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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NO. 0-27042
ALPHANET SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2554535
(I.R.S. EMPLOYERIDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION
OFINCORPORATION OR ORGANIZATION)
7 RIDGEDALE AVENUE, CEDAR KNOLLS, NEW JERSEY 07927
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(201) 267-0088
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(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 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. [_]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant: $33,129,525 at February 28, 1997 based on the last sales
price on that date.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of February 28, 1997:
CLASS NUMBER OF SHARES
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Common Stock, $.01 par value................................ 5,102,900
The following documents are incorporated by reference into the Annual Report
on Form 10-K: Portions of the registrant's definitive Proxy Statement for its
1997 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
ITEM PAGE
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PART I 1. Business.................................................. 1
2. Properties................................................ 10
3. Legal Proceedings......................................... 10
4. Submission of Matters to a Vote of Security Holders....... 10
PART II 5. Market for the Company's Common Equity and Related
Shareholder Matters...................................... 11
6. Selected Financial Data................................... 12
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition....................... 13
8. Financial Statements and Supplementary Data............... 21
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 21
PART III 10. Directors and Executive Officers of the Company........... 22
11. Executive Compensation.................................... 22
12. Security Ownership of Certain Beneficial Owners and
Management............................................... 22
13. Certain Relationships and Related Transactions............ 22
PART IV 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................. 23
EXHIBIT INDEX........................................................... 24
FINANCIAL DATA AND SCHEDULES............................................ F-1
SIGNATURES..............................................................
PART I
ITEM 1. BUSINESS.
GENERAL
AlphaNet Solutions, Inc. (the "Company") is a single-source provider of
information technology ("IT") products, services and support to Fortune 1000
and other large and mid-sized companies located primarily in the New York-to-
Philadelphia corridor. The Company is authorized by many industry-leading
manufacturers of IT products, including Cisco Systems, Compaq, Hewlett-
Packard, IBM, Lucent Technologies, Microsoft, NEC and Novell, to resell their
products and provide related services. Such products include workstations,
servers, microcomputers, networking and communications equipment and
applications software. Through its established vendor alliances with MicroAge
Computer Centers, Inc. ("MicroAge") and Ingram Micro, Inc. ("Ingram"), major
aggregators of computer hardware and software, the Company provides its
customers with competitive pricing and value-added services such as electronic
product ordering, product configuration, testing, warehousing and delivery.
Additionally, since 1990, the Company has been developing related IT services
and currently offers network consulting, workstation support, education,
communications installation and IT staffing services. The Company's major
customers include Nabisco, BASF Corporation, KPMG Peat Marwick, Summit Bank,
Mercedes-Benz of North America, Matsushita, PSE&G, Polo-Ralph Lauren, Lucent
Technologies, AT&T, Fuji Film, Innovex, CS First Boston, Johnson & Johnson,
and Schindler Elevator.
The Company, a New Jersey corporation, was incorporated in 1984 under the
name AlphaTronics Associates, Inc. The address of the Company's principal
executive offices is 7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927, and
its telephone number is (201) 267-0088.
"AlphaNet Solutions" and the Company's logo are trademarks of the Company.
All other trade names, trademarks or service marks appearing in this Annual
Report on Form 10-K are the property of their respective owners and are not
the property of the Company.
Certain statements included in this Annual Report on Form 10-K, including
without limitation, statements regarding the anticipated growth in the IT
products and services markets, the continuation of the trends favoring
outsourcing of management information systems ("MIS") functions by large and
mid-sized companies, the anticipated growth in the services and support
component of the Company's business, the timing of the development and
implementation of the Company's new service offerings and the utilization of
such services by the Company's clients, the Company's objective to grow
through strategic acquisitions and trends in future operating performance, are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements include
risks and uncertainties, including, but not limited to: (i) the substantial
variability of the Company's quarterly operating results caused by a variety
of factors, some of which are not within the Company's control, including (a)
the short-term nature of the Company's customers' commitments, (b) patterns of
capital spending by customers, (c) the timing, size and mix of product and
service orders and deliveries, (d) the timing and size of new projects, (e)
pricing changes in response to various competitive factors, (f) market factors
affecting the availability of qualified technical personnel, (g) the timing
and customer acceptance of new product and service offerings, (h) changes in
trends affecting outsourcing of IT services, (i) disruption in sources of
supply, (j) changes in product, personnel and other operating costs, and (k)
industry and general economic conditions; (ii) changes in technical personnel
billing and utilization rates which are likely to be adversely affected during
periods of rapid and concentrated hiring; (iii) the intense competition in the
markets for the Company's products and services; (iv) the Company's ability to
manage its growth effectively which will require the Company to continue
developing and improving its operational, financial and other internal
systems, including a major upgrade of the Company's internal MIS
infrastructure; (v) the Company's ability to develop, market, provide, and
achieve market acceptance of, new service offerings to new and existing
clients; (vi) the Company's ability to attract, hire, train and retain
qualified technical personnel in an increasingly competitive market; (vii) the
Company's substantial reliance on a concentrated number of key customers;
(viii) uncertainties relating to potential acquisitions, if any, made by the
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Company, such as its ability to integrate acquired operations and to retain key
customers and personnel of the acquired business; (ix) the Company's dependence
on vendor authorizations to resell certain computer products and to provide
related services; (x) the Company's dependence on certain aggregators for a
substantial portion of its products acquired for resale; and (xi) the Company's
reliance on the continued services of key executive officers and salespersons.
Such risks and uncertainties may cause the Company's actual results to differ
materially from the results discussed in the forward-looking statements
contained herein.
INDUSTRY BACKGROUND
Many organizations have become increasingly dependent on the use of IT as a
competitive tool in today's business environment. The need to access and
distribute data on a real-time basis throughout an organization and between
organizations has led to the rapid growth in network computing infrastructures,
which connect numerous and geographically dispersed end users via local and
wide area networks. This growth has been driven by the emergence of industry
standard hardware, software and communications tools, as well as the
significant improvement in the performance, capacity and utility of such
network-based equipment and applications.
The acquisition, development and implementation of computer networks has,
however, become increasingly complex for large organizations due to rapid and
continual change in IT. Organizations must determine: (i) the type of PC
platform, computer peripherals, and software applications to purchase among a
vast array of product offerings; (ii) the optimal design of the network,
allowing for both the integration of new systems and the upgrade of and
migration from existing systems; and (iii) the level of ongoing support
required by the network and end users. As organizations rely more heavily on IT
as a key component of their operations and as end users demand the latest
technologies, MIS departments must continually adapt to rapid change and the
increasing complexity of designing, implementing and maintaining networks and
related applications.
As a result of the rapid changes in the IT products market and the risks
associated with large capital expenditures, organizations increasingly rely on
companies which offer and have knowledge of a wide variety of networking
products and the ability to perform related technical services in a cost-
effective manner. Additionally, many businesses increasingly are electing to
outsource some or all of the management and support of their networks. The
Company believes that the trend to outsourcing of IT management functions is
driven by the significant costs associated with maintaining a full-service
internal MIS staff. Such organizations increasingly require MIS personnel with
diverse technology skill sets in order to effectively adapt to such constant
change. As a result, the costs of hiring, maintaining and continually educating
a MIS department have grown significantly as demand for qualified personnel has
intensified. These factors have motivated organizations to focus their
resources on their core businesses and seek the expertise of independent
providers of IT products and services.
The Company believes that by working with a single-source provider of IT
products, services and support, organizations will be able to adapt more
quickly to technological changes and reduce their overall IT costs. Those
companies which provide a broad range of product and service offerings,
including network consulting, workstation support, education, communications
installation and IT staffing services, as well as the ability to work as
integral members of their clients' internal MIS teams, should be well
positioned to capitalize on the anticipated growth of the IT products and
services industry.
PRODUCTS
The Company is a reseller of IT products of leading hardware manufacturers
and software developers. In 1996, 83.2% of the Company's net sales and 60.9% of
its gross profit was generated from product sales. Such products include
workstations, servers, microcomputers, networking and communications equipment
and applications software. Through its established vendor alliances with
MicroAge and Ingram, major aggregators of computer hardware and software, the
Company provides its customers with competitive pricing and value-added
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services such as electronic product ordering, product configuration, testing,
warehousing and delivery. The Company resells products of numerous industry-
leading manufacturers of computer hardware, software and networking equipment.
Such manufacturers include:
3Com DEC Intel Novell
APC Dell Kingston Okidata
Apple Epson Lexmark SMC
AST FORE Systems Lotus Tecmar
Bay Networks Hayes Lucent Technologies Tektronix
Cisco Systems Hewlett-Packard Microsoft Toshiba
Compaq IBM NEC Xircom
The Company obtains products from such manufacturers primarily through its
relationships with MicroAge and Ingram. The Company's relationships with
MicroAge and Ingram allow it to minimize inventory risk by ordering products
primarily on an as-needed basis. The Company believes that in most instances,
the cost-plus purchases from MicroAge and Ingram are at prices lower than
those which could be obtained independently from the various manufacturers and
other vendors. The Company utilizes electronic ordering and pricing systems
that provide real-time status checks on the aggregators' extensive
inventories. The Company maintains electronic data interchange links to other
suppliers, thereby enabling the Company's sales team to schedule shipments
accurately, arrange for product configuration services and provide
electronically generated client price lists.
In addition, product configuration and testing performed by MicroAge and
Ingram allow the Company to customize orders to the business needs of
customers, thereby ensuring quality control by minimizing the possibility of
delivering defective or improperly configured equipment. This is accomplished
by their ability to provide uniform and consistent configuration and loading
of network and system applications.
SERVICES
The Company's services and support consist of network consulting,
workstation support, education, communications installation and IT staffing
services. In 1996, such services accounted for 16.8% of the Company's net
sales and 39.1% of its gross profit.
Network Consulting Services
The Company's Network Consultants provide clients with a wide array of IT
and network consulting, integration and support services, including network
design, implementation, installation and remote help desk services. The
Company's Network Consultants also provide technical staffing and project
management services, including LAN/WAN performance analyses and system
migration and upgrade services. The Company's consulting group also provides
new technology feasibility and impact analyses, end-user group needs analyses
and formulates disaster recovery plans for its customers. The Company provides
its network consulting services 24 hours a day, seven days a week, on an as-
needed basis.
The Company's Network Consultants provide advanced network services and
support, utilizing products of many industry-leading manufacturers including
3Com, Bay Networks, Cisco Systems, Compaq, FORE Systems, Hewlett-Packard, IBM,
Microsoft and Novell. The Company's Network Consultants have knowledge and
experience in such LAN/WAN platforms as Microsoft Windows NT, Novell NetWare,
UNIX and IBM OS/2. Such personnel support both long- and short-term
engagements at client locations. As of December 31, 1996, most of the
Company's Network Consultants were on-site at various customer locations. The
Company believes that as many large and mid-sized corporations continue to
outsource many of their MIS requirements, there is an opportunity to expand
the services it provides to companies in its target markets.
The Company's Network Consultants have recently started to provide remote
help desk and Internet/Intranet support services and are continuing to develop
the Company's remote network management capabilities. The
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Company's remote help desk capabilities are fully operational and provide
advanced technical support and comprehensive software application support. To
date, two customers are fully integrated with the Company's remote help desk.
Since the end of 1996, the Company also has offered Internet/Intranet support
services which include secure access, hosting and publishing services. The
Company's net sales generated from remote help desk and Internet/Intranet
services to date have not been significant. The Company's remote network
management service capability continues to be under development and is
currently in beta testing with one client. Such development has been slowed
due to the Company's decision, in 1996, to allocate Network Consultants to
billable client projects in order to meet increased demand for the Company's
network consulting services rather than to internal remote network management
development efforts. Upon successful completion, the remote network management
service will enable the Company's Network Consultants to monitor and
administer clients' LAN/WAN systems remotely from the Company's headquarters
by means of dedicated communications links. The Company will be able to
monitor many components of a client's network, including file servers,
routers, database servers, concentrators, workstations, and printers and
promptly notify clients of problems as they occur, remedy such problems and
minimize or prevent the down-time of a networked system. No assurance can be
given that such project will be completed within the Company's budget or, if
completed, that it will meet client expectations or achieve market acceptance.
Workstation Support Services
The Company's Workstation Analysts provide clients with a wide array of IT
services for end users, including hardware and software installations, system
upgrades and enhancements, maintenance, equipment management and applications
help desk services. Several of the Company's largest customers require the
Company's Workstation Analysts to be on-site at their facilities on a fully
dedicated basis. As of December 31, 1996, most of the Company's Workstation
Analysts were on-site at customer locations. Other customers of the Company
rely on the Company's ability to provide dispatched on-site services in
response to customer requests for service. Such support is available 24 hours
a day, seven days a week, depending on the needs of the Company's customers.
The Company's Workstation Analysts also service and repair equipment at the
Company's facility pursuant to its depot, or drop-off, service. The Company
tracks service requests through its customer database which maintains current
status reports and historical logs of customer communications. The Company's
capabilities include call dispatching, tracking and escalation. The Company's
Workstation Analysts also provide customized configuration of software and
hardware for workstations and servers and perform deployment to customer
sites.
The Company's Workstation Analysts are authorized by many industry-leading
manufacturers, including AST, Compaq, Dell, Hewlett-Packard, IBM, NEC and
Toshiba, to perform both in- and out-of-warranty maintenance services. The
Company offers a warranty upgrade program to provide faster response and
repair times, additional hours of coverage, warranty extensions and warranty
administration services for customers who desire broader service offerings
than those of the manufacturer. Most of the Workstation Analysts employed by
the Company are "A+ Certified." The A+ Certification Program is sponsored by
the Microcomputer Industry Association and is recognized by leading
manufacturers as the industry-wide standard of professional competency for
Workstation Analysts. The Company's Workstation Analysts service and support a
wide variety of IT products, including microcomputers, associated peripherals
and application software.
Education Services
The Company operates four vendor authorized education facilities ("Learning
Centers") which conduct technical education courses for clients, employees and
the general public. The Company's Learning Centers offer authorized Microsoft,
Novell and Lotus training classes on network operating systems, application
software, groupware and the Internet. These Learning Centers are utilized by a
variety of customers including network administrators, MIS executives,
professional and administrative end users as well as the Company's own
technical staff.
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The Company is a Microsoft Authorized Technical Education Center to provide
advanced education programs for technical professionals on Windows NT and
Windows 95. Novell has designated the Company as a Novell Authorized Education
Center to offer training for NetWare, UnixWare and GroupWise engineers and
administrators. In addition, the Company is certified as a Lotus Authorized
Education Center to provide training for Lotus Notes administrators,
developers and end users. In addition, each Learning Center is a Sylvan
Prometric Authorized Testing Center which provides independent testing
services required for many training courses that lead to various industry
certifications.
The Learning Centers provide ancillary benefits to the Company by reducing
the cost to train its own Network Consultants and Workstation Analysts and
providing the Company with highly trained individuals. The Company believes
that its education services, coupled with its IT staffing services, provide it
with a talented pool of available Network Consultants and Workstation
Analysts.
Communications Installation Services
As part of its strategy to offer customers a single-source solution to their
IT needs, the Company provides telecommunications and data system cabling
services, often in conjunction with other services. Several of the Company's
Communications Engineers are Berk-Tek, Hubbell or AT&T certified. The
Company's Communications Engineers design and install cabling for LANs and
telecommunication equipment, including voice mail and paging systems. They
also provide maintenance and upgrade services for their clients'
telecommunications systems. The Company frequently coordinates with the
appropriate telephone service provider to provide for customers' service
requirements.
IT Staffing Services
In late 1996, the Company began to provide recruiting and placement services
for technical personnel for temporary assignments and permanent positions. At
December 31, 1996, the Company had five, full-time dedicated recruiters.
Although such placement services are available to the Company's customers, to
date, these services have been performed primarily for the Company to fulfill
its own technical personnel needs.
STRATEGY
The Company's primary business objective is to become a leading single-
source provider of high-quality IT products, services and support in its
target markets. To this end, the Company intends to pursue the following
strategies.
Leverage Complementary Businesses. The Company intends to continue to
combine the expertise of its technical personnel with its strong product
procurement and marketing capabilities to provide comprehensive IT solutions
to Fortune 1000 and other large and mid-sized companies. Since its inception,
the Company has operated as an authorized reseller of IT equipment from
leading manufacturers. The Company has established alliances with major
aggregators of computer hardware and software so that it may provide its
customers with competitive pricing, ready product availability and value-added
services such as electronic product ordering, product configuration, testing,
warehousing and delivery. Additionally, since 1990, the Company has been
developing related IT services and currently offers network consulting,
workstation support, education, communications installation and IT staffing
services. The Company believes that its ability to provide a broad range of
technical services, coupled with its traditional strength in satisfying its
clients' hardware requirements, enables the Company to strengthen long-term
relationships with its existing clients and affords cross-selling
opportunities with new and existing clients.
Broaden Service Offerings. The Company intends to broaden its IT service
offerings in order to provide additional sales opportunities within its
existing client base and to create sales opportunities with new clients. As
part of this strategy, the Company began to offer new services to its clients
in 1996, including IT staffing,
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remote help desk and Internet support services. All of such services remain in
the early stage of marketing and client acceptance. In addition, the Company
plans to offer new services in 1997, including remote network management. Upon
successful completion, the remote network management service will enable the
Company's Network Consultants to monitor and administer clients' LAN/WAN
systems remotely from the Company's headquarters by means of dedicated
communications links. The Company believes that its ability to provide a wide
array of IT products, services and support enables it to earn margins higher
than it would earn if it sold products only.
Expand and Develop Strategic Relationships. As the Company broadens its
service offerings, it plans to generate additional business opportunities by
developing strategic relationships with larger systems integrators and
consulting firms to deliver complete technology solutions to customers. The
Company has developed relationships with IT product manufacturers, such as
Cisco Systems, Compaq, Hewlett-Packard, IBM, Microsoft, NEC and Novell, in
order to maintain the authorization to resell and service their products and
which result in referrals and sales opportunities. As the Company expands the
services component of its business, it will need to continue to develop
strategic relationships with other service providers and software developers
to enhance its sales efforts. The Company recently developed relationships
with IBM Global Services (formerly ISSC) and Lucent Technologies and intends
to develop similar relationships with other consulting and technology firms.
The Company believes that these relationships create opportunities for the
Company to provide products and services complementary to those of its
strategic partners and, as a result, meet the needs of clients requiring
extensive IT solutions.
Pursue Strategic Acquisitions. The Company intends to pursue acquisitions of
IT products and services businesses in order to expand the Company's service
offerings, to add or enhance technical or sales personnel, or to provide
desirable customer relationships. In particular, the Company intends to focus
its acquisition strategy on candidates which have a proven record of
delivering high-quality technical services, a customer base of large and mid-
sized companies that could benefit from the Company's services, or a regional
strength which would enable the Company to further penetrate its target
markets. In July 1996, the Company consummated its acquisition of certain
assets and the business of Lior, Inc., a New Jersey-based MicroAge affiliate
("Lior"), which resulted in a substantial increase in product sales and
opportunities to provide services and support to Lior customers which
previously purchased primarily computer products from Lior.
SALES AND MARKETING
The Company currently focuses its sales and marketing efforts on major
corporations in its target markets through its direct sales and marketing
departments consisting of 90 people as of December 31, 1996. The Company
believes that its direct sales and support personnel provide effective account
penetration and management, enhanced communications and long-term
relationships with its existing clients. To date, the Company has focused its
sales and marketing efforts on Fortune 1000 and other large and mid-sized
companies located primarily in the New York-to-Philadelphia corridor. Given
the concentration of major corporations in such region and the trend to
outsourcing of IT services, the Company does not anticipate the need to expand
the geographic scope of its sales and marketing efforts outside of its
traditional sales area in the near future.
The Company has concentrated its efforts over the past few years on
increasing the size and quality of its direct sales force, expanding its sales
support infrastructure and developing a marketing department dedicated to
supporting the efforts of the Company's various business segments. The
Company's direct sales force is comprised of 41 sales persons as of December
31, 1996. Each salesperson's compensation is commission based. Sales personnel
derive sales leads from individual business contacts, from leads generated by
the marketing department's efforts and from customer referrals from suppliers
and vendors.
The Company continues to support the growth of its network consulting and
other services businesses through the hiring of additional sales personnel.
The Company's sales and marketing focus continues to be technology-driven,
with its Network Consultants and Workstation Analysts participating with its
direct sales personnel as part of the Company's team approach to sales. The
Company's sales personnel also participate in
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training programs designed by manufacturers to introduce their new and upgrade
products as well as to provide industry information and sales technique
instruction. The Company believes that it maintains a competitive advantage by
continually educating its sales force on the latest technologies and through
the increased role of high-level technical personnel in the sales process.
The Company's marketing department is responsible for coordinating the
various sales and technical personnel that may be required in soliciting a
particular project. The Company's marketing efforts include the creation and
production of Company brochures, direct mail programs, new business marketing
strategies and sales presentation materials for prospects.
CUSTOMERS
During 1996, the Company had approximately 800 customers which purchased
products from the Company or utilized its technical services, including many
Fortune 1000 corporations in a variety of industries. The Company's major
customers include:
Nabisco Matsushita Fuji Film
BASF Corporation PSE&G Innovex
KPMG Peat Marwick Polo-Ralph Lauren CS First Boston
Summit Bank Lucent Technologies Johnson & Johnson
Mercedes-Benz of North America AT&T Schindler Elevator
The Company added several new clients during 1996 through its own sales and
marketing efforts and as a result of the Lior acquisition, including KPMG Peat
Marwick, Matsushita, PSE&G, Innovex and CS First Boston. During each of the
three years ended December 31, 1996, one customer, Nabisco, accounted for
approximately 24%, 20% and 17% of the Company's net sales, respectively. No
other customer accounted for more than 10% of the Company's net sales during
the three years ended December 31, 1996. Sales to the Company's top 10
customers totaled approximately 74%, 68% and 63% of net sales for the three
years ended December 31, 1996, respectively.
In general, there are no ongoing written commitments by customers to
purchase products from the Company. All product sales by the Company are made
on a purchase order basis. In addition, the Company normally ships products
within 30 days of receiving an order and, therefore, does not customarily have
a significant backlog. A significant reduction in orders from any of the
Company's largest customers could have a material adverse effect on the
Company's results of operations. There can be no assurance that the Company's
largest customers will continue to place orders with the Company or that
orders by such customers will continue at their previous levels. Although the
Company has service contracts with many of its customers to provide systems
integration and other services, such service contracts generally are
terminable upon relatively short notice. There can be no assurance that the
Company's service customers will continue to enter into service contracts with
the Company or that existing contracts will not be terminated.
SUPPLIERS
The Company relies on manufacturers and aggregators of computer hardware,
software and peripherals to develop, manufacture and supply all of the
computer components sold and serviced by the Company. The Company primarily
utilizes MicroAge and Ingram, leading aggregators, to procure the majority of
its products for resale to its customers.
The Company has purchased products on a cost-plus basis from MicroAge since
the Company's inception in 1984. In July 1994, the Company renewed its
agreement with MicroAge. Under such agreement, the Company
7
is required to purchase a minimum of $100,000 of products from MicroAge per
quarter. During 1994, 1995 and 1996, the Company purchased from MicroAge
approximately 73%, 64% and 48%, respectively, of the products sold by the
Company. Such purchases totaled approximately $39.8 million, $35.2 million and
$46.3 million during such respective periods. The MicroAge agreement may be
terminated by the Company with or without cause upon 90 days prior written
notice and may be terminated by MicroAge under limited circumstances upon 90
days prior written notice. The Company also purchases computer products from
Ingram on a cost-plus basis. The Company's relationship with Ingram was
initiated by the Company in late 1994 to help ensure its clients of product
availability and competitive pricing. The Company's purchases from Ingram
accounted for approximately 9%, 17% and 35% of the Company's total product
purchases in 1994, 1995 and 1996, respectively. The agreement with Ingram may
be terminated with or without cause by either party upon 30 days prior written
notice. The Company's agreements with MicroAge and Ingram provide for
discounted pricing and rebates provided that the Company meets agreed-upon
purchase level targets.
In addition to its agreements with MicroAge and Ingram, the Company
maintains standard authorized dealership agreements directly with many leading
manufacturers of computer hardware and software. Under the terms of these
agreements, the Company is authorized to resell to end users and provide
warranty service on the products of such manufacturers. The Company's status
as an authorized reseller is essential to the operation of the Company's
business. In general, the agreements do not require minimum purchases and
include termination provisions ranging from immediate termination to
termination upon 90 days prior written notice. Many of such agreements are
based upon the Company's continued relationships with authorized aggregators.
The Company, however, generally does not purchase products directly from these
manufacturers because the Company believes that MicroAge and Ingram provide it
with several advantages, including competitive pricing, limited inventory
risk, ready product availability, product quality assurance, access to the
various vendors which may be required on a particular project, electronic
product ordering, product configuration, testing and warehousing. The Company
has not entered into any long-term contracts with its suppliers, electing to
purchase computers, computer systems, components and parts on a purchase order
basis. As a result, there can be no assurance that such products will be
available as required by the Company at prices or on terms acceptable to the
Company.
COMPETITION
The markets for the Company's products and services are characterized by
intense competition. The Company believes that the principal competitive
factors in the market for IT products and services include price, customer
service, breadth of product and service offerings, product availability,
technical expertise, the availability of skilled technical personnel,
adherence to industry standards, financial stability and reputation. The
Company's competitors include established computer product manufacturers (some
of which supply products to the Company), distributors, aggregators, computer
resellers (many of which are able to purchase products at prices lower than
the Company), systems integrators and IT service providers. Many of the
Company's current and potential competitors have longer operating histories
and financial, sales, marketing, technical and other resources substantially
greater than those of the Company. As a result, the Company's competitors may
be able to adapt more quickly to changes in customer needs or to devote
greater resources than the Company to the sales of IT products and the
provision of IT services. Such competitors could also attempt to increase
their presence in the Company's markets by forming strategic alliances with
other competitors or customers of the Company, offer new or improved products
and services to the Company's customers or increase their efforts to gain and
retain market share through competitive pricing. As the market for IT products
has matured, price competition has intensified and is likely to continue to
intensify and has resulted in continued industry-wide downward pricing
pressure. In addition, competition for quality technical personnel has
continued to intensify, resulting in increased personnel costs for many IT
service providers. Such competition in IT products and services has adversely
affected, and likely will continue to adversely affect, the Company's gross
profits, margins and results of operations. Furthermore, the Company believes
there are low barriers to entry into its markets which enable new competitors
to offer competing products and services. There can be no assurance that the
Company will be able to continue to compete successfully with existing or new
competitors.
8
The Company believes that it competes with its competitors by providing a
single-source solution for its customers' IT products and services needs and
by providing a wider range of high quality services to the MIS departments and
end users of its corporate clients. The Company also believes that it
distinguishes itself from its competition on the basis of its technical
expertise, competitive pricing, vendor alliances, relationships with MicroAge
and Ingram, direct sales strategy and customer service orientation. Based on
the level of the Company's recurring business with many of its large
customers, the Company believes that it compares favorably to many of its
competitors with respect to the principal competitive factors set forth above.
EMPLOYEES
As of December 31, 1996, the Company employed 370 persons, of whom 222 were
technical personnel (consisting of 107 Network Consultants, 90 Workstation
Analysts, 15 Communications Engineers and 10 Instructors), 90 were engaged in
sales and marketing, and 58 were engaged in finance, administration and
management. In addition, the Company engaged 20 persons primarily on a
temporary-to-permanent basis at December 31, 1996, of which 6 were Network
Consultants and 14 were Workstation Analysts. The total number of technical
personnel engaged by the Company has grown significantly in recent years, from
38 at December 31, 1992, or 36% of its workforce, to 242 at December 31, 1996,
or 62% of its workforce.
None of the Company's employees is represented by a collective bargaining
agreement. Substantially all of the Company's employees have executed an
invention assignment and confidentiality agreement. In addition, the Company
requires that all new employees execute such agreement as a condition of
employment by the Company. The Company believes that it has been successful in
attracting and retaining skilled and experienced personnel. There is
increasing competition for experienced sales and marketing personnel and
technical professionals. The Company considers relations with its employees to
be satisfactory.
The Company's success depends in part on its ability to attract, hire, train
and retain qualified managerial, technical and sales and marketing personnel,
particularly for systems integration, support services and training.
Competition with other service providers and internal corporate MIS
departments for such personnel is intense as many of the Company's larger
competitors recently have announced their intentions to aggressively hire
technical personnel on a large scale. There can be no assurance that the
Company will be successful in attracting and retaining the technical personnel
it requires to conduct and expand its operations successfully. The Company's
ability to implement its strategy to expand and broaden the services component
of its business and its results of operations could be materially adversely
affected if the Company were unable to attract, hire, train and retain
qualified technical personnel.
9
ITEM 2. PROPERTIES.
The Company currently leases or subleases all of its facilities. The Company
leases its headquarters in Cedar Knolls, New Jersey, totaling approximately
38,000 square feet of office space. The lease expires in September 2003 and
contains renewal options for two additional five-year terms. The Company's
headquarters includes sufficient space for its sales and marketing, network
consulting, workstation support, administrative, finance and management
personnel, as well as its primary Learning Center. The Company also leases
office space for three additional Learning Centers in Eatontown, Iselin and
Saddle Brook, New Jersey as well as its customer technology facility located
in Parsippany, New Jersey. The Company also leases office space in King of
Prussia, Pennsylvania for the Company's Philadelphia-area sales office and
Learning Center. In addition, the Company leases office space for sales
personnel in New York City. The Company anticipates leasing additional office
space for its customer technology facility in 1997. See Note 8 of Notes to
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
On February 13, 1996, the Company, as plaintiff, filed a complaint and jury
demand in the Superior Court of New Jersey Chancery Division: Morris County,
against two former employees of the Company and their current employer
(together, the "Defendants"). Such complaint relates to a civil action for
damages, a temporary restraining order and preliminary and permanent
injunctive relief against the Defendants and alleges theft of services, theft
of Company property, theft of corporate opportunity, and unauthorized use of
Company credit cards by the Defendants. The Company is seeking restitution
from certain of the Defendants and additional compensatory damages from
another Defendant. The Company intends to vigorously pursue all available
remedies against the Defendants. The litigation remains in an early stage of
discovery and, therefore, the Company currently is unable to evaluate the
likelihood of a favorable outcome for the Company. The Company believes that
some or all of its damages in connection with the litigation may be covered by
insurance. In any event, Stan Gang, the Company's founder, Chairman of the
Board, President and Chief Executive Officer and majority shareholder, has
agreed to indemnify the Company for any and all losses which the Company may
sustain, up to $1.0 million, arising from or relating to the alleged wrongful
conduct of the Defendants. In connection therewith, Mr. Gang paid $675,000 of
his personal funds to the Company. Pursuant to the terms of the agreement
between the Company and Mr. Gang, the Company shall reimburse Mr. Gang in the
event and to the extent that the Company is awarded and collects damages from
the Defendants, receives sums as a result of a settlement between the Company
and the Defendants, or receives proceeds under an insurance policy.
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol ALPH since March 21, 1996 when the Company conducted its
initial public offering. The following table sets forth, for the periods
indicated, the high and low sales prices per share of Common Stock as reported
by the Nasdaq National Market.
QUARTER ENDED HIGH LOW
- ------------- ---- ---
March 1996 (from March 21, 1996)................... $11 1/4 $10
June 1996.......................................... 12 8 1/2
September 1996..................................... 10 5/8 6 3/4
December 1996...................................... 16 3/8 9 1/2
The prices shown above represent quotations among securities dealers, do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
As of February 28, 1997, the approximate number of holders of record of the
Common Stock was 113 and the approximate number of beneficial holders of the
Common Stock was 2,300.
Prior to the consummation of the Company's initial public offering of its
Common Stock in March 1996, the Company had elected to be treated as an S
Corporation for federal income tax purposes from 1986 and for New Jersey state
income tax purposes from 1994. As a result, the net income of the Company for
federal and certain state income tax purposes for such periods was reported
by, and taxed directly to, the Company's then current shareholders. In 1995
and 1996, the Company made distributions to such shareholders in the form of
dividends ($8.6 million) and net loan payments ($719,000) totaling $9.3
million (of which $3.1 million was to fund their 1994, 1995 and 1996 tax
liabilities and $6.2 million represented substantially all of the Company's
previously taxed but undistributed S Corporation earnings). See Notes 1 and 10
of Notes to Consolidated Financial Statements. Since such distributions and
the termination of the Company's S Corporation status, the Company has applied
and currently intends to continue to apply, its retained and current earnings
toward the development of its business and to finance the growth of the
Company. Consequently, the Company currently does not anticipate paying cash
dividends in the foreseeable future. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Liquidity and Capital
Resources."
Other than as provided below, there were no unregistered securities sold by
the Company within the past three years:
(a) On December 10, 1996, the Company issued and sold 2,500 shares of
Common Stock to an employee upon the exercise of outstanding vested stock
options. The options were granted in 1995 and the exercise price was $9.00
per share; and
(b) On December 23, 1996, the Company issued and sold 400 shares of
Common Stock to an employee upon the exercise of outstanding vested stock
options. The options were granted in 1995 and the exercise price was $9.00
per share.
No underwriter was employed by the Company in connection with the issuance
and sale of the securities described above. The Company claims that the
issuance and sale of all of the foregoing securities were exempt from
registration pursuant to Rule 701 under the Securities Act of 1933, as
amended.
11
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below have been derived
from the consolidated financial statements of the Company audited by Price
Waterhouse LLP, independent accountants. Consolidated balance sheets at
December 31, 1995 and 1996 and the related consolidated statements of income,
of changes in shareholders' equity and of cash flows for each of the three
years in the period ended December 31, 1996 and notes thereto appear elsewhere
in this Annual Report on Form 10-K. The selected financial data presented
below at December 31, 1992, 1993 and 1994 and for the years ended December 31,
1992 and 1993 have been derived from audited financial statements of the
Company, which are not included in this Annual Report on Form 10-K. The
selected consolidated financial data set forth below should be read in
conjunction with, and is qualified in its entirety by, the Company's
consolidated financial statements, related notes and other financial
information included elsewhere in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995 1996(1)
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales:
Product sales................... $31,620 $41,641 $62,365 $62,516 $99,468
Services and support............ 3,812 5,400 8,103 11,500 20,137
------- ------- ------- ------- -------
35,432 47,041 70,468 74,016 119,605
------- ------- ------- ------- -------
Cost of sales:
Product sales................... 27,018 36,295 54,445 54,579 88,218
Services and support(2)......... 2,647 3,776 5,127 6,869 12,915
------- ------- ------- ------- -------
29,665 40,071 59,572 61,448 101,133
------- ------- ------- ------- -------
Gross profit:
Product sales................... 4,602 5,346 7,920 7,937 11,250
Services and support (2)........ 1,165 1,624 2,976 4,631 7,222
------- ------- ------- ------- -------
5,767 6,970 10,896 12,568 18,472
------- ------- ------- ------- -------
Operating expenses:
Selling expenses................ 2,434 2,771 3,946 4,468 7,301
General and administrative
expenses (2)................... 2,785 3,547 3,767 3,925 5,446
------- ------- ------- ------- -------
5,219 6,318 7,713 8,393 12,747
------- ------- ------- ------- -------
Operating income.................. 548 652 3,183 4,175 5,725
Other income (expense), net....... (77) (92) (107) (86) 129
------- ------- ------- ------- -------
Income before pro forma income
taxes (3)........................ 471 560 3,076 4,089 5,854
Pro forma provision for income
taxes (3)........................ 195 230 1,247 1,650 2,391
------- ------- ------- ------- -------
Pro forma net income (3).......... $ 276 $ 330 $ 1,829 $ 2,439 $ 3,463
======= ======= ======= ======= =======
Pro forma net income per share.... $ 0.61 $ 0.72
======= =======
Weighted average common shares and
common shares equivalent
outstanding (4).................. 3,988 4,829
======= =======
DECEMBER 31,
---------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital....................... $ 1,566 $ 2,478 $ 4,524 $ 5,033 $14,407
Total assets.......................... 7,522 9,806 16,697 18,770 43,647
Long term debt and capital lease
obligations, less current portion.... 140 1,131 1,455 590 41
Shareholders' equity.................. 1,562 2,072 3,909 6,574 18,921
12
- --------
(1) On July 24, 1996, the Company acquired certain assets of Lior, in a
business combination accounted for under the purchase method, for $1.1
million, including acquisition costs, financed with a portion of the
proceeds from the Company's initial public offering. The operations
related to the acquired assets of Lior are included in the accompanying
consolidated financial statements subsequent to July 24, 1996. See Note 2
of Notes to Consolidated Financial Statements.
(2) Commencing with the 1996 fourth quarter and year-end results, certain
indirect costs which previously were classified as costs of services have
been reclassified to general and administrative expenses to conform with
current industry practices. Such expenses amounted to $1.1 million, $1.4
million, $1.7 million, $2.2 million and $3.1 million for the years ended
December 31, 1992, 1993, 1994, 1995 and 1996, respectively. Throughout
this Annual Report on Form 10-K, all prior period financial information
has been reclassified to conform with the 1996 presentation.
(3) Prior to the consummation of the Company's initial public offering of its
Common Stock in March 1996, the Company had elected S Corporation
treatment for federal income tax purposes from 1986 and for New Jersey
state income tax purposes from 1994. The historical financial statements
for the years 1992 through 1995, therefore, do not include a provision for
federal and state income taxes for such periods, except for certain state
income taxes imposed at the corporate level. Accordingly, for such periods
and for the period January 1 through March 19, 1996 (the date on which the
Company terminated its S Corporation status), pro forma net income has
been computed as if the Company had been fully subject to federal and
state income taxes based on the tax laws in effect during the respective
periods. See Notes 1 and 10 of Notes to Consolidated Financial Statements.
(4) The weighted average common shares and common shares equivalent
outstanding have been adjusted for (i) the number of shares that were
required to fund the S Corporation distribution, less the outstanding loan
to a principal shareholder, following the Company's initial public
offering and (ii) certain stock options granted by the Company. See Notes
1 and 7 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
The Company is a single-source provider of IT products, services and support
to Fortune 1000 and other large and mid-sized companies located primarily in
the New York-to-Philadelphia corridor. The Company was formed in 1984 as an
authorized reseller of computer hardware and software products, and since
1990, has been developing and offering related IT services. To date, most of
the Company's net sales have been derived from IT product sales. In 1996, net
product sales were 83.2% and services and support revenue was 16.8% of the
Company's net sales.
The Company has entered into distribution agreements with MicroAge and
Ingram, two of the nation's largest aggregators, to acquire most of its IT
products for resale. The Company's relationship with MicroAge commenced in
1984, and as customer demand for IT products grew, the Company initiated its
relationship with Ingram in 1994. The distribution agreements with MicroAge
and Ingram give the Company access to such aggregators' extensive inventories
and provide the Company with electronic ordering capability, product
configuration and testing, warehousing and delivery. In general, the Company
orders IT products, including workstations, servers, microcomputers,
networking and communications equipment, and applications software from such
aggregators on an as-needed basis, thereby reducing the Company's need to
carry large inventories. During 1996, the Company acquired approximately 48%
and 35% of its products for resale from MicroAge and Ingram, respectively.
In general, there are no ongoing written commitments by customers to
purchase products from the Company and all product sales are made on a
purchase order basis. Furthermore, as the market for IT products has matured,
price competition has intensified and is likely to continue to intensify. The
Company's gross profits, margins and results of operations could be adversely
affected by such continued product pricing pressure, a significant reduction
in product purchase orders from the Company's customers, or a disruption in
the Company's sources of product supply.
13
The Company offers network consulting (including systems integration),
workstation support, education, communications installation and IT staffing
services. Services and support revenue is recognized as such services are
performed. The Company's network consulting, workstation support and
communications installation services are billed on a time and materials basis.
The Company's education and IT staffing services are fee-based on a per-course
and per-placement basis, respectively. Generally, the Company's service
arrangements with its customers may be terminated by such customers with
limited advance notice and without significant penalty. The most significant
cost relating to the services component of the Company's business is personnel
expenses which consist of salaries, benefits and payroll-related expenses.
Thus, the financial performance of the Company's service business is based
primarily upon billing margins (billable hourly rates less the costs to the
Company of such service personnel on an hourly basis) and utilization rates
(billable hours divided by paid hours). The future success of the services
component of the Company's business will depend in large part upon its ability
to maintain high utilization rates at profitable billing margins. The
Company's utilization rates for service personnel likely will be adversely
affected during periods of rapid and concentrated hiring. In addition, the
competition for quality technical personnel has continued to intensify
resulting in increased personnel costs for the Company and many other IT
service providers, which has adversely affected the Company's billing margins.
The Company's cost of sales includes primarily, in the case of product
sales, the cost to the Company of products acquired for resale, and in the
case of services and support revenue, salaries and related expenses for
billable technical personnel. The Company's selling expenses consist primarily
of personnel costs, including sales commissions earned by employees involved
in the sales of IT products, services and support. These personnel include
direct sales, sales support and marketing personnel. Sales commissions are
recorded as revenue is recognized. General and administrative expenses consist
of all other operating expenses, including primarily salaries and occupancy
costs for administrative, executive and finance personnel. Commencing with the
1996 fourth quarter and year-end results, certain indirect costs which
previously were classified as costs of services and support have been
reclassified to general and administrative expenses to conform with current
industry practices. Such expenses amounted to $1.7 million, $2.2 million and
$3.1 million for the years ended December 31, 1994, 1995 and 1996,
respectively. Throughout this Annual Report on Form 10-K, all prior period
financial information has been reclassified to conform with the 1996
presentation.
The Company believes that its ability to provide a broad range of technical
services, coupled with its traditional strength in satisfying its clients' IT
product requirements and its long-term relationships with large clients,
positions the Company to continue to grow the services component of its
business, while further strengthening its product sales. As such, the Company
anticipates that an increasing percentage of its gross profits in the future
will be derived from the services and support component of its business.
However, in the near term, the Company believes that product sales will
continue to generate a significantly larger percentage of the Company's gross
profit, particularly due to the acquisition of certain assets and the business
of Lior in July 1996. See Note 2 of Notes to Consolidated Financial
Statements. As a result of such acquisition, the Company's sales of IT
products increased substantially in the third and fourth quarters of 1996. In
addition, the Company has begun to provide services and support to the Lior
customers, which previously had purchased primarily computer products from
Lior. The Company believes that its ability to be a single-source provider of
IT products, services and support enables it to earn margins higher than it
would earn if it sold products only.
14
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of net sales, and the percentage change in the dollar
amount of such data compared to the prior year:
PERCENTAGE
PERCENTAGE OF NET SALES INCREASE
------------------------- (DECREASE)
YEAR ENDED ------------
DECEMBER 31, 1995 1996
------------------------- OVER OVER
1994 1995 1996 1994 1995
------- ------- ------- ----- -----
Net Sales:
Product Sales.................. 88.5% 84.5% 83.2% 0.2% 59.1%
Services and support........... 11.5 15.5 16.8 41.9 75.1
------- ------- -------
100.0 100.0 100.0 5.0 61.6
Cost of sales.................... 84.5 83.0 84.6 3.1 64.6
------- ------- -------
Gross profit..................... 15.5 17.0 15.4 15.3 47.0
------- ------- -------
Operating expenses:
Selling expenses............... 5.6 6.1 6.1 13.2 63.4
General and administrative
expenses...................... 5.4 5.3 4.5 4.2 38.8
------- ------- -------
11.0 11.4 10.6 8.8 51.9
------- ------- -------
Operating income................. 4.5 5.6 4.8 31.2 37.1
Other income (expense), net...... (0.1) (0.1) 0.1 (19.6) 250.0
------- ------- -------
Income before pro forma income
taxes........................... 4.4 5.5 4.9 32.9 43.2
Pro forma provision for income
taxes........................... 1.8 2.2 2.0 32.3 44.9
------- ------- -------
Pro forma net income............. 2.6% 3.3% 2.9% 33.4 42.0
======= ======= =======
Gross profit (as a percentage of
related net sales):
Product sales.................. 12.7% 12.7% 11.3% 0.2 41.7
Service and support............ 36.7% 40.3% 35.9% 55.6 55.9
Comparison of Years Ended December 31, 1996 and 1995
Net sales. Net sales increased by 61.6%, or $45.6 million, from $74.0
million in 1995 to $119.6 million in 1996. Product sales increased by 59.1%,
or $37.0 million, from $62.5 million in 1995 to $99.5 million in 1996. This
increase was attributable primarily to increased demand from the Company's
established customer base and to product sales resulting from the Company's
July 1996 acquisition of certain assets and the business of Lior. Services and
support revenue increased by 75.1%, or $8.6 million, from $11.5 million in
1995 to $20.1 million in 1996. This increase was attributable primarily to
increased demand for the Company's service and support offerings, particularly
its network consulting services, due to an increase in the number and size of
client projects. In 1996, sales to Nabisco, the Company's largest customer,
accounted for approximately 17% of the Company's net sales. There can be no
assurance that such customer will continue to place orders with the Company or
engage the Company to perform services and support at existing levels.
Gross profit. The Company's gross profit increased by 47.0%, or $5.9
million, from $12.6 million in 1995 to $18.5 million in 1996. Gross profit
margin decreased from 17.0% of net sales in 1995 to 15.4% in 1996. Gross
profit margin attributable to product sales decreased from 12.7% in 1995 to
11.3% in 1996. The decrease in such gross profit margin during 1996 was
attributable primarily to continued industry-wide downward pricing pressure on
sales of computer products, which typically results in margin deterioration on
such sales and increases in certain volume discounts. The Company expects that
downward pricing pressure on products will continue and there can be no
assurance that the Company will be able to sustain its margins on product
sales in the future. In addition, gross profit margin on product sales in the
first half of 1995 was positively impacted by certain higher
15
margin product sales. Gross profit margin attributable to services and support
revenue decreased from 40.3% of services and support revenue in 1995 to 35.9%
in 1996. The decrease in such gross profit margin was attributable primarily
to the fact that services and support revenue increased at a slower rate than
related personnel and recruiting costs, as the Company accelerated the hiring
and training of technical personnel in anticipation of the increased demand
for its services. The Company increased its staff of billable technical
personnel from 107 at December 31, 1995 to 242 at December 31, 1996.
Selling expenses. Selling expenses increased by 63.4%, or $2.8 million, from
$4.5 million in 1995 to $7.3 million in 1996, but remained relatively constant
at 6.1% of net sales in both years. The increase in selling expenses in
absolute dollars was attributable primarily to increased salesperson
commissions and other support costs due to the increase in net sales, the
increase in sales and marketing efforts associated with the Company's service
and support offerings, the costs associated with the Company's new service
offerings and the costs incurred and associated with the Company's expansion
into the Philadelphia market.
General and administrative expenses. General and administrative expenses
increased by 38.8%, or $1.5 million, from $3.9 million in 1995 to $5.4 million
in 1996, but decreased from 5.3% to 4.5% of net sales, respectively. The
increase in general and administrative expenses in absolute dollars was due
primarily to increases in personnel expenses, training costs, professional
fees, depreciation charges and corporate insurance premiums. The decrease as a
percentage of net sales was due primarily to the substantial increase in net
sales.
Comparison of Years Ended December 31, 1995 and 1994
Net sales. Net sales increased by 5.0%, or $3.5 million, from $70.5 million
in 1994 to $74.0 million in 1995. Product sales in 1995 remained relatively
constant at $62.5 million as compared to $62.4 million in 1994. Product sales
to new customers and increased product sales to existing customers were offset
by a decline in product sales to the Company's largest customer, Nabisco,
which had a substantial increase in product sales in 1994. Services and
support revenue increased by 41.9%, from $8.1 million in 1994 to $11.5 million
in 1995. This increase was attributable primarily to increased demand for the
Company's service and support offerings. During such period, certain customers
which previously had purchased only products from the Company also engaged the
Company for services and support. In 1995, sales to Nabisco accounted for
approximately 20% of the Company's net sales.
Gross profit. The Company's gross profit increased by 15.3%, or $1.7
million, from $10.9 million in 1994 to $12.6 million in 1995. Gross profit
margin increased from 15.5% of net sales in 1994 to 17.0% of net sales in
1995. Gross profit margin attributable to product sales remained constant at
12.7% of product sales in both 1994 and 1995. Despite industry-wide downward
pricing pressure on product sales, the Company was able to sustain its gross
profit margin on product sales in 1995, as compared to 1994, due primarily to
an increased percentage in 1995 of project-related product sales, which sales
typically yield higher margins. Gross profit margin on product sales was
higher in the first half of 1995 than in the latter half of the year due
primarily to downward pricing pressure on product sales in the latter half of
1995 and to certain high margin product sales in the first six months of 1995.
Gross profit margin attributable to services and support revenue increased
from 36.7% of services and support revenue in 1994 to 40.3% in 1995. The
increase in such gross profit margin was attributable primarily to the fact
that services and support revenue increased at a faster rate than personnel
costs and to increases in technical personnel utilization rates.
Selling expenses. Selling expenses increased by 13.2%, or $522,000, from
$3.9 million in 1994 to $4.5 million in 1995, and increased as a percentage of
net sales from 5.6% in 1994 to 6.1% in 1995. The increase in such expenses was
due primarily to costs associated with hiring additional sales, sales support
and marketing personnel.
16
General and administrative expenses. General and administrative expenses
increased by 4.2%, or $158,000, from $3.8 million in 1994 to $3.9 million in
1995, but decreased as a percentage of net sales from 5.4% to 5.3% of net
sales, respectively. The increase in general and administrative expenses in
absolute dollars was due primarily to higher overhead costs associated with
the Company's expansion of its administrative and support infrastructure which
were partially offset by the payment in 1994 of a non-recurring executive
bonus in connection with tax liabilities arising from the Company's status as
an S Corporation.
PRO FORMA ADJUSTMENTS FOR INCOME TAXES
Prior to the consummation of the Company's initial public offering of its
Common Stock in March 1996, the Company had elected S Corporation treatment
for federal income tax purposes from 1986 and for New Jersey state income tax
purposes from 1994. As a result, for such tax periods, the Company's earnings
were taxed directly to the Company's then current shareholders. The historical
financial statements for the years 1992 through 1995, therefore, do not
include a provision for federal and state income taxes for such periods,
except for certain state income taxes imposed at the corporate level.
Accordingly, for such periods and for the period January 1 through March 19,
1996 (the date on which the Company terminated its S Corporation status and
became subject to federal and state income taxes at applicable C Corporation
income tax rates) pro forma adjustments for income taxes were calculated as if
the Company had been fully subject to federal and state income taxes based on
the tax laws in effect for the respective periods using the criteria
established under Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes." The pro forma effective tax rates for the years
ended December 31, 1994, 1995 and 1996 were 40.5%, 40.4% and 40.8%,
respectively. See Notes 1 and 10 to Notes to Consolidated Financial
Statements.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited quarterly financial
information for each of the eight most recent quarters in the period ended
December 31, 1996. This information is derived from unaudited consolidated
financial statements of the Company that include, in the opinion of the
Company, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of results of operations for such periods,
when read in conjunction with the audited Consolidated Financial Statements of
the Company and notes thereto appearing elsewhere in this Annual Report on
Form 10-K. Commencing with the 1996 fourth quarter and year-end results,
certain indirect costs which previously were classified as costs of services
have been reclassified to general and administrative expenses to conform with
current industry practices. Throughout this Annual Report on Form 10-K, all
prior period financial information has been reclassified to conform with the
1996 presentation.
17
QUARTER ENDED
------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME
DATA:
Net sales:
Product sales.......... $15,835 $13,828 $15,535 $17,318 $15,191 $19,677 $25,466 $39,134
Services and support... 2,460 2,746 2,979 3,315 4,105 4,568 5,113 6,351
------- ------- ------- ------- ------- ------- ------- -------
18,295 16,574 18,514 20,633 19,296 24,245 30,579 45,485
------- ------- ------- ------- ------- ------- ------- -------
Cost of sales:
Product sales.......... 13,692 11,907 13,677 15,303 13,283 17,624 22,482 34,829
Services and support... 1,521 1,635 1,751 1,962 2,609 3,086 3,227 3,993
------- ------- ------- ------- ------- ------- ------- -------
15,213 13,542 15,428 17,265 15,892 20,710 25,709 38,822
------- ------- ------- ------- ------- ------- ------- -------
Gross profit:
Product sales.......... 2,143 1,921 1,858 2,015 1,908 2,053 2,984 4,305
Services and support... 939 1,111 1,228 1,353 1,496 1,482 1,886 2,358
------- ------- ------- ------- ------- ------- ------- -------
3,082 3,032 3,086 3,368 3,404 3,535 4,870 6,663
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling expenses....... 1,156 1,103 1,084 1,125 1,249 1,513 1,919 2,620
General and
administrative
expenses.............. 959 974 947 1,045 1,176 1,237 1,367 1,666
------- ------- ------- ------- ------- ------- ------- -------
2,115 2,077 2,031 2,170 2,425 2,750 3,286 4,286
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 967 955 1,055 1,198 979 785 1,584 2,377
Other income (expense),
net.................... (45) (13) (16) (12) (18) 83 59 5
------- ------- ------- ------- ------- ------- ------- -------
Income before pro forma
income taxes........... 922 942 1,039 1,186 961 868 1,643 2,382
Pro forma provision for
income taxes........... 372 380 419 479 389 352 674 976
------- ------- ------- ------- ------- ------- ------- -------
Pro forma net income.... $ 550 $ 562 $ 620 $ 707 $ 572 $ 516 $ 969 $ 1,406
======= ======= ======= ======= ======= ======= ======= =======
Pro forma net income per
share (primary)........ $ 0.14 $ 0.14 $ 0.15 $ 0.18 $ 0.14 $ 0.10 $ 0.19 $ 0.28
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET
SALES:
Net sales:
Product sales.......... 86.6% 83.4% 83.9% 83.9% 78.7% 81.2% 83.3% 86.0%
Services and support... 13.4 16.6 16.1 16.1 21.3 18.8 16.7 14.0
------- ------- ------- ------- ------- ------- ------- -------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales........... 83.2 81.7 83.3 83.7 82.4 85.4 84.1 85.4
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 16.8 18.3 16.7 16.3 17.6 14.6 15.9 14.6
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling expenses....... 6.3 6.6 5.9 5.4 6.4 6.2 6.3 5.7
General and
administrative
expenses.............. 5.3 5.9 5.1 5.1 6.1 5.1 4.4 3.7
------- ------- ------- ------- ------- ------- ------- -------
11.6 12.5 11.0 10.5 12.5 11.3 10.7 9.4
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 5.2 5.8 5.7 5.8 5.1 3.3 5.2 5.2
Other income (expense),
net.................... (0.2) (0.1) (0.1) (0.1) (0.1) 0.3 0.2 0.0
------- ------- ------- ------- ------- ------- ------- -------
Income before pro forma
income taxes........... 5.0 5.7 5.6 5.7 5.0 3.6 5.4 5.2
Pro forma provision for
income taxes........... 2.0 2.3 2.3 2.3 2.0 1.5 2.2 2.1
------- ------- ------- ------- ------- ------- ------- -------
Pro forma net income.... 3.0% 3.4% 3.3% 3.4% 3.0% 2.1% 3.2% 3.1%
======= ======= ======= ======= ======= ======= ======= =======
Gross profit (as a
percentage of related
net sales):
Product sales.......... 13.5% 13.9% 12.0% 11.6% 12.6% 10.4% 11.7% 11.0%
Services and support... 38.2% 40.5% 41.2% 40.8% 36.4% 32.4% 36.9% 37.1%
18
The Company's net sales, gross profit, operating income, and net income have
varied substantially from quarter to quarter and are expected to do so in the
future. Many factors, some of which are not within the Company's control, have
contributed and may in the future contribute to fluctuations in operating
results. These factors include: the short-term nature of the Company's
customers' commitments; patterns of capital spending by customers; the timing,
size, and mix of product and service orders and deliveries; the timing and
size of new projects, including projects for new customers; pricing changes in
response to various competitive factors; market factors affecting the
availability of qualified technical personnel; timing and customer acceptance
of new product and service offerings; changes in trends affecting outsourcing
of IT services; disruption in sources of supply; changes in material,
personnel, and other operating costs; and industry and general economic
conditions. The Company also believes that, to a limited degree, its business
is seasonal with a greater proportion of the Company's product sales occurring
in the fourth quarter due to the capital budgeting and spending patterns of
some of its larger customers. Operating results have been and may in the
future also be affected by the cost, timing and other effects of acquisitions,
including the mix of product and service revenues of acquired companies. The
Company believes, therefore, that past operating results and period-to-period
comparisons should not be relied upon as an indication of future operating
performance.
The Company experienced a decline in its results of operations during the
quarter ended June 30, 1996 primarily due to a decrease in gross profit margin
on product sales attributable to industry-wide downward pricing pressure on
product sales and increases in certain volume discounts and to a decrease in
gross profit margin on services and support revenue resulting from the fact
that such revenue increased at a slower rate than related costs due to the
accelerated hiring and training of technical personnel and lower utilization
rates. Product sales in the third and fourth quarter of 1996 increased
significantly due, in part to, the acquisition of Lior. The Company, however,
does not expect product sales to continue to increase in 1997 to the same
extent as they did in the third and fourth quarters of 1996.
The Company's operating results have been and in the future will continue to
be impacted by changes in technical personnel billing and utilization rates.
Many of the Company's costs, particularly costs associated with services and
support revenue, such as personnel and facilities costs, are fixed costs. The
Company's expense levels are based in part on expectations of future revenues.
Technical personnel utilization rates have been and are expected to continue
to be adversely affected during periods of rapid and concentrated hiring.
Depending upon the availability of qualified technical personnel, during
periods of rapid growth the Company has utilized and in the future is likely
to utilize contract personnel, which also adversely affects gross margins. Due
to these and other factors, if the Company is successful in expanding its
service offerings and revenue, periods of variability in utilization are
likely to reoccur. In addition, during such periods the Company is likely to
incur greater technical training costs. Quarterly results also may be impacted
due to the fact that certain compensation-based employment taxes are limited
per employee per calendar year and, as a result, the Company experiences a
decrease in employment taxes as a percent of revenue during the calendar year.
BACKLOG
The Company normally ships products within 30 days of receiving an order
and, therefore, does not customarily have a significant backlog.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1995, the Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") which requires companies
to measure stock compensation plans based on the fair value method of
accounting or to continue to apply APB No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and provide pro forma footnote disclosures under the
fair value method. Effective January 1, 1996, the Company adopted the
disclosure-only provisions of FAS 123 and continues to follow APB 25 and
related interpretations to account for the Company's stock compensation plans.
19
LIQUIDITY AND CAPITAL RESOURCES
In March and April 1996, the Company consummated an initial public offering
of 2,200,000 shares of its Common Stock at a price of $10.50 per share. Of the
2,200,000 shares sold, 1,700,000 shares (including 100,000 shares issued and
sold by the Company upon the exercise of the underwriters' over-allotment
option) were issued and sold by the Company and 500,000 shares were sold by a
shareholder of the Company. The Company did not receive any of the proceeds
from the sale of shares by such selling shareholder. The net proceeds to the
Company were $15.7 million.
Since its inception, the Company has funded its operations primarily from
cash generated by operations and, to a lesser extent, such cash has been
augmented with funds from borrowings under the Company's credit facilities and
the net proceeds from the Company's initial public offering. The Company's
cash used in operations was $524,000 for the year ended December 31, 1994.
During 1995, cash flow provided by operations was $5.9 million. However,
during 1996, cash used in operations was $4.6 million which was due primarily
to an increase in accounts receivable arising from increased sales and, to a
lesser extent, to an increase in inventories at December 31, 1996. The
increase in inventories is attributable primarily to the purchase of computer
equipment subject to firm purchase orders and then shipped to customers. The
Company's cash flow from operations has been and continues to be affected
primarily by the timing of collection of accounts receivable, which accounts
receivable have increased as net sales have increased.
The Company's working capital was $5.0 million and $14.4 million at December
31, 1995 and 1996, respectively.
In 1995 and 1996, the Company made cash distributions to the then current
shareholders of the Company in the form of dividends ($8.6 million) and net
loan payments ($719,000), totaling $9.3 million (of which $3.1 million was to
fund their 1994, 1995 and 1996 tax liabilities and $6.2 million represented
substantially all of the Company's previously taxed but undistributed S
Corporation earnings).
The Company invested $457,000, $779,000 and $3.1 million in capital
equipment and leasehold improvements in 1994, 1995 and 1996, respectively. The
significant increase in 1996 was due primarily to purchases and upgrades of
computer equipment and software utilized in-house, and development of the
services component of the Company's business. Although there are no other
material commitments for capital expenditures currently outstanding, the
Company intends additional capital expenditures to continue the expansion of
the services component of its business and for the enhancement of its MIS
infrastructure.
The Company purchases certain inventory and equipment through financing
arrangements with Deutsche Financial Services (a subsidiary of Deutsche Bank),
IBM Credit Corporation and Finova Capital Corporation. At December 31, 1996,
there were outstanding balances of $6.9 million, $4.5 million and $1.7
million, respectively, under such arrangements. Obligations under such
financing arrangements are collateralized by substantially all of the assets
of the Company. Finova Capital Corporation and First Union National Bank have
entered into an intercreditor agreement with respect to their relative
interests. Deutsche Financial Services and IBM Credit Corporation also have
entered into an intercreditor agreement with respect to their relative
interests.
The Company has a revolving credit facility with First Union National Bank
pursuant to which it may borrow up to a maximum of $7.0 million (at the bank's
prime rate less 0.25% or at LIBOR plus 1.50%), increasing to $9.0 million
during the period from October 1 through March 31 of each calendar year at the
bank's prime rate plus 1.00%. Obligations under such credit facility are
payable within 90 days following notice of termination by the bank, or
expiration of such facility on May 30, 1997, whichever is earlier, and are
collateralized by substantially all the assets of the Company. From time to
time, the Company borrows under the credit facility to meet its working
capital needs. There were, however, no outstanding borrowings under the
revolving credit facility as of December 31, 1996.
On March 7, 1997, the Company received a commitment from First Union
National Bank to expand the Company's credit facility to enable the Company to
borrow, based upon eligible accounts receivable, up to $15.0
20
million for short-term working capital purposes. Such facility includes a $2.5
million sublimit for letters of credit and a $5.0 million sublimit for
acquisitions. Under the new facility the Company will be able to borrow (i)
for working capital purposes at the bank's prime rate less 0.50% or LIBOR plus
1.25% and (ii) for acquisitions at the bank's prime rate less 0.25% or LIBOR
plus 1.50%. The commitment contemplates that the Company's obligations under
such facility will be collateralized by a first priority lien on the Company's
accounts receivable and inventory, except for inventory for which the bank
will have subordinated its position to certain other lenders pursuant to
intercreditor agreements. Despite the executed commitment with the bank, there
can be no assurance that the Company will consummate such credit facility.
The Company has entered into a master lease agreement with First Union
Leasing Group, Inc. under which the Company may lease up to $500,000 of
equipment. Such agreement provides for equipment to be leased for three-year
terms with transfer of ownership of the equipment to the Company at the end of
the applicable equipment lease term. At December 31, 1996, capital lease
obligations outstanding under these equipment leases, which expire in 1998,
aggregated $144,000.
As of December 31, 1995, the Company had a term loan from First Fidelity
Bank, N.A. (the predecessor to First Union National Bank). The Company prepaid
the entire outstanding balance of such term loan, $736,000 plus accrued
interest, with a portion of the net proceeds from its initial public offering.
The Company believes that its available funds, together with existing and
anticipated credit facilities and the cash flow expected to be generated from
operations, will be adequate to satisfy its current and planned operations for
at least the next 24 months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to Item 14(a)(1) and (2) on page 23 for a list of
financial statements and supplementary data required to be filed pursuant to
this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
1997 Annual Meeting of Shareholders is incorporated herein by reference to
such proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 1997 Annual Meeting of Shareholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the
1997 Annual Meeting of Shareholders is incorporated herein by reference to
such proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1997 Annual
Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Consolidated Financial Statements on Page
F-1.
(a) (2) Financial Statement Schedules and Supplementary Data.
All financial statement schedules are omitted because the information is not
required, or is otherwise included in the Consolidated Financial Statements or
the notes thereto included in this Annual Report on Form 10-K.
Reference is made to Item 7. "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Selected Quarterly Results of
Operations" on page 17 for selected quarterly financial data.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 24.
(b) Reports on Form 8-K.
During the fiscal year ended December 31, 1996, the Company filed, on August
5, 1996, a Current Report on Form 8-K ("Form 8-K") with the Securities and
Exchange Commission relating to the Company's acquisition of certain assets of
Lior. The Company filed, on October 7, 1996, an amendment to such Form 8-K,
providing audited financial statements of Lior and pro forma financial
information relating to the foregoing acquisition.
23
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
3.1* Amended and Restated Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1*# 1995 Stock Plan of the Company.
4.2*# 1995 Non-Employee Director Stock Option Plan.
4.3*# 401(k) Plan, adopted October 1991.
10.1*# Employment Agreement dated October 1, 1995 between the Company and
Stan Gang.
10.2*# Employment Agreement dated October 1, 1995 between the Company and
Bruce Flitcroft.
10.3*# Employment Agreement dated October 1, 1995 between the Company and
Philip M. Pfau.
10.4*# Employment Agreement dated October 1, 1995 between the Company and
Dennis Samuelson.
10.5*# Employment Agreement dated October 1, 1995 between the Company and
Lawrence Mahon.
10.6*# Employment Agreement dated October 1, 1995 between the Company and
John Centinaro.
10.7*# Employment Agreement dated October 1, 1995 between the Company and
John Crescenzo.
10.8*# Employment Agreement effective November 1, 1995 between the Company
and Gary S. Finkel.
10.9* Indemnification Agreement dated September 1, 1995 between the Company
and Stan Gang.
10.10* Indemnification Agreement dated September 1, 1995 between the Company
and Bruce Flitcroft.
10.11* Indemnification Agreement dated September 1, 1995 between the Company
and Philip M. Pfau.
10.12* Indemnification Agreement dated September 1, 1995 between the Company
and Dennis Samuelson.
10.13* Indemnification Agreement dated September 1, 1995 between the Company
and Lawrence Mahon.
10.14* Indemnification Agreement dated September 1, 1995 between the Company
and John Centinaro.
10.15* Indemnification Agreement dated September 1, 1995 between the Company
and John Crescenzo.
10.16* Indemnification Agreement dated September 1, 1995 between the Company
and Michael Gang.
10.17* Indemnification Agreement dated September 1, 1995 between the Company
and Michael R. Bruce.
10.18* Indemnification Agreement effective November 1, 1995 between the
Company and Gary S. Finkel.
10.19* Lease dated June 27, 1994 by and between Sutman Associates and the
Company, as amended.
10.20* Form of Invention Assignment and Confidentiality Agreement.
10.21* Agreement dated July 1, 1994 by and between the Company and MicroAge
Computer Centers, Inc., as amended.
10.22* Reseller Agreement dated November 7, 1994 by and between the Company
and Ingram Alliance Reseller Company, a division of Ingram Micro,
Inc., as amended.
10.23* Agreements for Wholesale Financing dated March 16, 1994 and June 29,
1994 by and between the Company and Deutsche Financial Services
(formerly ITT Commercial Finance Corporation).
10.24* Agreement for Wholesale Financing dated May 20, 1988 by and between
the Company and IBM Credit Corporation.
10.25 Dealer Loan and Security Agreement by and between the Company and
Finova Capital Corporation dated December 20, 1996.
10.26* Revolving Credit Agreement and Term Loan dated August 5, 1987 by and
between First Fidelity Bank, N.A., including certain amendments
thereto.
10.27* Form of modification to Revolving Credit Agreement and Term Loan with
First Fidelity Bank, N.A. effective as of the date of the Company's
initial public offering on March 20, 1996.
10.28* Agreement by Stan Gang dated February 19, 1996 to indemnify the
Company for certain losses.
24
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--------- ----------------------
10.29** Indemnification Agreement dated May 3, 1996 between the Company and
David J. Sorin.
10.30** Indemnification Agreement dated May 3, 1996 between the Company and
Susan Wolford.
10.31*** Modification Agreement dated May 31, 1996 of Loan and Security
Agreement dated August 5, 1987 by and between the Company and First
Union National Bank.
10.32***# Employment Agreement dated October 14, 1996 between the Company and
Sophien Bennaceur.
10.33*** Indemnification Agreement dated October 14, 1996 between the Company
and Sophien Bennaceur.
10.34+ Asset Purchase Agreement dated July 18, 1996 by and between Stan
Gang and Lior, Inc.
10.35+ Assignment of Asset Purchase Agreement dated July 24, 1996 by and
between Stan Gang and the Company.
11 Statement re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
- --------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration Statement No. 33-97922) declared effective on March 20,
1996.
** Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended March 31, 1996, filed with the Commission on May 15, 1996.
*** Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended September 30, 1996, filed with the Commission on November 14,
1996.
+ Incorporated by reference to the Company's Form 8-K, filed with the
Commission on August 5, 1996.
# A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
All other exhibits are filed herewith.
25
ALPHANET SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................................ F-2
Consolidated balance sheets as of December 31, 1995 and 1996............. F-3
Consolidated statements of income for the years ended December 31, 1994,
1995, and 1996 ......................................................... F-4
Consolidated statements of changes in shareholders' equity for the years
ended December 31, 1994, 1995, and 1996................................. F-5
Consolidated statements of cash flows for the years ended December 31,
1994, 1995, and 1996 ................................................... F-6
Notes to consolidated financial statements............................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of AlphaNet Solutions, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
AlphaNet Solutions, Inc. and its subsidiary at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Morristown, NJ
February 13, 1997
F-2
ALPHANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------
1995 1996
------- -------
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 1,223 $ 1,610
Accounts receivable, net..................................... 13,885 29,848
Inventories.................................................. 946 4,809
Current portion of loan receivable -- shareholder............ 160 --
Deferred income tax asset.................................... -- 445
Prepaid expenses and other current assets.................... 425 1,705
------- -------
Total current assets....................................... 16,639 38,417
Property and equipment, net.................................... 1,378 3,856
Loan receivable -- shareholder................................. 253 --
Other assets................................................... 500 1,374
------- -------
Total assets............................................... $18,770 $43,647
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................ $ 285 $ --
Current portion of capital lease obligations................. 91 103
Accounts payable............................................. 7,276 17,923
Accrued expenses............................................. 3,954 5,984
------- -------
Total current liabilities.................................. 11,606 24,010
Advance from principal shareholder............................. -- 675
Long-term debt................................................. 451 --
Capital lease obligations...................................... 139 41
------- -------
Total liabilities.......................................... 12,196 24,726
------- -------
Commitments and contingencies (Note 8).........................
Shareholders' equity:
Preferred stock -- $0.01 par value; authorized 3,000,000
shares, none issued......................................... -- --
Common stock -- $0.01 par value; authorized 15,000,000
shares, 5,102,900 shares issued and outstanding............. 34 51
Additional paid-in capital................................... 156 15,904
Retained earnings............................................ 6,384 2,966
------- -------
Total shareholders' equity................................. 6,574 18,921
------- -------
Total liabilities and shareholders' equity................. $18,770 $43,647
======= =======
See accompanying notes to consolidated financial statements.
F-3
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
------- ------- --------
Net sales:
Product sales.................................... $62,365 $62,516 $ 99,468
Services and support............................. 8,103 11,500 20,137
------- ------- --------
70,468 74,016 119,605
------- ------- --------
Cost of sales:
Product sales.................................... 54,445 54,579 88,218
Services and support............................. 5,127 6,869 12,915
------- ------- --------
59,572 61,448 101,133
------- ------- --------
Gross profit....................................... 10,896 12,568 18,472
------- ------- --------
Operating expenses:
Selling expenses................................. 3,946 4,468 7,301
General and administrative expenses.............. 3,767 3,925 5,446
------- ------- --------
7,713 8,393 12,747
------- ------- --------
Operating income................................... 3,183 4,175 5,725
------- ------- --------
Other income (expense):
Interest income.................................. 50 54 217
Interest expense................................. (214) (140) (106)
Gain on sale of marketable securities............ 57 -- 18
------- ------- --------
(107) (86) 129
------- ------- --------
Income before income taxes......................... 3,076 4,089 5,854
Provision for income taxes......................... 89 124 1,970
------- ------- --------
Net income......................................... $ 2,987 $ 3,965 $ 3,884
======= ======= ========
Unaudited pro forma data (Note 1):
Income before income taxes....................... $ 3,076 $ 4,089 $ 5,854
Provision for income taxes....................... 1,247 1,650 2,391
------- ------- --------
Net income....................................... $ 1,829 $ 2,439 $ 3,463
======= ======= ========
Net income per share............................. $ 0.61 $ 0.72
======= ========
Weighted average number of common shares and
common shares equivalent used in the pro forma
net income per share calculation ............... 3,988 4,829
======= ========
See accompanying notes to consolidated financial statements.
F-4
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------- ------ ------- -------- -------
Balance at January 1, 1994............ 3,400 $ 34 $ 156 $ 1,882 $ 2,072
Distributions to S Corporation
shareholders....................... -- -- -- (1,150) (1,150)
Net income.......................... -- -- -- 2,987 2,987
------- ------ ------- ------- -------
Balance at December 31, 1994.......... 3,400 34 156 3,719 3,909
Distributions to S Corporation
shareholders....................... -- -- -- (1,300) (1,300)
Net income ......................... -- -- -- 3,965 3,965
------- ------ ------- ------- -------
Balance at December 31, 1995 ......... 3,400 34 156 6,384 6,574
Sales of common stock............... 1,700 17 15,722 -- 15,739
Exercise of stock options........... 3 -- 26 -- 26
Distributions to S Corporation
shareholders....................... -- -- -- (7,302) (7,302)
Net income.......................... -- -- -- 3,884 3,884
------- ------ ------- ------- -------
Balance at December 31, 1996.......... 5,103 $ 51 $15,904 $ 2,966 $18,921
======= ====== ======= ======= =======
See accompanying notes to consolidated financial statements.
F-5
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
-------- ------- --------
Cash flows from operating activities:
Net income....................................... $ 2,987 $ 3,965 $ 3,884
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 102 165 651
Deferred income taxes........................... -- -- (445)
Gain on sale of marketable securities........... (57) -- (18)
Increase (decrease) from changes in:
Accounts receivable............................ (6,610) (174) (15,963)
Inventories.................................... (532) 802 (3,863)
Prepaid expenses and other current assets...... (19) (158) (1,288)
Other assets................................... 27 10 (255)
Accounts payable............................... 3,207 26 10,647
Accrued expenses............................... 371 1,288 2,030
-------- ------- --------
Net cash provided by (used in) operating
activities..................................... (524) 5,924 (4,620)
-------- ------- --------
Cash flows from investing activities:
Purchase of marketable securities................ (13) -- --
Proceeds from sale of marketable securities...... 70 -- 26
Property and equipment expenditures.............. (457) (779) (3,087)
Acquisition of businesses........................ -- (236) (1,060)
Receipt of loan repayments....................... 204 160 413
-------- ------- --------
Net cash used in investing activities........... (196) (855) (3,708)
-------- ------- --------
Cash flows from financing activities:
Repayment of long-term debt...................... (285) (285) (736)
Repayment of capital lease obligations........... -- (54) (86)
Net borrowings (payments) of note payable-bank... 1,152 (1,152) --
Proceeds from loans payable to shareholder....... 609 -- --
Repayment of loans payable to shareholder........ -- (719) --
Advance from principal shareholder............... -- -- 675
Distributions paid to S Corporation
shareholders.................................... (1,150) (1,300) (7,302)
Costs of anticipated common stock offering....... -- (399) --
Net proceeds from sales of common stock.......... -- -- 16,138
Exercise of stock options........................ -- -- 26
-------- ------- --------
Net cash provided by (used in) financing
activities..................................... 326 (3,909) 8,715
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (394) 1,160 387
Cash and cash equivalents, beginning of period.... 457 63 1,223
-------- ------- --------
Cash and cash equivalents, end of period.......... $ 63 $ 1,223 $ 1,610
======== ======= ========
See accompanying notes to consolidated financial statements.
F-6
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business:
AlphaNet Solutions, Inc. and its wholly-owned subsidiary (the "Company") is
a single-source provider of information technology products and services and
support. The Company markets computer products and provides a broad range of
information technology services, including network consulting, workstation
support, education, communications installation and technical placement
services to Fortune 1000 and other large and mid-sized companies in various
industries located primarily in the New York-to-Philadelphia corridor.
Intercompany balances and transactions are eliminated in consolidation.
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 period. Actual results could differ from those estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories:
Inventories, consisting entirely of goods for resale, are stated at the
lower of cost or market with cost determined on the weighted average method.
Property and Equipment:
Property and equipment are stated at cost less accumulated depreciation.
Repairs and maintenance costs which do not extend the useful lives of the
assets are expensed as incurred. The Company provides for depreciation on
property and equipment, except for leasehold improvements, on the straight-
line method over the estimated useful lives of the assets, generally three to
seven years. Leasehold improvements are amortized on the straight-line method
over the shorter of the estimated useful lives of the assets or the remaining
term of the applicable lease.
Costs of computer software developed or obtained for internal use and costs
associated with technology under development are capitalized and amortized
over the estimated useful lives of the assets, generally three to five years.
Capitalization of costs begins when conceptual and design activities have been
completed, and when management has authorized and committed to fund a project.
Costs capitalized include external direct costs of materials and services and
payroll and payroll-related costs for employees who are directly associated
with a project. Costs associated with training and general and administrative
activities are expensed as incurred.
Recoverability of Long-Lived Assets:
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based
primarily on the Company's ability to recover the unamortized balance of its
long-lived assets from expected future cash flows from its operations on an
undiscounted basis.
F-7
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Stock-Based Compensation:
In 1995, the Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") which requires companies
to measure stock compensation plans based on the fair value method of
accounting or to continue to apply APB No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and provide pro forma footnote disclosures under the
fair value method. Effective January 1, 1996, the Company adopted the
disclosure-only provisions of FAS 123 and continues to follow APB 25 and
related interpretations to account for the Company's stock compensation plans.
Leases:
Leases which meet certain criteria evidencing substantive ownership by the
Company are capitalized and the related capital lease obligations are included
in current and long-term liabilities. Amortization and interest are charged to
expense, with rent payments being treated as payments of the capital lease
obligation. All other leases are accounted for as operating leases, with rent
payments being charged to expense as incurred.
Revenue Recognition:
The Company recognizes sales of products when the products are shipped and
services and support revenue is recognized when the applicable services are
rendered. The Company recognizes revenue on service contracts on a prorated
basis over the life of the contracts. Prepaid fees related to the Company's
training programs are deferred and amortized to income over the duration of
the applicable training program. Deferred revenue is included in accrued
expenses and represents the unearned portion of each service contract and the
unamortized balance of prepaid training fees received as of the balance sheet
date.
Income Taxes:
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized based upon differences arising from the carrying amounts of the
Company's assets and liabilities for tax and financial reporting purposes
using enacted tax rates in effect for the year in which the differences are
expected to reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period when the change in
tax rates is enacted.
Prior to March 19, 1996, the Company, with the consent of its shareholders,
had elected to be taxed under the Subchapter S of the Internal Revenue Code as
an S Corporation for federal income tax purposes. In lieu of corporate income
taxes, the shareholders of an S Corporation are taxed on their proportionate
share of the Company's taxable income. As a result, the Company was not
subject to federal income taxes prior to March 19, 1996. The Company had also
elected S Corporation status in the State of New Jersey. The accompanying
financial statements include provisions for certain state and local income
taxes which were imposed at the corporate level.
On March 19, 1996, the Company terminated its status as an S Corporation and
became subject to federal and state income taxes thereafter at applicable C
Corporation income tax rates.
For informational purposes, the accompanying statements of income include an
unaudited pro forma adjustment for income taxes which would have been recorded
if the Company had not been an S Corporation, based on the tax laws in effect
during the respective periods.
Retirement Plan:
The Company adopted a 401(k) retirement plan in 1991. Employees of the
Company who have attained the age of 21 are eligible to participate in the
plan. Employees can elect to contribute up to 15% of their gross salary
F-8
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
to the plan. The Company may make discretionary matching cash contributions up
to 2% of the salary of the participating individual employee. Participants
vest in the Company's contributions to the plan over a six-year period based
upon years of service. Participants are fully vested at all times in their
employee contributions to the plan. The Company incurred $76, $79 and $117 of
expenses related to this plan in 1994, 1995 and 1996, respectively.
Reclassification:
Beginning in 1996, certain indirect costs which previously were classified
as costs of services have been reclassified to general and administrative
expenses to conform with current industry practices. Such expenses amounted to
$1,654, $2,236 and $3,116 for the years ended December 31, 1994, 1995 and
1996, respectively. All prior year financial information has been reclassified
to conform with the 1996 presentation.
Net Income per Share (unaudited):
Pro forma net income per share is computed using the weighted average number
of common shares and common shares equivalent outstanding during the latest
fiscal year. Common shares equivalent consists of the Company's common shares
issuable upon the exercise of stock options (Note 7). The weighted average
number of common shares and common shares equivalent outstanding have been
adjusted for the number of shares that were required to fund the S Corporation
Distribution to shareholders ($6,155) less the outstanding loan to a
shareholder ($413), following the Company's initial public offering in March
1996. Pursuant to the requirements of the Securities and Exchange Commission,
stock options issued by the Company during the twelve months immediately
preceding the Company's initial public offering have been included in the
weighted average number of common shares and common shares equivalent used in
computing pro forma net income per share as if they were outstanding for
periods prior to the Company's initial public offering using the treasury
stock method.
2. BUSINESS COMBINATION
On July 24, 1996, the Company acquired certain assets of Lior, Inc.
("Lior"), a MicroAge affiliate located in Paramus, New Jersey, in a business
combination accounted for under the purchase method, for $1,060, including
acquisition costs, financed through the proceeds raised in its initial public
offering. Intangible assets of $1,060, which are included in other assets, are
being amortized on the straight-line method over periods not exceeding fifteen
years. Amortization of intangible assets for the year ended December 31, 1996
was $42.
The operations related to the acquired assets of Lior are included in the
accompanying consolidated financial statements subsequent to July 24, 1996.
The following pro forma information for the years ended December 31, 1995
and 1996 is based on the historical financial statements of the Company and
Lior, adjusted to give effect to the acquisition of Lior by the Company, and
assume that the acquisition occurred as of the first day of the applicable
period.
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
----------- ------------
(UNAUDITED)
Net sales.............................................. $95,454 $134,311
Pro forma net income................................... 2,057 3,319
Pro forma net income per share......................... 0.52 0.69
F-9
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The pro forma financial information does not purport to present what the
Company's results of operations would actually have been if the acquisition of
Lior had occurred on the assumed date, as specified above, or to project the
Company's results of operations for any future period.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
DECEMBER 31,
---------------
1995 1996
------- -------
Accounts receivable......................................... $13,966 $30,111
Less: Allowance for doubtful accounts....................... 81 263
------- -------
$13,885 $29,848
======= =======
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
DECEMBER 31,
-------------
1995 1996
------ ------
Furniture, fixtures and equipment............................. $1,634 $3,120
Transportation equipment...................................... 43 36
Leasehold improvements........................................ 137 250
Technology and software under development..................... -- 1,464
------ ------
1,814 4,870
Less -- Accumulated depreciation and amortization............. 436 1,014
------ ------
$1,378 $3,856
====== ======
Depreciation expense and amortization of leasehold improvements for the
years ended December 31, 1994, 1995 and 1996 was $102, $165 and $609,
respectively.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-------------
1995 1996
------ ------
Wages and benefits payable.................................... $ 752 $1,504
Deferred revenue.............................................. 884 961
Sales taxes................................................... 321 833
Licensing fees payable........................................ 960 816
Sales commissions............................................. 162 663
Income taxes payable.......................................... 25 463
Other......................................................... 850 744
------ ------
$3,954 $5,984
====== ======
F-10
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
6. DEBT AND CAPITAL LEASE OBLIGATIONS
Notes Payable -- Bank:
The Company has entered into a modified revolving credit agreement (the
"Revolver") with First Union National Bank (the "Bank") whereby the Bank will
lend funds and issue standby letters of credit to the Company up to $7,000,
increasing to $9,000 during the period from October 1 through March 31 of each
year, or 75% of the Company's eligible accounts receivable less the
outstanding principal balance under any outstanding term loans and letters of
credit. The Revolver provides for second-tier loans which represent the
outstanding balance of all loans in excess of $7,000. All loans, exclusive of
second-tier loans, bear interest at the LIBOR Base Rate (5.5% at December 31,
1996) plus 1.5% and/or the Bank's prime rate (8.25% at December 31, 1996)
minus 0.25%. Second-tier loans bear interest at the Bank's prime rate plus 1%.
Cash receipts are deposited directly with the Bank and applied against the
outstanding loan balance; advances are made when needed. The weighted average
interest rate for 1995 and 1996 was approximately 9% and 8%, respectively.
At December 31, 1995 and 1996, the Company had standby letters of credit of
$2,068 and $2,038, respectively, of which $2,000 were issued primarily in
support of certain financing agreements for the purchase of inventory. Fees
payable to the Bank range from 1% to 2% per annum based on the amount of the
standby letters of credit issued.
The Revolver is secured by all of the assets of the Company, except for
certain inventory financed by IBM Credit Corporation, Deutsche Financial
Services and Finova Capital Corporation to which the Bank has a subordinated
security interest. The Revolver restricts the Company's ability to pay cash
dividends in the event of default and requires the Company to maintain certain
financial covenants. The Revolver expires on May 30, 1997.
Long-Term Debt:
In July 1993, the Company entered into a term loan agreement with the Bank
for $1,425. Interest was charged at 7% per annum. The remaining principal
balance was repaid with proceeds from the Company's initial public offering in
1996.
Capital Lease Obligations:
In March 1995, the Company entered into a master lease agreement under which
the Company may lease up to $500 of equipment. The master lease provides for
equipment to be leased for three-year terms with transfer of ownership of the
equipment to the Company at the end of the applicable equipment lease term. At
December 31, 1996, capital lease obligations outstanding under these equipment
leases, which expire in 1998, total $144.
7. STOCK OWNERSHIP AND COMPENSATION PLANS
At December 31, 1996, the Company had two stock-based compensation plans.
The Company applies APB 25 and related interpretations in accounting for its
plans. During 1996 and 1995, no compensation cost had been recognized for its
stock option plans, which are described below. Had compensation cost been
determined based on the fair value of the options at the grant dates
consistent with the method prescribed under FAS 123, the Company's pro forma
net income and pro forma earnings per share would have been reduced to the
adjusted pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
--------- ----------
Pro forma net income
As reported.......................................... $2,439 $3,463
As adjusted for FAS 123 method....................... 2,338 2,993
Pro forma earnings per share
As reported.......................................... 0.61 0.72
As adjusted for FAS 123 method....................... 0.59 0.62
F-11
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for 1996
and 1995: dividend yield of 0%; expected volatility of approximately 67%; risk
free interest rates of approximately 6%; and an expected holding period of six
years.
1995 Stock Plan:
On August 25, 1995, the Company's 1995 Stock Plan (the "Plan") was adopted
by the Board of Directors and approved by the shareholders of the Company. A
total of 747,100 shares are reserved for issuance upon exercise of options
granted or to be granted under the Plan. The options which expire ten years
after the date of grant, become exercisable in five equal annual installments
commencing one year after the date of grant provided that the optionee remains
an employee at the time of vesting of the installments.
1995 Non-Employee Director Stock Option Plan:
On August 25, 1995, the Board of Directors and shareholders adopted the
Company's 1995 Non-Employee Director Stock Option Plan which provides for the
grant of options to purchase a maximum of 100,000 shares of Common Stock of
the Company to non-employee Directors of the Company. Each person who is or
who becomes a Director of the Company after the effective date of the
Company's initial public offering and who is not also an employee or officer
of the Company shall be granted, on the effective date or the date on which he
or she becomes a Director, whichever is later, an option to purchase 20,000
shares of Common Stock, at an exercise price per share equal to the then fair
market value of the shares. The options which expire ten years after the date
of grant, become exercisable in five equal annual installments commencing one
year after the date of grant provided that the optionee then remains a
Director at the time of vesting of the installments.
A summary of the stock options granted under the Company's 1995 Stock Plan
and 1995 Non-Employee Director Stock Plan as of and for the year ended
December 31, 1995 and 1996 is presented below:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
--------------- ---------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE
------ -------- ------ --------
Outstanding at beginning of year................ -- $-- 260 $9.00
Granted......................................... 260 9.00 290 9.82
Exercised....................................... -- -- (3) 9.00
Forfeited....................................... -- -- (9) 9.00
---- ----
Outstanding at end of year...................... 260 9.00 539 9.44
==== ====
Options exercisable at end of year.............. -- -- 47 9.00
As of December 31, 1996, the 538,500 stock options outstanding under the
plans have exercise prices between $9.00 and $11.38, and a weighted-average
remaining contractual life of 9.2 years. The weighted-average fair value of
options granted during 1995 and 1996 were $5.98 and $6.56, respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company occupies seven facilities under operating leases which expire at
various dates through December 2001 and call for annual base rentals plus real
estate taxes. The future minimum payments under noncancelable leases as of
December 31, 1996 are as follows:
F-12
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR AMOUNT
---- ------
1997......................................................... $828
1998......................................................... 757
1999......................................................... 655
2000......................................................... 525
2001......................................................... 136
Rent expense including real estate taxes for the years ended December 31,
1994, 1995 and 1996 was $418, $553 and $688, respectively.
The Company has obtained financing terms from IBM Credit Corporation,
Deutsche Financial Services and Finova Capital Corporation for the purchase of
inventory. In exchange for these terms, the payables are collateralized by
substantially all the assets of the Company. The balance included in accounts
payable at December 31, 1995 and 1996 was $5,384 and $13,085, respectively.
The Company has entered into employment agreements which expire at various
dates through 1998 with certain key employees. The agreements provide for
aggregate annual salaries of $1,625.
On February 13, 1996, the Company, as plaintiff, filed a complaint against
two former employees of the Company and their current employer (together, the
"Defendants"). Such complaint alleges theft of services, theft of the
Company's property, theft of corporate opportunity and unauthorized use of
Company credit cards by the Defendants. The Company is seeking restitution
from certain of the Defendants and additional compensatory damages from
another Defendant. The Company intends to vigorously pursue all available
remedies against the Defendants. The Company currently is unable to evaluate
the likelihood of a favorable outcome for the Company. The Company believes
that some or all of its damages in connection with the litigation may be
covered by insurance. In any event, Stan Gang, the Company's founder, Chairman
of the Board, President and Chief Executive Officer and principal shareholder,
has agreed to indemnify the Company for any and all losses which the Company
may sustain, up to $1,000 arising from or relating to the alleged wrongful
conduct of the Defendants. In connection therewith, Mr. Gang paid $675 of his
personal funds to the Company, which is classified as an advance from the
principal shareholder. Pursuant to the terms of the agreement between the
Company and Mr. Gang, the Company shall reimburse Mr. Gang in the event and to
the extent that the Company is awarded and collects damages from the
Defendants, receives sums as a result of a settlement between the Company and
the Defendants, or receives proceeds under an insurance policy. Management is
of the opinion that the ultimate disposition of this matter will not have a
material adverse effect on the results of operations or financial position of
the Company.
9. SUPPLEMENTARY CASH FLOW INFORMATION
Following is a summary of supplementary cash flow information for the years
ended December 31, 1994, 1995 and 1996:
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------ ------ ------
Interest paid..................................... $164 $124 $ 97
Income taxes paid................................. 60 130 1,977
Noncash investing and financing activities:
Equipment acquired under capital lease.......... -- 284 --
F-13
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
10. INCOME TAXES
The Company accounts for income taxes under the asset and liability method
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of differences between the carrying amounts
and the tax bases of the assets and liabilities.
The components of the provision for income taxes for 1994, 1995 and 1996 are
as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
------- ------- -------
Current:
Federal.......................................... $ -- $ -- $ 1,733
State and local.................................. 89 124 682
------- ------- -------
89 124 2,415
------- ------- -------
Deferred:
Federal.......................................... -- -- (178)
State and local.................................. -- -- (57)
Benefit as a result of change in tax status...... -- -- (210)
------- ------- -------
-- -- (445)
------- ------- -------
$ 89 $ 124 $ 1,970
======= ======= =======
Prior to March 19, 1996, the Company had elected under the Internal Revenue
Code to be an S Corporation for federal income tax purposes. Therefore, no
provision or liability for federal income taxes has been recorded for the
years ended December 31, 1994 and 1995.
A reconciliation of the Federal statutory rate to the Company's effective
tax rate for 1994, 1995 and 1996 is as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -------
Taxes at statutory rate...................... 34.0% 34.0% 34.0%
State and local income taxes, net of federal
tax benefit................................. 6.2% 6.1% 6.7%
Income from S Corporation not subject to fed-
eral and state income taxes................. (37.7%) (37.4%) (7.2%)
Other, net................................... 0.4% 0.3% 0.2%
------- ------- -------
Effective tax rate........................... 2.9% 3.0% 33.7%
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the net deferred income tax asset at December 31, 1996 are as
follows:
Accounts receivable allowances......................................... $187
Inventory reserves..................................................... 95
Accrual for compensated absences....................................... 233
Accumulated depreciation and amortization.............................. (70)
----
$445
====
F-14
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
11. SIGNIFICANT CUSTOMERS AND VENDORS
During each of the three years ended December 31, 1996, one customer
accounted for approximately 24%, 20% and 17% of the Company's net sales during
the respective periods. No other customer accounted for more than 10% of the
Company's net sales during the three years ended December 31, 1996.
The Company purchases the majority of its products primarily from two
aggregators of computer hardware, software and peripherals. Agreements with
these aggregators provide for, among other things, certain discount pricing
for meeting agreed-upon purchase levels and minimum purchase commitments.
12. RELATED PARTY TRANSACTIONS
Loan Receivable -- Shareholder:
In July 1993, the Company loaned its principal shareholder $800. Interest
was charged at 7% per annum and the loan was repayable in equal installments,
including interest, ending July 1998. This loan was repaid during 1996.
Interest income earned from the principal shareholder was $46, $35 and $7 for
the years ended December 31, 1994, 1995 and 1996, respectively.
Loans Payable to Shareholder:
Loans payable to shareholder bore interest at 11%. During 1995, the Company
repaid the entire loan outstanding. Interest expense to the shareholder was
$45 and $30 for the years ended December 31, 1994 and 1995, respectively.
F-15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED THIS 26TH DAY OF
MARCH, 1997.
AlphaNet Solutions, Inc.
By: /s/ Stan Gang
----------------------------------
STAN GANG, CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER (PRINCIPAL EXECUTIVE
OFFICER)
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stan Gang Chairman of the March 26, 1997
- ------------------------------------- Board, President
STAN GANG and Chief Executive
Officer (Principal
Executive Officer)
/s/ Gary S. Finkel Vice President and March 26, 1997
- ------------------------------------- Chief Financial
GARY S. FINKEL Officer (Principal
Financial and
Accounting Officer)
/s/ Michael Gang Secretary and March 26, 1997
- ------------------------------------- Director
MICHAEL GANG
/s/ Michael R. Bruce Director March 26, 1997
- -------------------------------------
MICHAEL R. BRUCE
/s/ David J. Sorin Director March 26, 1997
- -------------------------------------
DAVID J. SORIN
/s/ Susan Wolford Director March 26, 1997
- -------------------------------------
SUSAN WOLFORD