SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File No. 0-27042
AlphaNet Solutions, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2554535
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7 Ridgedale Ave., Cedar Knolls, New Jersey 07927
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(Address of Principal Executive Offices) (Zip Code)
(973) 267-0088
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(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of September 30, 1997:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 6,256,240
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ALPHANET SOLUTIONS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION...............................................1
Item 1. Financial Statements...........................................1
Consolidated Balance Sheets
as of December 31, 1996
and September 30, 1997 (unaudited)...............................2
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 1996 and 1997 (unaudited) .........................3
Consolidated Statement of Changes in Shareholders'
Equity for the Nine Months Ended
September 30, 1997 (unaudited)...................................4
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1996 and 1997 (unaudited) .........................5
Notes to Consolidated Financial Statements (unaudited)...........6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition....................9
Results of Operations...........................................11
Liquidity and Capital Resources.................................14
PART II. OTHER INFORMATION.................................................16
Item 5. Other Information.............................................16
Item 6. Exhibits and Reports on Form 8-K..............................17
SIGNATURES..................................................................18
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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<TABLE>
ALPHANET SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
December 31, September 30,
1996 1997
------------ -------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 1,610 $ 8,350
Accounts receivable, net.......................... 29,848 42,030
Inventories....................................... 4,809 7,121
Deferred income tax asset......................... 445 850
Prepaid expenses and other current assets......... 1,705 2,819
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Total current assets............................ 38,417 61,170
Property and equipment, net.......................... 3,856 6,274
Other assets......................................... 1,374 2,433
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Total assets.................................... $ 43,647 $ 69,877
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations...... $ 103 $ 71
Accounts payable.................................. 17,923 18,911
Accrued expenses.................................. 5,984 10,379
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Total current liabilities ...................... 24,010 29,361
Advance from principal shareholder................... 675 675
Capital lease obligations............................ 41 --
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Total liabilities............................... 24,726 30,036
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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 and 6,256,240
shares issued and outstanding................... 51 63
Additional paid-in capital........................ 15,904 33,133
Retained earnings................................. 2,966 6,645
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Total shareholders' equity...................... 18,921 39,841
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Total liabilities and shareholders' equity...... $ 43,647 $ 69,877
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
ALPHANET SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
1996 1997 1996 1997
------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales:
Product sales................. $25,466 $ 34,590 $ 60,334 $ 104,967
Services and support.......... 5,113 11,902 13,786 29,836
------- ------ --------- ---------
30,579 46,492 74,120 134,803
------- ------ --------- ---------
Cost of sales:
Product sales................. 22,482 30,477 53,389 92,973
Services and support.......... 3,227 7,962 8,922 19,726
------- ------ --------- -------
25,709 38,439 62,311 112,699
------- ------ --------- -------
Gross profit..................... 4,870 8,053 11,809 22,104
------- ------ --------- -------
Operating expenses:
Selling expenses.............. 1,919 3,547 4,681 9,408
General and administrative
expenses..................... 1,367 2,242 3,780 6,475
------- ------ --------- ---------
3,286 5,789 8,461 15,883
------- ------ --------- -------
Operating income................. 1,584 2,264 3,348 6,221
------- ------ --------- -------
Other income (expense):
Interest income............... 74 143 194 164
Interest expense.............. (15) (3) (70) (149)
------- ------ --------- -------
59 140 124 15
------- ------ --------- -------
Income before income taxes....... 1,643 2,404 3,472 6,236
Provision for income taxes....... 674 986 994 2,557
------- ------ --------- -------
Net income....................... $ 969 $ 1,418 $ 2,478 $ 3,679
======= ======== ========= =========
Pro forma data (Note 2):
Income before income taxes.... $ 3,472
Provision for income taxes.... 1,415
---------
Net income.................... $ 2,057
=========
Net income per share............. $ 0.19 $ 0.22 $ 0.43 $ 0.64
======= ========= ========== ==========
Weighted average number
of common shares and
common shares equivalent...... 5,100 6,460 4,739 5,743
======= ======== ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
ALPHANET SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands)
<CAPTION>
Additional
Common Common Paid-In Retained
Shares Stock Capital Earnings Total
------ ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997........ 5,103 $ 51 $ 15,904 $ 2,966 $ 18,921
Sale of Common Stock.............. 1,150 12 17,199 -- 17,211
Exercises of stock options........ 3 -- 30 -- 30
Net income........................ -- -- -- 3,679 3,679
------- ------- -------- ------ --------
Balance at September 30, 1997..... 6,256 $ 63 $ 33,133 $ 6,645 $ 39,841
======= ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
ALPHANET SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
1996 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 2,478 $ 3,679
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 383 1,193
Deferred income taxes............................... -- (405)
Increase (decrease) from changes in:
Accounts receivable, net.......................... (8,634) (8,620)
Inventories....................................... (2,333) (2,145)
Prepaid expenses and other current assets......... (802) (873)
Other assets...................................... 391 36
Accounts payable and accrued expenses............. 6,441 512
----------- ---------
Net cash used in operating activities............... (2,076) (6,623)
----------- ----------
Cash flows from investing activities:
Property and equipment expenditures................... (1,412) (3,194)
Receipt of loan repayments - shareholder.............. 413 --
Acquisition of businesses (net of cash acquired)...... (971) (611)
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Net cash used in investing activities............... (1,970) (3,805)
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Cash flows from financing activities:
Net proceeds from sales of common stock............... 15,739 17,211
Exercises of stock options............................ -- 30
Repayment of long-term debt........................... (736) --
Repayment of capital lease obligations................ (60) (73)
Payment of dividends.................................. (1,147) --
Distribution of S Corporation earnings................ (6,155) --
----------- ---------
Net cash provided by financing activities........... 7,641 17,168
----------- ---------
Net increase in cash and cash equivalents............... 3,595 6,740
Cash and cash equivalents, beginning of period.......... 1,223 1,610
----------- ---------
Cash and cash equivalents, end of period................ $ 4,818 $ 8,350
=========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
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ALPHANET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
Note 1 -- Basis of Presentation:
- --------------------------------
The information presented for September 30, 1996 and 1997, and for the
three-month and nine-month periods then ended, is unaudited, but, in the opinion
of the management of AlphaNet Solutions, Inc. (the "Company"), the accompanying
unaudited consolidated 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 September 30,
1997, the results of its operations for the three-month and nine-month periods
ended September 30, 1996 and 1997 and its cash flows for the nine-month periods
ended September 30, 1996 and 1997. The consolidated financial statements
included herein have been prepared in accordance with generally accepted
accounting principles and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1996,
which were included as part of the Company's Form 10-K, as filed with the
Securities and Exchange Commission.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
Certain indirect costs, totaling $769 and $2,204, relating to the
three-month and nine-month periods ended September 30, 1996, respectively, which
previously were classified as costs of services and support, have been
reclassified to general and administrative expenses to conform with industry
practices.
Note 2 -- Income Taxes:
- -----------------------
Prior to March 19, 1996, the Company, with the consent of its
shareholders, had elected to be taxed under 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 for the
nine-month period ended September 30, 1996 include a pro forma adjustment for
income taxes which would have been recorded if the Company had not been an S
Corporation, based on the tax laws in effect during such period.
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ALPHANET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
Note 3 -- Net Income Per Share:
- -------------------------------
Net income per share (pro forma for the nine months ended September 30,
1996) is computed using the weighted average number of common shares and common
shares equivalent outstanding during the period. Common shares equivalent
consists of the Company's common shares issuable upon the exercise of stock
options. 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.
Note 4 -- Public Offering of Common Stock:
- ------------------------------------------
On June 18, 1997, the Company consummated a follow-on public offering of
2,000,000 shares of its Common Stock at a price to the public of $16.50 per
share, of which 1,150,000 shares were issued and sold by the Company and 850,000
shares were sold by certain selling shareholders. The Company received $15.51
per share, before offering expenses, resulting in net proceeds of approximately
$17,211. The Company did not receive any proceeds from the sale of shares by the
selling shareholders.
Note 5 -- New Credit Facility:
- ------------------------------
On June 30, 1997, the Company and First Union National Bank (the "Bank")
executed a Loan and Security Agreement whereby the Bank expanded 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, which matures on June 30, 1998, includes a $2,500 sublimit for letters
of credit and a $5,000 sublimit for acquisition advances. Under the new facility
the Company may borrow, subject to certain post-closing conditions and covenants
by the Company, (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 Company's obligations under such facility
are collateralized by a first priority lien on the Company's accounts receivable
and inventory, except for inventory for which the Bank has or will have
subordinated its position to certain other lenders pursuant to intercreditor
agreements.
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ALPHANET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share data)
Note 6 --Acquisition:
- ---------------------
On August 13, 1997, the Company consummated the acquisition of certain
assets and assumed certain liabilities of The Lande Group, Inc. ("Lande"), a
computer equipment reseller and provider of systems integration services located
in New York City. The Company purchased, among other assets, the entire customer
list, accounts receivable and inventory of Lande for an aggregate purchase price
of up to $1,100, of which $750 was paid at closing and $250 is held in escrow
pending certain post-closing adjustments. An additional $50 is payable to Lande
by the Company on each of the first and second anniversary of the closing date.
The Company also assumed certain liabilities, including certain trade debt of
$2,943, which was paid by the Company at closing, accounts payable and accrued
expenses of $1,828 and obligations under a lease which expires in April 2008,
for New York City office space which will serve as the Company's New York
headquarters. The value of the assets purchased was approximately the same as
the liabilities assumed. Intangible assets, which are included in other assets,
of approximately $1,193 resulted from this transaction and are being amortized
over their useful life.
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<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
General
- -------
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 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. For the first nine months of 1997, net product sales were
approximately 78% and services and support revenue was approximately 22% of the
Company's net sales.
The Company has distribution agreements with MicroAge Computer Centers,
Inc. ("MicroAge") and Ingram Micro ("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 the first nine
months of 1997, the Company acquired approximately 35% and 45% 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 generally 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
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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 nine months of 1997,
the Company's staff of service personnel increased from 242 at December 31, 1996
to 503 at September 30, 1997. 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, benefits and related expenses for
billable technical personnel. The Company, like many IT service companies, is
experiencing increased demand for qualified technical personnel which has
resulted in higher salaries for such personnel. The Company believes that such
salaries are increasing faster than related billable rates, resulting in
downward pressure on margins. The Company's selling expenses consist primarily
of personnel costs, including sales commissions earned by employees involved in
the sales of IT products, services and support. These personnel include direct
sales, sales support and marketing personnel. Sales commissions are recorded as
revenue is recognized. General and administrative expenses consist of all other
operating expenses, including primarily salaries, benefits and related expenses,
and occupancy costs for administrative, executive and finance personnel. In
addition, the Company believes that its costs for health insurance benefits for
its employees may increase substantially commencing with the fourth quarter of
1997. The Company is currently negotiating with its insurance carrier and is in
the process of reviewing its health insurance alternatives. Certain indirect
costs, totaling $769,000 and $2.2 million, relating to the three months and nine
months ended September 30, 1996, respectively, which previously were classified
as costs of services and support, have been reclassified to general and
administrative expenses to conform with current industry practices.
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 long term
will be derived from the services and support component of its business. For
example, in the third quarter of 1997, the Company's services and support
business represented 26% of net sales and 49% of gross profit. The Company's
services and support revenue as a percentage of net sales and gross profit may
vary from quarter to quarter primarily as a result of fluctuations in the volume
of product sales. 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.
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<PAGE>
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The Company's
forward-looking statements, including, but not limited to, those statements
relating to the anticipated growth in the services and support component of the
Company's business, include risks and uncertainties. Such risks and
uncertainties include, but are not limited to: (i) the substantial variability
of the Company's quarterly operating results caused by a variety of factors,
some of which are not within the Company's control, including (a) the short-term
nature of the Company's customers' commitments, (b) patterns of capital spending
by customers, (c) the timing, size and mix of product and service orders and
deliveries, (d) the timing and size of new projects, (e) pricing changes in
response to various competitive factors, (f) market factors affecting the
availability of qualified technical personnel, (g) the timing and customer
acceptance of new product and service offerings, (h) changes in trends affecting
outsourcing of IT services, (i) disruption in sources of supply, (j) changes in
product, personnel and other operating costs, and (k) industry and general
economic conditions; (ii) changes in technical personnel billing and utilization
rates which are likely to be adversely affected during periods of rapid and
concentrated hiring; (iii) the intense competition in the markets for the
Company's products and services; (iv) the Company's ability to manage its growth
effectively which will require the Company to continue developing and improving
its operational, financial and other internal systems, including a major upgrade
of the Company's internal management information systems ("MIS") infrastructure;
(v) the Company's ability to develop, market, provide, and achieve market
acceptance of, new service offerings to new and existing clients; (vi) the
Company's ability to attract, hire, train and retain qualified technical
personnel in an increasingly competitive market; (vii) the Company's substantial
reliance on a concentrated number of key customers; (viii) uncertainties
relating to potential acquisitions, if any, made by the Company, such as its
ability to integrate acquired operations and to retain key customers and
personnel of the acquired business; (ix) the Company's dependence on vendor
authorizations to resell certain computer products and to provide related
services; (x) the Company's dependence on certain aggregators for a substantial
portion of its products acquired for resale; and (xi) the Company's reliance on
the continued services of key executive officers and salespersons. Such risks
and uncertainties may cause the Company's actual results to differ materially
from the results discussed in the forward-looking statements contained herein.
Results of Operations
- ---------------------
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1997
Net sales. Net sales increased by 52.0%, or $15.9 million, from $30.6
million in the third quarter of 1996 to $46.5 million in the third quarter of
1997. Product sales increased by 35.8% or $9.1 million, from $25.5 million in
the third quarter of 1996 to $34.6 million in the third quarter of 1997. The
increase was attributable primarily to very high product sales to KPMG Peat
Marwick, which was the Company's largest customer during the third quarter of
1997. Services and support revenue increased by 132.8%, or $6.8 million, from
$5.1 million in the
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<PAGE>
third quarter of 1996 to $11.9 million in the third quarter of 1997. This
increase was attributable primarily to increased demand for the Company's
service and support offerings, particularly its network consulting services, an
increase in the number and size of client projects, and the addition of several
long-term staffing contracts. In the third quarter of 1997, sales to Nabisco,
the Company's largest customer for the nine months ended September 30, 1997,
accounted for approximately 12% of the Company's net sales. KPMG Peat Marwick
accounted for approximately 21% of net sales during the third quarter of 1997.
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 current
levels.
Gross profit. The Company's gross profit increased by 65.4%, or $3.2
million, from $4.9 million in the third quarter of 1996 to $8.1 million in the
third quarter of 1997. The Company's overall gross profit margin increased due
to the improved sales mix resulting from higher services and support revenue.
Total gross margins increased from 15.9% in the third quarter of 1996 to 17.3%
in the third quarter of 1997. Gross profit margin attributable to product sales
increased from 11.7% in the third quarter of 1996 to 11.9% in the third quarter
of 1997. Gross profit margin attributable to services and support revenue
decreased from 36.9% of services and support revenue in the third quarter of
1996 to 33.1% in the third quarter of 1997. This decrease in service and support
gross margin was primarily attributed to the addition of several long-term
staffing contracts, which typically yield lower gross margins than projects.
Additionally, higher salary costs for technical personnel have not been fully
passed on to customers.
Selling expenses. Selling expenses increased by 84.8%, or $1.6 million,
from $1.9 million in the third quarter of 1996 to $3.5 million in the third
quarter of 1997, and increased from 6.3% to 7.6% of net sales, respectively. The
increases in selling expenses were 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, the costs incurred in connection with the Company's expansion
into the Philadelphia market and costs associated with the Lande operations
after August 1, 1997.
General and administrative expenses. General and administrative expenses
increased by 64.0%, or $875,000, from $1.4 million in the third quarter of 1996
to $2.2 million in the third quarter of 1997, and increased from 4.5% to 4.8% of
net sales, respectively. The increases in general and administrative expenses
were due primarily to increases in personnel expenses, training costs and
depreciation charges.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1997
Net sales. Net sales increased by 81.9%, or $60.7 million, from $74.1
million in the first nine months of 1996 to $134.8 million in the first nine
months of 1997. Product sales increased by 74.0%, or $44.6 million, from $60.3
million in the first nine months of 1996 to $105.0 million in the first nine
months of 1997. This increase was attributable primarily to
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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 116.4%, or $16.1
million, from $13.8 million in the first nine months of 1996 to $29.8 million in
the first nine months of 1997. This increase was attributable primarily to
increased demand for the Company's service and support offerings, particularly
its network consulting services, an increase in the number and size of client
projects and the addition of several long-term staffing contracts. In the first
nine months of 1997, sales to Nabisco, the Company's largest customer, accounted
for approximately 17% of the Company's net sales. In addition, KPMG Peat Marwick
accounted for approximately 14% of net sales during the first nine months of
1997. 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 87.2%, or $10.3
million, from $11.8 million in the first nine months of 1996 to $22.1 million in
the first nine months of 1997. The Company's overall gross profit margin
increased due to the improved sales mix as a result of the increase in services
and support revenue. Total gross margins increased from 15.9% in the first nine
months of 1996 to 16.4% in the first nine months of 1997. Gross profit margin
attributable to product sales remained relatively constant, decreasing slightly
from 11.5% in the first nine months of 1996 to 11.4% in the first nine months of
1997. Gross profit margin attributable to services and support revenue decreased
from 35.3% of services and support revenue in the first nine months of 1996 to
33.9% in the first nine months of 1997. This decrease in service and support
gross margins was primarily attributed to the addition of several long-term
staffing contracts, which typically yield lower gross margins than projects.
Additionally, higher salary costs for technical personnel have not been fully
passed on to customers. The Company increased its staff of technical personnel
from 242 at December 31, 1996 to 503 at September 30, 1997.
Selling expenses. Selling expenses increased by 101.0%, or $4.7 million,
from $4.7 million in the first nine months of 1996 to $9.4 million in the first
nine months of 1997, and increased from 6.3% to 7.0% of net sales, respectively.
The increases in selling expenses were 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, the costs incurred in connection with the Company's expansion
into the Philadelphia market, and costs associated with the Lande operations
after August 1, 1997.
General and administrative expenses. General and administrative expenses
increased by 71.3%, or $2.7 million, from $3.8 million in the first nine months
of 1996 to $6.5 million in the first nine months of 1997, but decreased from
5.1% to 4.8% of net sales, respectively. The increase in general and
administrative expenses in absolute dollars was due primarily to increases
- 13 -
<PAGE>
in personnel expenses, training costs, professional fees and depreciation
charges. The decrease as a percentage of net sales was due primarily to the
substantial increase in net sales.
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 to the public 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.
On June 18, 1997, the Company consummated a follow-on public offering of
2,000,000 shares of its Common Stock at a price to the public of $16.50 per
share. Of such shares, 1,150,000 were issued and sold by the Company and an
aggregate of 850,000 shares were sold by Stan Gang, the Company's founder,
Chairman, President and Chief Executive Officer, and The Gang Annuity Trust. The
Company received $15.51 per share, before offering expenses, resulting in net
proceeds of approximately $17.2 million. The Company did not receive any
proceeds from the sale of shares by such selling shareholders. The Company used
approximately $3.7 million of the net proceeds to repay all amounts then
outstanding under its credit facility with the Bank. Amounts outstanding under
such facility were utilized by the Company for short-term working capital
purposes and carried an interest rate equal to the Bank's prime rate less 0.25%
or LIBOR plus 1.50%. See below for a discussion of the Company's current
financing terms with the Bank.
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 public offerings of its Common Stock
referenced above. The Company's cash used in operations was $6.6 million for the
nine months ended September 30, 1997 and consisted primarily of an increase in
accounts receivable of $8.6 million and an increase in inventories of $2.1
million partially offset by net income of $3.7 million. As measured in days
sales outstanding, the Company's accounts receivable increased from 58 days at
December 31, 1996 to 76 days at September 30, 1997. The increase in accounts
receivable in absolute dollars and in days sales outstanding in the first nine
months of 1997 was primarily attributable to temporary delays in cash receipts
from a few large customers and increased services and support revenues which
typically yield slower cash receipts than product sales. The increase in
inventories was attributable primarily to the purchase of computer equipment
subject to firm purchase orders with expected delivery to customers in the
fourth quarter of 1997. 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.
- 14 -
<PAGE>
The Company's working capital was $31.8 million at September 30, 1997
compared to $14.4 million at December 31, 1996.
The Company invested $3.2 million in property and equipment in the first
nine months of 1997, primarily related 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
to make additional capital expenditures to continue the expansion of the
services component of its business and for the enhancement of its MIS
infrastructure.
The Company purchases certain inventory and equipment through financing
arrangements with IBM Credit Corporation and Finova Capital Corporation. At
September 30, 1997, there were outstanding balances of $5.4 million and $9.1
million, respectively, under such arrangements. Obligations under such financing
arrangements are collateralized by substantially all of the assets of the
Company. Finova Capital Corporation and the Bank have entered into an
intercreditor agreement with respect to their relative interests. The Company
terminated and paid all amounts outstanding under its financing arrangement with
Deutsche Financial Services during the second quarter of 1997.
On June 30, 1997, the Company and the Bank executed a Loan and Security
Agreement whereby the Bank expanded 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, which matures on June
30, 1998, includes a $2.5 million sublimit for letters of credit and a $5.0
million sublimit for acquisition advances. Under the new facility the Company
may borrow, subject to certain post-closing conditions and covenants by the
Company, (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 Company's obligations under such facility are
collateralized by a first priority lien on the Company's accounts receivable and
inventory, except for inventory for which the Bank has or will have subordinated
its position to certain other lenders pursuant to intercreditor agreements. As
of September 30, 1997, the Company had no outstanding balance under such credit
facility.
The Company has entered into a master lease agreement with First Union
Leasing Group, Inc. under which the Company may lease up to $500,000 of
equipment. Such agreement provides for equipment to be leased for three-year
terms with transfer of ownership of the equipment to the Company at the end of
the applicable equipment lease term. At September 30, 1997, capital lease
obligations outstanding under the equipment leases, which expire in 1998,
aggregated $71,000.
The Company believes that its available funds, together with existing
credit facilities and the cash flow expected to be generated from operations,
will be adequate to satisfy its current and planned operations for at least the
next 24 months.
- 15 -
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information.
Management Changes
- ------------------
On July 30, 1997 Sophien Bennaceur and the Company mutually agreed to Mr.
Bennaceur's resignation as the Company's Executive Vice President and Chief
Operating Officer. Mr. Bennaceur served as the Company's Executive Vice
President and Chief Operating Officer since October 14, 1996.
In addition, in October 1997, the Company appointed John Centinaro to
Senior Vice President, Operations and appointed Dennis Samuelson to Senior Vice
President, Professional Development Services. Mr. Centinaro previously served as
the Company's Vice President, Sales and Mr. Samuelson previously served as the
Company's Vice President, Education Services.
In conjunction with these appointments, the Company added three members to
its management team. In October 1997, the Company hired John Warren to be its
Vice President of Human Resources and Robert Lang to be its Vice President,
Sales and Marketing for the Company's New Jersey operations, reporting to Mr.
Centinaro. On October 20, 1997, Gary Gann, Esq. was elected to the positions of
Vice President, General Counsel and Secretary to the Company.
Acquisition of The Lande Group, Inc.
- ------------------------------------
On August 13, 1997, the Company consummated the acquisition of certain
assets and assumed certain liabilities of The Lande Group, Inc. ("Lande"), a
computer equipment reseller and provider of systems integration services located
in New York City. The Company purchased, among other assets, the entire customer
list, accounts receivable and inventory of Lande for an aggregate purchase price
of up to $1.1 million, of which $750,000 was paid at closing and $250,000 is
held in escrow pending certain post-closing adjustments. An additional $50,000
is payable to Lande by the Company on each of the first and second anniversary
of the closing date. The Company also assumed certain liabilities, including
certain trade debt of approximately $2.9 million, which was paid by the Company
at closing, accounts payable and accrued expenses of approximately $1.8 million
and obligations under a lease, which expires in April 2008, for New York City
office space which will serve as the Company's New York headquarters. The value
of the assets purchased was approximately the same as the liabilities assumed.
In addition, six former Lande salespersons and 29 former Lande technical service
personnel currently work for the Company. Among such personnel, Stewart Lande,
the former President of Lande, joined the Company as a General Manager.
- 16 -
<PAGE>
The Company funded the purchase price from a portion of the net proceeds
of the follow-on public offering of its Common Stock consummated in June 1997.
In determining the purchase price, the Company considered, among other factors,
the past and projected revenues and earnings generated from the Lande business,
the value of the Lande technical personnel to the Company and the strategic
value of an enhanced New York City presence. Transactional costs associated with
the Lande acquisition were approximately $93,000.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
- 17 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AlphaNet Solutions, Inc.
DATE: November 13, 1997 By: /s/ Stan Gang
-----------------------
Stan Gang,
President and Chief
Executive Officer
(Principal Executive
Officer)
DATE: November 13, 1997 By: /s/ Gary S. Finkel
-----------------------
Gary S. Finkel,
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
- 18 -
<TABLE>
EXHIBIT 11
ALPHANET SOLUTIONS, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1996 1997 1996 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (1)............... $ 969 $ 1,418 $ 2,057 $ 3,679
========= ========== ========== ==========
Weighted average number of
common shares and common
shares equivalent:
Common shares................ 5,100 6,256 4,554 5,538
Shares necessary to fund
S Corporation Distribution. -- -- 173 --
Stock Options................ -- 204 -- 205
Cheap stock (treasury stock
method).................... -- -- 12 --
--------- --------- ---------- ----------
5,100 6,460 4,739 5,743
--------- --------- ---------- ----------
Net income per share(1)...... $ 0.19 $ 0.22 $ 0.43 $ 0.64
========= ========= ========== ==========
(1) Pro forma for the nine months ended September 30, 1996.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE ISSUER'S FORM 10-Q FOR THE PERIOD
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM.
</LEGEND>
<CIK> 0001002132
<NAME> AlphaNet Solutions, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 8,350
<SECURITIES> 0
<RECEIVABLES> 42,579
<ALLOWANCES> 549
<INVENTORY> 7,121
<CURRENT-ASSETS> 61,170
<PP&E> 8,324
<DEPRECIATION> 2,050
<TOTAL-ASSETS> 69,877
<CURRENT-LIABILITIES> 29,361
<BONDS> 0
0
0
<COMMON> 63
<OTHER-SE> 39,778
<TOTAL-LIABILITY-AND-EQUITY> 69,877
<SALES> 104,967
<TOTAL-REVENUES> 134,803
<CGS> 92,973
<TOTAL-COSTS> 112,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149
<INCOME-PRETAX> 6,236
<INCOME-TAX> 2,557
<INCOME-CONTINUING> 3,679
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,679
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0
</TABLE>
