-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JN2vMUk3sHOBp1v9K4yKVPa4naOyB3XPSQgui9KE95QY3NCFlGmNPaMJk6nst2Jn F2mQ1ehcFo9Epp5es1pvbw== 0000892569-98-001632.txt : 19980527 0000892569-98-001632.hdr.sgml : 19980527 ACCESSION NUMBER: 0000892569-98-001632 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980222 FILED AS OF DATE: 19980526 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALPHA MICROSYSTEMS CENTRAL INDEX KEY: 0000352869 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 953108178 STATE OF INCORPORATION: CA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10558 FILM NUMBER: 98631206 BUSINESS ADDRESS: STREET 1: 3511 W SUNFLOWER AVE CITY: SANTA ANA STATE: CA ZIP: 92704 BUSINESS PHONE: 7149578500 10-K 1 FORM 10-K PERIOD ENDED FEBRUARY 22, 1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the fiscal year ended FEBRUARY 22, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from ____________to____________ COMMISSION FILE NUMBER 0-10558 ALPHA MICROSYSTEMS (Exact name of registrant as specified in its charter) CALIFORNIA 95-3108178 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2722 SOUTH FAIRVIEW STREET, SANTA ANA, CA 92704 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (714) 957-8500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing sale price of its common stock on May 14, 1998 on the Nasdaq National Market, a date within 60 days prior to the date of filing, was $33,757,348. As of May 14, 1998, there were 10,914,112 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be filed no later than 120 days after the close of the registrant's fiscal year ended February 22, 1998, are incorporated by reference in Part III of this Annual Report on Form 10-K. 1 2 PART I INTRODUCTORY NOTE This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include (i) the market acceptance of the Company's products, including its AlphaCONNECT internet and intranet technology, and Information Technology ("IT") services, (ii) the continued development of the Company's technical, manufacturing, sales, marketing and management capabilities, (iii) anticipated competition, and (iv) any future performance, achievements of the Company, or industry results expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. Forward-looking statements included herein regarding the actual results, performance and achievements of the Company are dependent on a number of factors. The Company's ability to pursue companies that provide strategic platforms on which to leverage future growth is dependent on (i) the economic and competitive environment of the computer maintenance and IT support services industry in general, and in the Company's specific market areas, (ii) its ability to identify acquisition candidates, (iii) the availability of, and terms of, financing to fund the anticipated growth of the Company's business, and (iv) its ability to successfully integrate acquired operations with its existing operations. The Company's ability to execute internet/intranet technology and marketing agreements with key companies and its ability to derive internet/intranet revenues from the sale of product, licensing of technology, or revenue sharing relationships is dependent on (i) the Company's ability to develop, produce, and market products and services that incorporate new technology, are priced competitively, and achieve significant market acceptance, (ii) whether the Company's products and IT services will be commercially successful or technically advanced due to the rapid improvements in computer technology and resulting product obsolescence, (iii) the Company's ability to deliver commercial quantities of new products in a timely manner, (iv) the Company's ability to manage risks associated with its internet operating strategies, (v) changes in the Company's operating strategy and capital expenditure plans, and (vi) the economic and competitive environment of the internet/intranet industry in general. The Company's ability to expand the service segment through new service contracts, expansion of time and materials servicing, and alliances with third-party IT service providers and to develop opportunities to service products manufactured by third parties is dependent on (i) the Company's ability to develop, produce, and market services that are priced competitively, (ii) whether the Company's IT services will be commercially successful or technically advanced due to the rapid improvements in computer technology and resulting product obsolescence, (iii) changes in the cost of IT services, (iv) the Company's ability to manage risks associated with its IT services operating strategies, (v) changes in the Company's operating and capital expenditure plans and (vi) the Company's ability to manage its expenses commensurate to its revenues. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. ITEM 1. BUSINESS Alpha Microsystems (the "Company" or "Alpha Micro") is a California corporation with its principal offices located at 2722 South Fairview Street, Santa Ana, California 92704 (telephone number 714-957-8500). The Company provides information technology 2 3 products (including products for the internet and intranet markets) and IT services (including consulting, maintenance, support and networking) to a variety of market segments. The Company provides these services through its more than 55 locations throughout North America. This Annual Report on Form 10-K refers to various trademarks of the Company and certain trademarks of other companies. All products and services are trademarks or registered trademarks of their respective holders. GENERAL DEVELOPMENT OF BUSINESS The Company, which was incorporated under California law on March 17, 1977, is a supplier of information technology ("IT") services and products. The Company historically had two principal lines of business: (1) the sale of computer and networking hardware and software products, and (2) the service of its own and third-party hardware and software products as well as installation, training, and consulting services. In recognition of the intensely competitive nature of the computer hardware industry and the migration toward open system environments and away from proprietary systems such as those primarily sold by the Company, the Company has in the last several years focused its efforts on vertical niche markets, the expansion of its IT services business and the development and marketing of AlphaCONNECT, an internet and intranet technology. The movement into vertical niche markets did provide additional IT service revenues. However, the products were not sufficiently successful to warrant additional capital commitments. A discussion of the Company's divestitures during the most recent three years follows. In fiscal 1996, the Company sold CV Systems to Veterinary Centers of America ("VCA"), a major user of the product. The sale resulted from market pressures from veterinary industry consolidation and the Company's belief that it could apply its resources toward areas with greater growth potential. Also in 1996, the Company refocused its marketing strategy for PANDA, its food service software product, and the Company evaluated additional development of Alpha2000, its dental office software product, in an effort to economically enhance the product's market acceptance. These efforts were unsuccessful and management began evaluating these operations for potential disposition. In 1996, the Company also finalized the sale of Alpha Microsystems Belgium, S.A. ("AMB") to a member of the AMB management. Subsequent to this sale, the Company continued to conduct its European operations directly through Alpha Microsystems Great Britain Limited ("AMGB"). A write-down was taken at the end of fiscal 1996 aggregating $1,995,000; this write-down was associated with certain vertical software products and goodwill related to its PANDA and AlphaHealthCare operations. In fiscal 1997, the Company sold its remaining European operation, Alpha Microsystems Great Britain Limited ("AMGB"), including Sabre Business Systems Limited, and its remaining vertical software operations, PANDA and AlphaHealthCare. On December 23, 1997, the Company acquired the telephone installation and IT service business and certain related assets of Applied Cellular Technology, Inc. for a purchase price estimated to be $2.6 million, of which $1.1 million has been paid from the Company's cash reserves through February 22, 1998. All amounts paid, and any future payments, are contingent on future annualized revenues. Subsequent to February 22, 1998, the Company acquired the ongoing IT service contracts and certain related assets of M & J Technologies, Inc. ("M & J") for an estimated purchase price of $950,000. The purchase price, which is contingent on future annualized revenues, is to be paid over 18 months, with 50% of the purchase price paid on the closing date of the acquisition. 3 4 These divestitures and acquisitions were consistent with the Company's strategy to concentrate its resources on the IT services business and to develop and launch the AlphaCONNECT internet and intranet technology and software products. These divestitures along with the Company's efforts to grow the IT services business, primarily through internal growth, repositioned the Company in fiscal 1998, whereby IT service revenues accounted for 68.4% of total revenues and product sales accounted for 31.6% of total revenues, as compared to fiscal 1993, when IT service revenues accounted for 37.3% of total revenues and product sales accounted for 62.7% of total revenues. The following table sets forth the percentage contribution to total company revenues of each of these principal lines of business for the periods indicated: PERCENTAGE OF REVENUES
FISCAL YEAR ENDED ----------------- FEBRUARY 22, FEBRUARY 23, FEBRUARY 25, 1998 1997 1996 ---- ---- ---- IT Service Revenues 68.4% 62.2% 55.2% Product Revenues 31.6% 37.8% 44.8%
The Company in each of the last four years has sustained significant net losses and negative operating cash flows. Also during this time the Company divested certain operations, made significant investments in the development of its internet technology, and downsized its hardware operations, contributing to declines in net sales or results of operations. If the Company is to successfully execute its strategies discussed below, it will need to obtain outside financing and negotiate and successfully complete IT service business acquisitions. The Company is currently negotiating with several lending and investing institutions to finance its operating strategies and has received a commitment from a bank for a replacement $3,000,000 debt facility, subject to certain financial covenants and borrowing based requirements. While management believes it will be able to obtain sources of capital on acceptable terms, no assurances can be given that it will successfully do so. INDUSTRY BACKGROUND IT SERVICE INDUSTRY BACKGROUND The market for computer hardware maintenance and IT support services is large and growing. According to Dataquest the worldwide information technology (IT) market was $897 billion in 1997. Dataquest also states that the worldwide IT services market was $301 billion in 1997, with the United States holding 43% or $129 billion market share. While traditionally OEMs have garnered market share within the IT services market, the Company believes that independent, multi-vendor IT service providers such as the Company are taking market share from the OEMs faster than OEMs are contracting new business. The Company believes that this is occurring for several reasons including: (i) customers are looking for single source providers who support multiple computer hardware and software platforms, (ii) multi-vendor providers such as the Company are viewed as being unbiased toward computer purchase decisions and (iii) OEMs are increasingly outsourcing customer maintenance services (including warranty and post warranty IT services) and technical customer support (such as help desk services) to independents. The IT services and support industry is fragmented and consolidating, providing the Company with potential opportunity. Currently, the industry consists primarily of: (i) several large IT service providers, (ii) service segments of OEM operations, and (iii) hundreds of smaller companies servicing either product niches or limited geographical areas of the United States. The significant market position of OEMs is due largely to their traditional role of servicing their own installed base of equipment and their 4 5 customers' former reliance on centralized, single-vendor solutions. INTERNET/INTRANET INDUSTRY BACKGROUND International Data Corporation (IDC) predicts that the internet will reach "mass market" proportions in the United States with nearly 25% of households on-line in 1998. IDC further predicts that this rapid growth will propel the number of U.S. users from an expected 90-100 million by 1998 year-end to over 200 million by the year 2001 and the internet/intranet industry will reach $92 billion by the year 2000. The internet has become a critical new way of doing business and is reaching ever-larger audiences daily. As an example today, intranets -- private networks based on internet and web standards -- can be found in a full 59% of U.S. and 38% of European organizations according to a recent IDC report. Next year, 77% of U.S. and 75% of European organizations expect to be using intranets. This research shows that the internet/intranet and web-based standards are being embraced by organizations and are helping organizations deliver on the promise of collaborative computing. According to IDC, companies are investing significant resources in strategic internet technologies to streamline business processes. IDC believes new internet information technologies are in demand as companies seek to reduce costs, enhance productivity, as well as remain competitive. In addition, IDC believes companies are looking at return on information as a measurable value behind investment in the internet. The proliferation of information caused by the very efficiencies of the internet has become in many aspects unmanageable; however, given the importance of information to any organization, the ability to successfully manage it is critical. The Company believes that its AlphaCONNECT technology delivers added value to the one of the most critical aspects of the internet, information management. STRATEGY IT SERVICE STRATEGY Alpha Microsystems' business strategy for its IT services operation is to grow through (i) complementary acquisitions and alliances; and (ii) leveraging existing infrastructure. The fundamental elements of this business strategy are as follows: COMPLEMENT INTERNAL GROWTH WITH STRATEGIC ACQUISITIONS AND ALLIANCES WITHIN THE IT INDUSTRY In order to achieve the operating results and performance goals set by management, the Company believes that expansion through acquisitions, as well as internal growth, will be necessary. Accordingly, the Company has completed acquisitions of smaller IT service companies and expects to continue to pursue the acquisition of IT service companies that sell products and services complementary to those of Alpha Microsystems. The Company also expects to pursue companies that provide strategic platforms on which to leverage future growth. No assurance can be given that this strategy will be successfully implemented. LEVERAGE THE EXISTING INFRASTRUCTURE Over the past several years, the Company has built an IT services infrastructure serving all major and secondary cities in the United States and Canada. The Company believes that through its 55 locations and over 200 service personnel it has a competitive advantage over the majority of other IT service companies, which tend to have only a local or regional presence. This national presence provides the Company with the ability to expand services offered by acquired local and regional IT services companies to a national level. Further, the Company's national presence reduces the need for customers of acquired companies to maintain service contracts with many different IT service providers across the United States and Canada, and it also enhances internal growth of acquired companies by bringing in-house IT services that were previously outsourced due to local or regional operating constraints. No assurance can be given that this strategy will be successfully implemented. 5 6 INTERNET/INTRANET STRATEGY To date, the Company has established agreements with several key companies within the internet technology industry including General Magic, PC Quote, Quote.com, Zacks Investment Research, Cybernet Data Systems, Inc., Market Guide, and others. The agreements range from customized technology projects to marketing alliances. The Company expects to continue to execute technology and marketing agreements with key companies, as well as innovate additional strategies to keep pace with the fast changing market. Some of these strategies are anticipated to expand the integration of the AlphaCONNECT technology with third-party products and/or services currently being developed or marketed today. No assurance can be given that any of these strategies will be successfully implemented. SERVICES OPERATION The Company maintains service operations that employ over 200 service personnel in North America to provide service and technical support to the Company's customers and certain dealers. The Alpha Microsystems Services Operation ("AMSO") provides multi-vendor hardware and software maintenance and repair services throughout the United States and Canada via a network of 55 field offices linked to a national dispatch and advisory center. Through the Alpha Micro Technical Assistance Center, the Company responds to questions from dealers and end-users around the world via electronic and telephone communications channels. The Company intends to expand the service segment of its business through new service contracts, expansion of time and materials servicing, and alliances with third-party IT service providers, although no assurances can be given that the Company will be successful in expanding its services operation above current levels. While divestitures have decreased overall service revenues, AMSO's contribution to the Company's operations has increased over the past years relative to the decline in product revenues. On a worldwide basis, revenues from service operations represented 68.4%, 62.2% and 55.2% of total revenues for fiscal 1998, 1997 and 1996, respectively. AMSO continues to develop opportunities to service selected products manufactured by third parties in an effort to more fully exploit the Company's service capabilities. AMSO's services also include the design and installation of computer networks. Other professional services offered by AMSO include consulting services related to site preparation work, such as electrical power and cabling analysis; air conditioning, humidity and static electricity problems; and lightning protection for computer systems. PRODUCTS INTERNET PRODUCTS AND TECHNOLOGIES AlphaCONNECT is Alpha Microsystems' patent-pending software technology for sophisticated communication and data conversion through the use of intelligent agents. AlphaCONNECT is not a single product, but rather a technology that has been realized as a core of cooperating components. These component parts can be combined in many different ways to create a multitude of applications including complete, stand-alone applications as well as modules that integrate into other systems. Using AlphaCONNECT technology, information can be gathered through the use of TCP/IP (internet) protocols, including HTTP, HTTPS, FTP, SMTP and others. ODBC support allows most databases to be accessed and MAPI is supported for corporate e-mail. AlphaCONNECT can tie into additional protocols as needed. AlphaCONNECT's broad communications abilities allow it to acquire information from a diverse number of sources and to transmit data to an equally broad variety of destinations. The data AlphaCONNECT can acquire, manipulate and deliver include text, HTML, SGML, structured records, and many types of image, audio and video data. Acquired information can be converted into many forms including text, HTML, SGML and database records. AlphaCONNECT can also send data directly to specific target applications. Many popular office automation applications for Windows are supported, including word processors, spreadsheets, contact managers and database managers. 6 7 AlphaCONNECT is the underlying technology found in several applications developed and released by the Company including AlphaCONNECT StockVue, an agent application that provides custom delivery of financial data from the internet such as stock and mutual fund quotes, news, charts and SEC filings. StockVue is ready-tailored for OEMs or end-users. The Company has also developed and released AlphaCONNECT BusinessVue, an agent application that provides custom delivery of filtered, corporate and business information from the internet. BusinessVue is also ready-tailored for OEMs or end-users. The AlphaCONNECT technology provides the necessary components for additional client and enterprise applications, and can be integrated with other software products and environments. The Company has executed several business-to-business technology agreements whereby the Company has agreed to customize its AlphaCONNECT technology for OEMs, ISVs and other third-party vendors. Examples of AlphaCONNECT technology implementations for third parties include agreements with vendors such as General Magic, PC Quote, Cybernet Data Systems, Inc., AccountingNet, and CurtCo Freedom Group. In addition, the Company has developed and released acTools, a product line of Microsoft ActiveX components that targets software developers who work in a variety of programming languages including Visual Basic, Visual Basic for Applications, VBScript, Visual C++, and Delphi. acTools enable software developers to export multiple data types -- text, records sets, images, audio and video -- to many office automation products including popular word processors, spreadsheets and database managers. HARDWARE The Company supports its customers with personal computer products through its AlphaDirect program, through which the Company markets third-party PC and peripheral products, as well as its proprietary family of AM Series computer systems that is based primarily on the Motorola 680XX family of microprocessors. The AM Series consists of the Eagle family of small business computer systems at the low- to mid-range of the product line, and the AM-6000 family at the upper end. The Eagle family was first introduced by the Company in 1994, and the initial AM-6000 configuration began shipments in early fiscal 1998. The primary operating system licensed with the Company's products is AMOS, the Company's proprietary operating system. The Company also incorporates Novell NetWare, SCO, UNIX, MS-DOS, and Microsoft Windows, among others, into certain of its products. In addition to operating systems software, the Company markets and distributes a variety of software products for its hardware systems including language compilers, development and conversion tools, networking products, application programs and utility programs. DISTRIBUTION AND MARKETING During fiscal 1996 and 1997, the Company developed a national sales and marketing group for its IT services business with a view toward expanding the services business through a more aggressive, direct sales process. The sales and marketing efforts for the IT services group are concentrated on securing contracts for the service of open systems such as IBM RS6000s and AS400s, as well as Microsoft and Novell networks. Since the beginning of fiscal year 1997, the Company has increased headcount within its IT services sales and marketing group by over 100%. The Company expects to continue investing resources to grow its IT services sales and marketing group. The distribution strategy for AlphaCONNECT is focused on several methods of distribution which include: (i) establishing OEM relationships with hardware and software developers and suppliers, as well as computer products distributors, (ii) creating relationships with on-line mass merchandisers and software retailers, (iii) direct marketing to corporate environments, (iv) developing associations 7 8 with shareware providers, and (v) selling via the electronic marketplace of the internet. The Company has committed significant resources to developing these channels and creating market awareness. In fiscal 1998 and 1997, approximately $2,300,000 and $1,200,000, respectively, were committed to these programs. Using one or more of these distribution channels, the Company intends to derive revenues from the sale of product, licensing of technology, or revenue sharing relationships. The Company has begun to distribute both StockVue and BusinessVue at nominal or no cost, both to promote name recognition and to facilitate use of StockVue to generate advertising revenue income. However, although revenues are starting to be realized, direct revenue advertising on the internet is in the early stages, and such revenues available through the Company's present alliances are uncertain. There is no assurance that substantial revenues will be realized through such advertising revenues. The Company currently markets its hardware products through approximately 188 dealers and distributors located in North America, Europe, Latin America, Australia and the Asia Pacific area. The Company's distribution to its dealers and distributors is supported by sales and marketing personnel located at the Company's headquarters, as well as in various metropolitan locations throughout the United States. In addition, the Company engages in direct marketing of hardware in its service operations. Sales of the Company's hardware are dependent upon several large customers. While none of the Company's customers represents more than 10% of the Company's consolidated revenues, the loss of one or more of the Company's large hardware customers could have a material adverse effect on the Company's results of operations. During fiscal 1998, 1997 and 1996, approximately 12%, 20% and 30%, respectively, of the Company's total net revenues were made to foreign dealers and users. The decline in year-to-year net revenues is due primarily to divestitures of foreign operations. From its headquarters in the United States, the Company sells its products directly to distributors and independent dealers in Europe, Mexico, Latin America, Australia, the Asia Pacific area and other international markets. INTEGRATION AND SUPPLIES The Company's hardware manufacturing process consists primarily of assembling, integrating, and testing a wide variety of purchased electronic and electromechanical components and subassemblies. Most components and subassemblies are available from a number of alternative sources and certain suppliers have provided the Company with favorable consignment arrangements. However, some components and subassemblies used by the Company are available from a limited number of outside suppliers and may periodically be in short supply. The Company maintains a supply of these limited source components which it believes is sufficient to enable it to continue operations until a replacement supplier could be qualified and any necessary redesign could be completed with the exception of a line of Motorola microprocessors. The inability of the Company to obtain the components and subassemblies necessary to enable it to fill its then-existing orders for any reason, including, but not limited to, shortages, product delays or work stoppages experienced by the Company's suppliers, could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's backlog is not significant because lead-time is typically less than one week from receipt of order to shipment. The Company buys materials pursuant to short-term forecasts and builds inventory to a semi-finished goods state. The finished products are then integrated based upon individual customer orders. FOREIGN OPERATIONS The Company's foreign sales to dealers and users comprise a substantial part of the Company's total net sales (12%, 20% and 30% in fiscal 1998, 1997 and 1996, respectively). (See Note 11 to the Company's Notes to Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K for financial information concerning the Company's foreign operations.) 8 9 Gross profit margins with respect to foreign product sales are not materially different from gross profit margins with respect to domestic sales. A significant portion of international receivables and payables are in currencies other than U.S. dollars, the value of which fluctuates in relation to U.S. currency. Currency fluctuations can have a material adverse effect on the Company's foreign revenue, profitability and cash flow in terms of U.S. dollars. Foreign currency exchange gains (losses) included in the determination of loss from operations before taxes were $10,000, ($42,000) and $76,000 for the 1998, 1997 and 1996 fiscal years, respectively. The Company's operations outside the United States are subject to the usual risks and limitations attendant upon investments in foreign countries, such as fluctuations in currency values, exchange control regulations, wage and price controls, employment regulations, effects of foreign investment laws, and other potentially detrimental domestic and foreign governmental policies affecting U.S. companies doing business abroad. WARRANTY The Company provides a one-year parts and labor return to factory or 90-day on-site warranty with an option for on-site or extended warranties on most products, other than software. Primarily, software licensed by the Company is not warranted by the Company and is licensed "as is." Applications software and hardware provided by third parties is covered by the warranties of the third-party suppliers. The Company has not had significant warranty problems and believes its warranty reserves are adequate based on the Company's historical experience. ENGINEERING, RESEARCH AND DEVELOPMENT The Company intends, to a limited extent, to continue investing in engineering, research and development for both the AlphaCONNECT line of products and the AM Series of hardware products. Annually, management determines the amount of such investment after considering the Company's profitability levels and technological standing within the industry. Engineering support and services and research and development expenses totaled $1,411,000, $1,500,000 and $2,093,000, or 23.1%, 16.9% and 14.2% of the Company's product revenue, respectively, in fiscal years 1998, 1997 and 1996. The Company has, in the past, utilized independent software developers where appropriate and entered into agreements with such developers to design, enhance, and/or support products to be marketed by the Company. Some agreements provided for an initial amount to be paid as a development fee and a royalty structure based on future revenues received from the developed product and some agreements provide for compensation on an hourly rate basis. Currently, the Company develops its software internally. However, outsourced software developers may be utilized in the future as appropriate. COMPETITION The computer industry is characterized by rapid technological changes and product obsolescence and the Company, in particular, faces severe competitive pressures as many competitors have aggressively targeted the broad range of market segments in which the Company's products and services compete. The Company's competition includes a large number of hardware manufacturers, service providers, software developers and resellers, many of which have longer operating histories, greater name recognition, larger installed customer bases and databases, and significantly greater financial, technical and marketing resources than the Company. Such competitors may be able to undertake more extensive marketing campaigns and make more attractive offers to potential employees, distribution partners, advertisers and others. As a result of the competition's greater resources, they may also be better able than the Company to modify and enhance their products to meet changing market demands. Due to the declining popularity of proprietary systems in favor of open systems such as Microsoft Windows, there is an ever declining number of distributors, dealers and developers of software and related products using the Company's proprietary systems. This decline continues to have an adverse effect upon the Company's competitive position, impacting both its proprietary product sales and corresponding services business. The Company believes that its 55 service locations enable it to compete effectively 9 10 against comparably sized service providers in the open systems service market -- a market in which the Company has begun to effectively increase its penetration. However, there are service providers larger than the Company and there can be no assurance that (i) competition from existing competitors will not substantially increase, (ii) established or new companies will not enter the market in direct competition with the Company, or (iii) the Company will be able to compete successfully with such existing or new competitors. With respect to the Company's AlphaCONNECT technology, the market for internet services and products is intensely competitive. Since there are no substantial barriers to entry for internet services and products, the Company expects competition in these markets to persist. The Company believes that the principal competitive factors in these markets are name recognition, performance, ease of use, functionality, content and price. Competitors include on-line service and content providers, web site operators, providers of web browser software (such as Netscape and Microsoft) and other internet services and products that incorporate data retrieval, conversion and delivery or "push" technology. The Company's future success depends on its ability to (i) adapt to rapidly changing technologies, (ii) keep its products competitively priced, (iii) maintain and enhance its market position, (iv) adapt its services and products to evolving industry standards, (v) continually improve the performance, features and reliability of its services and products in response to both evolving demands of the marketplace and competitive service and product offerings, and (vi) the ability of internet product providers to establish a paying market. There can be no assurance that the Company will have the resources to respond to this rapidly evolving market. GOVERNMENTAL REGULATION The Company's operations are subject to a number of federal, state and local laws relating to environmental, health, safety and labor matters applicable to business generally. The Company believes its business is operated in substantial compliance with all material applicable government regulations. However, there can be no assurances that future regulations will not require the Company to modify its products, business or operations to meet environmental, health, safety, or labor requirements, or that the Company will be able, for financial or other reasons, to comply with such future requirements. Failure to comply with future governmental regulations could subject the Company to fines or injunctions, which could result in a material adverse effect on the Company's business, results of operations and financial condition. Although the Company is not aware of any claim involving violation of environmental, health, safety or labor laws or regulations, there can be no assurance that such claim may not arise in the future, which may have a material adverse effect on the Company's business, results of operations and financial conditions. The currently marketed versions of the Company's multi-user systems have been successfully tested by an independent testing agency for compliance with Federal Communications Commission requirements for electromagnetic interference in commercial environments. PATENTS, TRADEMARKS AND LICENSES In addition to claiming standard copyright protection, the Company has filed a utility patent application with the United States Patent and Trademark Office directed to certain aspects of its AlphaCONNECT technology. There can be no assurance that any patent will be issued with respect to any aspect of AlphaCONNECT. The Company may decide to abandon prosecution prior to issuance of a patent. If any patent issues, there can be no assurance that the issued claims will be sufficiently broad to protect the Company's technology, to deter competitors or to prevent third parties from developing equivalent technology that does not infringe such claims, or that the patent will not otherwise be circumvented. In addition, there can be no assurance that any patents that may be issued will not be challenged, re-issued, re-examined, invalidated or held unenforceable, or that any rights granted thereunder would provide proprietary protection to the Company and its investment in AlphaCONNECT. The Company could incur substantial 10 11 costs in litigation in which the Company may assert a patent against another party. Failure of any patents to provide protection of the Company's technology may make it easier for the Company's competitors to offer technology equivalent to or superior to the Company's technology. The Company has federally registered trademarks including, but not limited to, the following "AlphaACCOUNTING" (design), "AlphaACCOUNTING" (stylized), "AlphaBASIC," "AlphaCALC," "AlphaCONNECT," "AlphaFORTRAN 77," "AlphaLAN," "AlphaPASCAL," "AlphaPASCAL Programming System," "AlphaRJE," "Alpha 2000," "AlphaSERV," "AlphaWRITE" (stylized), "AMOS," "AMSO," "Caselode," "insight/AM," "NODESTAR," "Videotrax," "Videotrax" (in design), and the slogan "RIGHT. FROM THE START." Several of these marks have also been registered in certain foreign countries. The Company has also registered the trademark "ALPHA MICRO" in selected states and various foreign countries. In addition, the Company has pending applications for the marks, including but not limited to "AlphaCONNECT EdgarVue," "AlphaCONNECT Messenger," "AlphaCONNECT Power Package," "AlphaCONNECT SportsVue," "AlphaSphere," "AM Alpha Microsystems" (in design), "AM Services Operation," "EdgarVue," "AlphaMicrosystems," "Alphaconnect Pro," "Alphaconnect StockVue," "AlphaConnect BusinessVue," "StockVue," "BusinessVue," "SportsVue," and the slogan "AlphaCONNECT. Where the Internet Gets Down to Business." The Company claims common law rights in the following marks: "AM" (design), and "Image.Doc." The Company markets a variety of software programs that it has either developed internally, acquired ownership rights to, or is marketing through license agreements with third-party vendors. Internally developed software, as well as software in which all ownership rights, title and interest have been acquired from any third-party vendor, is distributed to dealers and users through a licensing system primarily in object code format. Source code to these software programs is not licensed for distribution and the Company claims such intellectual property protection as may be available for such source code. The Company's proprietary AMOS operating system is marketed and maintained in this manner. Software acquired from third-party vendors pursuant to master licenses is distributed to the Company's dealers and users for their use pursuant to a structure of sub-licenses consistent with such master licenses. The Company licenses the AlphaLAN network software product from U.A. Systems, Inc. pursuant to a nonexclusive, worldwide (except India) license that was renewed for a three-year term ending December 31, 1998, with successive one-year renewals. Either party may terminate such agreement upon giving notice to the other party at least 60 days prior to the end of any one-year renewal period. The Company licenses the AcuCOBOL AMOS-based compiler from AcuCOBOL, Inc. pursuant to a 10-year, exclusive worldwide license commencing October 29, 1992, and terminable by AcuCOBOL, Inc. upon default by the Company or the Company's failure to meet certain minimum royalty requirements. Although no assurances can be given, the Company believes it will be able to renew its material licenses on terms that will be acceptable to both parties. To protect its intellectual property, the Company also relies in part on agreements with strategic employees and consultants which typically include provisions concerning confidentiality and ownership of work product. Despite these precautions, there can be no assurance that such agreements will provide the Company with meaningful remedies in the event of an improper use or disclosure of proprietary information. There can be no assurance that the Company's products or activities will not infringe the patents or proprietary rights of others, even if the Company also has received patent protection or other proprietary rights for its technology. The Company may be required to obtain licenses to patents or other proprietary rights. There can be no assurance that any such licenses would be made available on terms acceptable to the Company, if at all. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, the development, manufacture or sale of products requiring such licenses could be precluded, and the Company may have to pay substantial damages for past infringement. The Company could encounter substantial costs in defending itself in litigation brought against it on such patents or proprietary rights. While patent, copyright and trade secret rights provide certain protection to the Company, the Company believes that its success is less dependent on those ownership rights than on its innovative skills, technical competence and marketing abilities. 11 12 EMPLOYEES On February 22, 1998, the Company and its subsidiaries employed approximately 263 persons. The Company's ability to attract and retain qualified personnel is a significant factor in its future success. The Company has never experienced a work stoppage and at present no employees are represented by a labor organization. The Company considers its employee relations to be good. ITEM 2. PROPERTIES The Company occupies 48,643 square feet of a 66,200 square foot facility located in Santa Ana, California. The lease, which began on July 1, 1995, is for a term of 66 months with an average annual rent of $285,000. The Company is depreciating tenant improvements of $923,000 over the life of the lease. In fiscal 1997, the Company subleased a portion of the 66,200 square foot facility for approximately $95,000 annually. ITEM 3. LEGAL PROCEEDINGS Carlos Garralda and Andre Warnier, employees of the Company's former subsidiary, AMB, filed an action in November 1995 against AMB and the Company in Orange County Superior Court alleging that AMB is in breach of its obligations under Belgium employment law to pay salaries for a notice period of up to two years following termination of employment. The plaintiffs allege, among other things, that the Company has alter ego liability for these obligations. The plaintiffs are claiming compensatory damages in excess of $780,000 and unspecified punitive damages. A settlement of the case between AMB and Andre Warnier in the Belgium action was effected on October 18, 1996. Five hundred thousand dollars ($500,000) of the claimed compensatory damages in the Orange County lawsuit are related to the claims by Mr. Warnier. In December 1997, the Company and Warnier executed a settlement agreement which involved no payment by the Company and Warnier dismissed his Orange County case with prejudice. Separately Garralda dismissed his Orange County case without prejudice upon the Company's execution of a Tolling Agreement allowing Garralda to re-file the suit upon the occurrence of specified conditions. Although no assurances as to the outcome of the litigation can be given, management believes that this litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. In December 1995, Phoenix Marketing, Inc. d.b.a. Electronic Business Systems, Inc., in response to the Company's collection efforts for a past due account, filed an amended cross-complaint alleging damages of $3,200,000 for defective merchandise, loss of business reputation and loss of future business. The Iowa court has referred this case to arbitration, which arbitration is now scheduled to begin in November, 1998. Although no assurances as to the outcome of the litigation can be given, management believes that the plaintiff's claims are without merit. The Company is currently involved in certain other claims and litigation. The Company does not consider any of these other claims or litigation to be material. Management has made provisions in the Company's financial statements for the settlement of lawsuits for which unfavorable outcomes are both probable and estimable. In the opinion of management, results of known existing claims and litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Inapplicable. 12 13 OFFICERS OF THE REGISTRANT Certain information regarding the officers of the Company is set forth in the following: CLARKE E. REYNOLDS, 77, has served as Chairman of the Board of Directors of the Company since May 1991 and has been a Director of the Company since 1989. Mr. Reynolds served as Chief Executive Officer of the Company from January 1991 to August 1991, as President from November 1990 to May 1991, as Vice Chairman of the Board from October 1990 to May 1991, and as Chief Operating Officer of the Company from November 1990 to May 1991. Mr. Reynolds provided independent consulting services to the Company from 1984 through 1990, was an employee of the Company from November 1990 through May 1993, and presently provides independent consulting services to the Company. Mr. Reynolds was previously employed by NCR Corporation for over 47 years, during which time Mr. Reynolds held a variety of sales and marketing and general management positions including Vice President Pacific Region, Managing Director and Chairman of the Board NCR United Kingdom, Vice President NCR Europe and Vice President Executive Office. Mr. Reynolds serves as a Director of Sparta, Inc., which provides a wide range of scientific, engineering and technical assistance services, primarily for the U.S. military services and the Department of Defense. DOUGLAS J. TULLIO, 55, has served as President, Chief Executive Officer and a Director of the Company since 1991. Mr. Tullio also served as Chief Operating Officer from May 1991 to March 1994. Mr. Tullio joined the Company in January 1990 and served as Executive Vice President of the Company and President of the Company's subsidiaries, Rexon Business Machines and AMS Computers. (In April 1990, these subsidiaries were merged into the Company.) From 1984 to 1989, he worked for General Automation, Inc., in the positions of President and member of the Board of Directors, Executive Vice President, Vice President, General Manager and Vice President of Sales and Marketing. JEFFREY J. DUNNIGAN, 38, was appointed Vice President and Chief Financial Officer of the Company in December 1997. Prior to joining the Company, Mr. Dunnigan headed a financial consulting practice in Irvine, California. From October 1995 to September 1996, he was Vice President, Finance of UROHEALTH Systems, Inc., a publicly traded medical device company. Prior to October 1995 he was Audit Senior Manager with Ernst & Young, specializing in high technology manufacturing and software and consulting on SEC matters. JOHN F. GLADE, 55, was appointed a Director of the Company in May 1996 and has served as Secretary of the Company since January 1987 and Vice President, Engineering and Manufacturing since May 1988. Mr. Glade joined the Company as Director of Engineering in September 1978, served as Vice President, Engineering from February 1979 until June 1985 and served as Vice President, Advanced Products Development from June 1985 until May 1988. He also served as Secretary of the Company from February 1983 to August 1985 and a Director of the Company from 1979 through 1994. DENNIS E. MICHAEL, 40, was named Vice President of Marketing of the Company in May 1996 and previously held the position of Director of Marketing of the Company. He served in various marketing management capacities at the Company between 1983 and 1990 and with AST from 1990 to 1995. RANDALL S. PARKS, 37, has served as Vice President of Services of the Company since 1995. Prior to his position as Vice President of Services, Mr. Parks served as Director of Service Operations, Eastern Regional Manager and Branch Field Engineering Manager of the Company. His previous experience was as field service engineer with several companies, including Uni Dynamics, Mettler Instruments and Consultant Field Engineering. 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 range of high and low sales prices for the Company's common stock (ALMI) for the fiscal quarters indicated, as quoted on the NASDAQ National Market:
HIGH LOW ---- --- FISCAL YEAR ENDED FEBRUARY 22, 1998 First Quarter $ 2 7/8 $ 1 1/4 Second Quarter 2 1/32 1 1/8 Third Quarter 1 15/16 1 1/8 Fourth Quarter 1 27/32 1 FISCAL YEAR ENDED FEBRUARY 23, 1997 First Quarter $5 25/32 $ 1/2 Second Quarter 4 3/4 1/4 Third Quarter 2 5/8 1 15/32 Fourth Quarter 2 15/32 1 3/16
On May 14, 1998, the high was $3 5/16 and the low was $3 and the approximate number of record holders of the Company's common stock was 534. The Company has not paid dividends on its common stock, and it anticipates that for the foreseeable future it will not pay dividends. Should the Company desire to pay dividends, any such dividends would be subject to the prior written consent of the Company's lender and to any preferential rights to receive dividend payments contained in any securities subsequently issued by the Company. 14 15 ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED FEBRUARY 22, FEBRUARY 23, FEBRUARY 25, FEBRUARY 26, FEBRUARY 27, 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Service revenues $ 13,223 $ 14,627 $ 18,070 $ 19,706 $ 18,413 Product sales 6,104 8,885 14,693 19,079 20,916 ------------ ------------ ------------ ------------ ------------ Net sales 19,327 23,512 32,763 38,785 39,329 Cost of sales 13,966 15,498 22,967 27,385 23,876 ------------ ------------ ------------ ------------ ------------ Gross margin 5,361 8,014 9,796 11,400 15,453 Income (loss) before taxes (3,318)(1) (2,742)(1) (3,555)(2) (6,247)(3) 223 Net income (loss) (3,297)(1) (2,770)(1) (3,575)(2) (6,247)(3) 336 Net income (loss) per share (4) $ (0.30) $ (0.28) $ (0.54) $ (0.95) $ 0.08 Number of shares used in the computation of per share amounts (4) 10,863,876 9,727,432 6,564,882 6,580,470 4,025,090 ============ ============ ============ ============ ============ BALANCE SHEET DATA: Current assets $ 9,754 $ 12,378 $ 7,199 $ 10,914 $ 15,252 Current liabilities 5,421 3,648 6,377 7,726 6,936 ------------ ------------ ------------ ------------ ------------ Working capital 4,333 8,730 822 3,188 8,316 Inventories 580 305 943 1,948 2,593 Total assets 15,788 17,195 13,061 17,902 23,100 Long-term obligations 60 34 201 140 154 Shareholders' equity $ 10,307 $ 13,513 $ 6,483 $ 10,036 $ 16,010
(1) Includes $2,281,000 in fiscal 1998 and $1,162,000 in fiscal 1997 of expenses attributable to the marketing and launching of the AlphaCONNECT software products. (2) Includes charges of $1,995,000 for the write-off of intangible assets primarily associated with the Company's AlphaHealthCare subsidiary and PANDA division. (3) Includes charges of $972,000 for the sale of Alpha Microsystems Belgium, S.A., $783,000 for the write-down of customer lists, $649,000 for the software associated with the Company's hardware business, $507,000 associated with the write-down of slow moving service spares, $279,000 severance, $694,000 in slow moving inventory associated with the Company's hardware business, and $304,000 in anticipation of the sale of the imaging and VSO product lines. (4) Per share amounts reflect the adoption of SFAS 128 and represents diluted per share amounts. See Note 1 of Notes to Consolidated Financial Statements. 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION SUMMARY The following table sets forth operational data as a percentage of net sales for the periods indicated:
RELATIONSHIP TO NET SALES ------------------------- FISCAL YEAR ENDED ----------------- FEB. 22, FEB. 23, FEB. 25, 1998 1997 1996 ------- ------- ------- Net sales: Service 68.4% 62.2% 55.2% Product 31.6 37.8 44.8 ------- ------- ------- Total net sales 100.0 100.0 100.0 Cost of sales 72.3 65.9 70.1 ------- ------- ------- Gross margin 27.7 34.1 29.9 Selling, general and administrative expense 38.9 41.2 36.2 Engineering, research and development expense 7.3 6.4 6.4 Interest (income) expense, net (1.6) (1.0) (0.2) Other (income) expense, net 0.3 (0.8) (1.6) ------- ------- ------- Loss before taxes (17.2) (11.7) (10.9) Net loss (17.1)% (11.8)% (10.9)%
GENERAL During fiscal 1998, the Company continued to develop and customize applications of its core AlphaCONNECT technology. The Company's net loss for the year was $3,297,000. Included in the 1998 results are costs of approximately $2,281,000 of expenses related to the marketing and launching of AlphaCONNECT applications. Also, during the last quarter of fiscal 1998, the Company began to implement an IT services business strategy, investing an estimated $2.6 million in the acquisition of the telephony service division of Applied Cellular Technologies Corporation, of which, $1.1 million has been paid from the Company's cash reserves through February 22, 1998. All amounts paid, and any future payments, are contingent on future annualized revenues, and to date the Company has not realized the anticipated contribution to the results of operations projected at the time of the acquisition. Subsequent to fiscal 1998, the Company acquired a complementary IT services business, M & J, for approximately $950,000. The purchase price, which is contingent on future annualized revenues, is to be paid over 18 months, with 50% of the purchase price paid on the closing date of the acquisition. The Company operates on a 52/53-week fiscal year ending on the last Sunday in the month of February. Fiscal years 1998, 1997 and 1996 ended on February 22, 1998, February 23, 1997, and February 25, 1996, respectively. The discussion herein is qualified by reference to the Introductory Note set forth in the beginning of this Annual Report on Form 10-K. FISCAL 1998 COMPARED TO FISCAL 1997 The Company had a net loss of $3,297,000, or $0.30 per share, in fiscal year 1998, compared to a net loss of $2,770,000, or $0.28 per share, during fiscal year 1997. This loss reflects $2,281,000 of expenses relating to the marketing and launching of the AlphaCONNECT product line, and a reduction in both product and IT services revenues, primarily due to the divestiture of the Company's UK and domestic subsidiaries. 16 17 Net sales in fiscal 1998 decreased $4,185,000, or 17.8%, to $19,327,000, compared to $23,512,000 for fiscal 1997. This decrease includes $4,838,000 relating to product lines and subsidiaries sold during 1997. Total IT services revenue declined $1,404,000, or 9.6%, to $13,223,000 for fiscal 1998 from $14,627,000 for the prior year. Approximately $1,898,000 of this decline was due to the sale of both the Company's UK and domestic AlphaHealthCare subsidiaries. On December 31, 1997, the Company completed the acquisition of the service business of ATI Communications ("ATI"), which expanded the Company's capabilities into computer telephony services and provided revenues of $404,000 during the last quarter of fiscal 1998. Subsequent to year-end, the Company acquired M & J and continues to actively evaluate additional acquisitions within the IT services industry. The Company has built a base of IT support services, including field maintenance and networking, and intends to invest additional resources in this area. In addition, the Company is also expanding its domestic IT services sales and marketing efforts to capitalize on its current customer base and further increase revenues from the open systems generation market. Total product revenue declined $2,781,000, or 31.3%, to $6,104,000 in fiscal 1998 from approximately $8,885,000 for fiscal year 1997. The decline in product revenues includes $1,545,000, or 55.6%, attributable to the absence of the UK subsidiary that was sold in August 1996. An additional $1,375,000 of decline was due primarily to the sale of the Company's domestic vertical software product lines. Total gross margin for the Company for fiscal 1998 decreased to 27.7%, compared to 34.1% during fiscal 1997, with declines for both product and IT services lines of business. IT services business gross margin in fiscal 1998 declined to 25.2% from 30.3% during fiscal 1997. The decline in IT services gross margin was primarily due to the sale of the Company's UK subsidiary that generated higher IT services margins than the domestic IT services organization. Additionally, the third-party service contracts contributed lower margins than the traditional Alpha Micro Operating System ("AMOS") based IT service contracts. While the IT services organization is focusing on (i) obtaining new contracts for its networking support and consulting services, (ii) supporting vertical markets with IT services, and (iii) increasing third-party services in order to improve revenues, the revenue from these new areas of focus generally produce lower margins than the Company's traditional IT services business. Product gross margin for fiscal 1998 decreased to 33.1%, compared to 40.3% in the prior year. The decrease in product gross margin was primarily due to a relatively lower proportion of higher-margin AMOS products sold both in the domestic and European markets, combined with higher inventory and warranty reserves in fiscal year 1998. Selling, general and administrative expenses decreased $2,112,000 to $7,518,000 in fiscal 1998 from $9,665,000 in the prior year. The sale of the UK and AlphaHealthCare subsidiaries and the remaining vertical software products resulted in a decrease in selling, general and administrative expenses of approximately $2,157,000. This reduction was partially offset by increases in the Company's investment in resources for the internet and intranet markets plus a significant increase in the IT services sales force. Research and development expenses (which include engineering support and IT services) were $1,411,000 in fiscal 1998 compared to $1,500,000 in fiscal 1997. This decrease includes $317,000 relating to the vertical software product lines sold in fiscal year 1997. Additionally, in fiscal 1998 approximately $407,000 of new software development expenses have been capitalized, as compared to $971,000 in the prior fiscal year. 17 18 FISCAL 1997 COMPARED TO FISCAL 1996 Net sales in fiscal 1997 decreased $9,251,000, or 28.2%, to $23,512,000, compared to $32,763,000 for fiscal 1996. This decrease includes $7,218,000, approximately 78.0%, relating to product lines and subsidiaries sold during 1997. Total IT services revenue for fiscal 1997 declined $3,443,000, or 19.1%, to $14,627,000 from $18,070,000 for the prior year. Approximately 63.1% of this decline was due to the European market (including $1,863,000 attributable to the absence of the Company's UK subsidiary). The remaining decline was due primarily to a decrease in the Company's traditional AMOS-based IT service contracts, and a decrease in support revenues from the Company's AlphaHealthCare subsidiary. The Company has expanded its base of support IT services, including field maintenance and networking, and intends to invest additional resources in this area. In addition, the Company is expanding its domestic IT service sales and marketing efforts to capitalize on its current base and further expand revenues from the open systems generation market. Total product revenue declined $5,808,000, or 39.5%, to $8,885,000 in fiscal 1997 from approximately $14,693,000 for fiscal 1996. Approximately 57.9% of the decline in product revenues was attributable to the European market (including $2,682,000 attributable to the absence of the UK subsidiary sold on August 19, 1996). The remaining decline was due to a decrease in the Company's domestic traditional product revenues and the product revenues from its AlphaHealthCare subsidiary. Total gross margin for the Company for fiscal 1997 increased to 34.1%, compared to 29.9% during the prior year, due to an increase in product gross margin offset by declines in the IT services gross margin. The IT services business gross margin declined to 30.3% during fiscal 1997 from 32.0% during 1996. The decline in gross margin was primarily due to the sale of the Company's UK subsidiary that generated higher IT service margins than the domestic IT service organization. Additionally, the AlphaHealthCare subsidiary that was sold in January 1997 and the third-party service contracts contributed lower margins than the traditional AMOS-based IT service contracts. To improve revenues, the IT services organization is focusing on obtaining new contracts for its networking support services, supporting vertical markets with IT services, and increasing third-party services. Revenue from these new areas of focus generally produce lower margins than the Company's traditional IT service business. The Company continues to evaluate potential IT service business acquisitions which meet its financial and market criteria. Product gross margin for fiscal 1997 increased to 40.3%, compared to 27.3% for 1996. The increase in product gross margin was primarily due to a relatively greater proportion of higher-margin AMOS products sold both in the domestic and European markets. Fiscal 1996 also included write-offs of $1,389,000 in capitalized software associated with the PANDA and Alpha2000 product lines. In addition, the sublease of a portion of the corporate headquarters facility, a reduction in the headcount in the manufacturing area, and a continued effort to control costs, also contributed to the improvement in product gross margin. Selling, general and administrative expenses decreased $2,190,000 to $9,665,000 in fiscal 1997 from $11,855,000 in 1996. The absence of the UK subsidiary during the last seven months of fiscal 1997 resulted in a decrease in selling, general and administrative expenses of approximately $1,997,000. Additionally, a reduction in headcount and a more vigilant approach to expense control in areas relating to the traditional business resulted in the balance of the reduction. This reduction was partially offset by a significant increase in the IT service sales force. Research and development expenses (which include engineering support and services) were $593,000 lower in fiscal 1997 than in fiscal 1996. Additionally, approximately $971,000 of new software development expenses have been capitalized in the current fiscal year, as compared to $976,000 in the prior fiscal year. Research and development expenses as a percentage of product sales increased to 16.9% in fiscal 1997 from 14.2% during fiscal 1996. 18 19 YEAR 2000 UNCERTAINTIES Many computer systems were not designed to handle any dates beyond the Year 1999, and therefore computer hardware and software will need to be modified prior to the Year 2000 in order to remain functional. Many enterprises will be devoting a substantial portion of their information systems spending to resolving this upcoming Year 2000 problem. The Year 2000 issue could lower demand for the Company's hardware products while increasing the Company's costs. These combining factors could have a material adverse impact on the Company's financial results. The Company believes the majority of its products are currently Year 2000 compliant, and future costs to make the Company's products Year 2000 compliant are not anticipated to be material. There can be no assurance that systems operated by third parties that interface with or contain the Company's products will timely achieve Year 2000 compliance. Any failure of these third parties' systems to timely achieve Year 2000 compliance could have a material adverse effect on the Company's business, financial condition and result of operations. The Company believes that its internal systems are Year 2000 compliant or will be upgraded or replaced in connection with previously planned changes to information systems prior to the need to comply with Year 2000 requirements. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1998, the Company's working capital decreased $4,397,000 to $4,333,000 from $8,730,000 at February 23, 1997. Net cash and short-term investments in U.S. treasury bills decreased during this period by $3,577,000 to $5,003,000. Net cash used in operating activities during fiscal 1998 was $1,637,000, compared to $1,882,000 during fiscal 1997. The Company also invested approximately $1,200,000 of its cash in IT service business acquisitions and approximately $1,800,000 in equipment and software primarily related to its new integrated information system. These capital investments, and the related increase in accounts receivable from acquired operations of approximately $1,000,000, were offset by $1,000,000 utilized under the Company's line of credit with its bank. Pursuant to the terms of the line of credit, the Company can borrow up to a maximum limit of $2,000,000. Borrowings under the line of credit bear interest at prime plus two and one-half percent (10.5% at February 22, 1998). The line of credit is secured by substantially all of the Company's assets. Subsequent to fiscal year end, the Company was in default with certain financial covenants. However, the Company has received a commitment from another lending institution for a $3,000,000 line of credit, subject to certain financial covenants and borrowing base requirements. The Company believes that its current cash position, augmented by operating activities, will provide it with sufficient resources to finance its working capital requirements through fiscal year 1999. The Company is also aggressively pursuing additional financing from various sources to support its acquisition strategy, although there can be no assurances that such financing will be available on acceptable terms. The Company's future capital requirements depend on a variety of factors, including, but not limited to, the rate of decline in the traditional business; the success, timing, and amount of investment required to penetrate the internet/intranet markets; IT services revenue growth or decline; and potential acquisitions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Supplementary Data of the Company are listed and included under Item 14 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 19 20 PART III The information required to be set forth herein, Item 10, "Directors and Executive Officers of the Registrant," Item 11, "Executive Compensation," Item 12, "Security Ownership of Certain Beneficial Owners and Management," and Item 13, "Certain Relationships and Related Transactions," except for a list of Executive Officers which is set forth in Part I of this report, is included in the Company's definitive Proxy Statement pursuant to Regulation 14A, which is incorporated herein by reference, filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended February 22, 1998. 20 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following financial statements are referenced in Part II Item 8 and submitted herewith:
PAGE NUMBER ----------- Report of Independent Auditors 29 Consolidated Balance Sheets at February 22, 1998 30 and February 23, 1997 Consolidated Statements of Operations for the years 31 ended February 22, 1998, February 23, 1997 and February 25, 1996 Consolidated Statements of 32 Shareholders' Equity for the years ended February 22, 1998, February 23, 1997 and February 25, 1996 Consolidated Statements of Cash Flows 33 for the years ended February 22, 1998, February 23, 1997 and February 25, 1996 Notes to Consolidated Financial Statements 34
(2) The following financial statement schedule for the fiscal years 1996, 1997, and 1998 is submitted herewith: Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is presented in the financial statements or notes thereto. (3) The list of exhibits contained in the Index to Exhibits is submitted herewith. (b) No reports on Form 8-K were filed during the fourth quarter of fiscal 1998. (c) 1. The Index of Exhibits is as follows: 2. Exhibits: 2.1 Agreement of Purchase and Sale by and between Registrant and Alpha Computer Services, Inc., dated February 24, 1994 (incorporated herein by reference to Exhibit 2.9 to the Quarterly Report on Form 10-Q for the quarter ended May 29, 1994) 21 22 2.2 Agreement to transfer shares by and between Registrant and Alpha Microsystems Great Britain, Mr. Patrick Bolle, and Alpha Microsystems Belgium dated February 28, 1995 (incorporated herein by reference to Exhibit 2.10 to the Annual Report on Form 10-K of Registrant for the Year Ended February 26, 1995 (the "1995 10-K") 2.3 Agreement of Purchase and Sale by and between Registrant and Sanderson Electronics PLC, dated August 10, 1996 (incorporated herein by reference to Exhibit 2 to the Form 8-K filed August 23, 1996) 2.4 Agreement of Purchase and Sale by and between Registrant and Pacific Triangle Software, Inc., dated January 13, 1997 (incorporated herein by reference to Exhibit 2.1 to the Form 8-K filed February 18, 1997) 2.5 Agreement of Purchase and Sale between AlphaHealthCare, Inc. and GLR Systems, Inc., dated January 27, 1997 (incorporated herein by reference to Exhibit 2.2 to the Form 8-K filed February 18, 1997) 2.6 Agreement of Purchase and Sale by and between the Registrant and Applied Cellular Technology, Inc. dated December 23, 1997 (incorporated herein by reference to Exhibit 2.6 to the Quarterly Report on Form 10-Q for the quarter ended November 23, 1997) 2.7 Agreement of Purchase and Sale by and between the Registrant and M & J Technologies, Inc. dated February 19, 1998 2.8 Modification to Contract for Purchase and Sale of M & J Technologies, Inc. Hardware Service Business Assets to Registrant dated February 19, 1998 3.1 Articles of Incorporation of Registrant dated as of March 16, 1977 (incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form-S-1 (Registration No. 2-72222) of Registrant) 3.2 Certificate of Amendment of Articles of Incorporation of Registrant dated as of September 29, 1988 (incorporated herein by reference to Exhibit 3.2 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1997) 3.3 Certificate of Amendment of the Articles of Incorporation of Registrant dated June 25, 1992 (incorporated herein by reference to Exhibit 10.71 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended May 31, 1992) 3.4 Restated Bylaws of Registrant (incorporated herein by reference to Exhibit 3.1 to the Form S-8 filed January 31, 1997) 3.5 Registration Rights Agreement by and between Registrant and Silicon Valley Bank dated July 10, 1995 (incorporated herein by reference to Exhibit 10.141 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended May 28, 1995) 4.2 Anti-dilution Agreement by and between Registrant and Silicon Valley Bank dated July 10, 1995 (incorporated herein by reference to Exhibit 10.142 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended May 28, 1995) 22 23 4.3 Warrant to Purchase Stock issued to Silicon Valley Bank on November 22, 1996(incorporated herein by reference to Exhibit 10.74 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 24,1996) 4.4 Registration Rights Agreement by and between Registrant and Silicon Valley Bank dated November 22, 1996 (incorporated herein by reference to Exhibit 10.75 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 24,1996) 4.5 Antidilution Agreement by and between Registrant and Silicon Valley Bank dated November 22, 1996 (incorporated herein by reference to Exhibit 10.76 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 24,1996) 4.6 Warrant to Purchase Common Stock issued to Dominick & Dominick dated October 15, 1996 (incorporated herein by reference to Exhibit 4.6 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1997) *10.2 Form of Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 to Amendment No. 1 of the Form S-2 Registration Statement filed with the Securities and Exchange Commission on September 30, 1993) *10.3 Form of Amended and Restated Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.51 to the Amendment No. 2 of the Form S-2 Registration Statement filed with the Securities Exchange Commission on October 15, 1993) *10.5 Stock Incentive Award Plan of Registrant (incorporated herein by reference to Exhibit 10.21 to the Annual Report on Form 10-K of Registrant for the Year Ended February 26, 1984) *10.6 Non-Qualified Stock Option Plan of Registrant (incorporated herein by reference to Exhibit 10.22 to the Annual Report on Form 10-K of Registrant for the Year Ended February 26, 1984) *10.8 Form of Non-Qualified Stock Option Agreement for use in connection with Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 4.8 to the Post-Effective Amendment No. 1 to the Registration Statement on Form 8 of the Registrant (Registration Statement No. 29252) filed on August 23, 1984) *10.9 Form of Stock Incentive Award and Escrow Agreement for use in connection with the Stock Incentive Award Plan (incorporated herein by reference to Exhibit 4.9 to the Post-Effective Amendment No. 1 to the Registration Statement on Form 8 of the Registrant (Registration Statement No. 2-9252) filed on August 23, 1984) *10.10 Revised Form of Non-Qualified Stock Option Agreement for use in connection with Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10.30 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1986) *10.11 Form of Contingent Non-Qualified Stock Option Agreement for use in connection with Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10.31 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1986) 23 24 *10.12 Alpha Microsystems Profit Sharing Trust Agreement between Alpha Microsystems and Bank of America NT & S.A. as Trustee dated May 24, 1985 (incorporated herein by reference to Exhibit 10.32 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1986) *10.13 Alpha Microsystems Profit Sharing Plan (as amended and restated) dated May 15, 1986 (incorporated herein by reference to Exhibit 10.33 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1986) *10.14 Acceptance of Trust by Trustee dated September 30, 1986 pursuant to Registrant's Profit Sharing Plan (incorporated herein by reference to Exhibit 10.29 to the Annual Report on Form 10-K of Registrant for the Year Ended February 22, 1987) *10.15 First Amendment dated March 1, 1987 to the Registrant's Profit Sharing Plan (incorporated herein by reference to Exhibit 10.30 to the Annual Report on Form 10-K of Registrant for the Year Ended February 22, 1987) *10.16 Revised Form of Non-Qualified Stock Option Agreement for use in connection with Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10.31 to the Annual Report on Form 10-K of Registrant for the Year Ended February 22, 1987) *10.17 Indemnification Agreement dated October 23, 1987 by and between Alpha Microsystems and John F. Glade (incorporated herein by reference to Exhibit 10.34 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 22, 1987) *10.18 Indemnification Agreement dated October 23, 1987 by and between Alpha Microsystems and Rockell N. Hankin (incorporated herein by reference to Exhibit 10.36 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 22, 1987) *10.20 Second Amendment to Alpha Microsystems Profit Sharing Plan dated January 22, 1988 (incorporated herein by reference to Exhibit 10.31 to the Annual Report on Form 10-K of Registrant for the Year Ended February 28, 1988) *10.21 Alpha Microsystems Profit Sharing Plan Amendments Under IRS Notice 88-131 dated May 24, 1989 (incorporated herein by reference to Exhibit 10.38 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended May 28, 1989) *10.22 Alpha Microsystems Profit Sharing Plan Amendment dated December 15, 1989 (incorporated herein by reference to Exhibit 10.45 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 26, 1989) *10.23 Employment Agreement by and between the Registrant and Douglas J. Tullio dated January 8, 1990 (incorporated herein by reference to Exhibit 10.49 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 26, 1989) *10.24 Indemnification Agreement by and between the Registrant and Douglas J. Tullio dated January 8, 1990 (incorporated herein by reference to Exhibit 10.50 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 26, 1989) 24 25 *10.26 Addendum to Employment Agreement by and between the Registrant and Douglas J. Tullio dated May 21, 1990 (incorporated herein by reference to Exhibit 10.54 to the Annual Report on Form 10-K of Registrant for the Year Ended February 25, 1990) *10.27 Revised Form of Non-Qualified Stock Option Agreement for use in connection with Registrant's Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10.59 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended August 26, 1990) *10.28 Indemnification Agreement by and between Registrant and Clarke E. Reynolds dated June 16, 1989 (incorporated herein by reference to Exhibit 10.67 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1992) *10.29 Consulting Agreement by and between the Registrant and Clarke E. Reynolds dated June 1, 1993 (incorporated herein by reference to Exhibit 10.87 to Amendment No. 1 to Form S-2) *10.30 Alpha Microsystems 1993 Employee Stock Option Plan (incorporated herein by reference to Exhibit 10.109 to the Quarterly Report on Form 10-Q for the Quarter Ended May 29, 1994) 10.31 Alpha Microsystems 1993 Directors' Stock Option Plan (incorporated herein by reference to Exhibit 10.110 to the Quarterly Report on Form 10-Q for the Quarter Ended May 29, 1994) 10.32 Industrial Lease between Fairview Investors Ltd. and Registrant dated October 28, 1994 (incorporated herein by reference to Exhibit 10.113 to the Quarterly Report on Form 10-Q for the Quarter Ended November 27, 1994) *10.33 First Amended and Restated Non-Qualified Stock Option Plan of Registrant dated August 18, 1989 (incorporated herein by reference to Exhibit 19.14 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended August 27, 1989) *10.34 First Amendment to Stock Incentive Award Plan of Registrant dated August 15, 1990 (incorporated herein by reference to Exhibit 19.16 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended August 26, 1990) *10.35 First Amendment to Employment Agreement by and between Registrant and John F. Glade dated May 3, 1991 (incorporated herein by reference to Exhibit 19.8 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1992) *10.36 First Amendment to Employment Agreement by and between Registrant and Douglas J. Tullio dated May 3, 1991 (incorporated herein by reference to Exhibit 19.10 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1992) *10.37 Second Amendment and Restatement to the Non-Qualified Stock Option Plan of Alpha Microsystems dated June 24, 1992 (incorporated herein by reference to Exhibit 10.70 to the Quarterly Report on Form 10-Q for the Quarter Ended May 31, 1992) 25 26 *10.38 Second Amendment and Restatement of the Alpha Microsystems Profit Sharing Plan dated July 1, 1992 (incorporated herein by reference to Exhibit 10.72 to the Quarterly Report on Form 10-Q for the Quarter Ended May 31, 1992) 10.39 Memorandum to Lease by and between Registrant and Fairview Investors, Ltd. dated January 24, 1995 (incorporated herein by reference to Exhibit 10.136 to the Annual Report on Form 10-K of Registrant for the Year Ended February 26, 1995) 10.40 Letter to Michael J. Lowell from Silicon Valley Bank dated May 3, 1995 re: new credit line (incorporated herein by reference to Exhibit 10.138 to the Annual Report on Form 10-K of Registrant for the Year Ended February 26, 1995) 10.41 Loan and Security Agreement by and between Registrant and Silicon Valley Bank dated July 10, 1995 (incorporated herein by reference to Exhibit 10.139 to the Quarterly Report on Form 10-Q for the Quarter Ended May 28, 1995) 10.42 Collateral Assignment, Patent Mortgage and Security Agreement by and between Registrant and Silicon Valley Bank dated July 10, 1995 (incorporated herein by reference to Exhibit 10.143 to the Quarterly Report on Form 10-Q for the Quarter Ended May 28, 1995) 10.43 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated November 30, 1995 (incorporated herein by reference to Exhibit 10.150 to the Quarterly Report on Form 10-Q for the Quarter Ended November 26, 1995) 10.44 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated February 7, 1996 (incorporated herein by reference to Exhibit 10.70 to the Annual Report on Form 10-K of Registrant for the Year Ended February 25, 1996) 10.45 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated March 7, 1996 (incorporated herein by reference to Exhibit 10.71 to the Annual Report on Form 10-K of Registrant for the Year Ended February 25, 1996) 10.46 Engagement Letter between Registrant and Sutro & Co., Inc. dated May 2, 1996 (incorporated herein by reference to Exhibit 10.72 to the Annual Report on Form 10-K of Registrant for the Year Ended February 25, 1996) 10.47 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated October 11, 1996 (incorporated herein by reference to Exhibit 10.73 to the Quarterly Report on Form 10-Q for the Quarter Ended November 24, 1996) 10.48 First Amendment to Alpha Microsystems 1993 Employee Stock Option Plan (incorporated herein by reference to Exhibit 4.6 to the Form S-8 filed January 31, 1997) 10.49 Second Amendment to Alpha Microsystems 1993 Employee Stock Option Plan (incorporated herein by reference to Exhibit 4.7 to the Form S-8 filed January 31, 1997) 26 27 10.50 Alpha Microsystems 1996 Nonemployee Director Stock Compensation Plan (incorporated herein by reference to Exhibit 4.8 to the Form S-8 filed January 31, 1997) 10.51 First Amendment to Alpha Microsystems 1996 Nonemployee Director Compensation Plan (incorporated herein by reference to Exhibit 4.9 to the Form S-8 filed January 31, 1997) 10.52 Alpha Microsystems Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4.10 to the Form S-8 filed January 31, 1997) 10.53 Letter Agreement between Registrant and Dominick & Dominick, Inc. dated October 15, 1996 (incorporated herein by reference to Exhibit 10.53 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) 10.54 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated March 3, 1997 (incorporated herein by reference to Exhibit 10.54 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.55 Indemnification Agreement by and between Registrant and James A. Sorensen dated January 16, 1997 (incorporated herein by reference to Exhibit 10.55 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.56 Indemnification Agreement by and between Registrant and Jeffrey A. Martin dated January 10, 1997 (incorporated herein by reference to Exhibit 10.56 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.57 Indemnification Agreement by and between Registrant and Dennis E. Michael dated January 17, 1997 (incorporated herein by reference to Exhibit 10.57 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.58 Indemnification Agreement by and between Registrant and Randall S. Parks dated January 17, 1997 (incorporated herein by reference to Exhibit 10.58 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.59 Indemnification Agreement by and between Registrant and Margaret Denson dated January 17, 1997 (incorporated herein by reference to Exhibit 10.59 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.60 Employment Agreement by and between Registrant and James A. Sorensen dated November 7, 1996 (incorporated herein by reference to Exhibit 10.77 to the Quarterly Report on Form 10-Q for the Quarter ended November 24, 1996) 10.61 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated October 11, 1997 (incorporated herein by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the Quarter ended November 23, 1997) 27 28 *10.62 Employment Letter by and between Registrant and Jeffrey J. Dunnigan dated November 15, 1997 (incorporated herein by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter Ended November 23, 1997) *10.63 Indemnification Agreement by and between Registrant and Jeffrey J. Dunnigan dated December 1, 1997 21 Subsidiaries 23 Consent of Independent Auditors 24 Power of Attorney (included on signature pages of this Annual Report) 27 Financial Data Schedule (* Denotes Management Contract or Compensation Plan) 28 29 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Alpha Microsystems We have audited the accompanying consolidated balance sheets of Alpha Microsystems as of February 22, 1998, and February 23, 1997, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended February 22, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alpha Microsystems at February 22, 1998, and February 23, 1997, and the results of its operations and its cash flows for each of the three years in the period ended February 22, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Orange County, California April 15, 1998, except for Note 6 as to which the date is April 23, 1998 29 30 ALPHA MICROSYSTEMS CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
FEBRUARY 22, FEBRUARY 23, 1998 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 5,003 $ 1,768 Short-term investments in U.S. treasury bills -- 6,812 Accounts receivable, net of allowance for doubtful accounts of $294 and $139 in 1998 and 1997, respectively 3,781 3,028 Inventories 580 305 Notes receivable 161 232 Prepaid expenses and other current assets 229 233 -------- -------- Total current assets 9,754 12,378 Property and equipment, net 3,186 2,932 IT Service contracts, net 1,192 364 Software costs, net 1,067 815 Notes receivable 417 598 Other assets, net 172 108 -------- -------- $ 15,788 $ 17,195 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank borrowings $ 1,000 $ -- Accounts payable 1,699 1,201 Deferred revenue 1,888 1,686 Accrued compensation 386 345 Other accrued liabilities 356 381 Current portion of long-term debt 92 35 -------- -------- Total current liabilities 5,421 3,648 Long-term debt 60 34 Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 5,000,000 shares authorized; none issued -- -- Common stock, no par value; 20,000,000 shares authorized; 10,914,112 and 10,821,897 shares issued and outstanding at February 22, 1998 and February 23, 1997, respectively 31,011 30,919 Accumulated deficit (20,761) (17,464) Unamortized restricted stock plan expense -- (13) Foreign currency translation adjustment 57 71 -------- -------- Total shareholders' equity 10,307 13,513 -------- -------- $ 15,788 $ 17,195 ======== ========
See accompanying notes. 30 31 ALPHA MICROSYSTEMS CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data)
YEAR ENDED ---------- FEBRUARY 22, FEBRUARY 23, FEBRUARY 25, 1998 1997 1996 ------------ ------------ ------------ Net sales: IT Services $ 13,223 $ 14,627 $ 18,070 Product 6,104 8,885 14,693 ------------ ------------ ------------ Total net sales 19,327 23,512 32,763 ------------ ------------ ------------ Cost of sales: IT Services 9,887 10,193 12,282 Product 4,079 5,305 10,685 ------------ ------------ ------------ Total cost of sales 13,966 15,498 22,967 ------------ ------------ ------------ Gross margin 5,361 8,014 9,796 Operating expenses: Selling, general and administrative 7,518 9,665 11,855 Engineering, research and development 1,411 1,500 2,093 ------------ ------------ ------------ Total operating expenses 8,929 11,165 13,948 ------------ ------------ ------------ Loss from operations (3,568) (3,151) (4,152) Other (income) expense: Interest income (310) (266) (93) Interest expense 7 31 38 Other (income) expense, net 63 (216) (466) Foreign exchange (gain) loss (10) 42 (76) ------------ ------------ ------------ Total other income (250) (409) (597) ------------ ------------ ------------ Loss before taxes (3,318) (2,742) (3,555) Income tax expense (benefit) (21) 28 20 ------------ ------------ ------------ Net loss $ (3,297) $ (2,770) $ (3,575) ------------ ------------ ------------ Basic and diluted net loss per share $ (0.30) $ (0.28) $ (0.54) ============ ============ ============ Number of shares used in the Computation of basic and diluted per share amounts 10,863,876 9,727,432 6,564,882 ============ ============ ============
See accompanying notes. 31 32 ALPHA MICROSYSTEMS CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THREE YEARS ENDED FEBRUARY 22, 1998 (In thousands, except share and per share data)
Unamortized Foreign Common Stock Restricted Currency ------------------------ Accumulated Stock Plan Translation Shares Amount Deficit Expenses Adjustment Total ---------- ---------- ---------- ---------- ---------- ---------- Balance at February 26, 1995 6,572,953 $ 21,224 $ (11,119) $ (19) $ (50) $ 10,036 Net loss -- -- (3,575) -- -- (3,575) Foreign currency translation -- -- -- -- 3 3 Restricted stock awards 22,500 18 -- (18) -- -- Amortization -- -- -- 19 -- 19 ---------- ---------- ---------- ---------- ---------- ---------- Balance at February 25, 1996 6,595,453 $ 21,242 $ (14,694) $ (18) $ (47) $ 6,483 Net loss -- -- (2,770) -- -- (2,770) Foreign currency translation -- -- -- -- 118 118 Issuance of stock and redeemable warrants 4,103,719 9,486 -- -- -- 9,486 Exercise of stock options ($1.00 to $2.00 per share) 62,770 101 -- -- -- 101 Non-employee Directors Comp Plan 59,955 90 -- -- -- 90 Amortization -- -- -- 5 -- 5 ---------- ---------- ---------- ---------- ---------- ---------- Balance at February 23, 1997 10,821,897 $ 30,919 $ (17,464) $ (13) $ 71 $ 13,513 Net loss -- -- (3,297) -- -- (3,297) Foreign currency translation -- -- -- -- (14) (14) Issuance of stock 12,171 20 -- -- -- 20 Costs for redeemable warrants -- (21) -- -- -- (21) Exercise of stock options ($0.9375 per share) 40,000 37 -- -- -- 37 Non-employee Directors Comp Plan 40,044 56 -- -- -- 56 Amortization -- -- -- 13 -- 13 ---------- ---------- ---------- ---------- ---------- ---------- Balance at February 22, 1998 10,914,112 $ 31,011 $ (20,761) $ -- $ 57 $ 10,307 ========== ========== ========== ========== ========== ==========
See accompanying notes. 32 33 ALPHA MICROSYSTEMS CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED ---------------------------------------------- FEBRUARY 22, FEBRUARY 23, FEBRUARY 25, 1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net loss $ (3,297) $ (2,770) $ (3,575) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 1,702 2,067 2,325 Provision for losses on accounts receivable 194 64 (21) Provision for slow-moving inventory 132 (59) 196 Intangible asset write-down -- -- 1,995 Gain on sale of fixed assets -- -- (282) Other changes in operating assets and liabilities: Accounts receivable (987) 28 (376) Inventories (206) (71) 811 Notes receivable 174 (671) -- Prepaid expenses and current assets (2) (65) 412 Accounts payable and accrued liabilities 487 112 (1,615) Deferred revenue 146 (383) (133) Other, net 20 (134) (30) -------- -------- -------- Net cash used in operating activities (1,637) (1,882) (293) -------- -------- -------- Cash flows from investing activities: Purchase of short-term investments (7,405) (19,697) -- Proceeds from sale of short-term investments 14,216 12,885 -- Acquisition of IT service assets (1,183) -- (94) Purchases of equipment (1,346) (427) (1,730) Capitalization of software costs (456) (971) (976) Purchase of intangible assets (30) -- -- Proceeds from sale of stock investments -- 2,088 -- Proceeds from sale of product lines 44 250 -- Proceeds from sale of fixed assets -- 11 440 Acquisition of business -- -- (149) -------- -------- -------- Net cash provided by (used in) investing activities 3,840 (5,861) (2,509) -------- -------- -------- Cash flows from financing activities: Line of credit, net 1,000 (500) 500 Issuance of common stock 92 9,677 -- Principal repayments on debt (53) (167) (463) -------- -------- -------- Net cash provided by financing activities 1,039 9,010 37 -------- -------- -------- Effect of exchange rate changes on cash (7) (4) (19) -------- -------- -------- Increase (decrease) in cash and cash equivalents 3,235 1,263 (2,784) Cash and cash equivalents at beginning of period 1,768 505 3,289 -------- -------- -------- Cash and cash equivalents at end of period $ 5,003 $ 1,768 $ 505 ======== ======== ======== Supplemental information: Cash paid for: Interest $ 7 $ 31 $ 38 Income tax payments (refunds), net $ (20) $ 16 $ (64)
See accompanying notes. 33 34 ALPHA MICROSYSTEMS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 22, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES THE BUSINESS Alpha Microsystems provides IT services (including consulting, maintenance, support and networking) and information technology products (including products for the internet/intranet market) to a variety of market segments. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Alpha Microsystems and its subsidiaries (the "Company"). Significant intercompany accounts and transactions have been eliminated in consolidation. Certain re-classifications have been made to the prior years' consolidated financial statements to conform to the fiscal 1998 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The industry in which the Company operates is characterized by rapid technological change and short product life cycles. As a result, estimates are required to provide for doubtful accounts receivable, product obsolescence and certain accrued liabilities. Historically, actual amounts recorded have not varied significantly from estimated amounts. The Company operates on a 52/53-week fiscal year ending on the last Sunday in the month of February. Fiscal years 1998, 1997 and 1996 ended on February 22, 1998, February 23, 1997, and February 25, 1996, respectively. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. For purposes of the Statement of Cash Flows for fiscal year 1997, the Company recorded the following non-cash transactions: common stock of $2,088,000 in exchange for the net assets of AMGB of $2,051,000, and cash of $250,000 and notes receivable of $600,000 in exchange for the net assets of AlphaHealthCare and PANDA totaling $875,000. SHORT-TERM INVESTMENTS The Company's short-term investments at February 23, 1997, are composed of U.S. treasury bills. These investments are classified as available-for-sale and are carried at fair value, which approximates cost, with the net unrealized gains or losses reported as a separate component of shareholders' equity, net of their related tax effects. Realized gains and losses, and declines in value judged to be other-than-temporary, as well as interest and dividends on available-for-sale securities, are included in investment income. Realized and unrealized gains and losses in fiscal years 1998 and 1997 were not material. 34 35 PROPERTY AND EQUIPMENT The straight-line method of depreciation is used for the following classes of assets for financial statement purposes and is based on the following estimated useful lives:
YEARS ----- Machinery and equipment 3 to 10 Leasehold improvements 1 to 6 IT Service parts 5
During fiscal 1998, the Company capitalized in machinery and equipment $671,000 associated with obtaining computer software for internal use. The amount capitalized includes amounts related to external direct costs of material and services, payroll and payroll-related costs. INTANGIBLE ASSETS Intangible assets include acquired IT service contracts, capitalized computer software costs and goodwill. The book value of goodwill and IT service contracts is associated with the acquisition of companies or assets. Capitalized software costs are the accumulation of software development costs or the assigned value of software associated with an acquisition. The straight-line amortization periods for the major classes of intangible assets are as follows:
YEARS ----- IT service contracts 5 to 10 Capitalized software costs 3 to 5 Goodwill 5 to 10
The Company capitalizes certain engineering costs related to software development after technological feasibility has been established and amortizes these costs as the respective products are sold. However, in no event is the amortization less than that which would be achieved by amortizing such costs on a 5-year straight-line basis from the date of product release. Capitalized software costs, net of accumulated amortization of $1,625,000 and $1,420,000, were $1,067,000 and $815,000 at February 22, 1998, and February 23, 1997, respectively. Total amortization expense charged to cost of product sales for the fiscal years 1998, 1997 and 1996 was approximately $178,000, $99,000,and $186,000, respectively. RECOVERABILITY OF LONG LIVED ASSETS The Company routinely evaluates the carrying value of long lived assets to determine if impairment exists based upon estimated undiscounted future cash flows. Impairment is analyzed for certain assets at a consolidated level as they do not have identifiable cash flows that are largely independent of other asset groupings. The impairment, if any, is measured by the difference between carrying value and estimated discounted future cash flows and is charged to expense in the period identified. It is at least reasonably possible that the Company's estimate of future undiscounted cash flows may change during fiscal 1999. In addition, if the Company's estimate of future undiscounted cash flows should change or if the operating plan is not achieved, future analyses may indicate insufficient future undiscounted net cash flows to recover the carrying value of the Company's long lived assets, in which case such assets would be written down to estimated fair value. In fiscal 1996, the Company wrote off $481,000 in goodwill and IT service contracts and $1,016,000 of capitalized software development cost related to AlphaHealthCare, which was divested during the fourth quarter of fiscal 1996. Also, during the fourth quarter of fiscal 1996, the Company wrote off accumulated capitalized software development costs of $373,000 for its PANDA product line, which was also divested. No additional write-offs were required in 1998 or 1997. Amounts written off are aggregated and presented as a component of selling, general and administrative expense. 35 36 WARRANTIES The Company accrues estimated costs of product warranties as revenues from sales are recognized, or if some event necessitates a change in the level of reserves for potential warranties. Products are typically warranted for twelve months. DEFERRED REVENUE Deferred revenue is revenue billed in advance for IT service contracts and is recognized ratably over the contract period or as the services are performed. REVENUE RECOGNITION The Company recognizes revenue on its hardware and software sales on delivery, and recognizes revenue on its IT service sales and post contract customer support on a straight-line basis over the contract period. When significant obligations remain after a software product has been delivered, revenue is not recognized until obligations have been completed or are no longer significant. The costs of any insignificant obligations are accrued when the related revenue is recognized. Revenue is recognized only when collection of the resulting receivable is probable. In the normal course of business, the Company extends credit to its customers who are principally distributors of its products and original equipment manufacturers who incorporate the Company's products into equipment which they resell to end-users. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses which have been within management's expectations. As of February 22, 1998, the Company had no significant concentrations of credit risk. ADVERTISING EXPENSES The Company recognizes expenses related to advertising costs in the period in which these costs are incurred. Total advertising expenses in 1998, 1997 and 1996 were $166,000, $795,000 and $66,000, respectively. RESEARCH AND DEVELOPMENT EXPENSES Research and development costs are expensed as incurred. Substantially all research and development expenses are related to developing new products and designing significant improvements to existing products. STOCK-BASED COMPENSATION In accordance with the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company applies Accounting Principles Bulletin Opinion No. 25 and related Interpretations in accounting for its stock option and purchase plans and, accordingly, has not recognized compensation cost in connection with such plans. Note 7 to the consolidated financial statements contains a summary of the pro forma effects to reported net loss and net loss per share for 1998, 1997, 1996 as if the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123. INCOME TAXES The Company uses the liability method to account for deferred taxes, which requires an asset and liability approach to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's 36 37 financial statements or tax returns. Under this method of accounting, deferred tax assets and liabilities are determined based upon the differences between the financial reporting basis and the income tax basis of the Company's assets and liabilities at the enacted income tax rates expected to apply when such differences are expected to reverse. PER SHARE DATA In fiscal 1998, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and warrants. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share, including the effect of dilutive stock options and warrants. For all years presented, the effect of options and warrants has been excluded as their effect is anti-dilutive. The implementation of SFAS 128 had no effect on the earnings per share data presented. FOREIGN CURRENCIES The Company's foreign entities use the local currency as the functional currency. The Company translates all foreign entity assets and liabilities at year-end exchange rates, all income and expense accounts at average rates, and records adjustments resulting from translation as a separate component of shareholders' equity. Foreign currency exchange gains (losses) included in the determination of loss from operations before taxes were 10,000, $(42,000) and $76,000 for fiscal 1998, 1997 and 1996, respectively. The Company had no forward exchange contracts outstanding at February 22, 1998. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), and Statement No. 131, Disclosure about Segments of an Enterprise and Related Information ("SFAS 131"). The Company is required to adopt these statements in fiscal 1999. SFAS 130 establishes new standards for reporting and displaying comprehensive income and its components. SFAS 131 requires disclosure of certain information regarding operating segments, products and IT services, geographic areas of operation and major customers. Adoption of these statements is expected to have no impact on the Company's consolidated financial position, results of operations or cash flows. The Company currently recognizes revenue based on the guidelines set forth in Statement of Position ("SOP") 91-1, Software Revenue Recognition. In October 1997, the Accounting Standards Executive Committee of the AICPA issued SOP 97-2, which supersedes SOP 91-1 and provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2 is intended to reduce the diversity in accounting for software revenue recognition and changes certain of the specific criteria for recognizing revenue related to software licensing arrangements. Specifically, the new SOP contains more restrictive revenue recognition provisions for software arrangements containing multiple elements (i.e. upgrades, enhancements, implementation and other services) similar to the arrangements entered into by the Company. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company is currently evaluating the provisions of the new SOP and the impact that it will have on the Company's revenue recognition policies and the terms under which it provides its products and services to customers. 37 38 2. ACQUISITIONS AND DIVESTITURES ACQUISITIONS On December 23, 1997, the Company acquired the telephone installation and IT service business and certain related assets of Applied Cellular Technology, Inc. for a purchase price estimated to be $2.6 million, of which, $1.1 million has been paid from the Company's cash reserves through February 22, 1998. All amounts paid, and any future payments, are contingent on future annualized revenues. On September 15, 1995, the Company acquired the ongoing IT service contracts and certain related assets of Instant Data Systems Incorporated ("IDS") for a purchase price of $300,000, plus a contingent payment of $50,000. The purchase price was reduced by $110,000 in fiscal 1997 based upon the deterioration of the revenues of the contracts purchased. On June 1, 1995, the Company acquired the assets of Alpha Technology for $161,000. Subsequent to February 22, 1998, the Company acquired the ongoing IT service contracts and certain related assets of M&J Technologies for an estimated purchase price of $950,000. The purchase price, which is contingent on future annualized revenues, is to be paid over 18 months, with 50% of the purchase price paid on the closing date of the acquisition. All acquisitions have been accounted for as purchases and the acquired operations have been included in the consolidated statements of operations from the dates of acquisition. Pro forma information has not been presented as it would not be materially different from the historical information presented. DIVESTITURES In January 1997, the Company sold its PANDA and AlphaHealthCare operations. Each was sold for a base price, consisting of cash and notes which approximated the Company's net book value, and a contingent or "Earnout" amount which depends on the future performance of the businesses sold. Contingent or earnout amounts realized in the future, if any, will be included in the Company's results of operations at that time. On August 19, 1996, the Company sold its UK subsidiary, Alpha Microsystems Great Britain ("AMGB"), to Sanderson Electronics PLC ("Sanderson"), for 907,792 ordinary shares of Sanderson. In connection with the sale, the Company and Sanderson signed a three-year hardware distribution agreement allowing Sanderson to sell Alpha Microsystems hardware products in the United Kingdom and Eire. The Company recognized a gain of approximately $37,000 from this sale. On September 17, 1996, the Company sold the Sanderson shares for approximately $2,088,000. On April 3, 1995, the Company sold its subsidiary, Alpha Microsystems Belgium, S.A., to a member of its Belgium local management resulting in a loss of $972,000. 38 39 3. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out method. Inventories, net of reserves for excess and obsolete inventories of $98,000 and $41,000 at February 22, 1998, and February 23, 1997, respectively, are comprised of the following:
FEBRUARY 22, FEBRUARY 23, (IN THOUSANDS) 1998 1997 ---- ---- Raw materials $568 $263 Work-in-process 4 9 Finished goods 8 33 ---- ---- $580 $305 ==== ====
4. NOTES RECEIVABLE In April 1995, as part of the consideration for selling the Belgian subsidiary to a member of local management, the Company received a note for $489,300, payable over a 52-month period from the date of the note, of which $391,440 has been paid. In January 1997, as part of the proceeds from the sale of the PANDA product line, the Company received an agreement specifying annual payments totaling $300,000, with the final payment due in January 2002. As part of the consideration for the sale of AlphaHealthCare in January 1997, the Company received a note for $300,000 bearing interest at six percent compounded annually, with annual payments of $60,000 due over a five-year period from the date of the note. 5. PROPERTY AND EQUIPMENT Major classes of property and equipment are as follows:
FEBRUARY 22, FEBRUARY 23, 1998 1997 ------- ------- Machinery and equipment $ 7,237 $ 6,467 Leasehold improvements 1,396 1,395 IT Service parts 4,032 8,171 ------- ------- 12,665 16,033 Less accumulated depreciation and amortization 9,479 13,101 ------- ------- Property and equipment, net $ 3,186 $ 2,932 ======= =======
Depreciation expense was $1,254,000, $1,547,000 and $1,405,000 for fiscal years 1998, 1997 and 1996, respectively. 6. DEBT On October 11, 1996, the Company amended its existing loan agreement extending its credit line to October 10, 1998. Pursuant to the terms of the amendment, the Company has a revolving line of credit up to a maximum limit of $2,000,000. Borrowings under 39 40 the line of credit bear interest at prime plus two and one-half percent (10.5% at February 22, 1998). In addition, the Company issued 25,000 warrants to the bank (See Note 7). Should the Company desire to pay dividends, any such dividends would be subject to the prior written consent of the Company's bank and to any preferential rights to receive dividend payments contained in any securities subsequently issued by the Company. The line of credit is secured by substantially all of the Company's assets. At February 22, 1998, there were outstanding borrowings totaling $1,000,000. Subsequent to fiscal year end, the Company was in default with certain financial covenants contained in the existing loan agreement. However, on April 23, 1998, the Company received a commitment from another lending institution for a $3,000,000 line of credit, subject to certain financial covenants and borrowing base requirements. 7. SHAREHOLDERS' EQUITY COMMON STOCK Under the terms of the Company's Stock Incentive Award Plan, the Board of Directors is authorized to award up to 150,000 restricted shares of common stock. These shares are issued subject to certain transfer restrictions, including the passage of time, ranging from one to ten years. The Company has granted 131,050 restricted shares of common stock to certain employees, without cost. The shares are subject to forfeiture under certain circumstances, and 25% of such shares will vest each year, beginning on the date of grant. As of February 22, 1998, all restricted shares are vested. Unearned compensation was recognized for the market value of the restricted shares on the date of grant and is amortized ratably over the vesting period. The unamortized unearned compensation value was recorded as a reduction of shareholders' equity in the accompanying financial statements. The Company's 1996 Non-employee Director Stock Compensation Plan provides to non-employee directors the opportunity to receive shares of common stock in lieu of cash compensation paid for services as a director, in an amount equal to the value of cash compensation otherwise paid for service as a director. The total number of shares reserved and available is 100,000 shares. At February 22, 1998, 1,542,672 shares of the Company's common stock is reserved for issuance pursuant to outstanding warrants and the Company's stock option Plans. WARRANTS On May 14, 1996, the Company filed a Registration Statement to register 4,442,069 shares of Common Stock issuable upon the exercise of warrants issued by the Company, of which 4,082,069 were issued in connection with its November 29, 1993, Shareholder Rights Offering and subsequent Public Offering, and the remainder were issued in consideration of services rendered to the Company. The Company redeemed its Redeemable Public Warrants on June 17, 1996, pursuant to its notice of redemption issued on May 14, 1996. Total shares issued from the exercise of redeemed warrants and other concurrently exercised warrants were 4,103,719, resulting in total gross proceeds of approximately $10,102,000. The proceeds from the exercise of all warrants, net of expenses, were $9,486,000. In connection with a public offering in fiscal 1993, Company granted to its underwriter a warrant to purchase 123,836 Units, with an exercise price of $1.95 per Unit, expiring November 1, 1998. Each Unit consists of one share of common stock and one Underlying Warrant to purchase one share of common stock. The exercise price of the Underlying Warrants is $2.50 and expire November 1, 1998. Pursuant to the terms of an amendment to the loan agreement signed in October 1996, the Company agreed to issue 25,000 warrants to the bank which are exercisable for five years at $1.81 per share. Also in October 1996, the Company issued a warrant to purchase 300,000 shares of common stock exercisable for five years at $3.00 per share to its financial advisor. 40 41 As of February 22, 1998, the Company has 448,836 warrants outstanding (572,672 including the Underlying Warrants) and 954,939 options outstanding, or a total of 1,403,775 shares under options and warrants (1,527,611 including the Underlying Warrants). OPTIONS The Company has a non-qualified stock option plan (the "1984 Plan") which provides for the grant, from time to time, of options to purchase up to 465,000 shares of Common Stock to eligible employees. In June 1996, the Board terminated the 1984 Plan and no further options may be granted. Outstanding options will remain exercisable. As of February 22, 1998, the Company's 1993 Employee Stock Option Plan provides for the Board to award up to 925,000 shares of common stock to employees of the Company. The Company's 1993 Director Stock Plan provides to non-employee directors automatic grants of non-statutory stock options at exercise prices equal to the fair market value of the Company's common stock on the date of grant, up to an aggregate of 100,000 shares of common stock. The following table contains a summary of transactions related to Incentive and Non-Qualified Stock Options for the fiscal years 1996, 1997, and 1998:
NON-QUALIFIED STOCK OPTIONS INCENTIVE STOCK OPTIONS --------------------------- ----------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE ---------------- ---------------- SHARES PRICE PER SHARE SHARES PRICE PER SHARE ------ --------------- ------ --------------- Outstanding at February 26, 1995 307,653 $ 1.79 328,702 $ 1.88 Granted -- 122,500 $ 1.47 Expired/canceled (110,568) $ 1.63 (136,763) $ 1.88 -------- -------- -------- Outstanding at February 25, 1996 197,085 $ 1.87 314,439 $ 1.72 Granted -- 621,000 $ 2.62 Expired/canceled (39,315) $ 2.84 (222,500) $ 2.50 Exercised (37,770) $ 1.73 (25,000) $ 1.63 -------- -------- -------- Outstanding at February 23, 1997 120,000 $ 1.61 687,939 $ 2.28 Granted -- 330,000 $ 1.23 Expired/canceled (10,000) $ 1.94 (133,000) $ 1.61 Exercised (40,000) $ 0.94 -- -- -------- -------- -------- Outstanding at February 22, 1998 70,000 $ 1.94 884,939 $ 1.99 ======== ======== ======== Exercisable at February 25, 1996 178,085 $ 1.86 253,189 $ 1.78 February 23, 1997 120,000 $ 1.61 313,439 $ 2.07 February 22, 1998 70,000 $ 1.94 380,939 $ 2.25 Available for grant: February 25, 1996 171,978 235,561 February 23, 1997 -- 212,061 February 22, 1998 -- 15,061
41 42 Options outstanding at February 22, 1998, under the non-qualified stock option plan are exercisable at $1.94. The weighted average remaining life of these options as of year-end is approximately 0.1 years. Options outstanding at February 22, 1998, under the incentive stock option plan have exercise prices and weighted average remaining lives as follows: 22,500 shares at $0.78 with a remaining life of 2.2 years, 409,439 shares at $1.38 to $1.88 with a remaining life of 2.6 years, 303,000 shares at $3.00 per share with a remaining life of 3.3 years and 150,000 shares at $1.03 per share with a remaining life of 4.8 years. Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing method with the following weighted average assumptions: risk-free interest rate of 6% for 1998, 1997, and 1996; volatility factors of the expected market price of the Company's common stock of 0.6 for all three years; and a weighted average expected life of the options of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) 1998 1997 1996 ---- ---- ---- Pro forma net loss $ (3,516) $ (2,873) $ (3,575) Pro forma basic and diluted loss per share: $ (0.32) $ (0.30) $ (0.54)
The per share weighted average fair value of options granted during 1998, 1997, and 1996 were $0.71, $1.48, and $0.66, respectively. The effect of applying Statement 123 for providing pro forma disclosures is not likely to be representative of the effects on reported net income (loss) for future years. 8. INCOME TAXES The current provision for income taxes consists of the following: (IN THOUSANDS)
1998 1997 1996 ---- ---- ---- Foreign $(31) $ 25 $ 20 State 10 3 -- ---- ---- ---- $(21) $ 28 $ 20 ==== ==== ====
42 43 Temporary differences and net operating loss carryforwards that give rise to deferred tax assets and liabilities recognized in the balance sheet are as follows:
(IN THOUSANDS) 1998 1997 ------- ------- Deferred tax assets: Net operating loss carryforward $ 8,793 $ 7,629 Accrued tax credits 899 899 Accruals not currently deductible for tax purposes 123 454 Depreciation 33 31 Translation adjustment 25 96 Other 38 10 Valuation allowance (9,911) (9,082) ------- ------- Total deferred tax asset -- 37 ------- ------- Deferred tax liabilities - capitalized software -- (37) ------- ------- Net deferred taxes $ -- $ -- ======= =======
The change in the valuation allowance was a net increase of $829,000 and $1,717,000 for fiscal years ended February 22, 1998, and February 23, 1997, respectively. The valuation allowance was increased since the realization of deferred tax assets is uncertain. The Company has federal net operating loss carryforwards totaling approximately $24,000,000 at February 22, 1998, which begin to expire in 2006, if not utilized. As a result of the exercise of the Redeemable Public Warrants in fiscal year ended February 23, 1997, the Company experienced a change of ownership as defined in the Internal Revenue Code. As a result of the ownership change, utilization of approximately $21,000,000 of the net operating loss carryforwards is limited to approximately $1,500,000 per year. A reconciliation of income tax expense (benefit) to the statutory U.S. federal income tax rate follows:
1998 1997 1996 ------ ------ ------ Statutory U.S. federal income tax rate (benefit) (34.0)% (34.0)% (34.0)% Changes in taxes resulting from: Foreign losses and excess rates (1.0) 1.2 1.4 Domestic losses with no tax benefit 34.0 32.7 28.0 Other items, net 0.4 1.1 5.2 ----- ----- ----- Effective tax rate (0.6)% 1.0% 0.6% ===== ===== =====
United States and foreign income (loss) before taxes are as follows:
(IN THOUSANDS) 1998 1997 1996 ------- ------- ------- Domestic $(3,524) $(2,933) $(3,714) Foreign 206 191 159 ------- ------- ------- $(3,318) $(2,742) $(3,555) ======= ======= =======
43 44 9. COMMITMENTS AND CONTINGENCIES The Company leases its manufacturing and office facilities and certain equipment under operating leases that expire on various dates through 2001. Rent expense during fiscal years 1998, 1997, and 1996 was $1,213,000, $1,318,000, and $1,966,000, respectively. The Company's annual minimum lease commitments under non-cancelable operating leases, net of sublease income of $95,000 for fiscal 1999, and $63,000 for fiscal 2000, are as follows:
(IN THOUSANDS) 1999 $ 1,042 2000 655 2001 375 ------- $ 2,072
The Company's current involvement with litigation is as follows: Carlos Garralda and Andre Warnier, employees of the Company's former subsidiary, AMB, filed an action in November 1995 against AMB and the Company in Orange County Superior Court alleging that AMB is in breach of its obligations under Belgium employment law to pay salaries for a notice period of up to two years following termination of employment. The Plaintiffs allege, among other things, that the Company has alter ego liability for these obligations. The plaintiffs are claiming compensatory damages in excess of $780,000 and unspecified punitive damages. A settlement of the case between AMB and Andre Warnier in the Belgium action was effected on October 18, 1996. Five hundred thousand dollars ($500,000) of the compensatory damages in the Orange County lawsuit are related to the claims by Mr. Warnier. In December 1997, the Company and Warnier executed a settlement agreement which involved no payment by the Company and Warnier dismissed his Orange County case with prejudice. Separately, Garralda dismissed his Orange County case without prejudice upon the Company's execution of a Tolling Agreement allowing Garralda to re-file the suit upon the occurrence of specified conditions. Although no assurances as to the outcome of the litigation can be given, management believes that this litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. In December 1995, Phoenix Marketing, Inc. d.b.a. Electronic Business Systems, Inc., in response to the Company's collection efforts for a past due account, filed an amended cross-complaint alleging damages of $3,200,000 for defective merchandise, loss of business reputation and loss of future business. The Iowa court has referred this case to arbitration, which arbitration is now scheduled to begin in November 1998. Although no assurances as to the outcome of the litigation can be given, management believes that the plaintiff's claims are without merit. The Company is currently involved in certain other claims and litigation. The Company does not consider any of these other claims or litigation to be material. Management has made provisions in the Company's financial statements for the settlement of lawsuits for which unfavorable outcomes are both probable and estimable. In the opinion of management, results of known existing claims and litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 10. EMPLOYEE BENEFIT PLANS The Company has a defined contribution profit sharing plan, which has been qualified under Section 401(k) of the Internal Revenue Code, covering substantially all of its full-time employees. Company contributions to the plan are at the sole discretion of the Company's Board of Directors and cannot exceed the maximum allowable deduction for federal income tax purposes. There were no discretionary Company contributions for fiscal 1998, 1997, and 1996. Voluntary employee contributions are matched at a rate of 20% of employee contributions up to a total of 5.0% of the employee's salary for participants with an annual income of less than $29,999. Matching contributions were $20,000, $29,000, and $32,000 for fiscal 1998, 1997, and 1996, respectively. 44 45 In fiscal 1997, the Company adopted a new Employee Stock Purchase Plan, covering substantially all of its full-time employees, enabling employees to acquire shares of the Company's stock at 85% of the lower of (i) the fair market value of a share on the first trading day of the date of grant, or (ii) the fair market value of a share on the date of exercise, up to an aggregate of 350,000 shares of common stock. Voluntary employee purchases under the plan in fiscal 1998 were $20,000. 11. INDUSTRY SEGMENT INFORMATION The Company operates in two business segments: the manufacture and sale of computer systems, software and related products, and the servicing of computer systems and related products. Operations by business segment are as follows:
(IN THOUSANDS) PRODUCT IT SERVICES CORPORATE CONSOLIDATED ------- ----------- --------- ------------ 1998 Net sales $ 6,104 $ 13,223 $ -- $ 19,327 Operating income (loss) (3,640)(1) 1,133 (1,061) (3,568) Identifiable assets 4,469 5,527 5,792 15,788 Depreciation and amortization expense 576 1,053 74 1,702 Capital expenditures 104 571 1 675 1997 Net sales $ 8,885 $ 14,627 $ -- $ 23,512 Operating income (loss) (3,169)(1) 1,369 (1,351) (3,151) Identifiable assets 4,893 2,991 9,311 17,195 Depreciation and amortization expense 637 1,096 334 2,067 Capital expenditures 26 370 31 427 1996 Net sales $ 14,693 $ 18,070 $ -- $ 32,763 Operating income (loss) (5,215)(2) 3,079 (2,016) (4,152) Identifiable assets 7,431 4,651 979 13,061 Depreciation and amortization expense 773 1,230 322 2,325 Capital expenditures 427 496 901 1,824
(1) Includes $2,281,000 in fiscal 1998 and $1,162,000 in fiscal 1997 of expenses attributable to the marketing and launching the AlphaCONNECT software products. (2) Includes charges of $1,995,000 for the write-off of intangible assets primarily associated with the Company's AlphaHealthCare and PANDA divisions Identifiable assets by industry segment include both assets directly identified with operations and an allocated share of jointly used assets. Corporate assets consist primarily of cash and other assets. Depreciation and amortization expense excludes intangible asset write-downs. Capital expenditures include purchases of equipment and acquisitions of IT service assets. The effect of capitalizing software costs is included in the product sales segment. Intersegment transfers are recorded at cost. The Company operates in the United States and in Europe through distributors and, until August 1996, through foreign subsidiaries. Total consolidated foreign sales (including export sales of $1,633,000, $1,314,000 and $906,000 in fiscal 1998, 1997 and 1996, respectively) were $2,310,000, $4,681,000 and $9,776,000 for fiscal 1998, 1997 and 1996, respectively. 45 46 OPERATIONS BY GEOGRAPHIC AREA
ADJUSTMENTS UNITED EUROPE & & (IN THOUSANDS) STATES CANADA AUSTRALIA ELIMINATIONS CONSOLIDATED -------- -------- --------- ------------ ------------ 1998 Sales to unaffiliated customers $ 18,649 $ 678 $ -- $ -- $ 19,327 Transfers between geographic areas -- -- -- -- -- -------- -------- -------- -------- -------- Net sales $ 18,649 $ 678 $ -- $ -- $ 19,327 ======== ======== ======== ======== ======== Net income (loss) $ (3,534) $ 237 $ -- $ -- $ (3,297) Identifiable assets $ 18,644 $ 291 $ -- $ (3,147) $ 15,788 1997 Sales to unaffiliated customers $ 20,145 $ 639 $ 2,728 $ -- $ 23,512 Transfers between geographic areas 473 -- -- (473) -- -------- -------- -------- -------- -------- Net sales $ 20,618 $ 639 $ 2,728 $ (473) $ 23,512 ======== ======== ======== ======== ======== Net income (loss) $ (2,945) $ 175 $ -- $ -- $ (2,770) Identifiable assets $ 20,385 $ 329 $ -- $ (3,519) $ 17,195 1996 Sales to unaffiliated customers $ 23,893 $ 621 $ 8,249 $ -- $ 32,763 Transfers between geographic areas 1,147 -- -- (1,147) -- -------- -------- -------- -------- -------- Net sales $ 25,040 $ 621 $ 8,249 $ (1,147) $ 32,763 ======== ======== ======== ======== ======== Net income (loss) $ (3,723) $ 221 $ (82) $ 9 $ (3,575) Identifiable assets $ 15,351 $ 160 $ 5,070 $ (7,520) $ 13,061
No single customer or other foreign geographic area accounted for 10% or more of the Company's sales. 46 47 ALPHA MICROSYSTEMS SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BEGINNING CHARGED TO BALANCE AT OF YEAR EXPENSE DEDUCTIONS END OF YEAR ------- ------- ---------- ----------- Allowance for doubtful accounts: February 22, 1998 $ 139 $ 194 $ 39 $ 294 February 23, 1997 927 64 852(1) 139 February 25, 1996 1,004 (21) 56 927 Reserve for inventories: February 22, 1998 $ 41 $ 73 $ 16 $ 98 February 23, 1997 1,726 (59) 1,626(2) 41 February 25, 1996 1,723 196 193 1,726
(1) Deduction is primarily the result of the sale of AMGB, AlphaHealthCare and PANDA and the disposition of a fully reserved individual account of approximately $362,000. (2) Deduction is primarily the result of the sale of AMGB, AlphaHealthCare and PANDA. 47 48 SIGNATURES Pursuant to the requirements of Section 13 pr 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ALPHA MICROSYSTEMS Date: By: /s/ DOUGLAS J. TULLIO Douglas J. Tullio President, Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby appoints Clarke E. Reynolds, Douglas J. Tullio and John F. Glade, and each and any of them, as attorneys-in-fact and agents with full powers of substitution to sign on his behalf, individually and in the capacity stated below, and to file any amendments to this Annual Report on Form 10-K with the Securities and Exchange Commission, granting to said attorneys-in-fact and agents full power and authority to perform any other act on behalf of the undersigned required to be done in the premises. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: By: /s/ CLARKE E. REYNOLDS Clarke E. Reynolds Chairman of the Board Date: By: /s/ DOUGLAS J. TULLIO Douglas J. Tullio President, Chief Executive Officer, Director Date: By: /s/ JOHN F. GLADE John F. Glade Vice President, Engineering and Manufacturing, Secretary and Director Date: By: /s/ JEFFREY J. DUNNIGAN Jeffrey J. Dunnigan Vice President Chief Financial Officer Date: By: /s/ ROCKELL N. HANKIN Rockell N. Hankin Director Date: By: /s/ RICHARD E. MAHMARIAN Richard E. Mahmarian Director
48 49
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION --- ----------- 2.1 Agreement of Purchase and Sale by and between Registrant and Alpha Computer Services, Inc., dated February 24, 1994 (incorporated herein by reference to Exhibit 2.9 to the Quarterly Report on Form 10-Q for the quarter ended May 29, 1994) 2.2 Agreement to transfer shares by and between Registrant and Alpha Microsystems Great Britain, Mr. Patrick Bolle, and Alpha Microsystems Belgium dated February 28, 1995 (incorporated herein by reference to Exhibit 2.10 to the Annual Report on Form 10-K of Registrant for the Year Ended February 26, 1995 (the "1995 10-K") 2.3 Agreement of Purchase and Sale by and between Registrant and Sanderson Electronics PLC, dated August 10, 1996 (incorporated herein by reference to Exhibit 2 to the Form 8-K filed August 23, 1996) 2.4 Agreement of Purchase and Sale by and between Registrant and Pacific Triangle Software, Inc., dated January 13, 1997 (incorporated herein by reference to Exhibit 2.1 to the Form 8-K filed February 18, 1997) 2.5 Agreement of Purchase and Sale between AlphaHealthCare, Inc. and GLR Systems, Inc., dated January 27, 1997 (incorporated herein by reference to Exhibit 2.2 to the Form 8-K filed February 18, 1997) 2.6 Agreement of Purchase and Sale by and between the Registrant and Applied Cellular Technology, Inc. dated December 23, 1997 (incorporated herein by reference to Exhibit 2.6 to the Quarterly Report on Form 10-Q for the quarter ended November 23, 1997) 2.7 Agreement of Purchase and Sale by and between the Registrant and M & J Technologies, Inc. dated February 19, 1998. 2.8 Modification to Contract for Purchase and Sale of M & J Technologies, Inc. Hardware Service Business Assets to Registrant dated February 19, 1998 3.1 Articles of Incorporation of Registrant dated as of March 16, 1977 (incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form-S-1 (Registration No. 2-72222) of Registrant) 3.2 Certificate of Amendment of Articles of Incorporation of Registrant dated as of September 29, 1988 (incorporated herein by reference to Exhibit 3.2 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1997) 3.3 Certificate of Amendment of the Articles of Incorporation of Registrant dated June 25, 1992 (incorporated herein by reference to Exhibit 10.71 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended May 31, 1992) 3.4 Restated Bylaws of Registrant (incorporated herein by reference to Exhibit 3.1 to the Form S-8 filed January 31, 1997) 3.5 Registration Rights Agreement by and between Registrant and Silicon Valley Bank dated July 10, 1995 (incorporated herein by reference to Exhibit 10.141 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended May 28, 1995) 4.2 Anti-dilution Agreement by and between Registrant and Silicon Valley Bank dated July 10, 1995 (incorporated herein by reference to Exhibit 10.142 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended May 28, 1995)
49 50 4.3 Warrant to Purchase Stock issued to Silicon Valley Bank on November 22, 1996(incorporated herein by reference to Exhibit 10.74 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 24,1996) 4.4 Registration Rights Agreement by and between Registrant and Silicon Valley Bank dated November 22, 1996 (incorporated herein by reference to Exhibit 10.75 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 24,1996) 4.5 Antidilution Agreement by and between Registrant and Silicon Valley Bank dated November 22, 1996 (incorporated herein by reference to Exhibit 10.76 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 24,1996) 4.6 Warrant to Purchase Common Stock issued to Dominick & Dominick dated October 15, 1996 (incorporated herein by reference to Exhibit 4.6 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1997) *10.2 Form of Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 to Amendment No. 1 of the Form S-2 Registration Statement filed with the Securities and Exchange Commission on September 30, 1993) *10.3 Form of Amended and Restated Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.51 to the Amendment No. 2 of the Form S-2 Registration Statement filed with the Securities Exchange Commission on October 15, 1993) *10.5 Stock Incentive Award Plan of Registrant (incorporated herein by reference to Exhibit 10.21 to the Annual Report on Form 10-K of Registrant for the Year Ended February 26, 1984) *10.6 Non-Qualified Stock Option Plan of Registrant (incorporated herein by reference to Exhibit 10.22 to the Annual Report on Form 10-K of Registrant for the Year Ended February 26, 1984) *10.8 Form of Non-Qualified Stock Option Agreement for use in connection with Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 4.8 to the Post-Effective Amendment No. 1 to the Registration Statement on Form 8 of the Registrant (Registration Statement No. 29252) filed on August 23, 1984) *10.9 Form of Stock Incentive Award and Escrow Agreement for use in connection with the Stock Incentive Award Plan (incorporated herein by reference to Exhibit 4.9 to the Post-Effective Amendment No. 1 to the Registration Statement on Form 8 of the Registrant (Registration Statement No. 2-9252) filed on August 23, 1984) *10.10 Revised Form of Non-Qualified Stock Option Agreement for use in connection with Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10.30 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1986) *10.11 Form of Contingent Non-Qualified Stock Option Agreement for use in connection with Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10.31 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1986)
50 51 *10.12 Alpha Microsystems Profit Sharing Trust Agreement between Alpha Microsystems and Bank of America NT & S.A. as Trustee dated May 24, 1985 (incorporated herein by reference to Exhibit 10.32 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1986) *10.13 Alpha Microsystems Profit Sharing Plan (as amended and restated) dated May 15, 1986 (incorporated herein by reference to Exhibit 10.33 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1986) *10.14 Acceptance of Trust by Trustee dated September 30, 1986 pursuant to Registrant's Profit Sharing Plan (incorporated herein by reference to Exhibit 10.29 to the Annual Report on Form 10-K of Registrant for the Year Ended February 22, 1987) *10.15 First Amendment dated March 1, 1987 to the Registrant's Profit Sharing Plan (incorporated herein by reference to Exhibit 10.30 to the Annual Report on Form 10-K of Registrant for the Year Ended February 22, 1987) *10.16 Revised Form of Non-Qualified Stock Option Agreement for use in connection with Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10.31 to the Annual Report on Form 10-K of Registrant for the Year Ended February 22, 1987) *10.17 Indemnification Agreement dated October 23, 1987 by and between Alpha Microsystems and John F. Glade (incorporated herein by reference to Exhibit 10.34 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 22, 1987) *10.18 Indemnification Agreement dated October 23, 1987 by and between Alpha Microsystems and Rockell N. Hankin (incorporated herein by reference to Exhibit 10.36 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 22, 1987) *10.20 Second Amendment to Alpha Microsystems Profit Sharing Plan dated January 22, 1988 (incorporated herein by reference to Exhibit 10.31 to the Annual Report on Form 10-K of Registrant for the Year Ended February 28, 1988) *10.21 Alpha Microsystems Profit Sharing Plan Amendments Under IRS Notice 88-131 dated May 24, 1989 (incorporated herein by reference to Exhibit 10.38 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended May 28, 1989) *10.22 Alpha Microsystems Profit Sharing Plan Amendment dated December 15, 1989 (incorporated herein by reference to Exhibit 10.45 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 26, 1989) *10.23 Employment Agreement by and between the Registrant and Douglas J. Tullio dated January 8, 1990 (incorporated herein by reference to Exhibit 10.49 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 26, 1989) *10.24 Indemnification Agreement by and between the Registrant and Douglas J. Tullio dated January 8, 1990 (incorporated herein by reference to Exhibit 10.50 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended November 26, 1989)
51 52 *10.26 Addendum to Employment Agreement by and between the Registrant and Douglas J. Tullio dated May 21, 1990 (incorporated herein by reference to Exhibit 10.54 to the Annual Report on Form 10-K of Registrant for the Year Ended February 25, 1990) *10.27 Revised Form of Non-Qualified Stock Option Agreement for use in connection with Registrant's Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10.59 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended August 26, 1990) *10.28 Indemnification Agreement by and between Registrant and Clarke E. Reynolds dated June 16, 1989 (incorporated herein by reference to Exhibit 10.67 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1992) *10.29 Consulting Agreement by and between the Registrant and Clarke E. Reynolds dated June 1, 1993 (incorporated herein by reference to Exhibit 10.87 to Amendment No. 1 to Form S-2) *10.30 Alpha Microsystems 1993 Employee Stock Option Plan (incorporated herein by reference to Exhibit 10.109 to the Quarterly Report on Form 10-Q for the Quarter Ended May 29, 1994) 10.31 Alpha Microsystems 1993 Directors' Stock Option Plan (incorporated herein by reference to Exhibit 10.110 to the Quarterly Report on Form 10-Q for the Quarter Ended May 29, 1994) 10.32 Industrial Lease between Fairview Investors Ltd. and Registrant dated October 28, 1994 (incorporated herein by reference to Exhibit 10.113 to the Quarterly Report on Form 10-Q for the Quarter Ended November 27, 1994) *10.33 First Amended and Restated Non-Qualified Stock Option Plan of Registrant dated August 18, 1989 (incorporated herein by reference to Exhibit 19.14 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended August 27, 1989) *10.34 First Amendment to Stock Incentive Award Plan of Registrant dated August 15, 1990 (incorporated herein by reference to Exhibit 19.16 to the Quarterly Report on Form 10-Q of Registrant for the Quarter Ended August 26, 1990) *10.35 First Amendment to Employment Agreement by and between Registrant and John F. Glade dated May 3, 1991 (incorporated herein by reference to Exhibit 19.8 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1992) *10.36 First Amendment to Employment Agreement by and between Registrant and Douglas J. Tullio dated May 3, 1991 (incorporated herein by reference to Exhibit 19.10 to the Annual Report on Form 10-K of Registrant for the Year Ended February 23, 1992) *10.37 Second Amendment and Restatement to the Non-Qualified Stock Option Plan of Alpha Microsystems dated June 24, 1992 (incorporated herein by reference to Exhibit 10.70 to the Quarterly Report on Form 10-Q for the Quarter Ended May 31, 1992)
52 53 *10.38 Second Amendment and Restatement of the Alpha Microsystems Profit Sharing Plan dated July 1, 1992 (incorporated herein by reference to Exhibit 10.72 to the Quarterly Report on Form 10-Q for the Quarter Ended May 31, 1992) 10.39 Memorandum to Lease by and between Registrant and Fairview Investors, Ltd. dated January 24, 1995 (incorporated herein by reference to Exhibit 10.136 to the Annual Report on Form 10-K of Registrant for the Year Ended February 26, 1995) 10.40 Letter to Michael J. Lowell from Silicon Valley Bank dated May 3, 1995 re: new credit line (incorporated herein by reference to Exhibit 10.138 to the Annual Report on Form 10-K of Registrant for the Year Ended February 26, 1995) 10.41 Loan and Security Agreement by and between Registrant and Silicon Valley Bank dated July 10, 1995 (incorporated herein by reference to Exhibit 10.139 to the Quarterly Report on Form 10-Q for the Quarter Ended May 28, 1995) 10.42 Collateral Assignment, Patent Mortgage and Security Agreement by and between Registrant and Silicon Valley Bank dated July 10, 1995 (incorporated herein by reference to Exhibit 10.143 to the Quarterly Report on Form 10-Q for the Quarter Ended May 28, 1995) 10.43 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated November 30, 1995 (incorporated herein by reference to Exhibit 10.150 to the Quarterly Report on Form 10-Q for the Quarter Ended November 26, 1995) 10.44 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated February 7, 1996 (incorporated herein by reference to Exhibit 10.70 to the Annual Report on Form 10-K of Registrant for the Year Ended February 25, 1996) 10.45 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated March 7, 1996 (incorporated herein by reference to Exhibit 10.71 to the Annual Report on Form 10-K of Registrant for the Year Ended February 25, 1996) 10.46 Engagement Letter between Registrant and Sutro & Co., Inc. dated May 2, 1996 (incorporated herein by reference to Exhibit 10.72 to the Annual Report on Form 10-K of Registrant for the Year Ended February 25, 1996) 10.47 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated October 11, 1996 (incorporated herein by reference to Exhibit 10.73 to the Quarterly Report on Form 10-Q for the Quarter Ended November 24, 1996) 10.48 First Amendment to Alpha Microsystems 1993 Employee Stock Option Plan (incorporated herein by reference to Exhibit 4.6 to the Form S-8 filed January 31, 1997) 10.49 Second Amendment to Alpha Microsystems 1993 Employee Stock Option Plan (incorporated herein by reference to Exhibit 4.7 to the Form S-8 filed January 31, 1997)
53 54 10.50 Alpha Microsystems 1996 Nonemployee Director Stock Compensation Plan (incorporated herein by reference to Exhibit 4.8 to the Form S-8 filed January 31, 1997) 10.51 First Amendment to Alpha Microsystems 1996 Nonemployee Director Compensation Plan (incorporated herein by reference to Exhibit 4.9 to the Form S-8 filed January 31, 1997) 10.52 Alpha Microsystems Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4.10 to the Form S-8 filed January 31, 1997) 10.53 Letter Agreement between Registrant and Dominick & Dominick, Inc. dated October 15, 1996 (incorporated herein by reference to Exhibit 10.53 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) 10.54 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated March 3, 1997 (incorporated herein by reference to Exhibit 10.54 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.55 Indemnification Agreement by and between Registrant and James A. Sorensen dated January 16, 1997 (incorporated herein by reference to Exhibit 10.55 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.56 Indemnification Agreement by and between Registrant and Jeffrey A. Martin dated January 10, 1997 (incorporated herein by reference to Exhibit 10.56 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.57 Indemnification Agreement by and between Registrant and Dennis E. Michael dated January 17, 1997 (incorporated herein by reference to Exhibit 10.57 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.58 Indemnification Agreement by and between Registrant and Randall S. Parks dated January 17, 1997 (incorporated herein by reference to Exhibit 10.58 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.59 Indemnification Agreement by and between Registrant and Margaret Denson dated January 17, 1997 (incorporated herein by reference to Exhibit 10.59 to the Annual Report on Form 10-K of the Registrant for the Year Ended February 23, 1997) *10.60 Employment Agreement by and between Registrant and James A. Sorensen dated November 7, 1996 (incorporated herein by reference to Exhibit 10.77 to the Quarterly Report on Form 10-Q for the Quarter ended November 24, 1996) 10.61 Amendment to Loan Agreement by and between Registrant and Silicon Valley Bank dated October 11, 1997 (incorporated herein by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the Quarter ended November 23, 1997)
54 55 *10.62 Employment Letter by and between Registrant and Jeffrey J. Dunnigan dated November 15, 1997 (incorporated herein by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter Ended November 23, 1997) *10.63 Indemnification Agreement by and between Registrant and Jeffrey J. Dunnigan dated December 1, 1997 21 Subsidiaries 23 Consent of Independent Auditors 24 Power of Attorney (included on signature pages of this Annual Report) 27 Financial Data Schedule
(* Denotes Management Contract or Compensation Plan) 55 EX-2.7 2 AGREEMENT OF PURCHASE AND SALE 1 EXHIBIT 2.7 AGREEMENT OF PURCHASE AND SALE ------------------------------ This Agreement is made and entered into this 19th day of February, 1998 by and between ALPHA MICROSYSTEMS, a California corporation ("Buyer") and M&J Technologies, a Florida corporation ("Seller"). R E C I T A L S : ----------------- A. Seller is in the business of selling, installing and servicing computer systems. B. Seller intends to continue to Refurbish Computer Hardware, to sell computer hardware including systems, peripherals, software and all brokers equipment and to service computer software, but desires to discontinue its hardware maintenance and servicing of computer hardware ("Hardware Service") and to sell substantially all of its assets relating to its hardware maintenance service operations, other than refurbishing computer hardware (the "Hardware Service Business") to Buyer. C. Buyer desires to purchase Seller's Hardware Service Business upon the terms and conditions set forth herein. A G R E E M E N T ----------------- In consideration of their respective representations, warranties and agreements contained herein, the parties hereto agree as follows: ARTICLE I --------- DEFINITIONS ----------- 1.01 Agreement. The term "Agreement" herein will refer to this "Agreement of Purchase and Sale." 1.02 Assumed Obligations. The term "Assumed Obligations" herein is defined in Paragraph 2.06(b). 1.03 Buyer. The term "Buyer" herein will refer to Alpha Microsystems, a California corporation. 2 1.04 Closing or Closing Date. The term "Closing" or "Closing Date" herein is as defined in Paragraph 6.02 hereof. 1.05 Customer List. The term "Customer List" herein is defined in Paragraph 2.05 hereof. 1.06 Hardware Service and Hardware Service Business. The terms "Hardware Service" and "Hardware Service Business" herein are defined in Recital B. 1.07 Leases. The term "Lease" herein shall refer to the Lease for the premises occupied prior to the Closing by Seller located at 129 North West 13th Street, Suite 27, Boca Raton , Florida 33432 and the AT&T Phone System lease 1.08. Post Closing Actual Monthly Contract Revenue. The term "Post Closing Actual Monthly Contract Revenue" herein is as defined in Paragraph 2.04(e). 1.09 Post Closing Average Monthly T&M Revenue. The term "Post Closing Average Monthly T&M Revenue" herein is defined in Paragraph 2.04(d). 1.10. Prepaid Revenue. The term "Prepaid Revenue" herein is defined as amounts invoiced and unearned as of the Closing by Seller related to Hardware Services to be performed by Buyer subsequent to the Closing. All Prepaid Revenue shall remain the property of Seller, whether received before or after the Closing Date, and does not include Seller's accounts receivable. 1.11. Purchase Price. The term "Purchase Price" herein is defined in Paragraph 2.02 hereof. 1.12. Product Sales. The term "Product Sales" herein is defined as new or used computer equipment sold, excluding Spare Parts and other parts used in T&M services. 1.13. Refurbish Computer Hardware. The phrase "Refurbish Computer Hardware" herein is defined as the purchasing and reworking of used computer hardware for resale. 1.14. Seller. The term "Seller" herein will refer to M&J Technologies, a Florida corporation. 1.15. Service Assets. The term "Service Assets" herein is defined in Paragraph 2.01 hereof. 1.16 Service Contracts. The term "Service Contracts" herein is defined in Paragraph 3.06 hereof. 1.17 Spare Parts. The term "Spare Parts" herein is defined in Paragraph 3.04 hereof and are listed on Exhibit "C". -2- 3 1.18 Transferred Service Contracts. The term "Transferred Service Contracts" herein will refer to all service contracts between Buyer or any affiliate of Buyer and any customer on the Customer List which replaces a Service Contract existing at the Closing and new contracts and addendums sold to customers by Seller and executed by Buyer during the first twelve months after Closing. 1.19 Vehicles. The term "Vehicles" shall refer to those vehicles listed on Exhibit "H" ARTICLE II PURCHASE AND SALE 2.01 Purchase and Sale. At the Closing, and subject to all of the other terms and conditions set forth herein, Seller shall sell, transfer, convey and assign to Buyer, and Buyer shall purchase from Seller, its entire right, title and interest in and to all of the assets of Seller's Hardware Service Business, including but not limited to (i) the Customer List and the associated goodwill; (ii) the Service Contracts; (iii) the Spare Parts; (iv) the Leases; and (v) the Vehicles; and furniture and fixtures (collectively, the "Service Assets") but excepting those assets listed on Exhibit "I". The entirety of the Service Assets shall be conveyed free and clear of all liens, trusts, encumbrances, charges, claims, security interests, community property or other interests, conditional sales agreements and all other restrictions. 2.02 Purchase Price. The purchase price ("Purchase Price") for the Service Assets shall be Eight Hundred Thousand Dollars ($800,000), as adjusted in accordance with Paragraphs 2.03 and 2.04 below. 2.03 Payment of Purchase Price. Subject to the terms and conditions set forth herein, the Purchase Price shall be delivered to Seller in the form of the Company's check as follows: (a) Buyer shall deliver at the Closing Four Hundred Thousand Dollars ($400,000), less any adjustments in accordance with Paragraphs 2.04(a) and (b), and less an amount equal to all Prepaid Revenue, and less any amounts owed to Alpha Microsystems at the time of Closing. (b) Buyer shall deliver on the date twelve (12) months after the Closing the sum of Two Hundred Thousand Dollars ($200,000) less any adjustments in accordance with Paragraphs 2.04(a), (b), (c) and (d) below. (c) Buyer shall deliver on the date eighteen (18) months after the Closing the sum of Two Hundred Thousand Dollars ($200,000) less any adjustments in accordance with Paragraphs 2.04(a), (b) and (e) below. 2.04 Adjustments to Purchase Price. The amounts payable pursuant to Paragraph 2.03 above shall be adjusted as set forth above as follows: -3- 4 (a) Deduction for Claims. In the event there has been an unresolved claim by any third party made to Buyer or Seller regarding the Service Assets which relates to a state of facts existing prior to the Closing, the liability with respect to which has not been assumed by Buyer, Buyer shall be entitled to withhold from the payments to be made pursuant to Section 2.03 the aggregate amount of such claim(s). Subject to the provisions of Section 8.01 hereof, Buyer may account for all said amounts claimed, until resolution of each specified claim, by debiting the amount otherwise due Seller. Buyer shall be entitled to compromise and settle the claim(s), and upon settlement and payment, shall deduct any amounts paid by Buyer with respect to each claim(s) from the amounts otherwise due Seller at the time in which actual payment is otherwise due by Buyer to claimant. Buyer may only compromise and settle such claims with the approval of Seller, which approval shall not be unreasonably withheld. (b) Deduction for Breach. In the event there has been a breach of any agreement, representation or warranty in this Agreement by Seller or other event which affords Buyer the right to indemnification pursuant to the provisions of paragraph 8.01 hereof, Buyer shall be entitled to deduct from the payments to be made to Seller pursuant to Section 2.03, the amount of Buyer's actual loss with respect thereto pursuant to the claim notice delivered under Paragraph 8.01 of this Agreement. (c) Spare Parts Adjustment. There shall be no purchase price adjustment for amounts related to spare parts. (d) Post Closing Average Monthly T & M Revenue Adjustment. As used in this Agreement, the term "Post Closing Average Monthly T & M Revenue" shall mean the total amounts invoiced by Buyer for the first six (6) months after the Closing, to customers listed on Seller's Customer List (excluding customers who were time and materials customers of Buyer within two (2) months immediately prior to the date of this Agreement) for Hardware Services rendered on a time and materials basis, divided by six (6). In the event the Post Closing Average Monthly T & M Revenue calculated as set forth above is less than Nineteen Thousand Dollars ($19,000), then Buyer shall be entitled to deduct from the payment made pursuant to Paragraph 2.03(b) a total of six (6) times the difference between the Post Closing Average Monthly T & M Revenue and Nineteen Thousand Dollars ($19,000). In the event the Post Closing Average Monthly T & M Revenue calculated as set forth above is greater than Nineteen Thousand Dollars ($19,000), then Buyer shall pay in addition to the amount due Seller pursuant to Paragraph 2.03(b) (adjusted as set forth in the prior paragraph of this 2.04(e), on the payment date pursuant to Paragraph 2.03(b) an additional bonus payment equal to six (6) times the difference between the Post Closing Average Monthly T & M Revenue and Nineteen Thousand Dollars ($19,000). -4- 5 Seller has the right to audit applicable records relating to adjustments of the payment specified in 2.03(b) and this payment will be adjusted for any errors in billing or otherwise made by Buyer. (e) Post Closing Actual Monthly Contract Revenue Adjustment. As used in this Agreement, the term "Post Closing Actual Monthly Contract Revenue" shall mean the sum of actual amounts collected by Buyer for services provided for the month of February 1999 with respect to Transferred Service Contacts and excludes Significant Contracts defined below. Post Closing Actual Monthly Contract Revenue shall be adjusted to include an amount, if any, for services not provided in the month of February 1999 by the Buyer as a result of Service Contracts cancelled by customer(s) due to dissatisfaction with Buyer's service delivery. In the event the Post Closing Actual Monthly Contract Revenue calculated as set forth above is less than Seventy-Five Thousand Dollars ($75,000), then Buyer shall be entitled to deduct from the payments made pursuant to Paragraph 2.03(c) a total of six (6) times the difference between the Post Closing Actual Monthly Revenue and Seventy-Five Thousand Dollars ($75,000). In the event the Post Closing Actual Monthly Contract Revenue calculated as set forth above is greater than Seventy-Five Thousand Dollars ($75,000), then Buyer shall pay in addition to the amount due Seller pursuant to Paragraph 2.03(c) (adjusted as set forth in the prior paragraph of this 2.04(e), on the payment date pursuant to Paragraph 2.03(c) an additional bonus payment equal to six (6) times the difference between the Post Closing Actual Monthly Revenue and Seventy-Five Thousand Dollars ($75,000). In the event the Seller sells a Significant Contract, the term "Significant Contract" shall mean any new contract or addendum sold that would be included in the Post Closing Actual Monthly Contract Revenue and has a monthly revenue of One Thousand Dollars ($1,000) or more, then Buyer shall pay in lieu of the amounts due to Seller pursuant to Paragraphs 2.03 for the Significant Contract (c) an amount equal to Fifty Percent (50%) of the annual Significant Contract Revenues. Buyer shall pay amounts due to Seller for Significant Contracts as the amounts are collected until amount due to Seller is paid in full. In the event any adjustments are made pursuant to this Paragraph 2.04, Buyer shall deliver to Seller a written notice specifying each ground for deduction of funds from or the addition of funds to the payments and the dollars allocated thereto. In the event any deduction or adjustment shall exceed the payment from which it is to be deducted, any excess shall be deducted against future payments, or if none, promptly paid to Buyer by Seller. 2.05 Delivery of Customer List. At the Closing Seller shall deliver to Buyer its complete Hardware Service customer list (the "Customer List") which shall consist of the Hardware Service customers only who have purchased from Seller within the last three (3) years Hardware Services on either a contract or time and materials, and shall include (1) the names, -5- 6 addresses, and telephone numbers of all such customers; and (2) with respect to customers with Service Contracts the names, addresses, telephone numbers and contract billing amounts for the prior month's billing. Such information shall be delivered to Buyer by Seller via quarter inch streamer tape or other medium acceptable to Buyer. In the event of any difficulties in assimilation by Buyer, Seller agrees to make the necessary original records available for inspection by Buyer. 2.06 No Assumption of Liabilities. (a) Buyer is not assuming, nor shall it become liable for, any debts, liabilities, taxes or any other obligations of any kind of Seller, whether known or unknown, disclosed or undisclosed, with respect to the business of Seller or the Service Assets existing as of the Closing Date, except as set forth in Paragraph 2.06(b) below. (b) At the Closing, subject to the provisions of Paragraph 2.06(c), Buyer shall assume and agree to perform and discharge, to the extent not performed or discharged by Seller on or before the Closing Date, (i) all obligations and liabilities of Seller under the Service Contracts accruing after the Closing; (ii) all obligations and liabilities of Seller under the Leases accruing after the Closing; (the "Assumed Obligations"). (c) Notwithstanding the provisions of Paragraph 2.06(b), Buyer shall not and does not assume any liability or obligation of Seller not included in the Assumed Obligations, including, without limitation, liabilities of or claims against Seller arising out of any action, suit proceeding, arbitration, investigation, or hearing or notice of hearing arising out of, or relating to, in any manner, the operation of the business of Seller prior to the Closing Date, except to the extent that the subject matter of such proceeding is an Assumed Obligation. (d) From and after the Closing, Buyer shall have complete control over the payment, settlement or other disposition of the Assumed Obligations and the right to commence, conduct and control all negotiations and proceedings with respect thereto. Seller shall notify Buyer promptly of any claim made with respect to any such Assumed Obligation and shall not, except with Buyer's prior consent, voluntarily make any payment of, settle or offer to settle, or consent to any compromise or admit liability with respect to, any such Assumed Obligation. 2.07 Taxes. Buyer agrees to be responsible for any and all sales taxes arising from its purchase of the Service Assets. Personal property taxes shall be prorated between Buyer and Seller as of the Closing Date. Buyer shall be responsible for filing necessary tax returns and reports with respect to such taxes. Prepaid taxes relating to the Hardware Service Business for the month of March, 1998 shall be reimbursed by the Buyer upon invoice from Seller. 2.08 Allocation of Purchase Price: Reporting Requirements. For tax purposes the parties hereby agree to (a) allocate the Purchase Price hereunder (which for purposes of such allocation shall include all liabilities being assumed by Buyer) in accordance with Exhibit "A" -6- 7 hereto, and (b) timely file Internal Revenue Service Form 8594, Asset Acquisition Statement, and otherwise report the transactions set forth herein in accordance with such allocation and with the provisions of Internal Revenue Code Section 1060 and comparable provisions of state law. 2.09 Delivery of Possession. At the Closing, Seller shall deliver possession of the Service Assets to Buyer at the premises which are the subject of the Lease. Title and risk of loss (including risk of theft) in and to the Service Assets shall pass to and be vested in Buyer, effective at the time of the Closing on the Closing Date, and Seller shall have no further liability with respect to the Service Assets, including liability for personal property taxes accruing after the Closing Date. 2.10 Consents to Assignment. Any other provision of this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any concession, claim, contract, lease or order, or any benefit arising thereunder or resulting therefrom, if an attempted assignment thereof, without the consent required or necessary for such assignment, would constitute a breach thereof or in any way materially adversely affect the rights of Buyer or Seller thereunder. If such consent is not obtained, or if an attempted assignment would be ineffective or would materially or adversely affect Seller's rights thereunder so that Buyer would not in fact receive substantially all of such rights, Seller shall cooperate in any arrangement Buyer may reasonably request in writing to provide for Buyer the benefits under any such concession, contract, lease or order, including enforcement for the benefit of Buyer of any and all rights of Seller against any other party thereto arising out of the breach or cancellation thereof by such party or otherwise; and any transfer or assignment of any property, property right, contract or agreement which shall require the consent or approval of any other party shall be made subject to such consent or approval being obtained. 2.11 Purchase of Service Vehicles. The Buyer agrees to purchase from the Seller the Service Vehicles listed in Exhibit "H" for the pay-off as of closing indicated therein. ARTICLE III ----------- REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF SELLER ---------------------------------------------------- As an inducement to Buyer to enter into this Agreement, Seller represents and warrants to Buyer and as to covenants agrees with Buyer that, effective on the date hereof and on the Closing Date, except as disclosed in Exhibit "B" to this Agreement: 3.01 Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. 3.02 Authority. All corporate action (including approval of the Board and shareholders of Seller) necessary to authorize and approve this Agreement has been taken, and this Agreement constitutes a valid and binding agreement, enforceable against Seller in accordance with its terms, and except for the lessor of the leased premises, no authorizations, consents or approvals, whether of governmental bodies or otherwise, are necessary in order to -7- 8 enable Seller to enter into and perform this Agreement. Consummation of the transactions herein contemplated, and the fulfillment of the terms of this Agreement will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the property or assets of Seller pursuant to the terms of, or result in the acceleration of any obligations or payment of a penalty under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which Seller is a party or by which Seller may be bound or to which any of the property or assets of Seller is subject, the Certificate of Incorporation or Bylaws of Seller, any agreement of the shareholders, or any statute or any order, decree, judgment, rule or regulation applicable to Seller of any court or of any regulatory authority or other governmental body having jurisdiction over Seller. 3.03 Compliance with Law. Seller is not in violation of any federal, state and local laws, regulations and orders. 3.04 Spare Parts. (a) Seller has prepared and delivered to Buyer a complete listing of Seller's spare parts inventory ("Spare Parts") as of January 31, 1998 and the location of such inventory as of the date thereof, which will be updated as of February 27th, 1998. Seller has not and will not dispose of our use any of the Spare Parts between the date of such listing and the Closing date except in the ordinary course of business. (b) Attached as Exhibit "C" is a listing of each type of Spare Part maintained by Seller as inventory in good working condition. 3.05 Customer List. The Customer List delivered to Buyer pursuant to Section 2.05 above includes a true, correct and complete list of the customers who purchased either contract service or time and material service from Seller. Seller has not received any direct or indirect communication that any customer with whom Seller presently has a Service Contract intends to terminate, not renew or materially reduce the present level of services obtained from Seller. 3.06 Service Contracts. (a) Attached as Exhibit "D" is a list of all service contracts which Buyer shall assume (the "Service Contracts"). The Service Contracts listed on Exhibit "D" include all existing verbal and written service contracts of Seller pursuant to which Seller provides or is obligated to provide Hardware Services to customers (together with names and addresses of such customers and the equipment subject to service under the Service Contracts) which extend beyond the Closing Date. Seller represents that amounts due or prepaid with respect to each of the Service Contracts are as set forth on Schedule "D". Seller has not committed any breach and or received any notice of default which is presently in effect under any Service Contract, nor is Seller aware of any event -8- 9 which has occurred which, with notice or passage of time, could give rise to any such default. All the Service Contracts, together with any amendments or modifications thereto, were duly authorized and executed and are enforceable in accordance with their terms, except that Seller does not represent and warrant as to matters which may relate to (a) the enforceability as may be limited by applicable insolvency, bankruptcy, reorganization, moratorium or other similar laws related to or affecting creditors' rights generally, or (b) enforceability in any court of any equitable remedies, specific performance and injunctive relief which are subject to the discretion of the court before which any proceeding therefor is brought (regardless of whether such enforceability is considered a proceeding at law or equity). To the best of Seller's knowledge, there is no reason to believe that any customer who is a party to any such Service Contract is unable or unwilling to perform its obligations under such contract. (b) Seller will deliver to Buyer at the Closing the original or a full, true and correct copy of each of the written Service Contracts, all proposed but not yet executed contracts, and all modifications and amendments to the foregoing, in existence on the Closing Date, as well as a complete written description of the terms of any and all oral agreements. (c) Seller is not aware of any request for or need for service under the Service Contracts which has not been performed prior to the Closing, except as set forth on Exhibit "D". 3.07 Spare Parts, Furniture and Fixtures and Vehicles. Attached as Exhibits "C", "F" and "H" respectively are complete listings of Seller's Spare Parts, Furniture and Fixtures and Vehicles used in the Company's Service Business. Said Spare Parts and Vehicles shall be in good working order on the Closing Date. 3.08 Leases. Seller has delivered to Buyer a true and correct copy of each Lease. Seller has, to the best knowledge of Seller, committed no breach and Seller has received no notice of default which is presently in effect under any Lease, nor does Seller have knowledge of any event which has occurred which, with notice or passage of time, could give rise to any such default. Seller has caused no damages to the leased premises which would entitle the lessor under such Lease to damages. Security and utility deposits for the leased premises as well as other prepaid rent amounts and build-out costs paid by the Seller under the Lease shall be prorated and reimbursed to the Seller at Closing. Buyer and Seller shall use commercially reasonable efforts to cause the lessor to consent to the assignment of such Lease. In the event the consent of the lessor shall not be obtained prior to the Closing and Buyer shall not be legally entitled to use the real or personal property which is the subject of the Leases, Buyer shall not assume the Lease or have any obligations thereunder. The parties shall use their best efforts to execute new leases on substantially the same terms to release seller from liability on said obligations. 3.09 Employees. Attached hereto as Exhibit "E" is a list of all of Seller's employees who have been involved during the past year in performing Hardware Service obligations under the Service Contracts, or otherwise primarily involved during the past year in -9- 10 Seller's Hardware Service business. Seller agrees that Buyer shall have the right to solicit and hire the employees so designated on Exhibit "E". Seller agrees to cooperate and assist Buyer in its efforts to hire such of Seller's employees listed on Exhibit "E", and as are designated on Exhibit "E". Buyer shall have no liability for any termination costs or liabilities arising by reason of the termination of any employees of Seller, including payment of accrued vacation, regardless of whether they are hired by Buyer. 3.10 Litigation. There are no actions, suits, investigations or proceedings by, against, involving or relating to Seller in which service of process has been made, nor to the best of Seller's knowledge are there any claims, actions, suits, investigations or proceedings contemplated, pending or against, involving or relating to Seller, at law or in equity, or before any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, in which any claim has been made or may be asserted against the Service Assets and there has been no garnishment, attachment or writ of executions issued with reference to any of the Service Assets. 3.11 Judgments, Decrees and Orders in Restraint of Business. Seller is not a party or subject to any judgment, decree or order entered in any suit or proceeding brought by any governmental agency or by any other person enjoining the Seller in respect of any of its business practices or the acquisition or disposition of any property or the conduct of its business in any area. 3.12 Title to Purchased Assets. Seller has good and marketable title to the Service Assets free and clear of all liens, claims and encumbrances, including covenants, conditions and restrictions, other than liens on the Vehicles and a security interest of Barnett Bank 3.13 Adverse Facts. To the best knowledge of Seller, and except for matters relating to the general economic condition, or the specific economic condition of any of its customers, there is no material adverse fact or condition relating to the Service Assets or any portion thereof which has not been specifically disclosed on Exhibit "B". 3.14 No Misrepresentations or Omissions. No representation, warranty or statement of Seller in this Agreement or in any document, exhibit, certificate or schedule furnished or to be furnished to Buyer pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements or facts contained herein or therein not misleading. 3.15 Bulk Sales Laws. Seller represents and warrants transactions contemplated hereunder do not require compliance with any bulk sales laws. 3.16 Compliance with Laws Regulating Environmental Quality. The property which is the subject of the Lease is, and at all times has been, operated, used and occupied in compliance with all Environmental Laws (as defined herein) and have been operated, used and occupied in a manner which will not give rise to any liability under any Environmental Laws. -10- 11 Seller has not received any notice at any time that it is or was claimed to be in violation of or in non-compliance with any conditions of any permit or Environmental Laws or that any of the current or past uses, operations or conduct at the property are or were in violation of or in non-compliance with any conditions of any permit or Environmental Laws. There is not now pending or threatened, nor any known basis for, nor has there ever been, any known action, claim, investigation, lawsuit, proceeding or order against Seller or any others who have owned or leased the property which are the subject of the Lease, under any Environmental Laws or otherwise with respect to the use, storage, presence, generation, manufacture or handling of any Hazardous Substance (as defined herein) at the property. For purposes of this Section 3.15, "Environmental Laws" shall mean any federal, state, regional, county, municipal, local and foreign laws, statutes, rules, ordinances, regulations and codes, as well as policies, orders, decrees, judgments, permits, directives, guidances, cleanup standards, injunctions and binding interpretations issued, promulgated, approved or entered thereunder, relating to pollution or protection of the environment, including, but not limited to, those relating to the release or threatened release of Hazardous Substances into the environment or otherwise relating to the presence, manufacture, transfer, generation, production, refinement, pumping, processing, distribution, use, treatment, storage, transport or handling of Hazardous Substances. For purposes of this Section 3.15, "Hazardous Substance" shall mean any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or waste, petroleum or petroleum-derived substance or waste, infectious or mutagenic or carcinogenic substance or waste, radioactive substance or waste, or any constituent of any such substance or waste, which is regulated under or defined by any Environmental Law. 3.17 Brokers or Finders. Seller has not entered into any agreement or incurred any obligation, directly or indirectly, for the payment of any broker's commissions or finder's fees in connection with this transaction. 3.18 Financial Information. Seller's gross revenues as detailed in Exhibit "G" have been calculated in accordance with generally accepted accounting principals for calendar 1997 and were not less than $1,828,720. 3.19 Survival of Representations and Warranties. The covenants, representations, warranties and agreements contained in this Agreement by Seller shall survive the Closing Date and shall terminate and expire on the close of business on the second anniversary of the Closing Date and shall be of no force or effect thereafter, except with respect to any claim with respect thereto under Paragraph 8.01 of this Agreement, written notice of which shall have been delivered to Seller on or prior to the second anniversary of the Closing Date. -11- 12 ARTICLE IV ---------- REPRESENTATIONS AND WARRANTIES OF BUYER --------------------------------------- As an inducement to Seller to enter into this Agreement, Buyer represents and warrants to Seller, and as to covenants agrees, with Seller as follows: 4.01 Incorporation. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and authorized to do business in the State of Florida. 4.02 Authority. This Agreement constitutes a valid and binding agreement, enforceable against Buyer in accordance with its terms, and excepting the approval of the Board of Directors of Buyer, no authorizations, consents or approvals not already obtained, whether of governmental bodies or otherwise, are necessary in order to enable Buyer to enter into and perform this Agreement. Consummation of the transactions herein contemplated, and the fulfillment of the terms of this Agreement will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the property or assets of Buyer pursuant to the terms of, or result in the acceleration of any obligations or payment of a penalty under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which Buyer is a party or by which Buyer may be bound or to which any of the property or assets of Buyer is subject, the Certificate of Incorporation or Bylaws of Buyer, or any statute or any order, decree, judgment, rule or regulation applicable to Buyer of any court or of any regulatory authority or other governmental body having jurisdiction over Buyer. 4.03 Judgments, Decrees and Orders in Restraint of Business. Buyer is not a party or subject to any judgment, decree or order entered in any suit or proceeding brought by any governmental agency or any other person enjoining the Buyer in respect of any of its business practices or the acquisition or disposition of any property or the conduct of its business in any area. 4.04 Brokers or Finders. Buyer has not entered into any agreement or incurred any obligation, directly or indirectly, for the payment of any broker's commissions or finder's fees in connection with this Agreement. ARTICLE V --------- CONDITIONS PRECEDENT TO CLOSING ------------------------------- 5.01 Conditions Precedent to the Performance of Seller's Obligations. The obligations of Seller to sell the Service Assets pursuant to this Agreement are subject, at the option of Seller, to the fulfillment on or before the Closing Date of each of the following conditions: -12- 13 (a) Compliance with Terms. At the Closing Date, all of the terms, conditions and agreements herein to be complied with and performed by Buyer at or before the Closing Date shall have been complied with or performed in all material respects. (b) Accuracy of Representations and Warrants. Seller shall not have acquired information that there is any material error, misstatement or omission in any of the representations or warranties made herein by Buyer. The representations and warranties made by Buyer in this Agreement shall be correct and complete at and as of the Closing Date, with only those exceptions which have been approved in writing by Seller. (c) Delivery of Required Items. Buyer shall have delivered all items set forth in Paragraph 7.02 below. (d) Transaction Legal. There shall be no order, decree or ruling by any court or governmental agency or threat thereof or any other fact or circumstance which might prohibit or render illegal the transactions contemplated by this Agreement. 5.02 Conditions Precedent to the Performance of Buyer's Obligations. The obligations of Buyer to purchase the Service Assets pursuant to this Agreement are subject to the fulfillment on or before the Closing Date of each of the following conditions: (a) Compliance with Terms. At the Closing Date, all of the terms, conditions and agreements herein to be complied with and performed by Seller at or before the Closing Date shall have been complied with or performed in all material respects. (b) Service Contracts and Agreements. Buyer shall have received copies of all of the Service Contracts, modifications and amendments thereof. (c) Spare Parts Inventory. Buyer shall have been given reasonable access to conduct an inventory and inspection of the Spare Parts. (d) Accuracy of Representations and Warranties. Buyer shall not have acquired information that there is any material error, misstatement or omission in any of the representations or warranties made herein by Seller. The representations and warranties made by Seller in this Agreement shall be correct and complete at and as of the Closing Date, subject only to those exceptions which have been approved in writing by Buyer, in its sole and absolute discretion. (e) Delivery of Required Items. Seller shall have delivered all items set forth in Paragraph 7.01 below. (f) Transaction Legal. There shall be no order, decree or ruling by any court or governmental agency or threat thereof or any other fact or circumstance which might prohibit or render illegal the transactions contemplated by this Agreement. -13- 14 (g) Approval of Exhibits. The form and contents of each of the Exhibits and related deliveries shall be satisfactory to Buyer. ARTICLE VI ---------- TERMINATION ----------- 6.01 Termination. Anything herein to the contrary notwithstanding, this Agreement may be terminated and abandoned at any time: (a) by mutual written consent of Buyer and Seller; (b) by Buyer, on the Closing Date, if any one or more of the conditions precedent to its obligations herein shall not have been fulfilled or waived in writing by Buyer; (c) by Seller, on the Closing Date, if any one or more of the conditions precedent to its obligations herein shall not have been fulfilled or waived in writing by Seller. If this Agreement is terminated pursuant to any of the foregoing provisions, this Agreement shall become wholly void and of no effect, and there shall be no liability on the part of either Buyer to Seller, Seller to Buyer, or their respective boards of directors as a result of such termination (except such liability arising pursuant to the indemnification provisions of Article VIII for, among other things, breach of covenants, representations and warranties and existence of suits and other actions), and in such event each party shall bear all expenses incurred by it in connection with this Agreement and any transactions in connection therewith. Notwithstanding the foregoing, in the event this Agreement is terminated, regardless of the cause for such termination, from and after the termination date all information furnished by Seller to Buyer prior to the date of Termination which is not generally publicly known and available shall for all purposes constitute confidential and trade secret information of Seller, which information shall not be used by Buyer or any of its officers, directors, affiliates or employees or disclosed by Buyer, its officers, directors, affiliates and employees, to any other person, and Buyer shall forthwith return to Seller all documents containing any written embodiments of any such confidential information. 6.02 Closing. Provided that all of the conditions to Closing have been fully satisfied, the transactions contemplated by this Agreement shall be consummated at a closing to be held at M&J Technologies, on February 27, 1998 (the "Closing Date") at 2:00 p.m. Eastern Daylight Time, or at such other place or time as shall be mutually agreed upon in writing between Buyer and Seller (the "Closing"). -14- 15 ARTICLE VII ----------- DELIVERIES AT CLOSING --------------------- 7.01 Deliveries of Seller. At the Closing, Seller shall deliver to Buyer all of the following: (a) Bill of Sales. Originally executed Bill of Sales for the Service Assets in form and content reasonably satisfactory to Buyer, including but not limited to separate bills of sales for each of the Vehicles. (b) Blanket Assignment. Blanket assignment by Seller to Buyer of all right, title and interest to the Service Contracts as well as such other assignments (including Lease Assignments with any required consents) which Buyer reasonably believes are necessary to vest in Buyer all of Seller's right, title and interest in and to the Service Assets in form and content reasonably satisfactory to Buyer. (c) Customer Lists. True and correct copies of the Customer Lists as of the Closing Date. (d) Service Contracts. The original of each Service Contract and any amendments thereto. (e) Closing Certificate. A certificate certifying the amount of Prepaid Revenues. (f) Covenants not to Compete. Covenants not to Compete executed by John Kaiser and Denise Kaiser at closing. 7.02 Deliveries of Buyer. At the Closing, Buyer shall deliver to Seller the initial payment calculated in accordance with Paragraph 2.03(a). ARTICLE VIII ------------ POST-CLOSING COVENANTS: ----------------------- INDEMNIFICATION, NON-COMPETITION AND COMMISSIONS ------------------------------------------------ 8.01 Indemnification by Buyer and Seller. (a) Indemnification by Seller. Seller hereby agrees to indemnify and hold Buyer, its officers, directors, employees, agents, advisers, affiliates and associates harmless, from all loss, liability and expense (including reasonable attorneys' fees and expenses in connection with the contest of any claim and interest on any claim paid by Buyer), which Buyer may incur or sustain by reason of the fact that (i) Seller should breach or fail to comply with any of the terms, conditions, covenants or agreements or any exhibits attached hereto or any of them contained herein, (ii) any representations or -15- 16 warranties made by Seller in this Agreement, the Exhibits, or in any certificates, lists or documents delivered pursuant hereto should prove to be false or erroneous, (iii) any claims, actions, suits, investigations or proceedings, pending or threatened, are or have been made or commenced by, against, involving, relating to or affecting any part of the Service Assets with respect to any state of facts existing or any event occurring prior to the Closing Date except for the Assumed Liabilities, or (iv) any action, arbitration, suit, proceeding, compromise, settlement, assessment or judgment arising out of or incidental to any of the matters indemnified against in this Paragraph 8.01(a); provided, however, that Seller shall not be obligated to indemnify Buyer and hold it harmless with respect to any settlement of a claim to which Seller has not consented, which consent by Seller shall not unreasonably be withheld. (b) Indemnification by Buyer. Buyer hereby agrees to indemnify and hold Seller, its officers, directors, employees, agents, advisers, affiliates and associates, harmless from all loss, liability and expense (including reasonable attorneys' fees and expenses in connection with the contest of any claim and interest on any claim paid by Seller), which Seller may incur or sustain by reason of the fact that (i) Buyer should breach or fail to comply with any of the terms, conditions, covenants or agreements or any exhibits attached hereto, or any of them contained herein, (ii) any representations or warranties made by Buyer in this Agreement should prove to be false or materially erroneous, (iii) any claims, actions, suits, investigations or proceedings, pending or threatened, are or have been made or commenced by, against, involving or arising out of (A) the Assumed Obligations, or (B) attributable to any state of facts existing or any event occurring after the Closing Date (to the extent included in the Assumed Obligations), (iv) all claims, actions, suits, investigations or proceedings, pending or threatened, are or have been made or commenced by, against, involving or arising out of the operation by Buyer of the Hardware Service business of Seller acquired hereunder, or the sale, transfer or other disposition by Buyer of all or any part of the Service Assets, from and after the Closing Date, except, in each case, if such liability arises in connection with the breach of any of the representations, warranties, covenants or agreements made by Seller in this Agreement, any Schedule or Exhibit hereto or any certificate or instrument delivered in connection herewith, (v) any action, suit, proceeding, compromise, settlement, assignment, judgment or arbitration arising out of or incidental to any of the matters indemnified against in this Paragraph 8.01(b); provided, however, that Buyer shall not be obligated to indemnify a Seller Indemnified Party and hold it harmless under this Paragraph 8.01(b) with respect to any settlement of a claim to which Buyer has not consented, if such consent has not been unreasonably withheld. (c) Right to Defend, Etc. If the facts giving rise to any such indemnification shall involve any actual claim or demand by any third party against a Buyer Indemnified Party or a Seller Indemnified Party (referred to hereinafter as an "Indemnified Party"), the indemnifying parties shall be entitled to notice of and entitled (without prejudice to the right of any Indemnified Party to participate at its own expense through counsel of its own choosing) to defend or prosecute such claim at their expense and through counsel of their own choosing if they give written notice of their intention to -16- 17 do so no later than the time by which the interests of the Indemnified Party would be materially prejudiced as a result of its failure to have received such notice; provided, however, that if the defendants in any action shall include both the indemnifying parties and Indemnified Party, and the Indemnified Party shall have reasonably concluded that counsel selected by the indemnifying parties have a conflict of interest because of the availability of different or additional defenses, the Indemnified Party shall have the right to select separate counsel to participate in the defense of such action on its own behalf, at the expense of the indemnifying parties. The Indemnified Party shall cooperate fully in the defense of such claim and shall make available to the indemnifying parties pertinent information under its control relating thereto. This subparagraph does not apply to individual claims in an amount below $1,000; provided, however, notice of any claims within 90 days of Closing shall be required. 8.02 Non-Competition. (a) Covenant of Seller. (i) Seller hereby covenants and agrees that for three (3) years from and after the Closing Date, it will not, directly or indirectly or through any subsidiary or joint venture, engage in any Hardware Service business which competes with Buyer's Hardware Service business in any geographic area where Seller now renders its Hardware Services. (ii) Seller agree not to solicit or offer employment to any employee hired by Buyer pursuant to Section 3.08 for a period of at least three (3) years after the date of the Closing unless such employee is not at the time of such solicitation or offer and has not been at any time during the immediately preceding three (3) month period employed by Buyer. (iii) Seller acknowledges that compliance with the covenants contained herein is necessary to protect the goodwill that was acquired by Buyer pursuant to this Agreement. Seller further acknowledges that any remedy at law for the breach of the foregoing covenants will be inadequate, and that Seller and its successors and assigns, notwithstanding any other provision of this Agreement, shall be entitled to injunctive relief as well as all other remedies which may be available at law or in equity. (iv) The parties intend that the covenants contained in this Section 8.02 shall be construed as a series of separate covenants, one for each county. Except for geographic coverage, each such separate covenant shall be deemed identical. If any one of the covenants is declared invalid for any reason, this ruling shall not affect the validity of the remainder of the covenants, which shall remain in effect as if the provision had been executed without the invalid covenants, and the covenant declared invalid shall be construed, at the option of Buyer, by limiting or reducing -17- 18 it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. (b) Covenant of Buyer. Buyer hereby covenants and agrees that for five (5) years from and after the Closing Date, it will not, directly or indirectly or through any subsidiary or joint venture, engage in any hardware product sales to any of Seller's customers included on the Customer List, other than customers who have been customers of Buyer prior to the Closing or who are customers of any business subsequently acquired by Buyer. Any offers to purchase such hardware products received from such customers will be referred to the Seller. 8.03 Commissions. As part of the purchase hereunder, Buyer agrees to pay Seller a commission for new AMSO Maintenance Contracts sold twelve months after Closing equal to ten percent (10%) of the first year's gross revenue under such annual contract sold by the Seller for Hardware Services. Commissions shall not be due the Seller for contract renewals. Commissions due to the Seller shall be paid to the Seller within 30 days receipt from the customer by the Buyer of the initial payment under the new AMSO Maintenance Contract. In the event any new AMSO Maintenance Contracts are cancelled within the first six (6) months of the Contract period, any commissions paid to the Seller for such contracts will be deducted from future commissions earned unless such contract was cancelled because of customer dissatisfaction with Buyer's services. In the event that a contract is cancelled for dissatisfaction with Buyer's services no additional commission amounts for that contract will be paid from the date of cancellation. Buyer hereby appoints Seller as an Authorized Sales Representative of Alpha Microsystems. M& J Technologies shall be entitled to represent itself as such. 8.04 Seller's Appointment of Buyer as Exclusive Hardware Service Provider. Seller hereby appoints and gives Buyer the exclusive right for the three (3) year period after the Closing to provide Hardware Services to all existing and future customers of the Seller. Under such exclusivity, the Buyer agrees to provided installation services to the Seller at a preferred rate of $75.00 per hour during normal business hours, such preferred rate being subject to increases not more than once each year, and not to exceed the percentage increases in the Consumer Price Index . ARTICLE IX ---------- CONDUCT OF BUSINESS PENDING THE CLOSING --------------------------------------- 9.01 The Seller covenants and agrees that, prior to the Closing Date or the earlier termination of this Agreement pursuant to Section 6.01 hereof, unless the Buyer shall otherwise agree in writing or as otherwise expressly permitted by this Agreement: (a) The business of Seller shall be conducted only in the ordinary course of business and consistent with past practice, and the Seller shall use its best efforts to maintain and preserve its business, assets, prospects, employees, customers and other advantageous business relationships. Without limiting the generality of the foregoing, -18- 19 Seller shall (i) maintain the Service Assets in substantially their current state of repair, excepting normal wear and tear, (ii) through the Closing Date, maintain insurance covering the Service Assets of the same nature and level as that in effect on the date hereof, and (iii) perform all obligations of Seller (including under the Service Contracts) in accordance with the Seller's past practice. (b) Seller shall not do any of the following: (i) except in the ordinary course of business, sell, pledge, dispose of or encumber any of the Service Assets: (ii) whether or not in the ordinary course of business, sell, pledge, dispose of or encumber any material portion of the Service Assets or (iii) authorize or propose any of the foregoing, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing. ARTICLE X --------- GENERAL PROVISIONS ------------------ 10.01 Notification of Changes. Each party will promptly notify the other in writing of the existence or happening of any material fact, event or occurrence which may tend to alter the accuracy or completeness of any representation or warranty contained in this Agreement. 10.02 Notices. Except as otherwise expressly provided herein, any notice herein required or permitted to be given shall be in writing and shall be personally served or sent by overnight courier, by registered mail or certified mail, postage prepaid, or by prepaid telex, telecopy or telegram and shall be deemed to have been given when such writing is received by the intended recipient thereof. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof served as provided in this Paragraph 10.02) shall be as follows: If to Buyer: Alpha Microsystems 2722 South Fairview Street Santa Ana, California 92704 Attn: Chief Financial Officer Fax No.: (714) 641-7678 With a copy to: Allen, Matkins, Leck, Gamble & Mallory 515 South Figueroa Street, 8th Floor Los Angeles, California 90071 Attn: Debra Dison Hall, Esq. Fax No.: (213) 620-8816 If to Seller: M&J Technologies, Inc. Attn: John Kaiser 541 South West 15th Street Boca Raton, Florida 33432 Fax No.: [ ] -19- 20 With a copy to: Carol B. Haight, P.A. 370 West Camino Gardens Boulevard Suite 300 Boca Raton, Florida 33432 Fax No.: (561) 362-0764 10.03. Entire Agreement. This Agreement, together with the Exhibits hereto, constitutes the entire understanding between the parties with respect to the subject matter hereof, superseding all negotiations, prior discussions and preliminary agreements. This Agreement may not be changed except in writing executed by Buyer and Seller. Fax signatures shall be binding and have the same effect as original signatures. 10.04. Payment of Expenses. Buyer and Seller shall each be responsible to pay all of its own respective expenses as incurred in connection with this Agreement, the transactions contemplated hereby, the negotiations leading to the same and the preparations made for carrying the same into effect, and no party shall be liable or responsible for the fees or expenses incurred by any other party. 10.05. Attorneys' Fees. Should any litigation be commenced between the parties hereto or their representatives concerning any provision of this Agreement or the rights and duties of any person or entity in relation thereto, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to an award of all actual attorneys' fees and costs incurred in such litigation, without regard to any schedule or rule of court purporting to restrict such an award, including, without limitation, actual attorneys' fees, costs and expenses incurred in connection with (i) enforcing, perfecting and executing such judgment, (ii) post-judgment motions; (iii) contempt proceedings; (iv) garnishment, levee, and debtor and third-party examinations; (v) discovery; and (vi) bankruptcy litigation. 10.06. Waiver. No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or be construed as a further or continuing waiver of any such term, provision or condition or as a waiver of any other term, provision or condition of this Agreement. 10.07. Captions. The captions of the paragraphs of this Agreement are for convenience only and shall not be considered or referred to in resolving questions or interpretation. 10.08. Counterparts. This Agreement may be executed in one or more counterparts and counterparts signed in the aggregate by Buyer and Seller shall constitute a single original instrument. 10.09. Assignment. This Agreement shall not be assignable by any party without the consent of the other party. Notwithstanding the foregoing, Buyer may assign this Agreement in whole or in part, to any subsidiary, affiliate or parent corporation or any successor of Buyer by -20- 21 merger, consolidation or acquisition of a substantial portion of its assets. In the case of any such assignment, Buyer shall continue to remain liable for its obligations hereunder. 10.10. Severability. If any term or provision of this Agreement, or the application thereof to any person or circumstance, shall to any extent be found to be invalid, void or unenforceable, the remaining provisions and any application thereof shall, nevertheless, continue in full force and effect without being impaired or invalidated in any way. 10.11. Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall be binding upon and shall inure to the benefit of the parties hereto, their personal representatives, heirs, executors, administrators, successors and/or assigns. 10.12. Further Actions. Each of the parties hereto agrees to take any and all actions reasonably necessary in order to carry out the provisions of this Agreement. 10.13. Gender and Number. As used in this Agreement, the masculine gender includes the feminine and neuter, the feminine gender includes the masculine and neuter, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 10.14. Time. Time is of the essence in each provisions of this Agreement of which time is an element. 10.15. Construction. This Agreement shall be construed in accordance with its plain meaning and not against either party. 10.16. Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 10.17. Public Announcements. Neither party shall make any public announcements or public statements regarding the transactions contemplated herein until after the Closing, unless approved in writing by the other, or unless the disclosing party reasonably believes that disclosure is required by law. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. -21- 22 "BUYER" "SELLER" ALPHA MICROSYSTEMS, M&J TECHNOLOGIES, Inc. a California corporation a Florida corporation By: By: ------------------------------ ---------------------------- Its: Its: President ------------------------ -22- 23 LIST OF EXHIBITS ---------------- Exhibit "A" Allocation of Purchase Price Exhibit "B" Exceptions to Representations and Warranties Exhibit "C" Spare Parts and Agreed Value Exhibit "D" Service Contracts Exhibit "E" Employees Exhibit "F" Furniture and Fixtures Exhibit "G" Seller's Gross Revenues Exhibit "H" Service Vehicles and Fair Market Value Exhibit "I" Excluded Assets EX-2.8 3 MODIFICATION OF CONTRACT 1 EXHIBIT 2.8 MODIFICATION TO CONTRACT FOR PURCHASE AND SALE OF M & J TECHNOLOGIES INC. HARDWARE SERVICE BUSINESS ASSETS TO ALPHA MICROSYSTEMS The Contract for Purchase and Sale of M & J Technologies, Inc. Hardware Service Business assets to Alpha Microsystems made and entered into by the Parties on February 19, 1998 is hereby Modified to correct typographical errors and to further clarify the intent of the parties as follows: Page 4, Paragraph 2.04(d) shall be amended to read: "Post Closing Average Monthly T&M Revenue" shall mean the total amounts invoiced by Buyer for time and materials services for the first six (6) months after the closing, to customers listed on Seller's Customer List and any additional Customers added, as agreed to by Buyer and Seller to Seller's Customer List, (excluding customers who were time and materials customers of Buyer, with the exception of M&J, within 2 months immediately prior to the date of this Agreement) for Hardware Services rendered on a time and Materials basis divided by six (6), and including all amounts invoiced to M&J for installation. Page 5, First Paragraph shall be amended to read: Seller has the right to audit applicable records relating to adjustments of the payments specified in this Paragraph 2.04 and this payment shall be adjusted for any errors in billing or otherwise made by Buyer. Page 5, Paragraph 2.04 (e) shall be amended to add the following sentence: All books and records shall be maintained according to Generally Accepted Accounting Principles (GAAP), and all analysis for adjustments shall be conducted accordingly. The following sentence shall be added to Paragraph 2.09: M&J shall move from the Leased Premises on or before May 1, 1998, and shall owe no rent to Buyer during this period from closing, through and including May 1, 1998. Page 19, Paragraph 8.02 (b) shall be amended to read: Any offers to purchase such hardware products received from such customers will be immediately referred to the Seller. Such customers shall include customers listed on Seller's Customer List and any additional Customers added to Seller's Customer List as agreed to by Buyer and Seller, excluding customers who were time and materials customers to Buyer with the exception of M&J, within 2 months immediately prior to the date of this Agreement). Buyer hereby agrees that Seller shall become its EXCLUSIVE Hardware Sales Provider for the Three (3) year period following Closing, for customers on or added to Customer List. M&J shall submit an invoice for block of time services for 2/25, 2/26/ and 2/27. Alpha Microsystems shall pay the invoice upon submission. 2 ALPHA MICROSYSTEMS M & J TECHNOLOGIES INC. - ------------------------------------- ------------------------------------ R. PARKS, VICE PRESIDENT JOHN KAISER, PRESIDENT EX-10.63 4 INDEMNIFICATION AGREEMENT 1 Exhibit 10.63 INDEMNIFICATION AGREEMENT ------------------------- THIS INDEMNIFICATION AGREEMENT ("Agreement") is made as of this 1st day of December, 1997, by and between ALPHA MICROSYSTEMS, a California corporation (the "Company"), and .Jeffrey J. Dunnigan ("Indemnitee"), an officer of the Company. WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation subjecting officers and directors to expensive litigation risks at the same time that liability insurance has been severely limited; WHEREAS, Indemnitee does not regard the current protection available as adequate given the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to serve as officers and directors without adequate protection; WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law; NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: I. INDEMNIFICATION --------------- 1.01 Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or complete action, suit or proceeding, whether civil, criminal, administrative or investigative (other than action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director and/or officer of the Company or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while a director and/or officer or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all expense, liability and loss (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably 2 believed to be in the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in the best interests of the Company, and with respect to any criminal action or proceeding, had reasonable cause to believe that Indemnitee's conduct was unlawful. 1.02 Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of fact that Indemnitee is or was a director and/or officer of the Company or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while a director and/or officer or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all expense, liability and loss (including attorneys' fees) and amounts paid in settlement (if such settlement is court-approved) actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the Company and its shareholders. No indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company in the performance of Indemnitee's duties to the Company and its shareholders, unless and only to the extent that the Court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine. 1.03 Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1.01 or 1.02 or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. II. EXPENSES; INDEMNIFICATION PROCEDURE ----------------------------------- 2.01 Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referenced in Section 1.01 or 1.02 hereof. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advance to be made hereunder shall be paid by the Company to Indemnitee within thirty (30) days following delivery of a written request therefor by Indemnitee to the Company. -2- 3 2.02 Determination of Conduct. Any indemnification (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of Indemnitee is proper under the circumstances because Indemnitee has met the applicable standard of conduct set forth in Section 1.01 or 1.02 of this Agreement. Such determination shall be made by any of the following: (1) the Board of Directors (or by an executive committee thereof) by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, (2) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, (3) by the shareholders, with the shares owned by Indemnitee not being entitled to vote thereon, or (4) the court in which such proceeding is or was pending upon application made by the Company or Indemnitee or the attorney or other person rendering service in connection with the defense, whether or not such application by Indemnitee, the attorney or the other person is opposed by the Company. 2.03 Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to Alpha Microsystems, 2722 South Fairview Street, Santa Ana, California 92704, or such other address as the Company shall designate in writing to Indemnitee. Notice shall be deemed received on the third business day after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise, notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. 2.04 Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 2.03 hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable actions to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. 2.05 Selection of Counsel. In the event the Company shall be obligated under Section 2.01 hereof to pay the expenses of any proceeding against Indemnitee, the Company, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (a) Indemnitee shall have the right to employ his or her counsel in any such proceeding at Indemnitee's expense; and (b) if (i) the employment of counsel by Indemnitee has been previously authorized by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (iii) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. -3- 4 III. ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY -------------------------------------------------- 3.01 Application. The provisions of this Agreement shall be deemed applicable to all actual or alleged actions or omissions by Indemnitee during any and all periods of time that Indemnitee was, is, or shall be serving as a director and/or officer of the Company. 3.02 Scope. The Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by law (except as set forth in Article VIII hereof), notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Articles of Incorporation, the Company's Bylaws or by statute. In the event of any changes, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a California corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee's rights and the Company's obligations under this Agreement. In the event of any change in any applicable law, statute, or rule which narrows the right of a California corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. 3.03 Non-Exclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which an Indemnitee may be entitled under the Company's Articles of Incorporation, its Bylaws, any agreement, any vote of shareholders or disinterested directors, the California General Corporation Law, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for an action taken or not taken while serving in an indemnified capacity even though he or she may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding. IV. PARTIAL INDEMNIFICATION ----------------------- 4.01 If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. -4- 5 V. MUTUAL ACKNOWLEDGMENT --------------------- 5.01 Both the Company and Indemnitee acknowledge that in certain instances, federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. VI. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE -------------------------------------------- 6.01 The Company shall, from time to time, make the good faith determination whether or not it is practicable for the company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the directors and officers with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of directors' and officers' liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company. VII. SEVERABILITY ------------ 7.01 Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Article VII. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify -5- 6 Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. VIII. EXCEPTIONS ---------- 8.01 Any other provision to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement for the following: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, unless said proceedings or claims were authorized by the board of directors of the Company. (b) Improper Personal Benefit. To indemnify Indemnitee against liability for any transactions from which Indemnitee derived an improper personal benefit, including, but not limited to, self-dealing or usurpation of a corporate opportunity. (c) Dishonesty. To indemnify Indemnitee if a judgment or other final adjudication adverse to Indemnitee established that Indemnitee committed acts of active and deliberate dishonesty, with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated. (d) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company. (e) Claims Under Section 16(b). To indemnify Indemnitee for expenses or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. IX. MISCELLANEOUS ------------- 9.01 Construction of Certain Phrases. (a) For purposes of this Agreement, references to the "Company" shall include any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust -6- 7 or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which impose duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "reasonably believed to be in the best interests of the Company and its shareholders" as referred to in this Agreement. 9.02 Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall insure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. 9.03 Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressed, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked: If to Indemnitee: Jeffrey J. Dunnigan --------------------------------- --------------------------------- If to Company: Alpha Microsystems 2722 South Fairview Street Santa Ana, California 92704 or to such other address as may be furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. 9.04 Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California. 9.05 Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of California, as applied to contracts between California residents entered into and to be performed entirely within California. -7- 8 9.06 Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereby have executed this Agreement as of the date first above written. "Company" ALPHA MICROSYSTEMS, a California corporation By: ---------------------------------- Douglas J. Tullio Its: President and Chief Executive Officer "Indemnitee" ----------------------------------------- Jeffrey J. Dunnigan -8- EX-21 5 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES ------------ AMDP, Inc. Alpha Technology Interconnect, Inc. EX-23 6 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-20771) pertaining to the Alpha Microsystems 1993 Employee Stock Option Plan, as amended, the 1996 Nonemployee Director Stock Compensation Plan and the Employee Stock Purchase Plan and in the Registration Statement (Form S-8 No. 333-29252) pertaining to the Third Amended and Restated Incentive Stock Option Plan, the Non-Qualified Stock Option Plan and the Stock Incentive Award Plan, and in the Registration Statement (Form S-8 No. 333-62411) pertaining to the 1993 Employee Stock Option Plan and the 1993 Directors' Stock Option Plan of Alpha Microsystems of our report dated April 15, 1998, except for Note 6, as to which the date is April 23, 1998, with respect to the consolidated financial statements and schedule of Alpha Microsystems included in the Annual Report (Form 10-K) for the year ended February 22, 1998. /s/ ERNST & YOUNG LLP Orange County, California May 21, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR FEB-22-1998 FEB-24-1997 FEB-22-1998 5,003 0 4,075 294 580 9,754 11,994 9,479 15,788 5,421 60 0 0 31,011 (20,704) 15,788 6,104 19,327 4,079 13,966 8,929 194 7 (3,318) (21) (3,297) 0 0 0 (3,297) (.30) (.30)
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