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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the fiscal year ended FEBRUARY 22, 1998
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 SOUTH FAIRVIEW STREET, SANTA ANA, CA 92704
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 957-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price of its common stock on May 14, 1998
on the Nasdaq National Market, a date within 60 days prior to the date of
filing, was $33,757,348.
As of May 14, 1998, there were 10,914,112 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 22, 1998, 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 products, including its AlphaCONNECT internet and
intranet technology, and Information Technology ("IT") services, (ii) the
continued development of the Company's technical, manufacturing, sales,
marketing and management capabilities, (iii) anticipated competition, and (iv)
any future performance, achievements of the Company, or industry results
expressed or implied by such forward-looking statements.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. Forward-looking statements
included herein regarding the actual results, performance and achievements of
the Company are dependent on a number of factors. The Company's ability to
pursue companies that provide strategic platforms on which to leverage future
growth is dependent on (i) the economic and competitive environment of the
computer maintenance and IT support services industry in general, and in the
Company's specific market areas, (ii) its ability to identify acquisition
candidates, (iii) the availability of, and terms of, financing to fund the
anticipated growth of the Company's business, and (iv) its ability to
successfully integrate acquired operations with its existing operations. The
Company's ability to execute internet/intranet technology and marketing
agreements with key companies and its ability to derive internet/intranet
revenues from the sale of product, licensing of technology, or revenue sharing
relationships is dependent on (i) the Company's ability to develop, produce, and
market products and services that incorporate new technology, are priced
competitively, and achieve significant market acceptance, (ii) whether the
Company's products and IT services will be commercially successful or
technically advanced due to the rapid improvements in computer technology and
resulting product obsolescence, (iii) the Company's ability to deliver
commercial quantities of new products in a timely manner, (iv) the Company's
ability to manage risks associated with its internet operating strategies, (v)
changes in the Company's operating strategy and capital expenditure plans, and
(vi) the economic and competitive environment of the internet/intranet industry
in general. The Company's ability to expand the service segment through new
service contracts, expansion of time and materials servicing, and alliances with
third-party IT service providers and to develop opportunities to service
products manufactured by third parties is dependent on (i) the Company's ability
to develop, produce, and market services that are priced competitively, (ii)
whether the Company's IT services will be commercially successful or technically
advanced due to the rapid improvements in computer technology and resulting
product obsolescence, (iii) changes in the cost of IT services, (iv) the
Company's ability to manage risks associated with its IT services operating
strategies, (v) changes in the Company's operating and capital expenditure plans
and (vi) the Company's ability to manage its expenses commensurate to its
revenues.
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.
The Company disclaims any obligations to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
ITEM 1. BUSINESS
Alpha Microsystems (the "Company" or "Alpha Micro") is a California corporation
with its principal offices located at 2722 South Fairview Street, Santa Ana,
California 92704 (telephone number 714-957-8500). The Company provides
information technology
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products (including products for the internet and intranet markets) and IT
services (including consulting, maintenance, support and networking) to a
variety of market segments. The Company provides these services through its more
than 55 locations throughout North America.
This Annual Report on Form 10-K refers to various trademarks of the Company and
certain trademarks of other companies. All products and services are trademarks
or registered trademarks of their respective holders.
GENERAL DEVELOPMENT OF BUSINESS
The Company, which was incorporated under California law on March 17, 1977, is a
supplier of information technology ("IT") services and products. 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 toward open system environments
and away from proprietary systems such as those primarily sold by the Company,
the Company has in the last several years focused its efforts on vertical niche
markets, the expansion of its IT services business and the development and
marketing of AlphaCONNECT, an internet and intranet technology. The movement
into vertical niche markets did provide additional IT service revenues. However,
the products were not sufficiently successful to warrant additional capital
commitments. A discussion of the Company's divestitures during the most recent
three years follows.
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 the Company evaluated additional development of Alpha2000,
its dental office software product, in an effort to economically enhance the
product's market acceptance. These efforts were unsuccessful and management
began evaluating these operations for potential disposition. In 1996, the
Company also finalized the sale of Alpha Microsystems Belgium, S.A. ("AMB") to a
member of the AMB management. Subsequent to this sale, the Company continued to
conduct its European operations directly through Alpha Microsystems Great
Britain Limited ("AMGB"). A write-down was taken at the end of fiscal 1996
aggregating $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 its remaining European operation, Alpha
Microsystems Great Britain Limited ("AMGB"), including Sabre Business Systems
Limited, and its remaining vertical software operations, PANDA and
AlphaHealthCare.
On December 23, 1997, the Company acquired the telephone installation and IT
service business and certain related assets of Applied Cellular Technology, Inc.
for a purchase price estimated to be $2.6 million, of which $1.1 million has
been paid from the Company's cash reserves through February 22, 1998. All
amounts paid, and any future payments, are contingent on future annualized
revenues.
Subsequent to February 22, 1998, the Company acquired the ongoing IT service
contracts and certain related assets of M & J Technologies, Inc. ("M & J") for
an estimated purchase price of $950,000. The purchase price, which is contingent
on future annualized revenues, is to be paid over 18 months, with 50% of the
purchase price paid on the closing date of the acquisition.
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These divestitures and acquisitions were consistent with the Company's strategy
to concentrate its resources on the IT services business and to develop and
launch the AlphaCONNECT internet and intranet technology and software products.
These divestitures along with the Company's efforts to grow the IT services
business, primarily through internal growth, repositioned the Company in fiscal
1998, whereby IT service revenues accounted for 68.4% of total revenues and
product sales accounted for 31.6% of total revenues, as compared to fiscal 1993,
when IT service revenues accounted for 37.3% of total revenues and product sales
accounted for 62.7% 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 22, FEBRUARY 23, FEBRUARY 25,
1998 1997 1996
---- ---- ----
IT Service Revenues 68.4% 62.2% 55.2%
Product Revenues 31.6% 37.8% 44.8%
The Company in each of the last four years has sustained significant net losses
and negative operating cash flows. Also during this time the Company divested
certain operations, made significant investments in the development of its
internet technology, and downsized its hardware operations, contributing to
declines in net sales or results of operations. If the Company is to
successfully execute its strategies discussed below, it will need to obtain
outside financing and negotiate and successfully complete IT service business
acquisitions. The Company is currently negotiating with several lending and
investing institutions to finance its operating strategies and has received a
commitment from a bank for a replacement $3,000,000 debt facility, subject to
certain financial covenants and borrowing based requirements. While management
believes it will be able to obtain sources of capital on acceptable terms, no
assurances can be given that it will successfully do so.
INDUSTRY BACKGROUND
IT SERVICE INDUSTRY BACKGROUND
The market for computer hardware maintenance and IT support services is large
and growing. According to Dataquest the worldwide information technology (IT)
market was $897 billion in 1997. Dataquest also states that the worldwide IT
services market was $301 billion in 1997, with the United States holding 43% or
$129 billion market share. While traditionally OEMs have garnered market share
within the IT services market, the Company believes that independent,
multi-vendor IT service providers such as the Company are taking market share
from the OEMs faster than OEMs are contracting new business. The Company
believes that this is occurring for several reasons including: (i) customers are
looking for single source providers who support multiple computer hardware and
software platforms, (ii) multi-vendor providers such as the Company are viewed
as being unbiased toward computer purchase decisions and (iii) OEMs are
increasingly outsourcing customer maintenance services (including warranty and
post warranty IT services) and technical customer support (such as help desk
services) to independents.
The IT services and support industry is fragmented and consolidating, providing
the Company with potential opportunity. Currently, the industry consists
primarily of: (i) several large IT service providers, (ii) service segments of
OEM operations, and (iii) hundreds of smaller companies servicing either product
niches or limited geographical areas of the United States. The significant
market position of OEMs is due largely to their traditional role of servicing
their own installed base of equipment and their
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customers' former reliance on centralized, single-vendor solutions.
INTERNET/INTRANET INDUSTRY BACKGROUND
International Data Corporation (IDC) predicts that the internet will reach "mass
market" proportions in the United States with nearly 25% of households on-line
in 1998. IDC further predicts that this rapid growth will propel the number of
U.S. users from an expected 90-100 million by 1998 year-end to over 200 million
by the year 2001 and the internet/intranet industry will reach $92 billion by
the year 2000. The internet has become a critical new way of doing business and
is reaching ever-larger audiences daily. As an example today, intranets --
private networks based on internet and web standards -- can be found in a full
59% of U.S. and 38% of European organizations according to a recent IDC report.
Next year, 77% of U.S. and 75% of European organizations expect to be using
intranets. This research shows that the internet/intranet and web-based
standards are being embraced by organizations and are helping organizations
deliver on the promise of collaborative computing.
According to IDC, companies are investing significant resources in strategic
internet technologies to streamline business processes. IDC believes new
internet information technologies are in demand as companies seek to reduce
costs, enhance productivity, as well as remain competitive. In addition, IDC
believes companies are looking at return on information as a measurable value
behind investment in the internet. The proliferation of information caused by
the very efficiencies of the internet has become in many aspects unmanageable;
however, given the importance of information to any organization, the ability to
successfully manage it is critical. The Company believes that its AlphaCONNECT
technology delivers added value to the one of the most critical aspects of the
internet, information management.
STRATEGY
IT SERVICE STRATEGY
Alpha Microsystems' business strategy for its IT services operation is to grow
through (i) complementary acquisitions and alliances; and (ii) leveraging
existing infrastructure. The fundamental elements of this business strategy are
as follows:
COMPLEMENT INTERNAL GROWTH WITH STRATEGIC ACQUISITIONS AND ALLIANCES
WITHIN THE IT INDUSTRY
In order to achieve the operating results and performance goals set by
management, the Company believes that expansion through acquisitions, as well as
internal growth, will be necessary. Accordingly, the Company has completed
acquisitions of smaller IT service companies and expects to continue to pursue
the acquisition of IT service companies that sell products and services
complementary to those of Alpha Microsystems. The Company also expects to pursue
companies that provide strategic platforms on which to leverage future growth.
No assurance can be given that this strategy will be successfully implemented.
LEVERAGE THE EXISTING INFRASTRUCTURE
Over the past several years, the Company has built an IT services infrastructure
serving all major and secondary cities in the United States and Canada. The
Company believes that through its 55 locations and over 200 service personnel it
has a competitive advantage over the majority of other IT service companies,
which tend to have only a local or regional presence. This national presence
provides the Company with the ability to expand services offered by acquired
local and regional IT services companies to a national level. Further, the
Company's national presence reduces the need for customers of acquired companies
to maintain service contracts with many different IT service providers across
the United States and Canada, and it also enhances internal growth of acquired
companies by bringing in-house IT services that were previously outsourced due
to local or regional operating constraints. No assurance can be given that this
strategy will be successfully implemented.
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INTERNET/INTRANET STRATEGY
To date, the Company has established agreements with several key companies
within the internet technology industry including General Magic, PC Quote,
Quote.com, Zacks Investment Research, Cybernet Data Systems, Inc., Market Guide,
and others. The agreements range from customized technology projects to
marketing alliances. The Company expects to continue to execute technology and
marketing agreements with key companies, as well as innovate additional
strategies to keep pace with the 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.
SERVICES OPERATION
The Company maintains service operations that employ over 200 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 55 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 via electronic and telephone
communications channels. The Company intends to expand the service segment of
its business through new service contracts, expansion of time and materials
servicing, and alliances with third-party IT service providers, although no
assurances can be given that the Company will be successful in expanding its
services operation above current levels.
While divestitures have decreased overall service revenues, AMSO's contribution
to the Company's operations has increased over the past years relative to the
decline in product revenues. On a worldwide basis, revenues from service
operations represented 68.4%, 62.2% and 55.2% of total revenues for fiscal 1998,
1997 and 1996, 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,
such as electrical power and cabling analysis; air conditioning, humidity and
static electricity problems; and lightning protection for computer systems.
PRODUCTS
INTERNET PRODUCTS AND TECHNOLOGIES
AlphaCONNECT is Alpha Microsystems' patent-pending software technology for
sophisticated communication and data conversion through the use of intelligent
agents. AlphaCONNECT is not a single product, but rather a technology that has
been realized as a core of cooperating components. These component parts can be
combined in many different ways to create a multitude of applications including
complete, stand-alone applications as well as modules that integrate into other
systems.
Using AlphaCONNECT technology, information can be gathered through the use of
TCP/IP (internet) protocols, including HTTP, HTTPS, FTP, SMTP and others. ODBC
support allows most databases to be accessed and MAPI is supported for corporate
e-mail. AlphaCONNECT can tie into additional protocols as needed. AlphaCONNECT's
broad communications abilities allow it to acquire information from a diverse
number of sources and to transmit data to an equally broad variety of
destinations. The data AlphaCONNECT can acquire, manipulate and deliver include
text, HTML, SGML, structured records, and many types of image, audio and video
data. Acquired information can be converted into many forms including text,
HTML, SGML and database records. AlphaCONNECT can also send data directly to
specific target applications. Many popular office automation applications for
Windows are supported, including word processors, spreadsheets, contact managers
and database managers.
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AlphaCONNECT is the underlying technology found in several applications
developed and released by the Company including AlphaCONNECT StockVue, an agent
application that provides custom delivery of financial data from the internet
such as stock and mutual fund quotes, news, charts and SEC filings. StockVue is
ready-tailored for OEMs or end-users. The Company has also developed and
released AlphaCONNECT BusinessVue, an agent application that provides custom
delivery of filtered, corporate and business information from the internet.
BusinessVue is also ready-tailored for OEMs or end-users.
The AlphaCONNECT technology provides the necessary components for additional
client and enterprise applications, and can be integrated with other software
products and environments. The Company has executed several business-to-business
technology agreements whereby the Company has agreed to customize its
AlphaCONNECT technology for OEMs, ISVs and other third-party vendors. Examples
of AlphaCONNECT technology implementations for third parties include agreements
with vendors such as General Magic, PC Quote, Cybernet Data Systems, Inc.,
AccountingNet, and CurtCo Freedom Group.
In addition, the Company has developed and released acTools, a product line of
Microsoft ActiveX components that targets software developers who work in a
variety of programming languages including Visual Basic, Visual Basic for
Applications, VBScript, Visual C++, and Delphi. acTools enable software
developers to export multiple data types -- text, records sets, images, audio
and video -- to many office automation products including popular word
processors, spreadsheets and database managers.
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, as well as its proprietary family of AM Series computer
systems that is based primarily on the Motorola 680XX family of microprocessors.
The AM Series consists of the Eagle family of small business computer systems at
the low- to mid-range of the product line, and the AM-6000 family at the upper
end. The Eagle family was first introduced by the Company in 1994, and the
initial AM-6000 configuration began shipments in early 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.
DISTRIBUTION AND MARKETING
During fiscal 1996 and 1997, the Company developed a national sales and
marketing group for its IT services business with a view toward expanding the
services business through a more aggressive, direct sales process. The sales and
marketing efforts for the IT services group are concentrated on securing
contracts for the service of open systems such as IBM RS6000s and AS400s, as
well as Microsoft and Novell networks. Since the beginning of fiscal year 1997,
the Company has increased headcount within its IT services sales and marketing
group by over 100%. The Company expects to continue investing resources to grow
its IT services sales and marketing group.
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, as well as computer products distributors,
(ii) creating relationships with on-line mass merchandisers and software
retailers, (iii) direct marketing to corporate environments, (iv) developing
associations
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with shareware providers, and (v) selling via the electronic marketplace of the
internet. The Company has committed significant resources to developing these
channels and creating market awareness. In fiscal 1998 and 1997, approximately
$2,300,000 and $1,200,000, respectively, were 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. The Company has begun to distribute both StockVue and BusinessVue
at nominal or no cost, both to promote name recognition and to facilitate use of
StockVue to generate advertising revenue income. However, although revenues are
starting to be realized, direct revenue advertising on the internet is in the
early stages, and such revenues available through the Company's present
alliances are uncertain. There is no assurance that substantial revenues will be
realized through such advertising revenues.
The Company currently markets its hardware products through approximately 188
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.
While none of the Company's customers represents more than 10% of the Company's
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.
During fiscal 1998, 1997 and 1996, approximately 12%, 20% and 30%, respectively,
of the Company's total net revenues were made to foreign dealers and users. The
decline in year-to-year net revenues is due primarily to divestitures of foreign
operations. 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 these 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 (12%, 20% and 30% in fiscal 1998, 1997 and 1996,
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.)
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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 fluctuations can have a material adverse effect on the
Company's foreign revenue, profitability and cash flow in terms of U.S. dollars.
Foreign currency exchange gains (losses) included in the determination of loss
from operations before taxes were $10,000, ($42,000) and $76,000 for the 1998,
1997 and 1996 fiscal years, respectively. 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, 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 90-day
on-site warranty with an option for on-site or extended warranties on most
products, other than software. Primarily, 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 a limited extent, 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 $1,411,000, $1,500,000 and $2,093,000,
or 23.1%, 16.9% and 14.2% of the Company's product revenue, respectively, in
fiscal years 1998, 1997 and 1996.
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 provided
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 agreements
provide for compensation on an hourly rate basis. Currently, the Company
develops its software internally. However, outsourced software developers 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, 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 others. As a result of the
competition's 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 using the Company's
proprietary systems. This decline continues to have an adverse effect upon the
Company's competitive position, impacting both its proprietary product sales and
corresponding services business. The Company believes that its 55 service
locations enable it to compete effectively
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against comparably sized service providers in the open systems service market --
a market in which the Company has begun to effectively increase its penetration.
However, there are service providers larger than the Company and there can be no
assurance that (i) competition from existing competitors will not substantially
increase, (ii) established or new companies will not enter the market in direct
competition with the Company, or (iii) 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 on-line 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 depends on its ability to (i) adapt to rapidly
changing technologies, (ii) keep its products competitively priced, (iii)
maintain and enhance its market position, (iv) adapt its services and products
to evolving industry standards, (v) 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, and (vi) the ability of internet product providers to establish a
paying market. 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 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 filed a
utility patent application with the United States Patent and Trademark Office
directed 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. If any patent issues, there can be no assurance that the issued claims
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, re-issued, re-examined, invalidated or held
unenforceable, or that any rights granted thereunder would provide proprietary
protection to the Company and its investment in AlphaCONNECT. The Company could
incur substantial
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costs in litigation in which the Company may assert a patent against another
party. 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.
The Company has federally registered trademarks including, but not limited to,
the following "AlphaACCOUNTING" (design), "AlphaACCOUNTING" (stylized),
"AlphaBASIC," "AlphaCALC," "AlphaCONNECT," "AlphaFORTRAN 77," "AlphaLAN,"
"AlphaPASCAL," "AlphaPASCAL Programming System," "AlphaRJE," "Alpha 2000,"
"AlphaSERV," "AlphaWRITE" (stylized), "AMOS," "AMSO," "Caselode," "insight/AM,"
"NODESTAR," "Videotrax," "Videotrax" (in design), and the slogan "RIGHT. FROM
THE START." Several of these marks have also been registered 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, including but not limited to "AlphaCONNECT
EdgarVue," "AlphaCONNECT Messenger," "AlphaCONNECT Power Package," "AlphaCONNECT
SportsVue," "AlphaSphere," "AM Alpha Microsystems" (in design), "AM Services
Operation," "EdgarVue," "AlphaMicrosystems," "Alphaconnect Pro," "Alphaconnect
StockVue," "AlphaConnect BusinessVue," "StockVue," "BusinessVue," "SportsVue,"
and the slogan "AlphaCONNECT. Where the Internet Gets Down to Business." The
Company claims common law rights in the following marks: "AM" (design), and
"Image.Doc."
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 10-year, exclusive worldwide license commencing October 29, 1992,
and terminable by AcuCOBOL, Inc. upon default by the Company or 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 both parties.
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. There can be no assurance that the
Company's products or activities will not infringe the patents or proprietary
rights of others, even if the Company also has received patent protection or
other proprietary rights for its technology. The Company may be required to
obtain licenses to patents or other proprietary rights. There can be no
assurance that any such licenses would be made available on terms acceptable to
the Company, if at all. If the Company does not obtain such licenses, it could
encounter delays in product introductions while it attempts to design around
such patents, the development, manufacture or sale of products requiring such
licenses could be precluded, and the Company may have to pay substantial damages
for past infringement. The Company could encounter substantial costs in
defending itself in litigation brought against it on such patents or proprietary
rights.
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.
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EMPLOYEES
On February 22, 1998, the Company and its subsidiaries employed approximately
263 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.
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,
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 claimed compensatory damages in the Orange County lawsuit are
related to the claims by Mr. Warnier. In December 1997, the Company and Warnier
executed a settlement agreement which involved no payment by the Company and
Warnier dismissed his Orange County case with prejudice. Separately Garralda
dismissed his Orange County case without prejudice upon the Company's execution
of a Tolling Agreement allowing Garralda to re-file the suit upon the occurrence
of specified conditions. Although no assurances as to the outcome of the
litigation can be given, management believes that this litigation will not have
a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
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 is now scheduled
to begin in November, 1998. 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.
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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, 77, 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, 55, 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.
JEFFREY J. DUNNIGAN, 38, was appointed Vice President and Chief Financial
Officer of the Company in December 1997. Prior to joining the Company, Mr.
Dunnigan headed a financial consulting practice in Irvine, California. From
October 1995 to September 1996, he was Vice President, Finance of UROHEALTH
Systems, Inc., a publicly traded medical device company. Prior to October 1995
he was Audit Senior Manager with Ernst & Young, specializing in high technology
manufacturing and software and consulting on SEC matters.
JOHN F. GLADE, 55, was appointed a Director of the Company 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, 40, was named Vice President of Marketing of the Company in
May 1996 and previously held the position of Director of Marketing of the
Company. He served in various marketing management capacities at the Company
between 1983 and 1990 and with AST from 1990 to 1995.
RANDALL S. PARKS, 37, has served as Vice President of Services of 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 of the Company. His previous experience was as field
service engineer with several companies, including Uni Dynamics, Mettler
Instruments and Consultant Field Engineering.
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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 22, 1998
First Quarter $ 2 7/8 $ 1 1/4
Second Quarter 2 1/32 1 1/8
Third Quarter 1 15/16 1 1/8
Fourth Quarter 1 27/32 1
FISCAL YEAR ENDED FEBRUARY 23, 1997
First Quarter $5 25/32 $ 1/2
Second Quarter 4 3/4 1/4
Third Quarter 2 5/8 1 15/32
Fourth Quarter 2 15/32 1 3/16
On May 14, 1998, the high was $3 5/16 and the low was $3 and the approximate
number of record holders of the Company's common stock was 534.
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
FEBRUARY 22, FEBRUARY 23, FEBRUARY 25, FEBRUARY 26, FEBRUARY 27,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF
OPERATIONS DATA:
Service revenues $ 13,223 $ 14,627 $ 18,070 $ 19,706 $ 18,413
Product sales 6,104 8,885 14,693 19,079 20,916
------------ ------------ ------------ ------------ ------------
Net sales 19,327 23,512 32,763 38,785 39,329
Cost of sales 13,966 15,498 22,967 27,385 23,876
------------ ------------ ------------ ------------ ------------
Gross margin 5,361 8,014 9,796 11,400 15,453
Income (loss) before taxes (3,318)(1) (2,742)(1) (3,555)(2) (6,247)(3) 223
Net income (loss) (3,297)(1) (2,770)(1) (3,575)(2) (6,247)(3) 336
Net income (loss) per
share (4) $ (0.30) $ (0.28) $ (0.54) $ (0.95) $ 0.08
Number of shares used in
the computation of per
share amounts (4) 10,863,876 9,727,432 6,564,882 6,580,470 4,025,090
============ ============ ============ ============ ============
BALANCE SHEET
DATA:
Current assets $ 9,754 $ 12,378 $ 7,199 $ 10,914 $ 15,252
Current liabilities 5,421 3,648 6,377 7,726 6,936
------------ ------------ ------------ ------------ ------------
Working capital 4,333 8,730 822 3,188 8,316
Inventories 580 305 943 1,948 2,593
Total assets 15,788 17,195 13,061 17,902 23,100
Long-term obligations 60 34 201 140 154
Shareholders' equity $ 10,307 $ 13,513 $ 6,483 $ 10,036 $ 16,010
(1) Includes $2,281,000 in fiscal 1998 and $1,162,000 in fiscal 1997 of expenses
attributable to the marketing and launching of the AlphaCONNECT software
products.
(2) Includes charges of $1,995,000 for the write-off of intangible assets
primarily associated with the Company's AlphaHealthCare subsidiary and PANDA
division.
(3) 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.
(4) Per share amounts reflect the adoption of SFAS 128 and represents diluted
per share amounts. See Note 1 of Notes to Consolidated Financial Statements.
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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. 22, FEB. 23, FEB. 25,
1998 1997 1996
------- ------- -------
Net sales:
Service 68.4% 62.2% 55.2%
Product 31.6 37.8 44.8
------- ------- -------
Total net sales 100.0 100.0 100.0
Cost of sales 72.3 65.9 70.1
------- ------- -------
Gross margin 27.7 34.1 29.9
Selling, general and administrative expense 38.9 41.2 36.2
Engineering, research and development expense 7.3 6.4 6.4
Interest (income) expense, net (1.6) (1.0) (0.2)
Other (income) expense, net 0.3 (0.8) (1.6)
------- ------- -------
Loss before taxes (17.2) (11.7) (10.9)
Net loss (17.1)% (11.8)% (10.9)%
GENERAL
During fiscal 1998, the Company continued to develop and customize applications
of its core AlphaCONNECT technology. The Company's net loss for the year was
$3,297,000. Included in the 1998 results are costs of approximately $2,281,000
of expenses related to the marketing and launching of AlphaCONNECT applications.
Also, during the last quarter of fiscal 1998, the Company began to implement an
IT services business strategy, investing an estimated $2.6 million in the
acquisition of the telephony service division of Applied Cellular Technologies
Corporation, of which, $1.1 million has been paid from the Company's cash
reserves through February 22, 1998. All amounts paid, and any future payments,
are contingent on future annualized revenues, and to date the Company has not
realized the anticipated contribution to the results of operations projected at
the time of the acquisition. Subsequent to fiscal 1998, the Company acquired a
complementary IT services business, M & J, for approximately $950,000. The
purchase price, which is contingent on future annualized revenues, is to be paid
over 18 months, with 50% of the purchase price paid on the closing date of the
acquisition.
The Company operates on a 52/53-week fiscal year ending on the last Sunday in
the month of February. Fiscal years 1998, 1997 and 1996 ended on February 22,
1998, February 23, 1997, and February 25, 1996, 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.
FISCAL 1998 COMPARED TO FISCAL 1997
The Company had a net loss of $3,297,000, or $0.30 per share, in fiscal year
1998, compared to a net loss of $2,770,000, or $0.28 per share, during fiscal
year 1997. This loss reflects $2,281,000 of expenses relating to the marketing
and launching of the AlphaCONNECT product line, and a reduction in both product
and IT services revenues, primarily due to the divestiture of the Company's UK
and domestic subsidiaries.
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Net sales in fiscal 1998 decreased $4,185,000, or 17.8%, to $19,327,000,
compared to $23,512,000 for fiscal 1997. This decrease includes $4,838,000
relating to product lines and subsidiaries sold during 1997.
Total IT services revenue declined $1,404,000, or 9.6%, to $13,223,000 for
fiscal 1998 from $14,627,000 for the prior year. Approximately $1,898,000 of
this decline was due to the sale of both the Company's UK and domestic
AlphaHealthCare subsidiaries. On December 31, 1997, the Company completed the
acquisition of the service business of ATI Communications ("ATI"), which
expanded the Company's capabilities into computer telephony services and
provided revenues of $404,000 during the last quarter of fiscal 1998. Subsequent
to year-end, the Company acquired M & J and continues to actively evaluate
additional acquisitions within the IT services industry. The Company has built a
base of IT support services, including field maintenance and networking, and
intends to invest additional resources in this area. In addition, the Company is
also expanding its domestic IT services sales and marketing efforts to
capitalize on its current customer base and further increase revenues from the
open systems generation market.
Total product revenue declined $2,781,000, or 31.3%, to $6,104,000 in fiscal
1998 from approximately $8,885,000 for fiscal year 1997. The decline in product
revenues includes $1,545,000, or 55.6%, attributable to the absence of the UK
subsidiary that was sold in August 1996. An additional $1,375,000 of decline was
due primarily to the sale of the Company's domestic vertical software product
lines.
Total gross margin for the Company for fiscal 1998 decreased to 27.7%, compared
to 34.1% during fiscal 1997, with declines for both product and IT services
lines of business. IT services business gross margin in fiscal 1998 declined to
25.2% from 30.3% during fiscal 1997. The decline in IT services gross margin was
primarily due to the sale of the Company's UK subsidiary that generated higher
IT services margins than the domestic IT services organization. Additionally,
the third-party service contracts contributed lower margins than the traditional
Alpha Micro Operating System ("AMOS") based IT service contracts. While the IT
services organization is focusing on (i) obtaining new contracts for its
networking support and consulting services, (ii) supporting vertical markets
with IT services, and (iii) increasing third-party services in order to improve
revenues, the revenue from these new areas of focus generally produce lower
margins than the Company's traditional IT services business.
Product gross margin for fiscal 1998 decreased to 33.1%, compared to 40.3% in
the prior year. The decrease in product gross margin was primarily due to a
relatively lower proportion of higher-margin AMOS products sold both in the
domestic and European markets, combined with higher inventory and warranty
reserves in fiscal year 1998.
Selling, general and administrative expenses decreased $2,112,000 to $7,518,000
in fiscal 1998 from $9,665,000 in the prior year. The sale of the UK and
AlphaHealthCare subsidiaries and the remaining vertical software products
resulted in a decrease in selling, general and administrative expenses of
approximately $2,157,000. This reduction was partially offset by increases in
the Company's investment in resources for the internet and intranet markets plus
a significant increase in the IT services sales force.
Research and development expenses (which include engineering support and IT
services) were $1,411,000 in fiscal 1998 compared to $1,500,000 in fiscal 1997.
This decrease includes $317,000 relating to the vertical software product lines
sold in fiscal year 1997. Additionally, in fiscal 1998 approximately $407,000 of
new software development expenses have been capitalized, as compared to $971,000
in the prior fiscal year.
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FISCAL 1997 COMPARED TO FISCAL 1996
Net sales in fiscal 1997 decreased $9,251,000, or 28.2%, to $23,512,000,
compared to $32,763,000 for fiscal 1996. This decrease includes $7,218,000,
approximately 78.0%, relating to product lines and subsidiaries sold during
1997.
Total IT services revenue for fiscal 1997 declined $3,443,000, or 19.1%, to
$14,627,000 from $18,070,000 for the prior year. Approximately 63.1% 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 AMOS-based IT service contracts, and
a decrease in support revenues from the Company's AlphaHealthCare subsidiary.
The Company has expanded its base of support IT services, including field
maintenance and networking, and intends to invest additional resources in this
area. In addition, the Company is expanding its domestic IT service sales and
marketing efforts to capitalize on its current base and further expand revenues
from the open systems generation market.
Total product revenue declined $5,808,000, or 39.5%, to $8,885,000 in fiscal
1997 from approximately $14,693,000 for fiscal 1996. Approximately 57.9% 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 from its AlphaHealthCare
subsidiary.
Total gross margin for the Company for fiscal 1997 increased to 34.1%, compared
to 29.9% during the prior year, due to an increase in product gross margin
offset by declines in the IT services gross margin. The IT services business
gross margin declined to 30.3% during fiscal 1997 from 32.0% during 1996. The
decline in gross margin was primarily due to the sale of the Company's UK
subsidiary that generated higher IT service margins than the domestic IT service
organization. Additionally, the AlphaHealthCare subsidiary that was sold in
January 1997 and the third-party service contracts contributed lower margins
than the traditional AMOS-based IT service contracts. To improve revenues, the
IT services organization is focusing on obtaining new contracts for its
networking support services, supporting vertical markets with IT services, and
increasing third-party services. Revenue from these new areas of focus generally
produce lower margins than the Company's traditional IT service business. The
Company continues to evaluate potential IT service business acquisitions which
meet its financial and market criteria.
Product gross margin for fiscal 1997 increased to 40.3%, compared to 27.3% 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.
Selling, general and administrative expenses decreased $2,190,000 to $9,665,000
in fiscal 1997 from $11,855,000 in 1996. The absence of the UK subsidiary during
the last seven months of fiscal 1997 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.
This reduction was partially offset by a significant increase in the IT service
sales force.
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 16.9% in fiscal 1997 from 14.2% during fiscal 1996.
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YEAR 2000 UNCERTAINTIES
Many computer systems were not designed to handle any dates beyond the Year
1999, and therefore computer hardware and software will need to be modified
prior to the Year 2000 in order to remain functional. Many enterprises will be
devoting a substantial portion of their information systems spending to
resolving this upcoming Year 2000 problem. The Year 2000 issue could lower
demand for the Company's hardware products while increasing the Company's costs.
These combining factors could have a material adverse impact on the Company's
financial results.
The Company believes the majority of its products are currently Year 2000
compliant, and future costs to make the Company's products Year 2000 compliant
are not anticipated to be material. There can be no assurance that systems
operated by third parties that interface with or contain the Company's products
will timely achieve Year 2000 compliance. Any failure of these third parties'
systems to timely achieve Year 2000 compliance could have a material adverse
effect on the Company's business, financial condition and result of operations.
The Company believes that its internal systems are Year 2000 compliant or will
be upgraded or replaced in connection with previously planned changes to
information systems prior to the need to comply with Year 2000 requirements.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the Company's working capital decreased $4,397,000 to
$4,333,000 from $8,730,000 at February 23, 1997. Net cash and short-term
investments in U.S. treasury bills decreased during this period by $3,577,000 to
$5,003,000. Net cash used in operating activities during fiscal 1998 was
$1,637,000, compared to $1,882,000 during fiscal 1997. The Company also invested
approximately $1,200,000 of its cash in IT service business acquisitions and
approximately $1,800,000 in equipment and software primarily related to its new
integrated information system. These capital investments, and the related
increase in accounts receivable from acquired operations of approximately
$1,000,000, were offset by $1,000,000 utilized under the Company's line of
credit with its bank.
Pursuant to the terms of the line of credit, the Company can borrow 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 (10.5% at February 22, 1998). The line of
credit is secured by substantially all of the Company's assets. Subsequent to
fiscal year end, the Company was in default with certain financial covenants.
However, the Company has received a commitment from another lending institution
for a $3,000,000 line of credit, subject to certain financial covenants and
borrowing base requirements.
The Company believes that its current cash position, augmented by operating
activities, will provide it with sufficient resources to finance its working
capital requirements through fiscal year 1999. The Company is also aggressively
pursuing additional financing from various sources to support its acquisition
strategy, although there can be no assurances that such financing will be
available on acceptable terms. The Company's future capital requirements depend
on a variety of factors, including, but not limited to, the rate of decline in
the traditional business; the success, timing, and amount of investment required
to penetrate the internet/intranet markets; IT services 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.
19
20
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 22, 1998.
20
21
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 29
Consolidated Balance Sheets at February 22, 1998 30
and February 23, 1997
Consolidated Statements of Operations for the years 31
ended February 22, 1998, February 23, 1997 and
February 25, 1996
Consolidated Statements of 32
Shareholders' Equity for the years
ended February 22, 1998, February 23,
1997 and February 25, 1996
Consolidated Statements of Cash Flows 33
for the years ended February 22,
1998, February 23, 1997 and February 25, 1996
Notes to Consolidated Financial Statements 34
(2) The following financial statement schedule for the fiscal years
1996, 1997, and 1998 is submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable
or the required information is presented in the financial
statements or notes thereto.
(3) The list of exhibits contained in the Index to Exhibits is
submitted herewith.
(b) No reports on Form 8-K were filed during the fourth quarter of fiscal 1998.
(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)
21
22
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)
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)
2.6 Agreement of Purchase and Sale by and between the Registrant and
Applied Cellular Technology, Inc. dated December 23, 1997
(incorporated herein by reference to Exhibit 2.6 to the Quarterly
Report on Form 10-Q for the quarter ended November 23, 1997)
2.7 Agreement of Purchase and Sale by and between the Registrant and M &
J Technologies, Inc. dated February 19, 1998
2.8 Modification to Contract for Purchase and Sale of M & J
Technologies, Inc. Hardware Service Business Assets to Registrant
dated February 19, 1998
3.1 Articles of Incorporation of Registrant dated as of March 16, 1977
(incorporated herein by reference to Exhibit 3.1 to the Registration
Statement on Form-S-1 (Registration No. 2-72222) of Registrant)
3.2 Certificate of Amendment of Articles of Incorporation of Registrant
dated as of September 29, 1988 (incorporated herein by reference to
Exhibit 3.2 to the Annual Report on Form 10-K of Registrant for the
Year Ended February 23, 1997)
3.3 Certificate of Amendment of the Articles of Incorporation of
Registrant dated June 25, 1992 (incorporated herein by reference to
Exhibit 10.71 to the Quarterly Report on Form 10-Q of Registrant for
the Quarter Ended May 31, 1992)
3.4 Restated Bylaws of Registrant (incorporated herein by reference to
Exhibit 3.1 to the Form S-8 filed January 31, 1997)
3.5 Registration Rights Agreement by and between Registrant and Silicon
Valley Bank dated July 10, 1995 (incorporated herein by reference to
Exhibit 10.141 to the Quarterly Report on Form 10-Q of Registrant
for the Quarter Ended May 28, 1995)
4.2 Anti-dilution Agreement by and between Registrant and Silicon Valley
Bank dated July 10, 1995 (incorporated herein by reference to
Exhibit 10.142 to the Quarterly Report on Form 10-Q of Registrant
for the Quarter Ended May 28, 1995)
22
23
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 (incorporated herein by reference to Exhibit 4.6 to
the Annual Report on Form 10-K of Registrant for the Year Ended
February 23, 1997)
*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)
*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)
23
24
*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)
*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)
24
25
*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)
*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)
25
26
*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)
26
27
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)
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 (incorporated herein by reference to
Exhibit 10.53 to the Annual Report on Form 10-K of the Registrant
for the Year Ended February 23, 1997)
10.54 Amendment to Loan Agreement by and between Registrant and Silicon
Valley Bank dated March 3, 1997 (incorporated herein by reference
to Exhibit 10.54 to the Annual Report on Form 10-K of the
Registrant for the Year Ended February 23, 1997)
*10.55 Indemnification Agreement by and between Registrant and James A.
Sorensen dated January 16, 1997 (incorporated herein by reference
to Exhibit 10.55 to the Annual Report on Form 10-K of the
Registrant for the Year Ended February 23, 1997)
*10.56 Indemnification Agreement by and between Registrant and Jeffrey
A. Martin dated January 10, 1997 (incorporated herein by
reference to Exhibit 10.56 to the Annual Report on Form 10-K of
the Registrant for the Year Ended February 23, 1997)
*10.57 Indemnification Agreement by and between Registrant and Dennis E.
Michael dated January 17, 1997 (incorporated herein by reference
to Exhibit 10.57 to the Annual Report on Form 10-K of the
Registrant for the Year Ended February 23, 1997)
*10.58 Indemnification Agreement by and between Registrant and Randall
S. Parks dated January 17, 1997 (incorporated herein by reference
to Exhibit 10.58 to the Annual Report on Form 10-K of the
Registrant for the Year Ended February 23, 1997)
*10.59 Indemnification Agreement by and between Registrant and Margaret
Denson dated January 17, 1997 (incorporated herein by reference
to Exhibit 10.59 to the Annual Report on Form 10-K of the
Registrant for the Year Ended February 23, 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)
10.61 Amendment to Loan Agreement by and between Registrant and Silicon
Valley Bank dated October 11, 1997 (incorporated herein by
reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q
for the Quarter ended November 23, 1997)
27
28
*10.62 Employment Letter by and between Registrant and Jeffrey J.
Dunnigan dated November 15, 1997 (incorporated herein by
reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q
for the quarter Ended November 23, 1997)
*10.63 Indemnification Agreement by and between Registrant and Jeffrey
J. Dunnigan dated December 1, 1997
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)
28
29
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 22, 1998, and February 23, 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended February 22, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with 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 22, 1998, and February 23, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
February 22, 1998, 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.
/s/ Ernst & Young LLP
Orange County, California
April 15, 1998, except for Note 6
as to which the date is April 23, 1998
29
30
ALPHA MICROSYSTEMS
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
FEBRUARY 22, FEBRUARY 23,
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 5,003 $ 1,768
Short-term investments in U.S. treasury bills -- 6,812
Accounts receivable, net of allowance for
doubtful accounts of $294 and $139 in
1998 and 1997, respectively 3,781 3,028
Inventories 580 305
Notes receivable 161 232
Prepaid expenses and other current assets 229 233
-------- --------
Total current assets 9,754 12,378
Property and equipment, net 3,186 2,932
IT Service contracts, net 1,192 364
Software costs, net 1,067 815
Notes receivable 417 598
Other assets, net 172 108
-------- --------
$ 15,788 $ 17,195
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 1,000 $ --
Accounts payable 1,699 1,201
Deferred revenue 1,888 1,686
Accrued compensation 386 345
Other accrued liabilities 356 381
Current portion of long-term debt 92 35
-------- --------
Total current liabilities 5,421 3,648
Long-term debt 60 34
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000
shares authorized; none issued -- --
Common stock, no par value; 20,000,000
shares authorized; 10,914,112 and
10,821,897 shares issued and outstanding
at February 22, 1998 and February 23,
1997, respectively 31,011 30,919
Accumulated deficit (20,761) (17,464)
Unamortized restricted stock plan expense -- (13)
Foreign currency translation adjustment 57 71
-------- --------
Total shareholders' equity 10,307 13,513
-------- --------
$ 15,788 $ 17,195
======== ========
See accompanying notes.
30
31
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
YEAR ENDED
----------
FEBRUARY 22, FEBRUARY 23, FEBRUARY 25,
1998 1997 1996
------------ ------------ ------------
Net sales:
IT Services $ 13,223 $ 14,627 $ 18,070
Product 6,104 8,885 14,693
------------ ------------ ------------
Total net sales 19,327 23,512 32,763
------------ ------------ ------------
Cost of sales:
IT Services 9,887 10,193 12,282
Product 4,079 5,305 10,685
------------ ------------ ------------
Total cost of sales 13,966 15,498 22,967
------------ ------------ ------------
Gross margin 5,361 8,014 9,796
Operating expenses:
Selling, general and administrative 7,518 9,665 11,855
Engineering, research and development 1,411 1,500 2,093
------------ ------------ ------------
Total operating expenses 8,929 11,165 13,948
------------ ------------ ------------
Loss from operations (3,568) (3,151) (4,152)
Other (income) expense:
Interest income (310) (266) (93)
Interest expense 7 31 38
Other (income) expense, net 63 (216) (466)
Foreign exchange (gain) loss (10) 42 (76)
------------ ------------ ------------
Total other income (250) (409) (597)
------------ ------------ ------------
Loss before taxes (3,318) (2,742) (3,555)
Income tax expense (benefit) (21) 28 20
------------ ------------ ------------
Net loss $ (3,297) $ (2,770) $ (3,575)
------------ ------------ ------------
Basic and diluted net loss per share $ (0.30) $ (0.28) $ (0.54)
============ ============ ============
Number of shares used in the
Computation of basic and diluted per share amounts 10,863,876 9,727,432 6,564,882
============ ============ ============
See accompanying notes.
31
32
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED FEBRUARY 22, 1998
(In thousands, except share and per share data)
Unamortized Foreign
Common Stock Restricted Currency
------------------------ Accumulated Stock Plan Translation
Shares Amount Deficit Expenses Adjustment Total
---------- ---------- ---------- ---------- ---------- ----------
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 awards 22,500 18 -- (18) -- --
Amortization -- -- -- 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-employee 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
Net loss -- -- (3,297) -- -- (3,297)
Foreign currency translation -- -- -- -- (14) (14)
Issuance of stock 12,171 20 -- -- -- 20
Costs for redeemable warrants -- (21) -- -- -- (21)
Exercise of stock options
($0.9375 per share) 40,000 37 -- -- -- 37
Non-employee Directors Comp Plan 40,044 56 -- -- -- 56
Amortization -- -- -- 13 -- 13
---------- ---------- ---------- ---------- ---------- ----------
Balance at February 22, 1998 10,914,112 $ 31,011 $ (20,761) $ -- $ 57 $ 10,307
========== ========== ========== ========== ========== ==========
See accompanying notes.
32
33
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
----------------------------------------------
FEBRUARY 22, FEBRUARY 23, FEBRUARY 25,
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net loss $ (3,297) $ (2,770) $ (3,575)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization 1,702 2,067 2,325
Provision for losses on accounts receivable 194 64 (21)
Provision for slow-moving inventory 132 (59) 196
Intangible asset write-down -- -- 1,995
Gain on sale of fixed assets -- -- (282)
Other changes in operating assets and liabilities:
Accounts receivable (987) 28 (376)
Inventories (206) (71) 811
Notes receivable 174 (671) --
Prepaid expenses and current assets (2) (65) 412
Accounts payable and accrued liabilities 487 112 (1,615)
Deferred revenue 146 (383) (133)
Other, net 20 (134) (30)
-------- -------- --------
Net cash used in operating
activities (1,637) (1,882) (293)
-------- -------- --------
Cash flows from investing activities:
Purchase of short-term investments (7,405) (19,697) --
Proceeds from sale of short-term investments 14,216 12,885 --
Acquisition of IT service assets (1,183) -- (94)
Purchases of equipment (1,346) (427) (1,730)
Capitalization of software costs (456) (971) (976)
Purchase of intangible assets (30) -- --
Proceeds from sale of stock investments -- 2,088 --
Proceeds from sale of product lines 44 250 --
Proceeds from sale of fixed assets -- 11 440
Acquisition of business -- -- (149)
-------- -------- --------
Net cash provided by (used in) investing
activities 3,840 (5,861) (2,509)
-------- -------- --------
Cash flows from financing activities:
Line of credit, net 1,000 (500) 500
Issuance of common stock 92 9,677 --
Principal repayments on debt (53) (167) (463)
-------- -------- --------
Net cash provided by financing
activities 1,039 9,010 37
-------- -------- --------
Effect of exchange rate changes on cash (7) (4) (19)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 3,235 1,263 (2,784)
Cash and cash equivalents at beginning of period 1,768 505 3,289
-------- -------- --------
Cash and cash equivalents at end of period $ 5,003 $ 1,768 $ 505
======== ======== ========
Supplemental information:
Cash paid for:
Interest $ 7 $ 31 $ 38
Income tax payments (refunds), net $ (20) $ 16 $ (64)
See accompanying notes.
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ALPHA MICROSYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 22, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
THE BUSINESS
Alpha Microsystems provides IT services (including consulting, maintenance,
support and networking) and information technology products (including products
for the internet/intranet market) 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
re-classifications have been made to the prior years' consolidated financial
statements to conform to the fiscal 1998 presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. The industry in which the
Company operates is characterized by rapid technological change and short
product life cycles. As a result, estimates are required to provide for doubtful
accounts receivable, product obsolescence and certain accrued liabilities.
Historically, actual amounts recorded have not varied significantly from
estimated amounts.
The Company operates on a 52/53-week fiscal year ending on the last Sunday in
the month of February. Fiscal years 1998, 1997 and 1996 ended on February 22,
1998, February 23, 1997, and February 25, 1996, respectively.
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 for fiscal year 1997, 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 totaling $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 years 1998 and 1997 were not material.
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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 10
Leasehold improvements 1 to 6
IT Service parts 5
During fiscal 1998, the Company capitalized in machinery and equipment $671,000
associated with obtaining computer software for internal use. The amount
capitalized includes amounts related to external direct costs of material and
services, payroll and payroll-related costs.
INTANGIBLE ASSETS
Intangible assets include acquired IT service contracts, capitalized computer
software costs and goodwill. The book value of goodwill and IT 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
periods for the major classes of intangible assets are as follows:
YEARS
-----
IT service contracts 5 to 10
Capitalized software costs 3 to 5
Goodwill 5 to 10
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 5-year straight-line basis from the date of product release. Capitalized
software costs, net of accumulated amortization of $1,625,000 and $1,420,000,
were $1,067,000 and $815,000 at February 22, 1998, and February 23, 1997,
respectively. Total amortization expense charged to cost of product sales for
the fiscal years 1998, 1997 and 1996 was approximately $178,000, $99,000,and
$186,000, respectively.
RECOVERABILITY OF LONG LIVED ASSETS
The Company routinely evaluates the carrying value of long lived assets to
determine if impairment exists based upon estimated undiscounted future cash
flows. Impairment is analyzed for certain assets at a consolidated level as they
do not have identifiable cash flows that are largely independent of other asset
groupings. The impairment, if any, is measured by the difference between
carrying value and estimated discounted future cash flows and is charged to
expense in the period identified. It is at least reasonably possible that the
Company's estimate of future undiscounted cash flows may change during fiscal
1999. In addition, if the Company's estimate of future undiscounted cash flows
should change or if the operating plan is not achieved, future analyses may
indicate insufficient future undiscounted net cash flows to recover the carrying
value of the Company's long lived assets, in which case such assets would be
written down to estimated fair value. In fiscal 1996, the Company wrote off
$481,000 in goodwill and IT service contracts and $1,016,000 of capitalized
software development cost related to AlphaHealthCare, which was divested during
the fourth quarter of fiscal 1996. Also, during the fourth quarter of fiscal
1996, the Company wrote off accumulated capitalized software development costs
of $373,000 for its PANDA product line, which was also divested. No additional
write-offs were required in 1998 or 1997. Amounts written off are aggregated and
presented as a component of selling, general and administrative expense.
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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.
DEFERRED REVENUE
Deferred revenue is revenue billed in advance for IT 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 IT 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 extends 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 22, 1998, 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 1998, 1997 and
1996 were $166,000, $795,000 and $66,000, 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.
STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company
applies Accounting Principles Bulletin Opinion No. 25 and related
Interpretations in accounting for its stock option and purchase plans and,
accordingly, has not recognized compensation cost in connection with such plans.
Note 7 to the consolidated financial statements contains a summary of the pro
forma effects to reported net loss and net loss per share for 1998, 1997, 1996
as if the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS 123.
INCOME TAXES
The Company uses the liability method to account for deferred taxes, which
requires an asset and liability approach to recognize deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's
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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
In fiscal 1998, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share ("SFAS 128"). SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options and warrants. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share, including
the effect of dilutive stock options and warrants. For all years presented, the
effect of options and warrants has been excluded as their effect is
anti-dilutive. The implementation of SFAS 128 had no effect on the earnings per
share data presented.
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 10,000, $(42,000) and $76,000 for fiscal 1998,
1997 and 1996, respectively. The Company had no forward exchange contracts
outstanding at February 22, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), and Statement No. 131, Disclosure about Segments of an Enterprise and
Related Information ("SFAS 131"). The Company is required to adopt these
statements in fiscal 1999. SFAS 130 establishes new standards for reporting and
displaying comprehensive income and its components. SFAS 131 requires disclosure
of certain information regarding operating segments, products and IT services,
geographic areas of operation and major customers. Adoption of these statements
is expected to have no impact on the Company's consolidated financial position,
results of operations or cash flows.
The Company currently recognizes revenue based on the guidelines set forth in
Statement of Position ("SOP") 91-1, Software Revenue Recognition. In October
1997, the Accounting Standards Executive Committee of the AICPA issued SOP 97-2,
which supersedes SOP 91-1 and provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP 97-2
is intended to reduce the diversity in accounting for software revenue
recognition and changes certain of the specific criteria for recognizing revenue
related to software licensing arrangements. Specifically, the new SOP contains
more restrictive revenue recognition provisions for software arrangements
containing multiple elements (i.e. upgrades, enhancements, implementation and
other services) similar to the arrangements entered into by the Company. SOP
97-2 is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company is currently evaluating the provisions of the new
SOP and the impact that it will have on the Company's revenue recognition
policies and the terms under which it provides its products and services to
customers.
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2. ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
On December 23, 1997, the Company acquired the telephone installation and IT
service business and certain related assets of Applied Cellular Technology, Inc.
for a purchase price estimated to be $2.6 million, of which, $1.1 million has
been paid from the Company's cash reserves through February 22, 1998. All
amounts paid, and any future payments, are contingent on future annualized
revenues.
On September 15, 1995, the Company acquired the ongoing IT 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.
Subsequent to February 22, 1998, the Company acquired the ongoing IT service
contracts and certain related assets of M&J Technologies for an estimated
purchase price of $950,000. The purchase price, which is contingent on future
annualized revenues, is to be paid over 18 months, with 50% of the purchase
price paid on the closing date of the acquisition.
All acquisitions have been accounted for as purchases and the acquired
operations have been included in the consolidated statements of operations from
the dates of acquisition. Pro forma information has not been presented as it
would not be materially different from the historical information presented.
DIVESTITURES
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, if any, will be included in the Company's results of
operations at that time.
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.
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.
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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 $98,000 and $41,000 at February 22, 1998, and February 23, 1997,
respectively, are comprised of the following:
FEBRUARY 22, FEBRUARY 23,
(IN THOUSANDS) 1998 1997
---- ----
Raw materials $568 $263
Work-in-process 4 9
Finished goods 8 33
---- ----
$580 $305
==== ====
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 $489,300,
payable over a 52-month period from the date of the note, of which $391,440 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 totaling
$300,000, 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:
FEBRUARY 22, FEBRUARY 23,
1998 1997
------- -------
Machinery and equipment $ 7,237 $ 6,467
Leasehold improvements 1,396 1,395
IT Service parts 4,032 8,171
------- -------
12,665 16,033
Less accumulated depreciation and amortization 9,479 13,101
------- -------
Property and equipment, net $ 3,186 $ 2,932
======= =======
Depreciation expense was $1,254,000, $1,547,000 and $1,405,000 for fiscal years
1998, 1997 and 1996, respectively.
6. DEBT
On October 11, 1996, the Company amended its existing loan agreement extending
its credit line to October 10, 1998. 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
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the line of credit bear interest at prime plus two and one-half percent (10.5%
at February 22, 1998). In addition, the Company issued 25,000 warrants to the
bank (See Note 7). Should the Company desire to pay dividends, any such
dividends would be subject to the prior written consent of the Company's bank
and to any preferential rights to receive dividend payments contained in any
securities subsequently issued by the Company. The line of credit is secured by
substantially all of the Company's assets. At February 22, 1998, there were
outstanding borrowings totaling $1,000,000. Subsequent to fiscal year end, the
Company was in default with certain financial covenants contained in the
existing loan agreement.
However, on April 23, 1998, the Company received a commitment from another
lending institution for a $3,000,000 line of credit, subject to certain
financial covenants and borrowing base requirements.
7. SHAREHOLDERS' EQUITY
COMMON STOCK
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 22, 1998, all restricted shares are 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 was recorded as a reduction of shareholders' equity in the
accompanying financial statements.
The Company's 1996 Non-employee Director Stock Compensation Plan provides to
non-employee 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.
At February 22, 1998, 1,542,672 shares of the Company's common stock is reserved
for issuance pursuant to outstanding warrants and the Company's stock option
Plans.
WARRANTS
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 and subsequent Public Offering, and the
remainder were issued in consideration of services rendered to the Company. 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 redeemed warrants and other concurrently exercised 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.
In connection with a public offering in fiscal 1993, Company granted to its
underwriter a warrant to purchase 123,836 Units, with an exercise price of $1.95
per Unit, expiring November 1, 1998. Each Unit consists of one share of common
stock and one Underlying Warrant to purchase one share of common stock. The
exercise price of the Underlying Warrants is $2.50 and expire November 1, 1998.
Pursuant to the terms of an amendment to the loan agreement signed in October
1996, the Company agreed to issue 25,000 warrants to the bank which are
exercisable for five years at $1.81 per share. Also in October 1996, the Company
issued a warrant to purchase 300,000 shares of common stock exercisable for five
years at $3.00 per share to its financial advisor.
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As of February 22, 1998, the Company has 448,836 warrants outstanding (572,672
including the Underlying Warrants) and 954,939 options outstanding, or a total
of 1,403,775 shares under options and warrants (1,527,611 including the
Underlying Warrants).
OPTIONS
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 22, 1998, 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 non-employee directors
automatic grants of non-statutory stock options at exercise prices equal to the
fair market value of the Company's common stock on the date of grant, up to an
aggregate of 100,000 shares of common stock.
The following table contains a summary of transactions related to Incentive and
Non-Qualified Stock Options for the fiscal years 1996, 1997, and 1998:
NON-QUALIFIED STOCK OPTIONS INCENTIVE STOCK OPTIONS
--------------------------- -----------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
---------------- ----------------
SHARES PRICE PER SHARE SHARES PRICE PER SHARE
------ --------------- ------ ---------------
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
Granted -- 330,000 $ 1.23
Expired/canceled (10,000) $ 1.94 (133,000) $ 1.61
Exercised (40,000) $ 0.94 -- --
-------- -------- --------
Outstanding at
February 22, 1998 70,000 $ 1.94 884,939 $ 1.99
======== ======== ========
Exercisable at
February 25, 1996 178,085 $ 1.86 253,189 $ 1.78
February 23, 1997 120,000 $ 1.61 313,439 $ 2.07
February 22, 1998 70,000 $ 1.94 380,939 $ 2.25
Available for grant:
February 25, 1996 171,978 235,561
February 23, 1997 -- 212,061
February 22, 1998 -- 15,061
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Options outstanding at February 22, 1998, under the non-qualified stock option
plan are exercisable at $1.94. The weighted average remaining life of these
options as of year-end is approximately 0.1 years.
Options outstanding at February 22, 1998, 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 2.2 years, 409,439 shares at $1.38 to
$1.88 with a remaining life of 2.6 years, 303,000 shares at $3.00 per share with
a remaining life of 3.3 years and 150,000 shares at $1.03 per share with a
remaining life of 4.8 years.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing method with the following weighted average assumptions: risk-free
interest rate of 6% for 1998, 1997, and 1996; volatility factors of the expected
market price of the Company's common stock of 0.6 for all three years; and a
weighted average expected life of the options of five 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 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 PER SHARE INFORMATION) 1998 1997 1996
---- ---- ----
Pro forma net loss $ (3,516) $ (2,873) $ (3,575)
Pro forma basic and diluted loss per share: $ (0.32) $ (0.30) $ (0.54)
The per share weighted average fair value of options granted during 1998, 1997,
and 1996 were $0.71, $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 (loss) for future years.
8. INCOME TAXES
The current provision for income taxes consists of the following:
(IN THOUSANDS)
1998 1997 1996
---- ---- ----
Foreign $(31) $ 25 $ 20
State 10 3 --
---- ---- ----
$(21) $ 28 $ 20
==== ==== ====
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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) 1998 1997
------- -------
Deferred tax assets:
Net operating loss carryforward $ 8,793 $ 7,629
Accrued tax credits 899 899
Accruals not currently deductible for
tax purposes 123 454
Depreciation 33 31
Translation adjustment 25 96
Other 38 10
Valuation allowance (9,911) (9,082)
------- -------
Total deferred tax asset -- 37
------- -------
Deferred tax liabilities - capitalized software -- (37)
------- -------
Net deferred taxes $ -- $ --
======= =======
The change in the valuation allowance was a net increase of $829,000 and
$1,717,000 for fiscal years ended February 22, 1998, and February 23, 1997,
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
$24,000,000 at February 22, 1998, which begin to expire in 2006, if not
utilized. As a result of the exercise of the Redeemable Public Warrants in
fiscal year ended February 23, 1997, the Company experienced a change of
ownership as defined in the Internal Revenue Code. As a result of the ownership
change, utilization of approximately $21,000,000 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:
1998 1997 1996
------ ------ ------
Statutory U.S. federal
income tax rate (benefit) (34.0)% (34.0)% (34.0)%
Changes in taxes resulting from:
Foreign losses and excess rates (1.0) 1.2 1.4
Domestic losses with no tax benefit 34.0 32.7 28.0
Other items, net 0.4 1.1 5.2
----- ----- -----
Effective tax rate (0.6)% 1.0% 0.6%
===== ===== =====
United States and foreign income (loss) before taxes are as follows:
(IN THOUSANDS)
1998 1997 1996
------- ------- -------
Domestic $(3,524) $(2,933) $(3,714)
Foreign 206 191 159
------- ------- -------
$(3,318) $(2,742) $(3,555)
======= ======= =======
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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 1998, 1997, and 1996 was $1,213,000, $1,318,000, and
$1,966,000, respectively. The Company's annual minimum lease commitments under
non-cancelable operating leases, net of sublease income of $95,000 for fiscal
1999, and $63,000 for fiscal 2000, are as follows:
(IN THOUSANDS)
1999 $ 1,042
2000 655
2001 375
-------
$ 2,072
The Company's current involvement with litigation is as follows:
Carlos Garralda and Andre Warnier, employees of the Company's former subsidiary,
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. In December 1997, the Company and Warnier executed
a settlement agreement which involved no payment by the Company and Warnier
dismissed his Orange County case with prejudice. Separately, Garralda dismissed
his Orange County case without prejudice upon the Company's execution of a
Tolling Agreement allowing Garralda to re-file the suit upon the occurrence of
specified conditions. Although no assurances as to the outcome of the litigation
can be given, management believes that this litigation will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
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 is now scheduled
to begin in November 1998. 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, which has been
qualified under Section 401(k) of the Internal Revenue Code, covering
substantially all of its full-time employees. Company contributions to the plan
are at the sole discretion of the Company's Board of Directors and cannot exceed
the maximum allowable deduction for federal income tax purposes. There were no
discretionary Company contributions for fiscal 1998, 1997, and 1996. Voluntary
employee contributions are matched at a rate of 20% of employee contributions up
to a total of 5.0% of the employee's salary for participants with an annual
income of less than $29,999. Matching contributions were $20,000, $29,000, and
$32,000 for fiscal 1998, 1997, and 1996, respectively.
44
45
In fiscal 1997, the Company adopted a new Employee Stock Purchase Plan, covering
substantially all of its full-time employees, enabling employees to acquire
shares of the Company's stock at 85% of the lower of (i) the fair market value
of a share on the first trading day of the date of grant, or (ii) the fair
market value of a share on the date of exercise, up to an aggregate of 350,000
shares of common stock. Voluntary employee purchases under the plan in fiscal
1998 were $20,000.
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 IT SERVICES CORPORATE CONSOLIDATED
------- ----------- --------- ------------
1998
Net sales $ 6,104 $ 13,223 $ -- $ 19,327
Operating income (loss) (3,640)(1) 1,133 (1,061) (3,568)
Identifiable assets 4,469 5,527 5,792 15,788
Depreciation and
amortization expense 576 1,053 74 1,702
Capital expenditures 104 571 1 675
1997
Net sales $ 8,885 $ 14,627 $ -- $ 23,512
Operating income (loss) (3,169)(1) 1,369 (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 $ 14,693 $ 18,070 $ -- $ 32,763
Operating income (loss) (5,215)(2) 3,079 (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
(1) Includes $2,281,000 in fiscal 1998 and $1,162,000 in fiscal 1997 of expenses
attributable to the marketing and launching the AlphaCONNECT software
products.
(2) Includes charges of $1,995,000 for the write-off of intangible assets
primarily associated with the Company's AlphaHealthCare and PANDA divisions
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 IT 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 $1,633,000, $1,314,000 and $906,000 in fiscal
1998, 1997 and 1996, respectively) were $2,310,000, $4,681,000 and $9,776,000
for fiscal 1998, 1997 and 1996, respectively.
45
46
OPERATIONS BY GEOGRAPHIC AREA
ADJUSTMENTS
UNITED EUROPE & &
(IN THOUSANDS) STATES CANADA AUSTRALIA ELIMINATIONS CONSOLIDATED
-------- -------- --------- ------------ ------------
1998
Sales to unaffiliated
customers $ 18,649 $ 678 $ -- $ -- $ 19,327
Transfers between
geographic areas -- -- -- -- --
-------- -------- -------- -------- --------
Net sales $ 18,649 $ 678 $ -- $ -- $ 19,327
======== ======== ======== ======== ========
Net income (loss) $ (3,534) $ 237 $ -- $ -- $ (3,297)
Identifiable assets $ 18,644 $ 291 $ -- $ (3,147) $ 15,788
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
No single customer or other foreign geographic area accounted for 10% or more of
the Company's sales.
46
47
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 22, 1998 $ 139 $ 194 $ 39 $ 294
February 23, 1997 927 64 852(1) 139
February 25, 1996 1,004 (21) 56 927
Reserve for inventories:
February 22, 1998 $ 41 $ 73 $ 16 $ 98
February 23, 1997 1,726 (59) 1,626(2) 41
February 25, 1996 1,723 196 193 1,726
(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.
47
48
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: 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: By: /s/ CLARKE E. REYNOLDS
Clarke E. Reynolds
Chairman of the Board
Date: By: /s/ DOUGLAS J. TULLIO
Douglas J. Tullio
President, Chief Executive Officer,
Director
Date: By: /s/ JOHN F. GLADE
John F. Glade
Vice President, Engineering and
Manufacturing, Secretary and Director
Date: By: /s/ JEFFREY J. DUNNIGAN
Jeffrey J. Dunnigan
Vice President
Chief Financial Officer
Date: By: /s/ ROCKELL N. HANKIN
Rockell N. Hankin
Director
Date: By: /s/ RICHARD E. MAHMARIAN
Richard E. Mahmarian
Director
48
49
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
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)
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)
2.6 Agreement of Purchase and Sale by and between the Registrant and
Applied Cellular Technology, Inc. dated December 23, 1997
(incorporated herein by reference to Exhibit 2.6 to the Quarterly
Report on Form 10-Q for the quarter ended November 23, 1997)
2.7 Agreement of Purchase and Sale by and between the Registrant and M &
J Technologies, Inc. dated February 19, 1998.
2.8 Modification to Contract for Purchase and Sale of M & J
Technologies, Inc. Hardware Service Business Assets to Registrant
dated February 19, 1998
3.1 Articles of Incorporation of Registrant dated as of March 16, 1977
(incorporated herein by reference to Exhibit 3.1 to the Registration
Statement on Form-S-1 (Registration No. 2-72222) of Registrant)
3.2 Certificate of Amendment of Articles of Incorporation of Registrant
dated as of September 29, 1988 (incorporated herein by reference to
Exhibit 3.2 to the Annual Report on Form 10-K of Registrant for the
Year Ended February 23, 1997)
3.3 Certificate of Amendment of the Articles of Incorporation of
Registrant dated June 25, 1992 (incorporated herein by reference to
Exhibit 10.71 to the Quarterly Report on Form 10-Q of Registrant for
the Quarter Ended May 31, 1992)
3.4 Restated Bylaws of Registrant (incorporated herein by reference to
Exhibit 3.1 to the Form S-8 filed January 31, 1997)
3.5 Registration Rights Agreement by and between Registrant and Silicon
Valley Bank dated July 10, 1995 (incorporated herein by reference to
Exhibit 10.141 to the Quarterly Report on Form 10-Q of Registrant
for the Quarter Ended May 28, 1995)
4.2 Anti-dilution Agreement by and between Registrant and Silicon Valley
Bank dated July 10, 1995 (incorporated herein by reference to
Exhibit 10.142 to the Quarterly Report on Form 10-Q of Registrant
for the Quarter Ended May 28, 1995)
49
50
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 (incorporated herein by reference to Exhibit 4.6 to
the Annual Report on Form 10-K of Registrant for the Year Ended
February 23, 1997)
*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)
*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)
50
51
*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)
*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)
51
52
*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)
*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)
52
53
*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)
53
54
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)
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 (incorporated herein by reference to
Exhibit 10.53 to the Annual Report on Form 10-K of the Registrant
for the Year Ended February 23, 1997)
10.54 Amendment to Loan Agreement by and between Registrant and Silicon
Valley Bank dated March 3, 1997 (incorporated herein by reference
to Exhibit 10.54 to the Annual Report on Form 10-K of the
Registrant for the Year Ended February 23, 1997)
*10.55 Indemnification Agreement by and between Registrant and James A.
Sorensen dated January 16, 1997 (incorporated herein by reference
to Exhibit 10.55 to the Annual Report on Form 10-K of the
Registrant for the Year Ended February 23, 1997)
*10.56 Indemnification Agreement by and between Registrant and Jeffrey
A. Martin dated January 10, 1997 (incorporated herein by
reference to Exhibit 10.56 to the Annual Report on Form 10-K of
the Registrant for the Year Ended February 23, 1997)
*10.57 Indemnification Agreement by and between Registrant and Dennis E.
Michael dated January 17, 1997 (incorporated herein by reference
to Exhibit 10.57 to the Annual Report on Form 10-K of the
Registrant for the Year Ended February 23, 1997)
*10.58 Indemnification Agreement by and between Registrant and Randall
S. Parks dated January 17, 1997 (incorporated herein by reference
to Exhibit 10.58 to the Annual Report on Form 10-K of the
Registrant for the Year Ended February 23, 1997)
*10.59 Indemnification Agreement by and between Registrant and Margaret
Denson dated January 17, 1997 (incorporated herein by reference
to Exhibit 10.59 to the Annual Report on Form 10-K of the
Registrant for the Year Ended February 23, 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)
10.61 Amendment to Loan Agreement by and between Registrant and Silicon
Valley Bank dated October 11, 1997 (incorporated herein by
reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q
for the Quarter ended November 23, 1997)
54
55
*10.62 Employment Letter by and between Registrant and Jeffrey J.
Dunnigan dated November 15, 1997 (incorporated herein by
reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q
for the quarter Ended November 23, 1997)
*10.63 Indemnification Agreement by and between Registrant and Jeffrey
J. Dunnigan dated December 1, 1997
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)
55