<PAGE>
Filed pursuant to Rule 424(b)(1)
under the Securities Act
Registration No. 333-27585
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 June 12, 1997, the last
reported sale price of the Common Stock on the Nasdaq National Market was
$17.50 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 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>
Price to Underwriting Proceeds to Proceeds to
Public Discount(1) Company(2) Selling Shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............ $16.50 $0.99 $15.51 $15.51
Total(3)............. $33,000,000 $1,980,000 $17,836,500 $13,183,500
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</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 $37,950,000, the Underwriting Discount will total $2,277,000, the
Proceeds to Company will total $20,511,975 and the Proceeds to Selling
Shareholders will total $15,161,025. 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 June 18, 1997.
--------------
MONTGOMERY SECURITIES
CRUTTENDEN ROTH
INCORPORATED
PARKER/HUNTER
INCORPORATED
June 12, 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.
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.
3
<PAGE>
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>
- --------
(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."
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)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $14,592 $32,221
Total assets............................................ 46,142 58,982
Notes payable to bank................................... 4,675 --
Shareholders' equity.................................... 20,082 37,389
</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 offering price of $16.50 per share and the
anticipated application of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
4
<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
5
<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
6
<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, the agreements between the Company and such manufacturers include
termination provisions ranging from
7
<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."
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."
8
<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,
9
<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."
10
<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 expected to be approximately
$17.3 million (approximately $20.0 million if the Underwriters' over-allotment
option is exercised in full), based on an offering price of $16.50 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 June 12, 1997)............................... 20 1/2 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 June 12, 1997, the last sales price of the Common Stock as reported by
the Nasdaq National Market was $17.50 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."
11
<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 offering price of $16.50 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 33,199
Retained earnings(3) ................................... 4,127 4,127
------- -------
Total shareholders' equity............................ 20,082 37,389
------- -------
Total capitalization................................ $20,082 $37,389
======= =======
</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.
12
<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> <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.
13
<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
14
<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>
15
<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.
16
<PAGE>
Comparison of Years Ended December 31, 1996 and 1995
Net sales. Net sales increased by 61.6%, or $45.6 million, from $74.0
million in 1995 to $119.6 million in 1996. Product sales increased by 59.1%,
or $37.0 million, from $62.5 million in 1995 to $99.5 million in 1996. This
increase was attributable primarily to increased demand from the Company's
established customer base and to product sales resulting from the Company's
July 1996 acquisition of certain assets and the business of Lior. Services and
support revenue increased by 75.1%, or $8.6 million, from $11.5 million in
1995 to $20.1 million in 1996. This increase was attributable primarily to
increased demand for the Company's service and support offerings, particularly
its network consulting services, 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.
17
<PAGE>
Comparison of Years Ended December 31, 1995 and 1994
Net sales. Net sales increased by 5.0%, or $3.5 million, from $70.5 million
in 1994 to $74.0 million in 1995. Product sales in 1995 remained relatively
constant at $62.5 million as compared to $62.4 million in 1994. Product sales
to new customers and increased product sales to existing customers were offset
by a decline in product sales to the Company's largest customer, Nabisco,
which had a substantial increase in product sales in 1994. Services and
support revenue increased by 41.9%, from $8.1 million in 1994 to $11.5 million
in 1995. This increase was attributable primarily to increased demand for the
Company's service and support offerings. During such period, certain customers
which previously had purchased only products from the Company also engaged the
Company for services and support. In 1995, sales to Nabisco accounted for
approximately 20% of the Company's net sales.
Gross profit. The Company's gross profit increased by 15.3%, or $1.7
million, from $10.9 million in 1994 to $12.6 million in 1995. Gross profit
margin increased from 15.5% of net sales in 1994 to 17.0% of net sales in
1995. Gross profit margin attributable to product sales remained constant at
12.7% of product sales in both 1994 and 1995. Despite industry-wide downward
pricing pressure on product sales, the Company was able to sustain its gross
profit margin on product sales in 1995, as compared to 1994, due primarily to
an increased percentage in 1995 of project-related product sales, which sales
typically yield higher margins. Gross profit margin on product sales was
higher in the first half of 1995 than in the latter half of the year due
primarily to downward pricing pressure on product sales in the latter half of
1995 and to certain high margin product sales in the first six months of 1995.
Gross profit margin attributable to services and support revenue increased
from 36.7% of services and support revenue in 1994 to 40.3% in 1995. The
increase in such gross profit margin was attributable primarily to the fact
that services and support revenue increased at a faster rate than personnel
costs and to increases in technical personnel utilization rates.
Selling expenses. Selling expenses increased by 13.2%, or $522,000, from
$3.9 million in 1994 to $4.5 million in 1995, and increased as a percentage of
net sales from 5.6% in 1994 to 6.1% in 1995. The increase in such expenses was
due primarily to costs associated with hiring additional sales, sales support
and marketing personnel.
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.
18
<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 administra-
tive 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 administra-
tive 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>
19
<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.
20
<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
21
<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.
22
<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,
23
<PAGE>
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:
<TABLE>
<S> <C> <C> <C>
3Com DEC Intel Novell
APC Dell Kingston Okidata
Apple Epson Lexmark SMC
AST FORE Systems Lotus Tecmar
Bay Networks Hayes Lucent Technologies Tektronix
Cisco Systems Hewlett-Packard Microsoft Toshiba
Compaq IBM NEC Xircom
</TABLE>
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.
25
<PAGE>
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
26
<PAGE>
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.
27
<PAGE>
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
28
<PAGE>
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
29
<PAGE>
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
30
<PAGE>
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.
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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.
33
<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."
34
<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 $100,000
(collectively, the "Named Executives") during the years ended December 31,
1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION(2) OPTIONS COMPENSATION(3)
POSITION (1) YEAR ($) ($) ($) (#) ($)
- ------------------ ---- ------- ------ --------------- ------------ ---------------
<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 $50,000 or 10%
of the total annual salary and bonus as reported above.
(3) Represents 401(k) contributions made by the Company on behalf of the Named
Executive.
(4) Mr. Finkel joined the Company in October 1995.
(5) Excludes 800 shares subject to options granted in September 1996 to
Virginia R. Samuelson, an employee of the Company and the wife of Dennis
Samuelson.
35
<PAGE>
Stock Option Grants in 1996
The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1995 Stock Plan during 1996 to
each of the Named Executives. The Company has never granted any stock
appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
NUMBER OF PRICE
SECURITIES PERCENT OF APPRECIATION
UNDERLYING TOTAL EXERCISE FOR OPTION
OPTIONS OPTIONS GRANTED OR BASE TERM(3)
GRANTED(2) TO EMPLOYEES IN PRICE EXPIRATION --------------
NAME(1) (#) FISCAL YEAR ($/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 $9.00 per share.
(4) Excludes 800 shares subject to options granted in September 1996 to
Virginia R. Samuelson, an employee of the Company and the wife of Dennis
Samuelson.
36
<PAGE>
Aggregated Option Exercises in 1996 and Fiscal Year-End Option Values
The following table sets forth information concerning each exercise of
options during 1996 by each of the Named Executives and the fiscal year-end
number and value of unexercised options held by each of the Named Executives.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR-END(#) YEAR-END ($)
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.
37
<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.
38
<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
39
<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.
40
<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.
41
<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.
42
<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.
43
<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."
44
<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.............................................. 1,000,000
Cruttenden Roth Incorporated....................................... 500,000
Parker/Hunter Incorporated......................................... 500,000
---------
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 $0.56 per share; and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $0.10 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
45
<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.
46
<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.
47
<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, 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
YEAR ENDED DECEMBER 31, ENDED MARCH 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
amortization.................................... 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
activities:
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............................................................. 5
Use of Proceeds.......................................................... 11
Price Range of Common Stock.............................................. 11
Dividend Policy.......................................................... 11
Capitalization........................................................... 12
Selected Consolidated Financial Data..................................... 13
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 14
Business................................................................. 23
Management............................................................... 32
Certain Transactions..................................................... 40
Principal and Selling Shareholders....................................... 41
Description of Capital Stock............................................. 42
Shares Eligible for Future Sale.......................................... 43
Underwriting............................................................. 45
Legal Matters............................................................ 46
Experts.................................................................. 46
Additional Information................................................... 47
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 SHARES
[LOGO OF ALPHA NET SOLUTIONS, INC. APPEARS HERE]
COMMON STOCK
----------------
PROSPECTUS
----------------
MONTGOMERY SECURITIES
CRUTTENDEN ROTH
INCORPORATED
PARKER/HUNTER
INCORPORATED
June 12, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
