<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ALPHANET SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 5045 22-2554535
(STATE OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
7 RIDGEDALE AVENUE
CEDAR KNOLLS, NEW JERSEY 07927
(201) 267-0088
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STAN GANG
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
ALPHANET SOLUTIONS, INC.
7 RIDGEDALE AVENUE
CEDAR KNOLLS, NEW JERSEY 07927
(201) 267-0088
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------
COPIES TO:
DAVID J. SORIN, ESQ. HENRY D. KAHN, ESQ.
ANDREW P. GILBERT, ESQ. LAWRENCE R. SEIDMAN, ESQ.
BUCHANAN INGERSOLL PIPER & MARBURY L.L.P.
COLLEGE CENTRE CHARLES CENTER SOUTH
500 COLLEGE ROAD EAST 36 SOUTH CHARLES STREET
PRINCETON, NEW JERSEY 08540 BALTIMORE, MARYLAND 21201
(609) 987-6800 (410) 539-2530
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Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 2,300,000 $17.94 $41,262,000 $12,503.64
</TABLE>
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(1) Includes 300,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933 based on the
average of the high and low prices per share of Common Stock of the
Registrant as reported on the Nasdaq National Market on May 20, 1997.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 22, 1997
2,000,000 SHARES
[LOGO OF ALPHANET SOLUTIONS, INC. APPEARS HERE]
COMMON STOCK
Of the 2,000,000 shares of Common Stock offered hereby, 1,150,000 shares are
being sold by AlphaNet Solutions, Inc. (the "Company") and 850,000 shares are
being sold by the Selling Shareholders. The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholders. See "Principal
and Selling Shareholders." The Company's Common Stock is traded on the Nasdaq
National Market under the symbol ALPH. On May 21, 1997, the last reported sale
price of the Common Stock on the Nasdaq National Market was $18 5/8 per share.
See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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Price to Underwriting Proceeds to Proceeds to
Public Discount(1) Company(2) Selling Shareholders
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<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
Total(3)................. $ $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company, estimated at
$530,000.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 172,500 and 127,500 additional shares,
respectively, of Common Stock, solely to cover over-allotments, if any. If
the Underwriters exercise this option in full, the Price to Public will
total $ , the Underwriting Discount will total $ , the Proceeds to
Company will total $ and the Proceeds to Selling Shareholders will total
$ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1997.
-----------
MONTGOMERY SECURITIES
CRUTTENDEN ROTH
INCORPORATED
PARKER/HUNTER
INCORPORATED
, 1997
<PAGE>
[PICTURE APPEARS HERE WITH HEADER. HEADER TO PICTURE STATES "A SINGLE-SOURCE
PROVIDER OF INFORMATION TECHNOLOGY PRODUCTS, SERVICES AND SUPPORT." BELOW HEADER
APPEARS A CIRCULAR DESIGN WITH SIX BULLET POINTS WITH ACCOMPANYING TEXT WHICH
IDENTIFY EACH OF THE COMPANY'S PRODUCT AND SERVICE OFFERINGS. CLOCKWISE FROM THE
TOP OF CIRCLE: PRODUCT PROCUREMENT; WORKSTATION SUPPORT SERVICES; IT STAFFING
SERVICES; COMMUNICATIONS INSTALLATION SERVICES; EDUCATION SERVICES; AND NETWORK
CONSULTING SERVICES.]
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Such transactions may include stabilizing, the purchase of Common Stock to
cover syndicate short positions and the imposition of penalty bids. For a
description of these activities, see "Underwriting."
----------------
"AlphaNet Solutions" and the Company's logo are trademarks of the Company.
All other trade names, trademarks or service marks appearing in this
Prospectus are the property of their respective owners and are not the
property of the Company.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the consolidated financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus, including information under "Risk Factors." Unless otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option.
THE COMPANY
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 technical 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 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. 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. These factors have
resulted in substantial growth in the IT services market. Industry sources
estimate that the U.S. market for all IT professional services was $49 billion
in 1995 and may reach $97 billion by 2000.
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: (i) to leverage its complementary
businesses by continuing to combine the expertise of its technical personnel
with its strong product procurement and marketing capabilities; (ii) to broaden
its IT service offerings in order to provide additional sales opportunities
with new and existing clients; (iii) to expand and develop its strategic
relationships to create new sales opportunities by offering products and
services complementary to those of its strategic partners; and (iv) to pursue
strategic acquisitions to expand the Company's service offerings, to add to or
enhance technical or sales personnel, or to provide desirable customer
relationships. 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. The Company
believes that additional acquisition opportunities may be available to it upon
completion of this offering.
3
<PAGE>
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 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 wide range of
high-quality services to the management information systems ("MIS") departments
and end users of its corporate clients. The Company also believes that it
distinguishes itself from its competition on the basis of technical expertise,
competitive pricing, vendor alliances, relationships with MicroAge and Ingram,
direct sales strategy and customer service orientation.
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.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 1,150,000 shares
Common Stock offered by the Selling Shareholders... 850,000 shares
Common Stock to be outstanding after the Offering.. 6,253,990 shares(1)
Use of Proceeds.................................... Repayment of bank debt;
expansion of services
component of the Company's
business; enhancement of
the Company's MIS
infrastructure; and
working capital and other
general corporate
purposes, including
possible acquisitions. See
"Use of Proceeds."
Nasdaq National Market Symbol...................... ALPH
</TABLE>
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(1) Excludes 746,010 shares of Common Stock reserved for issuance under the
Company's 1995 Stock Plan, under which options to purchase 523,360 shares
of Common Stock have been granted, 49,920 of which are currently
exercisable. Also excludes 100,000 shares of Common Stock reserved for
issuance under the Company's 1995 Non-Employee Director Stock Option Plan,
under which options to purchase 60,000 shares of Common Stock have been
granted, 12,000 of which are currently exercisable. See "Management--1995
Stock Plan" and "-- 1995 Non-Employee Director Stock Option Plan."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------
1992 1993 1994 1995 1996(1) 1996 1997(1)
------- ------- ------- ------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales.............. $35,432 $47,041 $70,468 $74,016 $119,605 $ 19,296 $ 46,501
Gross profit(2)........ 5,767 6,970 10,896 12,568 18,472 3,404 6,980
Operating income....... 548 652 3,183 4,175 5,725 979 2,026
Income before pro forma
income taxes(3)....... 471 560 3,076 4,089 5,854 961 1,968
Pro forma net
income(3)............. 276 330 1,829 2,439 3,463 572 1,161
Pro forma net income
per share(3).......... $ 0.61 $ 0.72 $ 0.14 $ 0.22
Weighted average common
shares and common
shares equivalent
outstanding(4)........ 3,988 4,829 4,043 5,293
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
ACTUAL AS ADJUSTED(5)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $14,592 $34,192
Total assets............................................ 46,142 61,067
Notes payable to bank................................... 4,675 --
Shareholders' equity.................................... 20,082 39,682
</TABLE>
- --------
(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, and $701,000
for the three months ended March 31, 1996. Throughout this Prospectus, all
prior period financial information has been reclassified to conform with
such 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.
(5) Adjusted to reflect the sale of 1,150,000 shares of Common Stock offered by
the Company hereby at an assumed offering price of $18 5/8 per share and
the anticipated application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
Certain statements included in this Prospectus, including without
limitation, statements regarding the anticipated growth in the information
technology products and services markets, the continuation of the trends
favoring outsourcing of management information systems 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 27A of the Securities
Act of 1933, as amended. The factors discussed below could cause actual
results and developments to be materially different from those expressed in or
implied by such statements. Accordingly, in addition to the other information
contained in this Prospectus, the following factors should be considered
carefully by prospective investors in evaluating an investment in the shares
of Common Stock offered hereby.
SUBSTANTIAL VARIABILITY OF QUARTERLY OPERATING RESULTS
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 information technology ("IT") services; disruption in sources of supply;
changes in product, 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.
Additionally, 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. In addition, during such periods, the Company is likely to
incur greater technical training costs. Due to these and other factors, if the
Company is successful in expanding its service offerings and revenues, periods
of variability in utilization are likely to reoccur. 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. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Selected Quarterly Results of Operations."
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 computer
product manufacturers sell to customers through their direct sales
organizations and certain of them have announced their
6
<PAGE>
intentions to enhance such direct sales efforts. 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 also could attempt to increase their presence in the
Company's markets by forming strategic alliances with other competitors or
customers of the Company, offering new or improved products and services to
the Company's customers or increasing 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. See "Business -- Competition."
MANAGEMENT OF GROWTH
The Company's growth has placed significant demands on its management,
administrative and operational resources. The Company's net sales increased
61.6% from $74.0 million in 1995 to $119.6 million in 1996, and 141.0% from
$19.3 million for the three months ended March 31, 1996 to $46.5 million for
the three months ended March 31, 1997. Such growth has resulted in increased
demands on the Company's infrastructure and working capital requirements. From
January 1, 1995 to March 31, 1997, the Company's staff increased 230% from 161
to 531. The Company's ability to manage its growth effectively is dependent
upon its ability to continue developing and improving its operational,
financial and other internal systems, as well as its business development
capabilities, and to attract, train, retain, motivate and manage its
employees. In late 1996, the Company hired a Chief Operating Officer to, among
other responsibilities, develop and implement improved internal operational
systems, including a major upgrade of the Company's management information
systems ("MIS") infrastructure. Such initiative is in an early stage and no
assurance can be given that the Company will implement new systems
successfully or achieve its objectives to improve operating efficiency and
performance. In addition, the future success of the services component of the
Company's business will depend in large part on its ability to continue to
maintain high rates of employee utilization at profitable billing rates,
maintain project quality, and integrate and manage additional technical and
other personnel. If the Company is unable to manage its growth effectively,
such inability could have a material adverse effect on the quality of the
Company's services and products and its ability to retain key personnel which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition."
RISKS ASSOCIATED WITH NEW SERVICE OFFERINGS
During 1996, the Company began to offer new services to its clients,
including technical placement, remote help desk and Internet support services.
All such services remain in an early stage of marketing and customer
acceptance. In addition, the Company plans to offer additional services in
1997, including remote network management and applications consulting. The
Company has no previous experience in developing, marketing or providing such
new services and, as a result, no assurance can be given that it will be able
to develop such capabilities, or that such capabilities may be developed in a
timely and profitable manner. Furthermore, no assurance can be made that the
Company will successfully market such services to new and existing clients,
that the Company's services will achieve market acceptance, or that the
Company will integrate and manage additional technical personnel or meet
client expectations. See "Business--Strategy."
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL
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 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
7
<PAGE>
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 personnel. See "Business --
Employees."
SUBSTANTIAL RELIANCE ON KEY CUSTOMERS; NATURE OF CUSTOMER RELATIONSHIPS
The Company's customer base is highly concentrated, with its top ten
customers in 1994, 1995 and 1996 accounting in the aggregate for approximately
74%, 68% and 63%, respectively, of net sales. Sales to such customers
comprised 73% of net sales in the first quarter of 1997. Sales to Nabisco
accounted for approximately 24%, 20%, 17% and 23% of net sales in 1994, 1995,
1996 and the first quarter of 1997, respectively. The Company believes that a
substantial portion of its net sales and gross profits will continue to be
derived from sales to a concentrated group of customers. 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 network consulting and other services,
such service contracts generally are terminable upon relatively short notice.
There can be no assurance that the Company's customers will continue to enter
into service contracts with the Company or that existing contracts will not be
terminated. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Results of Operations" and "Business -- Customers."
ACQUISITION RISK
As a part of the Company's business development strategy, the Company plans
to pursue acquisitions of IT product and service businesses in order to expand
the Company's service offerings, to add to or enhance its base of technical or
sales personnel, or to provide desirable customer relationships. The success
of this strategy depends not only upon the Company's ability to acquire
complementary businesses on a cost-effective basis, but also upon its ability
to integrate acquired operations into its organization effectively, to retain
and motivate key personnel, and to retain customers of acquired firms.
Although the Company reviews and considers possible acquisitions on an on-
going basis, no specific acquisitions are being negotiated or planned as of
the date of this Prospectus. There can be no assurance that the Company will
be able to acquire or integrate such businesses successfully. Furthermore,
there can be no assurance that financing for any such transactions will be
available on satisfactory terms, or that the Company will be able to
accomplish its strategic objectives as a result of any such transaction or
transactions. In addition, the Company competes for attractive acquisition
candidates with other companies or investors in the IT industry. Such
competition for acquisition candidates could have the effect of increasing the
cost to the Company of pursuing its acquisition strategy or could reduce the
number of attractive candidates to be acquired. Acquisitions also may involve
a number of specific risks including: possible adverse short-term effects on
the Company's operating results; dependence on retaining key customers and
personnel; diversion of management's attention; amortization of acquired
intangible assets; and risks associated with unanticipated problems,
liabilities or contingencies. See "Business -- Strategy."
DEPENDENCE ON CONTINUED AUTHORIZATION TO RESELL AND PROVIDE MANUFACTURER-
AUTHORIZED SERVICES
The Company's future success in both product sales and service and support
offerings depends largely on its continued status as an approved reseller of
products and its continued authorization as a service provider. The Company
maintains sales and service authorizations with many industry-leading
manufacturers, including Cisco Systems, Compaq, Hewlett-Packard, IBM, Lucent
Technologies, Microsoft, NEC and Novell. Without such sales and service
authorizations, the Company would be unable to provide the range of products
and services currently offered by the Company, including warranty services. In
particular, the Company is reliant upon products manufactured by IBM and
Compaq, which in the aggregate accounted for approximately 50% of the
Company's 1996 net product sales. Consequently, the Company's future success
depends largely on its continued status as an authorized remarketer of
computer products, particularly those manufactured by IBM and Compaq. In
general,
8
<PAGE>
immediate termination to termination upon 90 days prior written notice. In
addition, many of such agreements are based upon the Company's continued
relationships with authorized aggregators. There can be no assurance that such
manufacturers will continue to authorize the Company as an approved reseller
or service provider and the loss of one or more of such authorizations could
have a material adverse effect on the Company's business and results of
operations. See "Business -- Suppliers." the agreements between the Company
and such manufacturers include termination provisions ranging from immediate
termination to termination upon 90 days prior written notice. In addition,
many of such agreements are based upon the Company's continued relationships
with authorized aggregators. There can be no assurance that such manufacturers
will continue to authorize the Company as an approved reseller or service
provider and the loss of one or more of such authorizations could have a
material adverse effect on the Company's business and results of operations.
See "Business -- Suppliers."
DEPENDENCE ON SUPPLIERS
The Company's business depends upon the adequate supply of computers,
computer systems, components and parts at competitive prices and on reasonable
terms for resale by the Company. The Company elects to procure certain
computers, computer systems, components and parts primarily from MicroAge
Computer Centers, Inc. ("MicroAge") and Ingram Micro, Inc. ("Ingram"), in
order to obtain competitive pricing, maximize product availability and
maintain quality control. The Company's purchases from MicroAge accounted for
approximately 73%, 64%, 48% and 33% of the Company's total product purchases
in 1994, 1995, 1996 and the first quarter of 1997, respectively, and its
product purchases from Ingram accounted for approximately 9%, 17%, 35% and 50%
of the Company's total product purchases in 1994, 1995, 1996 and the first
quarter of 1997, respectively. The Company expects to continue to rely on such
suppliers for a substantial portion of its products. The Company has not
entered into any long-term supply contracts with its vendors, electing to
purchase computers, computer systems, components and parts on a purchase order
basis. The MicroAge and Ingram agreements may be terminated by the Company or
such suppliers upon prior written notice ranging from 30 to 90 days. There can
be no assurance that the Company will be able to continue to obtain products
from MicroAge, Ingram or its other vendors at prices or on terms acceptable to
the Company, if at all. See "Business -- Suppliers."
Although the Company has not experienced significant problems with its
suppliers in the past, there can be no assurance that such relationships will
continue or that, in the event of a termination of its relationships with
either MicroAge or Ingram, or both of such suppliers, it would be able to
obtain alternative sources of supply without a material disruption in the
Company's ability to provide products to its customers. Any material
disruption in the Company's supply of products would have a material adverse
effect on the Company's results of operations. Furthermore, as is typical in
the industry, the Company receives credits or allowances from many
manufacturers for market development which are used to offset a portion of the
Company's cost of products sold. Changes in the availability, structure or
timing of these credits or allowances could materially and adversely affect
the Company's results of operations. See "Business -- Suppliers."
DEPENDENCE ON KEY PERSONNEL
The success of the Company for the foreseeable future depends largely on the
continued services of its key executive officers and leading salespersons. The
Company is particularly dependent upon Stan Gang, founder, Chairman of the
Board, President and Chief Executive Officer of the Company, because of his
industry knowledge, marketing skills, and relationships with major vendors and
customers, as well as with the Company's employees. The loss of the services
of Mr. Gang or any of the other key executive officers or leading salespersons
could have a material adverse effect on the Company. Each executive officer
has entered into an employment agreement with the Company which contains a
non-competition covenant that extends for a period of up to eighteen months
following termination of employment. Substantially all of the Company's
salespersons have entered into agreements with the Company which contain non-
disclosure and non-solicitation provisions. The Company maintains, and is the
beneficiary of, a life insurance policy on the life of Stan Gang. The face
amount of such policy is $2.0 million. The Company does not maintain key
person life insurance on any of its other executive officers or salespersons.
See "Business -- Employees," "Management -- Executive Compensation," " --
Employment Agreements," and "--Key Man Insurance."
9
<PAGE>
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE
The market for the products and services offered by the Company is
characterized by rapidly changing technology and frequent new product and
service introductions. The development and commercialization of new
technologies and the introduction of new products and services can render
existing products and services obsolete or unmarketable. The Company's
continued success will depend on its ability to have access to such new
products for resale, to attract and retain highly capable technical personnel,
to enhance existing services, to develop additional services on a timely and
cost-effective basis, to keep pace with technological developments and to
address increasingly sophisticated client requirements. There can be no
assurance that the Company will be successful in identifying and marketing
service enhancements, or offering and supporting new products and services
introduced by vendors in response to technological change. In addition, the
Company may experience contractual or technical difficulties that could delay
or prevent its ability to successfully deploy newly developed and introduced
products.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock may be highly volatile.
Factors such as actual or anticipated quarterly fluctuations in financial
results, changes in recommendations or earnings estimates by securities
analysts, announcements of technological innovations or new commercial
products or services and the timing of announcements of acquisitions by the
Company or its competitors, as well as market conditions in the IT products
and services markets generally, may have a significant effect on the market
price of the Common Stock. Furthermore, the stock market historically has
experienced volatility which has particularly affected the market prices of
securities of many technology companies and which sometimes has been unrelated
to the operating performances of such companies. See "Price Range of Common
Stock."
CONTROL BY EXISTING SHAREHOLDER; ANTI-TAKEOVER CONSIDERATIONS
Upon completion of this offering, Stan Gang, the Company's founder, Chairman
of the Board, President and Chief Executive Officer will own 30.6% of the
Company's outstanding Common Stock (28.3% if the Underwriters' over-allotment
option is exercised in full). Accordingly, Mr. Gang will have the ability to
continue to exert significant influence with respect to the election of the
members of the Company's Board of Directors and other corporate actions. See
"Principal and Selling Shareholders."
The Company has an authorized class of 3,000,000 shares of Preferred Stock
which may be issued by the Board of Directors on such terms and with such
rights, preferences and designations as the Board of Directors may determine
without further shareholder action. Issuance of such Preferred Stock,
depending upon the rights, preferences and designations thereof, may have the
effect of delaying, deterring or preventing a change in control of the
Company. In addition, certain "anti-takeover" provisions of the New Jersey
Business Corporation Act, among other things, restrict the ability of certain
shareholders to effect a merger or business combination or obtain control of
the Company. See "Description of Capital Stock -- Preferred Stock" and " --
Anti-takeover Provisions."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market,
whether by purchasers in the offering or other shareholders of the Company, or
the perception that such sales could occur, may adversely affect the market
price of the Common Stock and could impair the Company's future ability to
raise capital through an offering of its equity securities. Upon completion of
this offering, an aggregate of 4,203,990 shares, consisting of the 2,000,000
shares offered hereby, the 2,200,000 shares offered and sold pursuant to the
Company's initial public offering of its Common Stock consummated in March and
April 1996 and an aggregate of 3,990 shares issued pursuant to the exercise of
vested stock options and resold pursuant to Rules 701 and 144 under the
Securities Act of 1933, as amended (the "Securities Act") and an effective
registration statement on Form S-8 filed by the Company, will be freely
tradeable by persons other than "affiliates" of the Company without
restriction. The remaining 2,050,000 shares held in the aggregate by Stan Gang
and The Gang Annuity Trust are subject to "lock-up" agreements under which
such shareholders have agreed not to sell or otherwise dispose of any of such
shares of Common Stock without the prior written consent of Montgomery
Securities until one year and 90 days, respectively, from the date of this
Prospectus. Such shares of Common Stock will be eligible for resale after the
expiration of the respective lock-up periods, subject to the provisions of
Rule 144,
10
<PAGE>
including without limitation, the volume limitations thereunder. The 61,920
shares of Common Stock issuable upon the exercise of outstanding vested
options are eligible for immediate resale in the public market pursuant to a
registration statement on Form S-8 filed by the Company, although the holders
of options to purchase 31,500 of such shares have agreed not to sell or
otherwise dispose of such securities for a period of 90 days from the date of
this Prospectus. See "Shares Eligible for Future Sale."
UNALLOCATED NET PROCEEDS
A substantial portion of the anticipated net proceeds of this offering has
not been designated for specific uses. Therefore, the Board of Directors of
the Company will have broad discretion with respect to the use of the net
proceeds of this offering. Failure to utilize the net proceeds within a
reasonable period of time may result in a dilution of the Company's earnings
per share which could have a material adverse effect on the price of the
Company's Common Stock. See "Use of Proceeds."
ABSENCE OF DIVIDENDS
The Company does not anticipate paying dividends on its Common Stock in the
forseeable future. See "Dividend Policy."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,150,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$19.6 million (approximately $22.6 million if the Underwriters' over-allotment
option is exercised in full), based on an assumed offering price of $18 5/8
per share and after deducting the underwriting discount and the estimated
offering expenses. The Company will not receive any proceeds from the sale of
shares of Common Stock by the Selling Shareholders. See "Principal and Selling
Shareholders."
The Company intends to use a portion of the net proceeds from this offering
to repay amounts outstanding under the Company's credit facility with First
Union National Bank (approximately $4.7 million at March 31, 1997) and
approximately $4.0 million of the net proceeds for the expansion of the
services component of the Company's business and the enhancement of the
Company's MIS infrastructure. Amounts outstanding under the credit facility
were utilized by the Company for short-term working capital purposes and carry
an interest rate equal to the bank's prime rate less 0.25% or LIBOR plus
1.50%. The balance of the net proceeds will be used for working capital and
other general corporate purposes, including possible acquisitions of IT
products and services businesses in order to expand the Company's service
offerings, to add to or enhance its base of technical or sales personnel, or
to provide desirable customer relationships. Although the Company reviews and
considers possible acquisitions on an on-going basis, no specific acquisitions
are being negotiated or planned as of the date of this Prospectus. Pending
such uses, the net proceeds to the Company from this offering will be invested
in short-term, investment-grade, interest-bearing instruments.
PRICE RANGE OF COMMON STOCK
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.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ------- ------
<S> <C> <C>
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
March 1997....................................................... 17 1/4 11 3/4
June 1997 (through May 21, 1997)................................. 19 3/8 11 7/8
</TABLE>
The prices shown above represent quotations among securities dealers, do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
On May 21, 1997, the last sales price of the Common Stock as reported by the
Nasdaq National Market was $18 5/8 per share. The number of shareholders of
record on March 31, 1997 was 115.
DIVIDEND POLICY
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) totalling $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."
12
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1997 the actual
capitalization of the Company and the capitalization of the Company as
adjusted to reflect the sale of 1,150,000 shares of Common Stock offered by
the Company hereby at an assumed offering price of $18 5/8 per share and the
anticipated application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of capital
lease obligations(1)..................................... $ 4,790 $ 115
======= =======
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,
actual; 6,252,900 shares issued and outstanding, as
adjusted(2)............................................ 51 63
Additional paid-in capital.............................. 15,904 35,492
Retained earnings(3) ................................... 4,127 4,127
------- -------
Total shareholders' equity............................ 20,082 39,682
------- -------
Total capitalization................................ $20,082 $39,682
======= =======
</TABLE>
- --------
(1) For information concerning the Company's long-term debt, see Note 6 of
Notes to Consolidated Financial Statements.
(2) Excludes 747,100 shares of Common Stock reserved for issuance under the
Company's 1995 Stock Plan, under which options to purchase 524,450 shares
of Common Stock have been granted, 47,010 of which were then exercisable.
Also excludes 100,000 shares of Common Stock reserved for issuance under
the Company's 1995 Non-Employee Director Stock Option Plan, under which
options to purchase 60,000 shares of Common Stock have been granted, 4,000
of which were then exercisable. See "Management -- 1995 Stock Plan" and
"-- 1995 Non-Employee Director Stock Option Plan." Subsequent to March 31,
1997, 1,090 shares of Common Stock were issued upon the exercise of
outstanding stock options granted under the 1995 Stock Plan.
(3) Reflects distributions of $7.3 million to S Corporation shareholders made
in 1996.
13
<PAGE>
SELECTED CONSOLIDATED 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 Prospectus. 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 Prospectus. The selected consolidated financial data as
of March 31, 1997 and for the three months ended March 31, 1996 and 1997 have
been derived from the unaudited consolidated financial statements of the
Company and, in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments) which are necessary to present fairly
the results of operations and financial position for such periods. The results
of operations for the three months ended March 31, 1997 are not necessarily
indicative of the results for any future period or for the full year ending
December 31, 1997. 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 Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ --------------------
1992 1993 1994 1995 1996(1) 1996 1997
-------- -------- -------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales:
Product sales.......... $ 31,620 $ 41,641 $ 62,365 $ 62,516 $ 99,468 $ 15,191 $ 38,768
Services and support... 3,812 5,400 8,103 11,500 20,137 4,105 7,733
-------- -------- -------- -------- -------- --------- ---------
35,432 47,041 70,468 74,016 119,605 19,296 46,501
-------- -------- -------- -------- -------- --------- ---------
Cost of sales:
Product sales.......... 27,018 36,295 54,445 54,579 88,218 13,283 34,493
Services and
support(2)............ 2,647 3,776 5,127 6,869 12,915 2,609 5,028
-------- -------- -------- -------- -------- --------- ---------
29,665 40,071 59,572 61,448 101,133 15,892 39,521
-------- -------- -------- -------- -------- --------- ---------
Gross profit:
Product sales.......... 4,602 5,346 7,920 7,937 11,250 1,908 4,275
Services and
support(2)............ 1,165 1,624 2,976 4,631 7,222 1,496 2,705
-------- -------- -------- -------- -------- --------- ---------
5,767 6,970 10,896 12,568 18,472 3,404 6,980
-------- -------- -------- -------- -------- --------- ---------
Operating expenses:
Selling expenses....... 2,434 2,771 3,946 4,468 7,301 1,249 2,918
General and
administrative
expenses(2)........... 2,785 3,547 3,767 3,925 5,446 1,176 2,036
-------- -------- -------- -------- -------- --------- ---------
5,219 6,318 7,713 8,393 12,747 2,425 4,954
-------- -------- -------- -------- -------- --------- ---------
Operating income........ 548 652 3,183 4,175 5,725 979 2,026
Other income (expense),
net.................... (77) (92) (107) (86) 129 (18) (58)
-------- -------- -------- -------- -------- --------- ---------
Income before pro forma
income taxes(3)........ 471 560 3,076 4,089 5,854 961 1,968
Pro forma provision for
income taxes(3)........ 195 230 1,247 1,650 2,391 389 807
-------- -------- -------- -------- -------- --------- ---------
Pro forma net
income(3).............. $ 276 $ 330 $ 1,829 $ 2,439 $ 3,463 $ 572 $ 1,161
======== ======== ======== ======== ======== ========= =========
Pro forma net income per
share.................. $ 0.61 $ 0.72 $ 0.14 $ 0.22
======== ======== ========= =========
Weighted average common
shares and common
shares equivalent
outstanding(4)......... 3,988 4,829 4,043 5,293
======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------- ---------
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $1,566 $2,478 $4,524 $5,033 $14,407 $14,592
Total assets................ 7,522 9,806 16,697 18,770 43,647 46,142
Notes payable to bank....... 1,062 -- 1,152 -- -- 4,675
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 20,082
</TABLE>
- --------
(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, and $701,000
for the three months ended March 31, 1996. Throughout this Prospectus, all
prior period financial information has been reclassified to conform with
such 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.
14
<PAGE>
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. For the first quarter of 1997, net product sales were
83.4% and services and support revenue was 16.6% of the Company's net sales.
The Company has entered into distribution agreements with MicroAge and
Ingram, two of the nation's largest aggregators of computer products, 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.
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. During the first
quarter of 1997, the Company hired 134 additional service personnel. 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
15
<PAGE>
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, and $701,000 for the three months ended March 31,
1996. Throughout this Prospectus, all prior period financial information has
been reclassified to conform with such 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. Due in part to such acquisition, the Company's sales of IT
products increased substantially in the third and fourth quarters of 1996 and
in the first quarter of 1997. 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.
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 period:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales:
Product sales........................... 88.5% 84.5% 83.2% 78.7% 83.4%
Services and support.................... 11.5 15.5 16.8 21.3 16.6
----- ----- ----- ------ ------
100.0 100.0 100.0 100.0 100.0
Cost of sales............................ 84.5 83.0 84.6 82.4 85.0
----- ----- ----- ------ ------
Gross profit............................. 15.5 17.0 15.4 17.6 15.0
----- ----- ----- ------ ------
Operating expenses:
Selling expenses........................ 5.6 6.1 6.1 6.5 6.3
General and administrative expenses..... 5.4 5.3 4.5 6.1 4.4
----- ----- ----- ------ ------
11.0 11.4 10.6 12.6 10.7
----- ----- ----- ------ ------
Operating income......................... 4.5 5.6 4.8 5.1 4.3
Other income (expense), net.............. (0.1) (0.1) 0.1 (0.1) (0.1)
----- ----- ----- ------ ------
Income before pro forma income taxes..... 4.4 5.5 4.9 5.0 4.2
Pro forma provision for income taxes..... 1.8 2.2 2.0 2.0 1.7
----- ----- ----- ------ ------
Pro forma net income..................... 2.6% 3.3% 2.9% 3.0% 2.5%
===== ===== ===== ====== ======
Gross profit (as a percentage of related
net sales):
Product sales........................... 12.7% 12.7% 11.3% 12.6% 11.0%
Services and support.................... 36.7% 40.3% 35.9% 36.4% 35.0%
</TABLE>
16
<PAGE>
Comparison of the Three Months Ended March 31, 1997 and 1996
Net sales. Net sales increased by 141.0%, or $27.2 million, from $19.3
million in the first three months of 1996 to $46.5 million in the first three
months of 1997. Product sales increased by 155.2%, or $23.6 million, from
$15.2 million in the first three months of 1996 to $38.8 million in the first
three months of 1997. 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 88.4%, or $3.6
million, from $4.1 million in the first three months of 1996 to $7.7 million
in the first three months of 1997. This increase was attributable primarily to
increased demand for the Company's service and support offerings, particularly
its network consulting services, and to an increase in the number and size of
client projects. In the first three months of 1997, sales to Nabisco, the
Company's largest customer, accounted for approximately 23% of the Company's
net sales. In addition, KPMG Peat Marwick accounted for approximately 11% of
net sales during the 1997 quarter. 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 at existing levels.
Gross profit. The Company's gross profit increased by 105.1%, or $3.6
million, from $3.4 million in the first three months of 1996 to $7.0 million
in the first three months of 1997. Gross profit margin decreased from 17.6% of
net sales in the first three months of 1996 to 15.0% in the first three months
of 1997. Gross profit margin attributable to product sales decreased from
12.6% in the first three months of 1996 to 11.0% in the first three months of
1997. The decrease in the gross profit margin for products during the first
three months of 1997 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 provided by the Company to its customers. 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. Gross profit margin attributable to services and support
revenue decreased from 36.4% of services and support revenue in the first
three months of 1996 to 35.0% in the first three months of 1997. The decrease
in the gross profit margin for services 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 thereby resulting in lower utilization of service and support
personnel. The Company increased its staff of technical personnel from 242 at
December 31, 1996 to 376 at March 31, 1997.
Selling expenses. Selling expenses increased by 133.6%, or $1.7 million,
from $1.2 million in the first three months of 1996 to $2.9 million in the
first three months of 1997, but decreased from 6.5% to 6.3% of net sales,
respectively. The increase in selling expenses in absolute dollars was
primarily attributable 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 in
connection with the Company's expansion into the Philadelphia market.
General and administrative expenses. General and administrative expenses
increased by 73.1%, or $860,000, from $1.2 million in the first three months
of 1996 to $2.0 million in the first three months of 1997, but decreased from
6.1% to 4.4% 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, 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.
17
<PAGE>
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, and 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 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 thereby resulting in lower utilization of service and support
personnel. 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.
18
<PAGE>
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.
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 1994,
1995 and 1996 and for the three months ended March 31, 1996 were 40.5%, 40.4%,
40.8% and 40.5%, respectively. See Notes 1 and 10 of Notes to Consolidated
Financial Statements.
19
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited quarterly financial
information for each of the nine most recent quarters in the period ended
March 31, 1997. 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 Prospectus.
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 Prospectus, all prior period financial
information has been reclassified to conform with such presentation.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- --------- -------- -------- -------- --------- -------- --------
STATEMENT OF INCOME DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Product sales........... $15,835 $13,828 $15,535 $17,318 $15,191 $19,677 $25,466 $39,134 $38,768
Services and support.... 2,460 2,746 2,979 3,315 4,105 4,568 5,113 6,351 7,733
------- ------- ------- ------- ------- ------- ------- ------- -------
18,295 16,574 18,514 20,633 19,296 24,245 30,579 45,485 46,501
------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of sales:
Product sales........... 13,692 11,907 13,677 15,303 13,283 17,624 22,482 34,829 34,493
Services and support.... 1,521 1,635 1,751 1,962 2,609 3,086 3,227 3,993 5,028
------- ------- ------- ------- ------- ------- ------- ------- -------
15,213 13,542 15,428 17,265 15,892 20,710 25,709 38,822 39,521
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit:
Product sales........... 2,143 1,921 1,858 2,015 1,908 2,053 2,984 4,305 4,275
Services and support.... 939 1,111 1,228 1,353 1,496 1,482 1,886 2,358 2,705
------- ------- ------- ------- ------- ------- ------- ------- -------
3,082 3,032 3,086 3,368 3,404 3,535 4,870 6,663 6,980
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling expenses........ 1,156 1,103 1,084 1,125 1,249 1,513 1,919 2,620 2,918
General and
administrative
expenses............... 959 974 947 1,045 1,176 1,237 1,367 1,666 2,036
------- ------- ------- ------- ------- ------- ------- ------- -------
2,115 2,077 2,031 2,170 2,425 2,750 3,286 4,286 4,954
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income......... 967 955 1,055 1,198 979 785 1,584 2,377 2,026
Other income (expense),
net..................... (45) (13) (16) (12) (18) 83 59 5 (58)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before pro forma
income taxes............ 922 942 1,039 1,186 961 868 1,643 2,382 1,968
Pro forma provision for
income taxes............ 372 380 419 479 389 352 674 976 807
------- ------- ------- ------- ------- ------- ------- ------- -------
Pro forma net income..... $ 550 $ 562 $ 620 $ 707 $ 572 $ 516 $ 969 $ 1,406 $ 1,161
======= ======= ======= ======= ======= ======= ======= ======= =======
Pro forma net income per
share (primary)......... $ 0.14 $ 0.14 $ 0.15 $ 0.18 $ 0.14 $ 0.10 $ 0.19 $ 0.28 $ 0.22
======= ======= ======= ======= ======= ======= ======= ======= =======
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% 83.4%
Services and support.... 13.4 16.6 16.1 16.1 21.3 18.8 16.7 14.0 16.6
------- ------- ------- ------- ------- ------- ------- ------- -------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales............ 83.2 81.7 83.3 83.7 82.4 85.4 84.1 85.4 85.0
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............. 16.8 18.3 16.7 16.3 17.6 14.6 15.9 14.6 15.0
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling expenses........ 6.3 6.6 5.9 5.4 6.5 6.2 6.3 5.7 6.3
General and
administrative
expenses............... 5.3 5.9 5.1 5.1 6.1 5.1 4.4 3.7 4.4
------- ------- ------- ------- ------- ------- ------- ------- -------
11.6 12.5 11.0 10.5 12.6 11.3 10.7 9.4 10.7
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income......... 5.2 5.8 5.7 5.8 5.1 3.3 5.2 5.2 4.3
Other income (expense),
net..................... (0.2) (0.1) (0.1) (0.1) (0.1) 0.3 0.2 0.0 (0.1)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before pro forma
income taxes............ 5.0 5.7 5.6 5.7 5.0 3.6 5.4 5.2 4.2
Pro forma provision for
income taxes............ 2.0 2.3 2.3 2.3 2.0 1.5 2.2 2.1 1.7
------- ------- ------- ------- ------- ------- ------- ------- -------
Pro forma net income..... 3.0% 3.4% 3.3% 3.4% 3.0% 2.1% 3.2% 3.1% 2.5%
======= ======= ======= ======= ======= ======= ======= ======= =======
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% 11.0%
Services and support.... 38.2% 40.5% 41.2% 40.8% 36.4% 32.4% 36.9% 37.1% 35.0%
</TABLE>
20
<PAGE>
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; utilization rates of its
technical personnel; 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 quarters of 1996 and in the first
quarter of 1997 increased significantly due, in part to, the acquisition of
Lior. The Company, however, does not expect product sales to continue to
increase, if at all, in the remainder of 1997 to the same extent as they did
in the third and fourth quarters of 1996 and in the first quarter of 1997.
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.
21
<PAGE>
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings per Share" ("FAS 128").
The Statement is effective for financial statements for periods ended after
December 15, 1997, and changes the method in which earnings per share will be
determined. Adoption of FAS 128 by the Company is not expected to have a
material impact on earnings per share.
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
The Gang Annuity Trust. 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, net 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 was attributable primarily to the purchase of
computer equipment subject to firm purchase orders and then shipped to
customers. The Company's cash used in operations was $4.9 million for the
first quarter of 1997 and consisted primarily of an increase in accounts
receivable of $4.3 million and a decrease in accounts payable and accrued
expenses of $3.3 million, partially offset by net income of $1.2 million and a
decrease in inventories of $1.2 million. The increase in accounts receivable
in the first quarter of 1997 was primarily attributable to temporary delays in
cash receipts from a few large customers and the increase in net sales. As
measured in days sales outstanding, the Company's accounts receivable
increased from 58 days at December 31, 1996 to 63 days at March 31, 1997. The
decrease in accounts payable and accrued expenses in the first quarter of 1997
was primarily due to the timing of certain large payments related to inventory
purchases. 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, $14.4 million and $14.6
million at December 31, 1995 and 1996, and at March 31, 1997, 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), totalling $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, $3.1 million and $887,000 in
capital equipment and leasehold improvements in 1994, 1995, 1996 and the first
quarter of 1997, respectively. The significant increases in 1996 and the first
quarter of 1997 were 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. See "Use of Proceeds."
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 March 31, 1997,
there were outstanding balances of $835,000, $2.2 million and $6.3 million,
respectively, under
22
<PAGE>
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%). 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 was $4.7 million in outstanding borrowings under
the Company's revolving credit facility at March 31, 1997. See Note 6 of Notes
to Consolidated Financial Statements.
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 million for
short-term working capital purposes. Such facility, intended to expire in May
1998, 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. Capital lease obligations outstanding
under these equipment leases, which expire in 1998, aggregated $144,000 and
$115,000 at December 31, 1996 and March 31, 1997, respectively.
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 the net proceeds of this 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.
23
<PAGE>
BUSINESS
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 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 and 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.
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 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. Accordingly, industry sources estimate
that the U.S. market for all IT professional services was $49 billion in 1995
and may reach $97 billion by 2000.
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,
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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.
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, 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 and applications consulting. 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 anticipates that its applications consulting
services may include, among other services, custom software development and
implementation of pre-packaged software applications. 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.
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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, 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. The Company believes that additional acquisition opportunities may be
available to it upon completion of this offering, and intends to use a portion
of the net proceeds from this offering or its equity securities to implement
its acquisition strategy. See "Use of Proceeds."
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
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 Tektronix
Cisco Systems Hewlett-Packard Technologies Toshiba
Compaq IBM Microsoft Xircom
NEC
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.
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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 and 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 operating systems as Microsoft Windows NT, Novell
NetWare, UNIX and IBM OS/2. Such personnel support both long- and short-term
engagements at client locations. At March 31, 1997, 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 Company's remote
help desk capabilities are fully operational and provide advanced technical
support and comprehensive software application support. To date, eight
customers are utilizing 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. The Company expects to allocate sufficient
resources to such project upon completion of this offering, although 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. See "Risk Factors--Risks Associated with New
Service Offerings" and "Use of Proceeds."
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. At March 31, 1997, most of the Company's Workstation Analysts
were on-site at customer locations. Other customers of the
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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 information technology 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.
The Company also 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 technical placement services,
provide it with a talented pool of available Network Consultants and
Workstation Analysts. At March 31, 1997, the Company employed 68 technical
trainees, 35 of whom had recently completed applicable training courses
offered by the Company and 33 of whom were enrolled in such courses.
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. The
Company currently has seven, 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.
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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 86 people at March 31, 1997. 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 42 sales persons as of March 31,
1997. 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 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 1994, 1995,
1996 and the three months ended March 31, 1997, one customer, Nabisco,
accounted for approximately 24%, 20%, 17% and 23% of the Company's net sales,
respectively. In addition, KPMG Peat Marwick accounted for approximately 11%
of net sales during the three months ended March 31, 1997. No other customer
accounted for more than 10% of the Company's net sales during 1994, 1995, 1996
and the three months ended March 31, 1997. Sales to the Company's top 10
customers totaled approximately 74%, 68%, 63% and 73% of net sales for 1994,
1995, 1996 and the three months ended March 31, 1997, 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
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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 is required to
purchase a minimum of $100,000 of products from MicroAge per quarter. During
1994, 1995, 1996 and the first quarter of 1997, the Company purchased from
MicroAge approximately 73%, 64%, 48% and 33%, respectively, of the products
sold by the Company. Such purchases totaled approximately $39.8 million, $35.2
million, $46.3 million and $11.6 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%, 35% and 50% of the
Company's total product purchases in 1994, 1995, 1996 and the first quarter of
1997, 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
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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 computer product manufacturers sell
to customers through their direct sales organizations and certain of them have
announced their intentions to enhance such direct sales efforts. 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.
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 March 31, 1997, the Company employed 509 persons, of whom 286 were
technical personnel (consisting of 133 Network Consultants, 126 Workstation
Analysts, 15 Communications Engineers and 12 instructors), 86 were engaged in
sales and marketing, 62 were engaged in finance and administration and 7 were
engaged as IT staffing recruiters. The Company also employed 68 technical
trainees who either had recently completed applicable training courses offered
by the Company or were enrolled in such courses at March 31, 1997. In
addition, the Company engaged 22 persons primarily on a temporary-to-permanent
basis at March 31, 1997, of which 2 were Network Consultants and 20 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 376 at March 31, 1997, or 71% 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
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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.
FACILITIES
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 which serves as the Company's Philadelphia-area sales
office and as a site for a planned Learning Center. In addition, the Company
leases office space for sales personnel in New York City. The Company
anticipates leasing additional office space beginning in the second half of
1997 for its customer technology facility where the Company will perform
warehousing, configuration, dispatching and repair services. See Note 8 of
Notes to Consolidated Financial Statements.
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. See
"Management--Compensation Committee Interlocks and Insider Participation."
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stan Gang............... 62 Chairman of the Board, President and Chief Executive
Officer
Sophien Bennaceur....... 35 Executive Vice President and Chief Operating Officer
Gary S. Finkel.......... 40 Vice President, Chief Financial Officer and
Treasurer
John Centinaro.......... 41 Vice President -- Sales
John Crescenzo.......... 48 Vice President -- Customer Technology Services
Bruce Flitcroft......... 31 Vice President -- Network Consulting Services
Lawrence Mahon.......... 34 Vice President -- National Accounts
Philip M. Pfau.......... 42 Vice President -- Operations and Administration
Dennis Samuelson........ 40 Vice President -- Education Services
Michael Gang............ 30 Secretary and Director
Michael R. Bruce........ 58 Director
David J. Sorin, Esq..... 39 Director
Susan H. Wolford........ 41 Director
</TABLE>
Stan Gang founded the Company and has served as Chairman of the Board,
President and Chief Executive Officer of the Company since 1984. Mr. Gang has
nearly 40 years of experience in the computer sales and services industry.
Prior to joining the Company, Mr. Gang was employed by IBM Corporation for 10
years in technical capacities and by MAI Equipment Corporation for five years
and Memorex Telex Corporation for 13 years in various management capacities.
Sophien Bennaceur joined the Company in October 1996 and currently serves as
Executive Vice President and Chief Operating Officer. Prior to joining the
Company, Mr. Bennaceur served as Chief Information Officer of SAP America,
Inc., a major international business applications software company, from April
1996 until September 1996. Prior to that, Mr. Bennaceur was Director of MIS
and Director of Product Development of Ceridian Corporation, an information
services company, from September 1992 to March 1996.
Gary S. Finkel joined the Company in October 1995 and currently serves as
Vice President, Chief Financial Officer and Treasurer. Prior to joining the
Company, Mr. Finkel served as Vice President and Chief Financial Officer of
Continental Health Affiliates, Inc. ("CHA"), a diversified publicly-held
health care provider, from 1989 through October 1995 in various financial
management positions. He also was Vice President, Chief Financial Officer and
Treasurer of Infu-Tech, Inc., a publicly-held 59% owned subsidiary of CHA from
1992 through October 1995. Prior to that, from 1982 to 1989, he held various
financial management positions at Sony Corporation of America. Mr. Finkel is a
Certified Public Accountant.
John Centinaro joined the Company in February 1992 and currently serves as
Vice President -- Sales. Prior to joining the Company, from 1978 to 1992, Mr.
Centinaro served as Regional Business Operations Manager and National Account
Service Manager with Memorex Telex Corporation. Mr. Centinaro is a member of
the Association for Field Service Management.
John Crescenzo joined the Company in September 1991 and currently serves as
Vice President -- Customer Technology Services. Prior to joining the Company,
Mr. Crescenzo served in various executive management capacities with Memorex
Telex Corporation for nearly twenty years working in mainframe, communication
and microcomputer services.
Bruce Flitcroft joined the Company in August 1990 and currently serves as
Vice President -- Network Consulting Services. Prior to joining the Company,
Mr. Flitcroft was President of a computer network services company, DATAR IDS
Corp., which he founded in 1986. The Company acquired DATAR IDS Corp. in 1990.
33
<PAGE>
Lawrence Mahon joined the Company in July 1985 and currently serves as Vice
President -- National Accounts. Prior to joining the Company, he held various
positions with a Computerland franchisee.
Philip M. Pfau joined the Company in February 1994 and currently serves as
Vice President -- Operations and Administration. Prior to that, he acted as an
independent consultant for the Company from September 1993 to February 1994.
Prior to joining the Company, Mr. Pfau held various financial positions with
the Customer Service Division of TRW, Inc., including, Controller from January
1988 to August 1993 and Financial Planning Manager from January 1986 until
December 1987. Mr. Pfau is a Certified Public Accountant.
Dennis Samuelson joined the Company in October 1989 and currently serves as
Vice President -- Education Services. Prior to joining the Company, Mr.
Samuelson held various staff management positions with AT&T and was Manager of
the AT&T Information Center which provided programming and support to AT&T's
General Business Systems division. Mr. Samuelson is a former member of the
Novell Advisory Board and a current member of the Certification Advisory Board
of Sylvan Prometric. In addition, he is a former President and currently is a
member of the Board of Directors of the Information Technology Training
Association.
Michael Gang joined the Company in April 1989 as Corporate Account Manager
and has been a Director and Secretary of the Company since September 1995.
Michael R. Bruce has been a Director of the Company since September 1995.
Since 1993, Mr. Bruce has been a business consultant to several IT companies.
Until July 1993, Mr. Bruce was president and chief executive officer of
Systems Industries, a storage systems company specializing in open systems and
DEC attachments. Prior to that, Mr. Bruce was chief operating officer of
Sequoia Systems, Inc., a company specializing in fault tolerant on-line
transaction processing systems. Earlier in his career, Mr. Bruce served IBM
for 29 years in various executive and management positions.
David J. Sorin, Esq. has been a Director of the Company since May 1996. Mr.
Sorin currently is, and since 1993 has been, the Managing Partner of the
Princeton, New Jersey office of the law firm Buchanan Ingersoll, counsel to
the Company. Prior to joining Buchanan Ingersoll, Mr. Sorin was a partner with
another law firm. Earlier in his career, he was an associate with Davis, Polk
& Wardwell, a New York City-based law firm. Mr. Sorin also serves as a member
of the Board of Directors of the New Jersey Technology Council, a not-for-
profit organization serving the high technology community.
Susan H. Wolford has been a Director of the Company since May 1996. Ms.
Wolford currently is Senior Vice President with Parker/Hunter Incorporated,
one of the Underwriters. Prior to joining Parker/Hunter Incorporated in 1995,
Ms. Wolford was a Managing Director with PNC Securities Corp. from 1992 to
1995. Prior to that, she was a Senior Vice President of Kidder, Peabody & Co.
Incorporated in New York from 1981 to 1991.
Other than Stan Gang and Michael Gang, who are father and son, there are no
family relationships among any of the directors, executive officers and key
employees of the Company.
All directors hold office until the next annual meeting of shareholders and
until their successors are duly elected and qualified. The Board of Directors
has a Compensation Committee, which approves salaries and certain incentive
compensation for management and key employees of the Company; an Audit
Committee, which reviews the results and scope of the audit and other services
provided by the Company's independent accountants; and an Option Committee,
which administers the Company's 1995 Stock Plan. The Company's Audit Committee
is comprised of Stan Gang, Messrs. Bruce and Sorin and Ms. Wolford. The Option
Committee is made up of Messrs. Bruce and Sorin and Ms. Wolford and the
Compensation Committee is comprised of Stan Gang, Mr. Bruce and Ms. Wolford.
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
34
<PAGE>
DIRECTORS' COMPENSATION
Each of the Company's outside (non-employee) directors receives compensation
of $1,000 per meeting for each regularly-scheduled meeting in which he or she
participates. In addition, each of the outside members of the Board who serve
on the Audit, Option and/or Compensation Committee of the Board receives a
$500 fee per meeting for each regularly-scheduled Committee meeting in which
such Committee member participates, as long as such Committee meeting or
meetings is or are held on a day or days other than the day of a regularly-
scheduled Board meeting. The Company also provides reimbursement to directors
for reasonable and necessary expenses incurred in connection with attendance
at meetings of the Board of Directors or its Committees. Outside directors
will also receive stock options pursuant to the Company's 1995 Non-Employee
Director Stock Option Plan and directors who are also employees are eligible
to participate in the Company's 1995 Stock Plan. See "--1995 Stock Plan" and
"--1995 Non-Employee Director Stock Option Plan."
35
<PAGE>
EXECUTIVE COMPENSATION
Summary of Compensation in 1996
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to the Company's
Chief Executive Officer and the four most highly compensated executive
officers of the Company whose aggregate cash compensation exceeded $100,000
(collectively, the "Named Executives") during the years ended December 31,
1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
AWARDS
------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION(2) OPTIONS COMPENSATION(3)
POSITION (1) YEAR ($) ($) ($) (#) ($)
- ------------------ ---- ------- ------ --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Stan Gang............... 1996 250,000 -- -- -- 3,000
President and Chief 1995 212,512 -- -- -- 1,870
Executive Officer
Gary S. Finkel.......... 1996 125,000 15,000 -- 3,500 1,677
Vice President, Chief 1995 21,795(4) -- -- 10,000 --
Financial Officer and
Treasurer
Bruce Flitcroft......... 1996 162,000 85,000 -- 10,000 3,000
Vice President -- 1995 162,375 35,000 -- 20,000 3,000
Network Consulting
Services
Lawrence Mahon.......... 1996 155,000 -- -- 2,500 --
Vice President -- 1995 155,000 -- -- 12,500 --
National Accounts
Dennis Samuelson........ 1996 150,000 -- -- 2,500(5) 3,000
Vice President -- 1995 86,250 88,750 -- 20,000 3,000
Education Services
</TABLE>
- --------
(1) Sophien Bennaceur became Executive Vice President and Chief Operating
Officer of the Company effective October 14, 1996. His current annual base
salary is $225,000.
(2) The costs of certain benefits are not included because they did not
exceed, in the case of each Named Executive, the lesser of $50,000 or 10%
of the total annual salary and bonus as reported above.
(3) Represents 401(k) contributions made by the Company on behalf of the Named
Executive.
(4) Mr. Finkel joined the Company in October 1995.
(5) Excludes 800 shares subject to options granted in September 1996 to
Virginia R. Samuelson, an employee of the Company and the wife of Dennis
Samuelson.
36
<PAGE>
Stock Option Grants in 1996
The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1995 Stock Plan during 1996 to
each of the Named Executives. The Company has never granted any stock
appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
NUMBER OF PRICE
SECURITIES PERCENT OF APPRECIATION
UNDERLYING TOTAL EXERCISE FOR OPTION
OPTIONS OPTIONS GRANTED OR BASE TERM(3)
GRANTED(2) TO EMPLOYEES IN PRICE EXPIRATION --------------
NAME(1) (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ------- ---------- --------------- -------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Stan Gang............... -- -- -- -- -- --
Gary S. Finkel.......... 3,500 1.5% 9.00 9/15/06 19,810 50,203
Bruce Flitcroft......... 10,000 4.3% 9.00 9/15/06 56,600 143,437
Lawrence Mahon.......... 2,500 1.1% 9.00 9/15/06 14,150 35,859
Dennis Samuelson........ 2,500(4) 1.1% 9.00 9/15/06 14,150 35,859
</TABLE>
- --------
(1) Mr. Bennaceur was granted options to purchase 30,000 shares of Common
Stock effective October 14, 1996 at an exercise price of $11.375 per
share.
(2) Options are granted pursuant to and in accordance with the Company's 1995
Stock Plan. See "--1995 Stock Plan."
(3) Represents the difference between (i) the market value of the Common Stock
for which the option may be exercised, assuming that the market value of
the Common Stock on the date of grant appreciates in value to the end of
the ten-year option term at rates of 5% and 10% per annum, respectively
and (ii) the exercise price of the option. On the grant date of the
options, the fair market value of the Company's underlying Common Stock
was $9.00 per share.
(4) Excludes 800 shares subject to options granted in September 1996 to
Virginia R. Samuelson, an employee of the Company and the wife of Dennis
Samuelson.
37
<PAGE>
Aggregated Option Exercises in 1996 and Fiscal Year-End Option Values
The following table sets forth information concerning each exercise of
options during 1996 by each of the Named Executives and the fiscal year-end
number and value of unexercised options held by each of the Named Executives.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEARAND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR-END(#) YEAR-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- ----------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Stan Gang .............. -- -- --/-- --/--
Gary S. Finkel ......... -- -- 2,000/11,500 14,000/80,500
Bruce Flitcroft......... -- -- 4,000/26,000 28,000/182,000
Lawrence Mahon.......... 2,500 10,625 --/12,500 --/87,500
Dennis Samuelson........ -- -- 4,000/18,500(2) 28,000/129,500
</TABLE>
- --------
(1) Based on a year-end fair market value of the underlying securities equal
to $16.00 per share.
(2) Excludes 800 shares subject to options granted in September 1996 to
Virginia R. Samuelson, an employee of the Company and the wife of Dennis
Samuelson.
1995 STOCK PLAN
The Company's 1995 Stock Plan (the "Plan") was adopted by the Board of
Directors and approved by the shareholders of the Company on August 25, 1995.
A total of 746,010 shares of Common Stock are reserved for issuance upon
exercise of options granted or to be granted under the Plan. The Plan is
administered by the Option Committee of the Board of Directors of the Company.
Subject to the provisions of the Plan, the administrator of the Plan has the
discretion to determine the optionees, the type of options to be granted
(incentive stock options ("ISOs") or non-qualified stock options ("NQSOs")),
the vesting provisions and the terms of the option grants. The exercise price
of an ISO may not be less than the fair market value per share of the Common
Stock on the date of grant. The exercise price of a NQSO may not be less than
85% of the fair market value per share of the Common Stock on the date of
grant. In the case of an optionee who beneficially owns 10% or more of the
outstanding capital stock of the Company, the exercise price of an option may
not be less than 110% of the fair market value per share on the date of grant.
The options terminate not more than ten years from the date of grant, subject
to earlier termination on the optionee's death, disability or termination of
employment with the Company. Options are not assignable or otherwise
transferable except by will or the laws of descent and distribution. The
options become exercisable in five equal annual installments commencing one
year after the date of grant provided that the optionee then 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 (the "Non-Employee
Director Plan"), effective September 1, 1995. The Non-Employee Director Plan
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. The Non-
Employee Director Plan is administered by the Board of Directors. As of March
31, 1997, options to purchase an aggregate of 60,000 shares of Common Stock
had been granted in accordance with the terms of such plan.
38
<PAGE>
Each person who was a director of the Company on the effective date of the
Company's initial public offering or became or becomes a director of the
Company thereafter, and who is not also an employee or officer of the Company
was or shall be granted, on the effective date of such offering or the date on
which he or she became or 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. All options 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. Each annual installment of options will be reduced
proportionately based on the optionee's actual attendance at Board of
Directors' meetings if the optionee fails to attend at least 80% of such
meetings held in any calendar year. The term of each option will be for a
period of ten years from the date of grant, unless sooner terminated in
accordance with the Non-Employee Director Plan. Options may not be assigned or
transferred except by will or by the laws of descent and distribution, or
pursuant to domestic relations order, and are exercisable to the extent vested
at any time prior to the scheduled expiration date of the option. The Non-
Employee Director Plan terminates on the earlier of August 31, 2005 or at such
time as all shares of Common Stock currently or hereafter reserved for
issuance shall have been issued.
401(K) PLAN
The Company's 401(k) Plan is a tax-qualified plan covering its employees who
elect to participate in the 401(k) Plan. The Company may make discretionary
matching cash contributions (not to exceed 2% of the salary of the
participating individual employee). All employee contributions are fully
vested at all times and contributions by the Company to the 401(k) Plan vest
over a six-year period based upon years of service. Benefits will normally be
distributed to an employee upon (i) the employee reaching age 59 1/2, (ii) the
employee's retirement with the Company, (iii) the employee's death or
disability, (iv) the termination of the employee's employment with the
Company, or (v) the termination of the 401(k) Plan.
EMPLOYMENT AGREEMENTS
The following executive officers of the Company entered into three-year
employment agreements with the Company, each commencing October 1, 1995. Under
the terms of their respective agreements, Messrs. Gang, Centinaro, Crescenzo,
Flitcroft, Mahon, Pfau and Samuelson currently are entitled to an annual base
salary of $250,000, $125,000, $125,000, $200,000, $155,000, $90,000 and
$150,000, respectively, and bonuses, the amounts and payment of which are
within the discretion of the Board of Directors or the Compensation Committee
thereof.
Effective November 1, 1995, the Company and Mr. Finkel executed a three-year
employment agreement pursuant to which Mr. Finkel currently is entitled to an
annual base salary of $130,000 and a bonus, the amount and payment of which is
within the discretion of the Board of Directors or the Compensation Committee
thereof. Effective October 14, 1996, the Company and Mr. Bennaceur executed a
one-year employment agreement, terminable at will by either party, pursuant to
which Mr. Bennaceur currently is entitled to an annual base salary of $225,000
and a bonus, the amount and payment of which is within the discretion of the
Board of Directors or the Compensation Committee thereof.
The above-described agreements require each executive to maintain the
confidentiality of Company information and assign inventions to the Company.
In addition, each of such executive officers has agreed that during the term
of his respective agreement and thereafter for a period of up to 18 months,
provided that such executive officer is being compensated at one-half of his
annual base salary under such agreement, such person will not compete with the
Company by engaging in any capacity in any business which is competitive with
the business of the Company.
In addition to the foregoing employment contracts, the Company has executed
indemnification agreements with each of its executive officers and Directors
pursuant to which the Company has agreed to indemnify such parties to the full
extent permitted by law, subject to certain exceptions, if such party becomes
subject to an action because such party is a Director, officer, employee,
agent or fiduciary of the Company.
39
<PAGE>
Substantially all of the Company's employees have executed an invention
assignment and confidentiality agreement pursuant to which the employee agrees
to keep confidential all proprietary information of the Company and to assign
to the Company all rights in any proprietary information or inventions made or
contributed by the employee during his or her employment. In addition, the
Company requires that all new employees execute such agreement as a condition
of employment by the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of Stan Gang, Michael Bruce and
Susan Wolford. The Option Committee is comprised of Messrs. Bruce and Sorin
and Ms. Wolford. There are no Compensation Committee or Option Committee
interlocks between the Company and any other entities involving the Company's
executive officers and Board of Directors who serve as executive officers of
such entities.
From time to time until consummation of the Company's initial public
offering, the Company made loans to and received loans from Stan Gang. All
outstanding loans made by the Company to Stan Gang, totaling $413,000 at
December 31, 1995, were repaid by Mr. Gang in 1996.
Mr. Gang 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 two of its former employees and the current
employer of such former employees (the "Defendants") and to date has paid
$675,000 of his personal funds to the Company in connection with an
indemnification arrangement with 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. See "Business -- Legal Proceedings."
On March 19, 1996, in connection with the Company's initial public offering
of its Common Stock, the Company terminated its status as an S Corporation. In
connection therewith, the Company declared a distribution made in March 1996,
of substantially all of the Company's previously taxed but undistributed
earnings of $6.2 million. The recipients of such distribution were the then
current shareholders of the Company, consisting solely of Stan Gang and The
Gang Annuity Trust, a trust created by Stan Gang for the benefit of certain
members of Mr. Gang's family. See "Principal and Selling Shareholders."
On July 24, 1996, the Company consummated the acquisition of certain assets
and the business of Lior. The Company purchased such assets and business for
an aggregate purchase price of $1.0 million, of which $900,000 was paid at
closing and $100,000 was paid in January 1997. The Company funded the purchase
price from proceeds raised in its initial public offering. The Company did not
assume any liabilities of Lior, other than the obligations to perform under
certain purchase orders and service contracts. The Company acquired such
assets and business from Stan Gang, who had purchased such assets for the same
consideration directly from Lior on July 18, 1996 pending approval of the
transaction by the Company's Board of Directors.
Susan H. Wolford has been a Senior Vice President of Parker/Hunter
Incorporated since 1995. Parker/Hunter Incorporated is acting as one of the
Underwriters in this offering. As compensation for the services of the
Underwriters in this offering, the Underwriters will receive an underwriting
discount. Parker/Hunter Incorporated also acted as one of the representatives
of the underwriters in the Company's initial public offering consummated in
March and April 1996, prior to Ms. Wolford's election to the Board of
Directors of the Company in May 1996. As compensation for services of the
underwriters in the initial public offering, the underwriters received a 7%
underwriting discount.
David J. Sorin has been the Managing Partner of the Princeton, New Jersey
office of the law firm Buchanan Ingersoll since 1993. Buchanan Ingersoll has
been counsel to the Company since 1995.
KEY MAN INSURANCE
Stan Gang is a key employee of the Company and his contribution to the
Company has been and will be a significant factor in the Company's future
success. The loss of Mr. Gang could adversely affect the Company's
40
<PAGE>
business. The Company maintains, and is the beneficiary of, a life insurance
policy on the life of Stan Gang. The face amount of such policy is $2.0
million.
CERTAIN TRANSACTIONS
In 1996, the Company paid, as compensation for services rendered to the
Company and for sales generated, an aggregate of $520,240 to Michael Gang, the
son of Stan Gang, the Company's Chairman of the Board, President, and Chief
Executive Officer. Michael Gang serves as Secretary and as a salesperson for
the Company and has served as a director of the Company since September 1995.
For transactions involving Stan Gang, David J. Sorin and Susan H. Wolford,
each a director of the Company, see "Management -- Compensation Committee
Interlocks and Insider Participation."
In 1995, the Board of Directors of the Company adopted a policy requiring
that any future transactions between the Company and its officers, directors,
principal shareholders and their affiliates be on terms no less favorable to
the Company than could be obtained from unrelated third parties and that any
such transactions be approved by a majority of the disinterested members of
the Company's Board of Directors.
41
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock at March 31, 1997, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by (i) each
person who is known to the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors and
Named Executives, (iii) the Selling Shareholders, and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED NUMBER OF BENEFICIALLY OWNED
PRIOR TO OFFERING(1) SHARES AFTER OFFERING(1)
-------------------- BEING --------------------
NAME NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
- ---- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Stan Gang(3)
7 Ridgedale Avenue
Cedar Knolls, NJ 07927.... 2,550,000 50.0% 635,000 1,915,000 30.6%
The Gang Annuity Trust(4)
c/o Andrew Kimmel, Esq.
185 Ridgedale Avenue
Cedar Knolls, NJ 07927.... 350,000 6.9 215,000 135,000 2.2
Gary S. Finkel(5).......... 2,000 * -- 2,000 *
Lawrence Mahon(6).......... -- -- -- -- --
Bruce Flitcroft(7)......... 7,075 * -- 7,075 *
Dennis Samuelson(8)........ 4,200 * -- 4,200 *
Michael Gang(4)(9)......... 3,000 * -- 3,000 *
Michael R. Bruce(10)....... 5,000 * -- 5,000 *
David J. Sorin, Esq.(11)... 4,000 * -- 4,000 *
Susan H. Wolford(12)....... 4,200 * -- 4,200 *
All directors and executive
officers as a group
(13 persons)(3)(13)....... 2,585,975 50.4 635,000 1,950,975 31.0
</TABLE>
- --------
*Less than one percent.
(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by such shareholder.
(2) Applicable ownership percentage is based on 5,102,900 shares of Common
Stock outstanding on March 31, 1997 and 6,252,900 shares of Common Stock
outstanding after the completion of this offering. Excludes 1,090
additional shares issued and outstanding after March 31, 1997 upon the
exercise of stock options.
(3) Does not include the shares of Common Stock owned by The Gang Annuity
Trust dated January 3, 1994. Mr. Gang expressly disclaims beneficial
ownership of such shares.
(4) The trustee of such trust is Andrew Kimmel, Esq., the settlor and income
beneficiary is Stan Gang and the beneficiaries of the trust are Stan
Gang's two adult children, including Michael Gang. Such trust is an
irrevocable five-year annuity trust which terminates automatically on
January 3, 1999 pursuant to which, until termination, the trust will pay
an annuity amount from the net income of the trust to Mr. Gang or his
estate, if applicable, no less than quarter annually, in an amount equal
to the greater of $60,000 or the entire net income of the trust estate for
such period. In the event net income is insufficient to pay such annuity
amount, the principal of the trust will be used for the payment of such
annuity amount. Upon termination of the annuity term, any remaining
principal not required to be paid to Mr. Gang in satisfaction of the final
annuity amount shall be divided equally and put into two separate trusts
to be established for the benefit of Mr. Gang's two adult children, each
of whom will be an income beneficiary of such respective trust until
termination pursuant to the terms thereof, at which time all remaining
principal shall be distributed to such children, respectively. Mr. Kimmel,
as trustee, has full voting and dispositive power with respect to the
shares of the Company held by the trust.
(5) Represents 2,000 shares of Common Stock underlying options which are
exercisable as of March 31, 1997 or within 60 days after such date.
Excludes 11,500 shares underlying options which become exercisable over
time after such period.
(6) Does not include options to purchase 12,500 shares of Common Stock not
currently vested.
(7) Represents 4,000 shares of Common Stock underlying options which are
exercisable as of March 31, 1997 or within 60 days after such date, 1,230
shares owned by Mr. Flitcroft and his wife, and 1,845 shares held by his
wife as custodian for minor children. Excludes 46,000 shares underlying
options which become exercisable over time after such period.
(8) Represents 4,000 shares of Common Stock underlying options which are
exercisable as of March 31, 1997 or within 60 days after such date and 200
shares held as custodian for minor children. Excludes 18,500 shares
underlying options which become exercisable over time after such period
and 800 shares subject to options not currently vested and owned by his
wife, an employee of the Company.
(9) Represents 3,000 shares of Common Stock underlying options which are
exercisable as of March 31, 1997 or within 60 days after such date.
Excludes 12,000 shares underlying options which become exercisable over
time after such period. In addition, excludes the shares owned by The Gang
Annuity Trust. Mr. Gang expressly disclaims beneficial ownership of such
shares.
(10) Includes 4,000 shares of Common Stock underlying options which are
exercisable as of March 31, 1997 or within 60 days after such date.
Excludes 16,000 shares underlying options which become exercisable over
time after such period.
(11) Represents 4,000 shares of Common Stock underlying options which are
exercisable as of March 31, 1997 or within 60 days after such date.
Excludes options to purchase 16,000 shares of Common Stock granted to Mr.
Sorin on May 3, 1996 pursuant to the Non-Employee Director Plan which are
not currently vested.
(12) Represents 4,000 shares of Common Stock underlying options which are
exercisable as of March 31, 1997 or within 60 days after such date and
200 shares owned as custodian for a minor child. Excludes options to
purchase 16,000 shares of Common Stock granted to Ms. Wolford on May 3,
1996 pursuant to the Non-Employee Director Plan which are not currently
vested.
(13) Includes 6,500 shares of Common Stock underlying options granted to
executive officers of the Company not individually listed on the table
which are exercisable as of March 31, 1997 or within 60 days after such
date and includes an aggregate of 25,000 shares of Common Stock
underlying options granted to individuals listed above which are
exercisable as of March 31, 1997 or within 60 days after such date.
Excludes 214,500 shares underlying options granted to executive offers
and directors which become exercisable over time after such period.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 15,000,000 shares of
Common Stock, $.01 par value per share, and 3,000,000 shares of undesignated
Preferred Stock, $.01 par value per share. At March 31, 1997, there were
5,102,900 shares of Common Stock issued and outstanding and held of record by
115 shareholders. There are no shares of Preferred Stock designated or issued.
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Amended and Restated
Certificate of Incorporation, a copy of which is incorporated by reference as
an exhibit to the Registration Statement. The following summary is qualified
in its entirety by reference thereto.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the shareholders of the Company.
Holders of shares of Common Stock will be entitled to receive dividends,
subject to the rights of preferred shareholders, if any, when, as and if
declared by the Board of Directors and to share ratably in the assets of the
Company legally available for distribution to its shareholders in the event of
the liquidation, dissolution or winding-up of the Company. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. All
of the issued and outstanding shares of Common Stock are, and all shares of
Common Stock to be sold in this offering will be, duly authorized, validly
issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors may without further action by the Company's
shareholders, from time to time, direct the issuance of shares of Preferred
Stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. The holders of Preferred Stock
would normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is
made to the holders of the Common Stock. The Company does not presently intend
to issue any series of Preferred Stock.
The overall effect of the ability of the Company's Board of Directors to
issue Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change-in-control attempts. To the extent that
this ability has this effect, removal of the Company's incumbent Board of
Directors and management may be rendered more difficult. Further, this may
have an adverse impact on the ability of shareholders of the Company to
participate in a tender or exchange offer for the Common Stock and in so doing
diminish the market value of the Common Stock. See "Risk Factors -- Control by
Existing Shareholders; Anti-takeover Considerations."
LIMITATION OF DIRECTOR LIABILITY
The Amended and Restated Certificate of Incorporation of the Company limits
the liability of directors and officers of the Company to the Company or its
shareholders to the fullest extent permitted by New Jersey law. Specifically,
directors and officers of the Company will not be personally liable for money
damages for breach of a duty as a director or an officer, except for liability
(i) for any breach of the director's or officer's duty of loyalty to the
Company or its shareholders, (ii) for acts or omissions not in good faith or
which involve a knowing violation of law, (iii) as to directors only, under
section 14A:6-12(1) of the New Jersey Business Corporation Act, which relates
to unlawful declarations of dividends or other distributions of assets to
shareholders or the unlawful purchase of shares of the corporation, or (iv)
for any transaction from which the director or officer derived an improper
personal benefit.
43
<PAGE>
ANTI-TAKEOVER PROVISIONS
The Company is governed by the provisions of Section 14A:10A-1 et seq., the
New Jersey Shareholders Protection Act (the "New Jersey Act"), of the New
Jersey Business Corporation Act, an anti-takeover law. In general, the statute
prohibits a publicly-held New Jersey corporation from engaging in a "business
combination" with an "interested shareholder" for a period of five years after
the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed
manner. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested shareholder.
An "interested shareholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 10% or more of the
corporation's voting stock. After the five-year waiting period has elapsed, a
business combination between a corporation and an interested shareholder will
be prohibited unless the business combination is approved by the holders of at
least two-thirds of the voting stock not beneficially owned by the interested
shareholder, or unless the business combination satisfies the New Jersey Act.
The New Jersey Act's fair price provision is intended to provide that all
shareholders (other than the interested shareholders) receive a fair price for
their shares.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
6,253,990 shares of Common Stock. Of these shares, the 2,000,000 shares sold
in this offering, the 2,200,000 shares offered and sold pursuant to the
Company's initial public offering of Common Stock consummated in March and
April 1996, and an aggregate of 3,990 shares of Common Stock issued upon the
exercise of vested stock options and resold in reliance on Rules 144 and 701
under the Act and an effective registration statement on Form S-8 filed by the
Company will be freely transferable by persons other than "affiliates" of the
Company without restriction or further registration under the Act. The
remaining 2,050,000 shares of Common Stock outstanding are "restricted
securities" (the "Restricted Shares") within the meaning of Rule 144 under the
Act and may not be sold in the absence of registration under the Act unless an
exemption from registration is available, including an exemption afforded by
Rule 144.
Mr. Gang, the Company's founder, President and Chief Executive Officer, and
The Gang Annuity Trust, the holders of the outstanding Restricted Shares have
agreed, subject to certain exceptions, not to offer, sell or otherwise dispose
of any shares of Common Stock for a period of one year and 90 days,
respectively, after the date of this Prospectus without the prior written
consent of Montgomery Securities. In addition, the Company's other directors
and executive officers have agreed, subject to certain exceptions, not to
offer, sell or otherwise dispose of any shares of Common Stock for a period of
90 days after the date of this Prospectus without the prior written consent of
Montgomery Securities. Following the expiration of the lock-up periods, all of
the Restricted Shares and the shares held by the other directors and executive
officers will be eligible for resale in the public market pursuant to Rule
144, subject to certain limitations described below.
Rule 144, as currently in effect, provides that an affiliate of the Company
or a person (or persons whose sales are aggregated) who has beneficially owned
restricted securities for at least one year but less than two years is
entitled to sell, commencing 90 days after the date of this Prospectus, within
any three-month period, a number of shares that does not exceed the greater of
one percent of the then outstanding shares of Common Stock (62,540 shares
immediately after this offering) or the average weekly trading volume in the
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 also are subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. However, a person who is not an "affiliate" of the Company at any
time during the three months preceding a sale, and who has beneficially owned
restricted securities for at least two years, is entitled to sell such shares
under Rule 144 without regard to the limitations described above.
44
<PAGE>
As of the date of this Prospectus, there were outstanding vested options to
purchase an aggregate of 61,920 shares of Common Stock. Such shares are
eligible for immediate resale in the public market pursuant to a registration
statement on Form S-8 filed by the Company, although the holders of options to
purchase 31,500 of such shares have agreed not to sell or otherwise dispose of
such securities for a period of 90 days from the date of this Prospectus.
The Common Stock has been traded on the Nasdaq National Market since March
21, 1996. Nevertheless, sales of a substantial amount of the Common Stock in
the public market, or the perception that such sales could occur, could
adversely affect the market price of shares of the Company's Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Risk Factors -- Shares Eligible for Future
Sale."
45
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions in the underwriting agreement (the
"Underwriting Agreement"), by and among the Company, the Selling Shareholders
and the Underwriters, to purchase from the Company and the Selling
Shareholders the number of shares of Common Stock indicated below opposite
their respective names, at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters are committed to
purchase all of the shares of Common Stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Montgomery Securities..............................................
Cruttenden Roth Incorporated.......................................
Parker/Hunter Incorporated.........................................
---------
Total............................................................ 2,000,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Shareholders that
they propose to offer the Common Stock to the public on the terms set forth on
the cover page of this Prospectus. The Underwriters may allow selected dealers
a concession of not more than $ per share; and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After the public offering, the public offering price
and other selling terms may be changed by the Underwriters. The Common Stock
is offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
The Company and the Selling Shareholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 300,000 additional shares of Common
Stock to cover over-allotments, if any, at the same price per share as the
initial shares to be purchased by the Underwriters. To the extent that the
Underwriters exercise such over-allotment option, the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares
in approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the Offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
Mr. Gang and The Gang Annuity Trust have agreed that for a period of one
year and 90 days, respectively, after the date of this Prospectus they will
not, without the prior written consent of Montgomery Securities, directly or
indirectly, sell, offer, contract or grant an option to sell (including
without limitation any short sale), pledge, transfer, establish an open put
equivalent position or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities
exchangeable or exercisable or convertible into shares of Common Stock held by
them. The other executive officers and directors of the Company have agreed
that for a period of 90 days after the date of this Prospectus they will not,
without the prior written consent of Montgomery Securities, directly or
indirectly, sell, offer, contract or grant an option to sell (including
without limitation any short sale), pledge, transfer, establish an open put
equivalent position or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities
exchangeable or exercisable or convertible into shares of Common Stock held by
them. The Company has also agreed not to issue, offer, sell, grant options to
purchase or otherwise dispose of any of the Company's equity securities or any
other securities convertible into or exchangeable for its equity securities
for a period of 180 days after the effective date of the Offering without the
prior written consent of Montgomery Securities, subject to limited exceptions
and grants and exercises of stock options. In evaluating any request for a
waiver of the lock-up
46
<PAGE>
periods, the Underwriters will consider, in accordance with their customary
practice, all relevant facts and circumstances at the time of the request,
including, without limitation, the recent trading market for the Common Stock,
the size of the request and, with respect to a request by the Company to issue
additional equity securities, the purpose of such an issuance. See "Shares
Eligible for Future Sale."
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriters may
reduce that short position by purchasing Common Stock in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase shares of Common Stock
in the open market to reduce the Underwriters' short position or to stabilize
the price of the Common Stock, they may reclaim the amount of the selling
concession from the selling group members who sold those shares as part of the
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The public offering price of the Common Stock will be determined by
negotiations among the Underwriters and the Company, and will be based largely
upon the market price for the Common Stock as reported on the Nasdaq National
Market.
The Common Stock is traded on the Nasdaq National Market under the symbol
ALPH.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Buchanan Ingersoll, Princeton, New Jersey.
Certain legal matters will be passed upon for the Underwriters by Piper &
Marbury L.L.P., Baltimore, Maryland. A member of the firm Buchanan Ingersoll,
counsel to the Company, serves on the Board of Directors of the Company and
another member of Buchanan Ingersoll serves on the Board of Directors of
Parker/Hunter Incorporated, one of the Underwriters.
EXPERTS
The consolidated financial statements as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
47
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect to
the shares of Common Stock offered hereby. This Prospectus, which forms a part
of the Registration Statement, does not contain all the information set forth
in the Registration Statement and the exhibits and schedules filed therewith.
For further information with respect to the Company and the shares of Common
Stock offered hereby, reference is made to the Registration Statement and to
such exhibits and schedules filed therewith. Statements contained herein as to
the content of any contract or other document are not necessarily complete
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and any amendments thereto, including exhibits filed or
incorporated by reference as a part thereof, are available for inspection and
copying at the Commission's offices as described in the following paragraph.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of filed
reports, proxy statements and other information can be obtained from the
Public Reference Section of the Commission, Washington D.C. 20549, upon
payment of prescribed rates or in certain cases by accessing the Commission's
World Wide Web site at http:/ /www.sec.gov. The Common Stock of the Company is
traded on the Nasdaq National Market under the symbol ALPH, and such reports,
proxy statements and other information concerning the Company also can be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington
D.C. 20006.
48
<PAGE>
ALPHANET SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated balance sheets as of December 31, 1995 and 1996 and March 31,
1997 (unaudited)......................................................... F-3
Consolidated statements of income for the years ended December 31, 1994,
1995, and 1996 and for the three months ended March 31, 1996 and 1997
(unaudited).............................................................. F-4
Consolidated statements of changes in shareholders' equity for the years
ended December 31, 1994, 1995, and 1996 and for the three months ended
March 31, 1996 and 1997 (unaudited)...................................... F-5
Consolidated statements of cash flows for the years ended December 31,
1994, 1995, and 1996 and for the three months ended March 31, 1997 (unau-
dited)................................................................... F-6
Notes to consolidated financial statements................................ F-7
</TABLE>
F-1
<PAGE>
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
<PAGE>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 1,223 $ 1,610 $ 117
Accounts receivable, net......................... 13,885 29,848 34,137
Inventories...................................... 946 4,809 3,594
Current portion of loan receivable -- sharehold-
er.............................................. 160 -- --
Deferred income tax asset........................ -- 445 445
Prepaid expenses and other current assets........ 425 1,705 1,684
------- ------- -------
Total current assets........................... 16,639 38,417 39,977
Property and equipment, net........................ 1,378 3,856 4,467
Loan receivable -- shareholder..................... 253 -- --
Other assets....................................... 500 1,374 1,698
------- ------- -------
Total assets................................... $18,770 $43,647 $46,142
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank............................ $ -- $ -- $ 4,675
Current portion of long-term debt................ 285 -- --
Current portion of capital lease obligations..... 91 103 115
Accounts payable................................. 7,276 17,923 13,243
Accrued expenses................................. 3,954 5,984 7,352
------- ------- -------
Total current liabilities...................... 11,606 24,010 25,385
Advance from principal shareholder................. -- 675 675
Long-term debt..................................... 451 -- --
Capital lease obligations.......................... 139 41 --
------- ------- -------
Total liabilities.............................. 12,196 24,726 26,060
------- ------- -------
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, 3,400,000 and 5,102,900
shares issued and outstanding................... 34 51 51
Additional paid-in capital....................... 156 15,904 15,904
Retained earnings................................ 6,384 2,966 4,127
------- ------- -------
Total shareholders' equity..................... 6,574 18,921 20,082
------- ------- -------
Total liabilities and shareholders' equity..... $18,770 $43,647 $46,142
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales:
Product sales............ $62,365 $62,516 $ 99,468 $15,191 $38,768
Services and support..... 8,103 11,500 20,137 4,105 7,733
------- ------- -------- ------- -------
70,468 74,016 119,605 19,296 46,501
------- ------- -------- ------- -------
Cost of sales:
Product sales............ 54,445 54,579 88,218 13,283 34,493
Services and support..... 5,127 6,869 12,915 2,609 5,028
------- ------- -------- ------- -------
59,572 61,448 101,133 15,892 39,521
------- ------- -------- ------- -------
Gross profit............... 10,896 12,568 18,472 3,404 6,980
------- ------- -------- ------- -------
Operating expenses:
Selling expenses......... 3,946 4,468 7,301 1,249 2,918
General and administra-
tive expenses........... 3,767 3,925 5,446 1,176 2,036
------- ------- -------- ------- -------
7,713 8,393 12,747 2,425 4,954
------- ------- -------- ------- -------
Operating income........... 3,183 4,175 5,725 979 2,026
------- ------- -------- ------- -------
Other income (expense):
Interest income.......... 50 54 217 17 3
Interest expense......... (214) (140) (106) (35) (61)
Gain on sale of market-
able securities......... 57 -- 18 -- --
------- ------- -------- ------- -------
(107) (86) 129 (18) (58)
------- ------- -------- ------- -------
Income before income tax-
es........................ 3,076 4,089 5,854 961 1,968
Provision (benefit) for in-
come taxes................ 89 124 1,970 (32) 807
------- ------- -------- ------- -------
Net income................. $ 2,987 $ 3,965 $ 3,884 $ 993 $ 1,161
======= ======= ======== ======= =======
Unaudited pro forma data
(Note 1):
Income before income tax-
es...................... $ 3,076 $ 4,089 $ 5,854 $ 961
Provision for income tax-
es...................... 1,247 1,650 2,391 389
------- ------- -------- -------
Net income............... $ 1,829 $ 2,439 $ 3,463 $ 572
======= ======= ======== =======
Net income per share..... $ 0.61 $ 0.72 $ 0.14 $ 0.22
======= ======== ======= =======
Weighted average number
of common shares and
common shares equivalent
used in the pro forma
net income per share
calculation ............ 3,988 4,829 4,043 5,293
======= ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
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
Net income (unaudited).............. -- -- -- 1,161 1,161
------- ------ ------- ------- -------
Balance at March 31, 1997 (unau-
dited)............................... 5,103 $ 51 $15,904 $ 4,127 $20,082
======= ====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
--------------------------- ---------------
1994 1995 1996 1996 1997
-------- ------- -------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income...................... $ 2,987 $ 3,965 $ 3,884 $ 993 $1,161
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization.. 102 165 651 84 311
Deferred income taxes.......... -- -- (445) -- --
Gain on sale of marketable
securities.................... (57) -- (18) -- --
Increase (decrease) from
changes in:
Accounts receivable........... (6,610) (174) (15,963) 18 (4,289)
Inventories................... (532) 802 (3,863) 196 1,215
Prepaid expenses and other
current assets............... (19) (158) (1,288) (723) 21
Other assets.................. 27 10 (255) 397 (37)
Accounts payable and accrued
expenses..................... 3,578 1,314 12,677 2,222 (3,312)
-------- ------- -------- ------- ------
Net cash (used in) provided by
operating activities.......... (524) 5,924 (4,620) 3,187 (4,930)
-------- ------- -------- ------- ------
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) (213) (887)
Acquisition of businesses....... -- (236) (1,060) -- --
Receipt of loan repayments...... 204 160 413 413 --
-------- ------- -------- ------- ------
Net cash (used in) provided by
investing activities.......... (196) (855) (3,708) 200 (887)
-------- ------- -------- ------- ------
Cash flows from financing
activities:
Repayment of long-term debt..... (285) (285) (736) (736) --
Repayment of capital lease
obligations.................... -- (54) (86) (22) (29)
Net borrowings (payments) of
notes payable-bank............. 1,152 (1,152) -- -- 4,675
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) (6,155) --
Payment of dividends............ -- -- -- (1,147) --
Costs of anticipated common
stock offering................. -- (399) -- -- (322)
Net proceeds from sales of
common stock................... -- -- 16,138 14,802 --
Exercise of stock options....... -- -- 26 -- --
-------- ------- -------- ------- ------
Net cash provided by (used in)
financing activities.......... 326 (3,909) 8,715 6,742 4,324
-------- ------- -------- ------- ------
Net (decrease) increase in cash
and cash equivalents............ (394) 1,160 387 10,129 (1,493)
Cash and cash equivalents,
beginning of period............. 457 63 1,223 1,223 1,610
-------- ------- -------- ------- ------
Cash and cash equivalents, end of
period.......................... $ 63 $ 1,223 $ 1,610 $11,352 $ 117
======== ======= ======== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
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
<PAGE>
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
<PAGE>
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, $117 and
$45 of expenses related to this plan in 1994, 1995, 1996 and the three months
ended March 31, 1997 (unaudited), 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, and $701 for the three months ended March 31, 1996 (unaudited),
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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 "Earnings per Share." The Statement
is effective for financial statements for periods ending after December 15,
1997, and changes the method in which earnings per share will be determined.
Adoption of this Statement by the Company is not expected to have a material
impact on earnings per share.
Interim Financial Information:
The information presented for March 31, 1997, and for the three-month
periods ended March 31, 1996 and 1997, is unaudited, but, in the opinion of
management, the accompanying unaudited consolidated interim 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 March 31, 1997 and the results of
its operations and its cash flows for the three-month periods ended March 31,
1996 and 1997 in accordance with generally accepted accounting principles.
Results for the interim period are not necessarily indicative of results that
may be expected for the entire year.
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.
F-9
<PAGE>
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Net sales.............................................. $95,454 $134,311
Pro forma net income................................... 2,057 3,319
Pro forma net income per share......................... 0.52 0.69
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable.............................. $13,966 $30,111 $34,440
Less: Allowance for doubtful accounts............ 81 263 303
------- ------- -------
$13,885 $29,848 $34,137
======= ======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture, fixtures and equipment................ $1,634 $3,120 $3,985
Transportation equipment......................... 43 36 57
Leasehold improvements........................... 137 250 274
Technology and software under development........ -- 1,464 1,441
------ ------ ------
1,814 4,870 5,757
Less -- Accumulated depreciation and amortiza-
tion............................................ 436 1,014 1,290
------ ------ ------
$1,378 $3,856 $4,467
====== ====== ======
</TABLE>
Depreciation expense and amortization of leasehold improvements for the
years ended December 31, 1994, 1995 and 1996 was $102, $165 and $609,
respectively, and was $276 for the three months ended March 31, 1997
(unaudited).
F-10
<PAGE>
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Wages and benefits payable......................... $ 752 $1,504 $1,793
Deferred revenue................................... 884 961 1,328
Sales taxes........................................ 321 833 1,088
Licensing fees payable............................. 960 816 803
Sales commissions.................................. 162 663 645
Income taxes payable............................... 25 463 892
Other.............................................. 850 744 803
------ ------ ------
$3,954 $5,984 $7,352
====== ====== ======
</TABLE>
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 (5.7% at March 31,
1997) plus 1.5% and/or the Bank's prime rate (8.5% at March 31, 1997) 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, 1996 and the three months ended March 31, 1997
(unaudited) was approximately 9%, 8%, and 8%, respectively.
At December 31, 1995 and 1996, and March 31, 1997 (unaudited) the Company
had standby letters of credit of $2,068, $2,038 and $38, 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, and March 31, 1997 (unaudited) capital lease obligations
outstanding under these equipment leases, which expire in 1998, total $144 and
$115, respectively.
F-11
<PAGE>
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
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
</TABLE>
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.
F-12
<PAGE>
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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 and three months ended March 31, 1997 (unaudited)
is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------- ENDED
1995 1996 MARCH 31, 1997
--------------- --------------- ---------------
(UNAUDITED)
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period....................... -- $-- 260 $9.00 539 $9.44
Granted....................... 260 9.00 290 9.82 50 15.21
Exercised..................... -- -- (3) 9.00 -- --
Forfeited..................... -- -- (9) 9.00 (4) 9.00
---- ---- ---
Outstanding at end of period.. 260 9.00 539 9.44 585 9.93
==== ==== ===
Options exercisable at end of
period....................... -- -- 47 9.00 51 9.12
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997.............................................................. $828
1998.............................................................. 757
1999.............................................................. 655
2000.............................................................. 525
2001.............................................................. 136
</TABLE>
Rent expense including real estate taxes for the years ended December 31,
1994, 1995 and 1996 was $418, $553 and $688, respectively, and was $197 for
the three months ended March 31, 1997 (unaudited).
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 and March 31, 1997 (unaudited) was
$5,384, $13,085 and $9,362, 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 $1,650 as of March 31, 1997 (unaudited).
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
F-13
<PAGE>
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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, 1996 and the three months ended March 31, 1996
and 1997 (unaudited):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- -------------
1994 1995 1996 1996 1997
------- ------- --------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest paid...................... $ 164 $ 124 $ 97 $35 $ 49
Income taxes paid.................. 60 130 1,977 28 378
Noncash investing and financing ac-
tivities:
Equipment acquired under capital
lease........................... -- 284 -- -- --
</TABLE>
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 the years ended
December 31, 1994, 1995 and 1996 and for the three months ended March 31, 1996
and 1997 (unaudited) are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- --------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal.......................... $ -- $ -- $ 1,733 $ 42 $ 602
State and local.................. 89 124 682 136 205
------- ------- ------- ------ ------
89 124 2,415 178 807
------- ------- ------- ------ ------
Deferred:
Federal.......................... -- -- (178) -- --
State and local.................. -- -- (57) -- --
Benefit as a result of change in
tax status...................... -- -- (210) (210) --
------- ------- ------- ------ ------
-- -- (445) (210) --
------- ------- ------- ------ ------
$ 89 $ 124 $ 1,970 $ (32) $ 807
======= ======= ======= ====== ======
</TABLE>
F-14
<PAGE>
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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, 1996 and for the three months ended March 31, 1996
and 1997 (unaudited) is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ---------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Taxes at statutory rate...... 34.0% 34.0% 34.0% 34.0% 34.0%
State and local income taxes,
net of federal tax benefit.. 6.2% 6.1% 6.7% 9.3% 6.9%
Income from S Corporation not
subject to federal and state
income taxes................ (37.7%) (37.4%) (7.2%) (46.8%) --
Other, net................... 0.4% 0.3% 0.2% 0.2% 0.1%
------- ------- ------- ------ -----
Effective tax rate........... 2.9% 3.0% 33.7% 3.3% 41.0%
======= ======= ======= ====== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred income tax asset at December 31, 1996 and March
31, 1997 (unaudited) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Accounts receivable allowances......................... $187 $199
Inventory reserves..................................... 95 95
Accrual for compensated absences....................... 233 287
Accumulated depreciation and amortization.............. (70) (136)
---- ----
$445 $445
==== ====
</TABLE>
11. SIGNIFICANT CUSTOMERS AND VENDORS
During 1994, 1995, 1996 and the three months ended March 31, 1997
(unaudited), one customer accounted for approximately 24%, 20%, 17% and 23% of
the Company's net sales during the respective periods. During the three months
ended March 31, 1997, one other customer accounted for 11% of the Company's
net sales. No other customer accounted for more than 10% of the Company's net
sales during 1994, 1995, 1996 or the three months ended March 31, 1997.
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
F-15
<PAGE>
ALPHANET SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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.
13. SUBSEQUENT EVENTS (UNAUDITED)
On March 7, 1997, the Company received a commitment from the Bank to expand
the Company's credit facility to enable the Company to borrow, based upon
eligible accounts receivable, up to $15,000 for short-term working capital
purposes. Such facility, intended to expire in May 1998, includes a $2,500
sublimit for letters of credit and a $5,000 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.
On May 15, 1997, the Board of Directors approved the filing of a
registration statement on Form S-1 with the Securities and Exchange Commission
to register 2,000,000 shares of Common Stock, of which 1,150,000 shares will
be issued and sold by the Company and 850,000 shares will be sold by certain
shareholders.
F-16
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained or incorporated by reference in this Pro-
spectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any of the Under-
writers. This Prospectus does not constitute an offer to sell or a solicita-
tion of an offer to buy any securities other than the shares of Common Stock
to which it relates or an offer to, or a solicitation of, any person in any
jurisdiction where such an offer or solicitation would be unlawful. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the af-
fairs of the Company or that the information contained herein is correct as of
any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 12
Price Range of Common Stock.............................................. 12
Dividend Policy.......................................................... 12
Capitalization........................................................... 13
Selected Consolidated Financial Data..................................... 14
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 15
Business................................................................. 24
Management............................................................... 33
Certain Transactions..................................................... 41
Principal and Selling Shareholders....................................... 42
Description of Capital Stock............................................. 43
Shares Eligible for Future Sale.......................................... 44
Underwriting............................................................. 46
Legal Matters............................................................ 47
Experts.................................................................. 47
Additional Information................................................... 48
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 SHARES
[LOGO OF ALPHANET SOLUTIONS, INC. APPEARS HERE]
COMMON STOCK
----------------
PROSPECTUS
----------------
MONTGOMERY SECURITIES
CRUTTENDEN ROTH
INCORPORATED
PARKER/HUNTER
INCORPORATED
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized estimate of fees and expenses
payable by the registrant in connection with the offering described in this
registration statement, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee............................................ $ 12,503.64
NASD filing fee................................................. 4,627.00
Nasdaq/NNM additional listing fee............................... 17,500.00
Counsel fees and expenses....................................... 175,000.00
Accounting fees and expenses.................................... 135,000.00
Blue sky fees and expenses...................................... 10,000.00
Printing expenses............................................... 150,000.00
Transfer agent and registrar fees............................... 5,000.00
Miscellaneous................................................... 20,369.36
-----------
Total......................................................... $530,000.00
===========
</TABLE>
All of the above expenses will be paid by the registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the New Jersey Business Corporation Act permits each New
Jersey business corporation to indemnify its directors, officers, employees
and agents against expenses and liabilities in connection with any proceeding
involving such persons by reason of his serving or having served in such
capacities or for each such person's acts taken in his capacity as a director,
officer, employee or agent of the corporation if such actions were taken in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal proceeding, if he had no reasonable cause to believe his conduct was
unlawful, provided that any such proceeding is not by or in the right of the
corporation.
Section 14A:2-7(3) of the New Jersey Business Corporation Act enables a
corporation in its certificate of incorporation to limit the liability of
directors and officers of the corporation to the corporation or its
shareholders. Specifically, the certificate of incorporation may provide that
directors and officers of the corporation will not be personally liable for
money damages for breach of a duty as a director or an officer, except for
liability (i) for any breach of the director's or officer's duty of loyalty to
the corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve a knowing violation of law, (iii) as to directors only,
under Section 14A:6-12(1) of the New Jersey Business Corporation Act, which
relates to unlawful declarations of dividends or other distributions of assets
to shareholders or the unlawful purchase of shares of the corporation, or (iv)
for any transaction from which the director or officer derived an improper
personal benefit.
The registrant's Amended and Restated Certificate of Incorporation limits
the liability of its directors and officers as authorized by Section 14A:2-
7(3).
Article 11 of the registrant's Amended and Restated By-laws specifies that
the registrant shall indemnify its directors, officers, employees and agents
to the extent such parties are a party to any action because he was a
director, officer, employee or agent of the Company. The Company has agreed to
indemnify such parties for their actual and reasonable expenses if such party
acted in good faith and in a manner he reasonably believed to be in the best
interests of the Company and such party had no reasonable cause to believe his
conduct was unlawful. This provision of the By-laws is deemed to be a contract
between the registrant and each director and
II-1
<PAGE>
officer who serves in such capacity at any time while such provision and the
relevant provisions of the New Jersey Business Corporation Act are in effect,
and any repeal or modification thereof shall not offset any action, suit or
proceeding theretofore or thereafter brought or threatened based in whole or
in part upon any such state of facts.
The registrant has executed indemnification agreements with each of its
officers and Directors pursuant to which the registrant has agreed to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent of fiduciary of the Company.
The registrant intends to obtain liability insurance for the benefit of its
directors and officers which will provide coverage for losses of directors and
officers for liabilities arising out of claims against such persons acting as
directors or officers of the registrant (or any subsidiary thereof) due to any
breach of duty, neglect, error, misstatement, misleading statement, omission
or act done by such directors and officers, except as prohibited by law.
At present, there is no pending litigation or proceeding involving a
Director or officer of the registrant as to which indemnification is being
sought nor is the registrant aware of any threatened litigation that may
result in claims for indemnification by any Director or officer.
Reference is made to Section 8 of the Underwriting Agreement, the proposed
form of which is filed as Exhibit One, in which the Underwriters agree to
indemnify the directors and officers of the registrant and certain other
persons, against civil liabilities, including certain liabilities under the
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Other than as provided below, there were no unregistered securities sold by
the registrant within the past three years:
(a) On December 10, 1996, the Company issued and sold 2,500 shares of
Common Stock to Lawrence Mahon, 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 Cheryl Fodor 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 Registrant in connection with the
issuance and sale of the securities described above. The Registrant claims
that the issuance and sale of all of the foregoing securities were exempt from
registration pursuant to Rule 701 under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1 Form of Underwriting Agreement.
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.
5 Opinion of Buchanan Ingersoll as to validity of Common Stock.
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
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 October 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.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
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.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Buchanan Ingersoll (contained in the opinion filed as
Exhibit 5 to the Registration Statement).
24 Powers of Attorney of certain officers and directors of the Company
(contained on the signature page of this Registration Statement).
27 Financial Data Schedules.
</TABLE>
(b) Financial Statement Schedules
All financial statement schedules are omitted because the information is not
required, or is otherwise included in the financial statements or the notes
thereto.
- --------
* 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.
+++ Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996, filed with the Commission on March 27, 1997.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the provisions described
in Item 14, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(2) For purpose of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF HANOVER, STATE OF
NEW JERSEY, ON MAY 21, 1997.
AlphaNet Solutions, Inc.
By /s/ Stan Gang
----------------------------------
STAN GANG, CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Know all Men By These Presents, that each individual whose signature appears
below constitutes and appoints Stan Gang and Gary S. Finkel, and each of them,
his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement and a related
registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and in each case, to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stan Gang Chairman, President, May 21, 1997
- ------------------------------------- Chief Executive
STAN GANG Officer and
Director (Principal
Executive Officer)
/s/ Gary S. Finkel Vice President, May 21, 1997
- ------------------------------------- Chief Financial
GARY S. FINKEL Officer and
Treasurer
(Principal
Financial and
Accounting Officer)
/s/ Michael Gang Secretary and May 21, 1997
- ------------------------------------- Director
MICHAEL GANG
/s/ Michael R. Bruce Director May 21, 1997
- -------------------------------------
MICHAEL R. BRUCE
/s/ David J. Sorin Director May 21, 1997
- -------------------------------------
DAVID J. SORIN
/s/ Susan Wolford Director May 21, 1997
- -------------------------------------
SUSAN WOLFORD
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS PAGE
-------- ------------
<C> <S> <C>
1 Form of Underwriting Agreement.
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.
5 Opinion of Buchanan Ingersoll as to validity of
Common Stock.
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 October 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS PAGE
-------- ------------
<C> <S> <C>
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.
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.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Buchanan Ingersoll (contained in the
opinion filed as Exhibit 5 to the Registration
Statement).
24 Powers of Attorney of certain officers and
directors of the Company (contained on the
signature page of this Registration Statement).
27 Financial Data Schedules.
</TABLE>
- -------
* 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.
+++ Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996, filed with the Commission on March 27, 1997.
<PAGE>
2,000,000 Shares
ALPHANET SOLUTIONS, INC.
Common Stock
Underwriting Agreement
dated _____ __, 1997
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Section 1. Representations And Warranties ............................................................2
A. Representations And Warranties of the Company and the Selling Stockholders......................2
Compliance With Registration Requirements.......................................................2
Offering Materials Furnished To Underwriters....................................................3
Distribution Of Offering Materials By The Company...............................................3
The Underwriting Agreement......................................................................3
Authorization Of The Common Shares..............................................................3
No Applicable Registration Or Other Similar Rights..............................................3
No Material Adverse Change......................................................................4
Independent Accountants.........................................................................4
Preparation Of The Financial Statements.........................................................4
Incorporation And Good Standing Of The Company And Its Subsidiaries.............................5
Capitalization And Other Capital Stock Matters..................................................5
Stock Exchange Listing..........................................................................6
Non-Contravention Of Existing Instruments; No Further Authorizations Or
Approvals Required........................................................................6
No Material Actions Or Proceedings..............................................................6
Intellectual Property Rights....................................................................7
All Necessary Permits, Etc......................................................................7
Title To Properties.............................................................................7
Tax Law Compliance..............................................................................7
Company Not An Investment Company...............................................................8
Insurance.......................................................................................8
No Price Stabilization Or Manipulation..........................................................8
Related Party Transactions......................................................................8
No Unlawful Contributions Or Other Payments.....................................................8
Company's Accounting System.....................................................................9
Compliance With Environmental Laws..............................................................9
ERISA Compliance...............................................................................10
B. Representations And Warranties Of The Selling Stockholders.....................................10
The Underwriting Agreement.....................................................................10
The Custody Agreement And Power Of Attorney....................................................11
Title To Common Shares To Be Sold; All Authorizations Obtained.................................11
Delivery Of The Common Shares To Be Sold.......................................................11
Non-Contravention; No Further Authorizations Or Approvals Required.............................11
No Registration Or Other Similar Rights........................................................12
No Further Consents, Etc.......................................................................12
Disclosure Made By Such Selling Stockholder In The Prospectus..................................12
No Price Stabilization Or Manipulation.........................................................12
Confirmation Of Company Representations And Warranties.........................................12
Section 2. Purchase, Sale And Delivery Of Common Shares..............................................13
The Firm Common Shares.........................................................................13
</TABLE>
- i -
<PAGE>
<TABLE>
<S> <C>
The First Closing Date.........................................................................13
The Optional Common Shares; The Second Closing Date............................................13
Public Offering Of The Common Shares...........................................................14
Payment For The Common Shares..................................................................14
Delivery Of The Common Shares..................................................................15
Delivery Of Prospectus To The Underwriters.....................................................15
Section 3. Additional Covenants......................................................................16
A. Covenants Of The Company.......................................................................16
Underwriters' Review Of Proposed Amendments And Supplements....................................16
Securities Act Compliance......................................................................16
Amendments And Supplements To The Prospectus And Other Securities Act
Matters..................................................................................16
Copies Of Any Amendments And Supplements To The Prospectus.....................................17
Blue Sky Compliance............................................................................17
Use Of Proceeds................................................................................17
Transfer Agent.................................................................................17
Earnings Statement.............................................................................17
Periodic Reporting Obligations.................................................................18
Agreement Not To Offer Or Sell Additional Securities...........................................18
Future Reports To The Underwriters.............................................................18
B. Covenants Of The Selling Stockholders..........................................................18
Agreement Not To Offer Or Sell Additional Securities...........................................19
Delivery Of Forms W-8 And W-9..................................................................19
Section 4. Payment Of Expenses.......................................................................19
Section 5. Conditions Of The Obligations Of The Underwriters.........................................20
Accountants' Comfort Letter....................................................................20
Compliance With Registration Requirements; No Stop Order, No Objection From
NASD.....................................................................................21
No Material Adverse Change Or Ratings Agency Change............................................21
Opinion Of Counsel For The Company.............................................................21
Opinion Of Counsel For The Underwriters........................................................22
Officers' Certificate..........................................................................22
Bring-Down Comfort Letter......................................................................22
Opinion Of Counsel For The Selling Stockholders................................................22
Selling Stockholders' Certificate..............................................................23
Selling Stockholders' Documents................................................................23
Lock-Up Agreement From Certain Shareholders Of The Company Other Than
Selling Stockholders.....................................................................23
Additional Documents...........................................................................23
Section 6. Reimbursement Of Underwriters' Expenses...................................................24
Section 7. Effectiveness Of This Agreement...........................................................24
Section 8. Indemnification...........................................................................24
Indemnification Of The Underwriters............................................................24
Indemnification Of The Company, Its Directors And Officers.....................................24
</TABLE>
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<TABLE>
<S> <C>
Notifications And Other Indemnification Procedures..............................................27
Settlements.....................................................................................27
Section 9. Contribution...............................................................................28
Section 10. Default Of One Or More Of The Several Underwriters.........................................29
Section 11. Termination Of This Agreement..............................................................30
Section 12. Representations And Indemnities To Survive Delivery........................................31
Section 13. Notices....................................................................................31
Section 14. Successors.................................................................................32
Section 15. Partial Unenforceability...................................................................32
Section 16. Governing Law Provisions...................................................................32
Section 17. Failure Of One Or More Of The Selling Stockholders To Sell And
Deliver Common Shares....................................................................32
Section 18. General Provisions.........................................................................33
</TABLE>
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Underwriting Agreement
_____ __, 1997
MONTGOMERY SECURITIES
CRUTTENDEN ROTH INCORPORATED
PARKER/HUNTER INCORPORATED
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
Introductory. AlphaNet Solutions, Inc., a New Jersey
corporation (the "Company"), proposes to issue and sell to the several
underwriters named in Schedule A (the "Underwriters") an aggregate of 1,150,000
shares of its Common Stock, par value $.01 per share (the "Common Stock"); and
the shareholders of the Company named in Schedule B (collectively, the "Selling
Stockholders") severally propose to sell to the Underwriters an aggregate of
850,000 shares of Common Stock. The 1,150,000 shares of Common Stock to be sold
by the Company and the 850,000 shares of Common Stock to be sold by the Selling
Stockholders are collectively called the "Firm Common Shares". In addition, the
Company has granted to the Underwriters an option to purchase up to an
additional 172,500 shares of Common Stock and the Selling Stockholders have
severally granted to the Underwriters an option to purchase up to an additional
127,500 shares of Common Stock, each Selling Stockholder selling up to the
amount set forth opposite such Selling Stockholder's name in Schedule B, all as
provided in Section 2. The additional 172,500 shares to be sold by the Company
and the additional 127,500 shares to be sold by the Selling Stockholders
pursuant to such option are collectively called the "Optional Common Shares".
The Firm Common Shares and, if and to the extent such option is exercised, the
Optional Common Shares are collectively called the "Common Shares".
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1
(File No. 333-[___]), which contains a form of prospectus to be used in
connection with the public offering and sale of the Common Shares. Such
registration statement, as amended, including the financial statements, exhibits
and schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (collectively, the "Securities Act"), including any
information deemed to be a part thereof at the time of effectiveness pursuant to
Rule 430A or Rule 434 under the Securities Act, is called the "Registration
Statement". Any registration statement filed by the Company pursuant to Rule
462(b) under the Securities Act is called the "Rule 462(b) Registration
Statement", and from and after the
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date and time of filing of the Rule 462(b) Registration Statement the term
"Registration Statement" shall include the Rule 462(b) Registration Statement.
Such prospectus, in the form first used by the Underwriters to confirm sales of
the Common Shares, is called the "Prospectus"; provided, however, if the Company
has, with the consent of Montgomery Securities, elected to rely upon Rule 434
under the Securities Act, the term "Prospectus" shall mean the Company's
prospectus subject to completion (each, a "preliminary prospectus") dated [___]
(such preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together with the applicable term sheet (the "Term Sheet") prepared and filed by
the Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or supplements
to any of the foregoing, shall include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
The Company and each of the Selling Stockholders hereby
confirm their respective agreements with the Underwriters as follows:
Section 1. Representations and Warranties.
A. Representations and Warranties of the Company and the Selling
Stockholders . Each of the Company and each of the Selling Stockholders
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The
Registration Statement and any Rule 462(b) Registration Statement have been
declared effective by the Commission under the Securities Act. The Company
has complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of
the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied
in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and sale
of the Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the
time it became effective and at all subsequent times, complied and will
comply in all material respects with the Securities Act and did not and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The
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Prospectus, as amended or supplemented, as of its date and at all subsequent
times, did not and will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Underwriter expressly for
use therein. There are no contracts or other documents required to be described
in the Prospectus or to be filed as exhibits to the Registration Statement which
have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Underwriters three complete manually signed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Underwriters have
reasonably requested for each of the Underwriters.
(c) Distribution of Offering Materials By the Company. The Company
has not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with the
offering and sale of the Common Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are
no persons with registration or other similar rights to have any equity or debt
securities
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<PAGE>
registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in
the Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company and its subsidiaries, considered as
one entity (any such change is called a "Material Adverse Change"); (ii) the
Company and its subsidiaries, considered as one entity, have not incurred any
material liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; and (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company or,
except for dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by the
Company or any of its subsidiaries of any class of capital stock.
(h) Independent Accountants. Price Waterhouse LLP, who have
expressed their opinion with respect to the financial statements (which term as
used in this Agreement includes the related notes thereto) and supporting
schedules filed with the Commission as a part of the Registration Statement and
included in the Prospectus, are independent public or certified public
accountants as required by the Securities Act and the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder (collectively, the
"Exchange Act").
(i) Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the consolidated financial position of
the Company and its subsidiaries as of and at the dates indicated and the
results of their operations and cash flows for the periods specified. The
supporting schedules, if any, included in the Registration Statement present
fairly the information required to be stated therein. Such financial statements
and supporting schedules, if any, have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Prospectus Summary--Summary
Consolidated Financial Data", "Selected Consolidated Financial Data" and
"Capitalization" fairly present the information set forth therein on a basis
consistent with that of the audited financial statements contained in the
Registration Statement.
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<PAGE>
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation and has corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Prospectus and, in the case of the Company, to enter into
and perform its obligations under this Agreement. Each of the Company and each
subsidiary is duly qualified as a foreign corporation to transact business and
is in good standing in each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions where the failure to so
qualify or to be in good standing would not, individually or in the aggregate,
result in a Material Adverse Change. All of the issued and outstanding capital
stock of each subsidiary has been duly authorized and validly issued, is fully
paid and nonassessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance or claim, except for such security interest granted to First Union
National Bank pursuant to that certain Revolving Credit Agreement and Term Loan
dated August 5, 1987 by and between the Company and First Union National Bank,
as amended or modified to date. The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
subsidiaries listed in Exhibit 21 to the Registration Statement.
(k) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options described in the Prospectus).
The Common Stock (including the Common Shares) conforms in all material respects
to the description thereof contained in the Prospectus. All of the issued and
outstanding shares of Common Stock (including the shares of Common Stock owned
by Selling Stockholders) have been duly authorized and validly issued, are fully
paid and nonassessable and have been issued in compliance with federal and state
securities laws. None of the outstanding shares of Common Stock were issued in
violation of any preemptive rights, rights of first refusal or other similar
rights to subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of first
refusal or other rights to purchase, or equity or debt securities convertible
into or exchangeable or exercisable for, any capital stock of the Company or any
of its subsidiaries other than those accurately described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted thereunder, set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
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<PAGE>
(l) Stock Exchange Listing. The Common Stock, including the Common
Shares, is registered pursuant to Section 12(g) of the Exchange Act and is
listed on the Nasdaq National Market, and the Company has taken no action
designed to, or likely to have the effect of, terminating the registration of
the Common Stock under the Exchange Act or delisting the Common Stock from the
Nasdaq National Market, nor has the Company received any notification that the
Commission or the National Association of Securities Dealers, Inc. (the "NASD")
is contemplating terminating such registration or listing.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or is in default (or,
with the giving of notice or lapse of time, would be in default) ("Default")
under any indenture, mortgage, loan or credit agreement, note, contract,
franchise, lease or other instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound (including,
without limitation, the Company's Revolving Credit Agreement and Term Loan with
First Union National Bank, as lender), or to which any of the property or assets
of the Company or any of its subsidiaries is subject (each, an "Existing
Instrument"), except for such Defaults as would not, individually or in the
aggregate, result in a Material Adverse Change. The Company's execution,
delivery and performance of this Agreement and consummation of the transactions
contemplated hereby and by the Prospectus (i) have been duly authorized by all
necessary corporate action and will not result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary, (ii) will
not conflict with or constitute a breach of, or Default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, or require the
consent of any other party to, any Existing Instrument, except for such
conflicts, breaches, Defaults, liens, charges or encumbrances as would not,
individually or in the aggregate, result in a Material Adverse Change and (iii)
will not result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any subsidiary. No
consent, approval, authorization or other order of, or registration or filing
with, any court or other governmental or regulatory authority or agency, is
required for the Company's execution, delivery and performance of this Agreement
and consummation of the transactions contemplated hereby and by the Prospectus,
except such as have been obtained or made by the Company and are in full force
and effect under the Securities Act, applicable state securities or blue sky
laws and from the NASD.
(n) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened (i) against or affecting the Company or any of
its subsidiaries, (ii) which has as the subject thereof any officer or director
of, or property owned or leased by, the Company or any of its subsidiaries or
(iii) relating to environmental or
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discrimination matters, where in any such case (A) there is a reasonable
possibility that such action, suit or proceeding might be determined adversely
to the Company or such subsidiary and (B) any such action, suit or proceeding,
if so determined adversely, would reasonably be expected to result in a Material
Adverse Change or adversely affect the consummation of the transactions
contemplated by this Agreement. No material labor dispute with the employees of
the Company or any of its subsidiaries, or with the employees of any principal
supplier of the Company, exists or, to the best of the Company's knowledge, is
threatened or imminent.
(o) Intellectual Property Rights. The Company and its subsidiaries
own or possess sufficient trademarks, trade names, patent rights, copyrights,
licenses, approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to conduct their businesses
as now conducted; and the expected expiration of any of such Intellectual
Property Rights would not result in a Material Adverse Change. Neither the
Company nor any of its subsidiaries has received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, would
result in a Material Adverse Change.
(p) All Necessary Permits, etc. The Company and each subsidiary
possess such valid and current certificates, authorizations or permits issued by
the appropriate state, federal or foreign regulatory agencies or bodies
necessary to conduct their respective businesses, and neither the Company nor
any subsidiary has received any notice of proceedings relating to the revocation
or modification of, or non-compliance with, any such certificate, authorization
or permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
(q) Title to Properties. The Company and each of its subsidiaries has
good and marketable title to all the properties and assets reflected as owned in
the financial statements referred to in Section 1(A)(i) above (or elsewhere in
the Prospectus), in each case free and clear of any security interests,
mortgages, liens, encumbrances, equities, claims and other defects, except such
as do not materially and adversely affect the value of such property and do not
materially interfere with the use made or proposed to be made of such property
by the Company or such subsidiary. The real property, improvements, equipment
and personal property held under lease by the Company or any subsidiary are held
under valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company or
such subsidiary.
(r) Tax Law Compliance. The Company and its subsidiaries have filed
all necessary federal, state and foreign income and franchise tax returns and
have paid all taxes required to be paid by any of them and, if due and payable,
any related
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<PAGE>
or similar assessment, fine or penalty levied against any of them. The Company
has made adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1(A)(i) above in respect of all federal, state
and foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its subsidiaries has not been finally
determined.
(s) Company Not an "Investment Company". The Company has been
advised of the rules and requirements under the Investment Company Act of 1940,
as amended (the "Investment Company Act"). The Company is not, and after receipt
of payment for the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act and will conduct its business in a manner so
that it will not become subject to the Investment Company Act.
(t) Insurance. Each of the Company and its subsidiaries are insured
by recognized, financially sound and reputable institutions with policies in
such amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes. The Company has no reason to believe that it or any subsidiary will
not be able (i) to renew its existing insurance coverage as and when such
policies expire or (ii) to obtain comparable coverage from similar institutions
as may be necessary or appropriate to conduct its business as now conducted and
at a cost that would not result in a Material Adverse Change. Neither of the
Company nor any subsidiary has been denied any insurance coverage which it has
sought or for which it has applied.
(u) No Price Stabilization or Manipulation. The Company has not taken
and will not take, directly or indirectly, any action designed to or that might
be reasonably expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Common
Shares.
(v) Related Party Transactions. There are no business relationships
or related-party transactions involving the Company or any subsidiary or any
other person required to be described in the Prospectus which have not been
described as required.
(w) No Unlawful Contributions or Other Payments. Neither the Company
nor any of its subsidiaries nor, to the best of the Company's knowledge, any
employee or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
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(x) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its subsidiaries is in violation of any federal,
state, local or foreign law or regulation relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum and
petroleum products (collectively, "Materials of Environmental Concern"), or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environmental Concern
(collectively, "Environmental Laws"), which violation includes, but is not
limited to, noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or its subsidiaries
under applicable Environmental Laws, or noncompliance with the terms and
conditions thereof, nor has the Company or any of its subsidiaries received any
written communication, whether from a governmental authority, citizens group,
employee or otherwise, that alleges that the Company or any of its subsidiaries
is in violation of any Environmental Law; (ii) there is no claim, action or
cause of action filed with a court or governmental authority, no investigation
with respect to which the Company has received written notice, and no written
notice by any person or entity alleging potential liability for investigatory
costs, cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising out
of, based on or resulting from the presence, or release into the environment, of
any Material of Environmental Concern at any location owned, leased or operated
by the Company or any of its subsidiaries, now or in the past (collectively,
"Environmental Claims"), pending or, to the best of the Company's knowledge,
threatened against the Company or any of its subsidiaries or any person or
entity whose liability for any Environmental Claim the Company or any of its
subsidiaries has retained or assumed either contractually or by operation of
law; and (iii) to the best of the Company's knowledge, there are no past or
present actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge, presence or
disposal of any Material of Environmental Concern, that reasonably could result
in a violation of any
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<PAGE>
Environmental Law or form the basis of a potential Environmental Claim against
the Company or any of its subsidiaries or against any person or entity whose
liability for any Environmental Claim the Company or any of its subsidiaries
has retained or assumed either contractually or by operation of law.
(z) ERISA Compliance. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained
by the Company, its subsidiaries or their "ERISA Affiliates" (as defined
below) are in compliance in all material respects with ERISA. "ERISA
Affiliate" means, with respect to the Company or a subsidiary, any member of
any group of organizations described in Sections 414(b),(c),(m) or (o) of the
Internal Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company or such
subsidiary is a member. No "reportable event" (as defined under ERISA) has
occurred or is reasonably expected to occur with respect to any "employee
benefit plan" established or maintained by the Company, its subsidiaries or
any of their ERISA Affiliates. No "employee benefit plan" established or
maintained by the Company, its subsidiaries or any of their ERISA Affiliates,
if such "employee benefit plan" were terminated, would have any "amount of
unfunded benefit liabilities" (as defined under ERISA). Neither the Company,
its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably
expects to incur any liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "employee benefit plan" or (ii)
Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their
ERISA Affiliates that is intended to be qualified under Section 401(a) of the
Code is so qualified and nothing has occurred, whether by action or failure to
act, which would cause the loss of such qualification.
Any certificate signed by an officer of the Company and
delivered to the Underwriters or to counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters set forth therein.
B. Representations and Warranties of the Selling Stockholders. In
addition to the representations, warranties and covenants set forth in Section
1(A), each Selling Stockholder represents, warrants and covenants to each
Underwriter as follows:
(a) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling Stockholder
and is a valid and binding agreement of such Selling Stockholder, enforceable
in accordance with its terms, except as rights to indemnification hereunder
may be limited by applicable law and except as the enforcement hereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
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(b) The Custody Agreement and Power of Attorney. Each of the (i)
Custody Agreement signed by such Selling Stockholder and Buchanan
Ingersoll, as custodian (the "Custodian"), relating to the deposit of the
Common Shares to be sold by such Selling Stockholder (the "Custody
Agreement") and (ii) Power of Attorney appointing certain individuals named
therein as such Selling Stockholder's attorneys-in-fact (each, an
"Attorney-in-Fact") to the extent set forth therein relating to the
transactions contemplated hereby and by the Prospectus (the "Power of
Attorney"), of such Selling Stockholder has been duly authorized, executed
and delivered by such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its
terms, except as rights to indemnification thereunder may be limited by
applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(c) Title to Common Shares to be Sold; All Authorizations Obtained.
Such Selling Stockholder has, and on the First Closing Date and the Second
Closing Date (as defined below) will have, good and valid title to all of
the Common Shares which may be sold by such Selling Stockholder pursuant to
this Agreement on such date and the legal right and power, and all
authorizations and approvals required by law and under its trust agreement
or other organizational documents to enter into this Agreement and its
Custody Agreement and Power of Attorney, to sell, transfer and deliver all
of the Common Shares which may be sold by such Selling Stockholder pursuant
to this Agreement and to comply with its other obligations hereunder and
thereunder.
(d) Delivery of the Common Shares to be Sold. Delivery of the Common
Shares which are sold by such Selling Stockholder pursuant to this
Agreement will pass good and valid title to such Common Shares, free and
clear of any security interest, mortgage, pledge, lien, encumbrance or
other claim.
(e) Non-Contravention; No Further Authorizations or Approvals Required.
The execution and delivery by such Selling Stockholder of, and the
performance by such Selling Stockholder of its obligations under, this
Agreement, the Custody Agreement and the Power of Attorney will not
contravene or conflict with, result in a breach of, or constitute a Default
under, or require the consent of any other party to, the trust agreement or
other organizational documents of such Selling Stockholder or any other
agreement or instrument to which such Selling Stockholder is a party or by
which it is bound or under which it is entitled to any right or benefit,
any provision of applicable law or any judgment, order, decree or
regulation applicable to such Selling Stockholder of any court, regulatory
body, administrative agency, governmental body or arbitrator having
jurisdiction over such Selling Stockholder. No consent, approval,
authorization or other order of, or registration or
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filing with, any court or other governmental authority or agency, is
required for the consummation by such Selling Stockholder of the
transactions contemplated in this Agreement, except such as have been
obtained or made and are in full force and effect under the Securities Act,
applicable state securities or blue sky laws and from the NASD.
(f) No Registration or Other Similar Rights. Such Selling Stockholder
does not have any registration or other similar rights to have any equity
or debt securities registered for sale by the Company under the
Registration Statement or included in the offering contemplated by this
Agreement, except for such rights as are described in the Prospectus under
"Shares Eligible for Future Sale".
(g) No Further Consents, etc. No consent, approval or waiver is
required under any instrument or agreement to which such Selling
Stockholder is a party or by which it is bound or under which it is
entitled to any right or benefit, in connection with the offering, sale or
purchase by the Underwriters of any of the Common Shares which may be sold
by such Selling Stockholder under this Agreement or the consummation by
such Selling Stockholder of any of the other transactions contemplated
hereby.
(h) Disclosure Made by Such Selling Stockholder in the Prospectus. All
information furnished by or on behalf of such Selling Stockholder in
writing expressly for use in the Registration Statement and Prospectus is,
and on the First Closing Date and the Second Closing Date will be, true,
correct, and complete in all material respects, and does not, and on the
First Closing Date and the Second Closing Date will not, contain any untrue
statement of a material fact or omit to state any material fact necessary
to make such information not misleading. Such Selling Stockholder confirms
as accurate the number of shares of Common Stock set forth opposite such
Selling Stockholder's name in the Prospectus under the caption "Principal
and Selling Stockholders" (both prior to and after giving effect to the
sale of the Common Shares).
(i) No Price Stabilization or Manipulation. Such Selling Stockholder
has not taken and will not take, directly or indirectly, any action
designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(j) Confirmation of Company Representations and Warranties. Such
Selling Stockholder has no reason to believe that the representations and
warranties of the Company contained in Section 1(A) hereof are not true and
correct, is familiar with the Registration Statement and the Prospectus and
has no knowledge of any material fact, condition or information not
disclosed in the Registration Statement or the Prospectus which has had or
may have a Material Adverse Effect and is not
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<PAGE>
prompted to sell shares of Common Stock by any information concerning the
Company which is not set forth in the Registration Statement and the
Prospectus.
Any certificate signed by or on behalf of any Selling Stockholder and
delivered to the Underwriters or to counsel for the Underwriters shall be deemed
to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
Section 2. Purchase, Sale and Delivery of the Common Shares.
The Firm Common Shares. Upon the terms herein set forth, (i)
the Company agrees to issue and sell to the several Underwriters an aggregate of
1,150,000 Firm Common Shares and (ii) the Selling Stockholders agree to sell to
the several Underwriters an aggregate of 850,000 Firm Common Shares, each
Selling Stockholder selling the number of Firm Common Shares set forth opposite
such Selling Stockholder's name on Schedule B. On the basis of the
----------
representations, warranties and agreements herein contained, and upon the terms
but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company and the Selling
Stockholders the respective number of Firm Common Shares set forth opposite
their names on Schedule A. The purchase price per Firm Common Share to be paid
----------
by the several Underwriters to the Company and the Selling Stockholders shall be
$[___] per share.
The First Closing Date. Delivery of certificates for the Firm
Common Shares to be purchased by the Underwriters and payment therefor shall be
made at the offices of Montgomery Securities, 600 Montgomery Street, San
Francisco, California (or such other place as may be agreed to by the Company
and the Representative) at 6:00 a.m. San Francisco time, on _____ __, 1997, or
such other time and date not later than 10:30 a.m. San Francisco time, on _____
__, 1997 as the Representative shall designate by notice to the Company (the
time and date of such closing are called the "First Closing Date"). The Company
and the Selling Stockholders hereby acknowledge that circumstances under which
the Underwriters may provide notice to postpone the First Closing Date as
originally scheduled include, but are in no way limited to, any determination by
the Company, the Selling Stockholders or the Underwriters to recirculate to the
public copies of an amended or supplemented Prospectus or a delay as
contemplated by the provisions of Section 10.
The Optional Common Shares; the Second Closing Date. In
addition, on the basis of the representations, warranties and agreements herein
contained, and upon the terms but subject to the conditions herein set forth,
the Company and the Selling Stockholders hereby grant an option to the several
Underwriters to purchase, severally and not jointly, up to an aggregate of
300,000 Optional Common Shares from the Company and the Selling Stockholders at
the purchase price per share to be paid by the Underwriters for the Firm Common
Shares. The option granted hereunder is for use by
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the Underwriters solely in covering any over-allotments in connection with the
sale and distribution of the Firm Common Shares. The option granted hereunder
may be exercised at any time (but not more than once) upon notice by the
Underwriters to the Company and the Selling Stockholders, which notice may be
given at any time within 30 days from the date of this Agreement. Such notice
shall set forth (i) the aggregate number of Optional Common Shares as to which
the Underwriters are exercising the option, (ii) the names and denominations in
which the certificates for the Optional Common Shares are to be registered and
(iii) the time, date and place at which such certificates will be delivered
(which time and date may be simultaneous with, but not earlier than, the First
Closing Date; and in such case the term "First Closing Date" shall refer to the
time and date of delivery of certificates for the Firm Common Shares and the
Optional Common Shares). Such time and date of delivery, if subsequent to the
First Closing Date, is called the "Second Closing Date" and shall be determined
by the Underwriters and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, (a) each Underwriter agrees, severally and not
jointly, to purchase the number of Optional Common Shares (subject to such
adjustments to eliminate fractional shares as the Underwriters may determine)
that bears the same proportion to the total number of Optional Common Shares to
be purchased as the number of Firm Common Shares set forth on Schedule A
----------
opposite the name of such Underwriter bears to the total number of Firm Common
Shares and (b) the Company and each Selling Stockholder agree, severally and not
jointly, to sell the number of Optional Common Shares (subject to such
adjustments to eliminate fractional shares as the Representative may determine)
that bears the same proportion to the total number of Optional Common Shares to
be sold as the number of Optional Common Shares set forth in Schedule B opposite
----------
the name of such Selling Stockholder (or, in the case of the Company, as the
number of Optional Common Shares to be sold by the Company as set forth in the
paragraph "Introductory" of this Agreement) bears to the total number of
Optional Common Shares. The Underwriters may cancel the option at any time prior
to its expiration by giving written notice of such cancellation to the Company
and the Selling Stockholders.
Public Offering of the Common Shares. The Underwriters hereby
advise the Company and the Selling Stockholders that the Underwriters intend to
offer for sale to the public, as described in the Prospectus, their respective
portions of the Common Shares as soon after this Agreement has been executed and
the Registration Statement has been declared effective as the Underwriters, in
their sole judgment, have determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares
to be sold by the Company shall be made at the First Closing Date (and, if
applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of the Company. Payment for the Common Shares to be
sold by the Selling Stockholders shall be made at the First Closing Date (and,
if applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of each of the Selling Stockholders.
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<PAGE>
It is understood that the Underwriters have been authorized,
for their own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. Montgomery Securities, individually and not as the Representative
of the Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose funds shall not have been
received by the First Closing Date or the Second Closing Date, as the case may
be, for the account of such Underwriter, but any such payment shall not relieve
such Underwriter from any of its obligations under this Agreement.
Each Selling Stockholder hereby agrees that (i) it will pay
all stock transfer taxes, stamp duties and other similar taxes, if any, payable
upon the sale or delivery of the Common Shares to be sold by such Selling
Stockholder to the several Underwriters, or otherwise in connection with the
performance of such Selling Stockholder's obligations hereunder and (ii) the
Custodian is authorized to deduct for such payment any such amounts from the
proceeds to such Selling Stockholder hereunder and to hold such amounts for the
account of such Selling Stockholder with the Custodian under the Custody
Agreement.
Delivery of the Common Shares. The Company and the Selling
Stockholders shall deliver, or cause to be delivered, to the Underwriters
certificates for the Firm Common Shares to be sold by them at the First Closing
Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company and
the Selling Stockholders shall also deliver, or cause to be delivered, to the
Underwriters, certificates for the Optional Common Shares the Underwriters have
agreed to purchase from them at the First Closing Date or the Second Closing
Date, as the case may be, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor. The
certificates for the Common Shares shall be in definitive form and registered in
such names and denominations as the Underwriters shall have requested at least
two full business days prior to the First Closing Date (or the Second Closing
Date, as the case may be) and shall be made available for inspection on the
business day preceding the First Closing Date (or the Second Closing Date, as
the case may be) at a location in New York City as the Underwriters may
designate. Time shall be of the essence, and delivery at the time and place
specified in this Agreement is a further condition to the obligations of the
Underwriters.
Delivery of Prospectus to the Underwriters. Not later than
12:00 p.m. on the second business day following the date the Common Shares of
released by the Underwriters for sale to the public, the Company shall delivery
or cause to be delivered copies of the Prospectus in such quantities and at such
places as the Underwriters shall request.
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<PAGE>
Section 3. Additional Covenants.
A. Covenants of the Company. The Company further covenants
and agrees with each Underwriter as follows:
(a) Underwriters' Review of Proposed Amendments and Supplements. During
such period beginning on the date hereof and ending on the later of the
First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered
in connection with sales by an Underwriter or dealer (the "Prospectus
Delivery Period"), prior to amending or supplementing the Registration
Statement (including any registration statement filed under Rule 462(b)
under the Securities Act) or the Prospectus (including any amendment or
supplement through incorporation by reference of any report filed under the
Exchange Act, the Company shall furnish to the Underwriters for review a
copy of each such proposed amendment or supplement, and the Company shall
not file any such proposed amendment or supplement to which the
Underwriters reasonably object.
(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Underwriters in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing
of any post-effective amendment to the Registration Statement or any
amendment or supplement to any preliminary prospectus or the Prospectus,
(iii) of the time and date that any post-effective amendment to the
Registration Statement becomes effective and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of any
order preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any proceedings to remove, suspend or terminate from
listing or quotation the Common Stock from any securities exchange upon
which it is listed for trading or included or designated for quotation, or
of the threatening or initiation of any proceedings for any of such
purposes. If the Commission shall enter any such stop order at any time,
the Company will use its best efforts to obtain the lifting of such order
at the earliest possible moment. Additionally, the Company agrees that it
shall comply with the provisions of Rules 424(b), 430A and 434, as
applicable, under the Securities Act and will use its reasonable efforts to
confirm that any filings made by the Company under such Rule 424(b) were
received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. If, during the Prospectus Delivery Period, any event shall
occur or condition exist as a result of which it is necessary to amend or
supplement
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<PAGE>
the Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if in the opinion of the Underwriters or counsel for the
Underwriters it is otherwise necessary to amend or supplement the
Prospectus to comply with law, the Company agrees to promptly prepare
(subject to Section 3(A)(a) hereof), file with the Commission and furnish
at its own expense to the Underwriters and to dealers, amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Underwriters, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Underwriters may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Underwriters and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
the Blue Sky or state securities laws of those jurisdictions designated by
the Underwriters, shall comply with such laws and shall continue such
qualifications, registrations and exemptions in effect so long as required
for the distribution of the Common Shares. The Company shall not be
required to qualify as a foreign corporation or to take any action that
would subject it to general service of process in any such jurisdiction
where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise the Underwriters
promptly of the suspension of the qualification or registration of (or any
such exemption relating to) the Common Shares for offering, sale or trading
in any jurisdiction or any initiation or threat of any proceeding for any
such purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company shall use its best
efforts to obtain the withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Underwriters an
earnings statement (which need not be audited) covering the twelve-month
period ending June 30, 1998 that satisfies the provisions of Section 11(a)
of the Securities Act.
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<PAGE>
(j) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and
the Nasdaq National Market all reports and documents required to be filed
under the Exchange Act.
(k) Agreement Not To Offer or Sell Additional Securities During the
period of 180 days following the date of the Prospectus, the Company will
not, without the prior written consent of Montgomery Securities (which
consent may be withheld at the sole discretion of Montgomery Securities),
directly or indirectly, sell, offer, contract or grant any option to sell,
pledge, transfer or establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or
transfer, or announce the offering of, or file any registration statement
under the Securities Act in respect of, any shares of Common Stock, options
or warrants to acquire shares of the Common Stock or securities
exchangeable or exercisable for or convertible into shares of Common Stock
(other than as contemplated by this Agreement with respect to the Common
Shares); provided, however, that the Company may issue shares of its Common
Stock or options to purchase its Common Stock, or Common Stock upon
exercise of options, pursuant to any stock option, stock bonus or other
stock plan or arrangement described in the Prospectus, but only if the
holders of such shares, options, or shares issued upon exercise of such
options, agree in writing not to sell, offer, dispose of or otherwise
transfer any such shares or options during the longer of (i) 90 days
following the date of the Prospectus or (ii) the lockup period pursuant to
its lockup agreement entered into with the Underwriters, without the prior
written consent of Montgomery Securities (which consent may be withheld at
the sole discretion of the Montgomery Securities).
(m) Future Reports to the Underwriters. During the period of five years
hereafter the Company will furnish to the Underwriters at 600 Montgomery
Street, San Francisco, CA 94111 Attention: David DeRuff: (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report
of the Company containing the balance sheet of the Company as of the close
of such fiscal year and statements of income, stockholders' equity and cash
flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report
on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of
any report or communication of the Company mailed generally to holders of
its capital stock.
B. Covenants of the Selling Stockholders. Each Selling Stockholder
further covenants and agrees with each Underwriter:
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<PAGE>
(a) Agreement Not to Offer or Sell Additional Securities. Such
Selling Stockholder will not, without the prior written consent of Montgomery
Securities (which consent may be withheld in its sole discretion), directly or
indirectly, sell, offer, contract or grant any option to sell (including without
limitation any short sale), pledge, transfer, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Exchange Act, or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock, or securities exchangeable or exercisable for or
convertible into shares of Common Stock currently or hereafter owned either of
record or beneficially (as defined in Rule 13d-3 under the Exchange Act) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date one (1) year after the date of the Prospectus in
the case of Stan Gang and through the close of trading on the date 90 days after
the date of the Prospectus in the case of The Gang Annuity Trust.
(b) Delivery of Forms W-8 and W-9. To deliver to the
Underwriters prior to the First Closing Date a properly completed and executed
United States Treasury Department Form W-8 (if the Selling Stockholder is a non-
United States person) or Form W-9 (if the Selling Stockholder is a United States
Person).
Montgomery Securities, on behalf of the several Underwriters,
may, in its sole discretion, waive in writing the performance by the Company or
any Selling Stockholder of any one or more of the foregoing covenants.
Section 4. Payment of Expenses. The Company and the Selling
Stockholders, jointly and severally, agree to pay in such proportions as they
may agree upon among themselves all costs, fees and expenses incurred in
connection with the performance of their obligations hereunder and in connection
with the transactions contemplated hereby, including without limitation (i) all
expenses incident to the issuance and delivery of the Common Shares (including
all printing and engraving costs), (ii) all fees and expenses of the registrar
and transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Common Shares
to the Underwriters, (iv) all fees and expenses of the Company's counsel,
independent public or certified public accountants and other advisors, (v) all
costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement (including
financial statements, exhibits, schedules, consents and certificates of
experts), each preliminary prospectus and the Prospectus, and all amendments and
supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees
and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the Blue Sky laws, and, if requested by the Underwriters, preparing and printing
a "Blue Sky Survey" or memorandum, and any supplements thereto, advising the
Underwriters of such qualifications, registrations and exemptions, (vii) the
filing fees incident to, and the
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reasonable fees and expenses of counsel for the Underwriters in connection with,
the NASD's review and approval of the Underwriters' participation in the
offering and distribution of the Common Shares, (viii) the fees and expenses
associated with including the Common Shares on the Nasdaq National Market, and
(ix) all other fees, costs and expenses referred to in Item 14 of Part II of the
Registration Statement. Except as provided in this Section 4, Section 6, Section
8 and Section 9 hereof, the Underwriters shall pay their own expenses, including
the fees and disbursements of their counsel.
The Selling Stockholders further agree with each Underwriter
to pay (directly or by reimbursement) all fees and expenses incident to the
performance of their obligations under this Agreement which are not otherwise
specifically provided for herein, including but not limited to (i) fees and
expenses of counsel and other advisors for such Selling Stockholders (ii) fees
and expenses of the Custodian and (iii) expenses and taxes incident to the sale
and delivery of the Common Shares to be sold by such Selling Stockholders to the
Underwriters hereunder (which taxes, if any, may be deducted by the Custodian
under the provisions of Section 2 of this Agreement).
This Section 4 shall not affect or modify any separate, valid
agreement relating to the allocation of payment of expenses between the Company,
on the one hand, and the Selling Stockholders, on the other hand.
Section 5. Conditions of the Obligations of the Underwriters.
The obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the Selling Stockholders set forth in Sections 1(A) and 1(B) hereof as of the
date hereof and as of the First Closing Date as though then made and, with
respect to the Optional Common Shares, as of the Second Closing Date as though
then made, to the timely performance by the Company and the Selling Stockholders
of their respective covenants and other obligations hereunder, and to each of
the following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Underwriters shall have received from Price Waterhouse LLP, independent
public or certified public accountants for the Company, a letter dated the
date hereof addressed to the Underwriters, in form and substance
satisfactory to the Underwriters, containing statements and information of
the type ordinarily included in accountant's "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards No. 72
(or any successor bulletin), with respect to the audited and unaudited
financial statements and certain financial information contained in the
Registration Statement and the Prospectus (and the Underwriters shall have
received an additional three conformed copies of such accountants' letter
for each of the several Underwriters).
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<PAGE>
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the Optional
Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by Rule
424(b) under the Securities Act; or the Company shall have filed a post-
effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective amendment
shall have become effective; or, if the Company elected to rely upon Rule
434 under the Securities Act and obtained the Underwriters' consent
thereto, the Company shall have filed a Term Sheet with the Commission in
the manner and within the time period required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in effect
and no proceedings for such purpose shall have been instituted or
threatened by the Commission; and
(iii) the NASD shall have raised no objection to the
fairness and reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For the period
from and after the date of this Agreement and prior to the First Closing
Date and, with respect to the Optional Common Shares, the Second Closing
Date:
(i) in the judgment of the Underwriters there shall not have
occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction of
the possible change, in the rating accorded any securities of the Company
or any of its subsidiaries by any "nationally recognized statistical rating
organization" as such term is defined for purposes of Rule 436(g)(2) under
the Securities Act.
(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date the Underwriters shall have received the
favorable opinion of Buchanan Ingersoll, counsel for the Company, dated as of
such Closing Date, the form of which is attached as Exhibit A (and the
---------
Underwriters shall
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<PAGE>
have received an additional three conformed copies of such counsel's legal
opinion for each of the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First Closing
Date and the Second Closing Date the Underwriters shall have received the
favorable opinion of Piper & Marbury L.L.P., counsel for the Underwriters, dated
as of such Closing Date, with respect to the matters set forth in paragraphs
(i), (v), (vi), (vii), (ix), (x), and the next-to-last paragraph of Exhibit A
---------
(and the Underwriters shall have received an additional three conformed copies
of such counsel's legal opinion for each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and the Second
Closing Date the Underwriters shall have received a written certificate executed
by the Chairman of the Board, Chief Executive Officer or President of the
Company and the Chief Financial Officer or Chief Accounting Officer of the
Company, dated as of such Closing Date, to the effect set forth in subsections
(b)(ii) and (c)(ii) of this Section 5, and further to the effect that:
(i) for the period from and after the date of this Agreement
and prior to such Closing Date, there has not occurred any Material Adverse
Change;
(ii) the representations, warranties and covenants of the
Company set forth in Section 1(A) of this Agreement are true and correct with
the same force and effect as though expressly made on and as of such Closing
Date; and
(iii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and the
Second Closing Date the Underwriters shall have received from Price Waterhouse
LLP, independent public or certified public accountants for the Company, a
letter dated such date, in form and substance satisfactory to the Underwriters,
to the effect that they reaffirm the statements made in the letter furnished by
them pursuant to subsection (a) of this Section 5, except that the specified
date referred to therein for the carrying out of procedures shall be no more
than three business days prior to the First Closing Date or Second Closing Date,
as the case may be (and the Underwriters shall have received an additional three
conformed copies of such accountants' letter for each of the several
Underwriters).
(h) Opinion of Counsel for the Selling Stockholders. On each of the First
Closing Date and the Second Closing Date the Underwriters shall have received
the favorable opinion of Buchanan Ingersoll, counsel for the Selling
Stockholders,
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<PAGE>
dated as of such Closing Date, the form of which is attached as Exhibit B (and
---------
the Underwriters shall have received an additional three conformed copies of
such counsel's legal opinion for each of the several Underwriters).
(i) Selling Stockholders' Certificate. On each of the First Closing Date
and the Second Closing Date the Underwriters shall have received a written
certificate executed by each Selling Stockholder, dated as of such Closing Date,
to the effect that:
(i) the representations, warranties and covenants of such
Selling Stockholder set forth in Section 1(B) of this Agreement are true and
correct with the same force and effect as though expressly made by such
Selling Stockholder on and as of such Closing Date; and
(ii) such Selling Stockholder has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date.
(j) Selling Stockholders' Documents. On the date hereof, the Company and
the Selling Stockholders shall have furnished for review by the Underwriters
copies of the Powers of Attorney and Custody Agreements executed by each of the
Selling Stockholders and such further information, certificates and documents as
the Underwriters may reasonably request.
(k) Lock-Up Agreement from Certain Shareholders of the Company Other Than
Selling Stockholders. On the date hereof, the Company shall have furnished to
the Underwriters an agreement in the form of Exhibit C hereto from each director
---------
and each officer of the Company, and such agreement shall be in full force and
effect on each of the First Closing Date and the Second Closing Date.
(l) Additional Documents. On or before each of the First Closing Date and
the Second Closing Date, the Underwriters and counsel for the Underwriters shall
have received such information, documents and opinions as they may reasonably
require for the purposes of enabling them to pass upon the issuance and sale of
the Common Shares as contemplated herein, or in order to evidence the accuracy
of any of the representations and warranties, or the satisfaction of any of the
conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Underwriters by notice to the Company and the Selling Stockholders at any time
on or prior to the First Closing Date and, with respect to the Optional Common
Shares, at any time prior to the Second Closing Date, which termination shall be
without liability on the part of any party to any
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<PAGE>
other party, except that Section 4, Section 6, Section 8 and Section 9 shall at
all times be effective and shall survive such termination.
Section 6. Reimbursement of Underwriters' Expenses. If this
Agreement is terminated by the Underwriters pursuant to Section 5, Section 7,
Section 10 or Section 11 or Section 17, or if the sale to the Underwriters of
the Common Shares on the First Closing Date is not consummated because of any
refusal, inability or failure on the part of the Company or the Selling
Stockholders to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse the Underwriters (or such Underwriters
as have terminated this Agreement with respect to themselves), severally, upon
demand for all out-of-pocket expenses that shall have been reasonably incurred
by the Underwriters in connection with the proposed purchase and the offering
and sale of the Common Shares, including but not limited to fees and
disbursements of counsel, printing expenses, travel expenses, postage, facsimile
and telephone charges.
Section 7. Effectiveness of this Agreement.
This Agreement shall not become effective until the later of
(i) the execution of this Agreement by the parties hereto and (ii) notification
by the Commission to the Company and the Underwriters of the effectiveness of
the Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated
by any party by notice to each of the other parties hereto, and any such
termination shall be without liability on the part of (a) the Company or the
Selling Stockholders to any Underwriter, except that the Company and the Selling
Stockholders shall be obligated to reimburse the expenses of the Underwriters
pursuant to Sections 4 and 6 hereof, (b) of any Underwriter to the Company or
the Selling Stockholders, or (c) of any party hereto to any other party except
that the provisions of Section 8 and Section 9 shall at all times be effective
and shall survive such termination.
Section 8. Indemnification.
(a) Indemnification of the Underwriters. Each of the Company and
each of the Selling Stockholders, jointly and severally, agrees to
indemnify and hold harmless each Underwriter, its officers and employees,
and each person, if any, who controls any Underwriter within the meaning
of the Securities Act and the Exchange Act against any loss, claim,
damage, liability or expense, as incurred, to which such Underwriter or
such controlling person may become subject, under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if
such settlement is effected with the written consent of the Company),
insofar as such loss, claim, damage, liability or expense (or actions in
respect thereof as contemplated below) arises out of or is based (i) upon
any untrue statement or alleged untrue statement of a
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<PAGE>
material fact contained in the Registration Statement, or any amendment
thereto, including any information deemed to be a part thereof pursuant to
Rule 430A or Rule 434 under the Securities Act, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (ii) upon any
untrue statement or alleged untrue statement of a material fact contained
in any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; or
(iii) in whole or in part upon any inaccuracy in the representations and
warranties of the Company or the Selling Stockholders contained herein; or
(iv) in whole or in part upon any failure of the Company or the Selling
Stockholders to perform their respective obligations hereunder or under
law; or (v) any act or failure to act or any alleged act or failure to act
by any Underwriter in connection with, or relating in any manner to, the
Common Stock or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, damage, liability or action
arising out of or based upon any matter covered by clause (i) or (ii)
above, provided that the Company shall not be liable under this clause (v)
to the extent that a court of competent jurisdiction shall have determined
by a final judgment that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence or
willful misconduct; and to reimburse each Underwriter and each such
controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by Montgomery Securities) as such expenses
are reasonably incurred by such Underwriter or such controlling person in
connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided,
however, that the foregoing indemnity agreement shall not apply to any
loss, claim, damage, liability or expense to the extent, but only to the
extent, arising out of or based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and
in conformity with written information furnished to the Company and the
Selling Stockholders by the Underwriters expressly for use in the
Registration Statement, any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto); and provided, further, that with
respect to any preliminary prospectus, the foregoing indemnity agreement
shall not inure to the benefit of any Underwriter from whom the person
asserting any loss, claim, damage, liability or expense purchased Common
Shares, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to Section 2
and a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was
not sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or expense.
Notwithstanding any provision herein to the contrary, the liability of The
Gang
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<PAGE>
Annuity Trust under this Agreement shall not exceed the net proceeds (before
deducting offering expenses) received by such shareholder from the sale of
Common Shares in this offering. The indemnity agreement set forth in this
Section 8(a) shall be in addition to any liabilities that the Company and the
Selling Stockholders may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement, the Selling Stockholders and each person, if any, who
controls the Company or any Selling Stockholder within the meaning of the
Securities Act or the Exchange Act, against any loss, claim, damage, liability
or expense, as incurred, to which the Company, or any such director, officer,
Selling Stockholder or controlling person may become subject, under the
Securities Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based upon
any untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or arises out of or is based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written information
furnished to the Company and the Selling Stockholders by the Underwriters
expressly for use therein; and to reimburse the Company, or any such director,
officer, Selling Stockholder or controlling person for any legal and other
expense reasonably incurred by the Company, or any such director, officer,
Selling Stockholder or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. Each of the Company and each of the Selling
Stockholders, hereby acknowledges that the only information that the
Underwriters have furnished to the Company and the Selling Stockholders
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) are the statements set
forth (A) as the last two paragraphs on the inside front cover page of the
Prospectus concerning stabilization and passive market making by the
Underwriters and (B) in the table in the first paragraph and as the second and
seventh paragraphs under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct. The indemnity agreement
set forth in this Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
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<PAGE>
(c) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (Montgomery Securities in the case of Section 8(b) and
Section 9), representing the indemnified parties who are parties to such action)
or (ii) the indemnifying party shall not have employed counsel satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall not
be liable for any settlement of any proceeding effected without its prior
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
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<PAGE>
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by Section 8(c) hereof, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement, compromise or consent to the entry
of judgment in any pending or threatened action, suit or proceeding in respect
of which any indemnified party is or could have been a party and indemnity was
or could have been sought hereunder by such indemnified party, unless such
settlement, compromise or consent includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
Section 9. Contribution.
If the indemnification provided for in Section 8 is for any
reason held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders, on the one hand,
and the Underwriters, on the other hand, from the offering of the Common Shares
pursuant to this Agreement or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Selling Stockholders, on the one
hand, and the Underwriters, on the other hand, in connection with the statements
or omissions or inaccuracies in the representations and warranties herein which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company and the Selling Stockholders, on the one hand, and the Underwriters,
on the other hand, in connection with the offering of the Common Shares pursuant
to this Agreement shall be deemed to be in the same respective proportions as
the total net proceeds from the offering of the Common Shares pursuant to this
Agreement (before deducting expenses) received by the Company and the Selling
Stockholders, and the total underwriting discount received by the Underwriters,
in each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price of the Common Shares
as set forth on such cover. The relative fault of the Company and the Selling
Stockholders, on the one hand, and the Underwriters, on the other hand, shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
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<PAGE>
state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company or the
Selling Stockholders, on the one hand, or the Underwriters, on the other hand,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in Section 8(c), any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to in this
Section 9.
Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the
underwriting commissions received by such Underwriter in connection with the
Common Shares underwritten by it and distributed to the public. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 9 are several, and not joint, in proportion
to their respective underwriting commitments as set forth opposite their names
in Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
Section 10. Default of One or More of the Several
Underwriters. If, on the First Closing Date or the Second Closing Date, as the
case may be, any one or more of the several Underwriters shall fail or refuse to
purchase Common Shares that it or they have agreed to purchase hereunder on such
date, and the aggregate number of Common Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase does not
exceed 10% of the aggregate number of the Common Shares to be purchased on such
date, the other Underwriters shall be obligated, severally, in the
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<PAGE>
proportions that the number of Firm Common Shares set forth opposite their
respective names on Schedule A bears to the aggregate number of Firm Common
----------
Shares set forth opposite the names of all such non-defaulting Underwriters, or
in such other proportions as may be specified by the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the non-defaulting Underwriters and the
Company for the purchase of such Common Shares are not made within 48 hours
after such default, this Agreement shall terminate without liability of any
party to any other party except that the provisions of Section 4, Section 6,
Section 8 and Section 9 shall at all times be effective and shall survive such
termination. In any such case either the Underwriters or the Company shall have
the right to postpone the First Closing Date or the Second Closing Date, as the
case may be, but in no event for longer than seven days in order that the
required changes, if any, to the Registration Statement and the Prospectus or
any other documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be
deemed to include any person substituted for a defaulting Underwriter under this
Section 10. Any action taken under this Section 10 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
Section 11. Termination of this Agreement. Prior to the First
Closing Date this Agreement may be terminated by the Underwriters by notice
given to the Company and the Selling Stockholders if at any time (i) trading or
quotation in any of the Company's securities shall have been suspended or
limited by the Commission or by the Nasdaq Stock Market, or trading in
securities generally on either the Nasdaq Stock Market or the New York Stock
Exchange shall have been suspended or limited, or minimum or maximum prices
shall have been generally established on any of such stock exchanges by the
Commission or the NASD; (ii) a general banking moratorium shall have been
declared by any of federal, New York, New Jersey or California authorities;
(iii) there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective substantial change in United States' or
international political, financial or economic conditions, as in the judgment of
the Underwriters is material and adverse and makes it impracticable to market
the Common Shares in the manner and on the terms described in the Prospectus or
to enforce contracts for the sale of securities; (iv) in the judgment of the
Underwriters there shall have occurred any Material Adverse Change; or (v) the
Company shall have sustained a loss by strike, fire, flood, earthquake, accident
or other calamity of such character as in the judgment of the Underwriters may
interfere materially with the conduct of the business and operations of the
Company regardless of
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<PAGE>
whether or not such loss shall have been insured. Any termination pursuant to
this Section 11 shall be without liability on the part of (a) the Company or the
Selling Stockholders to any Underwriter, except that the Company and the Selling
Stockholders shall be obligated to reimburse the expenses of the Underwriters
pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company or the
Selling Stockholders, or (c) of any party hereto to any other party except that
the provisions of Section 8 and Section 9 shall at all times be effective and
shall survive such termination.
Section 12. Representations and Indemnities to Survive
Delivery. The respective indemnities, agreements, representations, warranties
and other statements of the Company, of its officers, of the Selling
Stockholders and of the several Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
its or their partners, officers or directors or any controlling person, or the
Selling Stockholders, as the case may be, and will survive delivery of and
payment for the Common Shares sold hereunder and any termination of this
Agreement.
Section 13 Notices. All communications hereunder shall be in
writing and shall be mailed, hand delivered or telecopied and confirmed to the
parties hereto as follows:
If to the Underwriters:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
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<PAGE>
If to the Company:
AlphaNet Solutions, Inc.
7 Ridgedale Avenue
Cedar Knolls, New Jersey 07927
Facsimile: (201) 267-8675
Attention: Stan Gang
If to the Selling Stockholders:
Buchanan Ingersoll
College Centre
500 College Road East
Princeton, New Jersey 08540
Facsimile: (609) 520-0360
Attention: David J. Sorin, Esquire
Any party hereto may change the address for receipt of communications
by giving written notice to the others.
Section 14. Successors. This Agreement will inure to the
benefit of and be binding upon the parties hereto, including any substitute
Underwriters pursuant to Section 10 hereof, and to the benefit of the employees,
officers and directors and controlling persons referred to in Section 8 and
Section 9, and in each case their respective successors, and personal
representatives, and no other person will have any right or obligation
hereunder. The term "successors" shall not include any purchaser of the Common
Shares as such from any of the Underwriters merely by reason of such purchase.
Section 15. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
Section 16. Governing Law Provisions. THIS AGREEMENT SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE
OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
Section 17. Failure of One or More of the Selling Stockholders
to Sell and Deliver Common Shares. If one or more of the Selling Stockholders
shall fail to sell and deliver to the Underwriters the Common Shares to be sold
and delivered by such
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<PAGE>
Selling Stockholders at the First Closing Date pursuant to this Agreement, then
the Underwriters may at their option, by written notice from the Underwriters to
the Company and the Selling Stockholders, either (i) terminate this Agreement
without any liability on the part of any Underwriter or, except as provided in
Sections 4, 6, 8 and 9 hereof, the Company or the Selling Stockholders, or (ii)
purchase the shares which the Company and other Selling Stockholders have agreed
to sell and deliver in accordance with the terms hereof. If one or more of the
Selling Stockholders shall fail to sell and deliver to the Underwriters the
Common Shares to be sold and delivered by such Selling Stockholders pursuant to
this Agreement at the First Closing Date or the Second Closing Date, then the
Underwriters shall have the right, by written notice from the Underwriters to
the Company and the Selling Stockholders, to postpone the First Closing Date or
the Second Closing Date, as the case may be, but in no event for longer than
seven days in order that the required changes, if any, to the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected.
Section 18. General Provisions. This Agreement constitutes
the entire agreement of the parties to this Agreement and supersedes all prior
written or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may be
executed in two or more counterparts, each one of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement may not be amended or modified unless in writing by
all of the parties hereto, and no condition herein (express or implied) may be
waived unless waived in writing by each party whom the condition is meant to
benefit. The Table of Contents and the Section headings herein are for the
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a
sophisticated business person who was adequately represented by counsel during
negotiations regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company and the Custodian the enclosed
copies hereof, whereupon this instrument, along with all counterparts hereof,
shall become a binding agreement in accordance with its terms.
Very truly yours,
ALPHANET SOLUTIONS, INC.
By:__________________________
Stan Gang
President and Chief Executive
Officer
SELLING STOCKHOLDERS
By:__________________________
(Attorney-in-fact)
By:__________________________
(Attorney-in-fact)
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Underwriters in San Francisco, California as of the date first above
written.
MONTGOMERY SECURITIES
CRUTTENDEN ROTH INCORPORATED
PARKER/HUNTER INCORPORATED
By MONTGOMERY SECURITIES
By:___________________________
Richard A. Smith
Authorized Signatory
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<PAGE>
SCHEDULE A
Number of
Firm Common Shares
Underwriters to be Purchased
Montgomery Securities .................................... [___]
Cruttenden Roth Incorporated ............................. [___]
Parker/Hunter Incorporated ............................... [___]
Total............................................. 2,000,000
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<PAGE>
SCHEDULE B
Number of Maximum
Selling Stockholder Firm Number of
Common Optional Common
Shares Shares
to be Sold to be Sold
Stan Gang
c/o AlphaNet Solutions, Inc.
7 Ridgedale Avenue 635,000 95,250
Cedar Knolls, New Jersey 07927
The Gang Annuity Trust
185 Ridgedale Avenue
Cedar Knolls, NJ 07927
Attention: Andrew Kimmel, Esq. 215,000 32,250
------- -------
Total: 850,000 127,500
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<PAGE>
EXHIBIT A
Opinion of counsel for the Company to be delivered pursuant to Section
5(d) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
---------
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of New Jersey.
(ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Underwriting
Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in which
such qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except for such jurisdictions where the
failure to so qualify or to be in good standing would not, individually or in
the aggregate, result in a Material Adverse Change.
(iv) The authorized, issued and outstanding capital stock of the
Company (including the Common Stock) conform to the descriptions thereof set
forth in the Prospectus. All of the outstanding shares of Common Stock
(including the shares of Common Stock owned by Selling Stockholders) have been
duly authorized and validly issued, are fully paid and nonassessable and, to the
best of such counsel's knowledge, have been issued in compliance with the
registration and qualification requirements of federal and state securities
laws. The form of certificate used to evidence the Common Stock is in due and
proper form and complies with all applicable requirements of the charter and by-
laws of the Company and the Business Corporation Act of the State of New Jersey.
The description of the Company's stock option, stock bonus and other stock plans
or arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
(v) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to subscribe for
or purchase securities of the Company arising (i) by operation of the charter or
by-laws
- 1 -
<PAGE>
of the Company or the Business Corporation Act of the State of New Jersey or
(ii) to the best knowledge of such counsel, otherwise.
(vi) The Underwriting Agreement has been duly authorized, executed
and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
thereunder may be limited by applicable law and except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles.
(vii) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company pursuant to
the Underwriting Agreement against payment of the consideration set forth
therein, will be validly issued, fully paid and nonassessable.
(viii) Each of the Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the Commission
under the Securities Act. To the best knowledge of such counsel, no stop order
suspending the effectiveness of either of the Registration Statement or the Rule
462(b) Registration Statement, if any, has been issued under the Securities Act
and no proceedings for such purpose have been instituted or are pending or are
contemplated or threatened by the Commission. Any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time period required
by such Rule 424(b).
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus, and each amendment or supplement to the
Registration Statement and the Prospectus, as of their respective effective or
issue dates (other than the financial statements and supporting schedules
included therein or in exhibits to or excluded from the Registration Statement,
as to which no opinion need be rendered) comply as to form in all material
respects with the applicable requirements of the Securities Act.
(x) The Common Shares have been approved for listing on the Nasdaq
National Market.
(xi) The statements (i) in the Prospectus under the captions "Risk
Factors--Control by Existing Shareholder; Anti-takeover Considerations" and "-
Shares Eligible for Future Sale", "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Liquidity and Capital Resources",
"Business--Legal Proceedings", "Management--1995 Non-Employee Director Stock
Option Plan, -1995 Stock Plan, -401(k) Plan, -Employment Agreements, -
Compensation
- 2 -
<PAGE>
Committee Interlocks and Insider Participation", "Certain Transactions",
"Description of Capital Stock", and "Shares Eligible for Future Sale" and (ii)
in Item 14 and Item 15 of the Registration Statement, insofar as such statements
constitute matters of law, summaries of legal matters, the Company's charter or
by-law provisions, documents or legal proceedings, or legal conclusions, has
been reviewed by such counsel and fairly present and summarize, in all material
respects, the matters referred to therein.
(xii) To the best knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
(xiii) To the best knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto;
and the descriptions thereof and references thereto are correct in all material
respects.
(xiv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of the
Underwriting Agreement and consummation of the transactions contemplated thereby
and by the Prospectus, except as required under the Securities Act, applicable
state securities or blue sky laws and from the NASD.
(xv) The execution and delivery of the Underwriting Agreement by
the Company and the performance by the Company of its obligations thereunder
(other than performance by the Company of its obligations under the
indemnification section of the Underwriting Agreement, as to which no opinion
need be rendered), assuming due authorization, execution and delivery by each
other party thereto, (i) have been duly authorized by all necessary corporate
action on the part of the Company; (ii) will not result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary; (iii)
will not constitute a breach of, or Default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to, (A) the Company's Revolving
Credit Agreement and Term Loan with First Union National Bank, as lender, or (B)
to the best knowledge of such counsel, any other material Existing Instrument;
or (iv) to the best knowledge of such counsel, will not result in any violation
of any law, administrative regulation or administrative or court decree
applicable to the Company or any subsidiary.
(xvi) The Company is not, and after receipt of payment for the
Common Shares will not be, an "investment company" within the meaning of
Investment Company Act.
- 3 -
<PAGE>
(xvii) To the best knowledge of such counsel, there are no persons
with registration or other similar rights to have any equity or debt securities
registered for sale under the Registration Statement or included in the offering
contemplated by the Underwriting Agreement, except for such rights as have been
duly waived.
(xviii) To the best knowledge of such counsel, neither the Company nor
any subsidiary is in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree applicable to the
Company or any subsidiary or is in Default in the performance or observance of
any obligation, agreement, covenant or condition contained in any material
Existing Instrument, except in each such case for such violations or Defaults as
would not, individually or in the aggregate, result in a Material Adverse
Change.
(xix) The Company owns, or is licensed or otherwise has sufficient
rights to use the Intellectual Property Rights used in, or necessary for, the
conduct of its business as described in the Prospectus. To the best knowledge of
such counsel, except as described in the Prospectus, no claims have been
asserted against the Company by any person to the use of any such rights or
challenging or questioning the validity or effectiveness of any such rights. The
use, in connection with the business and operations of the Company of such
rights does not, to the best knowledge of such counsel, infringe on the rights
of any person.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), and
any supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief as to
the financial statements or schedules or
- 4-
<PAGE>
other financial or statistical data derived therefrom, included in the
Registration Statement or the Prospectus or any amendments or supplements
thereto).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
General Corporation Law of the State of Delaware, the Business Corporation Act
of the State of New Jersey or the federal law of the United States, to the
extent they deem proper and specified in such opinion, upon the opinion (which
shall be dated the First Closing Date or the Second Closing Date, as the case
may be, shall be satisfactory in form and substance to the Underwriters, shall
expressly state that the Underwriters may rely on such opinion as if it were
addressed to them and shall be furnished to the Underwriters) of other counsel
of good standing whom they believe to be reliable and who are satisfactory to
counsel for the Underwriters; provided, however, that such counsel shall further
state that they believe that they and the Underwriters are justified in relying
upon such opinion of other counsel, and (B) as to matters of fact, to the extent
they deem proper, on certificates of responsible officers of the Company and
public officials.
- 5 -
<PAGE>
EXHIBIT B
The opinion of such counsel pursuant to Section 5(h) shall be rendered
to the Underwriters at the request of the Company and shall so state therein.
References to the Prospectus in this Exhibit B include any supplements thereto
---------
at the Closing Date.
(i) The Underwriting Agreement has been duly authorized, executed
and delivered by or on behalf of, and, assuming due authorization,
execution and delivery by each other party thereto, is a valid and binding
agreement of Stockholder, enforceable in accordance with its terms, except
as rights to indemnification thereunder may be limited by applicable law
and except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles.
(ii) The execution and delivery by such Selling Stockholder of, and
the performance by such Selling Stockholder of its obligations under, the
Underwriting Agreement and its Custody Agreement and its Power of Attorney
will not contravene or conflict with, result in a breach of, or constitute
a default under, the charter or by-laws, partnership agreement, trust
agreement or other organizational documents, as the case may be, of such
Selling Stockholder, or, to the best of such counsel's knowledge, violate
or contravene any provision of applicable law or regulation, or violate,
result in a breach of or constitute a default under the terms of any other
agreement or instrument to which such Selling Stockholder is a party or by
which it is bound, or any judgment, order or decree applicable to such
Selling Stockholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Stockholder.
(iii) To the best of our knowledge, such Selling Stockholder has good
and valid title to all of the Common Shares which may be sold by such
Selling Stockholder under the Underwriting Agreement and has the legal
right and power, and all authorizations and approvals required by the trust
agreement or other organizational documents, as the case may be, to enter
into the Underwriting Agreement and its Custody Agreement and its Power of
Attorney, to sell, transfer and deliver all of the Common Shares which may
sold by such Selling Stockholder under the Underwriting Agreement and to
comply with its other obligations under the Underwriting Agreement, its
Custody Agreement and its Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of such
Selling Stockholder has been duly authorized, executed and delivered by
such Selling Stockholder and is a valid and binding agreement of such
Selling Stockholder,
- 1 -
<PAGE>
enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as
the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(v) Assuming that the Underwriters purchase the Common Shares
which are sold by such Selling Stockholder pursuant to the Underwriting
Agreement for value, in good faith and without notice of any adverse claim,
the delivery of such Common Shares pursuant to the Underwriting Agreement
will pass good and valid title to such Common Shares, free and clear of
either any security interest, mortgage, pledge, lieu encumbrance or other
claim.
(vi) To the best of such counsel's knowledge, no consent,
approval, authorization or other order of, or registration or filing with,
any court or governmental authority or agency, is required for the
consummation by such Selling Stockholder of the transactions contemplated
in the Underwriting Agreement, except as required under the Securities Act,
applicable state securities or blue sky laws, and from the NASD.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
General Corporation Law of the State of Delaware, the Business Corporation Act
of the State of New Jersey or the federal law of the United States, to the
extent they deem proper and specified in such opinion, upon the opinion (which
shall be dated the First Closing Date or the Second Closing Date, as the case
may be, shall be satisfactory in form and substance to the Underwriters, shall
expressly state that the Underwriters may rely on such opinion as if it were
addressed to them and shall be furnished to the Underwriters) of other counsel
of good standing whom they believe to be reliable and who are satisfactory to
counsel for the Underwriters; provided, however, that such counsel shall further
state that they believe that they and the Underwriters are justified in relying
upon such opinion of other counsel, and (B) as to matters of fact, to the extent
they deem proper, on certificates of the Selling Stockholders and public
officials.
- 2 -
<PAGE>
EXHIBIT C
[Date]
Montgomery Securities
Cruttenden Roth Incorporated
Parker/Hunter Incorporated
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
RE: AlphaNet Solutions, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares
of Common Stock of the Company ("Common Stock") or securities convertible into
or exchangeable or exercisable for Common Stock. The Company proposes to carry
out a public offering of Common Stock (the "Offering") for which you will act as
the representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not, without the prior written consent of Montgomery
Securities (which consent may be withheld in its sole discretion), directly or
indirectly, sell, offer, contract or grant any option to sell (including without
limitation any short sale), pledge, transfer, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act
of 1934, or otherwise dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock, or securities exchangeable or exercisable for
or convertible into shares of Common Stock currently or hereafter owned either
of record or beneficially (as defined in Rule 13d-3 under Securities Exchange
Act of 1934, as amended) by the undersigned, or publicly announce the
undersigned's intention to do any of the foregoing, for a period commencing on
the date hereof and continuing through the close of trading on the date 90 days
after the date of the Prospectus. The undersigned also agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares
- 1 -
<PAGE>
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock held by the undersigned except in compliance with the foregoing
restrictions.
With respect to the Offering only, the undersigned waives any
registration rights relating to registration under the Securities Act of any
Common Stock owned either of record or beneficially by the undersigned,
including any rights to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
- ------------------------------------
Printed Name of Holder
By:
---------------------------------
Signature
- ------------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
- 2 -
<PAGE>
[LETTERHEAD OF BUCHANAN INGERSOLL APPEARS HERE]
May 21, 1997
AlphaNet Solutions, Inc.
7 Ridgedale Avenue
Cedar Knolls, New Jersey 07927
Gentlemen:
In connection with the Registration Statement on Form S-1 (the
"Registration Statement"), filed on the date hereof by AlphaNet Solutions, Inc.,
a New Jersey corporation (the "Company"), under the Securities Act of 1933, as
amended, relating to the public offering of an aggregate of up to 2,300,000
shares of the Company's Common Stock, par value of $.01 per share, of which (a)
1,150,000 shares will be purchased by the underwriters from the Company; (b)
850,000 shares will be purchased by the underwriters from certain existing
shareholders of the Company (the "Selling Shareholders"); and (c) up to an
aggregate of 300,000 shares may be purchased by the underwriters, 172,500 of
which may be purchased from the Company and 127,500 of which may be purchased
from the Selling Stockholders, if the underwriters exercise the option granted
to them by the Company and the Selling Shareholders to cover over-allotments
(collectively, the "Shares"), we, as counsel for the Company, have examined such
corporate records, other documents, and questions of law as we have considered
necessary or appropriate for the purposes of this opinion.
Upon the basis of such examination, we advise you that in our opinion:
(i) the Shares to be issued and sold by the Company have been duly and
validly authorized and, when sold in the manner contemplated by the underwriting
agreement (the "Underwriting Agreement") filed as an exhibit to the Registration
Statement and upon receipt by the Company of payment therefor as provided in the
Underwriting Agreement, will be legally issued, fully paid and non-assessable;
and
(ii) the Shares to be sold by the Selling Shareholders are duly and
validly authorized, legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the reference to this firm under the caption "Legal Matters" in
the Prospectus contained therein.
Very truly yours,
/s/ Buchanan Ingersoll
<PAGE>
EXHIBIT 11
ALPHANET SOLUTIONS, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ------------------
1995 1996 1996 1997
----------- ----------- ------------------
<S> <C> <C> <C> <C>
Pro forma net income................ $ 2,439 $ 3,463 $ 572 $ 1,161
=========== =========== ======== =========
Weighted average number of common
shares and common shares equivalent
Common shares..................... 3,400 4,690 3,488 5,103
Shares necessary to fund S Corpo-
ration Distribution less out-
standing loan to shareholder..... 551 130 520 --
Cheap stock (treasury stock meth-
od).............................. 37 9 35 190
----------- ----------- -------- ---------
3,988 4,829 4,043 5,293
=========== =========== ======== =========
Pro forma net income per share...... $ 0.61 $ 0.72 $ 0.14 $ 0.22
=========== =========== ======== =========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 13, 1997,
relating to the consolidated financial statements of AlphaNet Solutions, Inc.,
which appears in such Prospectus. We also consent to the references to us
under the headings "'Experts" and "Selected Consolidated Financial Data" in
such Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Consolidated Financial Data."
PRICE WATERHOUSE LLP
Morristown, NJ
May 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS INCLUDED IN THE REGISTRANT'S FORM S-1 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM S-1.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<EXCHANGE-RATE> 1 1
<CASH> 1,223 1,610
<SECURITIES> 0 0
<RECEIVABLES> 13,966 30,111
<ALLOWANCES> 81 263
<INVENTORY> 946 4,809
<CURRENT-ASSETS> 16,639 38,417
<PP&E> 1,814 4,870
<DEPRECIATION> 436 1,014
<TOTAL-ASSETS> 18,770 43,647
<CURRENT-LIABILITIES> 11,606 24,010
<BONDS> 0 0
0 0
0 0
<COMMON> 34 51
<OTHER-SE> 6,540 18,870
<TOTAL-LIABILITY-AND-EQUITY> 18,770 43,647
<SALES> 62,516 99,468
<TOTAL-REVENUES> 74,016 119,605
<CGS> 54,579 88,218
<TOTAL-COSTS> 61,448<F1> 101,133<F1>
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 140 106
<INCOME-PRETAX> 4,089 5,854
<INCOME-TAX> 1,650<F2> 2,391<F2>
<INCOME-CONTINUING> 2,439<F2> 3,463<F2>
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,439<F2> 3,463<F2>
<EPS-PRIMARY> .61 .72
<EPS-DILUTED> 0 0
<FN>
<F1>REFLECTS RECLASSIFICATION OF CERTAIN INDIRECT COSTS WHICH WERE PREVIOUSLY
CLASSIFIED AS COSTS OF SERVICES TO GENERAL, AND ADMINISTRATIVE EXPENSES TO
CONFORM TO CURRENT INDUSTRY PRACTICES.
<F2>INCLUDES A PRO FORMA ADJUSTMENT TO INCLUDE INCOME TAXES WHICH WOULD HAVE BEEN
INCURRED IF THE COMPANY HAD NOT BEEN AN S CORPORATION FOR SUCH PERIOD.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE REGISTRANT'S FORM S-1 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM S-1.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 117
<SECURITIES> 0
<RECEIVABLES> 34,440
<ALLOWANCES> 303
<INVENTORY> 3,594
<CURRENT-ASSETS> 39,977
<PP&E> 5,756
<DEPRECIATION> 1,289
<TOTAL-ASSETS> 46,142
<CURRENT-LIABILITIES> 25,385
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 20,031
<TOTAL-LIABILITY-AND-EQUITY> 46,142
<SALES> 38,768
<TOTAL-REVENUES> 46,501
<CGS> 34,493
<TOTAL-COSTS> 39,521
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 1,968
<INCOME-TAX> 807
<INCOME-CONTINUING> 1,161
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,161
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0
</TABLE>
