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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended February 23, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ________________
COMMISSION FILE NUMBER 0-10558
ALPHA MICROSYSTEMS
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3108178
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2722 SO. 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
None 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 May 19, 1997
on the NASDAQ National Market, a date within 60 days prior to the date of
filing, was $17,247,398.
As of May 19, 1997, there were 10,821,897 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 fiscal year ended February 23, 1997, are incorporated by reference
in Part III of this Annual Report on Form 10-K.
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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 (the "Exchange Act") and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. These forward-looking statements include (i) the market
acceptance of the Company's hardware and software products and services,
including its AlphaCONNECT Internet/intranet product, (ii) the continued
development of the Company's technical, manufacturing, sales, marketing and
management capabilities, and (iii) anticipated competition.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. The Company's future success
will be highly dependent upon its ability to develop, produce, and market
products and services that incorporate new technology, are priced competitively,
and achieve significant market acceptance. There can be no assurance that the
Company's products and services will be commercially successful or technically
advanced due to the rapid improvements in computer technology and resulting
product obsolescence. There is also no assurance that the Company will be able
to deliver commercial quantities of new products in a timely manner. The success
of new product and service introductions is dependent on a number of factors,
including market acceptance, the Company's ability to manage risks associated
with product and services transitions, and the Company's ability to manage its
expenses in proportion to its revenues. There can be no assurance that such new
product and service introductions will occur without adversely affecting the
Company's revenues, cash flow, results of operations and financial condition.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. In addition, the business and operations of the
Company are subject to substantial risks which increase the uncertainty inherent
in the forward-looking statements. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
ITEM 1. BUSINESS
Alpha Microsystems (the "Company" or "Alpha Micro") is a California corporation
with its principal offices located at 2722 S. Fairview Street, Santa Ana, CA
92704 (telephone number 714/957-8500). The Company provides information
technology products (including products for the Internet/intranet market) and
services (including consulting, maintenance, support and networking) to a
variety of market segments. The Company provides these services through its more
than 40 locations throughout North America.
This Annual Report on Form 10-K refers to various trademarks of the Company and
certain trademarks of other companies.
GENERAL DEVELOPMENT OF THE BUSINESS
The Company was incorporated under California law on March 17, 1977. During the
last five years, the Company completed several acquisitions and dispositions
including both product lines and subsidiaries. Certain of these acquisitions
included service and software operations. While these acquisitions enabled it to
generate additional service revenues, there was significant attrition in
acquired customer bases.
In fiscal 1996, the Company sold CV Systems to Veterinary Centers of America
("VCA"), a major user of the product. The sale resulted from market pressures
from veterinary industry consolidation and the Company's belief that it could
apply its resources toward areas with greater growth potential. Also in 1996,
the Company refocused its marketing strategy for PANDA, its food service
software product, and evaluated additional development of Alpha2000, its dental
office software product, in an effort to economically enhance its market
acceptance. These efforts were unsuccessful and management began evaluating
these
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operations for potential disposition. In 1996, the Company also finalized
the sale of Alpha Microsystems Belgium, S.A. to a member of its Belgian
management. Subsequent to this sale, the Company continued to conduct its
European operations directly through Alpha Microsystems Great Britain Limited
("AMGB").
In fiscal 1997, the Company sold its remaining European operation, Alpha
Microsystems Great Britain Limited ("AMGB"), including Sabre Business Systems
Limited, and its remaining vertical software operations, PANDA and
AlphaHealthCare. These dispositions were consistent with the Company's strategy
to concentrate its resources on the service business and to develop and launch
the AlphaCONNECT Internet/intranet software products. (See Transition Plan.)
DESCRIPTION OF BUSINESS
The Company is a supplier of information technology products and services. The
Company historically had two principal lines of business: (1) the sale of
computer and networking hardware and software products, and (2) the service of
its own and third-party hardware and software products as well as installation,
training, and consulting services. In recognition of the intensely competitive
nature of the computer hardware industry and the migration towards open system
environments and away from proprietary systems such as those primarily sold by
the Company, the Company has in the last several years as part of a transition
plan focused its efforts on vertical niche markets, the expansion of its service
business and the development and marketing of AlphaCONNECT, an Internet/intranet
software product (See Transition Plan). The movement into vertical niche markets
did provide additional service revenues. However, the products were not
sufficiently successful to warrant additional capital commitments. Accordingly,
the Company sold its remaining vertical niche software businesses in fiscal 1997
but continues to provide service to the customer bases of these businesses.
In fiscal 1997, service revenues accounted for 63.0% of total revenues and
product sales accounted for 37.0% of total revenues, as compared to fiscal 1992,
when service revenues accounted for 33.3% of total revenues and product sales
accounted for 66.7% of total revenues.
The following table sets forth the percentage contribution to total company
revenues of each of these principal lines of business for the periods indicated:
PERCENTAGE OF REVENUES
FISCAL YEAR ENDED
--------------------------------------------------
FEBRUARY 23, FEBRUARY 25, FEBRUARY 26,
1997 1996 1995
---- ---- ----
Product Revenues 37.0% 44.2% 48.5%
Service Revenues 63.0% 55.8% 51.5%
TRANSITION PLAN
During the mid-1990s through fiscal 1997, the Company implemented a transition
plan to realign its hardware business and focus on its software and services
businesses. At the same time, the Company redeployed certain assets, closed
certain facilities, downsized its employment, initiated asset management
programs and adjusted its intangibles to more accurately reflect current market
values.
The Company closed its Italian operation in fiscal 1994 and transferred customer
service responsibilities for Italian customers to its United Kingdom subsidiary,
AMGB. The Company also closed its French subsidiary and disposed of its Belgian
subsidiary by selling it to one of the Belgian employees in 1996. In fiscal 1997
AMGB and Sabre were sold to Sanderson Electronics PLC.
In fiscal 1996, the Company wrote down certain intangibles to more accurately
reflect the current market value of such intangibles. A write-down was taken at
the end of fiscal 1996 and aggregated $1,995,000; this write-down was associated
with certain vertical software products and goodwill related to its PANDA and
AlphaHealthCare operations. In fiscal 1997, the Company sold these two
operations. Each was sold for a base price,
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consisting of cash and notes which approximated the Company's net book value,
and a contingent or "Earnout" amount which depends on the future performance of
the businesses sold. Contingent or earnout amounts realized in the future will
be included in the Company's results of operations when earned.
The Company has also taken steps that have reduced operating expenses and has
developed improved asset management techniques. In fiscal 1996, the Company
moved its corporate, software development, engineering, servicing operations and
its hardware manufacturing operation into a smaller facility in Santa Ana,
California. The Company also instituted asset management techniques to maximize
available working capital while funding software development. As a result of
these efforts the Company's working capital requirements were substantially
reduced by the end of fiscal 1996. The Company also reduced its personnel
worldwide from 392 at the end of fiscal 1995 to 191 at the end of fiscal 1997.
Additionally, the Company significantly reduced the expenses associated with the
hardware business to bring these expenses in line with the associated revenues.
Steps taken have included a substantial reduction in the Company's hardware
workforce and sales force, the outsourcing of subassemblies and certain product
lines, the reduction of floor space allocated to hardware integration and a
substantial reduction in hardware engineering expense. The Company also
reorganized its hardware business as a division within Alpha Microsystems
Services Organization ("AMSO"), resulting in a reduction of personnel expenses
associated with hardware products.
During this period the Company redirected some of its available resources and
assets toward the development and sale of software and information technology
services. The Company's investment in the development and introduction of new
products contributed to its losses during each of the fiscal years 1995, 1996
and 1997. In late 1996 and for the year 1997, a major portion of these resources
were committed to the development and launching of the AlphaCONNECT family of
Internet/intranet products.
PRODUCTS
ALPHACONNECT
In fiscal 1997, the Company announced the introduction of its
AlphaCONNECT technology and software products for use in Internet/intranet
applications. The patent pending AlphaCONNECT technology, which is highly
customizable, allows for smart data harvesting, conversion and delivery. Based
on user-specified criteria and under the control of a built-in timer,
AlphaCONNECT technology controls the entire data harvesting and updating cycle.
The technology can be set up to establish connections with legacy applications
or Web sites, collect the desired data, launch the appropriate Windows
application or Web page updating routines, filter the incoming source data, map
the output to the specified destination and shut down the application when all
processes are completed. When delivering data to Windows applications,
AlphaCONNECT can create new documents or spreadsheets, or update existing ones
containing user-defined formulas, formats and attributes. AlphaCONNECT also
facilitates the development and maintenance of dynamically self-updating Web
pages.
AlphaCONNECT is the underlying technology found in several applications
developed and announced by the Company. The Company has released AlphaCONNECT
Pro for harvesting Internet data and delivering it to user applications such as
Microsoft Excel, Microsoft Access, Microsoft Word, Quattro Pro, WordPerfect,
Borland Paradox and others, and Web browsers including Netscape and Microsoft
Internet Explorer. Also released is AlphaCONNECT StockVue, an agent application
ready-tailored for OEMs or for use by end-users to monitor their investment
portfolios, which provides custom delivery of financial data such as stock and
mutual fund quotes, news, charts and filings. The Company has announced the
future release of AlphaCONNECT BusinessVue which provides end users with a feed
of filtered, corporate and business information from the Internet. The Company
also is testing the prototype of its AlphaCONNECT Pro 2.0 software. An upgrade
to the previously released Pro product, version 2.0, features Open Data Base
Compliancy and multi-media capabilities, as well as other enhancements. The
Company expects Pro 2.0 to be released for sale in fiscal 1998. In addition, the
Company has released its AlphaCONNECT Messenger technology for e-mail
applications; this technology is currently embedded in all AlphaCONNECT
products.
The AlphaCONNECT technology provides the necessary components for additional
client applications and can be integrated with other software products and
environments. The
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Company plans to continue to research and develop additional Internet/intranet
strategies to keep pace with this fast changing market. Some of these strategies
are anticipated to expand the integration of the AlphaCONNECT technology with
third-party products and/or services currently being developed or marketed
today. No assurance can be given that any of these strategies will be
successfully implemented.
HARDWARE
The Company supports its customers with personal computer products
through its AlphaDirect program, through which the Company markets third-party
PC and peripheral products, and with its proprietary family of AM Series
computer systems, based primarily on the Motorola 680XX family of
microprocessors.
The AM Series consists primarily of the Eagle family of small business computer
systems. The Eagle family was first introduced by the Company in 1994 with the
latest member being the Super Eagle, which commenced delivery in late fiscal
1996. The AM Series also includes the AM-4000 as well as the recently announced
AM-6000 which is presently undergoing customer field testing and is anticipated
to be available for sale in the second quarter of fiscal 1998.
The primary operating system licensed with the Company's products is AMOS, the
Company's proprietary operating system. The Company also incorporates Novell
NetWare, SCO UNIX, MS-DOS, and Microsoft Windows, among others, into certain of
its products. In addition to operating systems software, the Company markets and
distributes a variety of software products for its hardware systems including
language compilers, development and conversion tools, networking products,
application programs, and utility programs.
SERVICES OPERATION
The Company maintains service operations that employ approximately 123 service
personnel in North America to provide service and technical support to the
Company's customers and certain dealers. The Alpha Microsystems Services
Operation ("AMSO") provides multi-vendor hardware and software maintenance and
repair services throughout the United States and Canada via a network of 41
field offices linked to a national dispatch and advisory center. Through the
Alpha Micro Technical Assistance Center, the Company responds to questions from
dealers and end users around the world by electronic and telephone
communications channels. The Company intends to expand the service segment of
its business through new service contracts, expansion of time and material
servicing, and alliances with third-party firms, although no assurances can be
given that the Company will be successful in expanding its services operation
above current levels.
While the Company's service revenues have decreased, AMSO's contribution to the
Company's operations has increased over the past years due to the decline in
product revenues. On a worldwide basis, revenues from service operations
represented 63.0%, 55.8% and 51.8% of total revenues for fiscal 1997, 1996 and
1995, respectively. AMSO continues to develop opportunities to service selected
products manufactured by third parties in an effort to more fully exploit the
Company's service capabilities. AMSO's services also include the design and
installation of computer networks. Other professional services offered by AMSO
include consulting services related to site preparation work, electrical power
and cabling analysis, air conditioning, humidity and static electricity
problems, and lightning protection for computer systems.
DISTRIBUTION AND MARKETING
The Company currently markets its hardware products through a network of
approximately 186 dealers and distributors located in North America, Europe,
Latin America, Australia and the Asia Pacific area. The Company's distribution
to its dealers and distributors is supported by sales and marketing personnel
located at the Company's headquarters as well as in various metropolitan
locations throughout the United States. In addition, the Company engages in
direct marketing of hardware in its service operations.
Sales of the Company's hardware are dependent upon several large customers,
however none of the Company's customers represents more than 10% of the
consolidated revenues. The loss of one or more of the Company's large hardware
customers could have a material adverse effect on the Company's results of
operations.
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The distribution strategy for AlphaCONNECT is focused on several methods of
distribution which include: (i) establishing OEM relationships with hardware and
software developers and suppliers; (ii) forming alliances with computer products
distributors; (iii) creating relationships with mass merchandisers and software
retailers; (iv) direct marketing to corporate environments; (v) developing
associations with shareware providers; and (vi) selling via the electronic
marketplace of the Internet. The Company has committed significant resources to
developing these channels and creating market awareness. In fiscal 1997,
approximately $1,200,000 was committed to these programs. Using one or more of
these distribution channels, the Company intends to derive revenues from the
sale of product, licensing of technology, or revenue sharing relationships. In
the first quarter of fiscal 1998, the Company is distributing StockVue 2.0 at
nominal or no cost, both to promote name recognition and to facilitate use of
StockVue in arrangements which may in the future generate advertising revenue
income. However, direct revenue advertising on the Internet is in the early
stages, revenues expected from such advertising have not yet materialized, the
revenues available through the Company's present alliances are uncertain, and
there is no assurance that substantial revenues will be realized through such
advertising revenues.
During fiscal 1996 and 1997, AMSO developed a national field sales and marketing
group with a view toward expanding the service business through a more
aggressive direct sales process. AMSO's sales efforts are concentrated on
securing contracts for service of open systems such as IBM RS6000s and Microsoft
and Novell networks.
During fiscal 1997, 1996 and 1995, approximately 20%, 30% and 30% of the
Company's total net sales were made to foreign dealers and users. From its
headquarters in the United States, the Company sells its products directly to
distributors and independent dealers in Europe, Mexico, Latin America,
Australia, the Asia Pacific area and other international markets.
INTEGRATION AND SUPPLIES
The Company's hardware manufacturing process consists primarily of assembling,
integrating, and testing a wide variety of purchased electronic and
electromechanical components and subassemblies. Most components and
subassemblies are available from a number of alternative sources and certain
suppliers have provided the Company with favorable consignment arrangements.
However, some components and subassemblies used by the Company are available
from a limited number of outside suppliers and may periodically be in short
supply. The Company maintains a supply of such limited source components which
it believes is sufficient to enable it to continue operations until a
replacement supplier could be qualified and any necessary redesign could be
completed with the exception of a line of Motorola microprocessors. The
inability of the Company to obtain the components and subassemblies necessary to
enable it to fill its then-existing orders for any reason, including, but not
limited to, shortages, product delays or work stoppages experienced by the
Company's suppliers, could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company's backlog is not significant because lead-time is typically less
than one week from receipt of order to shipment. The Company buys materials
pursuant to short-term forecasts and builds inventory to a semi-finished goods
state. The finished products are then integrated based upon individual customer
orders.
FOREIGN OPERATIONS
The Company's foreign sales to dealers and users comprise a substantial part of
the Company's total net sales (20%, 30% and 30% in fiscal 1997, 1996 and 1995,
respectively). (See Note 11 to the Company's Notes to Consolidated Financial
Statements contained elsewhere in this Annual Report on Form 10-K for financial
information concerning the Company's foreign operations.)
The Company believes that its gross profit margins with respect to foreign
product sales are not materially different from gross profit margins with
respect to domestic sales. A significant portion of international receivables
and payables are in currencies other than U.S. dollars, the value of which
fluctuates in relation to U.S. currency. Currency
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fluctuations can have a material adverse affect on the Company's foreign
revenue, profitability and cash flow in terms of U.S. dollars. Foreign currency
exchange gains included in the determination of income (loss) from operations
before taxes were ($42,000), $76,000 and $93,000 for the 1997, 1996 and 1995
fiscal years, respectively. To minimize the extent to which the Company may be
affected by changes in the value of foreign currencies in relation to the U.S.
dollar, from time to time the Company hedges some of its foreign currency
transactions by short-term forward foreign exchange contracts. The Company's
operations outside the United States are subject to the usual risks and
limitations attendant upon investments in foreign countries, such as
fluctuations in currency values, exchange control regulations, wage and price
controls, employment regulations, effects of foreign investment laws,
governmental instability (including expropriation or confiscation of assets),
and other potentially detrimental domestic and foreign governmental policies
affecting U.S. companies doing business abroad.
WARRANTY
The Company provides a one-year parts and labor return to factory or ninety-day
on-site warranty with an option for on-site or extended warranties on most
products, other than software. Software licensed by the Company is not warranted
by the Company and is licensed "as is." Applications software and hardware
provided by third parties is covered by the warranties of the third-party
suppliers. The Company has not had significant warranty problems and believes
its warranty reserves are adequate based on the Company's historical experience.
ENGINEERING, RESEARCH AND DEVELOPMENT
The Company intends to continue investing in engineering, research and
development for both the AlphaCONNECT line of products and the AM Series of
hardware products. Annually, management determines the amount of such investment
after considering the Company's profitability levels and technological standing
within the industry. Engineering support and services and research and
development expenses totaled $1,500,000, $2,093,000 and $2,239,000, or 17.3%,
14.5% and 11.9% of the Company's product revenue, respectively, in fiscal years
1997, 1996 and 1995. In accordance with Statement of Financial Accounting
Standards No. 86, 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. (See Note 1 to the
Notes to Consolidated Financial Statements included elsewhere in this Annual
Report on Form 10-K.)
The Company has, in the past, utilized independent software developers where
appropriate and entered into agreements with such developers to design, enhance,
and/or support products to be marketed by the Company. Some agreements provide
for an initial amount to be paid as a development fee and a royalty structure
based on future revenues received from the developed product and some provided
for compensation on an hourly rate basis.Currently, the Company develops its
software internally. However, such contracts may be utilized in the future as
appropriate.
COMPETITION
The computer industry is characterized by rapid technological changes and
product obsolescence and the Company, in particular, faces severe competitive
pressures as many competitors have aggressively targeted the broad range of
market segments in which the Company's products and services compete. The
Company's competition includes a large number of hardware manufacturers, service
providers and software developers and resellers, many of which have longer
operating histories, greater name recognition, larger installed customer bases
and databases and significantly greater financial, technical and marketing
resources than the Company. Such competitors may be able to undertake more
extensive marketing campaigns and make more attractive offers to potential
employees, distribution partners, advertisers and content providers. As a result
of their greater resources, they may also be better able than the Company to
modify and enhance their products to meet changing market demands.
Due to the declining popularity of proprietary systems in favor of open systems
such as Microsoft Windows, there is an ever declining number of distributors,
dealers and developers of software and related products for use with the
Company's proprietary systems,
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which continues to have an adverse effect upon the Company's competitive
position, generally, impacting both its proprietary product sales and
corresponding service business. The Company believes that its 41 Company service
locations enable it to compete effectively against comparably-sized service
providers in the open systems service market, where it is attempting to increase
market penetration. However, there are larger service providers than the
Company, and there can be no assurance that competition from existing
competitors will not substantially increase, that established or new companies
will not enter the market in direct competition with the Company or that the
Company will be able to compete successfully with such existing or new
competitors.
With respect to the Company's AlphaCONNECT technology, the market for Internet
services and products is intensely competitive. Since there are no substantial
barriers to entry for Internet services and products, the Company expects
competition in these markets to persist. The Company believes that the principal
competitive factors in these markets are name recognition, performance, ease of
use, functionality, content and price. Competitors include online service and
content providers, Web site operators, providers of Web browser software (such
as Netscape and Microsoft) and other Internet services and products that
incorporate data retrieval, conversion and delivery or "push" technology.
The Company's future success will depend in significant part on its ability to
adapt to rapidly changing technologies, keep its products competitively priced,
maintain and enhance its market position, adapt its services and products to
evolving industry standards, and continually improve the performance, features
and reliability of its services and products in response to both evolving
demands of the marketplace and competitive service and product offerings. There
can be no assurance that the Company will have the resources to respond to this
rapidly evolving market.
GOVERNMENTAL REGULATION
The Company's operations are subject to a number of federal, state and local
laws relating to environmental, health, safety and labor matters applicable to
business generally. The Company believes its business is operated in substantial
compliance with all material applicable government regulations. However, there
can be no assurances that future regulations will not require the Company to
modify its products, business or operations to meet environmental, health,
safety, or labor requirements, or that the Company will be able, for financial
or other reasons, to comply with such future requirements. Failure to comply
with future governmental regulations could subject the Company to fines or
injunctions, which could result in a material adverse effect on the Company's
business, results of operations and financial condition. Although the Company is
not aware of any claim involving violation of environmental, health, safety or
labor laws or regulations, there can be no assurance that such claim may not
arise in the future, which may have a material adverse effect on the Company's
business, results of operations, and financial conditions.
The currently marketed versions of the Company's multi-user systems (including
the recently announced AM-6000) have been successfully tested by an independent
testing agency for compliance with Federal Communications Commission
requirements for electromagnetic interference in commercial environments.
PATENTS, TRADEMARKS AND LICENSES
In addition to claiming standard copyright protection, the Company has submitted
three provisional patent applications and one regular patent application to the
United States Patent and Trademark Office with respect to certain aspects of its
AlphaCONNECT technology. There can be no assurance that any patent will be
issued with respect to any aspect of AlphaCONNECT. The Company may decide to
abandon prosecution prior to issuance of a patent. In addition, there can be no
assurance that the provisional patent applications will provide priority for the
later filed regular patent application. If any patent issues, there can be no
assurance that any claims allowed will be sufficiently broad to protect the
Company's technology, to deter competitors or to prevent third parties from
developing equivalent technology that does not infringe such claims, 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,
invalidated or held unenforceable, or that any rights granted thereunder would
provide proprietary protection to the Company and its investment
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in AlphaCONNECT. Failure of any patents to provide protection of the Company's
technology may make it easier for the Company's competitors to offer technology
equivalent to or superior to the Company's technology.
"AlphaWRITE" (stylized)," "AlphaACCOUNTING," "AlphaACCOUNTING (stylized),"
"AlphaBASIC," "AlphaCALC," "AlphaFORTRAN 77," "AlphaLAN," "AlphaPASCAL,"
"AlphaPASCAL Programming System," "AlphaRJE," "AlphaSERV," "AlphaWRITE
(stylized)," "AMOS," "AMSO," "insight/AM," "NODESTAR," "Videotrax," "Videotrax
and Design," and the slogan "Right. From The Start." Several of these marks have
also been registered in certain foreign countries. The Company claims the
trademark "OmniBasic" in certain foreign countries. The Company has also
registered the trademark "Alpha Micro" in selected states and various foreign
countries. In addition, the Company has pending applications for the marks
"AlphaStockVue," "StockVue," "AlphaCONNECT," "AlphaCONNECT Messenger," and the
slogan "AlphaCONNECT. Where the Internet gets down to business." The Company
claims common law rights for the following marks: "AlphaCONNECT Pro,"
"AlphaCONNECT SportsVue," "SportsVue," "AlphaCONNECT BusinessVue,"
"BusinessVue," "AlphaCONNECT Power Package," "AlphaCONNECT EdgarVue," and
"EdgarVue."
The Company markets a variety of software programs that it has either developed
internally, acquired ownership rights to, or is marketing through license
agreements with third-party vendors. Internally developed software, as well as
software in which all ownership rights, title and interest have been acquired
from any third-party vendor, is distributed to dealers and users through a
licensing system primarily in object code format. Source code to these software
programs is not licensed for distribution and the Company claims such
intellectual property protection as may be available for such source code. The
Company's proprietary AMOS operating system is marketed and maintained in this
manner. Software acquired from third-party vendors pursuant to master licenses
is distributed to the Company's dealers and users for their use pursuant to a
structure of sub-licenses consistent with such master licenses.
The Company licenses the AlphaLAN network software product from U.A. Systems,
Inc. pursuant to a nonexclusive, worldwide (except India) license that was
renewed for a three-year term ending December 31, 1998, with successive one-year
renewals. Either party may terminate such agreement upon giving notice to the
other party at least 60 days prior to the end of any one-year renewal period.
The Company licenses the AcuCOBOL AMOS-based compiler from AcuCOBOL, Inc.
pursuant to a ten-year, exclusive worldwide license commencing October 29, 1992,
and terminable by AcuCOBOL, Inc. upon default by the Company, including the
Company's failure to meet certain minimum royalty requirements. Although no
assurances can be given, the Company believes it will be able to renew its
material licenses on terms that will be acceptable.
To protect its intellectual property, the Company also relies 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
the Company with meaningful remedies in the event of an improper use or
disclosure of proprietary information. In addition, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future or that the Company will be able to resolve such claims or disputes
on terms acceptable to the Company.
While patent, copyright and trade secret rights provide certain protection to
the Company, the Company believes that its success is less dependent on those
ownership rights than on its innovative skills, technical competence and
marketing abilities.
EMPLOYEES
On February 23, 1997, the Company and its subsidiaries employed approximately
191 persons. The Company's ability to attract and retain qualified personnel is
a significant factor in its future success. The Company has never experienced a
work stoppage and at present no employees are represented by a labor
organization. The Company considers its employee relations to be good.
9
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ITEM 2. PROPERTIES
The Company occupies 48,643 square feet of a 66,200 square foot facility located
in Santa Ana, California. The lease, which began on July 1, 1995, is for a term
of 66 months with an average annual rent of $285,000. The Company is
depreciating tenant improvements of $923,000 over the life of the lease. In
fiscal 1997, the Company subleased a portion of the 66,200 square foot facility
for approximately $95,000 annually.
ITEM 3. LEGAL PROCEEDINGS
Carlos Garralda and Andre Warnier, employees of the Company's former subsidiary,
Alpha Microsystems Belgium, S.A. ("AMB"), filed an action in November 1995
against AMB and the Company in Orange County Superior Court alleging that AMB is
in breach of its obligations under Belgium employment law to pay salaries for a
notice period of up to two years following termination of employment. The
Plaintiffs allege, among other things, that the Company has alter ego liability
for these obligations. The plaintiffs are claiming compensatory damages in
excess of $780,000 and unspecified punitive damages. A settlement of the case
between AMB and Andre Warnier in the Belgium action was effected on October 18,
1996. Five hundred thousand dollars ($500,000) of the compensatory damages in
the Orange County lawsuit are related to the claims by Mr. Warnier. This
settlement should result in a dismissal of the Warnier portion of the Orange
County lawsuit. The Court has continued its temporary stay of this lawsuit in
its entirety until July 1997 in order to await the outcome of virtually
identical litigation instituted by the plaintiffs against AMB in Belgium.
Although no assurances as to the outcome of the litigation can be given,
management believes that its defenses to the litigation are meritorious.
In December 1995, Phoenix Marketing, Inc. d.b.a. Electronic Business Systems,
Inc., in response to the Company's collection efforts for a past due account,
filed an amended cross-complaint alleging damages of $3,200,000 for defective
merchandise, loss of business reputation and loss of future business. The Iowa
court has referred this case to arbitration, which arbitration must be completed
on or before October 31, 1997. Although no assurances as to the outcome of the
litigation can be given, management believes that the plaintiff's claims are
without merit.
The Company is currently involved in certain other claims and litigation. The
Company does not consider any of these other claims or litigation to be
material. Management has made provisions in the Company's financial statements
for the settlement of lawsuits for which unfavorable outcomes are both probable
and estimable. In the opinion of management, results of known existing claims
and litigation will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
10
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OFFICERS OF THE REGISTRANT
--------------------------
Certain information regarding the officers of the Company is set forth in the
following:
CLARKE E. REYNOLDS, 76, has served as Chairman of the Board of Directors of the
Company since May, 1991 and has been a director of the Company since 1989. Mr.
Reynolds served as Chief Executive Officer of the Company from January 1991 to
August 1991, as President from November 1990 to May 1991, as Vice Chairman of
the Board from October 1990 to May 1991, and as Chief Operating Officer of the
Company from November 1990 to May 1991. Mr. Reynolds provided independent
consulting services to the Company from 1984 through 1990, was an employee of
the Company from November 1990 through May 1993, and presently provides
independent consulting services to the Company. Mr. Reynolds was previously
employed by NCR Corporation for over 47 years, during which time Mr. Reynolds
held a variety of sales and marketing and general management positions including
Vice President Pacific Region, Managing Director and Chairman of the Board NCR
United Kingdom, Vice President NCR Europe and Vice President Executive Office.
Mr. Reynolds serves as a Director of Sparta, Inc., which provides a wide range
of scientific, engineering and technical assistance services, primarily for the
U.S. military services and the Department of Defense.
DOUGLAS J. TULLIO, 54, has served as President, Chief Executive Officer and a
Director of the Company since 1991. Mr. Tullio also served as Chief Operating
Officer from May 1991 to March 1994. Mr. Tullio joined the Company in January
1990 and served as Executive Vice President of the Company and President of the
Company's subsidiaries, Rexon Business Machines and AMS Computers. (In April
1990, these subsidiaries were merged into the Company.) From 1984 to 1989, he
worked for General Automation, Inc., in the positions of President and member of
the Board of Directors, Executive Vice President, Vice President, General
Manager and Vice President of Sales and Marketing.
JAMES A. SORENSEN, 56, has served as Vice President and Chief Financial Officer
of the Company since November 1996. Prior to joining the Company, Mr. Sorensen
was a financial consultant. From 1993 to 1995, he was the Chief Financial
Officer for Interfilm, a public company in the entertainment and computer
industry. From 1986 to 1993, he was the Chief Financial Officer for Showscan
Corporation, and from 1976 to 1985, was the Chief Financial Officer of Plitt
Theaters, a national theater chain. Prior to 1976 he held various accounting and
financial positions, including several years with Ernst & Young.
JOHN F. GLADE, 54, was appointed a Director in May 1996 and has served as
Secretary of the Company since January 1987 and Vice President, Engineering and
Manufacturing since May 1988. Mr. Glade joined the Company as Director of
Engineering in September 1978, served as Vice President, Engineering from
February 1979 until June 1985 and served as Vice President, Advanced Products
Development from June 1985 until May 1988. He also served as Secretary of the
Company from February 1983 to August 1985 and a Director of the Company from
1979 through 1994.
DENNIS E. MICHAEL, 39, was named Vice President of Marketing in May 1996 and
previously held the position of Director of Marketing for the Company. He served
in various marketing management capacities at the Company between 1983 and 1990
and with AST from 1990 to 1995.
RANDALL S. PARKS, 36, has served as Vice President of Services for the Company
since 1995. Prior to his position as Vice President of Services, Mr. Parks
served as Director of Service Operations, Eastern Regional Manager and Branch
Field Engineering Manager for the Company. His previous experience was as field
service engineer with several companies, including Uni Dynamics, Mettler
Instruments and Consultant Field Engineering.
11
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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 range of high and low sales prices for the
Company's common stock (ALMI) for the fiscal quarters indicated, as quoted on
the NASDAQ National Market:
HIGH LOW
---- ---
FISCAL YEAR ENDED FEBRUARY 23, 1997
- -----------------------------------
First Quarter $5 25/32 $ 1/2
Second Quarter 4 3/4 1 1/4
Third Quarter 2 5/8 1 15/32
Fourth Quarter 2 15/32 1 3/16
FISCAL YEAR ENDED FEBRUARY 25, 1996
- -----------------------------------
First Quarter $1 3/32 $ 25/32
Second Quarter 1 7/16 29/32
Third Quarter 1 7/16 15/16
Fourth Quarter 1 1/4 9/16
On May 19, 1997, the high was $1 11/16, the low was $1 19/32, and the
approximate number of record holders of the Company's common stock was 515.
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 subsequently issued by the
Company.
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ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED
-------------------------------------------------------------------------------------------
FEB. 23, FEB. 25, FEB. 26, FEB. 27, FEB. 28,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Product sales $ 8,692 $ 14,466 $ 18,823 $ 20,582 $ 28,261
Service revenues 14,820 18,297 19,962 18,747 16,781
----------- ----------- ----------- ----------- -----------
Net sales 23,512 32,763 38,785 39,329 45,042
Cost of sales 16,165 22,967 27,385 23,876 28,440
----------- ----------- ----------- ----------- -----------
Gross margin 7,347 9,796 11,400 15,453 16,602
Income (loss) before taxes (2,742)(4) (3,555)(3) (6,247)(2) 223 (3,819)(1)
Net income (loss) (2,770)(4) (3,575)(3) (6,247)(2) 336 (3,732)(1)
Net income (loss) per share $ (0.28) $ (0.54) $ (0.95) $ 0.08 $ (1.25)
=========== =========== =========== =========== ===========
Number of shares used in the
computation of per share
amounts 9,727,432 6,564,882 6,580,470 4,025,090 2,993,878
BALANCE SHEET DATA:
Current assets $ 12,976 $ 7,199 $ 10,914 $ 15,252 $ 15,193
Current liabilities 3,648 6,377 7,726 6,936 8,985
----------- ----------- ----------- ----------- -----------
Working capital 9,328 822 3,188 8,316 6,208
Inventories 305 943 1,948 2,593 4,102
Total assets 17,195 13,061 17,902 23,100 20,775
Long-term obligations 34 201 140 154 50
Shareholders' equity $ 13,513 $ 6,483 $ 10,036 $ 16,010 $ 11,740
- ------------------------
(1) Includes a charge of $2,676,000 for the restructuring of the Company's
operations including the closure of its operations in France and Italy.
(2) Includes charges of $972,000 for the sale of Alpha Microsystems Belgium,
S.A., $783,000 for the write-down of customer lists, $649,000 for the
software associated with the Company's hardware business, $507,000
associated with the write-down of slow moving service spares, $279,000
severance, $694,000 in slow moving inventory associated with the
Company's hardware business, and $304,000 in anticipation of the sale of
the imaging and VSO product lines.
(3) Includes charges of $1,995,000 for the write-off of intangible assets
primarily associated with the Company's AlphaHealthCare subsidiary and
PANDA division.
(4) Includes $1,162,000 of expenses attributable to the launch and marketing
expenses for the AlphaCONNECT software products.
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14
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:
RELATIONSHIP TO NET SALES
----------------------------------------------
FISCAL YEAR ENDED
----------------------------------------------
FEB. 23, FEB. 25, FEB. 26,
1997 1996 1995
---- ---- ----
Net sales:
Product sales 37.0 % 44.2 % 48.5 %
Service revenues 63.0 55.8 51.5
----- ----- -----
Total net sales 100.0 % 100.0 % 100.0 %
Cost of sales 68.8 70.1 70.6
----- ----- -----
Gross margin 31.2 % 29.9 % 29.4 %
Selling, general and administrative expense 38.3 36.2 40.1
Engineering, research and development expense 6.4 6.4 5.8
Interest (income) expense, net (1.0) (0.2) (0.4)
Other (income) expense (0.8) (1.6) --
----- ----- -----
Income (loss) before taxes (11.7) (10.9) (16.1)
Net income (loss) (11.8)% (10.9)% (16.1)%
GENERAL
The Company, which was originally a designer and vendor of computer hardware and
related systems software, has transitioned its business to focus on areas the
Company believes offer higher growth potential. During this transition period,
the Company incurred substantial operating losses in certain operations, took
significant write-offs against non-performing assets and sold businesses that
did not fit the Company's long-term strategy of developing a technology and
service organization that was more focused on the changing marketplace.
As part of this transition strategy, costs were reduced in line with decreasing
revenues in the hardware business, resources were invested in its service
business and research and development focused on the development of software
products for the PC, Web and Internet markets. In 1996, the first of the new
products, AlphaCONNECT, was developed and announced.
During fiscal 1997, the Company continued to reduce expenses in the hardware
related businesses, sold its remaining non-performing assets and European
operations and developed a family of AlphaCONNECT software products for
introduction to the marketplace. The Company's net loss for the year was
$2,770,000. Included in the 1997 results are costs of approximately $1,162,000
related to the marketing and launching of the AlphaCONNECT product line.
During fiscal 1997, the Company's cash and liquidity position improved
substantially as a result of a warrant call and sale of its European subsidiary.
These sources of cash amounted to approximately $11,574,000 and provided the
resources needed to market and develop the AlphaCONNECT software line while
continuing to invest in the service business.
The Company operates on a 52/53-week fiscal year ending on the last Sunday in
the month of February. Fiscal years 1997, 1996 and 1995 ended on February 23,
1997, February 25, 1996 and February 26, 1995, respectively.
The discussion herein is qualified by reference to the Introductory Note set
forth in the beginning of this Annual Report on Form 10-K.
14
15
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales in fiscal 1997 decreased $9,251,000, or 28.2 percent, to $23,512,000,
compared to $32,763,000 for fiscal 1996. This decrease includes $7,218,000,
approximately 78.0 percent, relating to product lines and subsidiaries sold
during 1997.
Total product revenue declined $5,774,000, or 39.9 percent, to $8,692,000 from
approximately $14,446,000 for the comparable period in 1996. Approximately 57.9
percent of the decline in product revenues was attributable to the European
market (including $2,682,000 attributable to the absence of the UK subsidiary
sold on August 19, 1996). The remaining decline was due to a decrease in the
Company's domestic traditional product revenues and the product revenues at its
AlphaHealthCare subsidiary.
Total service revenue for fiscal 1997 declined $3,477,000, or 19.0 percent, to
$14,820,000 from $18,297,000 for the prior year. Approximately 62.5 percent of
this decline was due to the European market (including $1,863,000 attributable
to the absence of the Company's UK subsidiary). The remaining decline was due
primarily to a decrease in the Company's traditional Alpha Micro Operating
System ("AMOS") based service contracts, and a decrease in support revenues from
the Company's AlphaHealthCare subsidiary. The Company has expanded its base of
support services, including field maintenance and networking, and intends to
invest additional resources in this area. In addition, the Company is expanding
its domestic service sales and marketing efforts to capitalize on its current
base and further expand revenues from the open systems generation market.
Total gross margin for the Company for fiscal 1997 increased to 31.2 percent,
compared to 29.9 percent during the prior year, due to an increase in product
gross margin offset by declines in the service gross margin. Product gross
margin for fiscal 1997 increased to 44.2 percent, compared to 29.3 percent for
1996. The increase in product gross margin was primarily due to a relatively
greater proportion of higher margin AMOS products sold both in the domestic and
European markets. Fiscal 1996 also included write-offs of $1,389,000 in
capitalized software associated with the PANDA and Alpha2000 product lines. In
addition, the sublease of a portion of the corporate headquarters facility, a
reduction in the headcount in the manufacturing area, and a continued effort to
control costs, also contributed to the improvement in product gross margin.
Service business gross margin declined to 23.7 percent during fiscal 1997 from
30.4 percent during 1996. The decline in gross margin was primarily due to a
significant increase in the service sales force and the sale of the Company's UK
subsidiary that generated higher service margins than the domestic service
organization. Additionally, the AlphaHealthCare subsidiary that was sold in
January 1997 and the third-party service contracts contributed lower margins
than on the traditional AMOS-based service contracts. To improve revenues, the
service organization is focusing on obtaining new contracts for its networking
support services, supporting vertical markets with services, and increasing
third-party services. Revenue from these new areas of focus generally produce
lower margins than the Company's traditional service business. The Company
continues to evaluate potential service acquisitions which meet its financial
and market criteria.
Selling, general and administrative expenses decreased $2,857,000 to $8,998,000
in fiscal 1997 from $11,855,000 in 1996. The absence of the UK subsidiary during
the last seven months of the current year resulted in a decrease in selling,
general and administrative expenses of approximately $1,997,000. Additionally, a
reduction in headcount and a more vigilant approach to expense control in areas
relating to the traditional business resulted in the balance of the reduction.
Research and development expenses (which include engineering support and
services) were $593,000 lower in fiscal 1997 than in fiscal 1996. Additionally,
approximately $971,000 of new software development expenses have been
capitalized in the current fiscal year, as compared to $976,000 in the prior
fiscal year. Research and development expenses as a percentage of product sales
increased to 17.3 percent from 14.5 percent during fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues in fiscal 1996 of $32,763,000 decreased $6,022,000, or 15.5 percent,
compared to
15
16
$38,785,000 for fiscal 1995 revenues. The largest portion of this decrease was
in product revenues, which decreased $4,357,000, or 23.1 percent, to $14,466,000
from $18,823,000 in fiscal 1995. This decrease was attributable in part to
actions taken by management during the year, such as the sale of the Company's
Pick 64, VSO (veterinary software) and imaging software, along with the loss of
sales for related hardware. In addition, product revenue decreased due to the
Company selling its Belgian subsidiary to local management during the first
quarter of fiscal 1996. These actions accounted for $2,394,000, or 54.9 percent,
of the decrease in product revenues during the year. In addition, the Company's
traditional hardware business continued to decline by approximately $1,773,000,
or 19.3 percent, to $7,400,000. During fiscal 1996, European hardware revenues
decreased $1,128,000, or 18.7 percent, to $4,891,000 from $6,019,000 in fiscal
1995.
Service revenues in fiscal 1996 decreased by $1,665,000, or 8.3 percent, to
$18,297,000 from $19,962,000 in fiscal 1995. The decrease was primarily
associated with the Company's United States operations and was mainly
attributable to a reduction in service revenue from prior acquisitions (Alpha
Computer Service, Inc. and MGI Group, International, Inc.). In addition,
revenues from the traditional proprietary service contracts declined. However,
the Company was able to stabilize its service business during fiscal 1996,
generating approximately $3,400,000 in domestic revenues during each of the four
quarters of the year with no material drop off in business during the last half
of the year. This was primarily accomplished by additional investment in service
sales and marketing personnel, increased marketing and advertising, and
expanding and enhancing its base of support services such as field maintenance,
networking, and open and mixed system operating environment support, including
AIX and IBM RS6000 support.
The gross margin decrease of $1,604,000 to $9,796,000 in fiscal 1996, compared
to $11,400,000 for fiscal 1995 was primarily associated with lower revenues. The
gross margin percentage increase of 0.5 percentage points to 29.9 percent in
fiscal 1996, compared to 29.4 percent in fiscal 1995, was primarily associated
with the Company's write-offs to cost of goods sold of approximately $2,777,000
in the fourth quarter of fiscal 1995, compared to write-offs in the fourth
quarter of fiscal 1996 of $1,389,000, in capitalized software associated with
the PANDA and Alpha2000 product lines.
Product gross margins in fiscal 1996 decreased by $1,213,000 to $4,238,000 from
$5,451,000 in fiscal 1995 due to the decrease in product sales in fiscal 1996,
when compared to fiscal 1995. The gross margin was negatively impacted in fiscal
1995 by the write-offs taken in the fourth quarter, which was primarily
responsible for the comparative increase in fiscal 1996. Product gross margin as
a percentage of product sales for fiscal 1996 increased by 0.3 percentage points
to 29.3 percent, compared to 29.0 percent in fiscal 1995, primarily due to lower
amount of write-offs taken in fiscal 1996 when compared to fiscal 1995.
Service gross margins in fiscal 1996 decreased by $391,000 to $5,558,000 from
$5,949,000 in fiscal 1995. The decrease in gross margin during fiscal 1996 was
associated with lower volume and a larger portion of the service revenues being
derived from lower margin open system contract revenues. The service gross
margin percentage for fiscal 1996 increased by 0.6 percentage points to 30.4
percent, compared to 29.8 percent in fiscal 1995. The comparable higher gross
margin percentage in fiscal 1996 was primarily associated with write-offs taken
in fiscal 1995.
Selling, general and administrative expense in fiscal 1996 decreased by
$3,698,000, or 23.8 percent, to $11,855,000 from $15,553,000 in fiscal 1995.
This was primarily due to the Company's continuing cost reduction program,
which, in fiscal 1996, included consolidating its European operations,
relocating its Santa Ana operations to a lower-cost facility, and reducing
headcount to 321 at February 25, 1996, from 392 at February 26, 1995. In
addition, the Company took a bad debt charge associated with selling its Belgian
operations and incurred severance expenses during fiscal 1995 of $237,000.
Research and development expense in fiscal 1996 was $146,000 lower than fiscal
1995. The Company continued to develop PANDA and Alpha2000 as well as its
AMOS-based family of products.
The Company reported other income in fiscal 1996 of $597,000, which was
primarily associated with the sale of the Pick 64 product line during the first
quarter and interest income earned during the year.
16
17
The Company reported a net loss of $3,575,000, or $0.54 per share, compared to a
net loss of $6,247,000, or $0.95 per share, for fiscal 1995. The loss is
attributable to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During fiscal 1997, the Company's working capital increased by $8,506,000 to
$9,328,000 from $822,000 at February 25, 1996. Net cash and short-term
investments in U.S. treasury bills increased during this period by $8,075,000 to
$8,580,000, primarily due to the redemption of warrants and the sale of the
Company's European subsidiary. Net cash used in operating activities during
fiscal 1997 was $1,882,000, compared to $293,000 during fiscal 1996, primarily
due to the Company's increased investment in Internet and intranet products.
On October 11, 1996, the Company and its bank signed an amendment to the
Company's existing loan agreement extending its credit line to October 10, 1997.
Pursuant to the terms of the amendment, the Company has a revolving line of
credit up to a maximum of $2,000,000, based upon fifty percent (50%) of the
eligible accounts receivable and under which letters of credit and the foreign
exchange portion shall not exceed in the aggregate at any one time $500,000.
Borrowings under the line of credit bear interest at prime plus two and one half
percent (2.5%). In addition, the Company issued 25,000 warrants to the lender.
The line of credit is secured by substantially all of the Company's assets.
Effective December 1, 1996, the loan agreement was further amended such that its
availability is subject to financial covenants requiring the Company to maintain
a quick ratio not less than 2.50 to 1, a liquidity ratio of not less than 1.50
to 1, and a ratio of total liabilities to tangible net worth no more than 0.50
to 1. At February 23, 1997, the Company had no outstanding bank borrowings.
The Company believes that it has sufficient working capital to finance its
requirements for the next twelve months. The Company's capital requirements
depend on a variety of factors, including, but not limited to, the rate of
decline in the traditional business; the success, timing, and amount of
investment required to penetrate the Internet/intranet markets; service revenue
growth or decline; and potential acquisitions.
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 report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
18
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 fiscal year ended
February 23, 1997.
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19
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:
PAGE NUMBER
-----------
Report of Independent Auditors 25
Consolidated Balance Sheets at February 23, 1997 and February 25, 1996 26
Consolidated Statements of Operations for the years ended February 23, 1997,
February 25, 1996 and February 26, 1995 27
Consolidated Statements of Shareholders' Equity for the years ended February 23,
1997, February 25, 1996 and February 26, 1995 28
Consolidated Statements of Cash Flows for the years ended February 23, 1997,
February 25, 1996 and February 26, 1995 29
Notes to Consolidated Financial Statements
(2) The following financial statement schedule for the fiscal years 1995,
1996, and 1997 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) Form 8-K filed on February 18, 1997, reporting the sale of its
PANDA operation to Pacific Triangle Software, Inc. and the
sale of AlphaHealthCare, Inc. to GLR Systems, Inc., including
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
November 24, 1996, Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the Year Ended February 25, 1996,
and Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Nine Months Ended November 24, 1996
(c) 1. The Index of Exhibits is as follows:
2. Exhibits:
2.1 Agreement of Purchase and Sale by and between Registrant and Alpha
Computer Services, Inc., dated February 24, 1994 (incorporated herein
by reference to Exhibit 2.9 to the Quarterly Report on Form 10-Q for
the quarter ended May 29, 1994)
2.2 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")
2.3 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)
19
20
2.4 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)
3.1 Articles of Incorporation of Registrant dated as of March 16, 1997
(incorporated herein by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 (Registration No. 2-72222) of Registrant)
3.2 Certificate of Amendment of Articles of Incorporation of Registrant
dated as of September 29, 1988
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)
4.1 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)
4.2 Antidilution 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)
4.3 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)
4.4 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)
4.5 Antidilution 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)
4.6 Warrant to Purchase Common Stock issued to Dominick & Dominick dated
October 15, 1996
*10.2 Form of Incentive Stock Option Agreement (incorporated herein by
reference to Exhibit 10.1 to Amendment No. 1 of the Form S-2
Registration Statement filed with the Securities and Exchange
Commission on September 30, 1993)
*10.3 Form of Amended and Restated Incentive Stock Option Agreement
(incorporated herein by reference to Exhibit 10.51 to the Amendment No.
2 of the Form S-2 Registration Statement filed with the Securities
Exchange Commission on October 15, 1993)
*10.5 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)
*10.6 Non-Qualified Stock Option Plan of Registrant (incorporated herein by
reference to Exhibit 10.22 to the Annual Report on Form 10-K of
Registrant for the Year Ended February 26, 1984)
20
21
*10.8 Form of Non-Qualified Stock Option Agreement for use in connection with
Non-Qualified Stock Option Plan (incorporated herein by reference to
Exhibit 4.8 to the Post-Effective Amendment No. 1 to the Registration
Statement on Form 8 of the Registrant (Registration Statement No.
29252) filed on August 23, 1984)
*10.9 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)
*10.10 Revised Form of Non-Qualified Stock Option Agreement for use in
connection with Non-Qualified Stock Option Plan (incorporated herein by
reference to Exhibit 10.30 to the Annual Report on Form 10-K of
Registrant for the Year Ended February 23, 1986)
*10.11 Form of Contingent Non-Qualified Stock Option Agreement for use in
connection with Non-Qualified Stock Option Plan (incorporated herein by
reference to Exhibit 10.31 to the Annual Report on Form 10-K of
Registrant for the Year Ended February 23, 1986)
*10.12 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)
*10.13 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)
*10.14 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)
*10.15 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)
*10.16 Revised Form of Non-Qualified Stock Option Agreement for use in
connection with Non-Qualified Stock Option Plan (incorporated herein by
reference to Exhibit 10.31 to the Annual Report on Form 10-K of
Registrant for the Year Ended February 22, 1987)
*10.17 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)
*10.18 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)
*10.20 Second Amendment to Alpha Microsystems Profit Sharing Plan dated
January 22, 1988 (incorporated herein by reference to Exhibit 10.31 to
the Annual Report on Form 10-K of Registrant for the Year Ended
February 28, 1988)
*10.21 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)
21
22
*10.22 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)
*10.23 Employment Agreement by and between the Registrant and Douglas J.
Tullio dated January 8, 1990 (incorporated herein by reference to
Exhibit 10.49 to the Quarterly Report on Form 10-Q of Registrant for
the Quarter Ended November 26, 1989)
*10.24 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)
*10.26 Addendum to Employment Agreement by and between the Registrant and
Douglas J. Tullio dated May 21, 1990 (incorporated herein by reference
to Exhibit 10.54 to the Annual Report on Form 10-K of Registrant for
the Year Ended February 25, 1990)
*10.27 Revised Form of Non-Qualified Stock Option Agreement for use in
connection with Registrant's Non-Qualified Stock Option Plan
(incorporated herein by reference to Exhibit 10.59 to the Quarterly
Report on Form 10-Q of Registrant for the Quarter Ended August 26,
1990)
*10.28 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)
*10.29 Consulting Agreement by and between the Registrant and Clarke E.
Reynolds dated June 1, 1993 (incorporated herein by reference to
Exhibit 10.87 to Amendment No. 1 to Form S-2)
*10.30 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)
10.31 Alpha Microsystems 1993 Directors' Stock Option Plan (incorporated
herein by reference to Exhibit 10.110 to the Quarterly Report on Form
10-Q for the Quarter Ended May 29, 1994)
10.32 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)
*10.33 First Amended and Restated Non-Qualified Stock Option Plan of
Registrant dated August 18, 1989 (incorporated herein by reference to
Exhibit 19.14 to the Quarterly Report on Form 10-Q of Registrant for
the Quarter Ended August 27, 1989)
*10.34 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)
*10.35 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)
*10.36 First Amendment to Employment Agreement by and between Registrant and
Douglas J. Tullio dated May 3, 1991 (incorporated herein by reference
to Exhibit 19.10 to the Annual Report on Form 10-K of Registrant for
the Year Ended February 23, 1992)
22
23
*10.37 Second Amendment and Restatement to the Non-Qualified Stock Option Plan
of Alpha Microsystems dated June 24, 1992 (incorporated herein by
reference to Exhibit 10.70 to the Quarterly Report on Form 10-Q for the
Quarter Ended May 31, 1992)
*10.38 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)
10.39 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)
10.40 Letter to Michael J. Lowell from Silicon Valley Bank dated May 3, 1995
re: new credit line (incorporated herein by reference to Exhibit 10.138
to the Annual Report on Form 10-K of Registrant for the Year Ended
February 26, 1995)
10.41 Loan and Security Agreement by and between Registrant and Silicon
Valley Bank dated July 10, 1995 (incorporated herein by reference to
Exhibit 10.139 to the Quarterly Report on Form 10-Q for the Quarter
Ended May 28, 1995)
10.42 Collateral Assignment, Patent Mortgage and Security Agreement by and
between Registrant and Silicon Valley Bank dated July 10, 1995
(incorporated herein by reference to Exhibit 10.143 to the Quarterly
Report on Form 10-Q for the Quarter Ended May 28, 1995)
10.43 Amendment to Loan Agreement by and between Registrant and Silicon
Valley Bank dated November 30, 1995 (incorporated herein by reference
to Exhibit 10.150 to the Quarterly Report on Form 10-Q for the Quarter
Ended November 26, 1995)
10.44 Amendment to Loan Agreement by and between Registrant and Silicon
Valley Bank dated February 7, 1996 (incorporated herein by reference to
Exhibit 10.70 to the Annual Report on Form 10-K of Registrant for the
Year Ended February 25, 1996)
10.45 Amendment to Loan Agreement by and between Registrant and Silicon
Valley Bank dated March 7, 1996 (incorporated herein by reference to
Exhibit 10.71 to the Annual Report on Form 10-K of Registrant for the
Year Ended February 25, 1996)
10.46 Engagement Letter between Registrant and Sutro & Co., Inc. dated May 2,
1996 (incorporated herein by reference to Exhibit 10.72 to the Annual
Report on Form 10-K of Registrant for the Year Ended February 25, 1996)
10.47 Amendment to Loan Agreement by and between Registrant and Silicon
Valley Bank dated October 11, 1996 (incorporated herein by reference to
Exhibit 10.73 to the Quarterly Report on Form 10-Q for the Quarter
Ended November 24, 1996)
10.48 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)
10.49 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)
10.50 Alpha Microsystems 1996 Nonemployee Director Stock Compensation Plan
(incorporated herein by reference to Exhibit 4.8 to the Form S-8 filed
January 31, 1997)
10.51 First Amendment to Alpha Microsystems 1996 Nonemployee Director
Compensation Plan (incorporated herein by reference to Exhibit 4.9 to
the Form S-8 filed January 31, 1997)
23
24
10.52 Alpha Microsystems Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 4.10 to the Form S-8 filed January 31, 1997)
10.53 Letter Agreement between Registrant and Dominick & Dominick, Inc. dated
October 15, 1996
10.54 Amendment to Loan Agreement by and between Registrant and Silicon
Valley Bank dated March 3, 1997
*10.55 Indemnification Agreement by and between Registrant and James A.
Sorensen dated January 16, 1997
*10.56 Indemnification Agreement by and between Registrant and Jeffrey A.
Martin dated January 10, 1997
*10.57 Indemnification Agreement by and between Registrant and Dennis E.
Michael dated January 17, 1997
*10.58 Indemnification Agreement by and between Registrant and Randall S.
Parks dated January 17, 1997
*10.59 Indemnification Agreement by and between Registrant and Margaret Denson
dated January 17, 1997
*10.60 Employment Agreement by and between Registrant and James A. Sorensen
dated November 7, 1996 (incorporated herein by reference to Exhibit
10.77 to the Quarterly Report on Form 10-Q for the Quarter ended
November 24, 1996)
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney (included on signature pages of this Annual Report)
27 Financial Data Schedule
- ---------------
(* Denotes Management Contract or Compensation Plan)
24
25
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Alpha Microsystems
We have audited the accompanying consolidated balance sheets of Alpha
Microsystems as of February 23, 1997 and February 25, 1996, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended February 23, 1997. 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 generally accepted auditing
standards. 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 February 23, 1997 and February 25, 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
February 23, 1997, in conformity with generally accepted accounting principles.
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.
ERNST & YOUNG LLP
Orange County, California
April 11, 1997
25
26
ALPHA MICROSYSTEMS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 23, FEBRUARY 25,
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,768 $ 505
Short-term investments in U.S. treasury bills 6,812 -
Accounts receivable, net of allowance for
doubtful accounts of $139 and $927 in
1997 and 1996, respectively 3,028 5,241
Inventories 305 943
Notes receivable 830 159
Prepaid expenses and other current assets 233 351
-------- --------
Total current assets 12,976 7,199
Property and equipment, net 2,932 4,275
Service contracts, net 364 793
Software costs, net 815 535
Other assets, net 108 259
-------- --------
$ 17,195 $ 13,061
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ - $ 500
Accounts payable 1,201 1,694
Deferred revenue 1,686 2,678
Accrued compensation 345 476
Other accrued liabilities 381 837
Current portion of long-term debt 35 192
-------- --------
Total current liabilities 3,648 6,377
Long-term debt 34 201
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000
shares authorized; none issued - -
Common stock, no par value; 20,000,000
shares authorized; 10,821,897 and
6,595,453 shares issued and outstanding
at February 23, 1997 and February 25,
1996, respectively 30,919 21,242
Accumulated deficit (17,464) (14,694)
Unamortized restricted stock plan expense (13) (18)
Foreign currency translation adjustment 71 (47)
-------- --------
Total shareholders' equity 13,513 6,483
-------- --------
$ 17,195 $ 13,061
======== ========
See accompanying notes.
26
27
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED
--------------------------------------------
FEBRUARY 23, FEBRUARY 25, FEBRUARY 26,
1997 1996 1995
---- ---- ----
Net sales:
Product $ 8,692 $ 14,466 $ 18,823
Service 14,820 18,297 19,962
----------- ----------- -----------
Total net sales 23,512 32,763 38,785
----------- ----------- -----------
Cost of sales:
Product 4,851 10,228 13,372
Service 11,314 12,739 14,013
----------- ----------- -----------
Total cost of sales 16,165 22,967 27,385
----------- ----------- -----------
Gross Margin 7,347 9,796 11,400
Selling, general and
administrative expense 8,998 11,855 15,553
Engineering, research and
development expense 1,500 2,093 2,239
----------- ----------- -----------
Total operating expenses 10,498 13,948 17,792
----------- ----------- -----------
Loss from operations (3,151) (4,152) (6,392)
Interest income (266) (93) (150)
Interest expense 31 38 17
Other (income) expense, net (216) (466) 81
Foreign exchange (gain) loss 42 (76) (93)
----------- ----------- -----------
Total other income (409) (597) (145)
----------- ----------- -----------
Loss before taxes (2,742) (3,555) (6,247)
Income tax expense 28 20 -
----------- ----------- -----------
Net loss $ (2,770) $ (3,575) $ (6,247)
=========== =========== ===========
Net loss per share $ (0.28) $ (0.54) $ (0.95)
=========== =========== ===========
Number of shares used in the
computation of per share amounts 9,727,432 6,564,882 6,580,470
=========== =========== ===========
See accompanying notes.
27
28
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED FEBRUARY 23, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
Unamortized Foreign
Common Stock Restricted Currency
---------------------- Accumulated Stock Plan Translation
Shares Amount Deficit Expenses Adjustment Total
---------- -------- ----------- ----------- ----------- --------
Balance at February 27, 1994 6,559,208 $ 21,186 $ (4,872) $ (34) $ (270) $16,010
Net loss - - (6,247) - - (6,247)
Foreign currency translation - - - - 220 220
Exercise of stock options
($1.00 to $2.00 per share) 13,745 38 - - - 38
Amortization - - - 15 - 15
---------- -------- --------- ------ ------ -------
Balance at February 26, 1995 6,572,953 21,224 (11,119) (19) (50) 10,036
Net loss - - (3,575) - - (3,575)
Foreign currency translation - - - - 3 3
Restricted stock award 22,500 18 - (18) - -
Amortization-current year
award - - - 19 - 19
---------- -------- --------- ------ ------ -------
Balance at February 25, 1996 6,595,453 21,242 (14,694) (18) (47) 6,483
Net loss - - (2,770) - - (2,770)
Foreign currency translation - - - - 118 118
Issuance of stock and
redeemable warrants 4,103,719 9,486 - - - 9,486
Exercise of stock options
($1.00 to $2.00 per share) 62,770 101 - - - 101
Non-emp Directors Comp Plan 59,955 90 - - - 90
Amortization - - - 5 - 5
---------- -------- --------- ------ ----- -------
Balance at February 23, 1997 10,821,897 $ 30,919 $ (17,464) $ (13) $ 71 $13,513
========== ======== ========= ====== ===== =======
See accompanying notes.
28
29
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
-----------------------------------------------
FEBRUARY 23, FEBRUARY 25, FEBRUARY 26,
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net loss $ (2,770) $ (3,575) $ (6,247)
Adjustments to reconcile net loss
to cash provided by operating activities:
(Gain)/loss from sale of subsidiary/product lines (12) -- 972
Intangible asset write-down -- 1,995 1,431
Depreciation and amortization 2,067 2,325 3,388
Gain on sale of fixed assets -- (282) --
Provision for losses on accounts receivable 64 (21) 467
Provision for slow-moving inventory (59) 196 694
Restricted stock plan expense amortization 5 19 15
Other changes in operating assets and liabilities:
Accounts receivable 28 (376) (132)
Inventories (71) 811 (109)
Notes receivable (671) -- --
Prepaid expenses and current assets (65) 412 (494)
Accrued compensation (18) (359) 79
Accounts payable and accrued liabilities 130 (1,256) 847
Deferred revenue (383) (133) (142)
Other, net (127) (49) (26)
-------- -------- --------
Net cash provided by (used in) operating activities (1,882) (293) 743
-------- -------- --------
Cash flows from investing activities:
Purchase of short-term investments (19,697) -- --
Proceeds from sale of short-term investments 12,885 -- --
Proceeds from sale of fixed assets 11 440 --
Acquisition of business -- (149) (84)
Acquisition of service assets -- (94) (511)
Purchases of equipment (427) (1,730) (984)
Capitalization of software costs (971) (976) (977)
Proceeds from sale of product lines 250 -- (357)
Proceeds from sale of stock investments 2,088 -- --
Other, net -- -- (30)
-------- -------- --------
Net cash used in investing activities (5,861) (2,509) (2,943)
-------- -------- --------
Cash flows from financing activities:
Line of credit, net (500) 500 --
Issuance of common stock 9,677 -- 38
Principal debt repayments (167) (463) (915)
-------- -------- --------
Net cash provided by (used in) financing activities 9,010 37 (877)
-------- -------- --------
Effect of exchange rate changes on cash (4) (19) 115
-------- -------- --------
Increase (decrease) in cash and cash equivalents 1,263 (2,784) (2,962)
Cash and cash equivalents at beginning of period 505 3,289 6,251
-------- -------- --------
Cash and cash equivalents at end of period $ 1,768 $ 505 $ 3,289
======== ======== ========
Supplemental information:
Cash paid for:
Interest $ 31 $ 38 $ 21
Income tax payments (refunds), net $ 16 $ (64) $ (139)
See accompanying notes.
29
30
ALPHA MICROSYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 23, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
THE BUSINESS
Alpha Microsystems provides information technology products (including products
for the Internet/intranet market)and services (including consulting,
maintenance, support and networking) to a variety of market segments.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Alpha
Microsystems and its subsidiaries (the "Company"). Significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the prior years' consolidated financial
statements to conform to the fiscal 1997 presentation.
FISCAL YEAR
The Company operates on a 52/53-week fiscal year ending on the last Sunday in
the month of February. Fiscal years 1997, 1996 and 1995 ended on February 23,
1997, February 25, 1996 and February 26, 1995, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities 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.
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 Company recorded the following
non-cash transactions: common stock of $2,088,000 in exchange for the net assets
of AMGB of $2,051,000, and cash of $250,000 and notes receivable of $600,000 in
exchange for the net assets of AlphaHealthCare and PANDA totalling $875,000.
SHORT-TERM INVESTMENTS
The Company's short-term investments at February 23, 1997 are composed of U.S.
treasury bills. These investments are classified as available-for-sale and are
carried at fair value, which approximates cost, with the net unrealized gains or
losses reported as a separate component of shareholders' equity, net of their
related tax effects. Realized gains and losses, and declines in value judged to
be other-than-temporary, as well as interest and dividends on available-for-sale
securities, are included in investment income. Realized and unrealized gains and
losses in fiscal 1997 were not material.
30
31
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:
YEARS
-----
Machinery and equipment 3 to 5
Leasehold improvements 1 to 6
Service parts 5
INTANGIBLE ASSETS
Intangible assets include acquired service contracts, capitalized computer
software costs and goodwill. The book value of goodwill and service contracts is
associated with the acquisition of companies or assets. Capitalized software
costs are the accumulation of software development costs or the assigned value
of software associated with an acquisition.
The straight-line amortization period for intangible assets is dependent on
their expected economic life. The amortization period for the major classes of
intangible assets is as follows:
YEARS
-----
Service contracts 5
Capitalized software costs 3 to 5
Goodwill 5 to 10
In fiscal 1996, the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets over the asset's life are less
than the carrying value. In accordance with SFAS 121 the Company wrote off
$481,000 in goodwill and service contracts related to AlphaHealthCare, during
the fourth quarter of fiscal 1996.
In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed," 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 five-year straight-line basis
from the date of product release. Capitalized software costs, net of accumulated
amortization of $1,420,000 and $3,256,000, were $815,000 and $535,000 at
February 23, 1997 and February 25, 1996, respectively. Total amortization
expense charged to cost of product sales for the fiscal years 1997, 1996 and
1995 was approximately $99,000, $186,000 and $689,000, respectively.
In addition, management routinely evaluates events or conditions that might
diminish the carrying value of intangible assets pursuant to SFAS No. 86. During
the fourth quarter of fiscal 1996, management reforecast revenues and cash flow
for each capitalized software asset's anticipated service life and as a result
of this analysis, the Company wrote down accumulated capitalized software
development costs of $373,000 for its PANDA product line and $1,016,000 for its
AlphaHealthCare product line to their respective revised net realizable value.
No additional write-downs were required in 1997.
WARRANTIES
The Company accrues estimated costs of product warranties as revenues from sales
are recognized, or if some event necessitates a change in the level of reserves
for potential warranties. Products are typically warranted for twelve months.
31
32
DEFERRED REVENUE
Deferred revenue is revenue billed in advance for service contracts and is
recognized ratably over the contract period or as the services are performed.
REVENUE RECOGNITION
The Company recognizes revenue on its hardware and software sales on delivery,
and recognizes revenue on its service sales and post contract customer support
on a straight-line basis over the contract period. When significant obligations
remain after a software product has been delivered, revenue is not recognized
until obligations have been completed or are no longer significant. The costs of
any insignificant obligations are accrued when the related revenue is
recognized. Revenue is recognized only when collection of the resulting
receivable is probable.
In the normal course of business, the Company provides credit to its customers
who are principally distributors of its products and original equipment
manufacturers who incorporate the Company's products into equipment which they
resell to end users. The Company performs ongoing credit evaluations of its
customers and maintains allowances for potential credit losses which have been
within management's expectations. As of February 23, 1997, the Company had no
significant concentrations of credit risk.
ADVERTISING EXPENSES
The Company recognizes expenses related to advertising costs in the period in
which these costs are incurred. Total advertising expenses in 1997, 1996 and
1995 were $795,000, $66,000 and $82,000, 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.
INCOME TAXES
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes," which requires an
asset and liability approach to recognize deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. 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.
PER SHARE DATA
Earnings (loss) per share is calculated using the weighted average number of
common shares outstanding during the period. Common stock equivalents were
anti-dilutive in all periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which is required to be adopted in the fourth quarter
of fiscal 1998. The Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. The impact of the adoption is not expected to
materially impact basic earnings per share. The Company has not yet determined
what the impact of Statement No. 128 will be on the calculation of fully diluted
earnings per share.
32
33
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 rates, and
records adjustments resulting from translation as a separate component of
shareholders' equity.
Foreign currency exchange gains (losses) included in the determination of loss
from operations before taxes were $(42,000), $76,000 and $93,000 for fiscal
1997, 1996 and 1995, respectively. The Company had no forward exchange contracts
outstanding at February 23, 1997.
2. ACQUISITIONS AND DISPOSALS
On September 15, 1995, the Company acquired the ongoing service contracts and
certain related assets of Instant Data Systems Incorporated ("IDS") for a
purchase price of $300,000, plus a contingent payment of $50,000. The purchase
price was reduced by $110,000 in fiscal 1997 based upon the deterioration of the
revenues of the contracts purchased. On June 1, 1995, the Company acquired the
assets of Alpha Technology for $161,000.
On April 3, 1995, the Company sold its subsidiary, Alpha Microsystems Belgium,
S.A., to a member of its Belgium local management resulting in a loss of
$972,000.
In fiscal 1995, the Company acquired certain assets of various service
companies, including service contracts, service parts and accounts receivable.
The cost of these acquisitions was $1,918,000 in fiscal 1995, of which the
non-cash portion was $1,407,000. In fiscal 1995, the most significant
acquisition was that of the service contracts and related assets of Alpha
Computer Services, Inc. ("ACS"), completed in March 1994. ACS was purchased for
$1,520,000, of which $238,000 was paid in cash, $1,156,000 in notes payable over
a period of twenty-two months, and the Company assumed $126,000 in liabilities.
In May 1994, the Company acquired certain assets and ongoing service contracts
from MTS, Inc. ("MTSI") for a purchase price of approximately $195,000.
In March 1994, the Company acquired the remaining shares of Sabre Business
Systems, Belfast, Ireland, for approximately $84,000, bringing the Company's
ownership to 100%. In addition, in December 1995, the Company acquired the
remaining shares of Sabre Business Systems, Dublin, Ireland for approximately
$149,000, bringing the Company's ownership to 100%. In May 1994, Alpha
Microsystems Great Britain (UK) Limited acquired certain assets and liabilities
of Kathy Parker Training Centers, UK, for approximately $137,000.
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.
On August 19, 1996, the Company sold its UK subsidiary, Alpha Microsystems Great
Britain ("AMGB"), to Sanderson Electronics PLC ("Sanderson"), for 907,792
ordinary shares of Sanderson. In connection with the sale, the Company and
Sanderson signed a three-year hardware distribution agreement allowing Sanderson
to sell Alpha Microsystems hardware products in the United Kingdom and Eire. The
Company recognized a gain of approximately $37,000 from this sale. On September
17, 1996, the Company sold the Sanderson shares for approximately $2,088,000.
In January 1997, the Company sold its PANDA and AlphaHealthCare operations. Each
was sold for a base price, consisting of cash and notes which approximated the
Company's net book value, and a contingent or "Earnout" amount which depends on
the future performance of the businesses sold. Contingent or earnout amounts
realized in the future would be included in the Company's earnings at that time.
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3. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined on the
first-in, first-out method. Inventories, net of reserves for excess and obsolete
inventories of $41,000 and $1,726,000 at February 23, 1997 and February 25,
1996, respectively, are comprised of the following:
FEB. 23, FEB. 25,
(IN THOUSANDS) 1997 1996
---- ----
Raw materials $ 263 $ 116
Work-in-process 9 --
Finished goods 33 827
---- ----
$ 305 $ 943
===== =====
4. NOTES RECEIVABLE
In April 1995, as part of the consideration for selling the Belgian subsidiary
to a member of local management, the Company received a note for 15,000,000
Belgian francs, payable over a two-year period from the date of the note, of
which 7,000,000 Belgian francs has been paid.
In January 1997, as part of the proceeds from the sale of the PANDA product
line, the Company received an agreement specifying annual payments totalling
$300,000. These payments are scheduled to begin in January 1998 with the final
payment due in January 2002.
As part of the consideration for the sale of AlphaHealthCare in January 1997,
the Company received a note for $300,000 bearing interest at six percent
compounded annually, with annual payments of $60,000 due over a five-year period
from the date of the note.
5. PROPERTY AND EQUIPMENT
Major classes of property and equipment are as follows:
FEB. 23, FEB. 25,
1997 1996
---- ----
Machinery and equipment $ 6,467 $ 7,577
Leasehold improvements 1,395 1,364
Service parts 8,171 7,769
------- -------
16,033 16,710
Less accumulated depreciation
and amortization 13,101 12,435
------- -------
Property and equipment, net $ 2,932 $ 4,275
======= =======
Depreciation expense was $1,547,000, $1,405,000 and $1,933,000 for fiscal years
1997, 1996 and 1995, respectively.
6. DEBT
On October 11, 1996, the Company amended its existing loan agreement extending
its credit line to October 10, 1997. Pursuant to the terms of the amendment, the
Company has a revolving line of credit up to a maximum limit of $2,000,000.
Borrowings under the line of credit bear interest at prime plus two and one half
percent (2.5%). In addition, the Company issued 25,000 warrants to the bank (See
Note 7).
The line of credit is secured by substantially all of the Company's assets and
contains certain financial covenants. At February 23, 1997, there were no
outstanding borrowings.
7. SHAREHOLDERS' EQUITY
On May 14, 1996, the Company filed a Registration Statement to register
4,442,069 shares of Common Stock issuable upon the exercise of warrants issued
by the Company, of which 4,082,069 were issued in connection with its November
29, 1993 Shareholder Rights Offering
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35
and subsequent Public Offering, and the remainder were issued in consideration
of services rendered to the Company.
On July 10, 1995, in exchange for a new line of credit and 40,000 warrants
previously issued, the Company issued 50,000 new warrants with an exercise price
of $1.21875 to its bank. In fiscal 1994, the Company agreed to sell to its
financial advisor a redeemable warrant to purchase 300,000 shares of common
stock exercisable at $2.50 per share. Both the Company's bank and its financial
advisor exercised these warrants in the first quarter of fiscal 1997. Pursuant
to the terms of an amendment to the loan agreement signed in October 1996, the
Company agreed to issue an additional 25,000 warrants to the bank which are
exercisable for five years at $1.81 per share. Also in October 1996, the Company
agreed to sell a redeemable warrant to purchase 300,000 shares of common stock
exercisable for five years at $3.00 per share to its financial advisor.
The Company redeemed its Redeemable Public Warrants on June 17, 1996, pursuant
to its notice of redemption issued on May 14, 1996. Total shares issued from the
exercise of all warrants were 4,103,719, resulting in total gross proceeds of
approximately $10,102,000. The proceeds from the exercise of all warrants, net
of expenses, were $9,486,000.
Under the terms of the Company's Stock Incentive Award Plan, the Board of
Directors is authorized to award up to 150,000 restricted shares of common
stock. These shares are issued subject to certain transfer restrictions,
including the passage of time, ranging from one to ten years. The Company has
granted 131,050 restricted shares of common stock to certain employees, without
cost. The shares are subject to forfeiture under certain circumstances, and 25%
of such shares will vest each year, beginning on the date of grant. As of
February 23, 1997, 125,425 of these restricted shares had vested. Unearned
compensation was recognized for the market value of the restricted shares on the
date of grant and is amortized ratably over the vesting period. The unamortized
unearned compensation value is recorded as a reduction of shareholders' equity
in the accompanying financial statements.
The Company has a non-qualified stock option plan (the "1984 Plan") which
provides for the grant, from time to time, of options to purchase up to 465,000
shares of Common Stock to eligible employees. In June 1996, the Board terminated
the 1984 Plan and no further options may be granted. Outstanding options will
remain exercisable.
As of February 23, 1997, 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.
The Company's 1993 Director Stock Plan provides to nonemployee directors
automatic grants of non-statutory stock options at exercise prices at fair
market value of common stock on the date of grant, up to an aggregate of 100,000
shares of common stock.
The Company's 1996 Nonemployee Director Stock Compensation Plan provides to
nonemployee directors the opportunity to receive shares of common stock in lieu
of cash compensation paid for services as a director, in an amount equal to the
value of cash compensation otherwise paid for service as a director. The total
number of shares reserved and available is 100,000 shares.
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The following table contains a summary of transactions related to Incentive and
Non-Qualified Stock Options for the fiscal years 1995, 1996 and 1997:
NON-QUALIFIED STOCK OPTIONS INCENTIVE STOCK OPTIONS
------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES PRICE PER SHARE SHARES PRICE PER SHARE
------ ---------------- ------ ----------------
Outstanding at
February 27, 1994 336,728 $1.78 328,702 $1.88
Expired/canceled (15,330) $1.73 -
Exercised (13,745) $1.73 -
------- --------
Outstanding at
February 26, 1995 307,653 $1.79 328,702 $1.88
Granted - 122,500 $1.47
Expired/canceled (110,568) $1.63 (136,763) $1.88
-------- --------
Outstanding at
February 25, 1996 197,085 $1.87 314,439 $1.72
Granted - 621,000 $2.62
Expired/canceled (39,315) $2.84 (222,500) $2.50
Exercised (37,770) $1.73 (25,000) $1.63
------- -------
Outstanding at
February 23, 1997 120,000 $1.61 687,939 $2.28
======= =======
Exercisable at
February 26, 1995 231,653 $1.81 253,189 $1.88
February 25, 1996 178,085 $1.86 253,189 $1.78
February 23, 1997 120,000 $1.61 313,439 $2.07
Available for grant:
February 26, 1995 61,410 221,298
February 25, 1996 171,978 235,561
February 23, 1997 0 212,061
Options outstanding at February 23, 1997 under the non-qualified stock option
plan are exercisable at prices ranging as follows: 40,000 shares at $0.93 and
80,000 shares at $1.94. The weighted average remaining life of these options as
of year-end is approximately 0.9 years.
Options outstanding at February 23, 1997 under the incentive stock option plan
have exercise prices and weighted average remaining lives as follows: 22,500
shares at $0.78 with a remaining life of 3.2 years, 359,439 shares at $1.56 to
$1.88 with a remaining life of 2.9 years, and 306,000 shares at $3.00 per share
with a remaining life of 4.5 years.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations in accounting
for its employee stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"), requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings 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 method with the following weighted average assumptions: risk-free
interest rate of 6% for 1996 and 1997; volatility factors of the expected market
price of the Company's common stock of 0.6 for both years; and a
weighted-average expected life of the options of five (5) years.
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
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including 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:
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE INFORMATION) 1997 1996
---- ----
Pro forma net income $(2,873) $(3,575)
Pro forma earnings per share:
Primary $ (0.30) $ (0.54)
The per share weighted average fair value of options granted during 1997 and
1996 were $1.48 and $0.66, respectively. The effect of applying Statement 123
for providing pro forma disclosures is not likely to be representative of the
effects on reported net income for future years.
8. INCOME TAXES
The provision for income taxes consists of the following:
(IN THOUSANDS) 1997 1996 1995
---- ---- ----
Federal:
Current $-- $-- $--
Deferred -- -- --
Foreign:
Current 25 20 --
Deferred -- -- --
State:
Current 3 -- --
Deferred -- -- --
--- --- ---
$28 $20 $--
=== === ===
Deferred tax assets and liabilities reflect the impact of temporary differences
between amounts of assets and liabilities for financial reporting purposes, such
amounts measured by tax laws and the expected future tax consequences of net
operating loss carryforwards. Temporary differences and net operating loss
carryforwards that give rise to deferred tax assets and liabilities recognized
in the balance sheet are as follows:
(IN THOUSANDS) 1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 7,629 $ 6,520
Accrued tax credits 899 899
Accruals not currently deductible for
tax purposes 454 353
Depreciation 31 --
Translation adjustment 96 67
Other 10 3
Valuation allowance (9,082) (7,365)
------- -------
Total deferred tax asset 37 477
------- -------
Deferred tax liabilities:
Depreciation -- (338)
Capitalized software (37) (139)
------- -------
Total deferred tax liability (37) (477)
------- -------
Net deferred tax asset $ -- $ --
======= =======
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The change in the valuation allowance was a net increase of $1,717,000 and
$259,000 for fiscal years ended February 23, 1997 and February 25, 1996,
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
$20,900,000 at February 23, 1997, which begin to expire in 2006, if not
utilized. As a result of the exercise of the Redeemable Public Warrants, the
Company experienced a change of ownership as defined in the Internal Revenue
Code. As a result of the ownership change, utilization of the net operating loss
carryforwards is limited to approximately $1,500,000 per year.
A reconciliation of income tax expense (benefit) to the statutory U.S. federal
income tax rate follows:
1997 1996 1995
---- ---- ----
Statutory U.S. federal
income tax rate (benefit) (34.0)% (34.0)% (34.0)%
Changes in taxes resulting from:
Foreign losses & excess rates 1.2 1.4 6.0
Domestic losses with no
tax benefit 32.7 28.0 28.0
Other items, net 1.1 5.2 -.-
---- ---- -----
Effective tax rate 1.0 % 0.6 % -.- %
==== ==== =====
United States and foreign income (loss) before taxes are as follows:
(IN THOUSANDS) 1997 1996 1995
---- ---- ----
Domestic $(2,933) $(3,714) $(4,912)
Foreign 191 159 (1,335)
------- ------- -------
$(2,742) $(3,555) $(6,247)
======= ======= =======
9. 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 fiscal years 1997, 1996 and 1995 was $1,318,000, $1,966,000 and
$2,255,000, respectively. The Company's annual minimum lease commitments under
non-cancelable operating leases are as follows:
(IN THOUSANDS)
1998 $ 903
1999 475
2000 432
2001 334
------
$2,144
======
The Company's current involvement with litigation is as follows:
Carlos Garralda and Andre Warnier, employees of the Company's former subsidiary,
Alpha Microsystems Belgium, S.A. ("AMB"), filed an action in November 1995
against AMB and the Company in Orange County Superior Court alleging that AMB is
in breach of its obligations under Belgium employment law to pay salaries for a
notice period of up to two years following termination of employment. The
Plaintiffs allege, among other things, that the Company has alter ego liability
for these obligations. The plaintiffs are claiming compensatory damages in
excess of $780,000 and unspecified punitive damages. A settlement
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of the case between AMB and Andre Warnier in the Belgium action was effected on
October 18, 1996. Five hundred thousand dollars ($500,000) of the compensatory
damages in the Orange County lawsuit are related to the claims by Mr. Warnier.
This settlement should result in a dismissal of the Warnier portion of the
Orange County lawsuit. The Court has continued its temporary stay of this
lawsuit in its entirety until July 1997 in order to await the outcome of
virtually identical litigation instituted by the plaintiffs against AMB in
Belgium. Although no assurances as to the outcome of the litigation can be
given, management believes that its defenses to the litigation are meritorious.
In December 1995, Phoenix Marketing, Inc. d.b.a. Electronic Business Systems,
Inc., in response to the Company's collection efforts for a past due account,
filed an amended cross-complaint alleging damages of $3,200,000 for defective
merchandise, loss of business reputation and loss of future business. The Iowa
court has referred this case to arbitration, which arbitration must be completed
on or before October 31, 1997. Although no assurances as to the outcome of the
litigation can be given, management believes that the plaintiff's claims are
without merit.
The Company is currently involved in certain other claims and litigation. The
Company does not consider any of these other claims or litigation to be
material. Management has made provisions in the Company's financial statements
for the settlement of lawsuits for which unfavorable outcomes are both probable
and estimable. In the opinion of management, results of known existing claims
and litigation will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
10. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution profit sharing plan covering
substantially all of its full-time employees. 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 fiscal 1997, 1996 and 1995.
During fiscal 1991, the Company implemented a program whereby the voluntary
contributions of the employees are matched at a rate of 50% of employee
contributions up to a total of 5.0% of the employee's salary. During the first
quarter of fiscal 1994, the employer match portion of the employee contribution
was reduced from 50% to 20% up to a total of 5.0% of an employee's salary.
During fiscal 1997, 1996 and 1995, the employer matched 60% of the employee
contribution for participants with an annual income of less than $29,999.
Matching contributions were $29,000, $32,000 and $42,000 for fiscal 1997, 1996
and 1995, respectively.
In fiscal 1997, the Company adopted a new Employee Stock Purchase Plan, that
enables 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.
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11. INDUSTRY SEGMENT INFORMATION
The Company operates in two business segments: the manufacture and sale of
computer systems, software and related products, and the servicing of computer
systems and related products.
Operations by business segment are as follows:
(IN THOUSANDS) PRODUCT SERVICE CORPORATE CONSOLIDATED
------- ------- --------- ------------
1997
Net sales $ 8,692 $14,820 $ -- $23,512
Operating income (loss) (2,908) 1,108 (1,351) (3,151)
Identifiable assets 4,893 2,991 9,311 17,195
Depreciation and
amortization expense 637 1,096 334 2,067
Capital expenditures 26 370 31 427
1996
Net sales $14,466 $18,297 $ -- $32,763
Operating income (loss) (4,985) 2,849 (2,016) (4,152)
Identifiable assets 7,431 4,651 979 13,061
Depreciation and
amortization expense 773 1,230 322 2,325
Capital expenditures 427 496 901 1,824
1995
Net sales $18,823 $19,962 $ -- $38,785
Operating income (loss) (7,349) 2,690 (1,733) (6,392)
Identifiable assets 8,134 5,020 4,748 17,902
Depreciation and
amortization expense 1,322 1,880 186 3,388
Capital expenditures 578 845 72 1,495
Identifiable assets by industry segment include both assets directly identified
with operations and an allocated share of jointly used assets. Corporate assets
consist primarily of cash and other assets. Depreciation and amortization
expense excludes intangible asset write-downs. Capital expenditures include
purchases of equipment and acquisitions of service assets. The effect of
capitalizing software costs is included in the product sales segment.
Intersegment transfers are recorded at cost.
The Company operates in the United States and in Europe through distributors
and, until August 1996, through foreign subsidiaries. Total consolidated foreign
sales (including export sales of $1,314,000, $906,000 and $1,596,000 in fiscal
1997, 1996 and 1995, respectively) were $4,681,000, $9,776,000 and $11,639,000
for fiscal 1997, 1996 and 1995, respectively.
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OPERATIONS BY GEOGRAPHIC AREA
ADJUSTMENTS
UNITED EUROPE & &
(IN THOUSANDS) STATES CANADA AUSTRALIA ELIMINATIONS CONSOLIDATED
------ ------ --------- ------------ ------------
1997
Sales to unaffiliated
customers $ 20,145 $639 $ 2,728 $ -- $ 23,512
Transfers between
geographic areas 473 -- -- (473) --
-------- ---- ------- ------- --------
Net sales $ 20,618 $639 $ 2,728 $ (473) $ 23,512
======== ==== ======= ======= ========
Net income (loss) $ (2,945) $175 $ -- $ -- $ (2,770)
Identifiable assets $ 20,385 $329 $ -- $(3,519) $ 17,195
1996
Sales to unaffiliated
customers $ 23,893 $621 $ 8,249 $ -- $ 32,763
Transfers between
geographic areas 1,147 -- -- (1,147) --
-------- ---- ------- ------- --------
Net sales $ 25,040 $621 $ 8,249 $(1,147) $ 32,763
======== ==== ======= ======= ========
Net income (loss) $ (3,723) $221 $ (82) $ 9 $ (3,575)
Identifiable assets $ 15,351 $160 $ 5,070 $(7,520) $ 13,061
1995
Sales to unaffiliated
customers $ 28,743 $609 $ 9,433 $ -- $ 38,785
Transfers between
geographic areas 1,518 -- -- (1,518) --
-------- ---- ------- ------- --------
Net sales $ 30,261 $609 $ 9,433 $(1,518) $ 38,785
======== ==== ======= ======= ========
Net income (loss) $ (5,005) $166 $(1,397) $ (11) $ (6,247)
Identifiable assets $ 19,827 $277 $ 5,947 $(8,149) $ 17,902
No single customer or other foreign geographic area accounted for 10% or more of
the Company's sales.
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ALPHA MICROSYSTEMS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT
OF YEAR EXPENSE DEDUCTIONS END OF YEAR
------- ------- ---------- -----------
Allowance for doubtful accounts:
February 23, 1997 $ 927 $ 64 $ 852(1) $ 139
February 25, 1996 1,004 (21) 56 927
February 26, 1995 1,728 467 1,191 1,004
Reserve for inventories:
February 23, 1997 $1,726 $(59) $1,626(2) $ 41
February 25, 1996 1,723 196 193 1,726
February 26, 1995 1,430 694 401 1,723
- ----------------------
(1) Deduction is primarily the result of the sale of AMGB, AlphaHealthCare
and PANDA and the disposition of a fully reserved individual account of
approximately $362,000.
(2) Deduction is primarily the result of the sale of AMGB, AlphaHealthCare
and PANDA.
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SIGNATURES
Pursuant to the requirements of Section 13 pr 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: May 23, 1997 By: /s/ DOUGLAS J. TULLIO
----------------------------------
Douglas J. Tullio
President, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Clarke E. Reynolds,
Douglas J. Tullio and John F. Glade, 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: May 23, 1997 By: /s/ CLARKE E. REYNOLDS
--------------------------------------
Clarke E. Reynolds
Chairman of the Board
Date: May 23, 1997 By: /s/ DOUGLAS J. TULLIO
--------------------------------------
Douglas J. Tullio
President, Chief Executive Officer,
Director
Date: May 23, 1997 By: /s/ JOHN F. GLADE
--------------------------------------
John F. Glade
Vice President, Engineering and
Manufacturing, Secretary and Director
Date: May 23, 1997 By: /s/ JAMES A. SORENSEN
--------------------------------------
James A. Sorensen
Vice President
Chief Financial Officer
Date: May 23, 1997 By: /s/ ROCKELL N. HANKIN
--------------------------------------
Rockell N. Hankin
Director
Date: May 23, 1997 By: /s/ RICHARD E. MAHMARIAN
--------------------------------------
Richard E. Mahmarian
Director
43