<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required] For the year ended December 31,
1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
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 SOUTH FAIRVIEW STREET, SANTA ANA, CA 92704
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 957-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price of its common stock on March 20, 2000
on the Nasdaq National Market, a date within 60 days prior to the date of
filing, was $91,954,132.
As of March 20, 2000, there were 11,770,129 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be filed no later than 120 days after the close of the
registrant's year ended December 31, 1999, are incorporated by reference in Part
III of this Annual Report on Form 10-K.
<PAGE> 2
PART I
INTRODUCTORY NOTE
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and we intend that such forward-looking
statements be subject to the safe harbors created thereby. These forward-looking
statements include, but are not limited to, statements relating to: (i) the
market acceptance of our products, including, but not limited to, our Network
Query Language based Internet and intranet technology, and our information
technology services, (ii) the continued development of our technical,
manufacturing, sales, marketing and management capabilities, (iii) anticipated
competition, (iv) completion of complementary acquisitions and alliances, and
(v) any future performance, achievements, or industry results expressed or
implied by such forward-looking statements.
The forward-looking statements included in this report are based on current
expectations that involve a number of risks and uncertainties. Forward-looking
statements included in this report regarding our actual results, performance and
achievements are dependent on a number of factors. Our ability to execute
Internet/intranet technology and marketing agreements with key companies and our
ability to derive revenues from the sale of product, licensing of technology, or
revenue sharing relationships depends on: (i) our ability to develop, produce
and market products and services that incorporate new technology, are priced
competitively and achieve significant market acceptance, (ii) whether our
products and information technology services will be commercially successful or
sufficiently technically advanced to keep pace with rapid improvements in
computer technology and resulting product obsolescence, (iii) our ability to
deliver commercial quantities of new products in a timely manner, (iv) our
ability to manage risks associated with our Internet operating strategies, (v)
changes in our operating strategy and capital expenditure plans, and (vi) the
economic and competitive environment of the Internet/intranet industry in
general. Our ability to expand our information technology professional services
division through new service contracts, expansion of time and materials
servicing, and alliances with third-party information technology service
providers, to realize revenues from existing service contract alliances and to
develop opportunities to service products manufactured by third parties depends
on: (i) our ability to develop, produce and market services that are priced
competitively, (ii) whether our information technology services will be
commercially successful or sufficiently technically advanced to keep pace with
rapid improvements in computer technology and resulting product obsolescence,
(iii) changes in the cost of information technology services, (iv) our ability
to manage risks associated with our information technology services operating
strategies, (v) changes in our operating and capital expenditure plans, and (vi)
our ability to manage our expenses in relation to our revenues. Our ability to
potentially pursue companies that provide strategic platforms on which to
leverage future growth depends on: (i) the economic and competitive environment
of the computer maintenance and information technology support services industry
in general, and in our specific market areas, (ii) our ability to identify
acquisition candidates, (iii) the availability of, and terms of, financing to
fund the anticipated growth of our business, and (iv) our ability to
successfully integrate acquired operations with our existing operations.
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
our control. In addition, our business and operations are subject to substantial
risks which increase the uncertainty inherent in forward-looking statements. In
light of the significant uncertainties inherent in the forward-looking
information included in this report, the inclusion of such information should
not be regarded as a representation by us or any other person that our
objectives or plans will be achieved. We disclaim any obligations to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained in this report to reflect future events or
developments.
We previously operated under a fiscal year end ending the last Sunday in
February. In 1998, we adopted a calendar year end effective for the fiscal
ten-month period ending December 31, 1998. To the extent comparisons of the year
ending December 31, 1999 are made to the twelve-month period ending December 31,
1998, the amounts for such prior periods have been derived from previously
reported results for the ten-month period ended December 31, 1998 plus
two-thirds of the quarter ended February 22, 1998, and are unaudited.
2
<PAGE> 3
RISK FACTORS
An investment in our Common Stock involves a high degree of risk. Before
making an investment decision, you should carefully consider all the risks
described in this report in addition to the other information contained in this
report (including the Exhibits referenced in this report). Our business,
operating results and financial condition all could be adversely affected by any
of the following risks. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business,
operating results and financial condition. The market price of our Common Stock
could decline due to the occurrence of any of such risks and you could lose all
or part of your investment. This report also contains certain forward-looking
statements that involve risks and uncertainties. Certain factors, including the
risks described below and elsewhere in this report, could cause our actual
results to differ materially from anticipated results reflected in the
forward-looking statements.
WE RECENTLY CHANGED THE FOCUS OF OUR BUSINESS TO CONCENTRATE ON INTERNET
PRODUCTS AND SERVICES, AND INFORMATION TECHNOLOGY PROFESSIONAL SERVICES;
THEREFORE, OUR PAST BUSINESS AND FINANCIAL RESULTS MAY NOT PROVIDE A RELIABLE
BASIS FOR ASSESSING THE PROSPECTS FOR THE NEW FOCUS OF OUR BUSINESS AND THE
FUTURE OF OUR BUSINESS NOW LARGELY DEPENDS ON NEW TECHNOLOGIES AND EMERGING
MARKETS.
Our historic principal business lines were (1) the sale of computer and
networking hardware and software products, and (2) the service of our products,
the service of third-party hardware and software products, and installation,
training and consulting services with respect to these products. On January 31,
2000, we completed a sale of these business lines to R.E. Mahmarian Enterprises,
LLC, which is owned by Richard E. Mahmarian, a current member of our Board of
Directors. We now focus exclusively on our remaining operations which we have
segmented into two operating divisions - our NQL Solutions technology division,
which focuses on Internet products and services, and our information technology
professional services division, which is also known as Delta CompuTec, Inc.
("DCi").
Accordingly, our past business and financial results do not reflect the
new focus of our business. Analyzing those past results will not provide an
accurate picture of our current risks or anticipated returns. The future for our
business will depend almost exclusively on elements that made up a relatively
smaller portion of our prior business and financial activities. Also, the future
of our NQL Solutions technology division will depend mostly on new technologies
and emerging markets, both of which are in the early stages of commercial
development.
WE MAY INCUR SUBSTANTIAL EXPENSES IF WE HAVE TO PERFORM OBLIGATIONS THAT
R.E. MAHMARIAN ENTERPRISES ASSUMED WHEN IT PURCHASED OUR HISTORIC PRINCIPAL
BUSINESS LINES.
In connection with the above described sale of our historic principal
business lines, R.E. Mahmarian Enterprises assumed many obligations that
previously belonged to us. Such obligations include, but are not limited to,
providing software and hardware service and support to our prior customers,
employee payroll, pension and insurance obligations, service outlet real estate
leases, vehicle leases and other contractual obligations. If for any reason R.E.
Mahmarian Enterprises fails to perform any of those obligations, we may have to
perform those obligations in its place. This could force us to incur substantial
expenses. Such expenses could significantly adversely affect our business,
financial results and the market price of our Common Stock. In the financial
statements included in this Form 10-K, we reflect approximately $2,700,000 of
deferred gain for these potential expenses. However, we expect that the amount
of this exposure will be reduced to approximately $1,700,000 by March 31, 2000,
as a result of the operations of R.E. Mahmarian Enterprises.
THE MARKET FOR OUR NQL SOLUTIONS BASED PRODUCTS AND SERVICES IS NEW AND
EMERGING AND IF IT DOES NOT GROW AS RAPIDLY AS WE ANTICIPATE OR IF IT DECLINES
IN SIZE, OUR PLANNED GROWTH AND FINANCIAL OBJECTIVES WILL NOT BE MET.
Our success depends on the emergence and growth of the market for bots,
intelligent agents and services for searching, gathering, filtering and
organizing information from the World Wide Web. We plan to dedicate all of our
sales, marketing, product development and service efforts toward (1) our NQL
Solutions technology division, which will focus on expanding the sales and
marketing of NQL Solutions based products and services, and (2) our technology
professional services division, which will concentrate on providing high
value-added services to major accounting firms, financial institutions,
hospitals and pharmaceutical companies that are primarily located in the
Northeast. If the markets for products and services for searching, gathering,
filtering and organizing information from the Web or for technology professional
services do not grow as rapidly as we expect, our planned growth and financial
objectives will not be met. A number of factors could prevent or hinder the
emergence and growth of these markets, including the following:
3
<PAGE> 4
- a decline in the growth rate of e-commerce or a decline in the
size of the e-commerce market;
- a failure of information technology spending to grow to
predicted levels;
- a failure of the Internet network infrastructure to keep pace
with substantial growth;
- concerns and adverse publicity about the security of e-commerce
transactions;
- actual or perceived harm to Web sites and e-commerce in general
caused by computer hackers or others attempting to disrupt
e-commerce; and
- an unwillingness of potential customers to change their
traditional business methods.
OUR NQL SOLUTIONS BASED PRODUCTS AND SERVICES ARE ALL IN EARLY STAGES OF
COMMERCIALIZATION.
Our NQL Solutions based products and services are all in early stages of
commercialization. Therefore, it is difficult to forecast the level of market
acceptance that our NQL Solutions based products and services will attain.
Market acceptance of NQL Solutions based products and services could be
negatively impacted by any of the following circumstances:
- instead of using our products and services, our current and
potential customers decide to create their own technology for
developing intelligent agents and data conversion software for
gathering and organizing information on the Web or use such
products and services provided by other companies;
- competitors develop products, technologies or capabilities that
render our products and services obsolete or noncompetitive, or
that shorten the life cycle of our products and services;
- our products and services do not meet customer performance needs
or contain significant defects;
- we are unable to recruit and retain sales personnel needed to
effectively market our products and services;
- we are unable to recruit and retain computer programmers and
software engineers needed to effectively develop and improve our
products and services; or
- we are unable to update and improve our products and services
frequently enough in order to remain competitive in the rapidly
changing Internet and e-commerce environment.
Furthermore, any decline in demand for our products or services or a
decline in the average selling or licensing price for our products could
significantly negatively impact our business, financial results and the market
price of our Common Stock.
OUR NQL SOLUTIONS TECHNOLOGY DIVISION HAS A HISTORY OF LOSSES AND
EXPECTS LOSSES IN THE FUTURE. IF THAT DIVISION DOES NOT ACHIEVE OR SUSTAIN
PROFITABILITY, OUR VIABILITY COULD BE IN DOUBT AND THE MARKET PRICE OF OUR
COMMON STOCK COULD DECLINE SIGNIFICANTLY.
To date, our NQL Solutions technology division has never had a
profitable quarter and there is no assurance that this division will attain or
sustain profitability in the future. To date, we have funded the operations of
our NQL Solutions technology division from revenue generated by our other
divisions and funds invested by Hampshire Equity Partners, II, L.P. We expect to
continue to incur significant costs developing and introducing enhancements to
our NQL Solutions based products and technologies, improving and expanding our
information technology services and expanding our sales and marketing
activities. We expect this strategy to result in losses for our NQL Solutions
technology division at least through the next six to eight quarters. These
losses could impede the ability of us to compete effectively by creating doubt
among our current and potential customers as to our long-term viability, and
could cause the market price of our Common Stock to decline significantly.
4
<PAGE> 5
OUR QUARTERLY OPERATING RESULTS FOR OUR NQL SOLUTIONS TECHNOLOGY
DIVISION ARE VOLATILE AND DIFFICULT TO PREDICT AND IF WE FAIL TO MEET THE
EXPECTATIONS OF ANALYSTS OR INVESTORS, THE MARKET PRICE OF OUR COMMON STOCK
COULD DECLINE SIGNIFICANTLY.
Our quarterly operating results for our NQL Solutions technology
division have varied in the past and may vary significantly in the future.
Because our business is evolving rapidly and our NQL Solutions technology
division is still in the early stages of commercial development, we have little
experience in forecasting revenues for this division. Since our operating
results for our NQL Solutions technology division are volatile and difficult to
predict, we believe that period-to-period comparisons of the operating results
from this division are not a reliable indication of this division's likely
future performance. Our future quarterly operating results may be below the
expectations of public market analysts and investors. In this event, the market
price of our Common Stock may decline significantly. Our future quarterly
operating results may vary for several reasons, including, but not limited to,
the numerous risk factors discussed in this report.
As we work to further develop our products and services and expand our
business, we may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. Such inability to adjust spending could
accentuate any negative effects on our quarterly results.
WE DO NOT HAVE LONG HISTORY OF OPERATING OUR INFORMATION TECHNOLOGY
PROFESSIONAL SERVICES DIVISION.
We acquired our information technology professional services division in
September of 1998. Although the key management personnel of this division
continued with us after our acquisition, we have owned and operated this
division for only five quarters. Therefore, we may not yet be fully aware of the
risks and prospects for this division or our industry in general. The short
length of our experience with our information technology professional services
divisions could negatively impact our ability to evaluate and effectively
oversee our operation, and this could significantly adversely affect our
business, financial results and the market price of our Common Stock.
VARIABLE SALES CYCLES MAKE IT DIFFICULT TO PREDICT THE TIMING OF WHEN
SALES WILL BE MADE, MAKING QUARTERLY OPERATING RESULTS LESS PREDICTABLE.
Because customers have differing views on the strategic importance of
acquiring products for gathering and organizing information on the Web and using
professional services for improving their information technology networks, the
time required to educate customers and sell our products and services can vary
widely. As a result, the evaluation, testing, implementation and acceptance
procedures undertaken by customers can vary, resulting in a variable sales
cycle, which typically can range from six to nine months. While our customers
are evaluating our products and services before placing an order, we may incur
substantial sales and marketing expenses and expend significant management
efforts after which customers still may not place an order with us. Sales cycles
for our products and services sold to larger companies have been longer than
sales cycles for our products that are sold to comparatively smaller companies.
We expect that our sales to larger companies may increase as a percentage of our
total sales over time, and, accordingly, we may experience longer average sales
cycles for our products and services. In addition, purchases of our products and
services will frequently be subject to unplanned processing and other delays,
particularly with respect to larger customers for whom our products and services
represent a very small percentage of their overall purchase activity. Large
customers typically require approvals at a number of management levels within
their organizations, and, therefore, frequently have longer sales cycles.
OUR REVENUE LARGELY DEPENDS ON OUR INFORMATION TECHNOLOGY PROFESSIONAL
SERVICES DIVISION.
The vast majority of our revenue currently comes from providing
information technology services. In 1999, our NQL Solutions technology division
generated less than 1% of the amount of revenue generated by our information
technology professional services division. We anticipate that our information
technology professional services division will generate almost all of our
revenue for at least the next six to eight quarters. If our information
technology professional services division fails to grow its profits as expected,
that could negatively impact our ability to develop and expand our NQL Solutions
technology division and significantly adversely affect our business, financial
results and the market price of our Common Stock.
WE FACE INTENSE AND INCREASING COMPETITION IN THE MARKET FOR OUR NQL
SOLUTIONS BASED PRODUCTS AND SERVICES AND FOR OUR INFORMATION TECHNOLOGY
SERVICES.
The markets for NQL Solutions based products and services and for
information technology services is intensely competitive
5
<PAGE> 6
and the competition is increasing. There are no substantial barriers to entry
for Internet services and products or for information technology services, so we
expect competition in these markets to increase and remain both strong and
persistent. Competitors include on-line service and content providers, Web site
operators, other Internet services and products that incorporate data retrieval,
conversion and delivery or "push" technology, and numerous information
technology service providers. Unknown to us, another company could now be
developing one or more products or services superior to our products or
services. Such a company could, to our detriment, rapidly acquire market share
for competitive Internet products and services or information technology
services. In short, competitive forces could rapidly, severely and adversely
affect our business, financial results and the market price of our Common Stock.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
our current and potential customers, have extensive knowledge of our industries
and may be capable of offering alternative solutions. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products and services than we can. In
addition, many of our current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties that
may improve their ability to address the needs of customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which could negatively impact our ability to sell our products or services at
the price levels required to support our continuing operations.
Our future success depends largely on our ability to (i) successfully
manage the operational growth of our products and services, (ii) adapt to
rapidly changing technologies, (iii) keep our products and services
competitively priced, (iv) maintain and enhance our market position, (v) adapt
our services and products to evolving industry standards, (vi) continually
improve the performance, features and reliability of our services and products
in response to both evolving demands of the marketplace and competitive service
and product offerings, and (vii) establish a paying market. There is no
assurance that any of these things will occur and, even they do occur, there is
no assurance that they will continue to occur. We may lack sufficient funds and
resources to keep our products and services up to date and competitively
positioned. With the new and rapidly evolving nature of the Internet
marketplace, there is no assurance that Internet product providers will be able
to establish and maintain a paying market for NQL Solutions based products.
IF WE FAIL TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR
PRODUCTS AND SERVICES WILL BECOME OBSOLETE OR UNMARKETABLE.
New technologies or new industry standards for gathering, exchanging,
integrating, personalizing and organizing information over the Internet could
render our products and services obsolete and unmarketable. We believe that to
succeed we will have to frequently enhance our NQL Solutions based products and
services, develop new products and services on a timely basis to keep pace with
technological developments and satisfy the increasingly sophisticated
requirements of our customers. Therefore, we cannot be certain that we will
successfully respond to technological change, evolving industry standards or
customer requirements. If we are unable to adequately respond to these changes,
our revenues and market share could rapidly decline. In connection with the
introduction of new products and enhancements, we expect to experience
development delays and related cost overruns, which are not unusual in the
software industry. We could encounter these problems or more serious delays in
the future. Any delays in developing and releasing new products or services or
enhancements to our existing products or services could result in:
- customer dissatisfaction;
- cancellation of orders and licensing agreements;
- negative publicity;
- loss of revenues;
- slower market acceptance;
- slower, or even negative, business growth rates; and
6
<PAGE> 7
- legal action against us by customers.
Our NQL Solutions based products and services are designed to work on a
variety of hardware and software platforms used by our customers. However, these
products may not operate well with future versions of hardware and software
platforms, programming languages, database environments, accounting and other
systems used by our customers. We must frequently modify and improve our
technology to keep pace with changes made to these platforms and to operational
applications and other Internet-related applications. This may result in
uncertainty relating to the timing and nature of new product or service
announcements, introductions or modifications, which may harm our business. If
we fail to modify or improve our products or services in response to evolving
industry standards, they could rapidly become obsolete or unmarketable, which
would significantly adversely affect our business, financial results and the
market price of our Common Stock.
IF A SIGNIFICANT NUMBER OF WEB SITES BLOCK BOTS AND INTELLIGENT AGENTS
FROM SEARCHING, GATHERING AND ORGANIZING INFORMATION FROM THEIR SITES, THAT
WOULD REDUCE THE MARKETABILITY OF OUR NQL SOLUTIONS BASED PRODUCTS.
Our NQL Solutions based products are designed to enable others to create
and use bots and intelligent agents for automatically searching, gathering,
filtering, organizing, converting and monitoring information on Web sites. If a
significant number of Web sites block bots and intelligent agents from taking
one or more of these actions or any other actions for which NQL Solutions based
bots and intelligent agents may be deployed, that would substantially reduce the
marketability of our NQL Solutions based products.
WE MAY BE UNABLE TO DEVOTE ENOUGH FUNDS AND RESOURCES TO SUFFICIENTLY
DEVELOP OUR PRODUCTS AND SERVICES IN ORDER TO SUSTAIN AND GROW OUR BUSINESS.
Developing and improving our products and services requires large
amounts of funds and resources. There are no assurances that we will be able to
provide enough funds and resources to sufficiently develop our products and
services in order to sustain and grow our business. If we lack funds and
resources for product and service development, our business, financial results
and the market price of our Common Stock could be significantly adversely
affected.
WE COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO SECURE AND MAINTAIN
TECHNOLOGY AND MARKETING AGREEMENTS WITH OTHER KEY COMPANIES OR IMPLEMENT
STRATEGIES TO KEEP PACE WITH THE MARKET.
We currently have agreements regarding our NQL Solutions technology with
several key companies in the Internet technology industry, including Microsoft,
General Magic, Jubii, Perspective Partners, NetBy-Tel, Emerge and
Lycos/Quote.com. One or more of these agreements could terminate or expire. Such
an event could significantly adversely affect our business, financial results
and the market price of our Common Stock.
We expect to execute technology and marketing agreements with key
companies, as well as develop additional strategies to keep pace with the fast
changing market. These anticipated agreements are expected to range from
customized technology projects to marketing alliances. While we expect these
agreements to provide us significant benefits, they may or may not provide us
any actual benefits. Some of our strategies are anticipated to expand the
integration of the NQL Solutions technology with third-party products and
services currently being developed or marketed. No assurance can be given that
any of these strategies will be successfully implemented. If we do not
successfully implement any or all of such strategies, our business, financial
results and the market price of our Common Stock could be significantly
adversely affected.
WE COULD BE ADVERSELY AFFECTED IF WE ARE UNSUCCESSFUL IN IMPLEMENTING
ONE OR MORE OF OUR GROWTH STRATEGIES FOR OUR INFORMATION TECHNOLOGY PROFESSIONAL
SERVICES DIVISION.
We plan to grow our information technology professional services
division through (i) employing Internet technologies to enhance information
technology services and to further our competitive advantage with the use of our
NQL Solutions technology, (ii) completing complementary acquisitions and
alliances focused primarily on enhancing our network management and integration
professional services, and (iii) leveraging existing infrastructure. There is no
assurance that we will successfully implement any of these growth strategies. We
may be unable to adequately enhance our information technology services to
retain or improve any competitive advantage we may now have. Government
regulations, competitive forces or other unforeseen factors may prevent us from
completing acquisitions and alliances. Even if we implement all these growth
strategies, no assurance can be given that our
7
<PAGE> 8
information technology professional services division will grow. Failure to grow
this division could significantly adversely affect our business, financial
results and the market price of our Common Stock.
WE COULD BE ADVERSELY AFFECTED IF ONE OR MORE OF OUR MARKETING,
DISTRIBUTION OR SALES STRATEGIES ARE UNSUCCESSFUL.
There is no assurance that we will successfully implement any of our
marketing, distribution or sales strategies. We may lack sufficient funds,
resources or qualified personnel to grow our sales and marketing staff. Failure
to successfully implement one or more of our marketing, distribution or sales
strategies could adversely affect our business, financial results and the market
price of our Common Stock.
IF OTHER PARTIES WRONGFULLY USE OUR NQL SOLUTIONS BASED PRODUCTS WITHOUT
BEING LICENSED, OUR REVENUE FROM THOSE PRODUCTS WOULD BE NEGATIVELY IMPACTED.
We anticipate depending almost exclusively on licensing agreements to
earn revenue from our NQL Solutions based products. We have safeguards in place
to monitor and reduce the risk of unauthorized use of our NQL Solutions based
products. There is, however, no assurance that other parties will not manage to
circumvent those safeguards and use those products without being licensed. If
that occurs, we could lose a significant portion of our potential revenue.
WE FACE INTENSE COMPETITION FOR KEY PERSONNEL. IF WE ARE UNABLE TO
ATTRACT, TRAIN AND RETAIN KEY PERSONNEL, WE WOULD BE ADVERSELY AFFECTED.
Competition for key personnel is intense, particularly in Orange County,
California, where our headquarters are located, and in New Jersey, where our
information technology professional services division is based. We have
experienced difficulties attracting, hiring, training and retaining personnel in
the past, and our key personnel, including members of our management team, may
terminate their employment with us or decide to work for one of our competitors
at any time for any reason. The loss of the services of any of our key personnel
would materially impede the operation and growth of our business. We do not
maintain key person life insurance on any of our personnel.
WE WOULD BE ADVERSELY AFFECTED IF WE COULD NOT EFFECTIVELY MANAGE RAPID
GROWTH AND EXPANSION.
Our ability to offer our products and services in a quickly evolving
market requires an effective planning and management process. We intend to
rapidly expand the operations of our two remaining divisions. Rapid growth can
place significant demands on our managerial and operational resources and our
internal training capabilities. In addition, we intend to hire a significant
number of employees for our two remaining divisions. We also plan to expand the
geographic scope of our operations, both domestically and internationally. We
intend for this geographic expansion to occur primarily in our NQL Solutions
technology division. Expansion may substantially burden our management team. To
manage growth effectively, we must:
- implement and improve our operational, financial, information
and other systems, procedures and controls on a timely basis;
- expand, train and manage our workforce, particularly our sales,
marketing and support organizations; and
- identify and move into suitable office space to expand our
facilities.
There is no assurance that our systems, procedures or controls will be adequate
to support our current or future operations or that our management team will be
able to manage expansion and still achieve the rapid execution necessary to meet
our growth expectations. Failure to manage our growth effectively could diminish
our growth prospects and could result in lost opportunities as well as operating
expenses exceeding budgeted amounts.
WE COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN UNDETECTED
DEFECTS.
Our NQL Solutions based products are complex and may contain undetected
errors or result in system failures, especially when first introduced or when
new versions or enhancements are released. Despite extensive testing, we have
discovered software defects in our new products after their introduction.
Testing of our NQL Solutions based products is particularly challenging because
8
<PAGE> 9
it is difficult to simulate the wide variety of computer environments into which
they may be deployed. The implementation of our NQL Solutions based products
typically involves working with sophisticated software, computing and
communications systems. If our software contains undetected errors or we fail to
meet our customers' expectations in a timely manner we could experience:
- loss or delay in receipt of revenues and loss of market share;
- loss of customers;
- failure to achieve market acceptance;
- diversion of development resources;
- diversion of customer support resources;
- negative publicity;
- increased service and warranty costs;
- legal actions by customers against us; and
- increased insurance costs.
Because our customers use our products and services for mission-critical
applications, errors or defects in or other performance problems associated with
our products and services could result in financial or other damages to our
customers. Our customers may then seek substantial damages from us for their
losses. We have not experienced any such claims to date. However, such claims
brought against us, even if not successful, would likely be time-consuming,
costly and harmful to our reputation.
Our license and service agreements with customers generally contain
provisions designed to limit our exposure to potential liability claims. These
provisions typically include disclaimers of warranties and limitations on
liability for special, consequential and incidental damages. In addition, our
license and service agreements generally limit the amounts recoverable for
damages to the amounts paid by our customers for the products or services giving
rise to the damages. We cannot be certain that the limitations of liability we
include in our contracts will be enforceable since existing or future laws or
unfavorable judicial decisions could negate these liability limiting provisions.
The successful assertion of one or more large claims that exceed contractual
limitations on our liability could have significant negative impact on our
business, financial results and the market price of our Common Stock.
OUR CURRENT INTELLECTUAL PROPERTY PROTECTIONS MAY NOT ADEQUATELY PROTECT
OUR RIGHTS AND INVESTMENTS IN OUR INTELLECTUAL PROPERTY ASSETS.
We have received a notice of allowance from the United States Patent and
Trademark Office on a utility patent application and have two additional utility
patent applications pending before the United States Patent and Trademark
Office. We have a number of federally registered trademarks and pending
applications to federally register marks.
While we believe that all our patent applications are based on unique
technologies developed and owned by us and that we own our trademarks, no
assurance can be given that any patent will be issued with respect to any of our
technologies or that any pending trademark applications will mature into
registration. We may decide to abandon prosecution of one or more of our patent
or trademark applications prior to the issuance of a patent or trademark. If any
patent or trademark issues, there can be no assurances that it will be
sufficiently broad to protect our technology and rights or that the patent or
trademark will not be circumvented by other means. If any patent or trademark
issues, it still may not deter competitors or other third parties from
developing equivalent technology that does not infringe on our rights or from
marketing competitive products under different marks. In addition, no assurance
can be given that any patents or trademarks that may be issued will not be
challenged, re-issued, re-examined, invalidated or held unenforceable. Also, any
rights granted to us through a patent or trademark do not guaranty that such
rights will adequately protect our investment in our technology and intellectual
property.
9
<PAGE> 10
Even if we receive patent protection, trademark registration or other
proprietary rights for our technology or trademarks, no assurance can be given
that our products, trademarks or activities will not infringe on the patents,
trademarks or proprietary rights of others. Regardless of whether we obtain or
maintain any patents or trademarks, another party could bring an action seeking
to stop us from using some or all of our technology or trademarks and to stop us
from engaging in some or all of our activities. If another party successfully
prosecutes such an action, we may have to cease using some or all of our
technology or trademarks, have to cease some or all of our activities, and be
held liable for substantial damages.
If the United States Patent and Trademark Office denies any or all of
our patent or trademark applications, in whole or in part, or if we lose an
existing trademark registration, our business, financial results and the market
price of our Common Stock could be significantly adversely affected. Partial or
complete denial of any or all of our patent or trademark applications or loss of
an existing trademark registration would also, among other things, substantially
reduce our ability to prevent others from copying our technology or trademarks
to develop and market competitive products or services and significantly limit
our ability to profit from licensing or selling our technology, products and
services to others. If we are unable to prevent others from copying any or all
of our patent pending technologies or trademarks to develop or market
competitive products, we could also lose a substantial portion or all of any
technological and marketing advantages we may currently have over any actual or
potential competitors.
Even if we obtain and maintain patents for our technologies and federal
registrations for our trademarks, another party could still develop a
competitive product or service that infringes on our patented technology or
trademarks. To stop such infringement, we may have to sue the infringing party
and convince a judge or jury that our rights are being infringed. Such
litigation would likely require us to spend substantial amounts on legal fees
and related costs and require substantial management effort and participation.
Due to the inherent uncertainties of litigation, there is no guaranty that a
judge or jury would reach a conclusion favorable to us even if one or more of
our patents or trademarks was being infringed. Accordingly, other parties may be
able to infringe upon our patent or trademark rights for long or indefinite
periods of time. Even if we ultimately prevail in litigation, we may not be able
to recover any or all of our costs, expenses and lost profits associated with
such infringement.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR
ABILITY TO COMPETE COULD BE SERIOUSLY HARMED. IF OTHER PARTIES BRING LAWSUITS
AGAINST US CLAIMING INFRINGEMENT OF THEIR INTELLECTUAL PROPERTY RIGHTS, WE COULD
BE LIABLE FOR SIGNIFICANT DAMAGES.
Our success depends in large part on our ability to adequately protect
our intellectual property rights. We seek to protect our source code,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. We require our customers to enter into
license agreements, which impose restrictions on our customers' ability to
utilize our products. In addition, we seek to avoid disclosure of our trade
secrets by, among other methods, restricting access to our source code and
requiring persons with access to our proprietary information to sign
confidentiality agreements. However, some of these confidentiality agreements
contain provisions that may permit these persons, in some circumstances, to
develop products based on our proprietary information as a result of their
access to our source code. If any such persons develop products based on our
proprietary information, the value of our proprietary information will be
adversely impacted. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our technology or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our technology is difficult, and while we are unable to determine the extent to
which piracy of our products exists, software piracy can be a persistent
problem. In addition, as we expand our operations globally, we become
increasingly exposed to intellectual property infringement since the laws of
some foreign countries do not protect our proprietary rights to as great an
extent as do the laws of the United States. Our means of protecting our
proprietary rights may not be adequate and our competitors may copy our products
and services, independently develop similar technology or services, or design
around our intellectual property rights. If we fail to adequately protect our
intellectual property, our business, financial results and the market price of
our Common Stock could be significantly adversely impacted.
There has been a substantial amount of litigation in the software
industry regarding intellectual property rights. It is possible that third
parties may claim that our current or future products or services infringe their
intellectual property rights. We expect that software developers will
increasingly be susceptible to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlap. Any intellectual property claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements. If a royalty or licensing agreement is required, it may not be
available to us on acceptable terms or at all. If this occurs, our business,
financial results and the market price of our Common Stock could be
significantly adversely impacted.
10
<PAGE> 11
AGREEMENTS WITH KEY EMPLOYEES AND CONSULTANTS MAY NOT ADEQUATELY PROTECT
OUR INTELLECTUAL PROPERTY RIGHTS.
We have agreements with certain key employees and consultants which
include provisions designed to protect the confidentiality and our ownership of
our intellectual property. Despite these precautions, no assurance can be given
that such agreements will adequately protect our intellectual property rights.
One or more persons could, to our substantial detriment, disclose confidential
information concerning our business or claim ownership of our intellectual
property. No assurance can be given that our agreements with certain key
employees and consultants would provide us with meaningful remedies in the event
of improper use or disclosure of our intellectual property.
THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS MAY PREVENT US FROM TIMELY
DEVELOPING PRODUCTS OR SERVICES.
We may have to obtain licenses to patents or other intellectual property
rights in order to quickly develop products and services. No assurance can be
given that we will be able to obtain any such licenses on acceptable terms or at
all. If we do not obtain such licenses, we could encounter detrimental delays in
developing or introducing products or services or even be completely prevented
from developing and marketing particular products or services. Even if we
attempt to design around the patent or other intellectual property rights of
others, other parties could bring actions claiming that we have infringed on
their rights. We could encounter substantial costs and delays in defending
itself in such litigation and, if the other party prevails, we could have to pay
substantial damages for infringement.
FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR
BUSINESS OUR INDIRECTLY MATERIALLY ADVERSELY IMPACT OUR BUSINESS BY LIMITING THE
GROWTH OF INTERNET COMMERCE.
As Internet commerce evolves, we expect federal, state, local and
foreign governments and agencies to adopt regulations covering many issues,
including user privacy, pricing, content and quality of products and services.
If enacted, these laws, rules or regulations could limit the market for our NQL
Solutions based products and related services, which could significantly
adversely affect our operating results, business prospects and the market price
of our Common Stock. Although many of these regulations may not apply to our
business directly, we expect that laws regulating the solicitation, collection
or processing of personal and consumer information could indirectly affect our
business. The Telecommunications Act of 1996 prohibits some types of information
and content from being transmitted over the Internet. The prohibition's scope
and the liability associated with a Telecommunications Act violation are
currently unsettled. In addition, although substantial portions of the
Communications Decency Act were held to be unconstitutional, we are unsure
whether similar legislation will be enacted and upheld in the future. It is
possible that legislation could expose companies involved in Internet commerce
to liability, which could limit the growth of Internet commerce generally.
Legislation like the Telecommunications Act and the Communications Decency Act
could dampen the growth of Internet usage and decrease our acceptance as a
commercial medium. Moreover, the applicability to the Internet of existing laws
in various jurisdictions governing issues such as property ownership, sales tax,
libel and personal privacy is uncertain and may take years to resolve. Our costs
could increase and our business could be harmed by any new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, the application of existing laws
and regulations to the Internet and on-line businesses, and litigation seeking
to restrict placing, accessing or using information on the Internet.
WE ARE VULNERABLE TO EXTERNAL EVENTS THAT MAY NEGATIVELY IMPACT OUR
ABILITY TO CONDUCT OUR BUSINESS OPERATIONS.
We are vulnerable to a major earthquake and other calamities. Our NQL
Solutions technology division's operational facilities and our central corporate
offices are located in Orange County, California, a very seismically active
region. Our computer systems, as well as the telecommunications and other
infrastructure serving our operations, are potentially vulnerable to a major
earthquake. We have not undertaken a systematic analysis of the potential
consequences to our business and financial results from a major earthquake and
we do not have a recovery plan for earthquake, fire, flood, systemic power or
communication failure, sabotage or similar disasters. We are unable to predict
the effects of any such event, but any such event could seriously harm our
business, financial results and the market price of our Common Stock.
IF WE ACQUIRE OTHER BUSINESSES, WE WILL BE SUBJECT TO RISKS THAT COULD
ADVERSELY AFFECT OUR BUSINESS, FINANCIAL RESULTS AND THE MARKET PRICE OF OUR
COMMON STOCK.
From time to time, we may pursue acquisitions to obtain complementary
products, services and technologies. An acquisition may not produce the revenue,
earnings or business synergies that we anticipate, and an acquired product,
service or technology might
11
<PAGE> 12
not perform as we expect. In pursuing any acquisition, our management could
spend a significant amount of time and effort, and the acquisition may not be
completed. If we complete an acquisition, we would likely have to devote a
significant amount of management resources to integrate the acquired business
with our existing business.
To pay for an acquisition, we may use our stock or cash. Alternatively,
we may borrow money from a bank or other lender. If we use our stock, our
shareholders would experience dilution of their ownership interests. If we use
cash or debt financing, our financial liquidity will be reduced.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL AND IT MAY NOT BE AVAILABLE TO
US ON FAVORABLE TERMS OR AT ALL.
We expect to have sufficient funds to meet our need for capital for at
least the next twelve months. After that, we may need to raise additional
capital and we cannot be certain that we will be able to obtain additional
financing on favorable terms, if at all. If we cannot raise additional capital
on acceptable terms, we may not be able to develop or enhance our products and
services, take advantage of future opportunities or respond to competitive
pressures or unanticipated events.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE;
YOU MIGHT LOSE ALL OUR PART OF YOUR INVESTMENT.
The price of our Common Stock has been and may continue to be volatile.
The price of our Common Stock may fluctuate significantly in response to a
number of events and factors relating to us, our competitors, the market for our
products or the securities markets in general, such as:
- quarterly variations in our operating results;
- announcements by us or our competitors of new technological
innovations, new products, new services, significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- changes in financial estimates and recommendations by securities
analysts;
- changes in market valuations of Internet-related and networking
companies;
- loss of a major customer;
- additions or departures of key personnel;
- changes in prevailing interest rates;
- fluctuations in overall stock market prices and volumes; and
- news relating to trends in our markets.
In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of these companies.
These broad market and industry fluctuations may adversely affect the market
price of our Common Stock, regardless of our operating performance.
Recently, when the market price of a stock has been volatile, holders of
that stock have often instituted securities class action litigation against the
company that issued the stock. If any of our shareholders brought such a lawsuit
against us, we could incur substantial costs defending the lawsuit. Such a
lawsuit could also divert the time and attention of our management.
12
<PAGE> 13
ITEM 1. BUSINESS
RECENT ASSET SALE
We recently sold our historic principal business lines which were: (1)
the sale of computer and networking hardware and software products, and (2) the
service of our products, the service of third-party hardware and software
products, and installation, training, and consulting services with respect to
these products. Following the completion of this transaction, we are now
focusing exclusively on our two remaining operating divisions: the NQL Solutions
technology division which will expand the sales and marketing of the NQL
Solutions technology, and the DCi information technology professional services
division which will concentrate entirely on providing high value-added services
to major accounting firms, financial institutions, hospitals and pharmaceutical
companies that are primarily located in the Northeastern United States.
The sale, which was completed on January 31, 2000, involved the
transfer of substantially all of the assets associated with the managed services
division and the computer hardware manufacturing division to R.E. Mahmarian
Enterprises, LLC for consideration of approximately $3.2 million, consisting
primarily of liabilities that were assumed by the purchaser. We also received a
ten percent contingent interest in gross cash and noncash proceeds that may be
received by R.E. Mahmarian Enterprises upon the occurrence of certain liquidity
events involving the purchaser, which is owned by Richard E. Mahmarian, a
current member of our Board of Directors. This transaction was approved by a
special committee of the Board of Directors and we received an opinion from our
investment bankers that the consideration received in the transaction was fair
from a financial point of view.
The assets sold included certain accounts receivable, prepaid expenses,
other current and non-current assets, inventories, fixed assets, information
technology service contracts and capitalized software development costs. We also
agreed to (1) grant R.E. Mahmarian Enterprises the right to use the name "Alpha
Microsystems" and associated logos, marks and trade dress, (2) transfer the
rights to the trade names, logos and trademarks associated with divisions that
were sold, and (3) enter into a five-year license agreement providing the right
to internally use our NQL Solutions technology. Additionally, we agreed to
sublease a portion of our Santa Ana, California facility at a rental rate equal
to our cost.
OVERVIEW
We are a provider of leading edge business-to-business Internet
technology. Our two remaining operating divisions are (1) our NQL Solutions
technology division that develops and markets Internet software products and
services which are designed to access, excavate, gather, organize and convert
into desired formats the massive amounts of data that are located on the Web,
and (2) our DCi information technology professional services division that
provides network installation, support and consulting services.
NQL SOLUTIONS TECHNOLOGY DIVISION
The NQL Solutions technology division provides leading edge bot and
intelligent agent technologies to the global Internet business-to-business
market. Bots are software robots designed to excavate, gather and organize the
massive amounts of data proliferating on the Web, and automate many of these
computing processes. Intelligent agents are personalized bots that can make
their own decisions and thus use their own "artificial intelligence" to improve
their abilities to search, retrieve and organize data. Intelligent agents access
and search multiple types of information systems in various locations,
especially across the Internet, and perform computing tasks that are difficult,
inefficient or impossible to conduct manually. Bots and intelligent agents can
also be used to monitor and report on the status of data and systems.
The NQL Solutions technology division serves the growing needs of
e-commerce businesses and other commercial Internet users for improved bot and
intelligent agent technologies. This division created and developed Network
Query Language (NQL), a proprietary scripting programming language that
streamlines the development of intelligent agents, bots and Web applications.
NQL can also be used to convert data on Web into desired formats for other
databases and documents. Currently, we believe NQL is the only programming
language designed exclusively for the development of bots and intelligent
agents. NQL provides an efficient development environment for bots, intelligent
agents and Web applications in much the same way as Structured Query Language
("SQL") provided a common development environment for database applications. As
a result, the NQL technology delivers substantial added value to information
management, one of the most critical needs on the Internet.
13
<PAGE> 14
We license the NQL technology to businesses so they can quickly create
and use their own bots and intelligent agents in real time. The current target
market for NQL based bot and intelligent agent technology includes Internet
integrators, information technology departments of Fortune 1000 and other large
companies, Internet communities and marketplaces (portals and vortals) and
independent software vendors. These businesses use NQL technology to quickly
create their own intelligent agents to search the Web for specific information
and then gather and organize that information for internal or external use.
Using NQL, companies and individuals can create and deploy customized bot and
intelligent agent applications in a matter of hours or days rather than the
weeks or months common with other development environments. NQL contains more
than 350 common English language verbs and is designed to be non-cryptic and
easily learned by even low-level programmers. NQL greatly simplifies Internet
programming, much like SQL simplifies database programming. For example, NQL's
automated Web recording function allows a user to initially determine the
information to be retrieved from a Web site utilizing intelligent agents that
would, thereafter enable the browser to automatically continue retrieving the
information without further user intervention. We also develop and market
customized NQL applications (including bots and intelligent agents) for
gathering and organizing information from the Web.
INFORMATION TECHNOLOGY PROFESSIONAL SERVICES DIVISION
Our information technology professional services division provides
Internet and intranet consulting, networking, design implementation, circuit
procurement, installation, maintenance, help desk services, premise wiring
services, network administration and on-site technical management and
consulting, and also cross-markets NQL based products and services to our
customers. Additionally, this division provides a wide array of computer
systems, data communications and LAN/WAN information technology services and
products to a customer base encompassing many industries. Specifically, this
division serves large financial institutions, major accounting firms,
pharmaceutical companies, hospitals and universities. Most customers are located
in the Northeast, but our customer base also reaches as far as Florida and the
West Coast.
While we maintain our corporate headquarters in Santa Ana, California,
our main center for information technology professional services is located in
Teterboro, New Jersey. The Northeast and Mid-Atlantic regions are serviced from
satellite offices in Delaware, Pennsylvania and New Jersey, while other areas of
the country are supported through the corporate home office and carefully
selected, monitored and managed sub-contractors.
NQL SOLUTIONS
NQL SOLUTIONS INTERNET TECHNOLOGIES
Our NQL Solutions technology division created and developed a scripting
language that enables extreme rapid application development of bots and
intelligent agents. The main competition to NQL is other scripting languages,
the most common of which are Perl, PHP, Python and REBOL. NQL is the only one of
these languages designed specifically for developing bots and intelligent
agents. NQL has several advantages over these other languages including the
following:
- We offer a level of product support and refinements for NQL that
is not available with other scripting languages.
- NQL enables much faster and advanced development of bots and
intelligent agents.
- NQL has unique capabilities not found in other scripting
languages, such as the ability to dynamically create Web
graphics.
- NQL is far less cryptic than other scripting languages, because
it is meant to appeal not only to Web site developers but also
to content engineers and other information services personnel.
- NQL's recording function automatically creates bots and
intelligent agents by monitoring a user's manual searches and
generating NQL scripts during the course of those searches.
Beyond these essential advantages, NQL offers many highly sought after
capabilities and features. Bots and intelligent agents created with NQL are
platform-independent. As a result they can communicate and interoperate with
virtually any information system that is readily used today. NQL also contains
sophisticated data conversion technologies that can automatically transform
unstructured
14
<PAGE> 15
data residing on the Web into a desired format for export into business
applications like Excel and MS Word, legacy systems and databases. This
capability is particularly well suited for Web architects who often must make a
corporation's existing information systems compatible with the Web (and vice
versa) to enable e-commerce with such corporation's customers. Unlike common
e-commerce solutions that are expensive and often require the introduction of
entirely new systems into an enterprise, an NQL based intelligent agent solution
integrates existing systems.
In addition to their cross-platform integration capabilities, NQL based
bots and intelligent agents efficiently automate computing tasks. NQL based
intelligent agents conduct a users' computing instructions with a level of
intelligence that enables them to interact with and learn from other machines
and applications. A single NQL based intelligent agent is capable of crossing
many computing platforms and performing multiple computing instructions in each
environment, all while reacting to changing conditions. For example, a single
NQL based intelligent agent could enter a Web site, complete multiple layers of
sign-in forms, find specific information, convert that information to the
desired database format and then place it on a local enterprise-based database.
Currently, doing all this typically requires a human "content engineer" to
manually conduct the different computing tasks.
The Web programming environment is diverse and sophisticated, therefore,
NQL's open architecture is designed to integrate with other development
platforms and application technologies. The language enables Web professionals
to develop applications and components that complement and enhance other
applications as part of a total solution. To enable these integrated solutions
across multiple platforms and applications, NQL talks with and can be called
from other development environments including Java, C++ and Visual Basic. NQL
also works with standards such as ODBC databases, all major Internet and
messaging protocols and data types, including text, HTML, XML and SGML, as well
as many types of image, audio and video files.
Communication systems increasingly are being incorporated into
comprehensive information system solutions. Another powerful feature of NQL is
that it is compatible with many common communication protocols, including the
newest wireless protocol, WAP. For instance, NQL can deliver information not
only to workstations, servers and inboxes, but also faxes, pagers and personal
digital assistants. Compliance with additional protocols is regularly being
added to NQL. NQL is also fully scalable to meet large Web/enterprise solution
requirements.
NQL PRODUCTS
NQL is a development language for bots and intelligent agents
encompassing many technologies and capabilities. NQL Solutions' packaged
applications offer technology components with a user interface for
install-and-run simplicity. We have developed the following NQL based packaged
applications:
- NQL Spotlight. Searches for and gathers unstructured content
from the Web and organizes it into structured databases, where
analytical tools can be applied. This is known as "reverse data
warehousing." NQL Spotlight accomplishes this valuable service
by acquiring specific data or objects from Web pages, filtering
that data to meet user needs and delivering it into ODBC
databases - today's standard for data management. Jubii, the
largest Danish Web portal, uses NQL Spotlight to aggregate all
real estate listings in Denmark into a comprehensive listing for
our millions of unique users. Microsoft uses NQL Spotlight to
gather and organize news information from the Web for delivery
to key personnel.
- NQL Shopper. Offers e-marketplaces a versatile e-commerce
solution, incorporating product-comparison, content aggregation,
personalization and integration capabilities. Parties that
license NQL Shopper can create their own customized bots and
agents to combine data from disparate sources. Just as with NQL,
the NQL Shopper is designed to workwith existing information
systems, payment systems and product databases. We intend to
commercially offer this product during the next quarter.
- StockVue 2000. Uses NQL based bots and intelligent agents to
provide customized delivery of financial data from the Internet
such as stock and mutual fund quotes, charts, market news and
SEC filings. StockVue 2000 is ready tailored for original
equipment manufacturers and end users. StockVue 2000 also
includes BusinessVue, an NQL based agent application that uses
the Internet to provide customized delivery of corporate and
business information on specific companies.
15
<PAGE> 16
ENGINEERING, RESEARCH AND DEVELOPMENT
For over four years, we have been developing innovative bot and
intelligent agent technologies for use on the Internet. We have received
numerous industry awards. We have received a notice of allowance from the United
States Patent and Trademark Office on a utility patent application and have two
additional utility patent applications pending before the United States Patent
and Trademark Office. David Pallmann, our Chief Technologist, wrote a book on
intelligent agent development: "Programming Bots, Spiders and Intelligent Agents
in Visual C++," which was considered to be the leading industry publication on
intelligent agent development when it was published by Microsoft Press in 1999.
We intend to continue to invest in engineering, research and development for our
NQL technologies and NQL based products. Management annually, or more
frequently, sets the amount of such investment after considering profitability
levels and technology standing within our industry.
We are continuously exploring potential new applications for our NQL
technologies. We intend to explore and take commercial advantage of
opportunities to develop new NQL based general purpose applications as we
discover such opportunities. We are completing version 1.0 of NQL for Windows
and intend to release it during the second quarter of 2000 and are currently
developing NQL for Java, Linux, Solaris, and for wireless devices. As soon as
the NQL technology is sufficiently developed, we intend to create and market a
product that will enable individuals with no computer programming experience to
develop their own customized bots and intelligent agents for gathering and
organizing information from the Web.
COMPETITION
The main competition to NQL are other scripting languages, the most
common of which are Perl, PHP, Python and REBOL. NQL's advantages over these
languages are described in the "NQL Solutions Internet Technologies" section
above. Other competitors include other scripting languages, on-line service and
content providers, Web site operators and other Internet services and products
that incorporate data retrieval, conversion and delivery or "push" technology.
Also, OnDisplay provides a product that competes with the NQL Spotlight product.
The market for Internet services and products is intensely competitive.
There are no substantial barriers to entry for Internet services and products,
so we expect competition in these markets to persist. We believe that the
principal competitive factors in these markets are name recognition,
performance, ease of use, functionality, content and price.
Future success will depend on our ability to (i) adapt to rapidly
changing technologies, (ii) keep products competitively priced, (iii) maintain
and enhance market position, (iv) adapt services and products to evolving
industry standards, (v) continually improve the performance, features and
reliability of services and products in response to both evolving demands of the
marketplace and competitive service and product offerings, and (vi) establish a
paying market. No assurance can be given that we will have the resources needed
to respond to this rapidly evolving market.
CUSTOMERS
NQL Solutions' customers include leading Internet and technology
companies such as Microsoft, Jubii (the largest Danish Web portal), Perspective
Partners, NetBy-Tel, Emerge and Lycos/Quote.com.
We are still in the very early stages of marketing and licensing the NQL
Solutions based technology, products and services. We intend to develop a large
and diversified revenue base as we expand our customer base and the range of our
NQL based products and services. No assurance can be given that this will occur.
INFORMATION TECHNOLOGY PROFESSIONAL SERVICES DIVISION
SERVICES PROVIDED
The information technology services market is large and growing. While
our total annual sales and revenues are only a fraction of the dollars spent
nationally for services and products related to information technology services,
we have been successful in establishing certain long-standing relationships with
large financial institutions, major accounting firms, banks, pharmaceutical
16
<PAGE> 17
companies, large healthcare providers and universities. In addition, we work
closely with major OEM's and system integrators to participate as a
subcontractor to their outsource needs.
Information technology services are based on providing direct technical
and maintenance solutions to customers' computer systems, data communications
and LAN/WAN needs. These services include:
- Network systems design.
- Network analysis and performance testing.
- Network management.
- Project management.
- Premise wiring.
- Telephone company circuit provisioning.
- Installation services.
- Technical consulting services.
- Maintenance services.
- Help desk support.
- Complete or partial outsource programs.
Some additional information technology services and products offered
include:
- Total Cost of Ownership, which is a program that allows
customers to lease products and services and form a "Technology
Refresh" strategy.
- Video conferencing services, including procurement, design,
installation and support.
- Special application development using the proprietary NQL
Solutions technology which provides powerful Web based solutions
for challenges facing customers' information systems support
groups.
- Service Trak, which is an NQL Solutions product that allows
customers to place or check status of service calls via the
Internet with any standard Web browser.
We believe these additional services and products will be attractive to
end users because they offer the advantages of dynamic Web based performance
reporting, benchmarking and enhanced search capabilities with obvious and
far-reaching customer benefits. Furthermore, these additional services and
products combine with existing services and products to give us the capability
to provide customers with complete technology solutions.
COMPETITION
We compete both with third-party service providers which are either
nationally based or have a strong regional presence and with manufacturers and
large distributors which have their own technical service organizations. We
compete with third-party providers on the basis of the technical competence,
customer satisfaction, responsiveness and effectiveness of services, as well as
the price at which such services are provided. We compete with manufacturers and
large distributors on the basis of breadth of product availability, product
price and ability to service multiple product lines. We believe that our breadth
of services, our long term presence
17
<PAGE> 18
in the industry, our Web based technologies and our specific expertise in
computer systems and networks gives us an advantage over traditional maintenance
companies and enables us to compete in the Fortune 1000 marketplace, as well as
compete for sub-contracting business from major systems integrators.
CUSTOMERS
The information technology professional services division's twenty
largest customers, measured in terms of revenue paid to that division, include
Morgan Stanley Dean Witter, the Pershing division of D.L.J., Deloitte & Touche
LLP, PricewaterhouseCoopers LLP, National Life of Vermont, DLJ Direct-Inautix
Technologies, Compaq/Citicorp, Kimball Medical Center, SmithKline Beecham and
Dupont Merck Pharmaceutical Company. In 1999, one customer provided
approximately 19% of the revenue for our information technology professional
services division and another customer provided approximately 17% of our
revenue.
PATENTS, TRADEMARKS AND LICENSES
In addition to claiming standard copyright protection, we have received
a notice of allowance from the United States Patent and Trademark Office on a
utility patent application and have two additional utility patent applications
pending before the United States Patent and Trademark Office. There can be no
assurance that any patent will be issued with respect to any aspect of our
technology. We may decide to abandon prosecution prior to issuance of a patent.
If any patent issues, there can be no assurance that the issued claims will be
sufficiently broad to protect our technology, to deter competitors or to prevent
third parties from developing equivalent technology that does not infringe such
patents, or that the patent will not otherwise be circumvented. In addition,
there can be no assurance that any patents that may be issued will not be
challenged, re-issued, re-examined, invalidated or held unenforceable, or that
any rights granted thereunder would provide us with proprietary protection or
otherwise protect the investment in our technology. We could incur substantial
costs in litigation in which we assert a patent infringement claim against
another party. Failure of any patents to provide protection of our technology
may make it easier for our competitors to offer technology equivalent to or
superior to our technology.
We have federally registered trademarks for the following marks:
"AlphaCONNECT," "AlphaCONNECT BusinessVue," "AlphaCONNECT Messenger,"
"AlphaCONNECT Pro," "AlphaCONNECT StockVue," "AlphaSERV" and "StockVue." In
addition, we have pending federal applications to register the following marks:
"AC Convert & Apply." "AC Enterprise," "AC Export," "AC Spotlight," "AC Tools,"
"AlphaCONNECT EdgarVue," "AlphaServ.com," "EdgarVue," "Network Query Language,"
"NQL," "Object Recognition Engine," "ORE," "Spotlight" and "The Corporate
Portal."
To protect our intellectual property, we also rely in part on agreements
with strategic employees and consultants which typically include provisions
concerning confidentiality and ownership of work product. Despite these
precautions, there can be no assurance that such agreements will provide us with
meaningful remedies in the event of an improper use or disclosure of proprietary
information. There can be no assurance that our products or activities will not
infringe the patents or proprietary rights of others, even if we also have
received patent protection or other proprietary rights for our technology. We
may be required to obtain licenses to patents or other proprietary rights. There
can be no assurance that any such licenses would be made available on terms
acceptable to us, if at all. If we do not obtain such licenses, we could
encounter delays in product introductions while we attempt to design around such
patents. If we cannot obtain such licenses, the development, manufacture or sale
of products requiring such licenses could be precluded and we may have to pay
substantial damages for past infringement. We could encounter substantial costs
in litigation brought against us on such patents or proprietary rights.
While patent, copyright, trademark and trade secret rights provide
certain protection, we believe that our success is less dependent on those
ownership rights than on our innovative skills, technical competence and
marketing abilities.
EMPLOYEES
On March 14, 2000, we employed approximately 170 persons. The ability to
attract and retain qualified personnel is a significant factor in our future
success. We employ approximately five persons who are represented by a labor
organization. We also contract for union members to work on specific projects
where necessary. We have never experienced a work stoppage. We consider our
employee relations to be good.
18
<PAGE> 19
ITEM 2. PROPERTIES
We currently occupy approximately 17,025 square feet of a 66,200 square
foot facility located in Santa Ana, California. The lease, which expires
December 31, 2000, has an average annual rent of $285,000. The lease contains an
option to extend the term of the lease through December 31, 2003. We currently
sublease approximately 49,175 square feet of this facility to two subtenants.
We currently lease approximately 38,000 square feet of a facility
located in Teterboro, New Jersey. The lease, which expires on July 30, 2001, has
an annual rent of $300,000. We currently sublease of approximately 18,500 square
feet of that facility for an average annual rent of approximately $120,000
through July 30, 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material litigation nor, to
its knowledge, is any material litigation being threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
19
<PAGE> 20
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding the executive officers of the Company is set forth
in the following:
DOUGLAS J. TULLIO, 57, has served as President, Chief Executive Officer and a
Director of the Company since 1991 and as Chairman of the Board since July 1998.
Mr. Tullio also served as Chief Operating Officer from May 1991 to March 1994.
Mr. Tullio joined the Company in January 1990. From 1984 to 1989, he worked for
General Automation, Inc., in the positions of President and member of the Board
of Directors.
ROBERT O. RIISKA, 38, was appointed Chief Financial Officer and Vice President
of Finance of the Company in November 1999. Prior to joining the Company, Mr.
Riiska worked for Morris-Anderson & Associates, Ltd. from March 1991 to November
1999, where he held the position of Regional Partner since January 1998.
Previously, he held the positions of Consulting Manager and Senior Consultant.
From 1983 to 1987 and from 1989 to 1991, Mr. Riiska served in management
consulting and audit capacities with Ernst & Young LLP and its predecessor Ernst
& Whinney.
JOHN T. DEVITO, 43, has served as President of Professional Services since the
acquisition of Delta CompuTec, Inc. in September 1998. Mr. DeVito previously
served as President and Chief Operating Officer of Delta CompuTec Inc. from
April 1995 to August 1998. Previously, he held the position of Vice President
and General Manager of Delta CompuTec, Inc.
DENNIS E. MICHAEL, 41, was named Vice President of Marketing of the Company in
May 1996 and previously held the position of Director of Marketing of the
Company. He served in various marketing management capacities at the Company
between 1983 and 1990 and with AST Research, Inc. from 1990 to 1995.
20
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is included on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") National Market under the symbol "ALMI".
The following table sets forth the high and low sales prices for the Company's
common stock (ALMI) for the fiscal periods indicated, as quoted on the NASDAQ
National Market. Prices reflect inter-dealer prices without retail mark-up,
mark-down or commissions, and may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999
First Quarter $ 7 7/8 $ 2
Second Quarter 7 1/8 2 1/2
Third Quarter 8 6/32 4 1/2
Fourth Quarter 6 7/8 3 7/8
TEN MONTHS ENDED DECEMBER 31, 1998
First Quarter $ 7 $ 1 1/2
Second Quarter 4 1/4 2 5/16
Third Quarter 3 25/32 1 23/32
One month period ended December 1998 9 2 3/16
</TABLE>
On March 20, 2000, the high was $8.00 and the low was $7.3125 and the
approximate number of holders of record of the Company's common stock was 528.
This number does not reflect the number of beneficial holders of the Company's
common stock.
The Company has not paid dividends on its common stock, and it anticipates that
for the foreseeable future it will not pay dividends. Should the Company desire
to pay dividends, any such dividends would be subject to the prior written
consent of the Company's lender and to any preferential rights to receive
dividend payments contained in any securities issued by the Company, including
those payable to holders of outstanding redeemable exchangeable preferred stock
(see Note 6 of Notes to Consolidated Financial Statements).
21
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED TEN MONTHS ---------------------------------------------
DECEMBER 31, ENDED FEBRUARY 22, FEBRUARY 23, FEBRUARY 25,
1999 DECEMBER 31, 1998 1998 1997 1996
------------ ----------------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
IT Services revenues $ 30,399 $ 20,072 $ 13,223 $ 14,627 $ 18,070
Product sales 4,491 4,068 6,104 8,885 14,693
Net sales 34,890 24,140 19,327 23,512 32,763
Cost of sales 27,032 20,994 13,966 15,498 22,967
Gross margin 7,858 3,146 5,361 8,014 9,796
Loss before taxes (12,158) (9,527) (3,318) (2,742) (3,555)
Net loss (12,204) (9,542) (3,297) (2,770) (3,575)
Net loss attributable to
common shareholders (14,093) (9,978) (3,297) (2,770) (3,575)
Basic and diluted net loss per share $ (1.21) $ (0.90) $ (0.30) $ (0.28) $ (0.54)
Number of shares used in the
computation of per share amounts 11,610 11,029 10,864 9,727 6,565
BALANCE SHEET DATA:
Current assets $ 5,272 $ 13,016 $ 9,754 $ 12,378 $ 7,199
Current liabilities 4,949 10,088 5,421 3,648 6,377
Working capital 323 2,928 4,333 8,730 822
Total assets 16,309 26,431 15,788 17,195 13,061
Long-term obligations 3,000 846 60 34 201
Redeemable preferred stock 2,190 12,824 - - -
Other shareholders' equity $ 6,170 $ 2,673 $ 10,307 $ 13,513 $ 6,483
</TABLE>
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SUMMARY
The following table sets forth operational data as a percentage of net sales for
the periods indicated:
<TABLE>
<CAPTION>
Relationship to Net Sales
--------------------------------------------------------
Year Ended Ten Months Ended Year Ended
December 31, 1999 December 31, 1998 February 22, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales:
IT Services 87.1 % 83.1 % 68.4 %
Product 12.9 16.9 31.6
----- ----- -----
Total net sales 100.0 100.0 100.0
Cost of sales 77.5 87.0 72.3
----- ----- -----
Gross margin 22.5 13.0 27.7
Selling, general and administrative expense 34.0 35.9 38.9
Engineering, research and development expense 3.7 4.9 7.3
Impairment of long-lived assets 0.6 10.1 -
Interest expense (income), net 0.3 0.1 (1.6)
Other expense (income), net 18.8 1.5 0.3
----- ----- -----
Loss before taxes (34.9) (39.5) (17.2)
Net loss (35.0) (39.5) (17.1)
Net loss attributable to common shareholders (40.4)% (41.3)% (17.1)%
</TABLE>
We had negative earnings before interest, taxes, depreciation and amortization
("EBITDA") of $10,381,000, during the year ended December 31, 1999, compared to
a negative EBITDA of $7,745,000 during the year ended December 31, 1998.
On December 17, 1998, our Board of Directors approved a change in the fiscal
year to a calendar year-end. Accordingly, the Company's 1999 annual fiscal
period is the calendar year ended December 31, 1999 and the Company had a ten
month transition period ended December 31, 1998 to adopt the new year end.
Fiscal year 1998 ended on February 22, 1998.
This discussion and analysis of our financial condition and results of operation
is qualified by the Introductory Note set forth in the beginning of this Annual
Report on Form 10-K.
RECENT ACTIVITIES REFOCUSING THE COMPANY'S FUTURE BUSINESS ACTIVITIES
Our historic principal business lines were (i) the sale of computer and
networking hardware and software products, and (ii) the service of those
products, the service of third-party hardware and software products, and
installation, training and consulting services with respect to these products.
On January 31, 2000, we completed a sale of these business lines to R.E.
Mahmarian Enterprises, LLC ("R.E. Mahmarian Enterprises"). The results of
operations for the year ended December 31, 1999 include a loss on the sale of
these businesses to R.E. Mahmarian Enterprises of $6,728,000 (included in loss
on sale of businesses) and other related asset impairment charges aggregating
$196,000.
We now focus exclusively on our two remaining operating divisions - the NQL
Solutions technology division, which focuses on Internet products and services
based on our Network Query Language, and the information technology professional
services division, which was acquired on September 1, 1998 and provides
management and consulting services, as well as network design, installation and
maintenance. Our NQL technology is also known by the name AlphaCONNECT.
As a result of the sales of Businesses in January 2000, the Company's future
revenues, costs and expenses are expected to be significantly
23
<PAGE> 24
lower than the Company has recognized historically. See Note 2 of Notes to
Consolidated Financial Statements for information concerning revenues, costs and
expenses of the Businesses sold.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following table presents the results for the year ended December 31, 1999
and the comparable unaudited pro forma results for the year ended December 31,
1998 for purposes of the discussion following. For comparative purposes, the
1998 results of operations for the year ended December 31, 1998 have been
derived from the previously reported results for the ten-month period ended
December 31, 1998 plus two-thirds of the operating results for the quarter ended
February 22, 1998, and are unaudited.
<TABLE>
<CAPTION>
(Unaudited)
-----------
Year Ended December 31, 1999 Year Ended December 31, 1998
---------------------------- ----------------------------
Relationship to Relationship
Operations Net Sales Operations to Net Sales
---------- --------------- ---------- ------------
<S> <C> <C> <C> <C>
Net sales:
IT Services $ 30,399 87.1% $ 22,381 81.3%
Product 4,491 12.9 5,132 18.7
-------- ----- -------- -----
Total net sales 34,890 100.0 27,513 100.0
-------- --------
Cost of sales:
IT Services 23,608 77.7 19,044 85.1
Product 3,424 76.2 4,529 88.3
-------- --------
Total cost of sales 27,032 77.5 23,573 85.7
-------- --------
Gross margin
Service 6,791 22.3 3,337 14.9
Product 1,067 23.8 603 11.7
-------- --------
Total gross margin 7,858 22.5 3,940 14.3
Selling, general and administrative 11,858 34.0 9,756 35.5
expense
Engineering, research and development 1,290 3.7 1,380 5.0
expense
Impairment of long-lived assets 196 0.6 2,438 8.9
Interest expense (income), net 114 0.3 (27) (0.1)
Other expense (income), net 6,558 18.8 390 1.4
-------- ----- -------- -----
Loss before taxes (12,158) (34.9) (9,997) (36.4)
Net loss $(12,204) (35.0)% $ (9,991) (36.4)%
======== ===== ======== =====
Net loss attributable to common $(14,093) (40.4)% $(10,427) (37.9)%
shareholders ======== ===== ======== =====
Basic and diluted net loss per share $ (1.21) $ (0.95)
======== ========
Number of shares used in the computation 11,610 11,009
of per share amounts ======== ========
</TABLE>
SIGNIFICANT 1998 CHARGES TO OPERATIONS
Significant to the comparative results of operations are charges totaling
$4,679,000 in the ten months ended December 31, 1998. These charges are
comprised of the following: (i) $2,230,000 to write-down impaired tangible and
intangible assets from non-core business acquired prior to 1998 to their
estimated fair values based on estimated cash flows, and write-down of accounts
receivable related to non-core operations, (ii) $910,000 to write-down impaired
fixed assets and inventory related to end-of-life proprietary product lines to
their estimated fair values, (iii) $813,000 related to software products
obsolesced by the introduction of new products, (iv) $379,000 resulting
24
<PAGE> 25
from the write-off of notes receivable from previously sold assets and
subsidiaries, (v) $256,000 of indirect financing costs related to the sale of
redeemable preferred stock and warrants and the expensing of previously
capitalized costs associated with abandoned acquisitions, and (vi) $91,000 in
write-offs of costs related to Year 2000 issues and adjustments of warranty and
other liabilities. The table below summarizes where these charges have been
recognized on the statement of operations for the ten months ended December 31,
1998 (in thousands):
<TABLE>
<CAPTION>
Cost of Operating Impairment
Sales Expenses Charge Other Total
------ --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C>
Impairment of tangible and intangible assets $ 147 $ 495 $1,588 $ -- $2,230
Write-down of fixed assets and inventory 60 -- 850 -- 910
Software obsolescence 730 83 -- -- 813
Loss on sale of assets and subsidiaries -- -- -- 379 379
Indirect financing costs -- 256 -- -- 256
Year 2000 issues and operating expenses 25 66 -- -- 91
------ ------ ------ ------ ------
Total $ 962 $ 900 $2,438 $ 379 $4,679
====== ====== ====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
We had a net loss attributable to common shareholders of $14,093,000, or $1.21
per share, in 1999 compared to a net loss attributable to common shareholders of
$10,427,000, or $0.95 per share, in 1998.
Net Sales
Our total net sales increased $7,377,000, or 26.8 percent, to $34,890,000 for
the year ended December 31, 1999 from $27,513,000 for the year ended December
31, 1998. The increase in total net sales is due to increases in information
technology service revenues (largely attributable to the acquisition of DCi),
offset by declines in product sales.
Information Technology Service Revenue
Our information technology service revenue increased $8,018,000, or 35.8
percent, to $30,399,000 during year over the respective prior year period. The
revenue increase includes $8,833,000 from the acquired DCi operations offset by
a decrease of $2,308,000 attributable to non-core businesses that were sold
during the current year. The balance of the revenue increase during the year of
$1,493,000 is attributable to organic growth.
Product Sales
Our total product revenues during the year declined $641,000, or 12.5 percent,
to approximately $4,491,000 from approximately $5,132,000. While both domestic
and European product sales declined, $208,000 of the decline was due to the loss
of sales to a large European customer, which in the past represented a
significant portion of our product revenues.
Gross Margin
Our total gross margin for the year ended December 31, 1999 increased to 22.5
percent compared to 14.3 percent during the year ended December 31, 1998.
Information Technology Services Gross Margin
Our information technology services gross margin increased to 22.3 percent for
the year ended December 31, 1999, compared to 14.9 percent during the year ended
December 31, 1998. The current year is 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 than
our historic service revenues. The current year was also positively affected by
the sale of the telephone installation business, which had a negative gross
margin. Offsetting these gross margin improvements were continuing increased
direct operating costs related to new
25
<PAGE> 26
information technology services contracts with major distributors, for which the
related services revenue remain below expected levels. Additionally, the shift
from proprietary to third-party information technology services negatively
impacted gross margins. As indicated above, the Businesses experiencing these
lower gross margins were sold in January 2000.
Product Gross Margin
Our product gross margin during the year ended December 31, 1999 increased to
23.8 percent compared to 11.7 percent for the year ended December 31, 1998. The
prior year includes a software obsolescence charge of $730,000.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased $2,102,000 to
$11,858,000 for the year ended December 31, 1999, compared to $9,756,000 for the
year ended December 31, 1998. The increase in costs for this year is primarily
due to additional general and administrative costs and goodwill amortization
associated with the DCi acquisition.
Research and Development Expenses
Our research and development expenses (which include, but are not limited to,
engineering support and services) incurred for the year ended December 31, 1999,
decreased by $90,000 to $1,290,000 compared to $1,380,000 during the year ended
December 31, 1998. Research and development expenses as a percentage of product
sales increased to 28.7 percent for the year ended December 31, 1999 compared to
26.9 percent during the year ended December 31, 1998. Research and development
expenses are expected to increase in the future as we develop and introduce our
new NQL Solutions products.
26
<PAGE> 27
TEN MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TEN MONTHS ENDED
DECEMBER 31, 1997
The following table presents the results for the ten months ended December 31,
1998 and the comparable unaudited pro forma results for the ten months ended
December 31, 1997 for purposes of the discussion following. For comparative
purposes, the 1997 results of operations for the ten-month period ended December
31, 1997 have been derived from the previously reported results for the
nine-month period ended November 23, 1997 plus one-third of the operating
results for the quarter ended February 22, 1998, and are unaudited.
<TABLE>
<CAPTION>
(Unaudited)
Ten Months Ended December 31, 1998 Ten Months Ended December 31, 1997
---------------------------------- ----------------------------------
Relationship to Relationship to
Operations Net Sales Operations Net Sales
------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Net sales:
IT Services $ 20,072 83.1% $ 10,914 68.4%
Product 4,068 16.9 5,040 31.6
-------- ----- -------- -----
Total net sales 24,140 100.0 15,954 100.0
-------- --------
Cost of sales:
IT Services 17,222 85.8 8,065 73.9
Product 3,772 92.7 3,322 65.9
-------- --------
Total cost of sales 20,994 87.0 11,387 71.4
-------- --------
Gross margin
Service 2,850 14.2 2,849 26.1
Product 296 7.3 1,718 34.1
-------- --------
Total gross margin 3,146 13.0 4,567 28.6
Selling, general and administrative 8,674 35.9 6,436 40.3
expense
Engineering, research and development 1,173 4.9 1,204 7.6
expense
Impairment of long-lived assets 2,438 10.1 -- --
Interest expense (income), net 18 0.1 (258) (1.6)
Other expense (income), net 370 1.5 33 0.2
-------- ----- -------- -----
Loss before taxes (9,527) (39.5) (2,848) (17.9)
Net loss $ (9,542) (39.5)% $ (2,848) (17.9)%
======== ===== ======== =====
Net loss attributable to common $ (9,978) (41.3)% $ (2,848) (17.9)%
shareholders ======== ===== ======== =====
Basic and diluted net loss per share $ (0.90) $ (0.26)
======== ========
Number of shares used in the computation 11,029 10,852
of per share amounts ======== ========
</TABLE>
RESULTS OF OPERATIONS
We had a net loss attributable to common shareholders of $9,978,000, or $0.90
per share, in the ten months ended December 31, 1998 compared to a net loss
attributable to common shareholders of $2,848,000, or $0.26 per share, in the
ten months ended December 31, 1997.
Net Sales
Our total net sales increased $8,186,000, or 51.3 percent, to $24,140,000 for
the ten months ended December 31, 1998, compared to $15,954,000 for the
ten-month period ended December 31, 1997. The increase in total net sales is due
to increases in information technology service revenues (largely attributable to
the acquisition of DCi), offset by declines in product sales.
27
<PAGE> 28
Information Technology Service Revenue
Our information technology service revenue increased $9,158,000, or 83.9
percent, to $20,072,000 during the ten-month period ended December 31, 1998 over
the respective prior year period. The revenue increase includes $5,380,000 from
the acquired DCi operations and $2,467,000 attributable to non-core businesses,
not included in the prior periods. The balance of the $1,311,000 revenue
increase during the ten-month period ended December 31, 1998 is attributable to
organic growth.
Product Sales
Our total product revenues during the ten-month period ended December 31, 1998
declined $972,000, or 19.3 percent, to approximately $4,068,000, compared to
approximately $5,040,000 during the respective prior year period. While both
domestic and European product sales declined, a majority of the decline was due
to the loss of sales to a large European customer, which in the past represented
a significant portion of our product revenues.
Gross Margin
Our total gross margin for the ten months ended December 31, 1998 decreased to
13.0 percent compared to 28.6 percent during the same period in the prior year.
Information Technology Services Gross Margin
Our information technology services gross margin declined to 14.2 percent for
the ten months ended December 31, 1998, compared to 26.1 percent during the same
period in the prior year. The principal factor contributing to this margin
decline was the inclusion of negative gross margins from non-core operations
acquired prior to 1998 resulting in approximately a 4.5 percent decrease.
Additionally, the gross margin was negatively impacted due to increased
depreciation related to other Information technology service business
acquisitions and increased operating costs related to new information technology
service contracts, for which no significant service revenue was recognized.
Product Gross Margin
Product gross margin during the ten-month period ended December 31, 1998
declined to 7.3 percent compared to 34.1 percent for the comparable prior year
period. The decline is primarily due to a software obsolescence charge of
$730,000. The product margin decline is also due to both a reduction in sales
volume and increases in inventory reserves for slow moving and obsolete
products.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased $2,238,000 to $8,674,000
for the ten-month period ended December 31, 1998, compared to $6,436,000 for the
ten-month period ended December 31, 1997. The increase in costs for this period
is primarily due to (i) additional general and administrative costs and goodwill
amortization associated with the DCi acquisition; and (ii) increased accounts
receivable reserves related to non-core businesses. These increases were
partially off-set by reduced spending related to our NQL Internet technology.
The last four months of 1998 also include expenditures made in support of the
Company's organic information technology service growth plan and the development
of the Company's new website.
Research and Development Expense
Research and development expenses (which include, but are not limited to,
engineering support and services) incurred for the ten-month period ended
December 31, 1998, decreased by $31,000 to $1,173,000 compared to $1,204,000
during the same period in the prior year. Research and development expenses as a
percentage of product sales increased to 28.8 percent for the ten months ended
December 31, 1998 compared to 23.9 percent during the ten months ended December
31, 1997.
28
<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1999, our working capital decreased
$2,605,000 from $2,928,000 at December 31, 1998 to $323,000. This decrease
reflects $4,516,000 of net cash generated from financing activities, offset by:
(i) $1,318,000 for the payment of preferred dividends; (ii) $366,000 of cash
used to acquire information technology service contracts; (iii) $290,000 of cash
used for software capitalized, including the further development of our NQL
technology; and (iv) $2,881,000 of cash to acquire equipment, including the
further implementation of our new integrated information system, and equipment
purchases to support new service capabilities. The remaining decrease is due
primarily to $4,619,000 of cash used by operations of which $1.2 million is
attributable to an increase in accounts receivable and $1.4 million is
attributable to a decrease in accounts payable and accrued liabilities.
In March 2000, we issued a Confidential Private Placement Memorandum in an
effort to sell approximately 2.3 million shares of our common stock at $6.25 per
share, pursuant to a private placement managed by Sutro & Co. This financing was
completed on March 30, 2000 with 2,342,000 shares of common stock sold at $6.25
per share, generating gross proceeds to us of $14,637,500 with net proceeds of
approximately $13,500,000 which will be released to us upon delivery of stock
certificates and various other closing documents. Hampshire Equity Partners II,
L.P. ("Hampshire"), our preferred stockholder, purchased 995,400 of the shares
of our common stock issued in the private placement.
As of December 31, 1999, we had a loan facility with a bank under which a $4
million accounts receivable line of revolving credit was designated for working
capital and $1 million was designated to finance acquisitions. The loan facility
is secured by substantially all of our assets. There were no outstanding
borrowings at December 31, 1999 or 1998 under the accounts receivable line of
revolving credit. On March 28, 2000, we terminated this revolving line of
credit. At December 31, 1999, the outstanding balance on the loan designated for
acquisitions was $687,505. This loan bears interest at the bank prime rate plus
2.5% (11% at December 31, 1999). On March 27, 2000, we obtained a waiver for
certain covenant violations under the existing credit facility and agreed to
repay the related amounts outstanding by May 15, 2000. We are currently in
negotiations with another bank to obtain a new revolving line of credit with
terms which we anticipate will be more favorable than those contained in the
recently terminated facility. There is no assurance that we will obtain this new
revolving line of credit or that the terms will, in fact, be more favorable than
those contained in the recently terminated facility.
Our NQL Solutions based products and services are all in early stages of
commercialization and, as a result, it is difficult to predict the level of
market acceptance that our NQL based products and services will attain. We
expect to continue to incur significant costs (i) developing and introducing
enhancements to our NQL Solutions based products and technologies, (ii)
improving and expanding our information technology professional services and
(iii) expanding our sales and marketing activities. We expect this strategy to
result in losses for our NQL Solutions technology division and the Company on a
consolidated basis at least through the next six to eight quarters.
We believe that our current cash balances combined with (i) the proceeds from
the private placement of common stock and (ii) cash expected to be generated by
our information technology professional services division will provide
sufficient resources to finance our working capital requirements through at
least March 31, 2001. After that date, we may need to obtain additional capital,
and we cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. If we cannot raise additional capital on acceptable
terms, we may not be able to develop or enhance our products and services, take
advantage of future opportunities or respond favorably to competitive pressures
or unanticipated events.
29
<PAGE> 30
IMPACT OF YEAR 2000
In prior years, we assessed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of systems.
As a result of those planning and implementation efforts, we experienced no
significant disruptions in mission critical information technology and
non-information technology systems and we believe those systems successfully
responded to the Year 2000 date change. We did not incur any material expenses
during 1999 in connection with remediating our systems. We are not aware of any
material problems resulting from Year 2000 issues, either with our products, our
internal systems, or the products and services of third parties. We will
continue to monitor our mission critical computer applications and those of our
suppliers and vendors throughout the Year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of the Company are listed and
included under Item 14 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE> 31
PART III
The information required to be set forth herein, Item 10, "Directors and
Executive Officers of the Registrant," Item 11, "Executive Compensation," Item
12, "Security Ownership of Certain Beneficial Owners and Management," and Item
13, "Certain Relationships and Related Transactions," except for a list of
Executive Officers which is set forth in Part I of this report, is included in
the Company's definitive Proxy Statement pursuant to Regulation 14A, which is
incorporated herein by reference, filed with the Securities and Exchange
Commission no later than 120 days after the close of the year ended December 31,
1999.
31
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are referenced in Part II Item 8
and submitted herewith:
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Report of Independent Auditors 40
Consolidated Balance Sheets at December 31, 1999 and 41
December 31, 1998
Consolidated Statements of Operations for the Year Ended December 31, 42
1999, the Ten Months Ended December 31, 1998 and the Year Ended
February 22, 1998
Consolidated Statements of Redeemable Preferred Stock and Other Shareholders' 43
Equity for the Year Ended December 31, 1999, the Ten Months Ended
December 31, 1998 and the Year Ended February 22, 1998
Consolidated Statements of Cash Flows for the Year Ended December 31, 1999, 44
the Ten Months Ended December 31, 1998 and the Year Ended February 22, 1998
Notes to Consolidated Financial Statements 45
</TABLE>
2. The following financial statement schedule for the year ended
December 31, 1999, the ten months ended December 31, 1998 and the year
ended February 22, 1998 is submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is presented in the financial statements or notes
thereto.
3. The list of exhibits contained in the Index to Exhibits is submitted
herewith.
(b) A Current Report on Form 8-K was filed by the Company on December 30,
1999 regarding the funding of an equity investment by Hampshire Equity
Partners II, L.P.
A Current Report on Form 8-K was filed by the Company on January 14,
2000 regarding the sale of certain assets associated with its managed
services and proprietary hardware business divisions to R.E. Mahmarian
Enterprises, LLC.
A Current Report on Form 8-K was filed by the Company on February 15,
2000 presenting the financial statements and pro forma financial
information applicable to the sale of assets to R.E.Mahmarian
Enterprises, LLC.
A Current Report on Form 8-K/A was filed by the Company on March 13,
2000 amending and restating in its entirety the
32
<PAGE> 33
Company's Current Report on Form 8-K which was filed on February 15,
2000.
(c) 1. The Index of Exhibits is as follows:
2. Exhibits:
2.1 Agreement to transfer shares by and between Registrant and Alpha
Microsystems Great Britain, Mr. Patrick Bolle, and Alpha Microsystems
Belgium dated February 28, 1995 (incorporated herein by reference to
Exhibit 2.10 to the Annual Report on Form 10-K of Registrant for the
year ended February 26, 1995 (the "1995 10-K")
2.2 Agreement of Purchase and Sale by and between Registrant and Sanderson
Electronics PLC, dated August 10, 1996 (incorporated herein by reference
to Exhibit 2 to the Form 8-K filed August 23, 1996)
2.3 Agreement of Purchase and Sale by and between Registrant and Pacific
Triangle Software, Inc., dated January 13, 1997 (incorporated herein by
reference to Exhibit 2.1 to the Form 8-K filed February 18, 1997)
2.5 Agreement of Purchase and Sale between AlphaHealthCare, Inc. and GLR
Systems, Inc., dated January 27, 1997 (incorporated herein by reference
to Exhibit 2.2 to the Form 8-K filed February 18, 1997)
2.6 Agreement of Purchase and Sale by and between the Registrant and Applied
Cellular Technology, Inc. dated December 23, 1997 (incorporated herein
by reference to Exhibit 2.6 to the Quarterly Report on Form 10-Q for the
quarter ended November 23, 1997)
2.7 Agreement of Purchase and Sale by and between the Registrant and M & J
Technologies, Inc. dated February 19, 1998 (incorporated herein by
reference to Exhibit 2.7 to the Annual Report on Form 10-K of Registrant
for the year ended February 22, 1998)
2.8 Modification to Contract for Purchase and Sale of M & J Technologies,
Inc. Hardware Service Business Assets to Registrant dated February 19,
1998 (incorporated herein by reference to Exhibit 2.8 to the Annual
Report on Form 10-K of Registrant for the year ended February 22, 1998)
2.9 First Amendment to Agreement of Purchase and Sale by and between the
Registrant and M & J Technologies, Inc., effective May 1, 1998
(incorporated herein by reference to Exhibit 2.9 to the Quarterly Report
on Form 10-Q for the quarter ended May 24, 1998)
2.10 Merger Agreement by and between the Registrant, Alpha Micro Merger
Corp., Delta CompuTec Inc. and Joseph Lobozzo II and Joanne Lobozzo
dated July 2, 1998 (incorporated by reference to Exhibit 2 to the Form
8-K filed September 16, 1998)
2.11 Agreement of Purchase and Sale by and between Registrant, Alpha
Technology Interconnect, Inc. and ADSI Telecom Services, Inc. dated
March 31, 1999 (incorporated herein by reference to Exhibit 2.11 to the
Quarterly Report on Form 10-Q of Registrant for the quarter ended March
31, 1999)
3.1 Articles of Incorporation of Registrant dated as of March 16, 1977
(incorporated herein by reference to Exhibit 3.1 to the Registration
Statement on Form-S-1 (Registration No. 2-72222) of Registrant)
33
<PAGE> 34
3.2 Certificate of Amendment of Articles of Incorporation of Registrant
dated as of September 29, 1988 (incorporated herein by reference to
Exhibit 3.2 to the Annual Report on Form 10-K of Registrant for the year
ended February 23, 1997)
3.3 Certificate of Amendment of the Articles of Incorporation of Registrant
dated June 25, 1992 (incorporated herein by reference to Exhibit 10.71
to the Quarterly Report on Form 10-Q of Registrant for the quarter ended
May 31, 1992)
3.4 Restated Bylaws of Registrant (incorporated herein by reference to
Exhibit 3.1 to the Form S-8 filed January 31, 1997)
3.5 Registration Rights Agreement by and between Registrant and Silicon
Valley Bank dated July 10, 1995 (incorporated herein by reference to
Exhibit 10.141 to the Quarterly Report on Form 10-Q of Registrant for
the quarter ended May 28, 1995)
3.6 Amendments to Restated Bylaws of Registrant dated August 3, 1998
(incorporated by reference to Exhibit 3.5 to the Quarterly Report on
Form 10-Q of Registrant for the quarter ended November 22, 1998)
3.7 Certificate of Amendment to Articles of Incorporation of Registrant
dated October 15, 1998 (incorporated by reference to Exhibit 3.6 to the
Quarterly Report on Form 10-Q of Registrant for the quarter ended
November 22, 1998)
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 (incorporated by
reference to Exhibit 3.8 to the Quarterly Report on Form 10-Q of
Registrant for the quarter ended September 30, 1999)
3.9 Certificate of Reduction of Class C Cumulative, Redeemable and
Exchangeable Preferred Stock dated November 18, 1999
4.1 Anti-dilution Agreement by and between Registrant and Silicon Valley
Bank dated July 10, 1995 (incorporated herein by reference to Exhibit
10.142 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended May 28, 1995)
4.2 Warrant to Purchase Stock issued to Silicon Valley Bank on November 22,
1996 (incorporated herein by reference to Exhibit 10.74 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended November 24,
1996)
4.3 Registration Rights Agreement by and between Registrant and Silicon
Valley Bank dated November 22, 1996 (incorporated herein by reference to
Exhibit 10.75 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended November 24, 1996)
4.4 Anti-dilution Agreement by and between Registrant and Silicon Valley
Bank dated November 22, 1996 (incorporated herein by reference to
Exhibit 10.76 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended November 24, 1996)
4.5 Warrant to Purchase Common Stock issued to Imperial Bank dated June 9,
1998 (incorporated herein by reference to Exhibit 4.7 to the Quarterly
Report on Form 10-Q for the quarter ended May 24, 1998)
4.6 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 (incorporated herein by reference to
34
<PAGE> 35
Exhibit 4 to the Form 8-K filed August 10, 1998)
4.7 Warrant to Purchase Common Stock issued to Princeton Securities dated
October 20, 1998 (incorporated herein by reference to Exhibit 4.7 to the
Quarterly Report on Form 10-Q for the quarter ended November 22, 1998)
4.8 Form of Warrant Certificate to Purchase Common Stock issued to ING
Equity Partners II, L.P. dated September 1, 1998 (incorporated herein by
reference to Exhibit 10.2 to the Form 8-K filed August 10, 1998)
4.9 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 (incorporated
herein by reference to Exhibit 4.9 to the Transition Report on Form 10-K
of Registrant for the transition period ended December 31, 1998)
4.10 Preferred Shareholder Agreement by and between Registrant and sole
holder of shares of issued and outstanding Class A Cumulative,
Redeemable and Exchangeable Preferred Stock and Class B Cumulative,
Redeemable and Exchangeable Preferred Stock dated January 22, 1999
(incorporated herein by reference to Exhibit 4.9 to the Transition
Report on Form 10-K of Registrant for the transition period ended
December 31, 1998)
4.11 Certificate of Determination of Rights and Preferences of Class E
Cumulative, Redeemable and Exchangeable Preferred Stock (incorporated
herein by reference as Exhibit A-2 to Exhibit 10.52 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended September 30,
1999)
*10.1 Alpha Microsystems Profit Sharing Trust Agreement between Alpha
Microsystems and Bank of America NT & S.A. as Trustee dated May 24, 1985
(incorporated herein by reference to Exhibit 10.32 to the Annual Report
on Form 10-K of Registrant for the year ended February 23, 1986)
*10.2 Alpha Microsystems Profit Sharing Plan (as amended and restated) dated
May 15, 1986 (incorporated herein by reference to Exhibit 10.33 to the
Annual Report on Form 10-K of Registrant for the year ended February 23,
1986)
*10.3 Acceptance of Trust by Trustee dated September 30, 1986 pursuant to
Registrant's Profit Sharing Plan (incorporated herein by reference to
Exhibit 10.29 to the Annual Report on Form 10-K of Registrant for the
year ended February 22, 1987)
*10.4 First Amendment dated March 1, 1987 to the Registrant's Profit Sharing
Plan (incorporated herein by reference to Exhibit 10.30 to the Annual
Report on Form 10-K of Registrant for the year ended February 22, 1987)
*10.5 Indemnification Agreement dated October 23, 1987 by and between Alpha
Microsystems and John F. Glade (incorporated herein by reference to
Exhibit 10.34 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended November 22, 1987)
*10.6 Indemnification Agreement dated October 23, 1987 by and between Alpha
Microsystems and Rockell N. Hankin (incorporated herein by reference to
Exhibit 10.36 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended November 22, 1987)
*10.7 Second Amendment to Alpha Microsystems Profit Sharing Plan dated January
22, 1988 (incorporated herein by
35
<PAGE> 36
reference to Exhibit 10.31 to the Annual Report on Form 10-K of
Registrant for the year ended February 28, 1988)
*10.8 Alpha Microsystems Profit Sharing Plan Amendments Under IRS Notice
88-131 dated May 24, 1989 (incorporated herein by reference to Exhibit
10.38 to the Quarterly Report on Form 10-Q of Registrant for the quarter
ended May 28, 1989)
*10.9 Alpha Microsystems Profit Sharing Plan Amendment dated December 15, 1989
(incorporated herein by reference to Exhibit 10.45 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended November 26,
1989)
*10.10 Indemnification Agreement by and between the Registrant and Douglas J.
Tullio dated January 8, 1990 (incorporated herein by reference to
Exhibit 10.50 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended November 26, 1989)
*10.11 Indemnification Agreement by and between Registrant and Clarke E.
Reynolds dated June 16, 1989 (incorporated herein by reference to
Exhibit 10.67 to the Annual Report on Form 10-K of Registrant for the
year ended February 23, 1992)
*10.12 Alpha Microsystems 1993 Employee Stock Option Plan (incorporated herein
by reference to Exhibit 10.109 to the Quarterly Report on Form 10-Q for
the quarter ended May 29, 1994)
10.13 Industrial Lease between Fairview Investors Ltd. and Registrant dated
October 28, 1994 (incorporated herein by reference to Exhibit 10.113 to
the Quarterly Report on Form 10-Q for the quarter ended November 27,
1994)
*10.14 First Amendment to Employment Agreement by and between Registrant and
John F. Glade dated May 3, 1991 (incorporated herein by reference to
Exhibit 19.8 to the Annual Report on Form 10-K of Registrant for the
year ended February 23, 1992)
*10.15 Second Amendment and Restatement of the Alpha Microsystems Profit
Sharing Plan dated July 1, 1992 (incorporated herein by reference to
Exhibit 10.72 to the Quarterly Report on Form 10-Q for the quarter ended
May 31, 1992)
10.16 Memorandum to Lease by and between Registrant and Fairview Investors,
Ltd. dated January 24, 1995 (incorporated herein by reference to Exhibit
10.136 to the Annual Report on Form 10-K of Registrant for the year
ended February 26, 1995)
10.17 First Amendment to Alpha Microsystems 1993 Employee Stock Option Plan
(incorporated herein by reference to Exhibit 4.6 to the Form S-8 filed
January 31, 1997)
10.18 Second Amendment to Alpha Microsystems 1993 Employee Stock Option Plan
(incorporated herein by reference to Exhibit 4.7 to the Form S-8 filed
January 31, 1997)
10.19 Alpha Microsystems Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 4.10 to the Form S-8 filed January 31, 1997)
*10.20 Indemnification Agreement by and between Registrant and Dennis E.
Michael dated January 17, 1997 (incorporated herein by reference to
Exhibit 10.57 to the Annual Report on Form 10-K of the Registrant for
the year ended February 23, 1997)
36
<PAGE> 37
*10.21 Indemnification Agreement by and between Registrant and Randall S. Parks
dated January 17, 1997 (incorporated herein by reference to Exhibit
10.58 to the Annual Report on Form 10-K of the Registrant for the year
ended February 23, 1997)
*10.22 Employment Letter by and between Registrant and Jeffrey J. Dunnigan
dated November 15, 1997 (incorporated herein by reference to Exhibit
10.6 to the Quarterly Report on Form 10-Q for the quarter ended November
23, 1997)
*10.23 Indemnification Agreement by and between Registrant and Jeffrey J.
Dunnigan dated December 1, 1997 (incorporated herein by reference to
Exhibit 10.63 to the Annual Report on Form 10-K of the Registrant for
the year ended February 22, 1998)
10.24 Security and Loan Agreement by and between Registrant and Imperial Bank
dated June 9, 1998 (incorporated herein by reference to Exhibit 10.64 to
the Quarterly Report on Form 10-Q for the quarter ended May 24, 1998)
10.25 Addendum to Security and Loan Agreement by and between Registrant and
Imperial Bank dated June 9, 1998 (incorporated herein by reference to
Exhibit 10.65 to the Quarterly Report on Form 10-Q for the quarter ended
May 24, 1998)
10.26 General Security Agreement by and between Registrant and Imperial Bank
dated June 9, 1998 (incorporated herein by reference to Exhibit 10.66 to
the Quarterly Report on Form 10-Q for the quarter ended May 24, 1998)
10.27 Credit Terms and Conditions ("Credit Agreement") by and between
Registrant and Imperial Bank dated June 9, 1998 (incorporated herein by
reference to Exhibit 10.67 to the Quarterly Report on Form 10-Q for the
quarter ended May 24, 1998)
10.28 Securities Purchase Agreement by and between Registrant and ING Equity
Partners II, L.P. dated August 7, 1998 (incorporated herein by reference
to Exhibit 10.1 to the Form 8-K filed August 10, 1998)
10.29 Promissory Note by and between Registrant and Imperial Bank dated
September 11, 1998 (incorporated herein by reference to Exhibit 10.68 to
the Quarterly Report on Form 10-Q for the quarter ended August 23, 1998)
*10.30 Employment Agreement by and between Registrant and John T. DeVito dated
September 1, 1998 (incorporated herein by reference to Exhibit 10.1 to
the Form 8-K/A filed October 5, 1998)
*10.31 Amended and Restated Employment Agreement by and between Registrant and
Douglas J. Tullio dated September 1, 1998 (incorporated herein by
reference to Exhibit 10.2 to the Form 8-K/A filed October 5, 1998)
*10.32 Alpha Microsystems 1998 Stock Option and Award Plan (incorporated herein
by reference to Exhibit 10.69 to the Quarterly Report on Form 10-Q for
the quarter ended November 22, 1998)
*10.33 Form of Incentive Stock Option Agreement for use in connection with 1998
Stock Option and Award Plan (incorporated herein by reference to Exhibit
10.70 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.34 Form of Non-employee Director Non-Qualified Stock Option Agreement to be
used in connection with 1998 Stock
37
<PAGE> 38
Option and Award Plan (incorporated herein by reference to Exhibit 10.71
to the Quarterly Report on Form 10-Q for the quarter ended November 22,
1998)
*10.35 Form of Non-employee Director Non-Qualified Stock Option Agreement in
Lieu of Cash Compensation for Prior Services for use in connection with
1998 Stock Option and Award Plan (incorporated herein by reference to
Exhibit 10.72 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.36 Form of Non-Qualified Stock Option Agreement for use in connection with
1998 Stock Option and Award Plan (incorporated herein by reference to
Exhibit 10.73 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.37 Form of Non-Qualified Stock Option Agreement issued in connection with
the acquisition of Delta CompuTec, Inc. (incorporated herein by
reference to Exhibit 10.74 to the Quarterly Report on Form 10-Q for the
quarter ended November 22, 1998)
*10.38 Indemnification Agreement by and between Registrant and Carlos D. De
Mattos dated December 17, 1998 (incorporated herein by reference to
Exhibit 10.75 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.39 Indemnification Agreement by and between Registrant and John T. DeVito
dated December 17, 1998 (incorporated herein by reference to Exhibit
10.76 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.40 Indemnification Agreement by and between Registrant and Benjamin P.
Giess dated December 17, 1998 (incorporated herein by reference to
Exhibit 10.77 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.41 Indemnification Agreement by and between Registrant and Sam Yau dated
December 17, 1998 (incorporated herein by reference to Exhibit 10.78 to
the Quarterly Report on Form 10-Q for the quarter ended November 22,
1998)
*10.42 Management Deferred Compensation Plan dated November 1, 1998
(incorporated herein by reference to Exhibit 4.9 to the Transition
Report on Form 10-K of Registrant for the transition period ended
December 31, 1998)
10.43 First Amendment to Security and Loan Agreement and Addendum Thereto by
and between Registrant and Imperial Bank dated November 22, 1998
(incorporated herein by reference to Exhibit 4.9 to the Transition
Report on Form 10-K of Registrant for the transition period ended
December 31, 1998)
10.44 First Amendment to Credit Terms and Conditions by and between Registrant
and Imperial Bank dated November 22, 1998 (incorporated herein by
reference to Exhibit 4.9 to the Transition Report on Form 10-K of
Registrant for the transition period ended December 31, 1998)
*10.45 Consulting Agreement by and between Registrant and Randy Parks dated
March 15, 1999 (incorporated herein by reference to Exhibit 4.9 to the
Transition Report on Form 10-K of Registrant for the transition period
ended December 31, 1998)
10.46 Stock Incentive Award Plan of Registrant (incorporated herein by
reference to Exhibit 10.21 to the Annual Report on Form 10-K of
Registrant for the year ended February 26, 1984)
38
<PAGE> 39
10.47 Form of Stock Incentive Award and Escrow Agreement for use in connection
with the Stock Incentive Award Plan (incorporated herein by reference to
Exhibit 4.9 to the Post-Effective Amendment No. 1 to the Registration
Statement on Form 8 of the Registrant (Registration Statement No.
2-9252) filed on August 23, 1984)
10.48 First Amendment to Stock Incentive Award Plan of Registrant dated August
15, 1990 (incorporated herein by reference to Exhibit 19.16 to the
Quarterly Report on Form 10-Q of Registrant for the quarter ended August
26, 1990)
10.49 Amendment No. 1 to Securities Purchase Agreement by and between
Registrant and ING Equity Partners II, L.P. dated February 1999
(incorporated herein by reference to Exhibit 10.49 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended June 30, 1999)
10.50 Amendment No. 2 to Securities Purchase Agreement by and between
Registrant and Hampshire Equity Partners II, L.P. dated June 28, 1999
(incorporated herein by reference to Exhibit 10.50 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended June 30, 1999)
10.51 Third Amendment to Security and Loan Agreement by and between Registrant
and Imperial Bank dated July 2, 1999 (incorporated herein by reference
to Exhibit 10.51 to the Quarterly Report on Form 10-Q of Registrant for
the quarter ended June 30, 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 (incorporated herein by reference to Exhibit 10.52 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended September 30,
1999)
*10.53 Employment Agreement by and between Registrant and Robert O. Riiska
dated November 26, 1999
*10.54 Indemnification Agreement by and between Registrant and Robert O. Riiska
dated November 26, 1999
10.55 Asset Purchase Agreement by and between Registrant and R.E. Mahmarian
Enterprises, LLC dated as of December 31, 1999 (incorporated herein by
reference to Exhibit 10.1 to Form 8-K Current Report dated January 14,
2000)
10.56 Amendment No. 1 to Asset Purchase Agreement by and between Registrant
and R.E. Mahmarian Enterprises, LLC dated January 31, 2000 (incorporated
herein by reference to Exhibit 10.2 of Form 8-K Current Report dated
January 31, 2000)
10.57 Amendment No. 2 to Asset Purchase Agreement by and between Registrant
and R.E. Mahmarian Enterprises, LLC dated March 15, 2000
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney (included on signature pages of this Annual Report on
Form 10-K)
27 Financial Data Schedule
(* Denotes Management Contract or Compensation Plan)
10.47 Form of Stock Incentive Award and Escrow Agreement for use in connection
with the Stock Incentive Award Plan (incorporated herein by reference to
Exhibit 4.9 to the Post-Effective Amendment No. 1 to the Registration
Statement on Form 8 of the Registrant (Registration Statement No.
2-9252) filed on August 23, 1984)
10.48 First Amendment to Stock Incentive Award Plan of Registrant dated August
15, 1990 (incorporated herein by reference to Exhibit 19.16 to the
Quarterly Report on Form 10-Q of Registrant for the quarter ended August
26, 1990)
10.49 Amendment No. 1 to Securities Purchase Agreement by and between
Registrant and ING Equity Partners II, L.P. dated February 1999
(incorporated herein by reference to Exhibit 10.49 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended June 30, 1999)
10.50 Amendment No. 2 to Securities Purchase Agreement by and between
Registrant and Hampshire Equity Partners II, L.P. dated June 28, 1999
(incorporated herein by reference to Exhibit 10.50 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended June 30, 1999)
10.51 Third Amendment to Security and Loan Agreement by and between Registrant
and Imperial Bank dated July 2, 1999 (incorporated herein by reference
to Exhibit 10.51 to the Quarterly Report on Form 10-Q of Registrant for
the quarter ended June 30, 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 (incorporated herein by reference to Exhibit 10.52 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended September 30,
1999)
*10.53 Employment Agreement by and between Registrant and Robert O. Riiska
dated November 26, 1999
*10.54 Indemnification Agreement by and between Registrant and Robert O. Riiska
dated November 26, 1999
10.55 Asset Purchase Agreement by and between Registrant and R.E. Mahmarian
Enterprises, LLC dated as of December 31, 1999 (incorporated herein by
reference to Exhibit 10.1 to Form 8-K Current Report dated January 14,
2000)
10.56 Amendment No. 1 to Asset Purchase Agreement by and between Registrant
and R.E. Mahmarian Enterprises, LLC dated January 31, 2000 (incorporated
herein by reference to Exhibit 10.2 of Form 8-K Current Report dated
January 31, 2000)
10.57 Amendment No. 2 to Asset Purchase Agreement by and between Registrant
and R.E. Mahmarian Enterprises, LLC dated March 15, 2000
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney (included on signature pages of this Annual Report on
Form 10-K)
27 Financial Data Schedule
(* Denotes Management Contract or Compensation Plan)
39
<PAGE> 40
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Alpha Microsystems
We have audited the accompanying consolidated balance sheets of Alpha
Microsystems as of December 31, 1999 and 1998, and the related statements of
operations, redeemable preferred stock and other shareholders' equity, and cash
flows for the year ended December 31, 1999, for the ten months ended December
31, 1998 and for the year ended February 22, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Alpha
Microsystems at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the year ended December 31, 1999, for the ten
months ended December 31, 1998 and for the year ended February 22, 1998, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
March 10, 2000,
except for Notes 2, 5 and 13, as to which the date is
March 30, 2000
40
<PAGE> 41
ALPHA MICROSYSTEMS
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,160 $ 4,930
Restricted cash - 384
Accounts receivable, net of allowance for doubtful accounts
of $40 and $700 at December 31, 1999 and 1998, respectively 3,391 6,473
Prepaid expenses and other current assets 221 1,229
Net assets held for sale to R.E. Mahmarian Enterprises (Note 2) 500 -
-------- --------
Total current assets 5,272 13,016
Property and equipment, net 2,025 3,776
Intangibles, net 8,543 9,162
Other assets 469 477
-------- --------
Total assets $ 16,309 $ 26,431
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Bank borrowings 688 250
Accounts payable $ 1,615 $ 3,686
Accrued compensation 444 1,530
Other accrued liabilities 1,189 1,480
Deferred revenue 1,013 3,142
-------- --------
Total current liabilities 4,949 10,088
Long-term debt - 741
Other long-term liabilities 274 105
Deferred gain on sale of Businesses to R.E. Mahmarian Enterprises (Note 2) 2,726 -
Commitments and contingencies
Redeemable preferred stock, no par value; 2,501 and 15,001 issued and
outstanding at December 31, 1999 and 1998, respectively; liquidation
value $2,500 at December 31, 1999 2,190 12,824
Other shareholders' equity:
Exchangeable redeemable preferred stock, no par value; 5,000,000 shares
authorized; 17,891 issued and outstanding at December 31, 1999;
liquidation value $17,891 at December 31, 1999 15,395 -
Common stock, no par value; 40,000,000 shares authorized;
11,678,025 and 11,193,952 shares issued and outstanding at
December 31, 1999 and 1998, respectively 32,914 31,632
Warrants 2,655 1,764
Accumulated deficit (44,832) (30,739)
Accumulated other comprehensive income 38 16
-------- --------
Total other shareholders' equity 6,170 2,673
-------- --------
Total liabilities and shareholders' equity $ 16,309 $ 26,431
======== ========
</TABLE>
See accompanying notes.
41
<PAGE> 42
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Year Ended
December 31, December 31, February 22,
1999 1998 1998
------------ ---------------- ------------
<S> <C> <C> <C>
Net sales:
IT Services $ 30,399 $ 20,072 $ 13,223
Product 4,491 4,068 6,104
-------- -------- --------
Total net sales 34,890 24,140 19,327
-------- -------- --------
Cost of sales:
IT Services 23,608 17,222 9,887
Product 3,424 3,772 4,079
-------- -------- --------
Total cost of sales 27,032 20,994 13,966
-------- -------- --------
Gross margin 7,858 3,146 5,361
Operating expenses:
Selling, general and administrative 11,858 8,674 7,518
Engineering, research and development 1,290 1,173 1,411
Impairment of long-lived assets 196 2,438 --
-------- -------- --------
Total operating expenses 13,344 12,285 8,929
-------- -------- --------
Loss from operations (5,486) (9,139) (3,568)
Other expense (income):
Interest income (72) (88) (310)
Interest expense 186 106 7
Loss on dispositions of businesses 6,506 379 --
Other expense (income), net 52 (9) 53
-------- -------- --------
Total other expense (income) 6,672 388 (250)
-------- -------- --------
Loss before taxes (12,158) (9,527) (3,318)
Income tax expense (benefit) 46 15 (21)
-------- -------- --------
Net loss (12,204) (9,542) (3,297)
Accretion on redeemable preferred stock (333) (72) --
Dividends on redeemable preferred stock (1,556) (364) --
-------- -------- --------
Net loss attributable to common shareholders $(14,093) $ (9,978) $ (3,297)
======== ======== ========
Basic and diluted net loss per share $ (1.21) $ (0.90) $ (0.30)
======== ======== ========
Number of shares used in computing
basic and diluted per share amounts 11,610 11,029 10,864
======== ======== ========
</TABLE>
See accompanying notes.
42
<PAGE> 43
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND OTHER SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999, TEN MONTHS ENDED DECEMBER 31, 1998
AND YEAR ENDED FEBRUARY 22, 1998
(In thousands)
<TABLE>
<CAPTION>
Exchangeable
Redeemable Redeemable
Preferred Stock Preferred Stock Common Stock
--------------------- ------------------- -------------------
Shares Amount Shares Amount Shares Amount Warrants
------ ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 23, 1997 -- $ -- -- $ -- 10,822 $ 30,919 $ --
Net loss -- -- -- -- -- -- --
Translation adjustment -- -- -- -- -- -- --
Total comprehensive loss
Issuance of stock, net of -- -- -- -- 12 20 --
expenses
Costs for redeemable -- -- -- -- -- (21) --
warrants
Exercise of stock options -- -- -- -- 40 37 --
Non-employee Directors -- -- -- -- 40 56 --
Comp Plan
Amortization -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ --------
Balance at February 22, 1998 -- -- -- -- 10,914 31,011 --
Net loss -- -- -- -- -- -- --
Translation adjustment -- -- -- -- -- -- --
Total comprehensive loss
Issuance of stock, net of
expenses 15 12,752 -- -- 274 612 --
Accretion on preferred
stock -- 72 -- -- -- -- --
Dividends on preferred
stock -- -- -- -- -- -- --
Issuance of redeemable
warrants, net -- -- -- -- -- -- 1,764
Exercise of stock options -- -- -- -- 6 9 --
------- ------- ------ ------- ------ ------- ---------
Balance at December 31, 1998 15 12,824 -- -- 11,194 31,632 1,764
Net loss -- -- -- -- -- -- --
Translation adjustment -- -- -- -- -- -- --
Total comprehensive loss
Issuance of stock, net of -- -- 5 4,037 357 1,014 --
expenses
Exchange of preferred (13) (10,719) 13 10,719 -- -- --
stock
Accretion on preferred -- 85 -- 248 -- -- --
stock
Dividends on preferred -- -- -- 391 -- -- --
stock
Issuance of redeemable -- -- -- -- -- -- 891
warrants, net
Exercise of stock options -- -- -- -- 127 268 --
------- -------- ------ -------- ------ -------- ---------
Balance at December 31, 1999 2 $ 2,190 18 $ 15,395 11,678 $ 32,914 $ 2,655
======= ======== ====== ======== ====== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Unamortized Accumulated
Restricted Other
Accumulated Stock Plan Comprehensive
Deficit Expense Income Total
----------- ----------- ------------- ------
<S> <C> <C> <C> <C>
Balance at February 23, 1997 $(17,464) $ (13) $ 71 $ 13,513
Net loss (3,297) -- -- (3,297)
Translation adjustment -- -- (14) (14)
Total comprehensive loss (3,311)
Issuance of stock, net of -- -- -- 20
expenses
Costs for redeemable -- -- -- (21)
warrants
Exercise of stock options -- -- -- 37
Non-employee Directors -- -- -- 56
Comp Plan
Amortization -- 13 -- 13
-------- -------- -------- --------
Balance at February 22, 1998 (20,761) -- 57 10,307
Net loss (9,542) -- -- (9,542)
Translation adjustment -- -- (41) (41)
Total comprehensive loss (9,583)
Issuance of stock, net of -- -- -- 612
expenses
Accretion on preferred (72) -- -- (72)
stock
Dividends on preferred (364) -- -- (364)
stock
Issuance of redeemable -- -- -- 1,764
warrants, net
Exercise of stock options -- -- -- 9
-------- -------- -------- --------
Balance at December 31, 1998 (30,739) -- 16 2,673
Net loss (12,204) -- -- (12,204)
Translation adjustment -- -- 22 22
Total comprehensive loss (12,182)
Issuance of stock, net of -- -- -- 5,051
expenses
Exchange of preferred -- -- -- 10,719
stock
Accretion on preferred (333) -- -- (85)
stock
Dividends on preferred (1,556) -- -- (1,165)
stock
Issuance of redeemable -- -- -- 891
warrants, net
Exercise of stock options -- -- -- 268
-------- -------- -------- --------
Balance at December 31, 1999 $(44,832) $ -- $ 38 $ 6,170
======== ======== ======== ========
</TABLE>
See accompanying notes.
43
<PAGE> 44
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Year Ended
December 31, December 31, February 22,
1999 1998 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(12,204) $ (9,542) $ (3,297)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on sales of businesses, net 6,506 378 --
Impairment of long-lived assets 196 2,438 --
IT service parts obsolescence 142 -- --
Software obsolescence -- 813 --
Depreciation and amortization 1,663 1,970 1,702
Provision for losses on accounts receivable 312 548 194
Other (58) 78 132
Other changes in operating assets and liabilities,
net of effects of acquisitions and dispositions:
Restricted cash 296 (384) --
Accounts receivable (1,222) (1,092) (987)
Prepaid expenses and other current assets 92 (143) (2)
Accounts payable and accrued liabilities (1,423) 792 523
Deferred revenue 909 (188) 146
Other, net 172 (23) (48)
-------- -------- --------
Net cash used in operating activities (4,619) (4,355) (1,637)
-------- -------- --------
Cash flows from investing activities:
Purchases of equipment (2,881) (1,847) (1,346)
Capitalization of software development costs (290) (269) (456)
Acquisition of DCi, net of cash acquired -- (3,285) --
Acquisition of other IT service assets (366) (478) (1,183)
Purchase of short-term investments -- -- (7,405)
Proceeds from sale of short-term investments -- -- 14,216
Other, net (134) -- 14
-------- -------- --------
Net cash (used in) provided by investing activities (3,671) (5,879) 3,840
-------- -------- --------
Cash flows from financing activities:
Issuance of preferred stock, net 4,037 12,812 --
Issuance of common stock, net 1,282 271 92
Issuance of warrants to purchase common stock, net 891 1,704 --
Line of credit, net -- (1,000) 1,000
Issuance of debt -- 1,050 --
Principal repayments on debt (308) (102) (53)
Repayments on debt assumed in acquisition of DCi -- (4,612) --
Payment of preferred stock dividends (1,318) (58) --
Other, net (68) 105 --
-------- -------- --------
Net cash provided by financing activities 4,516 10,170 1,039
Effect of exchange rate changes on cash and cash equivalents 4 (9) (7)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (3,770) (73) 3,235
Cash and cash equivalents at beginning of period 4,930 5,003 1,768
-------- -------- --------
Cash and cash equivalents at end of period $ 1,160 $ 4,930 $ 5,003
======== ======== ========
Supplemental information:
Cash paid for:
Interest $ 189 $ 98 $ 7
Income tax payments (refunds), net $ 22 $ 15 $ (20)
</TABLE>
See accompanying notes.
44
<PAGE> 45
ALPHA MICROSYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE BUSINESS
The Company is a provider of leading edge business-to-business Internet
technology through (i) the NQL Solutions technology division that develops and
markets Internet software products and services which are designed to access,
excavate, gather, organize and convert into a usable format the massive amounts
of data that are located on the World Wide Web into a usable format; and (ii)
the DCi information technology professional services division that provides
network installation, support and consulting services. On January 31, 2000, the
Company completed the sale of its historic principal business lines which were:
(i) the sale of computer and networking hardware and software products, and (ii)
the service of the Company's products, the service of third-party hardware and
software products, and installation, training, and consulting services with
respect to these products.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Alpha
Microsystems and its wholly-owned subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior periods consolidated
financial statements to conform with the current year presentation. The 1999
financial statements also include adjustments to reflect the sale of
substantially all of the assets associated with the Company's Alpha Micro
Services Division ("AMSO") and the Company's Alpha Micro Operating System
("AMOS") computer hardware manufacturing division (collectively the
"Businesses") to R.E. Mahmarian Enterprises, LLC ("R.E. Mahmarian Enterprises")
effective as of December 31,1999 (Note 2).
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 at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. The industry in which the
Company operates is characterized by rapid technological change and short
product life cycles. As a result, estimates are required to provide for doubtful
accounts receivable, product obsolescence, impairment in asset carrying values
and certain other accrued liabilities and to determine the fair value of stock
options and warrants issued by the Company. Historically, actual amounts
recorded have not varied significantly from estimated amounts.
FISCAL YEAR
On December 17, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year to a calendar year-end. Accordingly, the Company's 1999
annual fiscal period is the calendar year ended December 31, 1999 and the
Company had a ten-month transition period ended December 31, 1998 to adopt the
new year end. Fiscal year 1998 ended on February 22, 1998.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
For purposes of the statement of cash flows, the non-cash transaction recorded
during 1999 was the issuance of 391 shares of
45
<PAGE> 46
exchangeable redeemable preferred stock in lieu of cash payment of $391,000 of
accrued dividends on preferred stock. During the ten months ended December 31,
1998, the Company recorded the following non-cash transactions: $350,000 of debt
converted to 108,317 shares of common stock related to the exercise of a warrant
issued in connection with the acquisition of Delta CompuTec, Inc. ("DCi") (Note
2), and issuance of 200,000 warrants to a financial advisor in exchange for
$60,000 of services. There were no non-cash transactions recorded during the
year ended February 22, 1998.
RESTRICTED CASH
As part of the acquisition of DCi, the Company deposited funds into an escrow
account from which the Company is entitled to reimbursement for amounts
specifically relating to indemnification under the terms of the Agreement and
Plan of Merger ("Merger Agreement"). In November 1999, the Company received
$296,000 from the escrow account. The remaining balance was remitted to the
seller and reflected as an increase in goodwill in the accompanying consolidated
financial statements.
CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company extends credit to a wide variety
of customers including individuals, value-added resellers, distributors and
large corporations and partnerships. The Company performs ongoing credit
evaluations of its customers and maintains allowances for potential credit
losses that have been within management's expectations. As of December 31, 1999,
the Company had no significant concentrations of credit risk.
PROPERTY AND EQUIPMENT
The straight-line method of depreciation is used for the following classes of
assets for financial statement purposes and is based on the following estimated
useful lives:
<TABLE>
<CAPTION>
Years
--------
<S> <C>
Machinery and equipment 3 to 10
Information technology service parts 3
Leasehold improvements 1 to 6
</TABLE>
The Company capitalizes certain costs incurred in connection with developing or
obtaining internal use software. The amount capitalized includes amounts related
to external direct costs of material and services, payroll and payroll-related
costs. During the year ended December 31, 1999, the ten-month period ended
December 31, 1998 and the fiscal year ended February 22, 1998, the Company
capitalized in machinery and equipment $1,092,000, $696,000 and $671,000,
respectively, associated with obtaining and implementing computer software for
internal use.
INTANGIBLE ASSETS
Intangible assets include goodwill, acquired information technology service
contracts and capitalized software development costs. The book value of goodwill
and information technology service contracts is associated with the acquisition
of companies or assets. Capitalized software development costs are the
accumulation of software development costs or the assigned value of software
associated with an acquisition. The straight-line amortization periods for the
major classes of intangible assets are as follows:
<TABLE>
<CAPTION>
Years
--------
<S> <C>
Goodwill 20
Information technology service contracts 5 to 10
Capitalized software development costs 3 to 5
</TABLE>
46
<PAGE> 47
The Company capitalizes certain engineering costs related to software
development after technological feasibility has been established and amortizes
these costs as the respective products are sold. However, in no event is the
amortization less than that which would be achieved by amortizing such costs on
a straight-line basis over the product's estimated life beginning on the date of
general product release.
RECOVERABILITY OF LONG LIVED ASSETS
The Company routinely evaluates the carrying value of long lived assets to
determine if impairment exists based upon estimated undiscounted future cash
flows of the respective operating divisions. The impairment, if any, is measured
by the difference between carrying value and estimated discounted future cash
flows and is charged to expense in the period identified. It is at least
reasonably possible that the Company's estimate of future undiscounted cash
flows may change in future periods. In addition, if the Company's estimate of
future undiscounted cash flows should change or if the operating plan is not
achieved, future analyses may indicate insufficient future undiscounted net cash
flows to recover the carrying value of certain of the Company's long lived
assets, in which case, such assets would be written down to estimated fair
value.
DEFERRED REVENUE
Deferred revenue represents amounts billed and collected in advance for
information technology service contracts and is recognized ratably over the
contract period or as the services are performed.
DEFERRED GAIN ON SALE OF BUSINESSES TO R.E. MAHMARIAN ENTERPRISES
In connection with the sale of the Businesses to R.E. Mahmarian Enterprises
(Note 2), R.E. Mahmarian Enterprises assumed certain of the Company's
contractual service obligations associated with the Businesses sold. Because the
Company remains contingently obligated to honor the contractual service
obligation in the event R.E. Mahmarian Enterprises fails to perform, the Company
has retained its deferred revenue balance and reclassified it to deferred gain
on sale of the Businesses to R.E. Mahmarian Enterprises, which will be
recognized on a monthly basis over future periods as the contingent contractual
obligations lapse.
REVENUE RECOGNITION
The Company recognizes revenue on its information technology service sales and
post contract customer support on a straight-line basis over the contract period
and recognizes revenue on its product sales on shipment. When significant
obligations remain after a product has been delivered, revenue is not recognized
until obligations have been completed or are no longer significant. The costs of
any insignificant obligations are accrued when the related revenue is
recognized. Revenue is recognized only when collection of the resulting
receivable is probable.
ADVERTISING EXPENSES
The Company recognizes expenses related to advertising costs in the period in
which these costs are incurred. Total advertising expenses in the year ended
December 31, 1999, the ten months ended December 31, 1998 and the fiscal year
ended February 22, 1998 were $49,000, $101,000 and $166,000, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred. Substantially all
research and development expenses are related to developing new products and
designing significant improvements to existing products.
47
<PAGE> 48
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its employee stock option and purchase plans. Note 7 to the consolidated
financial statements contains a summary of the pro forma effects to reported net
loss and net loss per share for the year ended December 31, 1999, the ten months
ended December 31, 1998 and the fiscal year ended February 22, 1998 as if the
Company had elected to recognize compensation cost based on the fair value
method prescribed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation.
INCOME TAXES
The Company uses the liability method to account for deferred taxes, which
requires an asset and liability approach to recognize deferred tax assets and
liabilities. Under this method of accounting, deferred tax assets and
liabilities are determined based upon the differences between the financial
reporting basis and the income tax basis of the Company's assets and liabilities
at the enacted income tax rates expected to apply when such differences are
expected to reverse. A valuation allowance is provided for deferred tax assets
as there is no assurance that the Company will realize those assets through
future operations.
FOREIGN CURRENCIES
The Company's foreign entities use the local currency as the functional
currency. The Company translates all foreign entity assets and liabilities at
year-end exchange rates, all income and expense accounts at average exchange
rates, and records adjustments resulting from translation as a separate
component of other comprehensive income (loss) within shareholders' equity.
Foreign currency exchange gains (losses) included in the determination of loss
from operations before taxes were $(13,000), $31,000 and $10,000 for the year
ended December 31, 1999, the ten-month period ended December 31, 1998 and the
fiscal year ended February 22, 1998, respectively. The Company had no forward
exchange contracts outstanding at December 31, 1999 and 1998.
PER SHARE DATA
Basic and diluted net loss per share is based on the weighted average number of
common shares outstanding during the periods presented and excludes the
anti-dilutive effects of options and warrants. The net loss has been adjusted
to reflect dividends accrued and accretion related to preferred shares
outstanding.
COMPREHENSIVE INCOME
The Company's other comprehensive income is comprised of foreign currency
translation adjustments. The Company's comprehensive income is reported in the
consolidated statements of redeemable preferred stock and other shareholders'
equity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities, ("SFAS No. 133") was issued.
SFAS No. 133 establishes accounting and reporting standards for derivative
financial instrucments and hedging activities related to those instruments, as
well as other hedging activities. Because the Company does not currently hold
any derivative instruments and does not engage in hedging activities, the
Company expects the adoption of SFAS No. 133 will not have a material impact on
its consolidated financial position, results of operations or cash flows. In
July 1999, Statement of Financial Accounting Standards No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, was issued. The Company will be required to adopt
SFAS No. 133 in 2000.
48
<PAGE> 49
2. DIVESTITURES AND ACQUISITIONS
DIVESTITURES
On January 31, 2000, Alpha Microsystems completed the sale of substantially all
of its assets associated with its Alpha Micro Services Division ("AMSO") and its
Alpha Micro Operating System ("AMOS") computer hardware manufacturing division
to R.E. Mahmarian Enterprises, LLC ("R.E. Mahmarian Enterprises") for
consideration of approximately $3.2 million, consisting primarily of liabilities
of the Businesses that were assumed by R.E. Mahmarian Enterprises. The Company
also received a ten percent contingent interest in gross cash and non-cash
proceeds that may be received by R.E. Mahmarian Enterprises upon the occurrence
of certain liquidity events, as defined, following R.E. Mahmarian Enterprises's
acquisition of the Businesses. R.E. Mahmarian Enterprises is owned by Richard E.
Mahmarian, a current member of the Company's Board of Directors.
Assets of the Businesses initially sold to R.E. Mahmarian Enterprises include
certain accounts receivable, prepaid expenses, other current and non-current
assets, inventories, fixed assets, information technology service contracts and
capitalized software development costs. The Company has granted R.E. Mahmarian
Enterprises the right to use the name "Alpha Microsystems" and associated logos,
marks and trade dress, transferred the rights to the trade names, logos and
trademarks associated with the Businesses that were sold, and entered into a
five year license agreement providing R.E. Mahmarian Enterprises the right to
use the Company's NQL Solutions technology for R.E. Mahmarian Enterprises's
internal use in continuing operations of the Businesses. Additionally, the
Company has agreed to sublease to R.E. Mahmarian Enterprises the portion of the
Santa Ana, California facility presently occupied by the Businesses at amounts
equal to cost.
This sale indicates the assets sold to R.E. Mahmarian Enterprises were impaired
and, accordingly, as of December 31, 1999, the Company recognized a loss on the
sale of $6,728,000 and reclassified $2,726,000, representing deferred revenue at
December 31, 1999 related to contractual service obligations assumed by R.E.
Mahmarian Enterprises for which performance continues to be guaranteed by the
Company, to deferred gain on sale of Businesses to R.E. Mahmarian Enterprises.
On March 15, 2000, the Company entered into another agreement whereby R.E.
Mahmarian Enterprises, in exchange for $500,000 cash (recorded as net assets
held for sale to R.E. Mahmarian Enterprises as of December 31, 1999) and the
assumption of the remaining outstanding accounts payable of the Businesses,
purchased the remaining net accounts receivable of the Businesses it acquired in
the sale completed on January 31, 2000. $250,000 of the $500,000 cash payment
was received on March 20, 2000 while the $250,000 balance is due in full by May
20, 2000.Assets and liabilities at historical book values sold to R.E. Mahmarian
Enterprises and a reconciliation of the loss recorded on the sale are as
follows:
<TABLE>
<S> <C>
Accounts receivable $ 2,625
Prepaid expenses and other current assets 553
Property and equipment, net 3,244
Intangibles and other assets, net 1,049
Accounts payable and accrued liabilities (1,130)
--------
Subtotal 6,341
Direct transaction costs 387
--------
Loss on sale of Businesses to
R.E. Mahamarian Enterprises $ 6,728
========
</TABLE>
49
<PAGE> 50
The unaudited pro forma financial information below reflects the operations of
the Businesses that were included in the sale:
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Year Ended
December 31, December 31, February 22,
1999 1998 1998
----------- ---------------- ------------
<S> <C> <C> <C>
Net sales:
Information technology services $ 15,622 $ 12,224 $ 12,818
Product 4,324 3,824 5,741
-------- -------- --------
Total net sales 19,946 16,048 18,559
Cost of sales:
Information technology services 12,982 10,590 9,379
Product 3,402 2,899 4,047
-------- -------- --------
Total cost of sales 16,384 13,489 13,426
-------- -------- --------
Gross margin 3,562 2,559 5,133
Selling, general and 5,447 4,103 4,615
administrative
Engineering, research and 1,059 1,032 1,227
development
Impairment of long-lived assets -- 978 --
-------- -------- --------
Loss from operations $ (2,944) $ (3,554) $ (709)
======== ======== ========
</TABLE>
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
year ended December 31, 1999 include a gain of approximately $222,000 included
in loss on disposition of businesses. Operating results of this business, which
are included in the statement of operations, included net loss of $149,000,
$2,298,000, $26,000 and revenues of $563,000, $2,467,000 and $404,000 for the
year ended December 31, 1999, the ten-month period ended December 31, 1998, and
the year ended February 22, 1998, respectively. During the ten-month period
ended December 31, 1998, the net loss attributable to this business included an
impairment write-down of $1,460,000.
ACQUISITIONS
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 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 Microsystems.
The unaudited 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 at the beginning of the periods presented (in thousands, except per
share amounts).
<TABLE>
<CAPTION>
Ten Months Ended Year Ended
December 31, 1998 February 22, 1998
<S> <C> <C>
Revenue $ 31,508 $ 32,306
========= ========
Net loss $ (9,193) $ (2,055)
========= ========
Basic and diluted net loss per common share $ (0.90) $ (0.27)
========= ========
</TABLE>
On February 27, 1998, the Company acquired the ongoing information technology
service contracts and certain related assets of M&J
50
<PAGE> 51
Technologies for an estimated purchase price of $950,000. Fifty percent of the
purchase price was paid on the closing date of the acquisition. The remaining
amount to be paid is based on revenues subsequent to the date of acquisition and
currently is the subject of negotiation.
On December 23, 1997, the Company acquired the telephone installation and
information technology service business and certain related assets of Applied
Cellular Technology, Inc. for a purchase price originally estimated to be $2.6
million, of which, $1.75 million has been paid from the Company's cash reserves
through December 31, 1999. Effective April 1, 1999, this business was sold for
$650,000 (see Divestitures above).
All acquisitions have been accounted for as purchases and the acquired
operations have been included in the consolidated statements of operations from
the dates of acquisition. Pro forma information for acquisitions other than DCi
has not been presented as it would not be materially different from the
historical information presented
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
(In thousands)
December 31, December 31,
1999 1998
------- -------
<S> <C> <C>
Machinery and equipment $ 1,164 $ 8,474
Information technology service parts 1,166 3,149
Leasehold improvements 80 1,434
------- -------
2,410 13,057
Less accumulated depreciation and amortization 385 9,281
------- -------
Property and equipment, net $ 2,025 $ 3,776
======= =======
</TABLE>
Depreciation expense was $1,002,000, $1,265,000 and $1,254,000 for the year
ended December 31, 1999, the ten months ended December 31, 1998 and the fiscal
year ended February 22, 1998, respectively.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
(In thousands)
December 31, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Goodwill, net of accumulated amortization of $570 and $135
at December 31, 1999 and 1998, respectively $7,996 $8,158
Software development costs, net of accumulated amortization
of $28 and $1,613 at December 31, 1999 and 1998,
respectively 385 460
Information technology service contracts, net of
accumulated amortization of $60 at December 31, 1998 -- 479
Other, net 162 65
------ ------
$8,543 $9,162
====== ======
</TABLE>
51
<PAGE> 52
Related amortization expense charged to operations is as follows:
<TABLE>
<CAPTION>
(In thousands) Year Ended Ten Months Ended Year Ended
December 31, 1999 December 31, 1998 February 22, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Goodwill $435 $135 $ --
Software development costs 140 234 188
IT service contracts 68 311 248
Other 18 25 12
---- ---- ----
$661 $705 $448
==== ==== ====
</TABLE>
5. DEBT
As of December 31, 1999, the Company had a loan facility with a bank under which
a $4 million accounts receivable line of revolving credit was designated for
working capital and $1 million was designated to finance acquisitions. The loan
facility is secured by substantially all of the Company's assets. There were no
outstanding borrowings at December 31, 1999 or 1998 under the accounts
receivable line of revolving credit. On March 28, 2000, the Company terminated
this revolving line of credit. At December 31, 1999, the outstanding balance on
the loan designated for acquisitions was $687,505. This loan bears interest at
the bank prime rate plus 2.5% (11% at December 31, 1999). On March 27, 2000, the
Company obtained a waiver for certain covenant violations under the existing
credit facility and agreed to repay the related amounts outstanding by May 15,
2000. The Company is currently in negotiations with another bank to obtain a new
revolving line of credit with terms which the Company anticipates will be more
favorable than those contained in the recently terminated facility. There is no
assurance that the Company will obtain this new revolving line of credit or that
the terms will, in fact, be more favorable than those contained in the recently
terminated facility.
6. REDEEMABLE PREFERRED STOCK
In addition to the $1.0 million of cash proceeds provided under a bank term-loan
(Note 5), the acquisition of DCi was financed with $8.0 million obtained under a
Securities Purchase Agreement (the "Purchase Agreement"). Under the Purchase
Agreement, Hampshire Equity Partners II, L.P. ("Hampshire") agreed, subject to
certain conditions, to invest up to $20 million in redeemable preferred stock of
the Company. The Purchase Agreement provides for the purchase of redeemable
preferred stock in three tranches of $8 million, $7 million, and up to $5
million. The first tranche was completed concurrent with the acquisition of DCi
and the second tranche was funded on October 20, 1998 after shareholder
approval.
In February 1999, the Company exchanged $12.5 million face value of its then
outstanding $15.0 million face value of redeemable preferred stock for $12.5
million face value of exchangeable redeemable preferred stock. As a result of
this exchange, approximately, $10.7 million was reclassified from redeemable
preferred stock to exchangeable redeemable preferred stock (Note 7), a component
of other shareholders' equity in the accompanying consolidated balance sheet.
The outstanding shares of redeemable preferred stock mature on June 30, 2005, or
earlier in the event of default, and may be redeemed at any time by the Company
in cash. In the event of a public offering of its securities, the Company is
required to apply 50% of the net proceeds toward the redemption of the then
outstanding redeemable preferred stock. The redeemable preferred stock is being
accreted over seven years to its redemption value of $2.5 million.
The redeemable preferred stock is non-voting, except for one share that entitles
Hampshire to vote on all matters an aggregate number of votes equal to the
number of unexercised warrants held by Hampshire as of the record date (Note 7).
Dividends on the redeemable preferred stock are cumulative and are payable
quarterly in arrears at an initial cumulative annual dividend rate of 9%, which
increases to 11% on July 1, 2000, and thereafter increases an additional 1%
annually until July 1, 2004, when the rate will be 14%. Effective October 1,
1999, the Company is accruing dividends on the redeemable preferred stock using
the effective interest
52
<PAGE> 53
method at a rate approximating 12.5% per year. Prior to October 1, 1999, the
Company was accruing dividends on the redeemable preferred stock and the
exchangeable redeemable preferred stock (Note 7) based on the stated dividend
rate of 9% based on the fact that management had intended to redeem the
preferred stock prior to July 1, 2000, when the dividend rate first
increases. During 1999 and 1998, dividends on the preferred stock aggregating
$341,000 and $364,000, respectively, were accrued by the Company, of which,
$568,000, including $306,000 of dividends accrued at December 31, 1998, and
$58,000, respectively, were paid in cash, and $56,000 was paid in 1999 in
additional shares of exchangeable redeemable preferred stock. At December 31,
1999 and 1998, accrued but unpaid dividends on the redeemable preferred stock
aggregate $23,000 and $306,000, respectively, and are included in other accrued
liabilities in the accompanying consolidated balance sheet.
The holders of the redeemable preferred stock are entitled to a liquidation
preference equal to the original cost of the redeemable preferred stock plus any
accrued but unpaid dividends (based on the stated dividend rate) prior to any
distributions to holders of common stock. A merger, reorganization or other
transaction in which control of the Company is transferred may be treated as a
liquidation. The redeemable preferred stock is exchangeable, upon approval of
the Board of Directors, into subordinated debentures whose maturity, variable
interest rate, and liquidation preference would be equal to the redeemable
preferred stock. The subordinated debentures also have mandatory redemption
rights payable in cash on terms equal to the exchanged preferred stock.
7. OTHER SHAREHOLDERS' EQUITY
EXCHANGEABLE REDEEMABLE PREFERRED STOCK
As discussed in Note 6, in February 1999, the Company exchanged $12.5 million
face value of its then outstanding $15.0 million face value of redeemable
preferred stock for $12.5 million face value of exchangeable redeemable
preferred stock. The exchangeable redeemable preferred stock has the same
redemption, voting, dividend, liquidation and conversion 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. Effective November 18, 1999, the Company
issued $5.0 million of exchangeable redeemable preferred stock under the third
tranche of the Purchase Agreement on essentially the same terms as the then
outstanding exchangeable redeemable preferred stock. The carrying value of the
exchangeable redeemable preferred stock is being accreted over seven years to
its redemption value of $17.5 million. During 1999, dividends on the
exchangeable redeemable preferred stock aggregating $1,215,000 were accrued by
the Company of which $750,000 was paid in cash and $335,000 was paid in
additional shares of exchangeable redeemable preferred stock. At December 31,
1999, accrued but unpaid dividends on the exchangeable redeemable preferred
stock aggregate $130,000 and are included in other accrued liabilities in the
accompanying consolidated balance sheet.
WARRANTS
In connection with its initial investment in the Company's preferred stock in
September 1998, Hampshire was granted warrants to purchase a total of 5,844,826
shares of the Company's common stock for $2.50 per share exercisable immediately
and expiring in September 2008. In connection with its investment in the
Company's preferred stock in November 1999, Hampshire was granted warrants to
purchase 2,971,620 shares of common stock at $2.50 per share exercisable
immediately and expiring in November 2009. The estimated fair value assigned to
the warrants, aggregating approximately $2.6 million, and direct costs
associated with the financings, aggregating approximately $566,000, reduced the
initial carrying value of the preferred stock in the accompanying consolidated
financial statements. The difference between the initial carrying value and the
aggregate redemption amounts of the preferred stock is being accreted through
periodic charges to accumulated deficit..
In connection with a public offering in fiscal 1993, the Company granted to its
underwriter a warrant to purchase 139,315 units with an exercise price of $1.95
per unit. Those warrants were exercised during the ten-month period ended
December 31, 1998, providing net proceeds to the Company of $272,000. Pursuant
to the terms of an amendment to a loan agreement signed in October 1996, the
Company
53
<PAGE> 54
issued 25,000 warrants to a bank which were exercisable for five years at $1.81
per share. In June 1999, the bank elected to exercise these warrants, utilizing
a cashless exercise option and received 18,010 shares of the Company's common
stock. Also in October 1996, the Company issued a warrant to purchase 300,000
shares of common stock exercisable for five years at $3.00 per share to its
financial advisor. In January 1999, those warrants were exercised, providing net
proceeds to the Company of $897,000. In June 1998, the Company issued 33,000
warrants to a bank which were exercisable for seven years at $2.50 per share. In
February 2000, the bank elected to exercise these warrants, utilizing a cashless
exercise option and received 22,354 shares of the Company's common stock. In
October 1998, the Company granted an additional 200,000 warrants to a financial
advisor, exercisable for five years at $3.23 per share. These warrants remain
outstanding at December 31, 1999.
OPTIONS
In October 1998, the shareholders approved the 1998 Stock Option and Award Plan
which provides for the grants of (i) incentive stock options; (ii) non-qualified
stock options; (iii) deferred delivery of shares of common stock; (iv)
restricted stock; (v) performance shares of common stock; and (vi) stock
appreciation rights that are only exercisable in the event of a change in
control of the Company or upon other events. A total of 2,500,000 shares of
common stock are available for issuance under the 1998 Plan.
As of December 31, 1999, the Company's 1993 Employee Stock Option Plan provides
for the Board to award up to 925,000 shares of common stock to employees of the
Company.
In connection with the DCi acquisition, 195,000 non-qualified stock options were
issued to employees outside of the above plans.
54
<PAGE> 55
The following table contains a summary of transactions related to options for
the year ended December 31, 1999, ten months ended December 31, 1998, and the
fiscal year ended February 22, 1998:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price Per Share
-------- ------------------------
<S> <C> <C>
Outstanding at February 23, 1997 850,439 $2.16
Granted 337,500 $1.24
Expired/canceled (143,000) $1.63
Exercised (40,000) $0.94
---------
Outstanding at February 22, 1998 1,004,939 $1.97
Granted 1,713,578 $2.29
Expired/canceled (272,689) $1.89
Exercised (6,250) $1.44
---------
Outstanding at December 31, 1998 2,439,578 $2.21
Granted 525,000 $5.15
Expired/canceled (243,750) $2.71
Exercised (127,250) $2.15
---------
Outstanding at December 31, 1999 2,593,578 $2.76
=========
Exercisable at:
February 22, 1998 457,064 $2.13
December 31, 1998 823,179 $2.21
December 31, 1999 1,397,002 $2.24
Available for grant:
February 22, 1998 65,061
December 31, 1998 699,172
December 31, 1999 917,922
</TABLE>
Options outstanding at December 31, 1999 have exercise prices and weighted
average remaining lives as follows: 22,500 shares at $0.78 with a remaining life
of 0.3 years, 197,500 shares at $1.03 to $1.44 per share with a remaining life
of 2.6 years, 1,302,781 shares at $1.81 to $2.06 with a remaining life of 8.7
years, 740,797 shares at $2.69 to $3.94 per share with a remaining life of 6.5
years, and 330,000 shares at $4.94 to $5.68 per share with a remaining life of
9.2 years.
Pro forma information regarding net loss and net loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rate of 6.5%, for the year ended December 31, 1999 and 5.8% for the
periods ended December 31, 1998 and February 22, 1998; volatility factors of the
expected market price of the Company's common stock of 1.1 for the year ended
December 31, 1999 and 0.6 for the ten months ended December 31, 1998 and the
fiscal year ended February 22, 1998; and a weighted average expected life of the
options of seven years for the year ended December 31, 1999 and five years for
the ten months ended December 31, 1998 and the fiscal year ended February 22,
1998.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including
55
<PAGE> 56
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Year Ended
(In thousands, except per share information) December 31, 1999 December 31, 1998 February 22, 1998
----------------- ------------------ -----------------
<S> <C> <C> <C>
Pro forma net loss $(13,346) $(10,403) $ (3,516)
Pro forma net loss attributable to common $(15,235) $(10,839) $ (3,516)
shares
Pro forma basic and diluted loss per share $ (1.31) $ (0.98) $ (0.32)
</TABLE>
The per share weighted average fair value of options granted during the year
ended December 31, 1999, the ten months ended December 31, 1998 and the fiscal
year ended February 22, 1998 were $4.52, $1.30, and $2.62, respectively.
As of December 31, 1999, the Company has 9,049,446 warrants outstanding and
3,511,500 options outstanding and available for grant, or a total of 12,560,946
shares of common stock reserved for issuance pursuant to option and warrant
agreements.
8. OPERATING CHARGES
The results of operations for the year ended December 31, 1999 include charges
as follows: (i) $196,000 write-down for the impairment of leasehold improvements
and certain other long-lived assets, and (ii) $142,000 obsolescence write-down
of information technology service parts as a result of changes in DCi's customer
network hardware systems, which is included in cost of sales.
Significant to the comparative results of operations for the ten months ended
December 31, 1998 are charges totaling $4,679,000. These charges are comprised
of the following: (i) $2,230,000 to write-down impaired tangible and intangible
assets from non-core business acquired prior to 1998 to their estimated fair
values based on estimated cash flows, and write-down of accounts receivable
related to non-core operations, (ii) $910,000 to write-down impaired fixed
assets and inventory related to end-of-life proprietary product lines to their
estimated fair values, (iii) $813,000 related to software products obsolesced by
the introduction of new products, (iv) $379,000 resulting from the write-off of
notes receivable from previously sold assets and subsidiaries, (v) $256,000 of
indirect financing costs related to the sale of redeemable preferred stock and
warrants and the expensing of previously capitalized costs associated with
abandoned acquisitions, and (vi) $91,000 in write-offs of costs related to Year
2000 issues and adjustments of warranty and other liabilities. The table below
summarizes where these charges have been recognized on the statement of
operations for the periods ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Cost of Operating Impairment
Sales Expenses Charge Other Total
------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C>
Impairment of tangible and intangible assets $ 147 $ 495 $1,588 $ -- $2,230
Write-down of fixed assets and inventory 60 -- 850 -- 910
Software obsolescence 730 83 -- -- 813
Loss on sale of assets and subsidiaries -- -- -- 379 379
Indirect financing costs -- 256 -- -- 256
Year 2000 issues and operating expenses 25 66 -- -- 91
------ ------ ------ ------ ------
Total $ 962 $ 900 $2,438 $ 379 $4,679
====== ====== ====== ====== ======
</TABLE>
56
<PAGE> 57
9. INCOME TAXES
The current provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
(In thousands)
Year Ended Ten Months Ended Year Ended
December 31, 1999 December 31, 1998 February 22, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Foreign $-- $-- $(31)
State 46 15 10
-- -- --
$46 $15 $(21)
=== === =====
</TABLE>
Temporary differences and net operating loss carryforwards that give rise to
deferred tax assets and liabilities recognized in the balance sheet are as
follows:
<TABLE>
<CAPTION>
(In thousands)
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 17,931 $ 13,573
Tax credits 1,063 991
Accruals not currently deductible for tax purposes 569 1,400
Depreciation and capitalized software 111 (57)
Translation adjustment 20 20
Other (17) 80
Valuation allowance (19,677) (16,007)
-------- --------
Net deferred taxes -- --
======== ========
</TABLE>
The change in the valuation allowance was a net increase of $3,670,000 and
$6,096,000 for the year ended December 31, 1999 and the ten months ended
December 31, 1998, respectively. The valuation allowance was increased since the
realization of deferred tax assets is uncertain.
The Company has federal net operating loss carryforwards totaling approximately
$48,000,000 at December 31, 1999, which begin to expire in 2006, if not
utilized. Due to the exercise of redeemable public warrants in the fiscal year
ended February 23, 1997, the Company experienced a change of ownership as
defined in Section 382 of the Internal Revenue Code. As a result of the
ownership change, utilization of approximately $19,000,000 of the net operating
loss carryforwards is limited to approximately $1,300,000 per year. In addition,
approximately $6,500,000 of acquired net operating loss carryforwards is limited
to approximately $400,000 per year as a result of another change in ownership.
The recognition of tax benefits associated with approximately $13.6 million of
net operating loss carryforwards and deductible temporary differences arising as
a result of the acquisition of DCi, will first reduce goodwill and other
noncurrent intangible assets related to the acquisition, and then income tax
expense.
57
<PAGE> 58
A reconciliation of income tax expense (benefit) to the statutory U.S. federal
income tax rate follows:
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Year Ended
December 31, 1999 December 31 1998 February 22, 1998
----------------- ---------------- -----------------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate (34.0)% (34.0)% (34.0)%
(benefit)
Changes in taxes resulting from:
Foreign losses and excess rates 0.1 0.3 (1.0)
Domestic losses with no tax benefit 32.7 33.4 34.0
Other items, net 1.2 0.5 0.4
---- ---- ----
Effective tax rate --% 0.2% (0.6)%
==== ==== ====
</TABLE>
United States and foreign income (loss) before taxes are as follows:
<TABLE>
<CAPTION>
(In thousands)
Year Ended Ten Months Ended Year Ended
December 31, 1999 December 31, 1998 February 22, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Domestic $(12,187) $ (9,615) $ (3,524)
Foreign 29 88 206
-------- -------- --------
$(12,158) $ (9,527) $ (3,318)
======== ======== ========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company leases its manufacturing and office facilities and certain equipment
under operating leases that expire on various dates through 2001. Rent expense
during the year ended December 31, 1999, the ten months ended December 31, 1998
and the fiscal year ended February 22, 1998 was $1,729,000, $1,415,000, and
$1,213,000, respectively. The Company's annual minimum lease commitments under
non-cancelable operating leases, net of sublease income of $332,000 for 2000
(including $125,760 from R.E. Mahmarian Enterprises for a portion of the Santa
Ana facility) and $65,000 for 2001, respectively, are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000 $ 316
2001 122
-------
$ 438
======
</TABLE>
The Company is involved in matters of litigation arising in the normal course of
business. The Company is not aware of any legal proceedings or claims that it
believes will have, individually or in the aggregate, a material adverse effect
on its business, consolidated financial position, results of operations or cash
flows.
11. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution profit sharing plan, which has been
qualified under Section 401(k) of the Internal Revenue Code, covering
substantially all of its full-time employees. Company contributions to the plan
are at the sole discretion of the Company's Board of Directors and cannot exceed
the maximum allowable deduction for federal income tax purposes. There were no
discretionary Company contributions for the year ended December 31, 1999, for
the ten-month period ended December 31, 1998 or for the fiscal year ended
February 22, 1998. Voluntary employee contributions are matched at a rate of 20%
of employee contributions up to a total of 5.0% of the employee's salary for
participants with an annual income of less than $29,999. Matching contributions
were $36,000, $21,000, and $20,000 for the year ended December 31, 1999, for the
ten-month period ended December 31, 1998 and for the fiscal year ended February
22, 1998, respectively.
58
<PAGE> 59
In fiscal 1997, the Company adopted a new Employee Stock Purchase Plan, covering
substantially all of its full-time employees, enabling employees to acquire
shares of the Company's stock at 85% of the lower of (i) the fair market value
of a share on the first trading day of the date of grant, or (ii) the fair
market value of a share on the date of exercise, up to an aggregate of 350,000
shares of common stock. Voluntary employee purchases under the plan for the year
ended December 31, 1999, for the ten months ended December 31, 1998 and for the
fiscal year ended February 22, 1998 were $117,000, $26,000 and $20,000,
respectively.
59
<PAGE> 60
12. INDUSTRY SEGMENT INFORMATION
During the year ended December 31, 1999, the ten months ended December 31, 1998
and the year ended February 22, 1998, the Company operated 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 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
year ended December 31, 1999, the ten months ended December 31, 1998 and the
fiscal year ended February 22, 1998 follows:
<TABLE>
<CAPTION>
Corporate
(In thousands) IT Services Product Expenses Consolidated
----------- ------- --------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Revenues from external customers $30,399(1) $ 4,491(1) $ -- $ 34,890
Segment income (loss) (1,037) (1,358)(1)(3) (9,809)(2) (12,204)
Segment assets 13,432 501 2,376 16,309
Depreciation and amortization 1,103 166 394 1,663
Expenditures for long-lived assets 1,634 341 1,195(4) 3,170
TEN MONTHS ENDED DECEMBER 31, 1998
Revenues from external customers $20,072(1) $ 4,068(1) $ -- $ 24,140
Significant operating charges (Note 7) 1,042 534(1) 3,103 4,679
Segment income (loss) (2,047) (2,067)(1)(3) (5,428) (9,542)
Segment assets 16,547 2,240 7,644 26,431
Depreciation and amortization 1,330 318 322 1,970
Expenditures for long-lived assets 1,083 291 742 2,116
FISCAL YEAR ENDED FEBRUARY 22, 1998
Revenues from external customers $13,223(1) $ 6,104(1) $ -- $ 19,327
Segment income (loss) 432 (1,862)(1)(3) (1,867) (3,297)
Segment assets 5,527 4,469 5,792 15,788
Depreciation and amortization 1,037 400 265 1,702
Expenditures for long-lived assets 571 560 671 1,802
</TABLE>
(1) In January 2000, the Company closed the sale of a significant portion of the
Company's operations to R.E. Mahmarian Enterprises. Note 2 to the
consolidated financial statements summarizes, on an unaudited basis, the
results of operations of the Businesses sold.
(2) Includes $6,728 loss from sale of Businesses to R.E. Mahmarian Enterprises
and $222 gain from sale of telephone installation business.
(3) Includes expenses attributable to the marketing and launching of the NQL
Solutions software products of $681, $1,684 and $2,281 for the year ended
December 31, 1999, the ten months ended December 31, 1998 and the fiscal
year ended February 22, 1998, respectively.
(4) Includes $1,092 relating to the computer system.
During all periods presented there were no significant revenues or long-lived
assets outside of the United States.
No single customer accounted for 10% or more of the Company's sales during any
of the periods presented.
60
<PAGE> 61
13. SUBSEQUENT EVENTS
In January 2000, the Company completed the sale of a significant portion of the
Company's operations to R.E. Mahmarian Enterprises. Note 2 to the Consolidated
Financial Statements summarizes, on an unaudited basis, the results of
operations of the Businesses sold.
In March 2000, the Company issued a Confidential Private Placement Memorandum in
an effort to sell approximately 2.3 million shares of its common stock at $6.25
per share, pursuant to a private placement managed by Sutro & Co. This financing
was completed on March 30, 2000 with 2,342,000 shares of common stock sold at
$6.25 per share, generating gross proceeds to the Company of $14,637,500 with
net proceeds of approximately $13,500,000 which will be released to the Company
upon delivery of stock certificates and various other closing documents.
Hampshire Equity Partners II, L.P. ("Hampshire"), the Company's preferred
stockholder, purchased 995,400 of the shares of the Company's common stock
issued in the private placement.
61
<PAGE> 62
ALPHA MICROSYSTEMS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to End
of Period Other Expense Deductions of Period
Allowance for doubtful accounts: ---------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1999 $700 $(888)(1) $518(2) $290(3) $ 40
December 31, 1998 294 94 548 236 700
February 22, 1998 139 194 39 294
</TABLE>
(1) Reserve related to accounts receivable sold to R.E. Mahmarian Enterprises in
March 2000.
(2) Includes $205,000 reserve for accounts receivable related to non-core
operations.
(3) Includes $63,000 for the write-off of accounts receivable related to
non-core operations.
(4) Balance transferred as part of the acquisition of DCi.
(5) Includes $495,000 for the write-off of accounts receivable related to
non-core operations.
(6) Includes the write-off of $108,000 of accounts receivable related to
non-core operations.
62
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 29, 2000 By: /s/ DOUGLAS J. TULLIO
Douglas J. Tullio
President, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Douglas J. Tullio and
Robert O. Riiska, and each and any of them, as attorneys-in-fact and agents with
full powers of substitution to sign on his behalf, individually and in the
capacity stated below, and to file any amendments to this Annual Report on Form
10-K with the Securities and Exchange Commission, granting to said
attorneys-in-fact and agents full power and authority to perform any other act
on behalf of the undersigned required to be done in the premises.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 29, 2000 By: /s/ DOUGLAS J. TULLIO
Douglas J. Tullio
Chairman of the Board, President,
Chief Executive Officer, Director
Date: March 29, 2000 By: /s/ ROBERT O. RIISKA
Robert O. Riiska
Vice President, Chief Financial Officer
Date: March 29, 2000 By: /s/ ROCKELL N. HANKIN
Rockell N. Hankin
Director
Date: March 29, 2000 By: /s/ RICHARD E. MAHMARIAN
Richard E. Mahmarian
Director, Secretary
Date: March 29, 2000 By: /s/ CLARKE E. REYNOLDS
Clarke E. Reynolds
Director
Date: March 29, 2000 By: /s/ BENJAMIN P. GIESS
Benjamin P. Giess
Director
Date: March 29, 2000 By: /s/ CARLOS D. DE MATTOS
Carlos D. DeMattos
Director
Date: March 29, 2000 By: /s/ SAM YAU
Sam Yau
Director
63
<PAGE> 64
EXHIBIT INDEX
2.1 Agreement to transfer shares by and between Registrant and Alpha
Microsystems Great Britain, Mr. Patrick Bolle, and Alpha Microsystems
Belgium dated February 28, 1995 (incorporated herein by reference to
Exhibit 2.10 to the Annual Report on Form 10-K of Registrant for the
year ended February 26, 1995 (the "1995 10-K")
2.2 Agreement of Purchase and Sale by and between Registrant and Sanderson
Electronics PLC, dated August 10, 1996 (incorporated herein by reference
to Exhibit 2 to the Form 8-K filed August 23, 1996)
2.3 Agreement of Purchase and Sale by and between Registrant and Pacific
Triangle Software, Inc., dated January 13, 1997 (incorporated herein by
reference to Exhibit 2.1 to the Form 8-K filed February 18, 1997)
2.5 Agreement of Purchase and Sale between AlphaHealthCare, Inc. and GLR
Systems, Inc., dated January 27, 1997 (incorporated herein by reference
to Exhibit 2.2 to the Form 8-K filed February 18, 1997)
2.6 Agreement of Purchase and Sale by and between the Registrant and Applied
Cellular Technology, Inc. dated December 23, 1997 (incorporated herein
by reference to Exhibit 2.6 to the Quarterly Report on Form 10-Q for the
quarter ended November 23, 1997)
2.7 Agreement of Purchase and Sale by and between the Registrant and M & J
Technologies, Inc. dated February 19, 1998 (incorporated herein by
reference to Exhibit 2.7 to the Annual Report on Form 10-K of Registrant
for the year ended February 22, 1998)
2.8 Modification to Contract for Purchase and Sale of M & J Technologies,
Inc. Hardware Service Business Assets to Registrant dated February 19,
1998 (incorporated herein by reference to Exhibit 2.8 to the Annual
Report on Form 10-K of Registrant for the year ended February 22, 1998)
2.9 First Amendment to Agreement of Purchase and Sale by and between the
Registrant and M & J Technologies, Inc., effective May 1, 1998
(incorporated herein by reference to Exhibit 2.9 to the Quarterly Report
on Form 10-Q for the quarter ended May 24, 1998)
2.10 Merger Agreement by and between the Registrant, Alpha Micro Merger
Corp., Delta CompuTec Inc. and Joseph Lobozzo II and Joanne Lobozzo
dated July 2, 1998 (incorporated by reference to Exhibit 2 to the Form
8-K filed September 16, 1998)
2.11 Agreement of Purchase and Sale by and between Registrant, Alpha
Technology Interconnect, Inc. and ADSI Telecom Services, Inc. dated
March 31, 1999 (incorporated herein by reference to Exhibit 2.11 to the
Quarterly Report on Form 10-Q of Registrant for the quarter ended March
31, 1999)
3.1 Articles of Incorporation of Registrant dated as of March 16, 1977
(incorporated herein by reference to Exhibit 3.1 to the Registration
Statement on Form-S-1 (Registration No. 2-72222) of Registrant)
<PAGE> 65
3.2 Certificate of Amendment of Articles of Incorporation of Registrant
dated as of September 29, 1988 (incorporated herein by reference to
Exhibit 3.2 to the Annual Report on Form 10-K of Registrant for the year
ended February 23, 1997)
3.3 Certificate of Amendment of the Articles of Incorporation of Registrant
dated June 25, 1992 (incorporated herein by reference to Exhibit 10.71
to the Quarterly Report on Form 10-Q of Registrant for the quarter ended
May 31, 1992)
3.4 Restated Bylaws of Registrant (incorporated herein by reference to
Exhibit 3.1 to the Form S-8 filed January 31, 1997)
3.5 Registration Rights Agreement by and between Registrant and Silicon
Valley Bank dated July 10, 1995 (incorporated herein by reference to
Exhibit 10.141 to the Quarterly Report on Form 10-Q of Registrant for
the quarter ended May 28, 1995)
3.6 Amendments to Restated Bylaws of Registrant dated August 3, 1998
(incorporated by reference to Exhibit 3.5 to the Quarterly Report on
Form 10-Q of Registrant for the quarter ended November 22, 1998)
3.7 Certificate of Amendment to Articles of Incorporation of Registrant
dated October 15, 1998 (incorporated by reference to Exhibit 3.6 to the
Quarterly Report on Form 10-Q of Registrant for the quarter ended
November 22, 1998)
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 (incorporated by
reference to Exhibit 3.8 to the Quarterly Report on Form 10-Q of
Registrant for the quarter ended September 30, 1999)
3.9 Certificate of Reduction of Class C Cumulative, Redeemable and
Exchangeable Preferred Stock dated November 18, 1999
4.1 Anti-dilution Agreement by and between Registrant and Silicon Valley
Bank dated July 10, 1995 (incorporated herein by reference to Exhibit
10.142 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended May 28, 1995)
4.2 Warrant to Purchase Stock issued to Silicon Valley Bank on November 22,
1996 (incorporated herein by reference to Exhibit 10.74 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended November 24,
1996)
4.3 Registration Rights Agreement by and between Registrant and Silicon
Valley Bank dated November 22, 1996 (incorporated herein by reference to
Exhibit 10.75 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended November 24, 1996)
4.4 Anti-dilution Agreement by and between Registrant and Silicon Valley
Bank dated November 22, 1996 (incorporated herein by reference to
Exhibit 10.76 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended November 24, 1996)
4.5 Warrant to Purchase Common Stock issued to Imperial Bank dated June 9,
1998 (incorporated herein by reference to Exhibit 4.7 to the Quarterly
Report on Form 10-Q for the quarter ended May 24, 1998)
4.6 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 (incorporated herein by reference to
<PAGE> 66
Exhibit 4 to the Form 8-K filed August 10, 1998)
4.7 Warrant to Purchase Common Stock issued to Princeton Securities dated
October 20, 1998 (incorporated herein by reference to Exhibit 4.7 to the
Quarterly Report on Form 10-Q for the quarter ended November 22, 1998)
4.8 Form of Warrant Certificate to Purchase Common Stock issued to ING
Equity Partners II, L.P. dated September 1, 1998 (incorporated herein by
reference to Exhibit 10.2 to the Form 8-K filed August 10, 1998)
4.9 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 (incorporated
herein by reference to Exhibit 4.9 to the Transition Report on Form 10-K
of Registrant for the transition period ended December 31, 1998)
4.10 Preferred Shareholder Agreement by and between Registrant and sole
holder of shares of issued and outstanding Class A Cumulative,
Redeemable and Exchangeable Preferred Stock and Class B Cumulative,
Redeemable and Exchangeable Preferred Stock dated January 22, 1999
(incorporated herein by reference to Exhibit 4.9 to the Transition
Report on Form 10-K of Registrant for the transition period ended
December 31, 1998)
4.11 Certificate of Determination of Rights and Preferences of Class E
Cumulative, Redeemable and Exchangeable Preferred Stock (incorporated
herein by reference as Exhibit A-2 to Exhibit 10.52 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended September 30,
1999)
*10.1 Alpha Microsystems Profit Sharing Trust Agreement between Alpha
Microsystems and Bank of America NT & S.A. as Trustee dated May 24, 1985
(incorporated herein by reference to Exhibit 10.32 to the Annual Report
on Form 10-K of Registrant for the year ended February 23, 1986)
*10.2 Alpha Microsystems Profit Sharing Plan (as amended and restated) dated
May 15, 1986 (incorporated herein by reference to Exhibit 10.33 to the
Annual Report on Form 10-K of Registrant for the year ended February 23,
1986)
*10.3 Acceptance of Trust by Trustee dated September 30, 1986 pursuant to
Registrant's Profit Sharing Plan (incorporated herein by reference to
Exhibit 10.29 to the Annual Report on Form 10-K of Registrant for the
year ended February 22, 1987)
*10.4 First Amendment dated March 1, 1987 to the Registrant's Profit Sharing
Plan (incorporated herein by reference to Exhibit 10.30 to the Annual
Report on Form 10-K of Registrant for the year ended February 22, 1987)
*10.5 Indemnification Agreement dated October 23, 1987 by and between Alpha
Microsystems and John F. Glade (incorporated herein by reference to
Exhibit 10.34 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended November 22, 1987)
*10.6 Indemnification Agreement dated October 23, 1987 by and between Alpha
Microsystems and Rockell N. Hankin (incorporated herein by reference to
Exhibit 10.36 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended November 22, 1987)
*10.7 Second Amendment to Alpha Microsystems Profit Sharing Plan dated January
22, 1988 (incorporated herein by
<PAGE> 67
reference to Exhibit 10.31 to the Annual Report on Form 10-K of
Registrant for the year ended February 28, 1988)
*10.8 Alpha Microsystems Profit Sharing Plan Amendments Under IRS Notice
88-131 dated May 24, 1989 (incorporated herein by reference to Exhibit
10.38 to the Quarterly Report on Form 10-Q of Registrant for the quarter
ended May 28, 1989)
*10.9 Alpha Microsystems Profit Sharing Plan Amendment dated December 15, 1989
(incorporated herein by reference to Exhibit 10.45 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended November 26,
1989)
*10.10 Indemnification Agreement by and between the Registrant and Douglas J.
Tullio dated January 8, 1990 (incorporated herein by reference to
Exhibit 10.50 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended November 26, 1989)
*10.11 Indemnification Agreement by and between Registrant and Clarke E.
Reynolds dated June 16, 1989 (incorporated herein by reference to
Exhibit 10.67 to the Annual Report on Form 10-K of Registrant for the
year ended February 23, 1992)
*10.12 Alpha Microsystems 1993 Employee Stock Option Plan (incorporated herein
by reference to Exhibit 10.109 to the Quarterly Report on Form 10-Q for
the quarter ended May 29, 1994)
10.13 Industrial Lease between Fairview Investors Ltd. and Registrant dated
October 28, 1994 (incorporated herein by reference to Exhibit 10.113 to
the Quarterly Report on Form 10-Q for the quarter ended November 27,
1994)
*10.14 First Amendment to Employment Agreement by and between Registrant and
John F. Glade dated May 3, 1991 (incorporated herein by reference to
Exhibit 19.8 to the Annual Report on Form 10-K of Registrant for the
year ended February 23, 1992)
*10.15 Second Amendment and Restatement of the Alpha Microsystems Profit
Sharing Plan dated July 1, 1992 (incorporated herein by reference to
Exhibit 10.72 to the Quarterly Report on Form 10-Q for the quarter ended
May 31, 1992)
10.16 Memorandum to Lease by and between Registrant and Fairview Investors,
Ltd. dated January 24, 1995 (incorporated herein by reference to Exhibit
10.136 to the Annual Report on Form 10-K of Registrant for the year
ended February 26, 1995)
10.17 First Amendment to Alpha Microsystems 1993 Employee Stock Option Plan
(incorporated herein by reference to Exhibit 4.6 to the Form S-8 filed
January 31, 1997)
10.18 Second Amendment to Alpha Microsystems 1993 Employee Stock Option Plan
(incorporated herein by reference to Exhibit 4.7 to the Form S-8 filed
January 31, 1997)
10.19 Alpha Microsystems Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 4.10 to the Form S-8 filed January 31, 1997)
*10.20 Indemnification Agreement by and between Registrant and Dennis E.
Michael dated January 17, 1997 (incorporated herein by reference to
Exhibit 10.57 to the Annual Report on Form 10-K of the Registrant for
the year ended February 23, 1997)
<PAGE> 68
*10.21 Indemnification Agreement by and between Registrant and Randall S. Parks
dated January 17, 1997 (incorporated herein by reference to Exhibit
10.58 to the Annual Report on Form 10-K of the Registrant for the year
ended February 23, 1997)
*10.22 Employment Letter by and between Registrant and Jeffrey J. Dunnigan
dated November 15, 1997 (incorporated herein by reference to Exhibit
10.6 to the Quarterly Report on Form 10-Q for the quarter ended November
23, 1997)
*10.23 Indemnification Agreement by and between Registrant and Jeffrey J.
Dunnigan dated December 1, 1997 (incorporated herein by reference to
Exhibit 10.63 to the Annual Report on Form 10-K of the Registrant for
the year ended February 22, 1998)
10.24 Security and Loan Agreement by and between Registrant and Imperial Bank
dated June 9, 1998 (incorporated herein by reference to Exhibit 10.64 to
the Quarterly Report on Form 10-Q for the quarter ended May 24, 1998)
10.25 Addendum to Security and Loan Agreement by and between Registrant and
Imperial Bank dated June 9, 1998 (incorporated herein by reference to
Exhibit 10.65 to the Quarterly Report on Form 10-Q for the quarter ended
May 24, 1998)
10.26 General Security Agreement by and between Registrant and Imperial Bank
dated June 9, 1998 (incorporated herein by reference to Exhibit 10.66 to
the Quarterly Report on Form 10-Q for the quarter ended May 24, 1998)
10.27 Credit Terms and Conditions ("Credit Agreement") by and between
Registrant and Imperial Bank dated June 9, 1998 (incorporated herein by
reference to Exhibit 10.67 to the Quarterly Report on Form 10-Q for the
quarter ended May 24, 1998)
10.28 Securities Purchase Agreement by and between Registrant and ING Equity
Partners II, L.P. dated August 7, 1998 (incorporated herein by reference
to Exhibit 10.1 to the Form 8-K filed August 10, 1998)
10.29 Promissory Note by and between Registrant and Imperial Bank dated
September 11, 1998 (incorporated herein by reference to Exhibit 10.68 to
the Quarterly Report on Form 10-Q for the quarter ended August 23, 1998)
*10.30 Employment Agreement by and between Registrant and John T. DeVito dated
September 1, 1998 (incorporated herein by reference to Exhibit 10.1 to
the Form 8-K/A filed October 5, 1998)
*10.31 Amended and Restated Employment Agreement by and between Registrant and
Douglas J. Tullio dated September 1, 1998 (incorporated herein by
reference to Exhibit 10.2 to the Form 8-K/A filed October 5, 1998)
*10.32 Alpha Microsystems 1998 Stock Option and Award Plan (incorporated herein
by reference to Exhibit 10.69 to the Quarterly Report on Form 10-Q for
the quarter ended November 22, 1998)
*10.33 Form of Incentive Stock Option Agreement for use in connection with 1998
Stock Option and Award Plan (incorporated herein by reference to Exhibit
10.70 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.34 Form of Non-employee Director Non-Qualified Stock Option Agreement to be
used in connection with 1998 Stock
<PAGE> 69
Option and Award Plan (incorporated herein by reference to Exhibit 10.71
to the Quarterly Report on Form 10-Q for the quarter ended November 22,
1998)
*10.35 Form of Non-employee Director Non-Qualified Stock Option Agreement in
Lieu of Cash Compensation for Prior Services for use in connection with
1998 Stock Option and Award Plan (incorporated herein by reference to
Exhibit 10.72 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.36 Form of Non-Qualified Stock Option Agreement for use in connection with
1998 Stock Option and Award Plan (incorporated herein by reference to
Exhibit 10.73 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.37 Form of Non-Qualified Stock Option Agreement issued in connection with
the acquisition of Delta CompuTec, Inc. (incorporated herein by
reference to Exhibit 10.74 to the Quarterly Report on Form 10-Q for the
quarter ended November 22, 1998)
*10.38 Indemnification Agreement by and between Registrant and Carlos D. De
Mattos dated December 17, 1998 (incorporated herein by reference to
Exhibit 10.75 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.39 Indemnification Agreement by and between Registrant and John T. DeVito
dated December 17, 1998 (incorporated herein by reference to Exhibit
10.76 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.40 Indemnification Agreement by and between Registrant and Benjamin P.
Giess dated December 17, 1998 (incorporated herein by reference to
Exhibit 10.77 to the Quarterly Report on Form 10-Q for the quarter ended
November 22, 1998)
*10.41 Indemnification Agreement by and between Registrant and Sam Yau dated
December 17, 1998 (incorporated herein by reference to Exhibit 10.78 to
the Quarterly Report on Form 10-Q for the quarter ended November 22,
1998)
*10.42 Management Deferred Compensation Plan dated November 1, 1998
(incorporated herein by reference to Exhibit 4.9 to the Transition
Report on Form 10-K of Registrant for the transition period ended
December 31, 1998)
10.43 First Amendment to Security and Loan Agreement and Addendum Thereto by
and between Registrant and Imperial Bank dated November 22, 1998
(incorporated herein by reference to Exhibit 4.9 to the Transition
Report on Form 10-K of Registrant for the transition period ended
December 31, 1998)
10.44 First Amendment to Credit Terms and Conditions by and between Registrant
and Imperial Bank dated November 22, 1998 (incorporated herein by
reference to Exhibit 4.9 to the Transition Report on Form 10-K of
Registrant for the transition period ended December 31, 1998)
*10.45 Consulting Agreement by and between Registrant and Randy Parks dated
March 15, 1999 (incorporated herein by reference to Exhibit 4.9 to the
Transition Report on Form 10-K of Registrant for the transition period
ended December 31, 1998)
10.46 Stock Incentive Award Plan of Registrant (incorporated herein by
reference to Exhibit 10.21 to the Annual Report on Form 10-K of
Registrant for the year ended February 26, 1984)
<PAGE> 70
10.47 Form of Stock Incentive Award and Escrow Agreement for use in connection
with the Stock Incentive Award Plan (incorporated herein by reference to
Exhibit 4.9 to the Post-Effective Amendment No. 1 to the Registration
Statement on Form 8 of the Registrant (Registration Statement No.
2-9252) filed on August 23, 1984)
10.48 First Amendment to Stock Incentive Award Plan of Registrant dated August
15, 1990 (incorporated herein by reference to Exhibit 19.16 to the
Quarterly Report on Form 10-Q of Registrant for the quarter ended August
26, 1990)
10.49 Amendment No. 1 to Securities Purchase Agreement by and between
Registrant and ING Equity Partners II, L.P. dated February 1999
(incorporated herein by reference to Exhibit 10.49 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended June 30, 1999)
10.50 Amendment No. 2 to Securities Purchase Agreement by and between
Registrant and Hampshire Equity Partners II, L.P. dated June 28, 1999
(incorporated herein by reference to Exhibit 10.50 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended June 30, 1999)
10.51 Third Amendment to Security and Loan Agreement by and between Registrant
and Imperial Bank dated July 2, 1999 (incorporated herein by reference
to Exhibit 10.51 to the Quarterly Report on Form 10-Q of Registrant for
the quarter ended June 30, 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 (incorporated herein by reference to Exhibit 10.52 to the Quarterly
Report on Form 10-Q of Registrant for the quarter ended September 30,
1999)
*10.53 Employment Agreement by and between Registrant and Robert O. Riiska
dated November 26, 1999
*10.54 Indemnification Agreement by and between Registrant and Robert O. Riiska
dated November 26, 1999
10.55 Asset Purchase Agreement by and between Registrant and R.E. Mahmarian
Enterprises, LLC dated as of December 31, 1999 (incorporated herein by
reference to Exhibit 10.1 to Form 8-K Current Report dated January 14,
2000)
10.56 Amendment No. 1 to Asset Purchase Agreement by and between Registrant
and R.E. Mahmarian Enterprises, LLC dated January 31, 2000 (incorporated
herein by reference to Exhibit 10.2 of Form 8-K Current Report dated
January 31, 2000)
10.57 Amendment No. 2 to Asset Purchase Agreement by and between Registrant
and R.E. Mahmarian Enterprises, LLC dated March 15, 2000
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney (included on signature pages of this Annual Report on
Form 10-K)
27 Financial Data Schedule
(* Denotes Management Contract or Compensation Plan)
<PAGE> 1
EXHIBIT 3.9
CERTIFICATE OF REDUCTION
OF
CLASS C 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 Richard E. Mahmarian 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 C
Cumulative, Redeemable and Exchangeable Preferred Stock (the "Class C 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 C 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 C Preferred Stock is outstanding.
FOURTH: That resolutions duly adopted by the Board of Directors of the
Company are as follows:
<PAGE> 2
"...RESOLVED, that the Certificate of Determination filed
August 25, 1998 be amended to reduce the number of authorized
shares of Class C 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 C Preferred Stock thereunder to
zero, in such form as is 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: November 18, 1999
------------------------------
DOUGLAS J. TULLIO, President
------------------------------
RICHARD E. MAHMARIAN, Director
<PAGE> 1
EXHIBIT 10.53
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective as of
the 26th day of November, 1999 (the "Effective Date") between ALPHA
MICROSYSTEMS, a California corporation (the "Company") and Robert O. Riiska (the
"Employee").
RECITALS
WHEREAS, the Company and Employee desire to enter into a contract for
the employment of Employee by the Company which shall provide compensation to
Employee in return for Employee's services to the Company;
WHEREAS, the Company further desires to provide certain compensation for
Employee in the event of his actual or constructive termination by the Company
as a result of a takeover or similar business reorganization or change in
control in order to encourage Employee to remain in the service of the Company
now and in the future when a takeover might be threatened or likely;
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 under this Agreement shall commence on
November 26, 1999, and shall be for an unspecified term until terminated by
Employee or Company pursuant to Article III below (the "Employment period").
1.3 Duties. Employee shall devote his full time, energy and talents to
serving as the Chief Financial Officer of the Company, and shall have such
duties as are typically expected of such officer, subject to the direction of
the President of the Company. The Employee will have
<PAGE> 2
such authority, power, responsibilities and duties as are inherent to his
position 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 weekly rate of Three Thousand Seventy Seven
Dollars ($3,077), which rate may be amended from time to time in accordance with
the provisions of this paragraph, payable 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. 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, Employee shall receive bonuses 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.
(b) Provided that Employee commences his duties on or before
November 29, 1999 and continues in the employ of the Company through December
31, 1999, Employee shall receive a signing bonus in the amount of Fifty Thousand
Dollars ($50,000), to be delivered on or before December 31, 1999.
(c) For each fiscal year, Employee shall be eligible to receive a
discretionary bonus of up to thirty percent (30%) of the Base Salary if one
hundred percent (100%) of the plan achievement for fiscal year 2000 has been
met. The measurement factors and basis for payment for such bonus shall be
determined by the Compensation Committee of the Company's Board of Directors.
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. Employee will also be
eligible to participate in the following benefit plans, as they may be in effect
from time to time:
(a) Company's Executive Deferred Compensation Program;
(b) Company's Profit Sharing 401(k) Plan, beginning July 1, 2000;
and
(c) Company's Employee Stock Purchase Plan for the semi-annual
period beginning January 1, 2000.
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
-2-
<PAGE> 3
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.
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 other 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:
-3-
<PAGE> 4
(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 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 Non-Competition; Non-Solicitation. During the term of this
Agreement, (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 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).
-4-
<PAGE> 5
ARTICLE III
TERMINATION
3.1 Termination of Employment. Notwithstanding anything in this
Agreement to the contrary, express or implied, this Agreement (and Employee's
employment) shall terminate immediately upon the occurrence of any of the
following: (a) written notice given at any time by Employee; (b) the death or
permanent disability (as defined below) of Employee; (c) written notice given at
any time by the Company. 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. EMPLOYEE HEREBY
ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, AND HIS EMPLOYMENT HEREUNDER, IS
TERMINABLE AT-WILL (i.e., WITH OR WITHOUT CAUSE) AT ANY TIME BY EITHER PARTY.
3.2 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 as follows:
(a) the Employee's earned but unpaid Base Salary for the period
ending on his Termination Date; and
(b) 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.
3.3 Termination Upon Change-In-Control.
(a) 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":
(i) merger or consolidation of the Company in which the
Company is not the surviving entity.
(ii) sale of all or substantially all of the assets of the
Company.
(iii) the purchase by any person or entity of more than fifty
percent (50%) of the outstanding common stock of the Company.
(b) Termination. Employee shall be entitled to the severance
payments and other severance benefits set forth in Sections 3.3(c)
hereof if Employee is terminated under either of the following
circumstances:
-5-
<PAGE> 6
(i) 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 3.3(a) 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.
(ii) 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 for a reason other than neglect
of duties or misconduct 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.
(c) Calculation of Severance Payment. Upon termination pursuant
to Section 3.3(b), the Employee shall be entitled to receive an amount
equal to his Base Salary for the Company's immediately preceding fiscal
year , payable in equal installments over a twelve-month period
beginning as soon as practicable after the Termination Date.
(d) Stock Option, Stock and Profit Sharing Plans. Upon
termination pursuant to Section 3.3(a), unless prohibited by the terms
of the applicable plan or applicable law, all of Employee's stock
options shall become fully vested.
3.4 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: President; if to
Employee, to Robert O. Riiska, 380 Olmstead Hill Road, Wilton, CT 06897, 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
payments pursuant to Section 3.3(c)shall be due after Employee's death). Subject
to the above, this Agreement shall
-6-
<PAGE> 7
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 including that offer letter dated November 9, 1999. No modification or
amendment to this Agreement shall be effective unless in a writing executed by
both parties.
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 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.
4.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
4.10 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.
4.11 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
-7-
<PAGE> 8
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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
be effective as of the Effective Date first above written.
"Company" ALPHA MICROSYSTEMS,
a California corporation
By:___________________________
Name:_________________________
Title:________________________
"Employee" ______________________________
Robert O. Riiska
-8-
<PAGE> 1
EXHIBIT 10.54
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made as of this 26th
day of November, 1999, by and between ALPHA MICROSYSTEMS, a California
corporation (the "Company"), and Robert O. Riiska ("Indemnitee"), an officer of
the Company.
WHEREAS, the Company and Indemnitee recognize the increasing difficulty
in obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation subjecting officers and directors to expensive
litigation risks at the same time that liability insurance has been severely
limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate given the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to serve as officers and directors
without adequate protection;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as officers and
directors of the Company and to indemnify its officers and directors so as to
provide them with the maximum protection permitted by law;
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
I.
INDEMNIFICATION
1.01 Third Party Proceedings. The Company shall indemnify Indemnitee if
Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or complete action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than action by or in the right
of the Company) by reason of the fact that Indemnitee is or was a director
and/or officer of the Company or any subsidiary of the Company, by reason of any
action or inaction on the part of Indemnitee while a director and/or officer or
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against all expense,
liability and loss (including attorneys' fees), judgments, fines and amounts
paid in settlement (if such settlement is approved in advance by the Company,
which approval shall not be unreasonably withheld) actually and reasonably
incurred by Indemnitee in connection with such action, suit or proceeding if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the best interests of the Company, and, with respect to
<PAGE> 2
any criminal action or proceeding, had no reasonable cause to believe
Indemnitee's conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in the best
interests of the Company, and with respect to any criminal action or proceeding,
had reasonable cause to believe that Indemnitee's conduct was unlawful.
1.02 Proceedings by or in the Right of the Company. The Company shall
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor by reason of fact that Indemnitee is or was a director and/or officer
of the Company or any subsidiary of the Company, by reason of any action or
inaction on the part of Indemnitee while a director and/or officer or by reason
of the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against all expense, liability and loss
(including attorneys' fees) and amounts paid in settlement (if such settlement
is court-approved) actually and reasonably incurred by Indemnitee in connection
with the defense or settlement of such action or suit if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the best
interests of the Company and its shareholders. No indemnification shall be made
in respect of any claim, issue or matter as to which Indemnitee shall have been
adjudged to be liable to the Company in the performance of Indemnitee's duties
to the Company and its shareholders, unless and only to the extent that the
Court in which such proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine.
1.03 Mandatory Payment of Expenses. To the extent that Indemnitee has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1.01 or 1.02 or the defense of any claim,
issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
II.
EXPENSES; INDEMNIFICATION PROCEDURE
2.01 Advancement of Expenses. The Company shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 1.01 or 1.02 hereof. Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized
hereby. The advance to be made hereunder shall be paid by the Company to
-2-
<PAGE> 3
Indemnitee within thirty (30) days following delivery of a written request
therefor by Indemnitee to the Company.
2.02 Determination of Conduct. Any indemnification (unless ordered by a
court) shall be made by the Company only as authorized in the specific case upon
a determination that indemnification of Indemnitee is proper under the
circumstances because Indemnitee has met the applicable standard of conduct set
forth in Section 1.01 or 1.02 of this Agreement. Such determination shall be
made by any of the following: (1) the Board of Directors (or by an executive
committee thereof) by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, (2) if such a quorum is not
obtainable, or, even if obtainable, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, (3) by the
shareholders, with the shares owned by Indemnitee not being entitled to vote
thereon, or (4) the court in which such proceeding is or was pending upon
application made by the Company or Indemnitee or the attorney or other person
rendering service in connection with the defense, whether or not such
application by Indemnitee, the attorney or the other person is opposed by the
Company.
2.03 Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
precedent to his or her right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to Alpha Microsystems, 2722
South Fairview Street, Santa Ana, California 92704, or such other address as the
Company shall designate in writing to Indemnitee. Notice shall be deemed
received on the third business day after the date postmarked if sent by domestic
certified or registered mail, properly addressed; otherwise, notice shall be
deemed received when such notice shall actually be received by the Company. In
addition, Indemnitee shall give the Company such information and cooperation as
it may reasonably require and as shall be within Indemnitee's power.
2.04 Notice to Insurers. If, at the time of the receipt of a notice of
a claim pursuant to Section 2.03 hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable actions to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
2.05 Selection of Counsel. In the event the Company shall be obligated
under Section 2.01 hereof to pay the expenses of any proceeding against
Indemnitee, the Company, shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee
of written notice of its election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (a) Indemnitee shall have the right to employ his or
her counsel in any such proceeding at Indemnitee's expense; and (b) if (i) the
employment of counsel by Indemnitee has been
-3-
<PAGE> 4
previously authorized by the Company, (ii) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (iii) the Company shall not,
in fact, have employed counsel to assume the defense of such proceeding, then
the fees and expenses of Indemnitee's counsel shall be at the expense of the
Company.
III.
ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY
3.01 Application. The provisions of this Agreement shall be deemed
applicable to all actual or alleged actions or omissions by Indemnitee during
any and all periods of time that Indemnitee was, is, or shall be serving as a
director and/or officer of the Company.
3.02 Scope. The Company hereby agrees to indemnify Indemnitee to the
fullest extent permitted by law (except as set forth in Article VIII hereof),
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Articles of Incorporation, the
Company's Bylaws or by statute. In the event of any changes, after the date of
this Agreement, in any applicable law, statute, or rule which expands the right
of a California corporation to indemnify a member of its board of directors or
an officer, such changes shall be, ipso facto, within the purview of
Indemnitee's rights and the Company's obligations under this Agreement. In the
event of any change in any applicable law, statute, or rule which narrows the
right of a California corporation to indemnify a member of its board of
directors or an officer, such changes, to the extent not otherwise required by
such law, statute or rule to be applied to this Agreement shall have no effect
on this Agreement or the parties' rights and obligations hereunder.
3.03 Non-Exclusivity. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Articles of Incorporation, its Bylaws, any
agreement, any vote of shareholders or disinterested directors, the California
General Corporation Law, or otherwise, both as to action in Indemnitee's
official capacity and as to action in another capacity while holding such
office. The indemnification provided under this Agreement shall continue as to
Indemnitee for an action taken or not taken while serving in an indemnified
capacity even though he or she may have ceased to serve in such capacity at the
time of any action, suit or other covered proceeding.
IV.
PARTIAL INDEMNIFICATION
4.01 If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for some or a portion of the expenses, judgments,
fines or penalties actually or reasonably incurred by him in the investigation,
defense, appeal or settlement of any civil or criminal action, suit or
proceeding, but not, however, for the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion of such expenses, judgments,
fines or penalties to which Indemnitee is entitled.
-4-
<PAGE> 5
V.
MUTUAL ACKNOWLEDGMENT
5.01 Both the Company and Indemnitee acknowledge that in certain
instances, federal law or public policy may override applicable state law and
prohibit the Company from indemnifying its directors and officers under this
Agreement or otherwise. For example, the Company and Indemnitee acknowledge that
the Securities and Exchange Commission (the "SEC") has taken the position that
indemnification is not permissible for liabilities arising under certain federal
securities laws, and federal legislation prohibits indemnification for certain
ERISA violations. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the SEC to submit
the question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
VI.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
6.01 The Company shall, from time to time, make the good faith
determination whether or not it is practicable for the company to obtain and
maintain a policy or policies of insurance with reputable insurance companies
providing the directors and officers with coverage for losses from wrongful
acts, or to ensure the Company's performance of its indemnification obligations
under this Agreement. Among other considerations, the Company will weigh the
costs of obtaining such insurance coverage against the protection afforded by
such coverage. In all policies of directors' and officers' liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer. Notwithstanding the foregoing, the Company shall have no obligation to
obtain or maintain such insurance if the Company determines in good faith that
such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a parent or subsidiary of the Company.
VII.
SEVERABILITY
7.01 Nothing in this Agreement is intended to require or shall be
construed as requiring the Company to do or fail to do any act in violation of
applicable law. The Company's inability, pursuant to court order, to perform its
obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable as provided in
this Article VII. If this Agreement or any portion hereof shall be invalidated
on any
-5-
<PAGE> 6
ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
VIII.
EXCEPTIONS
8.01 Any other provision to the contrary notwithstanding, the Company
shall not be obligated pursuant to the terms of this Agreement for the
following:
(a) Claims Initiated by Indemnitee. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, unless said
proceedings or claims were authorized by the board of directors of the Company.
(b) Improper Personal Benefit. To indemnify Indemnitee against
liability for any transactions from which Indemnitee derived an improper
personal benefit, including, but not limited to, self-dealing or usurpation of a
corporate opportunity.
(c) Dishonesty. To indemnify Indemnitee if a judgment or other
final adjudication adverse to Indemnitee established that Indemnitee committed
acts of active and deliberate dishonesty, with actual dishonest purpose and
intent, which acts were material to the cause of action so adjudicated.
(d) Insured Claims. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company.
(e) Claims Under Section 16(b). To indemnify Indemnitee for
expenses or the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
IX.
MISCELLANEOUS
9.01 Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the "Company"
shall include any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger so that if Indemnitee is or
was a director, officer, employee or agent of
-6-
<PAGE> 7
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, Indemnitee
shall stand in the same position under the provisions of this Agreement with
respect to the resulting or surviving corporation as Indemnitee would have with
respect to such constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee or agent of the Company
which impose duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its participants, or
beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the best interests of the participants and
beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have
acted in a manner "reasonably believed to be in the best interests of the
Company and its shareholders" as referred to in this Agreement.
9.02 Successors and Assigns. This Agreement shall be binding upon the
Company and its successors and assigns, and shall insure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
9.03 Notice. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressed, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked:
If to Indemnitee: Robert O. Riiska
380 Olmstead Hill Road
Wilton, CT 06897
If to Company: Alpha Microsystems
2722 South Fairview Street
Santa Ana, California 92704
or to such other address as may be furnished to Indemnitee by the Company or to
the Company by Indemnitee, as the case may be.
9.04 Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
9.05 Choice of Law. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of California, as
applied to contracts between California residents entered into and to be
performed entirely within California.
-7-
<PAGE> 8
9.06 Counterparts. This Agreement may be executed in counterparts, each
of which shall constitute an original and all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as
of the date first above written.
"Company" ALPHA MICROSYSTEMS,
a California corporation
By:
------------------------------------
Douglas J. Tullio
Its: Chairman, President and CEO
"Indemnitee" -----------------------------------------
Robert O. Riiska
-8-
<PAGE> 1
EXHIBIT 10.57
AMENDMENT NO. 2 TO ASSET PURCHASE AGREEMENT
THIS AMENDMENT NO. 2 TO ASSET PURCHASE AGREEMENT ("Amendment No. 2") is
entered into as of March 15, 2000, by and between ALPHA MICROSYSTEMS, a
California corporation doing business as AlphaServ.com (the "Seller") and R.E.
MAHMARIAN ENTERPRISES, LLC, a California limited liability company (the "Buyer")
(collectively the "Parties").
R E C I T A L S :
- - - - - - - -
WHEREAS, the Parties entered into an Asset Purchase Agreement dated
December 31, 1999 (the "Agreement") and they now desire to amend the Agreement.
WHEREAS, unless otherwise defined herein, all capitalized terms have
the same meaning as defined in the Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Parties agree to amend the Agreement as follows:
AMENDMENTS
1. Section 1.01 of the Agreement is hereby amended to add the
following:
(c) As of the date of Amendment No. 2, Seller further
transfers, sells and assigns all of its right, title and interest to
the accounts receivable set forth on Schedule 1.01H attached to
Amendment No. 2 (which schedule reflects all accounts receivable set
forth in Seller's account schedule through March 3, 2000).
2. Section 1.02 of the Agreement is hereby amended to add the
following:
(a) As of the date of Amendment No. 2, Buyer assumes all of
the obligations and liabilities of Seller relating to the accounts
payable of Seller set forth on Schedule 1.02A, attached to Amendment
No. 2 (which schedule reflects all accounts payable set forth in
Seller's activity schedule through March 3, 2000) which accounts
payable shall be considered "Assumed Liabilities" under the Agreement,
and Buyer shall indemnify and hold Seller harmless from and against any
and all claims, damages and other liabilities with respect to such
accounts payable in the same manner as is provided for all of the
Assumed Liabilities under the Agreement.
<PAGE> 2
3. Section 1.03 of the Agreement is hereby amended to add the
following:
(d) Buyer hereby agrees to pay to Seller the amount of
$500,000 in cash as follows:
(i) $250,000 as of March 20, 2000;
(ii) $125,000 as of April 20, 2000; and
(iii) $125,000 as of May 20, 2000.
IN WITNESS WHEREOF, the Parties have executed this Amendment No. 2 to
the Agreement as of the date first above written and all other terms and
conditions of the Agreement not herein deleted or amended remain as stated in
the original Agreement.
SELLER:
ALPHA MICROSYSTEMS,
a California corporation
By: /s/ Douglas J. Tullio
------------------------------------
Douglas J. Tullio
Chief Executive Officer
BUYER:
R.E. MAHMARIAN ENTERPRISES, LLC,
a California limited liability company
By: /s/ Richard E. Mahmarian
------------------------------------
Richard E. Mahmarian
Managing Member
-2-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
AMDP, Inc.
Alpha Technology Interconnect, Inc.
Delta Computec, Inc.
NQL Solutions, Inc.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in: (i) the Registration Statement
(Form S-8 No. 333-20771) pertaining to the Alpha Microsystems 1993 Employee
Stock Option Plan, as amended, the 1996 Nonemployee Director Stock Compensation
Plan and the Employee Stock Purchase Plan; (ii) the Registration Statement (Form
S-8 No. 333-29252) pertaining to the Third Amended and Restated Incentive Stock
Option Plan, the Non-Qualified Stock Option Plan and the Stock Incentive Award
Plan; (iii) the Registration Statement (Form S-8 No. 333-62411) pertaining to
the 1993 Employee Stock Option Plan and the 1993 Directors' Stock Option Plan of
Alpha Microsystems; and (iv) the Registration Statement (Form S-8 No. 333-82919)
pertaining to Alpha Microsystems 1998 Stock Option and Award Plan, as amended,
of our report dated March 10, 2000, except for notes 2, 5 and 13, as to which
the date is March 30, 2000, with respect to the consolidated financial
statements and schedule of Alpha Microsystems included in the Annual Report
(Form 10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Orange County, California
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,160
<SECURITIES> 0
<RECEIVABLES> 3,431
<ALLOWANCES> 40
<INVENTORY> 0
<CURRENT-ASSETS> 5,272
<PP&E> 2,410
<DEPRECIATION> 385
<TOTAL-ASSETS> 16,309
<CURRENT-LIABILITIES> 4,949
<BONDS> 0
17,585
0
<COMMON> 32,914
<OTHER-SE> (42,139)
<TOTAL-LIABILITY-AND-EQUITY> 16,309
<SALES> 4,491
<TOTAL-REVENUES> 34,890
<CGS> 3,424
<TOTAL-COSTS> 27,032
<OTHER-EXPENSES> 13,344
<LOSS-PROVISION> 312
<INTEREST-EXPENSE> 186
<INCOME-PRETAX> (12,158)
<INCOME-TAX> 46
<INCOME-CONTINUING> (12,204)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,204)
<EPS-BASIC> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
