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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from February 23, 1998 to December 31, 1998
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
incorporation or organization) Identification No.)
2722 SOUTH FAIRVIEW STREET, SANTA ANA, CA 92704
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 957-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price of its common stock on March 12, 1999
on the Nasdaq National Market, a date within 60 days prior to the date of
filing, was $61,353,425.
As of March 12, 1999, there were 11,548,880 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 transition period ended December 31, 1998, are incorporated by
reference in Part III of this Transition Report on Form 10-K.
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PART I
INTRODUCTORY NOTE
This Transition 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 statements relating to
(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, (iv)
completion of complementary acquisitions and alliances, and (v) 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, to realize revenues from existing service
contract alliances 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.
The Company, which previously operated under a fiscal year end ending the last
Sunday in February, has adopted a calendar year end. To the extent comparisons
of the ten-month period ending December 31, 1998 are made to the same period of
prior fiscal years, the amounts for such prior periods have been derived from
previously reported results for the first three fiscal quarters of such year
plus one-third of the last quarter of such year and are unaudited.
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ITEM 1. BUSINESS
Alpha Microsystems (the "Company" or "Alpha Micro"), also currently doing
business as AlphaServ.com, 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
products (including products for the internet and intranet markets) and IT
services (including consulting, hardware maintenance, technical support and
network administration and integration) to a variety of market segments. The
Company provides these services through its more than 65 locations throughout
North America.
This Transition 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 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. As a result
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 refocused its efforts. Today, while it continues to market hardware
products, its focus is on its IT services business and the development and
marketing of AlphaCONNECT, an internet and intranet technology.
On February 27, 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. The acquisition was accounted
for as a purchase.
On September 1, 1998, the Company completed the acquisition of Delta CompuTec
Inc. ("DCI"). DCI provides management and consulting services, as well as
services that include network design, installation and maintenance. The
Agreement and Plan of Merger ("Merger Agreement") provided for the payment of
$3.4 million in exchange for all of the outstanding shares of DCI at the time of
closing, and a net payment of DCI's then outstanding debt in the amount of $4.6
million. Under the Merger Agreement, DCI became a wholly-owned subsidiary of
Alpha Micro. The acquisition was accounted for as a purchase. To finance the
acquisition of DCI and provide additional cash to the Company, the Company sold
$15 million of redeemable exchangeable preferred stock.
These 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. In 1998, IT
service revenues accounted for 83.1% of total revenues and product sales
accounted for 16.9% 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
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TEN MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 FEBRUARY 22, 1998 FEBRUARY 23, 1997 FEBRUARY 25, 1996
----------------- ----------------- ----------------- -----------------
IT Service Revenues 83.1% 68.4% 62.2% 55.2%
Product Revenues 16.9% 31.6% 37.8% 44.8%
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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 to date
obtained $3,000,000 bank debt facility and a remaining $5,000,000 commitment
from ING Equity Partners II, L.P. under its Securities Purchase Agreement with
ING Equity Partners. Borrowings under both the bank facility and Securities
Purchase Agreement are subject to certain financial covenants and borrowing
based requirements. While management believes it will be able to obtain
additional 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, IT spending will rise to about $2 trillion
by 2003, almost double the $1.2 trillion spent now. International Data
Corporation ("IDC") expects the IT services market to grow from slightly more
than $135 billion in 1998 to over $204 billion in 2002. 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 customers' former reliance on
centralized, single-vendor solutions.
INTERNET/INTRANET INDUSTRY BACKGROUND
A recent report from IDC said that corporate spending on internet-related
technology is expected to hit $85 billion in the United States alone in 1999.
Worldwide internet technology spending will climb to $203 billion by 2002,
according to the analyst firm.
IDC estimated that e-commerce activities are fueling internet-related IT
spending. Worldwide in 1998, the research firm said there were approximately 150
million World Wide Web users, and by 2003, there would be 500 million,
representing 2 new users per second. Nearly $900 billion in goods and services
will be purchased via the internet by 2003, according to IDC.
Technology and online commerce are only components of the internet pie.
According to IDC, companies are investing significant resources in strategic
internet technologies to streamline business processes. Investing so heavily,
IDC says, that by 2003, $1.5 trillion will be spent on technology deployment,
marketing and sales, professional services, content creation, education and
training, and other peripheral costs. 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.
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STRATEGY
IT SERVICE STRATEGY
Alpha Microsystems' business strategy for its IT services operation is to grow
through (i) employing internet technologies to enhance IT Services and to
further its competitive advantage with the use of its unique AlphaCONNECT
technology, (ii) completing complementary acquisitions and alliances focused
primarily on enhancing its network management and integration professional
services, and (iii) leveraging existing infrastructure. The fundamental elements
of this business strategy are as follows:
EMPLOYING INTERNET TECHNOLOGIES TO ENHANCE IT SERVICES
The Company is committed to achieve superior IT Services by employing internet
technologies, including its internally developed and patent pending AlphaCONNECT
technology. The Company believes that internet related technologies can
significantly enhance customer service by providing its customers with greater
access to services, improved feedback on the status of individual service calls
and increasing operating efficiencies. Further, the Company believes that its
AlphaCONNECT technology provides a unique advantage over its competitors. For
example, the Company's ServiceTrak product allows customers, using the browser
of their choice, to track the current status of individual sales calls over the
web.
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 over 65 locations and approximately 335
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 out-sourced due to local or regional operating constraints.
INTERNET/INTRANET STRATEGY
To date, the Company has established agreements with several key companies
within the internet technology industry including General Magic, PC Quote, 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.
Due to the uniqueness of the AlphaCONNECT technology, the Company is also
exploring structural changes to the organization in its continuing effort to
maximize shareholder value. The Company has hired investment bankers to assist
in evaluating various strategic
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options related to AlphaCONNECT, including a strategic partnership, a spin-off
from the parent company, or the sale of the technology.
SERVICES OPERATION
The Company maintains service operations that employ approximately 335 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 over 65
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 83.1%, 68.4% and 62.2% of total revenues for the ten
months ended December 31, 1998 and the fiscal years ended February 22, 1998 and
February 23, 1997, 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, XML, SGML, structured records, and many types of image, audio and
video data. Acquired information can be converted into many forms including
text, HTML, XML, 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. Information can be delivered to
workstations, servers, inboxes, faxes, pagers and PDAs.
AlphaCONNECT is the underlying technology found in several applications
developed and released by the Company including:
* AC Enterprise - a corporate portal which unifies both public (including
Internet) and corporate information and integrates it into the user's
favorite application
* AC Spotlight - identifies and collects unstructured data from the
Internet and transforms it into actionable information
* AC Convert & Apply - software that transforms various types of data
from the Internet, legacy systems, network PCs and servers, into
existing systems or services
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* AlphaCONNECT StockVue 99 - a desktop application that uses intelligent
agents to provide custom delivery of financial data from the Internet
such as stock and mutual fund quotes, news, charts and SEC filings.
Ready-tailored for OEMs or end users, StockVue 99 now includes
BusinessVue, an agent application that provides users custom delivery
of corporate and business information on specific companies from the
internet.
AlphaCONNECT technologies provide the necessary components for additional
client, Internet 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 technologies for OEMs, ISVs, Internet portals (or
Internet sites) and other third-party vendors. AlphaCONNECT technology
implementations for third parties include agreements with vendors such as
Microsoft Corp., Matthews Studio Equipment, Interactive Search, Inc. (I-Search),
General Magic, Inc., PC Quote, Inc., Cybernet Data Systems, Inc., and
AccountingNet.
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 and Coldfire families 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 April 1997. In November 1998,
the Company introduced the Eagle 450 Series, which is the first product to
incorporate Motorola Coldfire microprocessor.
The primary operating system licensed with the Company's products is AMOS, the
Company's proprietary operating system. The Company also incorporates Novell
NetWare, UNIX, 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 with major distributors and OEMs, as well as value-added resellers and
larger accounts. 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; computer products distributors; (ii) creating
relationships with online mass merchandisers and software retailers; (iii)
direct marketing to corporate environments; (iv) developing associations 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. The Company has released StockVue 99 to
promote name recognition and to facilitate use of this third generation StockVue
to generate advertising revenue income. There is no assurance that substantial
revenues will be realized through such advertising revenues. The Company has
also entered into a strategic alliance with Matthews Studio Group to provide an
"entertainment portal," including the development of applications and solutions
for the entertainment industry via the Internet and the World Wide Web, as well
as the creation of "Showbizmart.com," a new network of Web sites built for
industry insiders as well as
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consumers and collectors of show business related items and memorabilia.
Additionally, the Company signed a multiyear agreement with I-Search in which AC
Spotlight technology enables I-Search to collect and process significant amounts
of information - quickly and accurately - from a wide array of Web sites and in
many diverse formats.
The Company currently markets its hardware products through approximately 162
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.
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 customers
could have a material adverse effect on the Company's results of operations.
During the fiscal periods ended December 1998 and February 1998 and 1997,
approximately 7%, 12% and 20%, 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 the 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 7%, 12% and 20% during
the fiscal periods ended December 1998 and February 1998 and 1997, respectively,
of the Company's total net sales. (See Note 11 to the Company's Notes to
Consolidated Financial Statements contained elsewhere in this Transition Report
on Form 10-K for financial information concerning the Company's foreign
operations.)
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 $31,000, $10,000 and $(42,000) for the ten
months ended December 1998 and the fiscal years ended February 22, 1998 and
February 23, 1997, respectively. The Company's operations outside the United
States are subject to the usual risks and limitations
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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 $1,173,000 and $1,411,000, and
$1,500,000, or 28.8%, 23.1% and 16.9% of the Company's product revenue,
respectively, in the ten months ended December 1998 and the fiscal years ended
February 1998 and 1997.
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 over 65 service
locations enable it to compete effectively 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.
9
10
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 and a provisional patent application with the United
States Patent and Trademark Office directed to certain aspects of the Company's
technology. On March 15, 1999, the Company filed a provisional patent
application with the United States Patent and Trademark Office for the software
programming language Network Query Language (NQL). There can be no assurance
that any patent will be issued with respect to any aspect of the Company's
technology. 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 the Company's technology. The
Company could incur substantial 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," "AlphaCONNECT Messenger,"
"AlphaFORTRAN 77," "AlphaLAN," "AlphaPASCAL," "AlphaPASCAL Programming System,"
"AlphaRJE," "Alpha 2000,"
10
11
"AlphaSERV," "AlphaWRITE" (stylized), "AMOS," "AMSO," "Caselode," "insight/AM,"
"NODESTAR," "StockVue," "Videotrax," "Videotrax" (in design)," and the slogan
"RIGHT. FROM THE START." The marks "Caselode" and "Videotrax" 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 federal applications for the marks including,
but not limited to "AC Convert & Apply," "AC Enterprise," "AC Export," "AC
HTML," "AC Spotlight," "AC Tools," "AlphaCONNECT EdgarVue," "AlphaCONNECT Power
Package," "AlphaCONNECT SportsVue," "AlphaServ.com," "AlphaSphere," "Alpha
Microsystems," "AlphaCONNECT Pro," "AlphaCONNECT StockVue," "AlphaCONNECT
BusinessVue," "AM Alpha Microsystems" (in design), "AM Services Operation,"
"BusinessVue," "EdgarVue," "Network Query Language," "NQL," "Object Recognition
Engine," "ORE," "SportsVue," "Spotlight," "The Corporate Portal," 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.
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.
EMPLOYEES
On December 31, 1998, the Company and its subsidiaries employed approximately
433 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, expires December 2001, has an
average annual rent of $285,000. The Company is depreciating tenant improvements
of $993,000 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
through October 1999, with tenant options to extend through December 2001.
11
12
The Company also occupies approximately 20,000 square feet of a 38,000 square
foot facility located in Teterboro, New Jersey. The lease, which expires on July
31, 2001, has an annual rent of $300,000. Effective January 1, 1998, the Company
entered into a sublease of approximately 18,000 square feet for an average
annual rent of approximately $113,000 through December 1999. The sublease has
options to renew through July 31, 2001 at an annual rent of approximately
$120,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in certain claims and litigation. The Company
does not consider any of these claims or litigation to be material. Management
has made provisions in the Company's financial statements for the settlement of
lawsuits for which unfavorable outcomes are both probable and estimable. In the
opinion of management, results of known existing claims and litigation will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
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:
DOUGLAS J. TULLIO, 56, has served as President, Chief Executive Officer and a
Director of the Company since 1991 and as Chairman of the Board since July 1998.
Mr. Tullio also served as Chief Operating Officer from May 1991 to March 1994.
Mr. Tullio joined the Company in January 1990. From 1984 to 1989, he worked for
General Automation, Inc., in the positions of President and member of the Board
of Directors.
JEFFREY J. DUNNIGAN, 39, was appointed Vice President and Chief Financial
Officer of the Company in December 1997 and as Secretary in September 1998.
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
LLP, specializing in high technology manufacturing and software and consulting
on SEC matters.
JOHN T. DEVITO, 42, has served as President of Professional Services since the
acquisition of Delta CompuTec Inc. in September 1998. Mr. DeVito previously
served as President and Chief Operating Officer of Delta CompuTec Inc. from
April 1995 to August 1998. Previously, he held the position of Vice President
and General Manager of Delta CompuTec Inc.
JOHN F. GLADE, 56, served as a Director of the Company from May 1996 through
September 1998, as Secretary of the Company from January 1987 through September
1998 and as 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 Research, Inc. from 1990 to 1995.
13
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is included on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") National Market under the symbol "ALMI".
The following table sets forth the high and low sales prices for the Company's
common stock (ALMI) for the fiscal periods indicated, as quoted on the NASDAQ
National Market. Prices reflect inter-dealer prices without retail mark-up,
mark-down or commissions, and may not necessarily reflect actual transactions.
HIGH LOW
-------- --------
TEN MONTHS ENDED DECEMBER 31, 1998
First Quarter $7 $1 1/2
Second Quarter 4 1/4 2 5/16
Third Quarter 3 25/32 1 23/32
One month period ended December 1998 9 2 3/16
YEAR ENDED FEBRUARY 22, 1998
First Quarter $2 7/8 $1 1/4
Second Quarter 1 1/32 1 1/8
Third Quarter 1 15/16 1 1/8
Fourth Quarter 1 27/32 1
On March 12, 1999, the high was $5 1/2 and the low was $5 3/16 and the
approximate number of holders of record of the Company's common stock was 513.
This number does not reflect the number of beneficial holders of the Company's
common stock.
The Company has not paid dividends on its common stock, and it anticipates that
for the foreseeable future it will not pay dividends. Should the Company desire
to pay dividends, any such dividends would be subject to the prior written
consent of the Company's lender and to any preferential rights to receive
dividend payments contained in any securities issued by the Company, including
those payable to holders of outstanding redeemable exchangeable preferred stock
(see Note 6 of Notes to Consolidated Financial Statements).
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED
TEN MONTHS ---------------------------------------------------------------
ENDED FEBRUARY 22, FEBRUARY 23, FEBRUARY 25, FEBRUARY 26,
DECEMBER 31, 1998 1998 1997 1996 1995
----------------- ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Service revenues $ 20,072 $ 13,223 $ 14,627 $ 18,070 $ 19,706
Product sales 4,068 6,104 8,885 14,693 19,079
-------- -------- -------- -------- --------
Net sales 24,140 19,327 23,512 32,763 38,785
Cost of sales 20,994 13,966 15,498 22,967 27,385
-------- -------- -------- -------- --------
Gross margin 3,146 5,361 8,014 9,796 11,400
Loss before taxes (9,527)(1)(2) (3,318)(2) (2,742)(2) (3,555)(3) (6.247)(4)
Net loss (9,542)(1)(2) (3,297)(2) (2,770)(2) (3,575)(3) (6,247)(4)
======== ======== ======== ======== ========
Net loss attributable to
common shareholders (9,978) (3,297) (2,770) (3,575) (6,247)
======== ======== ======== ======== ========
Net loss per share (5) $ (0.90) $ (0.30) $ (0.28) $ (0.54) $ (0.95)
======== ======== ======== ======== ========
Number of shares used in the
computation of per share
amounts (5) 11,029 10,864 9,727 6,565 6,580
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Current assets $ 13,016 $ 9,754 $ 12,378 $ 7,199 $ 10,914
Current liabilities 10,088 5,421 3,648 6,377 7,726
-------- -------- -------- -------- --------
Working capital 2,928 4,333 8,730 822 3,188
Total assets 26,431 15,788 17,195 13,061 17,902
Long-term obligations 846 60 34 201 140
Redeemable preferred stock 12,824 -- -- -- --
Shareholders' equity $ 2,673 $ 10,307 $ 13,513 $ 6,483 $ 10,036
(1) Includes charges totaling $4,679,000 comprised of (i) $2,230,000 to
write-down impaired tangible and intangible assets from non-core business
acquired prior to 1998 to their estimated fair values based on estimated
cash flows, and write-down of accounts receivable related to non-core
operations, (ii) $910,000 to write-down impaired fixed assets and inventory
related to end-of-life proprietary product lines to their estimated fair
values, (iii) $813,000 related to software products obsolesced by the
introduction of new products, (iv) $379,000 resulting from the write-off of
notes receivable from previously sold assets and subsidiaries, (v) $256,000
of indirect financing costs related to the sale of redeemable preferred
stock and warrants and the expensing of previously capitalized costs
associated with abandoned acquisitions, and (vi) $91,000 in write-offs of
costs related to Year 2000 issues and adjustments of warranty and other
liabilities. Net loss was also increased by a change in net interest expense
of $321,000 comparing the ten months ended December 31, 1998 with the fiscal
year ended February 22, 1998.
(2) Includes $1,684,000 in transition period 1998, $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.
(3) Includes charges of $1,995,000 for the write-off of intangible assets
primarily associated with the Company's AlphaHealthCare subsidiary and PANDA
division.
(4) Includes 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.
(5) 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
----------------------------------------------------------------
Ten Months Ended Year Ended Year Ended
December 31, 1998 February 22, 1998 February 23, 1997
----------------- ----------------- -----------------
Net sales:
Service 83.1 % 68.4 % 62.2 %
Product 16.9 31.6 37.8
----- ----- -----
Total net sales 100.0 100.0 100.0
Cost of sales 87.0 72.3 65.9
----- ----- -----
Gross margin 13.0 27.7 34.1
Selling, general and administrative expense 35.9 38.9 41.2
Engineering, research and development expense 4.9 7.3 6.4
Impairment of long-lived assets 10.1 -- --
Interest expense (income), net 0.1 (1.6) (1.0)
Other expense (income), net 1.5 0.3 (0.8)
----- ----- -----
Loss before taxes (39.5) (17.2) (11.7)
Net loss (39.5)% (17.1)% (11.8)%
GENERAL
During the ten months ended December 31, 1998, the Company substantially
expanded its information technology ("IT") operations with the acquisition of
Delta CompuTec Inc. ("DCI"), which was financed by the sale of redeemable
preferred stock and warrants and a bank term loan. Additionally, the Company's
IT Service organic growth continued with the addition of a new distributor
warranty service agreement with Tech Data Corporation ("Tech Data"). Revenues
from the Tech Data agreement, as well as from agreements signed earlier in
fiscal 1998 with Ingram Micro and ATS Money Systems, are expected to be realized
in future operating periods. However, the current period results of operations
were negatively impacted as additional IT Service costs of sales were incurred
without significant related revenues. The Company's realization of revenues from
these distributor warranty service agreements is dependent upon distributor
sales of products under warranty. Also during the current quarter, the Company
resolved to focus on its core business competencies within IT Services while
pursuing strategic options surrounding its AlphaCONNECT technology, including a
strategic partnership, a spin-off from the parent company, or the sale of the
technology.
The Company had negative earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $7,539,000, during the ten months ended December 31,
1998, compared to a negative EBITDA of $1,713,000 during the same period of the
prior fiscal year.
16
17
Significant to the comparative results of operations are charges totaling
$4,679,000 in the ten months ended December 31, 1998. These charges are
comprised of the following: (i) $2,230,000 to write-down impaired tangible and
intangible assets from non-core business acquired prior to 1998 to their
estimated fair values based on estimated cash flows, and write-down of accounts
receivable related to non-core operations, (ii) $910,000 to write-down impaired
fixed assets and inventory related to end-of-life proprietary product lines to
their estimated fair values, (iii) $813,000 related to software products
obsolesced by the introduction of new products, (iv) $379,000 resulting from the
write-off of notes receivable from previously sold assets and subsidiaries, (v)
$256,000 of indirect financing costs related to the sale of redeemable preferred
stock and warrants and the expensing of previously capitalized costs associated
with abandoned acquisitions, and (vi) $91,000 in write-offs of costs related to
Year 2000 issues and adjustments of warranty and other liabilities. The table
below summarizes where these charges have been recognized on the statement of
operations for the ten months ended December 31, 1998 (in thousands):
Cost of Operating Impairment
Sales Expenses Charge Other Total
------- --------- ---------- ----- ------
Impairment of tangible and intangible assets $147 $495 $1,588 $ - $2,230
Write-down of fixed assets and inventory 60 - 850 - 910
Software obsolescence 730 83 - - 813
Loss on sale of assets and subsidiaries - - - 379 379
Indirect financing costs - 256 - - 256
Year 2000 issues and operating expenses 25 66 - - 91
---- ---- ------ ---- ------
Total $962 $900 $2,438 $379 $4,679
==== ==== ====== ==== ======
Also significant to the comparative results of operations is net interest
expense. During the ten months ended December 31, 1998, the Company incurred net
interest expense of $18,000 as compared to net interest income during the
comparable ten-month period ended December 31, 1997 of $258,000. Accordingly,
the change in net interest expense during the most recent ten months increased
net loss by $276,000.
Historically, the Company's fiscal year ended in the month of February. On
December 17, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year to a calendar year-end. Fiscal years 1998 and 1997 ended
on February 22, 1998 and February 23, 1997, respectively.
The discussion herein is qualified by reference to the Introductory Note set
forth in the beginning of this Transition Report on Form 10-K.
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TEN MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TEN MONTHS ENDED DECEMBER 31,
1997
The following table presents the results for the ten months ended December 31,
1998 and the comparable pro forma results for the ten months ended December 31,
1997 for purposes of the discussion following. For comparative purposes, the
1997 results of operations for the ten-month period ended December 31, 1997 have
been derived from the previously reported results for the nine-month period
ended November 23, 1997 plus one-third of the operating results for the quarter
ended February 22, 1998, and are unaudited.
(Unaudited)
Ten Months Ended December 31, 1998 Ten Months Ended December 31, 1997
---------------------------------- ----------------------------------
Relationship to Relationship to
Operations Net Sales Operations Net Sales
---------- --------------- ---------- ---------------
Net sales:
Service $ 20,072 83.1% $ 10,914 68.4%
Product 4,068 16.9 5,040 31.6
-------- ------- -------- -------
Total net sales 24,140 100.0 15,954 100.0
-------- --------
Cost of sales:
Service 17,222 85.8 8,065 73.9
Product 3,772 92.7 3,322 65.9
-------- --------
Total cost of sales 20,994 87.0 11,387 71.4
-------- --------
Gross margin
Service 2,850 14.2 2,849 26.1
Product 296 7.3 1,718 34.1
-------- --------
Total gross margin 3,146 13.0 4,567 28.6
Selling, general and administrative expense 8,674 35.9 6,436 40.3
Engineering, research and development expense 1,173 4.9 1,204 7.6
Impairment of long-lived assets 2,438 10.1 -- --
Interest expense (income), net 18 0.1 (258) (1.6)
Other expense (income), net 370 1.5 33 0.2
-------- ------- -------- -------
Loss before taxes (9,527) (39.5) (2,848) (17.9)
Net loss $ (9,542) (39.5)% $ (2,848) (17.9)%
======== ======= ======== =======
Basic and diluted net loss per share $ (0.90) $ (0.26)
======== ========
RESULTS OF OPERATIONS
The Company had a net loss attributable to common shareholders of $9,978,000, or
$0.90 per share, in the ten months ended December 31, 1998 compared to a net
loss attributable to common shareholders of $3,297,000, or $0.30 per share, in
fiscal year 1998.
Net Sales
Total net sales increased $8,186,000, or 51.3 percent, to $24,140,000 for the
ten months ended December 31, 1998 from $15,954,000 for the ten-month period
ended December 31, 1997. The increase in total net sales is due to increases in
IT Service revenues (largely attributable to the acquisition of DCI), offset by
declines in product sales.
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IT Services Sales
IT Service revenue increased $9,158,000, or 83.9 percent, to $20,072,000 during
the ten-month period over the respective prior fiscal period. The revenue
increase includes $5,380,000 from the DCI acquired operations and $2,467,000
attributable to non-core businesses, not included in the prior periods. The
balance of the revenue increase during the ten-month period of $1,311,000 is
attributable to organic growth.
Product Sales
Total product revenues during the ten-month period declined $972,000, or 19.3
percent, to approximately $4,068,000 from approximately $5,040,000. While both
domestic and European product sales declined, a majority of the decline was due
to the loss of sales to a large European customer, which represented in the past
a significant portion of the Company's product revenues. No assurances can be
made as to future product sales levels whether domestic or international.
Gross Margin
Total gross margin for the Company for the ten months ended December 31, 1998
decreased to 13.0 percent compared to 28.6 percent during the same period last
year.
IT Service Gross Margin
IT Services gross margin declined to 14.2 percent for the ten months ended
December 31, 1998, from 26.1 percent during the same period in the prior year.
The principal factor contributing to the margin decline during the period is the
inclusion of negative gross margins from non-core operations acquired prior to
1998 resulting in approximately a 4.5 percent decrease. Additionally, the gross
margin was negatively impacted due to increased depreciation related to other IT
Service business acquisitions and increased operating costs related to new IT
Service contracts, for which no significant service revenue was recognized. Due
to the continuing shift from proprietary to third-party IT Services, the Company
does not expect gross margins to return to historic levels.
Product Gross Margin
Product gross margin during the ten-month period declined to 7.3% compared to
34.1% for the comparable prior fiscal year period. The decline is primarily due
to a software obsolescence charge of $730,000. The product margin decline is
also due to both a reduction in sales volume and increases in inventory reserves
for slow moving and obsolete product.
Selling, General and Administrative
Selling, general and administrative expenses increased $2,238,000 to $8,674,000
for the ten-month period ended December 31, 1998, compared to $6,436,000 for the
ten-month period ended December 31, 1997. The increase in costs for this period
is primarily due to (i) additional general and administrative costs and goodwill
amortization associated with the DCI acquisition; and (ii) increased accounts
receivable reserves related to non-core businesses. These increases were
partially off-set by reduced spending related to the AlphaCONNECT internet
technology. The last four months of the current year also include expenditures
made in support of the Company's organic IT Service growth plan and the
development of the Company's new website.
Research and Development
Research and development expenses (which include engineering support and
services) incurred for the ten-month period ended December 31, 1998, decreased
by $31,000 to $1,173,000 from $1,204,000 during the same period in the prior
fiscal year. Research and development expenses as a percentage of product sales
increased to 28.8 percent for the ten months ended December 31, 1998 compared to
23.9 percent during the ten months ended December 31, 1997.
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
19
20
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.
Net Sales
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.
IT Services Sales
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 Technologies, Inc.
Product Sales
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.
Gross Margin
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 Service Gross Margin
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
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
Selling, general and administrative expenses decreased $2,147,000 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
Research and development expenses (which include engineering support and IT
services) were $1,411,000 in fiscal 1998 compared to
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$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.
LIQUIDITY AND CAPITAL RESOURCES
During the ten months ended December 31, 1998, the Company's working capital
decreased $1,405,000 from $4,333,000 at February 22, 1998 to $2,928,000. This
increase reflects $10,170,000 of net cash generated from financing activities,
offset by: $3,763,000 of cash used to acquire IT Service companies; $269,000 of
cash used for software capitalized, including the further development of the
Company's AlphaCONNECT technology; $1,847,000 of working capital to acquire
equipment, including the further implementation of the Company's new integrated
information system, and equipment purchases to support new service capabilities;
the remaining decrease is due primarily to cash used by operations of which $1.1
million is attributable to an increase in accounts receivable.
During the ten months, the Company paid $156,000 in debt service and preferred
stock dividends and expects to pay $1,350,000 in dividends over the next twelve
months.
The Company believes that its current cash position, augmented by expected cash
generated by future operating activities, and working capital available through
its Imperial Bank revolving credit facility, will provide sufficient resources
to finance its working capital requirements through at least December 31, 1999.
Advances under the bank facility are subject to availability based on eligible
accounts receivable and certain financial covenants, including tangible net
worth, debt to tangible net worth and quick ratio minimum requirements. In order
to fund its acquisition strategy, the Company expects that additional capital
will be necessary. The Company's agreement with ING Equity Partners II, L.P.
provides up to an additional $5 million as an equity investment, subject to
certain conditions. The Company is also pursuing additional financing from other
sources to support its acquisition and internet strategies, although there can
be no assurances that any 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 proprietary business;
the success, timing, and amount of investment required to penetrate the
Internet/intranet markets; service revenue growth or decline; and potential
acquisitions.
YEAR 2000 COMPLIANCE
Background
Most pre-1998 computers, software, and other equipment which utilize programming
code contain calendar year data that is abbreviated to only two digits. As a
result of these design decisions, many of these systems could fail to operate or
fail to produce correct results if "00" is not interpreted to mean 2000. These
problems may not be fully recognized, either as to frequency or severity until
the year 2000 arrives. These problems are commonly referred to as the
"Millennium Bug" or "Year 2000 Problem".
Assessment
The Year 2000 Problem affects certain of the computers, software, and other
equipment used, operated, or maintained by the Company. Accordingly, the Company
has undertaken a review of such computer programs and systems to attempt to
ascertain which are or will be Year 2000 compliant. The Company presently
believes that its necessary and essential computer systems, software and
equipment will be Year 2000 compliant in a timely manner. However, while the
estimated cost of these efforts are not expected to be material to the Company's
financial position or any year's results of operations, there can be no
assurance to this effect.
Software Sold to Customers
The Company has been engaged for some time in the process of identifying and
resolving potential Year 2000 Problems with the software products which it has
developed and currently markets. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company's software products will be identified or corrected due to
the complexity of
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these products and the fact that these products interact with other third-party
vendor products and operate on computer systems which are not under the
Company's control.
Internal Infrastructure
The Company is engaged in reviewing its major computers, software applications,
and related equipment used in connection with its internal operations for Year
2000 Problems; however, the majority of the computer programs used by the
Company are off-the-shelf, recently developed programs from third-party vendors.
The Company is in the process of obtaining assurances from such vendors as to
the Year 2000 compliance of their products. Although some vendors make verbal
assurances of Year 2000 compliance, there can be no certainty that the systems
utilized by the Company will not be affected. The Company intends to continue
confirming with vendors, testing, replacing or enhancing its internal
applications to ensure that risks related to such software are minimized.
This process is expected to be completed in mid-1999.
Systems Other than Information Technology Systems
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, photocopiers, telephone switches,
security systems, elevators, and other common devices may be affected by the
Year 2000 Problem. The Company is currently assessing the potential effect of,
and costs of, remediating the Year 2000 Problem on its office and facilities
equipment. The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on the Company's business or results of
operations and anticipates that this process will be completed by mid-1999.
These estimates are being monitored and will be revised as additional
information becomes available.
Suppliers
The Company has initiated communications with third-party suppliers of products
or services used, operated, or maintained by the Company to identify and, to the
extent possible, to resolve issues involving any Year 2000 Problems. However,
the Company has limited or no control over the actions of these third-party
suppliers. Thus, while the Company expects that it will not be impacted by any
significant Year 2000 Problems experienced by its suppliers, there can be no
assurance that their suppliers will resolve any or all Year 2000 Problems with
these systems before the occurrence of a material disruption to the business of
the Company or any of its customers. Any failure of these third parties to
resolve Year 2000 Problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition, and
results of operation.
Most Likely Consequences of Year 2000 Problems
The Company expects to identify and resolve the Year 2000 Problems that could
materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting the Company have been or will be identified or
corrected. The number of devices that are affected and the interactions among
these devices are simply too numerous. In addition, accurate predictions of Year
2000 Problem-related failures will occur or the severity, duration, or financial
consequences of such failures cannot be made. As a result, management expects
that the Company could likely suffer the following consequences:
1. a number of operational inconveniences and inefficiencies for the Company
and its clients that may consume management's time and attention as well as
financial and human resources normally devoted to its ordinary business
activities; and
2. a lesser number of serious system failures that may require significant
efforts by the Company or its customers to prevent or alleviate material
business disruptions.
Costs
The Company has thus far performed the analysis described above using existing
personnel. The Company does not separately track internal costs incurred in
connection with analysis, investigation and implementation of Year 2000
compliance plans. The Company has not made any material expenditure to address
the Year 2000 Problem and at present does not anticipate that it will be
required to make any such material expenditures in the future.
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Contingency Plans
The Company is currently in the process of developing contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Company expects to complete its contingency
plans by the end of the second quarter of 1999. Depending on the systems
affected, these plans could include accelerated replacement of affected
equipment or software, short- to medium-term use of backup equipment and
software, increased work hours for Company personnel or use of contract
personnel to correct on an accelerated schedule any Year 2000 Problems that
arise, development of manual workarounds for information systems, and similar
approaches. If the Company is required to implement any of these contingency
plans, it could have a material adverse effect on the Company's financial
condition and results of operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") which supercedes Statement of Financial Accounting Standards No.
14. This statement changes the way that publicly-held companies report
information about operating segments as well as disclosures about products and
services, geographic areas and major customers. Operating segments are defined
as revenue-producing components of the enterprise, which are generally used
internally for evaluating segment performance. SFAS 131 is effective for the
Company's ten-month period ended December 31, 1998 and does not affect the
Company's financial position or results of operations.
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 Transition Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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 ten-month period ended December 31, 1998.
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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 32
Consolidated Balance Sheets at December 31, 1998 33
and February 22, 1998 and Pro Forma Balance Sheet (Unaudited) at
December 31, 1998
Consolidated Statements of Operations for the Ten Months 34
Ended December 31, 1998 and the Years Ended February 22, 1998
and February 23, 1997
Consolidated Statements of Redeemable Preferred Stock and Shareholders' 35
Equity for the Ten Months Ended December 31, 1998 and the Years Ended
February 22, 1998 and February 23, 1997
Consolidated Statements of Cash Flows for the Ten Months 36
Ended December 31, 1998 and the Years Ended February 22,
1998, and February 23, 1997
Notes to Consolidated Financial Statements 37
(2) The following financial statement schedule for the fiscal years 1997
and 1998 and for the ten months ended December 31, 1998 is submitted
herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is presented in the financial statements or notes
thereto.
(3) The list of exhibits contained in the Index to Exhibits is submitted
herewith.
(b) A Current Report on Form 8-K was filed by the Company on December 29, 1998
regarding the adoption of a new fiscal year based on a calendar year-end.
(c) 1. The Index of Exhibits is as follows:
2. Exhibits:
2.1 Agreement to transfer shares by and between Registrant and
Alpha Microsystems Great Britain, Mr. Patrick Bolle, and
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Alpha Microsystems Belgium dated February 28, 1995 (incorporated
herein by reference to Exhibit 2.10 to the Annual Report on Form
10-K of Registrant for the year ended February 26, 1995 (the
"1995 10-K")
2.2 Agreement of Purchase and Sale by and between Registrant and
Sanderson Electronics PLC, dated August 10, 1996 (incorporated
herein by reference to Exhibit 2 to the Form 8-K filed August 23,
1996)
2.3 Agreement of Purchase and Sale by and between Registrant and
Pacific Triangle Software, Inc., dated January 13, 1997
(incorporated herein by reference to Exhibit 2.1 to the Form 8-K
filed February 18, 1997)
2.5 Agreement of Purchase and Sale between AlphaHealthCare, Inc. and
GLR Systems, Inc., dated January 27, 1997 (incorporated herein by
reference to Exhibit 2.2 to the Form 8-K filed February 18, 1997)
2.6 Agreement of Purchase and Sale by and between the Registrant and
Applied Cellular Technology, Inc. dated December 23, 1997
(incorporated herein by reference to Exhibit 2.6 to the Quarterly
Report on Form 10-Q for the quarter ended November 23, 1997)
2.7 Agreement of Purchase and Sale by and between the Registrant and
M & J Technologies, Inc. dated February 19, 1998 (incorporated
herein by reference to Exhibit 2.7 to the Annual Report on Form
10-K of Registrant for the year ended February 22, 1998)
2.8 Modification to Contract for Purchase and Sale of M & J
Technologies, Inc. Hardware Service Business Assets to Registrant
dated February 19, 1998 (incorporated herein by reference to
Exhibit 2.8 to the Annual Report on Form 10-K of Registrant for
the year ended February 22, 1998)
2.9 First Amendment to Agreement of Purchase and Sale by and between
the Registrant and M & J Technologies, Inc., effective May 1,
1998 (incorporated herein by reference to Exhibit 2.9 to the
Quarterly Report on Form 10-Q for the quarter ended May 24, 1998)
2.10 Merger Agreement by and between the Registrant, Alpha Micro
Merger Corp., Delta CompuTec Inc. and Joseph Lobozzo II and
Joanne Lobozzo dated July 2, 1998 (incorporated by reference to
Exhibit 2 to the Form 8-K filed September 16, 1998)
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)
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3.6 Amendments to Restated Bylaws of Registrant dated August 3, 1998
(incorporated by reference to Exhibit 3.5 to the Quarterly Report
on Form 10-Q of Registrant for the quarter ended November 22,
1998)
3.7 Certificate of Amendment to Articles of Incorporation of
Registrant dated October 15, 1998 (incorporated by reference to
Exhibit 3.6 to the Quarterly Report on Form 10-Q of Registrant
for the quarter ended November 22, 1998)
4.1 Anti-dilution Agreement by and between Registrant and Silicon
Valley Bank dated July 10, 1995 (incorporated herein by reference
to Exhibit 10.142 to the Quarterly Report on Form 10-Q of
Registrant for the quarter ended May 28, 1995)
4.2 Warrant to Purchase Stock issued to Silicon Valley Bank on
November 22, 1996 (incorporated herein by reference to Exhibit
10.74 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended November 24, 1996)
4.3 Registration Rights Agreement by and between Registrant and
Silicon Valley Bank dated November 22, 1996 (incorporated herein
by reference to Exhibit 10.75 to the Quarterly Report on Form
10-Q of Registrant for the quarter ended November 24, 1996)
4.4 Anti-dilution Agreement by and between Registrant and Silicon
Valley Bank dated November 22, 1996 (incorporated herein by
reference to Exhibit 10.76 to the Quarterly Report on Form 10-Q
of Registrant for the quarter ended November 24, 1996)
4.5 Warrant to Purchase Common Stock issued to Imperial Bank dated
June 9, 1998 (incorporated herein by reference to Exhibit 4.7 to
the Quarterly Report on Form 10-Q for the quarter ended May 24,
1998)
4.6 Certificate of Determination of Rights and Preferences of Class A
Cumulative, Redeemable and Exchangeable Preferred Stock, Class B
Cumulative, Redeemable and Exchangeable Preferred Stock, Class C
Cumulative, Redeemable and Exchangeable Preferred Stock, and
Voting Preferred Stock (incorporated herein by reference to
Exhibit 4 to the Form 8-K filed August 10, 1998)
4.7 Warrant to Purchase Common Stock issued to Princeton Securities
dated October 20, 1998 (incorporated herein by reference to
Exhibit 4.7 to the Quarterly Report on Form 10-Q for the quarter
ended November 22, 1998)
4.8 Form of Warrant Certificate to Purchase Common Stock issued to
ING Equity Partners II, L.P. dated September 1, 1998
(incorporated herein by reference to Exhibit 10.2 to the Form 8-K
filed August 10, 1998)
4.9 Certificate of Determination of Rights and Preferences of Class
A1 Cumulative, Redeemable and Exchangeable Preferred Stock, Class
A2 Cumulative, Redeemable and Exchangeable Preferred Stock, Class
B1 Cumulative, Redeemable and Exchangeable Preferred Stock, Class
C1 Cumulative, Redeemable and Exchangeable Preferred Stock and
Class D Cumulative, Redeemable and Exchangeable Preferred Stock
4.10 Preferred Shareholder Agreement by and between Registrant and
sole holder of shares of issued and outstanding Class A
Cumulative, Redeemable and Exchangeable Preferred Stock and Class
B Cumulative, Redeemable and Exchangeable Preferred Stock dated
January 22, 1999
*10.1 Alpha Microsystems Profit Sharing Trust Agreement between Alpha
Microsystems and Bank of America NT & S.A. as
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Trustee dated May 24, 1985 (incorporated herein by reference to
Exhibit 10.32 to the Annual Report on Form 10-K of Registrant for
the year ended February 23, 1986)
*10.2 Alpha Microsystems Profit Sharing Plan (as amended and restated)
dated May 15, 1986 (incorporated herein by reference to Exhibit
10.33 to the Annual Report on Form 10-K of Registrant for the
year ended February 23, 1986)
*10.3 Acceptance of Trust by Trustee dated September 30, 1986 pursuant
to Registrant's Profit Sharing Plan (incorporated herein by
reference to Exhibit 10.29 to the Annual Report on Form 10-K of
Registrant for the year ended February 22, 1987)
*10.4 First Amendment dated March 1, 1987 to the Registrant's Profit
Sharing Plan (incorporated herein by reference to Exhibit 10.30
to the Annual Report on Form 10-K of Registrant for the year
ended February 22, 1987)
*10.5 Indemnification Agreement dated October 23, 1987 by and between
Alpha Microsystems and John F. Glade (incorporated herein by
reference to Exhibit 10.34 to the Quarterly Report on Form 10-Q
of Registrant for the quarter ended November 22, 1987)
*10.6 Indemnification Agreement dated October 23, 1987 by and between
Alpha Microsystems and Rockell N. Hankin (incorporated herein by
reference to Exhibit 10.36 to the Quarterly Report on Form 10-Q
of Registrant for the quarter ended November 22, 1987)
*10.7 Second Amendment to Alpha Microsystems Profit Sharing Plan dated
January 22, 1988 (incorporated herein by reference to Exhibit
10.31 to the Annual Report on Form 10-K of Registrant for the
year ended February 28, 1988)
*10.8 Alpha Microsystems Profit Sharing Plan Amendments Under IRS
Notice 88-131 dated May 24, 1989 (incorporated herein by
reference to Exhibit 10.38 to the Quarterly Report on Form 10-Q
of Registrant for the quarter ended May 28, 1989)
*10.9 Alpha Microsystems Profit Sharing Plan Amendment dated December
15, 1989 (incorporated herein by reference to Exhibit 10.45 to
the Quarterly Report on Form 10-Q of Registrant for the quarter
ended November 26, 1989)
*10.10 Indemnification Agreement by and between the Registrant and
Douglas J. Tullio dated January 8, 1990 (incorporated herein by
reference to Exhibit 10.50 to the Quarterly Report on Form 10-Q
of Registrant for the quarter ended November 26, 1989)
*10.11 Indemnification Agreement by and between Registrant and Clarke E.
Reynolds dated June 16, 1989 (incorporated herein by reference to
Exhibit 10.67 to the Annual Report on Form 10-K of Registrant for
the year ended February 23, 1992)
*10.12 Alpha Microsystems 1993 Employee Stock Option Plan (incorporated
herein by reference to Exhibit 10.109 to the Quarterly Report on
Form 10-Q for the quarter ended May 29, 1994)
10.13 Industrial Lease between Fairview Investors Ltd. and Registrant
dated October 28, 1994 (incorporated herein by reference to
Exhibit 10.113 to the Quarterly Report on Form 10-Q for the
quarter ended November 27, 1994)
*10.14 First Amendment to Employment Agreement by and between Registrant
and John F. Glade dated May 3, 1991 (incorporated herein by
reference to Exhibit 19.8 to the Annual Report on Form 10-K of
Registrant for the year ended February 23, 1992)
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*10.15 Second Amendment and Restatement of the Alpha Microsystems Profit
Sharing Plan dated July 1, 1992 (incorporated herein by reference
to Exhibit 10.72 to the Quarterly Report on Form 10-Q for the
quarter ended May 31, 1992)
10.16 Memorandum to Lease by and between Registrant and Fairview
Investors, Ltd. dated January 24, 1995 (incorporated herein by
reference to Exhibit 10.136 to the Annual Report on Form 10-K of
Registrant for the year ended February 26, 1995)
10.17 First Amendment to Alpha Microsystems 1993 Employee Stock Option
Plan (incorporated herein by reference to Exhibit 4.6 to the Form
S-8 filed January 31, 1997)
10.18 Second Amendment to Alpha Microsystems 1993 Employee Stock Option
Plan (incorporated herein by reference to Exhibit 4.7 to the Form
S-8 filed January 31, 1997)
10.19 Alpha Microsystems Employee Stock Purchase Plan (incorporated
herein by reference to Exhibit 4.10 to the Form S-8 filed January
31, 1997)
*10.20 Indemnification Agreement by and between Registrant and Dennis E.
Michael dated January 17, 1997 (incorporated herein by reference
to Exhibit 10.57 to the Annual Report on Form 10-K of the
Registrant for the year ended February 23, 1997)
*10.21 Indemnification Agreement by and between Registrant and Randall
S. Parks dated January 17, 1997 (incorporated herein by reference
to Exhibit 10.58 to the Annual Report on Form 10-K of the
Registrant for the year ended February 23, 1997)
*10.22 Employment Letter by and between Registrant and Jeffrey J.
Dunnigan dated November 15, 1997 (incorporated herein by
reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q
for the quarter ended November 23, 1997)
*10.23 Indemnification Agreement by and between Registrant and Jeffrey
J. Dunnigan dated December 1, 1997 (incorporated herein by
reference to Exhibit 10.63 to the Annual Report on Form 10-K of
the Registrant for the year ended February 22, 1998)
10.24 Security and Loan Agreement by and between Registrant and
Imperial Bank dated June 9, 1998 (incorporated herein by
reference to Exhibit 10.64 to the Quarterly Report on Form 10-Q
for the quarter ended May 24, 1998)
10.25 Addendum to Security and Loan Agreement by and between Registrant
and Imperial Bank dated June 9, 1998 (incorporated herein by
reference to Exhibit 10.65 to the Quarterly Report on Form 10-Q
for the quarter ended May 24, 1998)
10.26 General Security Agreement by and between Registrant and Imperial
Bank dated June 9, 1998 (incorporated herein by reference to
Exhibit 10.66 to the Quarterly Report on Form 10-Q for the
quarter ended May 24, 1998)
10.27 Credit Terms and Conditions ("Credit Agreement") by and between
Registrant and Imperial Bank dated June 9, 1998 (incorporated
herein by reference to Exhibit 10.67 to the Quarterly Report on
Form 10-Q for the quarter ended May 24, 1998)
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10.28 Securities Purchase Agreement by and between Registrant and ING
Equity Partners II, L.P. dated August 7, 1998 (incorporated
herein by reference to Exhibit 10.1 to the Form 8-K filed August
10, 1998)
10.29 Promissory Note by and between Registrant and Imperial Bank dated
September 11, 1998 (incorporated herein by reference to Exhibit
10.68 to the Quarterly Report on Form 10-Q for the quarter ended
August 23, 1998)
*10.30 Employment Agreement by and between Registrant and John T. DeVito
dated September 1, 1998 (incorporated herein by reference to
Exhibit 10.1 to the Form 8-K/A filed October 5, 1998)
*10.31 Amended and Restated Employment Agreement by and between
Registrant and Douglas J. Tullio dated September 1, 1998
(incorporated herein by reference to Exhibit 10.2 to the Form
8-K/A filed October 5, 1998)
*10.32 Alpha Microsystems 1998 Stock Option and Award Plan (incorporated
herein by reference to Exhibit 10.69 to the Quarterly Report on
Form 10-Q for the quarter ended November 22, 1998)
*10.33 Form of Incentive Stock Option Agreement for use in connection
with 1998 Stock Option and Award Plan (incorporated herein by
reference to Exhibit 10.70 to the Quarterly Report on Form 10-Q
for the quarter ended November 22, 1998)
*10.34 Form of Non-employee Director Non-Qualified Stock Option
Agreement to be used in connection with 1998 Stock Option and
Award Plan (incorporated herein by reference to Exhibit 10.71 to
the Quarterly Report on Form 10-Q for the quarter ended November
22, 1998)
*10.35 Form of Non-employee Director Non-Qualified Stock Option
Agreement in Lieu of Cash Compensation for Prior Services for use
in connection with 1998 Stock Option and Award Plan (incorporated
herein by reference to Exhibit 10.72 to the Quarterly Report on
Form 10-Q for the quarter ended November 22, 1998)
*10.36 Form of Non-Qualified Stock Option Agreement for use in
connection with 1998 Stock Option and Award Plan (incorporated
herein by reference to Exhibit 10.73 to the Quarterly Report on
Form 10-Q for the quarter ended November 22, 1998)
*10.37 Form of Non-Qualified Stock Option Agreement issued in connection
with the acquisition of Delta CompuTec, Inc. (incorporated herein
by reference to Exhibit 10.74 to the Quarterly Report on Form
10-Q for the quarter ended November 22, 1998)
*10.38 Indemnification Agreement by and between Registrant and Carlos D.
De Mattos dated December 17, 1998 (incorporated herein by
reference to Exhibit 10.75 to the Quarterly Report on Form 10-Q
for the quarter ended November 22, 1998)
*10.39 Indemnification Agreement by and between Registrant and John T.
DeVito dated December 17, 1998 (incorporated herein by reference
to Exhibit 10.76 to the Quarterly Report on Form 10-Q for the
quarter ended November 22, 1998)
*10.40 Indemnification Agreement by and between Registrant and Benjamin
P. Giess dated December 17, 1998 (incorporated herein by
reference to Exhibit 10.77 to the Quarterly Report on Form 10-Q
for the quarter ended November 22, 1998)
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*10.41 Indemnification Agreement by and between Registrant and Sam Yau
dated December 17, 1998 (incorporated herein by reference to
Exhibit 10.78 to the Quarterly Report on Form 10-Q for the
quarter ended November 22, 1998)
*10.42 Management Deferred Compensation Plan dated November 1, 1998
10.43 First Amendment to Security and Loan Agreement and Addendum
Thereto by and between Registrant and Imperial Bank dated
November 22, 1998
10.44 First Amendment to Credit Terms and Conditions by and between
Registrant and Imperial Bank dated November 22, 1998
*10.45 Consulting Agreement by and between Registrant and Randy Parks
dated March 15, 1999
10.46 Stock Incentive Award Plan of Registrant (incorporated herein by
reference to Exhibit 10.21 to the Annual Report on Form 10-K of
Registrant for the year ended February 26, 1984)
10.47 Form of Stock Incentive Award and Escrow Agreement for use in
connection with the Stock Incentive Award Plan (incorporated
herein by reference to Exhibit 4.9 to the Post-Effective
Amendment No. 1 to the Registration Statement on Form 8 of the
Registrant (Registration Statement No. 2-9252) filed on August
23, 1984)
10.48 First Amendment to Stock Incentive Award Plan of Registrant dated
August 15, 1990 (incorporated herein by reference to Exhibit
19.16 to the Quarterly Report on Form 10-Q of Registrant for the
quarter ended August 26, 1990)
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney (included on signature pages of this Transition
Report on Form 10-K)
27 Financial Data Schedule
(* Denotes Management Contract or Compensation Plan)
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REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Alpha Microsystems
We have audited the accompanying consolidated balance sheets of Alpha
Microsystems as of December 31, 1998 and February 22, 1998, and the related
statements of operations, redeemable preferred stock and shareholders' equity
and cash flows for the ten months ended December 31, 1998 and for the years
ended February 22, 1998 and February 23, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Alpha
Microsystems at December 31, 1998 and February 22, 1998, and the results of its
operations and its cash flows for the ten months ended December 31, 1998 and for
the years ended February 22, 1998 and February 23, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
March 8, 1999
32
33
ALPHA MICROSYSTEMS
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Pro forma
December 31,
1998
December 31, February 22, (Unaudited
1998 1998 Note 6)
------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,930 $ 5,003 $ 4,930
Restricted cash 384 -- 384
Accounts receivable, net of allowance for doubtful accounts
of $700 at December 31, 1998 and $294 at February 22, 1998 6,473 3,781 6,473
Prepaid expenses and other current assets 1,229 970 1,229
-------- -------- --------
Total current assets 13,016 9,754 13,016
Property and equipment, net 3,776 3,186 3,776
Intangibles, net 9,097 2,259 9,097
Other assets 542 589 542
-------- -------- --------
$ 26,431 $ 15,788 $ 26,431
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 250 $ 1,000 $ 250
Accounts payable 3,686 1,699 3,686
Accrued compensation 1,530 386 1,530
Deferred revenue 3,142 1,888 3,142
Other accrued liabilities 1,480 448 1,480
-------- -------- --------
Total current liabilities 10,088 5,421 10,088
Long-term debt 741 60 741
Other long-term liabilities 105 -- 105
Commitments and contingencies
Redeemable preferred stock, no par value; 15,001 issued
and outstanding at December 31, 1998, 2,501 pro forma;
liquidation value $15,306, $2,551 pro forma 12,824 -- 2,137
Shareholders' equity:
Redeemable preferred stock, no par value; 5,000,000 shares authorized;
none issued and outstanding at December 31, 1998,
12,500 pro forma; liquidation value $12,755 pro forma -- -- 10,687
Common stock, no par value; 40,000,000 shares authorized;
11,193,952 and 10,914,112 shares issued and outstanding at
December 31, 1998 and February 22, 1998, respectively 31,632 31,011 31,632
Warrants 1,764 -- 1,764
Accumulated deficit (30,739) (20,761) (30,739)
Accumulated other comprehensive income 16 57 16
-------- -------- --------
Total shareholders' equity 2,673 10,307 13,360
-------- -------- --------
$ 26,431 $ 15,788 $ 26,431
======== ======== ========
See accompanying notes.
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34
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Ten Months Ended Year Ended Year Ended
December 31, February 22, February 23,
1998 1998 1997
---------------- ------------ ------------
Net sales:
IT Services $ 20,072 $ 13,223 $ 14,627
Product 4,068 6,104 8,885
-------- -------- --------
Total net sales 24,140 19,327 23,512
-------- -------- --------
Cost of sales:
IT Services 17,222 9,887 10,193
Product 3,772 4,079 5,305
-------- -------- --------
Total cost of sales 20,994 13,966 15,498
-------- -------- --------
Gross margin 3,146 5,361 8,014
Operating expenses:
Selling, general and administrative 8,674 7,518 9,665
Engineering, research and development 1,173 1,411 1,500
Impairment of long-lived assets 2,438 -- --
-------- -------- --------
Total operating expenses 12,285 8,929 11,165
-------- -------- --------
Loss from operations (9,139) (3,568) (3,151)
Other expense (income):
Interest income (88) (310) (266)
Interest expense 106 7 31
Other expense (income), net 370 53 (174)
-------- -------- --------
Total other expense (income) 388 (250) (409)
-------- -------- --------
Loss before taxes (9,527) (3,318) (2,742)
Income tax expense (benefit) 15 (21) 28
-------- -------- --------
Net loss $ (9,542) $ (3,297) $ (2,770)
======== ======== ========
Net loss attributable to common shares $ (9,978) $ (3,297) $ (2,770)
======== ======== ========
Basic and diluted net loss per share $ (0.90) $ (0.30) $ (0.28)
======== ======== ========
Number of shares used in computing
basic and diluted per share amounts 11,029 10,864 9,727
======== ======== ========
See accompanying notes.
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35
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
TEN MONTHS ENDED DECEMBER 31, 1998 AND YEARS ENDED
FEBRUARY 22, 1998 AND FEBRUARY 23, 1997
(In thousands)
Redeemable Unamortized Accumulated
Preferred Stock Common Stock Restricted Other
--------------- --------------- Accumulated Stock Plan Comprehensive
Shares Amount Shares Amount Warrants Deficit Expense Income Total
------ ------ ------ ------ -------- ----------- ---------- ------------- -------
Balance at February 25, 1996 -- $ -- 6,595 $21,242 $ -- $ (14,694) $ (18) $ (47) $ 6,483
Net loss -- -- -- -- -- (2,770) -- -- (2,770)
Other comprehensive income
(loss) -- -- -- -- -- -- -- 118 118
------------------------------------------------------------------------------------------------
Total comprehensive loss -- -- -- -- -- (2,770) -- 118 (2,652)
Issuance of stock and
redeemable warrants, net
of expenses -- -- 4,104 9,486 -- -- -- -- 9,486
Exercise of stock options -- -- 63 101 -- -- -- -- 101
Non-employee Directors Comp
Plan -- -- 60 90 -- -- -- -- 90
Amortization -- -- -- -- -- -- 5 -- 5
------------------------------------------------------------------------------------------------
Balance at February 23, 1997 -- -- 10,822 30,919 -- (17,464) (13) 71 13,513
Net loss -- -- -- -- -- (3,297) -- -- (3,297)
Other comprehensive income
(loss) -- -- -- -- -- -- -- (14) (14)
------------------------------------------------------------------------------------------------
Total comprehensive loss -- -- -- -- -- (3,297) -- (14) (3,311)
Issuance of stock, net of
expenses -- -- 12 20 -- -- -- -- 20
Costs for redeemable warrants -- -- -- (21) -- -- -- -- (21)
Exercise of stock options -- -- 40 37 -- -- -- -- 37
Non-employee Directors Comp
Plan -- -- 40 56 -- -- -- -- 56
Amortization -- -- -- -- -- -- 13 -- 13
------------------------------------------------------------------------------------------------
Balance at February 22, 1998 -- -- 10,914 31,011 -- (20,761) -- 57 10,307
Net loss -- -- -- -- -- (9,542) -- -- (9,542)
Other comprehensive income
(loss) -- -- -- -- -- -- -- (41) (41)
------------------------------------------------------------------------------------------------
Total comprehensive loss -- -- -- -- -- (9,542) -- (41) (9,583)
Issuance of stock, net of
expenses 15 12,752 274 612 -- -- -- -- 13,364
Accretion on preferred stock -- 72 -- -- -- (72) -- -- --
Dividends on preferred stock -- -- -- -- -- (364) -- -- (364)
Issuance of redeemable
warrants, net -- -- -- -- 1,764 -- -- -- 1,764
Exercise of stock options -- -- 6 9 -- -- -- -- 9
------------------------------------------------------------------------------------------------
Balance at December 31, 1998 15 $12,824 11,194 $31,632 $ 1,764 $ (30,739) $ -- $ 16 $15,497
================================================================================================
See accompanying notes.
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36
ALPHA MICROSYSTEMS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Ten Months Ended Year Ended Year Ended
December 31, February 22, February 23,
1998 1998 1997
---------------- ---------- ------------
Cash flows from operating activities:
Net loss $ (9,542) $ (3,297) $ (2,770)
Adjustments to reconcile net loss to net cash
used in operating activities:
Impairment of long-lived assets 2,438 -- --
Software obsolescence 730 -- --
Depreciation and amortization 1,970 1,702 2,067
Loss on sale of subsidiary 378 -- --
Provision for losses on accounts receivable 548 194 64
Other 78 132 (59)
Other changes in operating assets and liabilities,
net of effects of acquisitions:
Restricted cash (384) -- --
Accounts receivable (1,092) (987) 28
Prepaid expenses and other current assets (143) (2) (65)
Accounts payable and accrued liabilities 13 487 112
Accrued compensation 779 36 (18)
Deferred revenue (188) 146 (383)
Other, net 60 (48) (858)
-------- -------- --------
Net cash used in operating activities (4,355) (1,637) (1,882)
-------- -------- --------
Cash flows from investing activities:
Acquisition of DCI, net of cash acquired (3,285) -- --
Acquisition of other IT service assets (478) (1,183) --
Purchases of equipment (1,847) (1,346) (427)
Capitalization of software development costs (269) (456) (971)
Purchase of short-term investments -- (7,405) (19,697)
Proceeds from sale of short-term investments -- 14,216 12,885
Proceeds from sale of stock investments -- -- 2,088
Other, net -- 14 261
-------- -------- --------
Net cash (used in) provided by investing
activities (5,879) 3,840 (5,861)
-------- -------- --------
Cash flows from financing activities:
Issuance of preferred stock, net 12,812 -- --
Issuance of warrants to purchase common stock, net 1,704 -- --
Issuance of common stock 271 92 9,677
Line of credit, net (1,000) 1,000 (500)
Issuance of debt 1,050 -- --
Principal repayments on debt (102) (53) (167)
Repayments on debt assumed in acquisition of DCI (4,612) -- --
Payment of preferred stock dividend (58) -- --
Other, net 105 -- --
-------- -------- --------
Net cash provided by financing activities 10,170 1,039 9,010
Effect of exchange rate changes on cash and cash equivalents (9) (7) (4)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (73) 3,235 1,263
Cash and cash equivalents at beginning of period 5,003 1,768 505
-------- -------- --------
Cash and cash equivalents at end of period $ 4,930 $ 5,003 $ 1,768
======== ======== ========
Supplemental information:
Cash paid for:
Interest $ 98 $ 7 $ 31
Income tax payments (refunds), net $ 15 $ (20) $ 16
See accompanying notes.
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37
ALPHA MICROSYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
THE BUSINESS
Alpha Microsystems provides IT services (including consulting, maintenance,
support and networking services) 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 wholly-owned subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior years consolidated
financial statements to conform with the current period 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, impairment in asset carrying values,
and certain accrued liabilities. Historically, actual amounts recorded have not
varied significantly from estimated amounts.
FISCAL YEAR
Historically, the Company's fiscal year ended in the month of February. On
December 17, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year to a calendar year-end. Fiscal years 1998 and 1997 ended
on February 22, 1998 and February 23, 1997, 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 during the ten months ended December
31, 1998, the Company recorded the following non-cash transactions: $350,000 of
debt converted to 108,317 shares of common stock related to the exercise of a
warrant issued in connection with the acquisition of Delta CompuTec Inc. ("DCI")
(Note 2), and issuance of 200,000 warrants to a financial advisor in exchange
for $60,000 of services. There were no non-cash transactions recorded during
fiscal year 1998. During fiscal year 1997, the Company recorded the following
non-cash transactions: common stock of $2,088,000 in exchange for the net assets
of Alpha Microsystems Great Britain, and cash of $250,000 and notes receivable
of $600,000 in exchange for the net assets of AlphaHealthCare and PANDA.
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RESTRICTED CASH
As part of the acquisition of DCI, the Company deposited funds into an escrow
account from which the Company is entitled to reimbursement for amounts
specifically relating to indemnification under the terms of the Agreement and
Plan of Merger ("Merger Agreement").
CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company extends credit to a wide variety
of customers including individuals, value-added resellers, distributors and
large corporations and partnerships. The Company performs ongoing credit
evaluations of its customers and maintains allowances for potential credit
losses that have been within management's expectations. As of December 31, 1998,
the Company had no significant concentrations of credit risk.
PROPERTY AND EQUIPMENT
The straight-line method of depreciation is used for the following classes of
assets for financial statement purposes and is based on the following estimated
useful lives:
Years
----------
Machinery and equipment 3 to 10
Leasehold improvements 1 to 6
IT Service parts 5
In March 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. The SOP, which was adopted in fiscal
year 1998, requires capitalization of certain costs incurred in connection with
developing or obtaining internal use software. During the ten-month period ended
December 31, 1998 and fiscal year 1998, the Company capitalized in machinery and
equipment $696,000 and $671,000, respectively, 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 goodwill, acquired IT service contracts and
capitalized software development costs. The book value of goodwill and IT
service contracts is associated with the acquisition of companies or assets.
Capitalized software development costs are the accumulation of software
development costs or the assigned value of software associated with an
acquisition. The straight-line amortization periods for the major classes of
intangible assets are as follows:
Years
----------
Goodwill 20
IT service contracts 5 to 10
Capitalized software development costs 3 to 5
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.
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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 in future
periods. In addition, if the Company's estimate of future undiscounted cash
flows should change or if the operating plan is not achieved, future analyses
may indicate insufficient future undiscounted net cash flows to recover the
carrying value of the Company's long lived assets, in which case such assets
would be written down to estimated fair value.
DEFERRED REVENUE
Deferred revenue is revenue billed and collected 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 IT Service sales and post contract
customer support on a straight-line basis over the contract period and
recognizes revenue on its product sales on shipment. When significant
obligations remain after a product has been delivered, revenue is not recognized
until obligations have been completed or are no longer significant. The costs of
any insignificant obligations are accrued when the related revenue is
recognized. Revenue is recognized only when collection of the resulting
receivable is probable.
ADVERTISING EXPENSES
The Company recognizes expenses related to advertising costs in the period in
which these costs are incurred. Total advertising expenses in the ten months
ended December 31, 1998 and the fiscal years ended February 22, 1998 and
February 23, 1997 were $101,000, $166,000 and $795,000, 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 Board Opinion No. 25 and related Interpretations
in accounting for its employee stock option and purchase plans and, accordingly,
has not recognized compensation cost in connection with such plans. Note 6 to
the consolidated financial statements contains a summary of the pro forma
effects to reported net loss and net loss per share for the ten months ended
December 31, 1998 and the fiscal years ended February 22, 1998 and February 23,
1997 as if the Company had elected to recognize compensation cost based on the
fair value of the options at grant date as prescribed by SFAS 123.
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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 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.
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 $31,000, $10,000 and $(42,000) for the
ten-month period ended December 31, 1998 and the fiscal years ended February 22,
1998 and February 23, 1997, respectively. The Company had no forward exchange
contracts outstanding at December 31, 1998.
PER SHARE DATA
Basic and diluted net loss per share is based on the weighted average common
shares outstanding during the periods presented and excludes the anti-dilutive
effects of options and warrants. The net loss has been adjusted to reflect
dividends earned and accretion related to redeemable preferred shares
outstanding, as shown below:
(In thousands)
Ten Months Ended Year Ended Year Ended
December 31, 1998 February 22, 1998 February 23, 1997
----------------- ----------------- ------------------
Net loss $(9,542) $(3,297) $(2,770)
Accretion on redeemable preferred stock (72) - -
Dividends on redeemable preferred stock (364) - -
-------- -------- -------
Net loss to common shareholders $(9,978) $(3,297) $(2,770)
======= ======= =======
COMPREHENSIVE INCOME
As of February 22, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's results of operations or shareholders' equity. SFAS 130 requires
foreign currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income.
2. ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
On September 1, 1998, the Company completed the acquisition of Delta CompuTec
Inc. ("DCI"). DCI provides management and consulting services, as well as
services that include network design, installation and maintenance. The Merger
Agreement provided for the payment of $3.4 million in exchange for all of the
outstanding shares of DCI at the time of closing, and a net payment of DCI's
then
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outstanding debt in the amount of $4.6 million. Under the Merger Agreement, DCI
became a wholly-owned subsidiary of Alpha Microsystems. The acquisition was
accounted for as a purchase and is reflected in the pro forma information below
based upon available information and upon certain assumptions that the Company
believes are reasonable in the circumstances. The Company's initial purchase
price allocation is preliminary and subject to change as the Company obtains all
the information necessary to complete the allocation process.
The unaudited pro forma financial information below reflects the acquisition of
DCI and the related purchase price financing through the sale of redeemable
preferred stock, warrants and term loan borrowings as if the acquisition
occurred at the beginning of the periods presented below (in thousands, except
per share amounts).
Ten Months Ended Year Ended
December 31, 1998 February 22, 1998
----------------- -----------------
Revenue $31,508 $32,306
======= =======
Net loss $(9,193) $(2,055)
======= =======
Basic and diluted net loss per common share $ (0.90) $ (0.27)
======= =======
On February 27, 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.
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 December 31, 1998. All
amounts paid, and any future payments, are contingent on future annualized
revenues.
All acquisitions have been accounted for as purchases and the acquired
operations have been included in the consolidated statements of operations from
the dates of acquisition. Pro forma information for acquisitions other than DCI
has not been presented as it would not be materially different from the
historical information presented.
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 Ireland.
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.
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3. PROPERTY AND EQUIPMENT
Major classes of property and equipment are as follows:
(In thousands)
December 31, 1998 February 22, 1998
----------------- -----------------
Machinery and equipment $ 8,474 $ 7,237
Leasehold improvements 1,434 1,396
IT Service parts 3,149 4,032
------- -------
13,057 12,665
Less accumulated depreciation and amortization 9,281 9,479
------- -------
Property and equipment, net $ 3,776 $ 3,186
======= =======
Depreciation expense was $1,265,000, $1,254,000 and $1,547,000 for the ten
months ended December 31, 1998, and for the fiscal years ended February 22, 1998
and February 23, 1997, respectively.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
(In thousands)
December 31, 1998 February 22, 1998
----------------- -----------------
Goodwill, net of accumulated amortization of $135 $8,158 $ --
IT Service contracts, net of accumulated amortization
of $60 and $2,960 at December 31, 1998 and February
22, 1998, respectively 479 1,192
Software development costs, net of accumulated
amortization of $1,613 and $1,625 at December 31, 1998
and February 22, 1998, respectively 460 1,067
------ ------
$9,097 $2,259
====== ======
Related amortization expense charged to operations is as follows:
(In thousands) Ten Months Ended Year Ended Year Ended
December 31, 1998 February 22, 1998 February 23, 1997
----------------- ----------------- -----------------
Goodwill $135 $ -- $ --
IT Service contracts 311 248 389
Capitalized software development 259 200 131
---- ---- ----
$705 $448 $520
==== ==== ====
5. DEBT
On June 9, 1998, the Company signed a $3 million credit facility with a bank.
Advances under the facility are subject to availability based on eligible
accounts receivable and certain financial covenants, including tangible net
worth, debt to tangible net worth and quick ratio minimum requirements. Under
the facility, a $2 million accounts receivable line of revolving credit has been
designated for working capital and $1 million has been designated to finance
potential acquisitions under the Company's current business plan. Amounts drawn
under the accounts receivable line bear interest at the bank's prime rate plus 2
percent. There were no outstanding borrowings at
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43
December 31, 1998 under the accounts receivable line of revolving credit.
Borrowings for acquisitions approved by the bank mature four years from the date
of funding and bear interest at the bank's prime rate plus 2.5 percent (10.25%
at December 31, 1998). A portion of the DCI acquisition was financed with $1.0
million of cash proceeds under the acquisition portion of the credit facility
provided by the bank. At December 31, 1998, the outstanding balance on this loan
is $937,501. 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. As additional consideration for
granting the credit facility, the Company issued to the bank warrants to
purchase 33,000 shares of the Company's common stock at $2.50 per share.
6. SHAREHOLDERS' EQUITY
PREFERRED STOCK
In addition to the $1.0 million of cash proceeds provided under a four year bank
term-loan (Note 5), the acquisition of DCI was financed with $8.0 million
obtained under a Securities Purchase Agreement (the "Purchase Agreement"). Under
the Purchase Agreement, ING Equity Partners II, L.P. ("ING") agreed, subject to
certain conditions, to invest up to $20 million in redeemable exchangeable
preferred stock (the "Redeemable Preferred Stock") of the Company. The Purchase
Agreement provides for the purchase of Redeemable Preferred Stock in three
tranches of $8 million, $7 million, and up to $5 million. The first tranche was
completed concurrent with the acquisition of DCI and the second tranche was
funded on October 20, 1998 after shareholder approval. In connection with its
investment, ING was granted warrants to purchase 5,833,188 shares of the
Company's common stock for $2.50 per share. Warrants were assigned a value of
$1.7 million, determined by an independent appraisal. The value assigned to
warrants and direct costs associated with issuance aggregating approximately
$484,000 reduced the initial carrying value of the Redeemable Preferred Stock to
$12,752,000. The difference between the initial carrying value and the
Redeemable Preferred Stock's liquidation value of $15,000,000 is being accreted
through periodic charges to accumulated deficit. Such accretion aggregated
$72,000 during the ten months ended December 31, 1998.
The redeemable preferred stock is non-voting, except for one share that entitles
ING to vote on all matters an aggregate number of votes equal to the number of
unexercised warrants held by ING as of the record date.
Dividends are cumulative and are payable quarterly in arrears on the Redeemable
Preferred Stock at an initial 9% cumulative annual dividend rate, which
increases to 11% on July 1, 2000 and thereafter increases an additional 1%
annually. All outstanding preferred shares mature on June 30, 2005 or earlier in
the event of default, and may be redeemed at any time by the Company in cash. In
the event of a public offering, the Company is required to apply 50% of the net
proceeds toward the redemption of the then outstanding redeemable preferred
stock. In the period ended December 31, 1998, dividends aggregating $364,000
were charged to accumulated deficit, of which $58,000 were paid.
All outstanding non-voting preferred stock is exchangeable, upon approval of the
Board of Directors, into subordinated debentures whose maturity, variable
interest rate and liquidation preference would be equal to the exchanged
preferred stock. The subordinated debentures also have mandatory redemption
rights payable in cash on terms equal to the exchanged preferred stock.
If the Company elects to close the third tranche, subject to certain conditions,
ING will invest up to an additional $5 million, the proceeds from which must be
used for certain acquisitions. In such event, ING will be granted warrants to
purchase additional shares of common stock which, together with previously
issued warrants will total up to 8,753,626 shares, at $2.50 per share. The third
closing must occur, if at all, on or before June 30, 1999.
There is no assurance that the third tranche of the ING transaction will be
consummated. If the Company elects to redeem the Redeemable Preferred Stock
prior to June 30, 2000, the shares purchasable pursuant to the Warrants
outstanding at December 31, 1998
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will be reduced by approximately 600,000 shares, assuming all three tranches are
closed.
PRO FORMA BALANCE SHEET - UNAUDITED
During February 1999, the Company restructured $12.5 million liquidation value
of its outstanding $15.0 million liquidation value redeemable preferred stock.
The restructured redeemable preferred stock carry the same terms as described
above except that each share is automatically convertible at maturity into one
share of a new class of non-redeemable preferred stock with a 40% annual
dividend rate. Accordingly, the restructured redeemable preferred stock is
reflected as a component of shareholders' equity on the accompanying pro forma
balance sheet. The pro forma balance sheet is presented herein to show the
effects of the preferred restructuring as if the restructuring occurred on
December 31, 1998. The remaining originally issued redeemable preferred stock,
not presented as a component of shareholders' equity, will be accreted over
seven years to its redemption value of $2.5 million.
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 vests each year, beginning on the date of grant. As of December
31, 1998, all restricted shares granted have vested.
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 is 100,000 shares. As of December 31, 1998, 99,999
shares have been issued. The fair market value of these shares totaling $56,000
and $90,000 was charged to expense in fiscal years 1998 and 1997, respectively.
No additional stock is available under this plan.
WARRANTS
In addition to the warrants granted to ING (see above), the Company has granted
additional warrants as follows:
In connection with a public offering in fiscal 1993, Company granted to its
underwriter a warrant to purchase 139,315 units with an exercise price of $1.95
per unit. Those warrants were exercised during the ten-month period ended
December 31, 1998, providing net proceeds to the Company of $272,000. Pursuant
to the terms of an amendment to a loan agreement signed in October 1996, the
Company issued 25,000 warrants to a 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. In June 1998, the Company issued 33,000 warrants to a
bank which are exercisable for seven years at $2.50 per share. In October 1998,
the Company granted an additional 200,000 warrants to a financial advisor,
exercisable for five years at $3.23 per share.
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.
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OPTIONS
In October 1998, the shareholders approved a new Stock Option and Award Plan
(the "1998 Plan") which provides for the grants of (i) qualified incentive stock
options ("ISOs") which meet the requirements of Section 422 of the Internal
Revenue Code; (ii) stock options not so qualified ("NQSOs"); (iii) deferred
stock in which delivery of common stock occurs upon expiration of a deferral
period; (iv) restricted stock, in which common stock is granted to participants
subject to restrictions on transferability and other restrictions, which lapse
over time; (v) performance shares, consisting of a right to receive common stock
subject to restrictions based upon the attainment of specified performance
criteria; and (vi) stock appreciation rights, whether in conjunction with the
grant of stock options or independent of such grant, or stock appreciation
rights that are only exercisable in the event of a change in control of the
Company or upon other events. A total of 2,000,000 shares of common stock are
available for issuance under this Plan.
As of December 31, 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.
In connection with the DCI acquisition , 195,000 non-qualified stock options
were issued to employees outside of the above Plans.
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The following table contains a summary of transactions related to options for
the ten months ended December 31, 1998, and the fiscal years ended February 22,
1998 and February 23, 1997:
Weighted Average
Options Price per Share
--------- ----------------
Outstanding at February 25, 1996 546,849 $1.04
Granted 628,500 $2.62
Expired/canceled (262,140) $2.55
Exercised (62,770) $1.69
---------
Outstanding at February 23, 1997 850,439 $2.16
Granted 337,500 $1.24
Expired/canceled (143,000) $1.63
Exercised (40,000) $0.94
---------
Outstanding at February 22, 1998 1,004,939 $1.97
Granted 1,713,578 $2.29
Expired/canceled (272,689) $1.89
Exercised (6,250) $1.44
---------
Outstanding at December 31, 1998 2,439,578 $2.21
=========
Exercisable at:
February 23, 1997 464,689 $1.93
February 22, 1998 457,064 $2.13
December 31, 1998 823,179 $2.21
Available for grant:
February 23, 1997 269,561
February 22, 1998 65,061
December 31, 1998 699,172
Options outstanding at December 31, 1998 have exercise prices and weighted
average remaining lives as follows: 22,500 shares at $0.78 with a remaining life
of 1.3 years, 337,500 shares at $1.03 to $1.44 per share with a remaining life
of 3.7 years, 1,383,781 shares at $1.63 to $2.06 with a remaining life of 9.5
years, and 695,797 shares at $2.69 to $3.94 per share with a remaining life of
6.5 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 5.8% for the fiscal periods presented; volatility factors of
the expected market price of the Company's common stock of 0.6 for all three
fiscal periods; 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.
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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:
Ten Months Ended Year Ended Year Ended
(In thousands, except per share information) December 31, 1998 February 22, 1998 February 23, 1997
----------------- ----------------- -----------------
Pro forma net loss $(10,403) $ (3,516) $ (2,873)
Pro forma net loss attributable to common shares $(10,839) $ (3,516) $ (2,873)
Pro forma basic and diluted loss per share $ (0.98) $ (0.32) $ (0.30)
The per share weighted average fair value of options granted during the ten
months ended December 31, 1998 and the fiscal years ended February 23, 1997 and
February 22, 1998 were $1.30, $1.24, and $2.62, respectively. Because Statement
123 is applicable only to options issued after February 24, 1996, its pro forma
effect will not fully be reflected until 1999. Accordingly, 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.
As of December 31, 1998, the Company has 6,402,826 warrants outstanding and
2,439,578 options outstanding, or a total of 8,842,404 shares of common stock
reserved for issuance pursuant to option and warrant agreements.
7. OPERATING CHARGES
Significant to the comparative results of operations for the ten months ended
December 31, 1998 are charges totaling $4,679,000. These charges are comprised
of the following: (i) $2,230,000 to write-down impaired tangible and intangible
assets from non-core business acquired prior to 1998 to their estimated fair
values based on estimated cash flows, and write-down of accounts receivable
related to non-core operations, (ii) $910,000 to write-down impaired fixed
assets and inventory related to end-of-life proprietary product lines to their
estimated fair values, (iii) $813,000 related to software products obsolesced by
the introduction of new products, (iv) $379,000 resulting from the write-off of
notes receivable from previously sold assets and subsidiaries, (v) $256,000 of
indirect financing costs related to the sale of redeemable preferred stock and
warrants and the expensing of previously capitalized costs associated with
abandoned acquisitions, and (vi) $91,000 in write-offs of costs related to Year
2000 issues and adjustments of warranty and other liabilities. The table below
summarizes where these charges have been recognized on the statement of
operations for the periods ended December 31, 1998 (in thousands):
Cost of Operating Impairment
Sales Expenses Charge Other Total
------- --------- ---------- ------ ------
Impairment of tangible and intangible assets $ 147 $ 495 $1,588 $ -- $2,230
Write-down of fixed assets and inventory 60 -- 850 -- 910
Software obsolescence 730 83 -- -- 813
Loss on sale of assets and subsidiaries -- -- -- 379 379
Indirect financing costs -- 256 -- -- 256
Year 2000 issues and operating expenses 25 66 -- -- 91
------ ------ ------ ------ ------
Total $ 962 $ 900 $2,438 $ 379 $4,679
====== ====== ====== ====== ======
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8. INCOME TAXES
The current provision (benefit) for income taxes consists of the following:
(In thousands)
Ten Months Ended Year Ended Year Ended
December 31, 1998 February 22, 1998 February 23, 1997
----------------- ----------------- -----------------
Foreign $ -- $(31) $ 25
State 15 10 3
---- ---- ----
$ 15 $(21) $ 28
==== ==== ====
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)
December 31, 1998 February 22, 1998
----------------- -----------------
Deferred tax assets:
Net operating loss carryforward $ 13,573 $ 8,793
Tax credits 991 899
Accruals not currently deductible for tax
purposes 1,400 123
Depreciation and capitalized software (57) 33
Translation adjustment 20 25
Other 80 38
Valuation allowance (16,007) (9,911)
-------- --------
Total deferred tax asset -- --
-------- --------
Deferred tax liabilities -- --
-------- --------
Net deferred taxes $ -- $ --
======== ========
The change in the valuation allowance was a net increase of $6,096,000 and
$829,000 for ten months ended December 31, 1998 and the fiscal year ended
February 22, 1998, respectively. The valuation allowance was increased since the
realization of deferred tax assets is uncertain.
The Company has federal net operating loss carryforwards totaling approximately
$37,000,000 at December 31, 1998, which begin to expire in 2006, if not
utilized. Due to the exercise of the Redeemable Public Warrants in fiscal year
ended February 23, 1997, the Company experienced a change of ownership as
defined in Section 382 of the Internal Revenue Code. As a result of the
ownership change, utilization of approximately $19,000,000 of the net operating
loss carryforwards is limited to approximately $1,300,000 per year. In addition,
approximately $6,500,000 of acquired net operating loss carryforwards is limited
to approximately $400,000 per year as a result of another change in ownership.
The recognition of tax benefits associated with approximately $13.6 million of
net operating loss carryforwards and deductible temporary differences arising as
a result of the acquisition of Delta CompuTec Inc., will first reduce goodwill
and other noncurrent intangible assets related to the acquisition, and then
income tax expense.
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A reconciliation of income tax expense (benefit) to the statutory U.S. federal
income tax rate follows:
Ten Months Ended Year Ended Year Ended
December 31, 1998 February 22, 1998 February 23, 1997
----------------- ----------------- -----------------
Statutory U.S. federal
income tax rate (benefit) (34.0)% (34.0)% (34.0)%
Changes in taxes resulting from:
Foreign losses and excess rates 0.3 (1.0) 1.2
Domestic losses with no tax
benefit 33.4 34.0 32.7
Other items, net 0.5 0.4 1.1
----- ----- -----
Effective tax rate 0.2% (0.6)% 1.0%
===== ===== =====
United States and foreign income (loss) before taxes are as follows:
(In thousands)
Ten Months Ended Year Ended Year Ended
December 31, 1998 February 22, 1998 February 23, 1997
----------------- ----------------- -----------------
Domestic $(9,439) $(3,524) $(2,933)
Foreign (88) 206 191
------- ------- -------
$(9,527) $(3,318) $(2,742)
======= ======= =======
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 the ten months ended December 31, 1998 and the fiscal years ended
February 22, 1998 and February 23, 1997 was $1,415,000, $1,213,000, and
$1,318,000, respectively. The Company's annual minimum lease commitments under
non-cancelable operating leases, net of sublease income of $186,000 for 1999,
are as follows:
(In thousands)
1999 $1,140
2000 711
2001 241
------
$2,092
======
The Company is currently involved in certain claims and litigation. The Company
does not consider any of these claims or litigation to be material. Management
has made provisions in the Company's financial statements for the settlement of
lawsuits for which unfavorable outcomes are both probable and estimable. In the
opinion of management, results of known existing claims and litigation will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
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 the ten-month period ended December 31,
1998 or for the fiscal years ended February 22, 1998 and February 23, 1997.
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 $21,000,
$20,000, and $29,000 for the ten-month period ended December 31, 1998 and the
fiscal years ended February 22, 1998 and February 23, 1997, respectively.
In fiscal 1997, the Company adopted a new Employee Stock Purchase Plan, covering
substantially all of its full-time employees, enabling
49
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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 the ten months ended December 31, 1998 and the fiscal year ended
February 22, 1998 were $26,000 and $20,000, respectively.
11. INDUSTRY SEGMENT INFORMATION
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") which supercedes Statement of Financial Accounting Standards No.
14. This statement changes the way that publicly-held companies report
information about operating segments as well as disclosures about products and
services, geographic areas and major customers. Operating segments are defined
as revenue-producing components of the enterprise, which are generally used
internally for evaluating segment performance. SFAS 131 is effective for the
Company's ten-month period ended December 31, 1998 and does not affect the
Company's financial position or results of operations, but did affect the
following disclosure of segment information.
The Company operates in two business segments: the servicing of computer
systems, networks and related products and the manufacture and sale of computer
systems, software and related products. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies except that certain expenses, such as interest,
amortization of certain intangibles, special charges and general corporate
expenses are not allocated to the segments. In addition, certain assets
including cash and cash equivalents, deferred taxes and certain intangible
assets are held at corporate. The effect of capitalizing software costs is
included in the product segment.
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Selected financial information for the Company's reportable segments for the ten
months ended December 31, 1998 and the fiscal years ended February 22, 1998 and
February 23, 1997 follows:
Corporate
(In thousands) IT Services Product Expenses Consolidated
- -------------- ----------- ------- --------- ------------
TEN MONTHS ENDED DECEMBER 31, 1998
Revenues from external customers $ 20,072 $ 4,068 $ -- $ 24,140
Significant operating charges (Note 7) 1,042 534 3,103 4,679
Segment income (loss) (2,047) (2,067)(1) (5,428) (9,542)
Segment assets 16,547 2,240 7,644 26,431
Depreciation and amortization 1,330 318 322 1,970
Expenditures for long-lived assets 1,083 291 742 2,116
FISCAL YEAR ENDED FEBRUARY 22, 1998
Revenues from external customers $ 13,223 $ 6,104 $ -- $ 19,327
Segment income (loss) 432 (1,862)(1) (1,867) (3,297)
Segment assets 5,527 4,469 5,792 15,788
Depreciation and amortization 1,037 400 265 1,702
Expenditures for long-lived assets 571 560 671 1,802
FISCAL YEAR ENDED FEBRUARY 23, 1997
Revenues from external customers $ 14,627 $ 8,885 $ -- $ 23,512
Segment income (loss) 1,361 (2,572)(1) (1,559) (2,770)
Segment assets 2,991 4,893 9,311 17,195
Depreciation and amortization 1,096 637 334 2,067
Expenditures for long-lived assets 370 997 31 1,398
(1) Includes expenses attributable to the marketing and launching of the
AlphaCONNECT software products of $1,684,000, $2,281,000 and $1,162,000 for
the ten months ended December 31, 1998 and the fiscal years ended February
22, 1998 and February 23, 1997, respectively.
During the ten months ended December 31, 1998 and the fiscal year ended February
22, 1998 there were no significant revenues or long-lived assets outside of the
United States. During the fiscal year ended February 23, 1997, revenues of
$2,728,000 were in Europe and Australia combined, and all other significant
revenues were in the United States. Also, all significant long-lived assets held
at February 23, 1997 were in the United States.
No single customer accounted for 10% or more of the Company's sales.
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ALPHA MICROSYSTEMS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Balance at
Beginning Charged to End
of Period Other Expense Deductions of Period
--------- ----- ---------- ---------- ----------
Allowance for doubtful accounts:
December 31, 1998 $294 $ 94(1) $548(2) $236(3) $700
February 22, 1998 139 194 39 294
February 23, 1997 927 64 852(4) 139
(1) Balance transferred as part of the acquisition of DCI.
(2) Includes $495,000 for the write-down of accounts receivable related to
non-core operations.
(3) Includes the write-off of $108,000 of accounts receivable related to
non-core operations.
(4) 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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALPHA MICROSYSTEMS
Date: March 29, 1999 By: /s/ DOUGLAS J. TULLIO
----------------------------------
Douglas J. Tullio
President, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Douglas J. Tullio and
Jeffrey J. Dunnigan, 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 Transition Report on
Form 10-K with the Securities and Exchange Commission, granting to said
attorneys-in-fact and agents full power and authority to perform any other act
on behalf of the undersigned required to be done in the premises.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 29, 1999 By: /s/ DOUGLAS J. TULLIO
---------------------------------------
Douglas J. Tullio
Chairman of the Board, President, Chief
Executive Officer, Director
Date: March 29, 1999 By: /s/ JEFFREY J. DUNNIGAN
----------------------------------
Jeffrey J. Dunnigan
Vice President
Chief Financial Officer, Secretary
Date: March 29, 1999 By: /s/ ROCKELL N. HANKIN
----------------------------------
Rockell N. Hankin
Director
Date: March 29, 1999 By: /s/ RICHARD E. MAHMARIAN
----------------------------------
Richard E. Mahmarian
Director
Date: March 29, 1999 By: /s/ CLARKE E. REYNOLDS
----------------------------------
Clarke E. Reynolds
Director
Date: March 29, 1999 By: /s/ BENJAMIN P. GIESS
----------------------------------
Benjamin P. Giess
Director
Date: March 29, 1999 By: /s/ CARLOS D. DE MATTOS
----------------------------------
Carlos D. DeMattos
Director
Date: March 29, 1999 By: /s/ SAM YAU
----------------------------------
Sam Yau
Director
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EXHIBIT INDEX
4.9 Certificate of Determination of Rights and Preferences of Class A1
Cumulative, Redeemable and Exchangeable Preferred Stock, Class A2
Cumulative, Redeemable and Exchangeable Preferred Stock, Class B1
Cumulative, Redeemable and Exchangeable Preferred Stock, Class C1
Cumulative, Redeemable and Exchangeable Preferred Stock and Class D
Cumulative, Redeemable and Exchangeable Preferred Stock
4.10 Preferred Shareholder Agreement by and between Registrant and sole
holder of shares of issued and outstanding Class A Cumulative,
Redeemable and Exchangeable Preferred Stock and Class B Cumulative,
Redeemable and Exchangeable Preferred Stock dated January 22, 1999
*10.42 Management Deferred Compensation Plan dated November 1, 1998
10.43 First Amendment to Security and Loan Agreement and Addendum Thereto by
and between Registrant and Imperial Bank dated November 22, 1998
10.44 First Amendment to Credit Terms and Conditions by and between Registrant
and Imperial Bank dated November 22, 1998
*10.45 Consulting Agreement by and between Registrant and Randy Parks dated
March 15, 1999
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney (included on signature pages of this Transition Report
on Form 10-K)
27 Financial Data Schedule
(* Denotes Management Contract or Compensation Plan)