to Customers
The Company has been engaged for some time in the process of identifying and
resolving potential Year 2000 Problems with the products that it has developed
and currently markets. However, management believes that it is not possible to
determine with complete certainty if all Year 2000 Problems affecting the
Company's products will be identified or corrected due to the complexity of
these products and the fact that these products interact with other third-party
vendor products and operate on computer systems that are not under the Company's
control.
Internal Infrastructure
The Company has reviewed its major computers, software applications, and related
equipment used in connection with its internal operations for Year 2000
Problems; however, the majority of the computer programs used by the Company are
off-the-shelf, recently developed programs from third-party vendors. The Company
has obtained assurances from such vendors as to the Year 2000 compliance of
their products. Although some vendors make verbal assurances of Year 2000
compliance, there can be no certainty that the systems utilized by the Company
will not be affected. The Company completed testing, replacing or enhancing its
internal applications to ensure that risks related to such software are
minimized. However, the infrastructure will continue to be monitored and
necessary actions taken as additional information becomes available.
Systems Other than Information Technology Systems
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, photocopiers, telephone switches,
security systems, elevators, and other common devices may be affected by the
Year 2000 Problem. The Company has assessed the potential effect of, and costs
of, remediating the Year 2000 Problem on its office and facilities equipment.
The Company has completed the modifications, upgrades, and replacements which it
believes to be required of these internal systems. However, the systems will
continue to be monitored and necessary actions taken as additional information
becomes available.
-15-
<PAGE> 16
Suppliers
The Company has initiated communications with third-party suppliers of products
or services used, operated, or maintained by the Company to identify and, to the
extent possible, to resolve issues involving any Year 2000 Problems. However,
the Company has limited or no control over the actions of these third-party
suppliers. Thus, while the Company expects that it will not be impacted by any
significant Year 2000 Problems experienced by its suppliers, there can be no
assurance that its suppliers will resolve any or all Year 2000 Problems with
these systems before the occurrence of a material disruption to the business of
the Company or any of its customers. Any failure of these third parties to
resolve Year 2000 Problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Most Likely Consequences of Year 2000 Problems
The Company expects to identify and resolve the Year 2000 Problems that could
materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting the Company have been or will be identified or
corrected. The number of devices that are affected and the interactions among
these devices are simply too numerous. In addition, accurate predictions of Year
2000 Problem-related failures that will occur or the severity, duration, or
financial consequences of such failures cannot be made. As a result, management
expects that the Company could likely suffer the following consequences:
1. a number of operational inconveniences and inefficiencies for the Company
and its customers that may consume management's time and attention as well
as financial and human resources normally devoted to its ordinary business
activities; and
2. a lesser number of serious system failures that may require significant
efforts by the Company or its customers to prevent or alleviate material
business disruptions.
Costs
The Company has thus far performed the analysis described above using existing
personnel. The Company does not separately track internal costs incurred in
connection with analysis, investigation and implementation of Year 2000
compliance plans. The Company has not made any material expenditure to address
the Year 2000 Problem and at present does not anticipate that it will be
required to make any such material expenditures in the future.
Contingency Plans
The Company has completed initial contingency plans to be implemented and
continues to revise such plans as part of its efforts to identify and correct
Year 2000 Problems affecting its internal systems. Depending on the systems
affected, these plans include accelerated replacement of affected equipment or
software, short- to medium-term use of backup equipment and software, increased
work hours for Company personnel or use of contract personnel to correct on an
accelerated schedule any Year 2000 Problems that arise, development of manual
workarounds for information systems, and similar approaches. If the Company is
required to implement any of these contingency plans, it could have a material
adverse effect on the Company's financial condition and results of operations.
-16-
<PAGE> 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) No Form 8-K was filed by the Company during the quarter ended September
30, 1999.
-17-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALPHA MICROSYSTEMS
(Registrant)
Date: November 19, 1999 By: /s/ Douglas J. Tullio
---------------------------
Chairman, CEO and President
Date: November 19, 1999 By: /s/ Jeffrey J. Dunnigan
---------------------------
Vice President and
Chief Financial Officer
-18-
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description of Documents
- ------ ------------------------
<C> <S>
3.8 Certificate of Reduction of Class A Cumulative, Redeemable and
Exchangeable Preferred Stock, Class B Cumulative, Redeemable and
Exchangeable Preferred Stock dated August 25, 1999
10.52 Amendment No. 3 to Securities Purchase Agreement by and between
Registrant and Hampshire Equity Partners II, L.P. dated November 18,
1999
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.8
CERTIFICATE OF REDUCTION
OF
CLASS A CUMULATIVE, REDEEMABLE AND EXCHANGEABLE PREFERRED STOCK
CLASS B CUMULATIVE, REDEEMABLE AND EXCHANGEABLE PREFERRED STOCK
OF
ALPHA MICROSYSTEMS, a California corporation
PURSUANT TO THE SECTION 401(c)
OF THE GENERAL CORPORATION LAW OF THE STATE OF CALIFORNIA
Douglas J. Tullio and Jeffrey J. Dunnigan certify that:
FIRST: They are the president and secretary, respectively, of ALPHA
MICROSYSTEMS, a California corporation (the "Company").
SECOND: The number of outstanding shares of the Company's Class A
Cumulative, Redeemable and Exchangeable Preferred Stock (the "Class A Preferred
Stock") and Class B Cumulative, Redeemable and Exchangeable Preferred Stock (the
"Class B Preferred Stock") is zero (0) shares.
THIRD: That the Board of Directors of the Company, pursuant to the
authority so vested in the Articles of Incorporation of the Company and in
accordance with Section 401(c) of the General Corporation Law of the State of
California, duly adopted the following resolutions reducing the number of
authorized shares of the Class A Preferred Stock and Class B Preferred Stock to
zero (0) shares (the "Reduction") since the Reduction solely reduces the number
of shares constituting series of the Company's capital stock that were
designated by the Board of Directors pursuant to the Certificate of
Determination of Rights and Preferences of Class A Cumulative, Redeemable and
Exchangeable Preferred Stock, Class B Cumulative, Redeemable and Exchangeable
Preferred Stock, Class C Cumulative, Redeemable and Exchangeable Preferred Stock
and Voting Preferred Stock of Alpha Microsystems filed on August 25, 1998 (the
"Certificate of Determination") and because none of the Class A Preferred Stock
and Class B Preferred Stock are outstanding.
<PAGE> 2
FOURTH: That resolutions duly adopted by the Board of Directors of the
Company are as follows:
"...RESOLVED, that the Certificate of Determination filed August 25,
1998 be amended to reduce the number of authorized shares of Class A
Preferred Stock and Class B Preferred Stock thereunder to zero.
BE IT FURTHER RESOLVED, that the officers of this Corporation are
hereby authorized and directed to execute and file with the
Secretary of State an amendment to the Certificate of Determination
filed August 25, 1998 to reduce the number of authorized shares of
Class A Preferred Stock and Class B Preferred Stock thereunder to
zero, in such form as is necessary and appropriate, and to do such
other acts and things as may be necessary or appropriate and
consistent with carrying out the intent and purposes of this and the
foregoing resolutions and recitals, the execution and delivery of
the foregoing documents or the doing of any act or thing being
conclusive evidence as to the appropriateness thereof and of the
authority of the party executing or doing the same to so execute and
deliver any such documents and to do any such act and thing."
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this Certificate are true and
correct of our own knowledge.
DATE: August 25, 1999
------------------------------
DOUGLAS J. TULLIO, President
------------------------------
JEFFREY J. DUNNIGAN, Secretary
2
<PAGE> 1
Exhibit 10.52
AMENDMENT NO. 3 TO SECURITIES PURCHASE AGREEMENT
AMENDMENT NO. 3 TO SECURITIES PURCHASE AGREEMENT, dated as of November
18, 1999 (this "Amendment") to that certain Securities Purchase Agreement dated
as of August 7, 1998 (as the same has been amended by Amendment No. 1 dated
February, 1999 and Amendment No. 2 dated June 28, 1999, the "Purchase
Agreement") between ALPHA MICROSYSTEMS, a California corporation doing business
as AlphaServ.com (the "Company"), and HAMPSHIRE EQUITY PARTNERS II, L.P. (f/k/a
ING Equity Partners II, L.P.), a Delaware limited partnership (the "Purchaser"),
is made by and between the Company and the Purchaser.
WHEREAS, at the First Closing and the Second Closing under the Purchase
Agreement, the Purchaser invested an aggregate $15.0 million to purchase certain
classes of Preferred Stock and Warrants of the Company;
WHEREAS, the Purchase Agreement contemplates a Third Closing, to occur
at the option of the Company, at which the Purchaser would, subject to the terms
and conditions of the Purchase Agreement, invest up to an additional $5.0
million to purchase Class C1 Preferred Stock and the Third Closing Warrants,
with the proceeds of such investment to be applied by the Company to certain
designated uses; and
WHEREAS, the Company desires to exercise such option and issue, and the
Purchaser desires to purchase, the Class C1 Preferred Stock and the Third
Closing Warrants, subject to the terms and conditions of the Purchase Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
and obligations hereinafter set forth, the Company and the Purchaser hereby
agree as follows:
SECTION 1. Definitions. Capitalized terms used but not otherwise
defined herein shall have the meaning given to them in the Purchase Agreement
or, if not defined therein, in the Company's Certificate of Incorporation.
SECTION 2. Amendments to Purchase Agreement. The Purchase Agreement is
hereby amended as of the date hereof as follows:
(a) Section 1.1 is amended to add the following definitions:
"Class E Certificate of Determination" means the
Certificate of Determination of Rights and Preferences
attached hereto as Exhibit A-2.
"Class E Preferred Stock" means the Class E
Cumulative, Redeemable and Exchangeable Preferred Stock, no
par value, of the Company, having the
1
<PAGE> 2
rights, preferences, privileges and restrictions set forth in
the Class E Certificate of Determination.
(b) Section 1.1 is further amended to amend and restate the following
definition:
"Preferred Stock" means, collectively, the Class A
Preferred Stock, the Class B Preferred Stock, the Class C
Preferred Stock, any Voting Preferred Stock, the Class A1
Preferred Stock, the Class A2 Preferred Stock, the Class B1
Preferred Stock, the Class C1 Preferred Stock, the Class D
Preferred Stock and the Class E Preferred Stock.
(c) Section 2.1(c) is amended and restated in its entirety as follows:
(c) The third closing (the "Third Closing") hereunder
in respect of the issuance and sale of the Class C1 Preferred
Stock being purchased by the Investor at the Third Closing
will occur at the option of the Company, and subject to the
satisfaction or waiver of the applicable terms and conditions
set forth herein, take place at the offices of Mayer, Brown &
Platt in New York, New York on November 18, 1999, or such
other date agreed upon by the Investor and the Company (the
"Third Closing Date"); provided, that the Third Closing Date
shall be within five Business Days after all conditions of the
Investor and the Company to the Third Closing have been
satisfied or waived, but in any case the Third Closing Date
shall occur, if at all, on or before June 30, 2000.
Notwithstanding anything to the contrary contained in the New
Certificate relating to the Class A1 Preferred Stock, Class A2
Preferred Stock, Class B1 Preferred Stock, Class C1 Preferred
Stock and Class D Preferred Stock, upon the filing of the
Class E Certificate of Determination with the California
Secretary of State, the Company shall have the option,
exercisable in its sole discretion, of paying dividends on the
Class A1 Preferred Stock, Class A2 Preferred Stock, Class B1
Preferred Stock and Class C1 Preferred Stock either (x) in
cash or (y) in shares of validly issued, fully-paid and
nonassessable Class E Preferred Stock at a rate of one share
per each integral multiple of $1,000 of dividends payable,
with any remaining fractional dividend amount to be paid in
cash.
(d) Section 2.2(c) is amended and restated in its entirety as follows:
(c) The proceeds received by the Company from the
sale of the Class C1 Preferred Stock to the Investor shall be
used by the Company solely (i) to repay up to $2,500,000.00 of
Indebtedness that is outstanding under the Credit Agreement,
dated June 9, 1998, between the Company and Imperial Bank (the
"Credit Agreement"), (ii) to fund the separation of the
Company's AlphaCONNECT business from its IT Service business,
(iii) to pay fees and expenses incurred in connection with the
consummation of the Third Closing and (iv) for general
corporate purposes.
2
<PAGE> 3
(e) The current Section 5.4(b) is deleted in its entirety and the
following is substituted in its place:
(b) Opinion of Counsel. Allen, Matkins, Leck Gamble &
Mallory, counsel to the Company, shall have delivered its
opinion to the Investor, dated as of the Third Closing Date,
in a form reasonably acceptable to the Investor.
(f) The current Section 5.4(c) is deleted in its entirety and the
following is substituted in its place:
(c) Performance. [Intentionally Deleted].
(g) The following is added to the Purchase Agreement as Section 7.7
thereof:
7.7 Filing of Class E Certificate of Determination.
The Company shall use its best efforts to file or cause to be
filed the Series E Certificate of Determination with the
Secretary of State of the State of California as promptly as
is practicable.
(h) The following is added to the Purchase Agreement as Section 7.8
thereof:
7.8 Exchange of Series E Preferred Stock. A holder of
shares of Series E Preferred Stock shall have the right, at
any time, to surrender any or all such shares to the Company
and receive in exchange therefor the number of duly
authorized, validly issued, fully paid and nonassessable
shares of Common Stock that equal (x) the aggregate
Liquidation Value of the shares of Series E Preferred Stock
being surrendered, divided by (y) Two Dollars and Fifty Cents
($2.50).
(i) The Class E Certificate of Determination (a copy of which is
attached as Exhibit A to this Amendment) is added to the Purchase Agreement as
Exhibit A-2 thereof.
(j) The Warrant Schedule attached as Exhibit C-1 to the Purchase
Agreement is hereby amended such that (i) the Series E Common Stock Warrant's
"Intended Percentage" is changed from 8.50% to 8.29487% and its "Initial
Exercise Amount" is changed from 1,750,725 to 1,720,737 as of the Third Closing,
and (ii) the Series F Common Stock Warrant's "Intended Percentage" is changed
from 1.00% to 1.20513% and its "Initial Exercise Amount" is changed from 205,968
to 250,000 as of the Third Closing.
SECTION 3. Warrant Shares as of the Third Closing Date. The Company and
Equity Partners hereby acknowledge and agree that each outstanding Common Stock
Warrant issued by the Company to Equity Partners pursuant to the Purchase
Agreement, after applying the terms and conditions of such Warrant, including
any adjustments determined in accordance with the Warrant Schedule, is
exercisable as of the Third Closing Date for the number of shares of Common
Stock indicated below:
3
<PAGE> 4
(a) The Restated Series A Warrant is exercisable for 3,630,300 shares;
(b) The Restated Series B Warrant is exercisable for 207,446 shares;
(c) The Series C Warrant is exercisable for 2,800,517 shares;
(d) The Series D Warrant is exercisable for 207,446 shares;
(e) The Series E Warrant is exercisable for 1,720,737 shares; and
(f) the Series F Warrant is exercisable for 250,000 shares.
This Section 3 shall in no way mitigate the responsibility or Liability of the
Company for any breach of the representations and warranties made by it in the
Purchase Agreement, on which Equity Partners is relying in full in connection
with the calculation of the foregoing share amounts.
SECTION 4. Credit Agreement. Solely with respect to, and to the extent
that, any event of default under the Credit Agreement has been disclosed in
writing to the Investor prior to the date of this Amendment, the Investor hereby
waives the application of Section 5.4(d) as a condition precedent to its
obligation to purchase the Class C1 Preferred Stock.
SECTION 5. No Implied Amendments. Except as herein amended, the
Purchase Agreement shall remain in full force and effect and is ratified in all
respects. On and after the effectiveness of this Amendment, each reference in
the Purchase Agreement to "this Agreement", "hereunder", "hereof", "herein" or
words of like import, and each reference to the Purchase Agreement in any other
agreements, documents or instruments executed and delivered pursuant to the
Purchase Agreement, shall mean and be a reference to the Purchase Agreement, as
amended by this Amendment.
SECTION 6. Costs and Expenses. The Company confirms the Company's
agreement to pay all reasonable fees, expenses and costs of Equity Partners for
the negotiation, preparation, execution and delivery of this Amendment and
amendments, as necessary, to the other Purchase Documents, in connection with
this Amendment (including the reasonable fees, expenses and disbursements of
Equity Partners' counsel) all as provided for in Section 8.1 of the Purchase
Agreement. Equity Partners shall notify the Company to the extent that such
fees, expenses and costs exceed $100,000.
SECTION 7. Effective Date. This Amendment shall be effective as of the
date hereof.
SECTION 8. Counterparts. This Amendment may be executed by the parties
hereto in several counterparts, each of which shall be executed by the Company
and the Purchaser and be deemed to be an original and all of which shall
constitute together but one and the same agreement.
* * * *
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above-written.
ALPHA MICROSYSTEMS
By: /s/ Douglas J. Tullio
------------------------------------
Name: Douglas J. Tullio
Title: President and Chief Executive
Officer
HAMPSHIRE EQUITY PARTNERS II, L.P.
By: LEXINGTON EQUITY PARTNERS II, L.P.,
its General Partner
By: LEXINGTON EQUITY PARTNERS, INC.,
Its General Partner
By: /s/ Benjamin P. Giess
------------------------------------
Name: Benjamin P. Giess
Title: Authorized Signatory
5
<PAGE> 6
Exhibit A-2
CERTIFICATE OF
DETERMINATION OF RIGHTS AND PREFERENCES
OF
CLASS E CUMULATIVE, REDEEMABLE AND EXCHANGEABLE PREFERRED STOCK
OF
ALPHA MICROSYSTEMS, a California corporation
PURSUANT TO THE PROVISIONS OF SECTION 401
OF THE GENERAL CORPORATION LAW OF THE STATE OF CALIFORNIA
Douglas J. Tullio and Richard E. Mahmarian hereby certify that:
FIRST: They are the President and Secretary, respectively, of Alpha
Microsystems, a California corporation (the "Company").
SECOND: That the Board of Directors of the Company, pursuant to the
authority so vested in it by the Articles of Incorporation of the Company and in
accordance with the provisions of Section 401 of the General Corporation Law of
the State of California (the "California Corporation Law"), duly adopted the
following resolutions creating the following series of Preferred Stock
designated as Class E Cumulative Redeemable and Exchangeable Preferred Stock
(the "Class E Preferred Stock").
THIRD: That, as required by subsection A, subsection B, subsection C
and subsection D of the Certificate of Determination of Rights and Preferences
of Class A Cumulative, Redeemable and Exchangeable Preferred Stock, Class B
Cumulative, Redeemable and Exchangeable Preferred Stock, Class C Cumulative,
Redeemable and Exchangeable Preferred Stock and Voting Preferred Stock of the
Company, as filed with the California Secretary of State on August 25, 1998 (the
"8/25/98 Certificate of Determination"), the creation of the Class E Preferred
Stock has been consented to by the Requisite Preferred Holders, the Requisite
Preferred A Holders, the Requisite Preferred B Holders, the Requisite Preferred
C Holders and the Requisite Voting Preferred Holders (as each such term is
defined in the 8/25/98 Certificate of Determination).
<PAGE> 7
FOURTH: That, as required by subsection A1, subsection A2, subsection
B1, subsection C1 and subsection D of the Certificate of Determination of Rights
and Preferences of Class A1 Cumulative, Redeemable and Exchangeable Preferred
Stock, Class A2 Cumulative, Redeemable and Exchangeable Preferred Stock, Class
B1 Cumulative, Redeemable and Exchangeable Preferred Stock, Class C1 Cumulative,
Redeemable and Exchangeable Preferred Stock and Class D Cumulative, Redeemable
and Exchangeable Preferred Stock of the Company, as filed with the California
Secretary of State on February 22, 1999 (the "2/22/99 Certificate of
Determination"), the creation of the Class E Preferred Stock has been consented
to by the Requisite Preferred Holders, the Requisite Preferred A1 Holders, the
Requisite Preferred A2 Holders, the Requisite Preferred A1/A2 Holders, the
Requisite Preferred B Holders, the Requisite Preferred C Holders and the
Requisite Preferred D Holders (as each such term is defined in the 2/22/99
Certificate of Determination).
FIFTH: That the following resolutions designate12,000 shares of Class E
Preferred Stock, and that as of the date hereof, no shares of Class A Preferred
Stock, Class B Preferred Stock, Class C Preferred Stock or Class D Preferred
Stock are issued and outstanding.
SIXTH: The resolutions duly adopted by the Board of Directors of the
Company are as follows:
WHEREAS the Articles of Incorporation of the Company authorize
Preferred Stock consisting of 5,000,000 shares, no par value per share, issuable
from time to time in one or more series; and
WHEREAS the Board of Directors of the Company is authorized, subject to
limitations prescribed by law and by the provisions of Article IV of the
Company"s Articles of Incorporation, as amended, to establish and fix the number
of shares to be included in any series of Preferred Stock and the designation of
rights, preferences, privileges and restrictions of the shares of such series;
and
WHEREAS it is the desire of the Board of Directors to establish and fix
the number of shares to be included in a new series of Preferred Stock and the
designation of rights, preferences privileges and restrictions of the shares of
such new series;
NOW, THEREFORE, BE IT RESOLVED that pursuant to Article IV of the
Company"s Articles of Incorporation, as amended, there is hereby established the
following new series of Preferred Stock with such designations and authorized
number of shares as set forth herein:12,000 shares of Class E Cumulative,
Redeemable and Exchangeable Preferred Stock (the "Class E Preferred Stock").
Each share of such Class E Preferred Stock shall have the rights, preferences,
privileges and restrictions set forth in the following Determination of Rights,
Preferences, Privileges and Restrictions of Class E Preferred Stock (the
"Determination of Preferred Stock"):
2
<PAGE> 8
Class E Preferred Stock.
1. Definitions. As used in this Determination of Preferred Stock,
capitalized terms not otherwise defined herein shall have the meanings given to
such terms in the Purchase Agreement. In addition, the following capitalized
terms have the following meanings:
"Articles of Incorporation" means the Articles of Incorporation of the
Company as amended and restated and in effect at the time in question.
"By-laws" means the By-laws of the Company, as amended and in effect
from time to time.
"Board" means the Board of Directors of the Company.
"Class A Preferred Stock" means the Class A Cumulative, Redeemable and
Exchangeable Preferred Stock of the Company.
"Class A1 Preferred Stock" means the Class A1 Cumulative, Redeemable
and Exchangeable Preferred Stock of the Company.
"Class A2 Preferred Stock" means the Class A2 Cumulative, Redeemable
and Exchangeable Preferred Stock of the Company.
"Class B Preferred Stock" means the Class B Cumulative, Redeemable and
Exchangeable Preferred Stock of the Company.
"Class B1 Preferred Stock" means the Class B1 Cumulative, Redeemable
and Exchangeable Preferred Stock of the Company.
"Class C Preferred Stock" means the Class C Cumulative, Redeemable and
Exchangeable Preferred Stock of the Company.
"Class C1 Preferred Stock" means the Class C1 Cumulative, Redeemable
and Exchangeable Preferred Stock of the Company.
"Class D Preferred Stock" means the Class D Cumulative, Redeemable and
Exchangeable Preferred Stock of the Company.
"Common Stock" means, collectively, all of the Common Stock, no par
value, of the Company of any class, and any other class of capital stock of the
Company hereafter authorized that is not limited to a fixed sum or percentage of
par or stated value in respect to the rights of the holders thereof to
participate in dividends or in the distribution of assets upon any liquidation,
dissolution or winding up of the Company.
3
<PAGE> 9
"Dividend Reference Date" has the meaning ascribed to it in Section
C.2(c).
"Exchange Triggering Date" means December 31, 1999.
"Liquidation" means, subject to the provisions of Section 3(b) of this
Determination of Preferred Stock, any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company.
"Liquidation Value" shall mean Original Cost plus any accrued and
unpaid dividends as determined pursuant to Section 2(c) of this Determination of
Preferred Stock.
"Maturity Date" means, with respect to any Class E Preferred Stock or
Notes issued in exchange for Class E Preferred Stock, the earliest to occur of
(i) a Maturity Default, (ii) a Change of Control or (iii) June 30, 2005.
"Maturity Default" shall have the meaning set forth in Section 6(a) of
this Determination of Preferred Stock.
"Net Proceeds" of any transaction shall mean the gross proceeds of such
transaction net of any commissions or transaction fees and expenses paid by the
Company in connection with such transaction.
"Original Cost" means, with respect to any share of Class E Preferred
Stock, $1,000.
"Person" shall be construed broadly and shall include without
limitation an individual, a partnership, a corporation, an association, a joint
stock company, a limited liability company, a trust, a joint venture, an
unincorporated organization and a Governmental Authority.
"Preferred E Holders" means holders of Class E Preferred Stock.
"Preferred Stock" means, collectively, the Class A Preferred Stock,
Class B Preferred Stock, Class C Preferred Stock, Class A1 Preferred Stock,
Class A2 Preferred Stock, Class B1 Preferred Stock, Class C1 Preferred Stock,
Class D Preferred Stock, Class E Preferred Stock and Voting Preferred Stock.
"Purchase Agreement" means the Securities Purchase Agreement dated as
of August 7, 1998, between the Company and the Investor (as defined therein), as
amended, restated or otherwise modified from time to time.
"Rate per Annum" means the specified rate per annum computed on the
basis of a 360-day year; provided, that in the event dividends are not paid in
full in cash on any applicable Dividend Reference Date or upon any Redemption
Date, the Rate per Annum for the applicable period shall be increased by 500
basis points (e.g., a 9.0% Rate per Annum would be increased to a 14.0% Rate per
Annum) until such dividends are paid in full in cash.
4
<PAGE> 10
"Redemption Price" has the meaning ascribed to it in Section 5(a) of
this Determination of Preferred Stock.
"Requisite Preferred E Holders" means the holders of a majority of the
then outstanding shares of Class E Preferred Stock.
"Requisite Preferred Holders" means the holders representing a majority
of the then outstanding shares of Class A1 Preferred Stock, Class A2 Preferred
Stock, Class B1 Preferred Stock, Class C1 Preferred Stock, Class D Preferred
Stock and Class E Preferred Stock voting together as a group.
"Transaction Documents" means the Purchase Agreement, the Exhibits and
Schedules attached thereto in their final and executed form, as applicable, and
each of the agreements contemplated thereby.
"Voting Preferred Stock" means the Voting Preferred Stock of the
Company.
"Warrant" has the meaning given to such term in the Purchase Agreement.
2. Dividends.
(a) The Preferred E Holders shall be entitled to receive, out of funds
legally available therefor, cumulative dividends on the Liquidation Value at the
Rate per Annum and for the periods set forth below:
<TABLE>
<CAPTION>
Rate Per
Period Annum
------ --------
<S> <C>
Until June 30, 2000................. 9.0%
July 1, 2000 to June 30, 2001....... 11.0%
July 1, 2001 to June 30, 2002....... 12.0%
July 1, 2002 to June 30, 2003....... 13.0%
July 1, 2003 to June 30, 2004....... 14.0%
July 1, 2004 to June 30, 2005....... 15.0%
</TABLE>
(subject to appropriate adjustments in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting such shares) per
share per annum, and no more, payable in preference and priority to any payment
of any cash dividend on Common Stock or any other shares of capital stock of the
Company other than the Class A Preferred Stock, Class B Preferred Stock, Class C
Preferred Stock, Class A1 Preferred Stock, Class A2 Preferred Stock, Class B1
Preferred Stock, Class C1 Preferred Stock and Class D Preferred Stock (which
shall rank on a par with the Class E Preferred Stock) or other class or series
of stock ranking on a par with, or senior to the Class E Preferred Stock in
respect of dividends (such Common Stock and other inferior stock being
collectively referred to as "Junior Stock"), when and as declared by the Board.
5
<PAGE> 11
(b) Such dividends shall accrue with respect to each share of Class E
Preferred Stock from the date on which such share is issued and outstanding and
thereafter shall be deemed to accrue from day to day whether or not earned or
declared and whether or not there exists profits, surplus or other funds legally
available for the payment of dividends, and shall be cumulative so that if such
dividends on the Class E Preferred Stock shall not have been paid, or declared
and set apart for payment, the deficiency shall be fully paid or declared and
set apart for payment before any dividend shall be paid or declared or set apart
for any Junior Stock and before any purchase or acquisition of any Junior Stock
is made by the Company, except the repurchase of Junior Stock from employees of
the Company upon termination of employment, except as otherwise approved by the
Requisite Preferred E Holders.
(c) Dividends shall be payable in cash, quarterly in arrears. To the
extent dividends are not paid on each September 30, December 31, March 31 and
June 30, (each a "Dividend Reference Date") all dividends which have accrued on
each share of Class E Preferred Stock during the three-month period (or shorter
period in the case of the first or last period) ending on each Dividend
Reference Date will be added to the Liquidation Value of such share and will
remain a part thereof until such dividends are paid in full in cash. Each
dividend paid in cash shall be mailed to the holders of record of the Class E
Preferred Stock as their names and addresses appear on the share register of the
Company or at the office of the transfer agent on the corresponding dividend
payment date.
3. Liquidation.
(a) In the event of any Liquidation of the Company, the Preferred E
Holders shall be entitled to be paid out of the assets of the Company legally
available for distribution to its stockholders, after and subject to the payment
in full of all amounts required to be distributed to the holders of Voting
Preferred Stock and any other class or series of stock of the Company ranking on
liquidation prior and in preference to the Class E Preferred Stock (collectively
referred to as "Senior Preferred Stock"), but before any payment shall be made
to the holders of Junior Stock by reason of their ownership thereof, an amount
equal to the Liquidation Value per share of Class E Preferred Stock. If upon any
such Liquidation of the Company the remaining assets of the Company available
for distribution to its stockholders shall be insufficient to pay the holders of
shares of Class E Preferred Stock the full amount to which they shall be
entitled, the holders of shares of Class E Preferred Stock and the holders of
shares of Class A Preferred Stock, Class B Preferred Stock, Class C Preferred
Stock, Class A1 Preferred Stock, Class A2 Preferred Stock, Class B1 Preferred
Stock, Class C1 Preferred Stock, Class D Preferred Stock and any other class or
series of stock ranking on liquidation on a parity with the Class E Preferred
Stock shall share ratably in any distribution of the remaining assets and funds
of the Company in proportion to the respective amounts which would otherwise be
payable in respect of the shares held by them upon such distribution if all
amounts payable on or with respect to such shares were paid in full.
(b) The merger or consolidation of the Company into or with another
corporation which results in the exchange of outstanding shares of the Company
for securities or other consideration issued or paid or caused to be issued or
paid by such other corporation or an affiliate thereof (except if such merger or
consolidation does not result in the transfer of more than 50 percent of the
voting securities of
6
<PAGE> 12
the Company), or the sale of all or substantially all the assets of the Company,
shall be deemed to be a Liquidation of the Company for purposes of this Section
3 of this Determination of Preferred Stock, unless the Requisite Preferred E
Holders vote otherwise. The amount deemed distributed to the holders of Class E
Preferred Stock upon any such merger or consolidation shall be the cash or the
value of the property, rights and/or securities distributed to such holders by
the acquiring person, firm or other entity. The value of such property, rights
or other securities shall be determined in good faith by the Board.
4. Voting Rights.
(a) Except as required by law and pursuant to paragraphs (b), (c) and
(d) below, the Preferred E Holders shall not be entitled to vote.
(b) The Company shall not, without the affirmative consent or approval
of the Requisite Preferred E Holders:
(i) in any manner authorize, issue or sell any shares of Class
E Preferred Stock other than as contemplated by the Purchase Agreement
or this Determination of Preferred Stock;
(ii) reclassify, cancel or in any manner alter or change the
designations, privileges or relative, optional or other special rights,
or the qualifications, limitations or restrictions thereof, of the
Class E Preferred Stock;
(iii) amend, repeal or modify any provision of this
Determination of Preferred Stock; or
(iv) amend, repeal or modify any provision of the Articles of
Incorporation or By-laws in a manner that would adversely affect the
preferences, privileges or rights of the Preferred E Holders.
(c)(i) The Company hereby covenants that the Requisite Preferred E
Holders shall have the right to have that number of representatives
(each such representative, an "Observer") determined as hereinafter
provided present at all meetings of the Board. Such right shall from
time to time be exercisable by delivery to the Company of written
notice from the Requisite Preferred E Holders specifying the names of
such Observers. The number of Observers shall at all times and from
time to time be equal to that number of nominees to the Board that the
Preferred E Holders are then entitled to designate less the number of
such nominees as are then members of the Board.
(ii) The Company will give each Observer reasonable prior
notice (it being agreed that the same prior notice given to the Board
shall be deemed reasonable prior notice) in any manner permitted in the
Company"s By-laws for notices to directors of the time and place of any
proposed meeting of the Board, such notice in all cases to include true
and complete copies of all documents furnished to any director in
connection with such meeting. Each such Observer will
7
<PAGE> 13
be entitled to be present in person as an observer at any such meeting
or, if a meeting is held by telephone conference, to participate
therein for the purpose of listening thereto.
(iii) The Company will deliver to each Observer copies of all
papers which may be distributed from time to time to the directors of
the Company at such time as such papers are so distributed to them,
including copies of any written consent.
(d) The Company shall not, without the affirmative consent or approval
of the Requisite Preferred Holders:
(i) take any action, or enter into or authorize any material
agreement or material transaction, other than in the ordinary course of
business and consistent with past practice;
(ii) agree to acquire the stock or assets of, or otherwise
agree to any joint venture, licensing arrangement with, any other
person.
(iii) enter into any arrangement which would reasonably be
expected to result in a Change of Control;
(iv) sell, transfer, convey, assign or otherwise dispose of
any of its material assets or properties, or spinoff or splitoff any
material assets, properties or Securities except sales of inventory and
used, obsolete, worn out or unnecessary equipment or fixtures in the
ordinary course of business and consistent with past practice;
(v) sell, transfer, convey, assign, license or otherwise
dispose of any significant portion of its Intellectual Property Rights;
(vi) except in the ordinary course of business and consistent
with past practice, waive, release or cancel any material claims
against third parties or material debts owing to it, or any material
rights which have any material value;
(vii) make any material changes in its accounting systems,
policies, principles or practices except in the ordinary course of
business and consistent with past practice;
(viii) enter into, authorize, or permit any transaction with
Affiliates, or modify in any material respect the employment,
compensation or other arrangements with the executive officers of the
Company or any Subsidiary;
(ix) authorize for issuance, issue, sell, deliver or agree or
commit to issue, sell or deliver (whether through the issuance or
granting of options, warrants or exchangeable Securities, commitments,
subscriptions, rights to purchase or otherwise) any shares of capital
stock or any other Securities of the Company or any Subsidiary, or
amend any of the terms of any such capital stock or other Securities;
8
<PAGE> 14
(x) split, combine, or reclassify any shares of its capital
stock, declare, set aside or pay any dividend (other than dividends on
the Preferred Stock) or other distribution (whether in cash, stock or
property or any combination thereof) in respect of its capital stock,
or redeem or otherwise acquire any capital stock or other Securities of
the Company or any Subsidiary;
(xi) except in the ordinary course of business and consistent
with past practice, make any borrowings, incur any Indebtedness, or
assume, guarantee, endorse or otherwise become liable (whether
directly, contingently or otherwise) for the obligations of any other
Person;
(xii) except in the ordinary course of business and consistent
with past practice, make any loans, advances or capital contributions
to, or investments in, any other Person.
5. Redemption.
(a) Subject to the Company having funds legally available for such
purpose, (i) on the Maturity Date the Company shall redeem all shares of Class E
Preferred Stock then outstanding and (ii) upon the Company"s receipt of a
written redemption request from any Preferred E Holder, the Company shall redeem
all of the shares of Class E Preferred Stock with respect to which such
redemption request was made. The per share redemption price at which shares of
Class E Preferred Stock are to be redeemed pursuant to this Section 5(a) shall
be equal to the Liquidation Value (the "Redemption Price").
(b) In the event the Company or any of its Subsidiaries consummates a
public or private offering for cash of capital stock or other equity interests,
the Company shall be required to apply 50% of the Net Proceeds of such offering
toward the redemption of shares of Preferred Stock (other than Voting Preferred
Stock), on a pro rata basis (determined on the basis of the number of shares of
Preferred Stock (other than Voting Preferred Stock), held by such holder over
the total number of shares of Preferred Stock (other than Voting Preferred
Stock) outstanding) from the Holders of Preferred Stock at the Redemption Price.
(c) In addition to the Company"s obligations as set forth in Sections
5(a) and (b), of this Determination of Preferred Stock, the Company shall have
the option to redeem a minimum of $1 million of Original Cost of Class E
Preferred Stock and integral multiples of $100,000 thereafter at the Liquidation
Value thereof. Any shares to be redeemed pursuant to this Section 5(c) of this
Determination of Preferred Stock shall be selected for redemption at the
discretion of, or in a manner approved by, the Board.
(d) On and after any date set for redemption (the "Redemption Date")
pursuant to this Section 5 of this Determination of Preferred Stock (unless
default shall be made by the Company in the payment of the Redemption Price, in
which event such rights shall be exercisable until such default is cured), all
rights in respect of the shares of the Class E Preferred Stock to be redeemed,
except the right to receive the Redemption Price, shall cease and terminate, and
such shares shall no longer be deemed to be outstanding, whether or not the
certificates representing such shares have been received by the Company.
9
<PAGE> 15
(e) Any communication or notice relating to redemption given pursuant
to this Section 5 of this Determination of Preferred Stock shall be sent by
first-class certified mail, return receipt requested, postage prepaid, to the
Preferred E Holders, at their respective addresses as the same shall appear on
the books of the Company, or to the Company at the address of its principal, or
registered office, as the case may be.
(f) At any time on or after the Redemption Date, the Preferred E
Holders shall be entitled to receive the Redemption Price upon actual delivery
to the Company or its agents of the certificates representing the shares of the
Class E Preferred Stock to be redeemed.
(g) Any redemption payments by the Company pursuant to this Section 5
of this Determination of Preferred Stock shall be paid in cash.
(h) Any shares of Class E Preferred Stock which are redeemed or
otherwise acquired by the Company shall be canceled and shall not be reissued,
sold or transferred as Class E Preferred Stock and the Board shall reduce the
number of authorized shares of Class E Preferred Stock by the number of shares
so redeemed or otherwise acquired.
6. Maturity Default.
(a) The occurrence of any of the following events of default shall, at
the option of the Requisite Preferred Holders, constitute a Maturity Default:
(i) the Company fails to comply in any material respect with
any of its obligations under any of the Transaction Documents or the
Fundamental Documents;
(ii) a material default occurs under any mortgage, indenture
or other instrument under which there may be secured or evidenced any
indebtedness for money borrowed by the Company if the principal amount
of such indebtedness aggregates $1,000,000 or more; or
(iii) the Company fails to comply with the provisions of
Section 7.2(g)(iv) of the Purchase Agreement.
(b) A default under clauses (a)(i) or (a)(ii) is not a Maturity Default
until the Company does not cure the default within 30 days of the Company having
Knowledge of such default. When a default is cured, it ceases.
(c) The Requisite Preferred Holders by notice to the Company may waive
an existing default or Maturity Default and its consequences. When a default or
Maturity Default is waived, it ceases.
10
<PAGE> 16
7. Exchange.
(a) Subject to the provisions of Section 500 of California Corporation
Law, the Requisite Preferred E Holders and the Company may agree at any time and
from time to time following the Exchange Triggering Date to exchange all or any
portion of the shares of Class E Preferred Stock outstanding into the Company"s
Subordinated Debentures (the "Notes") to be issued substantially in the form
attached to the Purchase Agreement as Exhibit D, in the amount of $1,000
principal amount of Notes for each $1,000 of Liquidation Value of Class E
Preferred Stock; provided, however, that no such exchange may be consummated
unless full cumulative dividends (including, without duplication, full
cumulative dividends pro rata for the elapsed portion of the current dividend
period) on the Class E Preferred Stock to the date of exchange shall have been
paid. Notes shall be issued only in integral multiples of $1,000 at the time of
exchange. If any additional amounts ("Fractional Principal Amounts") would
otherwise be issuable to any holders of Preferred Stock, then the Company shall,
in lieu of issuing a Fractional Principal Amount therefor, pay in full payment
of the Company"s obligation with respect to such Fractional Principal Amount, to
each Preferred E Holder an amount in cash equal to the Fractional Principal
Amount. Any and all exchange rights set forth in this Section 7 of this
Determination of Preferred Stock shall be deemed to be a right of redemption
subject to Section 402 of the California Corporation Law. In the event that the
Company exercises its option to exchange any portion of the outstanding shares
of Class E Preferred Stock into Notes pursuant to this Section 7 of this
Determination of Preferred Stock, such shares to be exchanged shall be selected
for exchange at the discretion of, or in a manner approved by, the Board.
(b) Any exchange pursuant to this Section 7 shall be made upon not less
than 30 days" notice prior to the date fixed for exchange (the "Exchange Date").
The notice given shall state that, upon surrender of their certificate or
certificates to the Company, the holders of Class E Preferred Stock will receive
Notes in the amount set forth in Section 7(a) of this Determination of Preferred
Stock above and that, at the close of business on the Exchange Date, all rights
of the holders with respect to such shares so called for exchange shall cease,
except the right to receive the Notes in the amount set forth in Section 7(a) of
this Determination of Preferred Stock. Except as may be otherwise required by
applicable law, the form of the Notes may only be amended or supplemented before
the first Exchange Date which occurs with the affirmative vote or consent of the
Requisite Preferred E Holders. On or after such first Exchange Date, the Notes
may only be amended or supplemented as provided in the Notes. The Company will
cause the Notes to be authenticated on the Exchange Date, and the Company will
pay interest on the Notes at the rate and on the dates specified in the Notes
from and after the relevant Exchange Date.
Douglas J. Tullio
President
Richard E. Mahmarian
Secretary
11
<PAGE> 17
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this Certificate are true and
correct of our own knowledge. Executed at Santa Ana, California, on November 18,
1999.
Douglas J. Tullio
President
Richard E. Mahmarian
Secretary
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 517
<SECURITIES> 0
<RECEIVABLES> 8,261
<ALLOWANCES> 657
<INVENTORY> 0
<CURRENT-ASSETS> 9,573
<PP&E> 15,304
<DEPRECIATION> 9,963
<TOTAL-ASSETS> 24,850
<CURRENT-LIABILITIES> 10,743
<BONDS> 0
12,863
0
<COMMON> 32,825
<OTHER-SE> (32,282)
<TOTAL-LIABILITY-AND-EQUITY> 24,850
<SALES> 3,578
<TOTAL-REVENUES> 27,628
<CGS> 2,632
<TOTAL-COSTS> 20,568
<OTHER-EXPENSES> 9,363
<LOSS-PROVISION> (35)
<INTEREST-EXPENSE> 133
<INCOME-PRETAX> (2,180)
<INCOME-TAX> 50
<INCOME-CONTINUING> (2,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,230)
<EPS-BASIC> (.29)
<EPS-DILUTED> (.29)
</TABLE>
