<PAGE> 1
CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission File No. 0-27042
AlphaNet Solutions, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2554535
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7 Ridgedale Ave., Cedar Knolls, New Jersey 07927
- ------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(201) 267-0088
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
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 the number of shares outstanding of each of the Registrant's
classes of common stock, as of June 30, 1996:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 5,100,000
Page 1 of 18
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ALPHANET SOLUTIONS, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . 1
Item 1. Financial Statements . . . . . . . . . . . . . 1
Balance Sheets
as of December 31, 1995
and June 30, 1996 (unaudited) . . . . . . . . . . 2
Statements of Income
for the Three Months and Six Months Ended
June 30, 1995 and 1996 (unaudited). . . . . . . . 3
Statement of Changes in Shareholders'
Equity for the Six Months Ended
June 30, 1996 (unaudited) . . . . . . . . . . . . 4
Statements of Cash Flows
for the Six Months Ended
June 30, 1995 and 1996 (unaudited). . . . . . . . 5
Notes to Financial Statements (unaudited) . . . . 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition . . 9
Results of Operations . . . . . . . . . . . . . . 10
Liquidity and Capital Resources . . . . . . . . . 13
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . 16
Item 5. Other Information . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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ALPHANET SOLUTIONS, INC.
BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 1,223 $ 6,686
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 13,885 16,809
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 946 1,886
Current portion of loan receivable -- shareholder. . . . . . . . . . . 160 -
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 425 1,900
----- -------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 16,639 27,281
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . 1,378 1,929
Loan receivable -- shareholder . . . . . . . . . . . . . . . . . . . . . . 253 -
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 112
------ ------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,770 $29,322
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . $ 285 $ -
Current portion of capital lease obligations . . . . . . . . . . . . . 91 95
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . 11,230 12,617
------ -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 11,606 12,712
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451 -
Capital lease obligations. . . . . . . . . . . . . . . . . . . . . . . . . 139 90
------ ------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 12,196 12,802
------ ------
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, 3,400,000 and 5,100,000
shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . 34 51
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 156 15,878
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,384 591
------- ------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . 6,574 16,520
------- ------
Total liabilities and shareholders' equity . . . . . . . . . . . . . $18,770 $29,322
======= =======
</TABLE>
See accompanying notes to financial statements.
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ALPHANET SOLUTIONS, INC.
STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -----------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales:
Product sales. . . . . . . . . . . . . . . . . . $13,828 $19,677 $29,663 $34,868
Services and support . . . . . . . . . . . . . . 2,746 4,568 5,206 8,673
------- ------- ------- -------
16,574 24,245 34,869 43,541
------- ------- ------- -------
Cost of sales:
Product sales. . . . . . . . . . . . . . . . . . 11,907 17,624 25,599 30,907
Services and support . . . . . . . . . . . . . . 2,155 3,820 4,199 7,130
------- ------- ------- -------
14,062 21,444 29,798 38,037
------- ------- ------- -------
Gross profit. . . . . . . . . . . . . . . . . . . . 2,512 2,801 5,071 5,504
------- ------- ------- -------
Operating expenses:
Selling expenses . . . . . . . . . . . . . . . . 1,103 1,513 2,259 2,762
General and administrative expenses. . . . . . . 454 503 890 978
------- ------- ------- -------
1,557 2,016 3,149 3,740
------- ------- ------- -------
Operating income. . . . . . . . . . . . . . . . . . 955 785 1,922 1,764
------- ------- ------- -------
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . 14 103 27 120
Interest expense . . . . . . . . . . . . . . . . (27) (20) (85) (55)
------- ------- ------- -------
(13) 83 (58) 65
------- ------- ------- -------
Income before income taxes. . . . . . . . . . . . . 942 868 1,864 1,829
Provision for income taxes. . . . . . . . . . . . . 28 352 56 320
------- ------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . $ 914 $ 516 $ 1,808 $ 1,509
======= ======= ======= =======
Pro forma data:
Income before income taxes . . . . . . . . . . . $ 942 $ 868 $ 1,864 $ 1,829
Provision for income taxes . . . . . . . . . . . 380 352 752 741
------- ------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . $ 562 $ 516 $ 1,112 $ 1,088
======= ======= ======= =======
Net income per share . . . . . . . . . . . . . . $ 0.14 $ 0.10 $ 0.28 0.24
======= ======= ======= =======
Weighted average number
of common shares and
common shares equivalent . . . . . . . . . . . . 3,988 5,073 3,988 4,558
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
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ALPHANET SOLUTIONS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1996. . . . . . . . . . . . . $ 34 $ 156 $ 6,384 $ 6,574
Net proceeds from issuance of
1,700,000 shares of Common Stock . . . . . . . . 17 15,722 -- 15,739
Payment of dividends. . . . . . . . . . . . . . . . -- -- (1,147) (1,147)
Distribution of S Corporation earnings. . . . . . . -- -- (6,155) (6,155)
Net income . . . . . . . . . . . . . . . . . . . . -- -- 1,509 1,509
------ -------- ----------- -----------
Balance at June 30, 1996. . . . . . . . . . . . . . $ 51 $ 15,878 $ 591 $ 16,520
======= ======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
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ALPHANET SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . $ 1,808 $ 1,509
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 95 187
Increase (decrease) from changes in:
Accounts receivable, net . . . . . . . . . 4,483 (2,924)
Inventories. . . . . . . . . . . . . . . . 1,095 (940)
Prepaid expenses and other current assets. 55 1,475)
Other assets . . . . . . . . . . . . . . . -- 388
Accounts payable and accrued expenses. . . (2,256) 1,387
------- -------
Net cash provided by (used in) operating activities 5,280 (1,868)
------- -------
Cash flows from investing activities:
Property and equipment expenditures . . . . . . . . (271) (738)
Receipt of loan repayments - shareholder. . . . . . 80 413
------- -------
Net cash used in investing activities . . . . . . . (191) (325)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock. . . . . -- 15,739
Repayment of long-term debt . . . . . . . . . . . . (153) (736)
Repayment of capital lease obligations. . . . . . . -- (45)
Net payments of notes payable-bank. . . . . . . . . (1,152) --
Repayment of loan payable - shareholder . . . . . . (719) --
Payment of dividends. . . . . . . . . . . . . . . . (755) (1,147)
Distribution of S Corporation earnings. . . . . . . -- (6,155)
------- -------
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . (2,779) 7,656
------- -------
Net increase in cash and cash equivalents . . . . . . . 2,310 5,463
Cash and cash equivalents, beginning of period. . . . . 63 1,223
------- -------
Cash and cash equivalents, end of period. . . . . . . . $ 2,373 $ 6,686
======= =======
</TABLE>
See accompanying notes to financial statements.
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ALPHANET SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Note 1 -- Basis of Presentation:
The information presented for June 30, 1995 and 1996, and for the
three-month and six-month periods then ended, is unaudited, but, in the opinion
of the Company's management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal recurring adjustments) which
the Company considers necessary for the fair presentation of the Company's
financial position as of June 30, 1996 and the results of its operations and its
cash flows for the three-month and six-month periods ended June 30, 1995 and
1996. The financial statements included herein have been prepared in accordance
with generally accepted accounting principles and the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These financial statements should be read in conjunction with the Company's
audited financial statements for the year ended December 31, 1995, which were
included as part of the Company's Registration Statement on Form S-1
(Registration No. 33-97922), as declared effective by the Securities and
Exchange Commission on March 20, 1996.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
Certain amounts in the 1995 financial statements have been reclassified
to conform to the 1996 presentation. Such reclassifications are not material.
Note 2 -- Income Taxes:
Prior to its initial public offering of Common Stock, the Company had
elected to be treated as a Subchapter S Corporation for income tax purposes. The
Subchapter S status was terminated effective March 19, 1996. Accordingly, $210
of net deferred tax assets have been recorded on the June 30, 1996 balance sheet
with a corresponding tax benefit for the six-month period ended June 30, 1996.
The net deferred tax assets reflected on the June 30, 1996 balance sheet of the
Company are as follows:
<TABLE>
<S> <C>
Allowance for doubtful accounts $ 33
Inventory reserves 66
Accrual for compensated absences 191
Differences between book and
tax bases of property and equipment (80)
-------
Net deferred tax assets $ 210
=======
</TABLE>
For informational purposes, the accompanying statements of income include a
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.
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ALPHANET SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Note 3 -- Pro Forma Net Income Per Share:
Pro forma net income per share is computed using the weighted average number of
common shares and common shares equivalent outstanding during the periods.
Common shares equivalent consists of the Company's common shares issuable upon
the exercise of stock options. The weighted average number of common shares
and common shares equivalent outstanding have been adjusted for the number of
shares that the Company would need to issue to fund the S Corporation
Distribution to its then current shareholders less the outstanding loan to a
current shareholder.
Note 4 -- Initial Public Offering:
On March 26, 1996, the Company consummated an initial public offering of
2,100,000 shares of its Common Stock at a price of $10.50 per share, of which
1,600,000 shares were issued and sold by the Company and 500,000 shares were
sold by a selling shareholder of the Company. The Company did not receive any
proceeds from the sale of shares sold by the selling shareholder. On April 19,
1996, the underwriters of the Company's initial public offering notified the
Company of their intent to exercise, in part, their over-allotment option to
purchase shares of the Company's Common Stock. As a result, the Company issued
and sold an additional 100,000 shares of its Common Stock at the initial public
offering price of $10.50 per share. The option lapsed as to its unexercised
portion. The aggregate net proceeds to the Company after expenses and
underwriting discounts and commissions, were approximately $15,739.
Note 5 -- Related Party Transactions:
On September 28, 1995, the Board of Directors voted to distribute to its
shareholders the previously taxed and undistributed earnings of the Company as
of the effective date of the Company's termination of its S Corporation status,
which termination occurred on March 19, 1996. The amount of such distribution
was $5,782 and represented substantially all of the previously taxed and
undistributed earnings less the outstanding loan to a current shareholder.
In connection with certain litigation arising from the alleged wrongful conduct
of two former employees of the Company, Stan Gang, the Company's President,
Chief Executive Officer and principal shareholder, paid the Company $675 to
indemnify the Company for any and all losses which the Company may sustain
relating to such litigation, and such amount is included in accounts payable
and accrued expenses on the June 30, 1996 balance sheet. Mr. Gang has agreed
to indemnify the Company for an additional $325 in connection therewith. The
Company shall reimburse Mr. Gang in the event and to the extent that the
Company, as plaintiff in such litigation, is awarded and collects damages from
the defendants in such litigation, receives sums as a result of a settlement
between the Company and such defendants, or receives proceeds under an
insurance policy.
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ALPHANET SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Note 6 --Subsequent Event:
On July 24, 1996, the Company consummated the acquisition of certain assets of
Lior, Inc. ("Lior"), a MicroAge affiliate located in Paramus, New Jersey. The
Company purchased the entire customer list and outstanding purchase orders of
Lior for an aggregate purchase price of up to $1,000,000, of which $900,000 was
paid at closing and $100,000 may be due in January 1997 if certain former Lior
salespersons remain employed by the Company through such date. The Company
funded the purchase price from proceeds raised in its initial public offering.
In determining the purchase price, the Company considered, among other factors,
the past and projected revenues generated from such customers and the value of
the acquired purchase orders. The Company did not assume any liabilities of
Lior, other than the obligations to perform under the acquired purchase orders
and certain service contracts. The Company acquired such assets from Stan
Gang, the Company's President and Chief Executive Officer, who had purchased
such assets for the same consideration from Lior on July 18, 1996 pending
approval of the transaction by the Company's Board of Directors. In connection
with such transaction, effective July 1, 1996, 26 former employees of Lior,
including 7 sales persons and 8 technical personnel, joined the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
The Company was formed in 1984 as a reseller of computer hardware and
software products, and to date most of its revenues have been derived from
product sales. The Company entered into a distribution agreement in 1984 with
MicroAge, one of the nation's largest aggregators, to acquire products for
resale. The distribution agreement with MicroAge gives the Company access to
products on an as-needed basis (thereby reducing the Company's need to carry
large inventories), electronic ordering capability, product configuration and
testing, warehousing and delivery. The Company also has partnered with many
industry-leading vendors of information technology equipment, including Compaq,
Hewlett-Packard, IBM, Lotus, Microsoft and Novell, to resell such products and
provide enhanced service offerings.
In 1990, the Company began developing its systems integration capabilities
to expand the scope of its service offerings. At that time, the Company also
made the strategic decision to focus its sales, services and support efforts
directly to Fortune 1000 and other large and mid-sized companies located in the
New York-to-Philadelphia corridor. The Company believes that there is a growing
trend on the part of such companies to outsource information technology
functions.
The Company's primary strategy is to combine the technical expertise of its
service personnel with the strong product procurement and marketing capabilities
of its reseller business to provide comprehensive information technology
solutions to new and existing clients. 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 and its long-term
relationships with large clients, positions the Company to grow the services
component of its business, while further strengthening its product sales. The
Company believes that its ability to be a single-source provider of information
technology products and services and support enables it to earn margins higher
than it would earn if it sold products only. In general, the Company
anticipates that an increasing percentage of its gross profit 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 Company's recent acquisition of the Lior customer list. See Note 6
to Notes to Financial Statements. Many of such customers historically had
purchased primarily computer products from Lior. The Company believes that it
may be able to leverage the product sales component of the Lior business to
increase sales of services and support to such customers, although no assurance
can be given with respect thereto. See Item 5. "Other Information."
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This Form 10-Q contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1995 Compared to Three Months Ended June 30, 1996
Revenue. Total revenue increased by 46.3%, or $7,671,000, from
$16,574,000 in the second quarter of 1995 to $24,245,000 in the second quarter
of 1996. Product sales revenue increased by 42.3% or $5,849,000, from
$13,828,000 in the second quarter of 1995 to $19,677,000 in the second quarter
of 1996. The increase is primarily attributed to increased demand for computer
products among the Company's larger customer base. Service and support revenue
increased by 66.4%, or $1,822,000, from $2,746,000 in the second quarter of 1995
to $4,568,000 in the second quarter of 1996. This increase was attributable
primarily to increased demand for the Company's services and support, including
increased demand for the Company's systems engineering, cabling, training and
customer engineering services. During such period, certain customers which
previously had purchased only products from the Company also engaged the Company
for services and support. In the second quarter of 1996, sales to Nabisco Foods
Group, BASF and United Jersey Bank, the Company's three largest customers, each
of which accounted for more than 10% of the Company's total revenue, accounted
in the aggregate for approximately 41.9% of such revenue. There can be no
assurance that such customers will continue to place orders with the Company or
engage the Company to perform services and support functions at existing levels.
Gross profit. The Company's cost of sales includes primarily, in the
case of product sales revenue, the cost to the Company of products acquired for
resale, and in the case of services and support revenue, salaries and related
employee benefits and payroll taxes. The Company's gross profit increased by
11.5%, or $289,000, from $2,512,000 in the second quarter of 1995 to $2,801,000
in the second quarter of 1996. Gross profit margin decreased from 15.2% of
total revenue in the second quarter of 1995 to 11.6% of total revenue in the
corresponding 1996 quarter. Such decrease was due to a decline in gross profit
margin attributable to product sales coupled with a decline in gross profit
margin attributable to services and support revenue. Gross profit margin
attributable to product sales decreased from 13.9% in the second quarter of 1995
to 10.4% in the second quarter of 1996. This decrease was attributed primarily
to continued downward pricing pressure on sales of computer hardware products,
which typically results in margin deterioration on such sales. Gross profit
margin attributable to services and support revenue decreased from 21.5% of
services and support revenue in the second quarter of 1995 to 16.4% in the
second quarter of 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 costs as the Company accelerated hiring and
training of technical professionals and experienced
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<PAGE> 13
lower utilization and incurred higher expenses relating to its learning centers
during the second quarter of 1996.
Selling expenses. Selling expenses consist primarily of personnel
costs, including sales commissions earned by Company personnel involved in the
sales and marketing of hardware, software and professional services. These
personnel include direct sales, sales support and marketing personnel. Selling
expenses also include costs of advertising and promotion. Selling expenses
increased by 37.2%, or $410,000, from $1,103,000 in the second quarter of 1995
to $1,513,000 in the second quarter of 1996, but decreased from 6.7% of total
revenue in the second quarter of 1995 to 6.2% of total revenue in the second
quarter of 1996. The increase in selling expenses in absolute dollars was
attributable primarily to the Company's increased sales and marketing efforts
associated with its services and support offerings and to costs incurred and
associated with the Company's expansion into the Philadelphia market. The
decrease as a percentage of revenue was due to the substantial increase in
revenue.
General and administrative expenses. General and administrative
expenses consist primarily of salaries and occupancy costs for administrative,
executive and finance personnel. General and administrative expenses increased
by 10.8% or $49,000, from $454,000 in the second quarter of 1995 to $503,000 in
the second quarter of 1996, but decreased from 2.7% to 2.1% of total revenue,
respectively. The increase in general and administrative expenses in absolute
dollars was due primarily to increases in accounting personnel expenses,
professional fees and corporate insurance premiums. The decrease as a
percentage of revenue is due to the substantial increase in revenue.
Income taxes. Prior to March 19, 1996, the Company was treated as an S
Corporation for income tax purposes. Therefore, for all of the second quarter
of 1995, the Company was exempt from Federal income taxes and certain state
income taxes. As a result, the Company's effective income tax rates were 3.0%
in the second quarter of 1995 and 40.6% in the second quarter of 1996. For
informational purposes, based upon the tax laws in effect during 1995, pro forma
income taxes have been disclosed for income taxes which would have been recorded
if the Company had not been an S Corporation in the second quarter of 1995.
Six Months Ended June 30, 1995 Compared to Six Months Ended June 30, 1996
Revenue. Total revenue increased by 24.9%, or $8,672,000, from
$34,869,000 in the first six months of 1995 to $43,541,000 in the first six
months of 1996. Product sales revenue increased by 17.5%, or $5,205,000, from
$29,663,000 in the first six months of 1995 to $34,868,000 in the first six
months of 1996. The increase is primarily attributed to increased demand during
the second quarter for computer products among the Company's larger customer
base. Service and support revenue increased by 66.6%, or $3,467,000, from
$5,206,000 in the first six months of 1995 to $8,673,000 in the corresponding
period of 1996. This increase was attributable primarily to increased demand for
the Company's services and support, including
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<PAGE> 14
increased demand for the Company's systems engineering, cabling, training and
customer engineering services. During such period, certain customers which
previously had purchased only products from the Company also engaged the
Company for services and support. In the 1996 period, sales to Nabisco Foods
Group, BASF and United Jersey Bank, the Company's three largest customers, each
of which accounted for more than 10% of the Company's total revenue, accounted
in the aggregate for approximately 38.4% of such revenue. There can be no
assurance that such customers will continue to place orders with the Company or
engage the Company to perform services and support functions at existing
levels.
Gross profit. The Company's cost of sales includes primarily, in the
case of product sales revenue, the cost to the Company of products acquired for
resale, and in the case of services and support revenue, salaries and related
employee benefits and payroll taxes. The Company's gross profit increased by
8.5%, or $433,000, from $5,071,000 in the first six months of 1995 to $5,504,000
in the corresponding 1996 period. Gross profit margin decreased, however, from
14.5% of total revenue in the 1995 period to 12.6% in the six months ended June
30, 1996. Such decrease was due to a decline in gross profit margin
attributable to product sales coupled with a decline in gross profit margin
attributable to services and support revenue. Gross profit margin attributable
to product sales decreased from 13.7% in the first six months of 1995 to 11.4%
in the corresponding 1996 period. This decrease was attributed primarily to
continued downward pricing pressure on sales of computer hardware products,
which typically results in margin deterioration on such sales. Gross profit
margin attributable to services and support revenue decreased from 19.3% of
services and support revenue in the first six months of 1995 to 17.8% in the
first six months of 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 costs, as the Company accelerated hiring and
training of technical professionals and experienced lower utilization and
incurred higher expenses relating to its learning centers during the 1996
period.
Selling expenses. Selling expenses consist primarily of personnel
costs, including sales commissions earned by Company personnel involved in the
sales and marketing of hardware, software and professional services. These
personnel include direct sales, sales support and marketing personnel. Selling
expenses also include costs of advertising and promotion. Selling expenses
increased by 22.3%, or $503,000, from $2,259,000 in the first six months of 1995
to $2,762,000 in the corresponding 1996 period, but decreased from 6.5% of total
revenue in the first six months of 1995 to 6.3% of total revenue in the first
six months of 1996. The increase in selling expenses in absolute dollars was
attributable primarily to the Company's increased sales and marketing efforts
associated with its services and support offerings and to costs incurred and
associated with the Company's expansion into the Philadelphia market. The
decrease as a percentage of revenue was due to the substantial increase in
revenue.
General and administrative expenses. General and administrative
expenses consist primarily of salaries and occupancy costs for administrative,
executive and finance personnel.
- 12 -
<PAGE> 15
General and administrative expenses increased by 9.9% or $88,000, from $890,000
in the first six months of 1995 to $978,000 in the corresponding 1996 period,
but decreased from 2.6% to 2.2% of total revenue, respectively. The increase
in general and administrative expenses in absolute dollars was due primarily to
increases in accounting personnel expenses, professional fees and corporate
insurance premiums. The slight decrease as a percentage of revenue is due to
the substantial increase in revenue.
Income taxes. Prior to March 19, 1996, the Company was treated as an S
Corporation for income tax purposes. Therefore, for all of the 1995 period,
the Company was exempt from Federal income taxes and certain state income
taxes. In addition, the Company received a $210,000 benefit for income taxes in
the first quarter of 1996 to reflect the recording of net deferred tax assets
as of March 31, 1996 which resulted from the Company's termination of its S
Corporation status. As a result, the Company's effective income tax rates were
3.0% in the first six months of 1995 and 17.5% in the first six months of 1996.
For informational purposes, based upon the tax laws in effect prior to the
Company's termination of S Corporation status, pro forma income taxes have been
disclosed for income taxes which would have been recorded if the Company had
not been an S Corporation during such period.
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, 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 the selling shareholder. The net proceeds to the
Company were $15,739,000.
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 revolving credit
facility. Net cash used in operations was $1,868,000 for the first six months
of 1996 and consisted primarily of an increase in accounts receivable of
$2,924,000, an increase in inventories of $940,000 and an increase in prepaid
expenses and other current assets of $1,475,000. The increase in accounts
receivable is attributable primarily to higher sales. The aging of the
Company's accounts receivable remained constant when compared to the accounts
receivable aging at December 31, 1995. The increase in inventories is primarily
attributable to the purchase of computer equipment subject to a firm purchase
commitment from a large customer. The increase in prepaid expenses and other
current assets is primarily attributable to an increase in amounts due from
vendors which were partially offset by a $1,387,000 increase in accounts payable
and accrued expenses and net income of $1,509,000.
The Company's working capital was $14,569,000 at June 30, 1996 compared
to $5,033,000 at December 31, 1995.
- 13 -
<PAGE> 16
Net cash used in investing activities in the first six months of 1996 was
$325,000, consisting of $738,000 of expenditures for property and equipment
which were partially offset by the receipt of a $413,000 loan repayment from a
current shareholder. Capital expenditures consisted primarily of purchases of
computer equipment utilized in-house and for the continued development of the
Company's Technical Support Center. Although the Company currently has no
material commitments for capital expenditures outstanding, the Company
anticipates further capital expenditures for the continued development of its
Technical Support Center, the continued upgrading of its internal computer
systems and for further expansion of its Learning Centers.
Net cash provided by financing activities in the first six months of 1996
was $7,656,000, which consisted of the net proceeds from the issuance of Common
Stock of $15,739,000, partially offset by a $6,155,000 distribution of
previously undistributed S Corporation earnings, payments of dividends of
$1,147,000, repayment of long-term debt of $736,000 and payment of capital lease
obligations of $45,000.
The Company has entered into a master lease agreement with First Fidelity
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 June 30, 1996, capital lease
obligations outstanding under these equipment leases, which expire in 1998,
aggregated $185,000.
The Company has a revolving credit facility with First Union National Bank
(formerly First Fidelity Bank, N.A.) pursuant to which it may borrow up to a
maximum of $7,000,000 at the bank's prime rate less 0.25% or at LIBOR plus 1.5%,
increasing to $9,000,000 during the period from October 1 through March 30 of
each calendar year at the bank's prime rate plus 1.0%. 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. There
were no outstanding borrowings under the revolving credit facility as of June
30, 1996. The credit facility contains, among other provisions, covenants
relating to the Company's payment of cash dividends.
The Company purchases certain inventory and equipment through financing
arrangements with Deutsche Financial Services, IBM Credit Corporation and Finova
Capital Corporation and expects to continue these relationships. At June 30,
1996, there were outstanding balances of $3,354,000, $1,486,000 and $0,
respectively, under such arrangements. Obligations under such financing
arrangements are collateralized by substantially all of the assets of the
Company. Deutsche Financial Services and IBM Credit Corporation have entered
into an intercreditor agreement with respect to their relative interests.
As of December 31, 1995, the Company had a $1,425,000 term loan from First
Fidelity Bank, N.A., of which approximately $736,000 was outstanding. The
Company prepaid the entire
- 14 -
<PAGE> 17
outstanding balance of such term loan with a portion of the net proceeds from
its initial public offering.
The Company believes that the net proceeds of the initial public
offering, together with available funds, existing 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.
- 15 -
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On July 24, 1996, the Company consummated the acquisition of certain
assets of Lior, Inc. ("Lior"), a MicroAge affiliate located in Paramus, New
Jersey. The Company purchased the entire customer list and outstanding purchase
orders of Lior for an aggregate purchase price of up to $1,000,000, of which
$900,000 was paid at closing and $100,000 may be due in January 1997 if certain
former Lior salespersons remain employed by the Company through such date. The
Company funded the purchase price from proceeds raised in its initial public
offering. In determining the purchase price, the Company considered, among other
factors, the past and projected revenues generated from such customers and the
value of the acquired purchase orders. The Company did not assume any
liabilities of Lior, other than the obligations to perform under the acquired
purchase orders and certain service contracts. The Company acquired such assets
from Stan Gang, the Company's President and Chief Executive Officer, who had
purchased such assets for the same consideration from Lior on July 18, 1996
pending approval of the transaction by the Company's Board of Directors. In
connection with such transaction, effective July 1, 1996, 26 former employees of
Lior, including 7 sales persons and 8 technical personnel, joined the Company.
- 16 -
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
11 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the quarter ended
June 30, 1996. Subsequent to the end of the quarter, the Company filed a
Current Report on Form 8-K with the Securities and Exchange Commission on August
5, 1996 relating to its acquisition of certain assets of Lior, Inc. See Item 5.
"Other Information."
-17-
<PAGE> 20
SIGNATURES
Pursuant to the requirements 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.
AlphaNet Solutions, Inc.
DATE: August 13, 1996 By: /s/ Stan Gang
--------------------------
Stan Gang
President and Chief
Executive Officer
(Principal Executive
Officer)
DATE: August 13, 1996 By: /s/ Gary S. Finkel
--------------------------
Gary S. Finkel,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 1
EXHIBIT 11
ALPHANET SOLUTIONS, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ------------------------
1995 1996 1995 1996
<S> <C> <C> <C> <C>
Pro forma net income $562 $ 516 $1,112 $1,088
==== ====== ====== ======
Weighted average number
of common shares and
common shares equivalent:
Common shares................ 3,400 5,073 3,400 4,281
Shares necessary to 551 - 551 260
fund S Corporation Distribution
Cheap stock (treasury
stock method).............. 37 - 37 17
----- ------ ----- ------
3,988 5,073 3,988 4,558
===== ====== ===== ======
Pro forma net income per share $ 0.14 $ 0.10 $ 0.28 $ 0.24
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM FINANCIAL STATEMENTS INCLUDED IN THE REGISTRANT'S FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 6,686
<SECURITIES> 0
<RECEIVABLES> 16,890
<ALLOWANCES> 81
<INVENTORY> 1,886
<CURRENT-ASSETS> 27,281
<PP&E> 2,552
<DEPRECIATION> 623
<TOTAL-ASSETS> 29,322
<CURRENT-LIABILITIES> 12,712
<BONDS> 90
0
0
<COMMON> 51
<OTHER-SE> 16,469
<TOTAL-LIABILITY-AND-EQUITY> 29,322
<SALES> 34,868
<TOTAL-REVENUES> 43,541
<CGS> 30,907
<TOTAL-COSTS> 38,037
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 1,829
<INCOME-TAX> 741<F1>
<INCOME-CONTINUING> 1,088<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,088<F1>
<EPS-PRIMARY> 0.24<F1>
<EPS-DILUTED> 0
<FN>
<F1>Includes a pro forma adjustment to include income taxes which would have been
incurred if the Company had not been an S Corproation for such period.
</FN>
</TABLE>
