SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998
Commission file number 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 Identification No.)
Incorporation or Organization)
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:
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of October 31, 1998:
CLASS NUMBER OF SHARES
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Common Stock, $.01 par value 6,226,676
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ALPHANET SOLUTIONS, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION.................................................1
Item 1. Financial Statements.........................................1
Consolidated Balance Sheets
as of December 31, 1997
and September 30, 1998 (unaudited)...........................2
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1997 (unaudited) and 1998 (unaudited) .........3
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1997 (unaudited) and 1998 (unaudited) .........4
Notes to Consolidated Financial Statements (unaudited).......5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition................8
Results of Operations.......................................11
Liquidity and Capital Resources.............................14
PART II. OTHER INFORMATION...................................................18
Item 5. Other Information...........................................18
Item 6. Exhibits and Reports on Form 8-K............................18
SIGNATURES....................................................................19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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ALPHANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 2,689 $ 1,689
Accounts receivable, net ............................................... 50,388 39,313
Inventories ............................................................ 4,941 6,009
Deferred income tax asset .............................................. 1,651 1,651
Prepaid expenses and other current assets .............................. 3,598 2,939
-------- --------
Total current assets ................................................. 63,267 51,601
Property and equipment, net ................................................. 6,386 5,407
Other assets ................................................................ 2,888 2,452
-------- --------
Total assets ......................................................... $ 72,541 $ 59,460
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations ........................... $ 44 $ 13
Accounts payable ....................................................... 17,921 12,269
Accrued expenses ....................................................... 12,179 3,128
-------- --------
Total current liabilities ............................................ 30,144 15,410
Advance from principal shareholder .......................................... 675 675
Capital lease obligations ................................................... -- 57
-------- --------
Total liabilities .................................................... 30,819 16,142
-------- --------
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, 6,257,610
and 6,251,901 shares issued and outstanding at December 31, 1997 and
September 30, 1998, respectively ...................................... 63 63
Treasury stock, 87,500 shares at cost ..................................... -- (375)
Additional paid-in capital ............................................. 33,172 33,846
Retained earnings ...................................................... 8,487 9,784
-------- --------
Total shareholders' equity ........................................... 41,722 43,318
-------- --------
Total liabilities and shareholders' equity ........................... $ 72,541 $ 59,460
======== ========
</TABLE>
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ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- ----------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Product sales ..................... $ 34,590 $ 30,388 $ 104,967 $ 91,507
Services and support .............. 11,902 13,212 29,836 42,505
--------- --------- --------- ---------
46,492 43,600 134,803 134,012
--------- --------- --------- ---------
Cost of sales:
Product sales ..................... 30,477 26,669 92,973 80,249
Services and support .............. 7,962 8,661 19,726 28,576
--------- --------- --------- ---------
38,439 35,330 112,699 108,825
--------- --------- --------- ---------
Gross profit ........................... 8,053 8,270 22,104 25,187
--------- --------- --------- ---------
Operating expenses:
Selling expenses .................. 3,547 3,830 9,408 11,546
General and administrative expenses 2,242 3,369 6,475 9,251
Write-off of capitalized software &
consulting fees ................. -- 2,476 -- 2,476
--------- --------- --------- ---------
5,789 9,675 15,883 23,273
--------- --------- --------- ---------
Operating income (loss) ................ 2,264 (1,405) 6,221 1,914
--------- --------- --------- ---------
Other income (expense):
Interest and other income ......... 143 96 164 344
Interest expense .................. (3) (15) (149) (61)
--------- --------- --------- ---------
140 81 15 283
--------- --------- --------- ---------
Income (loss) before income taxes ...... 2,404 (1,324) 6,236 2,197
Provision (benefit) for income taxes ... 986 (543) 2,557 900
--------- --------- --------- ---------
Net income (loss) ...................... $ 1,418 $ (781) $ 3,679 $ 1,297
========= ========= ========= =========
Earnings (loss) per share - Basic ...... $ 0.23 $ (0.12) $ 0.66 $ 0.21
========= ========= ========= =========
Weighted average shares outstanding .... 6,256 6,305 5,538 6,283
========= ========= ========= =========
Earnings (loss) per share - Diluted .... $ 0.22 $ (0.12) $ 0.64 $ 0.20
========= ========= ========= =========
Weighted average shares
and share equivalents outstanding ... 6,460 6,305 5,743 6,362
========= ========= ========= =========
</TABLE>
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ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1997 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 3,679 $ 1,297
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ..................................... 1,193 1,996
Deferred income taxes ............................................. (405) --
Write-off of capitalized software and consulting fees ............. -- 2,476
Increase (decrease) from changes in:
Accounts receivable, net ........................................ (8,620) 11,075
Inventories ..................................................... (2,145) (1,068)
Prepaid expenses and other current assets ....................... (873) 659
Other assets .................................................... 36 310
Accounts payable and accrued expenses ........................... 512 (14,703)
-------- --------
Net cash (used in) provided by operating activities ............... (6,623) 2,042
-------- --------
Cash flows from investing activities:
Property and equipment expenditures ................................. (3,194) (3,295)
Acquisition of businesses, net of cash acquired ..................... (611) --
-------- --------
Net cash used in investing activities ............................. (3,805) (3,295)
-------- --------
Cash flows from financing activities:
Net proceeds from sales of common stock ............................. 17,211 413
Exercises of stock options .......................................... 30 261
Treasury stock purchases ............................................ -- (375)
Repayment of capital lease obligations .............................. (73) (46)
-------- --------
Net cash provided by financing activities ......................... 17,168 253
-------- --------
Net increase (decrease) in cash and cash equivalents ................... 6,740 (1,000)
Cash and cash equivalents, beginning of period ......................... 1,610 2,689
-------- --------
Cash and cash equivalents, end of period ............................... $ 8,350 $ 1,689
======== ========
</TABLE>
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ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
Note 1 - Basis of Presentation:
The information presented for September 30, 1997 and 1998 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,
1998, the results of its operations for the three month and nine month periods
ended September 30, 1997 and 1998 and its cash flows for the nine month periods
ended September 30, 1997 and September 30, 1998. 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, 1997,
which were included as part of the Company's Annual Report on 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.
Note 2 - Earnings Per Share:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings per Share" ("SFAS No. 128"), which specifies the
computation, presentation and disclosure requirements for earnings per share
("EPS") of entities with publicly held common stock or potential common stock.
The statement defines two earnings per share calculations, basic and diluted.
The objective of basic EPS is to measure the performance of an entity over the
reporting period by dividing income available to common stock by the weighted
average shares outstanding. The objective of diluted EPS is consistent with that
of basic EPS, that is to measure the performance of an entity over the reporting
period, while giving effect to all dilutive potential common shares that were
outstanding during the period. The calculation of diluted EPS is similar to
basic EPS except both the numerator and denominator are increased for the
conversion of potential common shares. In February 1998, the Securities and
Exchange Commission staff issued Staff Accounting Bulletin No. 98 ("SAB 98")
revising previously issued statements to become consistent with SFAS No. 128 and
No. 130. SAB 98 requires the Company to revise its EPS computations to present
historical EPS including pre initial public offering periods. The computations
for earnings per share contained in this report incorporate SAB 98.
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ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
The following is a reconciliation of the number of shares used in the
basic EPS and diluted EPS computations:
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
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1997 1998
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NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT LOSS SHARES AMOUNT
------ ------ ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ................ $1,418 6,256 $ 0.23 $ (781) 6,305 $ (0.12)
Effect of dilutive stock
options .................. -- 204 (0.01) -- -- --
------ ------ ------ ------ ------ -------
Diluted EPS .............. $1,418 6,460 $ 0.22 $ (781) 6,305 $ (0.12)
====== ====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1997 1998
------------------------------------- ------------------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS................. $3,679 5,538 $ 0.66 $1,297 6,283 $ 0.21
Effect of dilutive stock
options..................... -- 205 (0.02) -- 79 (0.01)
------ ------ ------ ------ ------ -------
Diluted EPS............... $3,679 5,743 $ 0.64 $1,297 6,362 $ 0.20
====== ====== ====== ====== ====== =======
</TABLE>
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Note 3 - Write-off of Capitalized Software and Consulting Fees:
In connection with the one time write-off of capitalized software and consulting
fees associated with the Company's termination of implementation of an
integrated accounting software program, the Company recorded a charge of $2.5
million for the third quarter of 1998.
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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. Although most of the Company's net sales to date have been derived
from IT product sales, the Company intends to continue expanding its service and
support offerings. There can be no assurances that the risks relating to
expansion of such offerings of its business will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows. For the first nine months of 1998, net product sales were approximately
68.3% and services and support revenues were approximately 31.7% of the
Company's net sales.
The Company has entered into distribution agreements with Ingram Micro,
Inc. ("Ingram") and MicroAge Computer Centers, Inc. ("MicroAge"), two of the
nation's largest aggregators, to acquire most of its IT products for resale. The
Company's relationship with MicroAge commenced in 1984 and, as customer demand
for IT products grew, the Company initiated its relationship with Ingram in
1994. The distribution agreements with Ingram and MicroAge 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, enterprise computing products, 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 nine months ended September 30, 1998, the Company acquired
approximately 52.2% and 31.1% of its products for resale from Ingram and
MicroAge, respectively.
In December 1997 the Company entered into a $20.4 million contract
("MTA contract") with the MTA-New York City Transit Authority ("MTA") to furnish
and install local and wide area computer network components throughout the MTA's
over 200 locations, including subway stations, electrical power substations and
a diverse group of train car maintenance facilities. The contract allows for
completion over a four-year period although the MTA project schedule currently
provides for completion on or about July 2000. The aggregate revenues generated
from the MTA contract in the nine months ended September 30, 1998 were
approximately $3.2 million. For further discussion on the MTA contract and its
effect on the Company's results of operations, see "RESULTS OF OPERATIONS".
Except for the MTA contract, 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,
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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, workstation support, application
development, communications installation, education, help desk, IT staffing,
internet and remote network management services. Services and support revenue is
recognized as such services are performed. The Company's network consulting,
workstation support, application development, 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. The Company's help desk, internet and remote network management
services are fee based and are dependent upon the scope of services. Generally,
the Company's service arrangements with its customers may be terminated by such
customers with limited advance notice and without significant penalty. The most
significant cost relating to the services component of the Company's business is
personnel expenses which consist of salaries, benefits and payroll-related
expenses. Thus, the financial performance of the Company's service business is
based primarily upon billing margins (billable hourly rates less the costs to
the Company of such service personnel on an hourly basis) and utilization rates
(billable hours divided by paid hours). The future success of the services
component of the Company's business will depend in large part upon its ability
to maintain high utilization rates at profitable billing margins. The Company's
utilization rates for service personnel likely will be adversely affected during
periods of rapid and concentrated hiring. In addition, the competition for
quality technical personnel has continued to intensify resulting in increased
personnel costs for the Company and many other IT service providers, which has
adversely affected the Company's billing margins.
The Company may receive manufacturer rebates resulting from equipment
sales. In addition, the Company receives volume discounts and other incentives
from certain of its suppliers. Except for products in transit or products
awaiting configuration at a Company facility, the Company generally does not
maintain large inventory balances. The Company's primary vendors have announced
or instituted changes in their price protection and inventory management
programs as a direct result of changes in such policies by manufacturers.
Specifically, they have announced that they will (i) limit price protection to
that provided by the manufacturer, generally less than 30 days, rather than the
unlimited protection previously available; and (ii) restrict product returns,
other than defective returns, to a percentage (the percentage varies depending
on the vendor and when the return is made) of product purchased, during a
defined period, at the lower of the invoiced price or the current price, subject
to the specific manufacturer's requirements and restrictions. At the present
time, the Company does not believe these changes in the vendor policies will
have a material impact on its business. Other than changes in such price
protection and return policies, the Company is unaware that any of its suppliers
or manufacturers have changed or intend to further change these programs. There
can be no assurances that any such rebates, discounts or incentives will
continue at historical levels, if at all. Further adverse modification,
restriction or reduction in such programs could have a material adverse effect
on the Company's financial position, results of operations, or cash flows.
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 staff of billable technical personnel
increased from 503 at September 30, 1997 to 515 at September 30, 1998. The
Company's selling expenses consist primarily of personnel costs, including sales
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commissions earned by employees involved in the sales of IT products, services
and support. These employees include direct sales, sales support and marketing
personnel. Sales commissions are recorded as revenue is recognized. General and
administrative expenses consist of all other operating expenses, including
primarily salaries and occupancy costs for administrative, executive and finance
personnel.
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 significant percentage of the Company's gross profit. 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.
FORWARD LOOKING STATEMENTS
Certain statements included in this Form 10-Q, including, without
limitation, statements regarding the anticipated growth in the IT products and
services markets, the continuation of the trends favoring outsourcing of
management information systems ("MIS") functions by large and mid-sized
companies, the anticipated growth in the services and support component of the
Company's business, the timing of the development and implementation of the
Company's new service offerings and the utilization of such services by the
Company's customers, the Company's objective to grow through strategic
acquisitions, and trends in future operating performance, are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements include risks and
uncertainties, including, but not limited to: (i) the substantial variability of
the Company's quarterly operating results caused by a variety of factors, some
of which are not within the Company's control, including (a) the short-term
nature of the Company's customers' commitments, (b) patterns of capital spending
by customers, (c) the timing, size and mix of product and service orders and
deliveries, (d) the timing and size of new projects, (e) pricing changes in
response to various competitive factors, (f) market factors affecting the
availability of qualified technical personnel, (g) the timing and customer
acceptance of new product and service offerings, (h) changes in trends affecting
outsourcing of IT services, (i) disruption in sources of supply, (j) changes in
terms and conditions of purchases from sources of supply, including changes in
price protection and return policies, (k) changes in product, personnel and
other operating costs, and (l) industry and general economic conditions; (ii)
changes in technical personnel billing and utilization rates which are likely to
be adversely affected during periods of rapid and concentrated hiring; (iii) the
intense competition in the markets for the Company's products and services; (iv)
the Company's ability to manage its growth effectively which will require the
Company to continue developing and improving its operational, financial and
other internal systems, including a major upgrade of the Company's internal MIS
infrastructure; (v) the Company's ability to complete implementation of its MIS,
the implementation can be accomplished without future delays in monthly
closings, or the costs in rectifying delays would not be material; (vi) the
Company's ability to develop, market, provide, and achieve market acceptance of
new service offerings to new and existing customers; (vii) the Company's ability
to attract, hire, train, and retain qualified technical personnel in an
increasingly competitive market; (viii) the Company's substantial reliance on a
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concentrated number of key customers; (ix) the MTA's right to terminate its
contract with the Company, the Company's continued compliance with its
obligations under the MTA contract, or the Company's ability to complete the
project without incurring a loss; (x) 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; (xi) the Company's dependence on vendor authorizations to resell
certain computer products and to provide related services; (xii) the Company's
dependence on certain aggregators for a substantial portion of its products
acquired for resale; (xiii) the Company's reliance on the continued services of
key executive officers and salespersons; (xiv) the possibility that the
currently installed computer systems, software products or other business
systems of the Company or its distributors, manufacturers or customers, working
either alone or in conjunction with other software or systems, will not accept
input of, store, manipulate and/or output dates in the year 2000 or thereafter
without error or interruption; and (xv) the Company's ability to implement
required policies and procedures regarding internal accounting controls. 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, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES. Net sales decreased by 6.2%, or $2.9 million, from $46.5
million in 1997 to $43.6 million in 1998. Product sales decreased by 12.1%, or
$4.2 million, from $34.6 million in 1997 to $30.4 million in 1998. This decrease
in product sales was primarily attributed to reduced unit volumes and lower
average selling prices. Service and support revenue increased by 11.0%, or $1.3
million, from $11.9 million in 1997 to $13.2 million in 1998. This increase was
attributable primarily to increased demand for the Company's service and support
offerings and services performed under the MTA contract in the current quarter.
The Company has performed services and supplied products to the MTA
since the inception of the MTA contract. The initial sites selected by the MTA
for such services were varied to include each type of site expected to be
encountered during the contract ("Pilot Sites"). Changes in the scope of work at
Pilot Sites required increased labor by the Company to complete. Such changes
and their impact on the project, while under review by the MTA, have not yet
been addressed by the MTA. The Company believes such changes are beyond the
original scope of work and the Company has requested the MTA for an equitable
adjustment in the contract amount and terms. However, there can be no assurance
the MTA will approve, either in whole or in part, any equitable adjustment in
the contract amount or terms requested by the Company. Accordingly, pending
resolution of the Company's request, the Company is recording revenues under the
MTA contract equal to costs incurred. There can be no assurance that the Company
can complete the project within the contract amount or without incurring a loss.
During the three months ended September 30, 1998, sales to KPMG Peat
Marwick, LLP accounted for approximately 15.1% 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.
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GROSS PROFIT. The Company's gross profit increased by 2.7%, or
$217,000, from $8.1 million in 1997 to $8.3 million in 1998. Total gross profit
margin increased from 17.3% of net sales in 1997 to 19.0% in 1998 due to an
increase in service and support revenues as a percentage of net sales and
increases in profit margins for both product and service related revenues. Gross
profit margin attributable to product sales increased from 11.9% in 1997 to
12.2% in 1998 primarily due to the sales mix of higher margin products. The
Company expects that the industry downward pricing pressure on products will
continue. 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 increased from 33.1% in 1997 to 34.4% in 1998. The
increase in such gross profit margin was attributable primarily to higher
utilization rates for current technical staff.
SELLING EXPENSES. Selling expenses increased by 8.0%, or $283,000, from
$3.5 million in 1997 to $3.8 million in 1998, increasing from 7.6% to 8.8% of
net sales, respectively. Such increases were primarily attributed to increased
salesperson commissions and other support costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased by 50.3 %, or $1.1 million from $ 2.3 million in 1997 to $
3.4 million in 1998, increasing from 4.8% to 7.7% of net sales, respectively.
Such increases were primarily due to increases in personnel expenses, MIS
implementation costs, depreciation and amortization charges, additional leased
facilities and their related costs, and professional fees.
WRITE-OFF OF CAPITALIZED SOFTWARE AND CONSULTING FEES. In connection
with the one time write-off of capitalized software and consulting fees
associated with the Company's termination of implementation of an integrated
accounting software program, the Company recorded a charge of $2.5 million in
the third quarter of 1998. For further discussion on the write-off of
capitalized software and consulting fees, see "LIQUIDITY AND CAPITAL RESOURCES"
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES. Net sales remained relatively constant, decreasing by 0.6%,
or $791,000, from $134.8 million in the first nine months of 1997 to $134.0
million in the first nine months of 1998. Product sales decreased by 12.8%, or
$13.5 million, from $105.0 million in the first nine months of 1997 to $91.5
million in the first nine months of 1998. This decrease in product sales was
primarily attributed to lower average selling prices in 1998 due to continued
pricing pressures on hardware manufacturers and reduced unit volume. Service and
support revenue increased by 42.5%, or $12.7 million, from $29.8 million in the
first nine months of 1997 to $42.5 million in the first nine months of 1998.
This increase was attributable primarily to increased demand for the Company's
service and support offerings, particularly its network consulting services, to
an increase in the number and size of client projects and to service performed
under the MTA contract.
The Company has performed services and supplied products to the MTA
since the inception of the MTA contract. The initial sites selected by the MTA
for such services were varied to include each type of site expected to be
encountered during the contract ("Pilot Sites"). Changes in the scope of work at
Pilot Sites required increased labor by the Company to complete. Such changes
and their impact on the project, while under review by the MTA, have
-12-
<PAGE>
not yet been addressed by the MTA. The Company believes such changes are beyond
the original scope of work and the Company has requested the MTA for an
equitable adjustment in the contract amount and terms. However, there can be no
assurance the MTA will approve, either in whole or in part, any equitable
adjustment in the contract amount or terms requested by the Company.
Accordingly, pending resolution of the Company's request, the Company is
recording revenues under the MTA contract equal to costs incurred. There can be
no assurance that the Company can complete the project within the contract
amount or without incurring a loss.
In the first nine months of 1998, sales to KPMG Peat Marwick, LLP
accounted for approximately 16.7% 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 13.9%, or $3.1
million, from $22.1 million in the first nine months of 1997 to $25.2 million in
the first nine months of 1998. Total gross profit margin increased from 16.4% of
net sales in the first nine months of 1997 to 18.8% in the first nine months of
1998 due to the increase in higher margin service and support revenues as a
percentage of net sales. Gross profit margin attributable to product sales
increased from 11.4% in the first nine months of 1997 to 12.3% in the first nine
months of 1998 primarily due to the sales mix of higher margin products. The
Company expects that the industry downward pricing pressure on products will
continue. 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 33.9% in the first nine months of
1997 to 32.8% in the first nine months of 1998 due to lower utilization of
billable personnel and the effect of the MTA contract.
SELLING EXPENSES. Selling expenses increased by 22.7%, or $2.1 million,
from $9.4 million in the first nine months of 1997 to $11.5 million in the first
nine months of 1998, and increased from 7.0% to 8.6% of net sales, respectively.
The increases in selling expenses were primarily attributed to increased
salesperson commissions and other support costs, and the increase in sales and
marketing efforts associated with the Company's service and support offerings.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased by 42.9%, or $2.8 million, from $6.5 million in the first
nine months of 1997 to $9.3 million in the first nine months of 1998, and
increased from 4.8% to 6.9% of net sales, respectively. The increases were
primarily due to increases in personnel expenses, MIS implementation costs,
depreciation and amortization charges, additional leased facilities and their
related costs, and professional fees.
WRITE-OFF OF CAPITALIZED SOFTWARE AND CONSULTING FEES. In connection
with the one time write-off of capitalized software and consulting fees
associated with the Company's termination of implementation of an integrated
accounting software program, the Company recorded a charge of $2.5 million for
the third quarter of 1998. For further discussion on the write-off of
capitalized software and consulting fees, see "LIQUIDITY AND CAPITAL RESOURCES".
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily
from cash generated by operations, as well as with funds from borrowings under
the Company's credit facilities and the net proceeds from the Company's public
offerings of its common stock. The Company's cash provided by operations was
approximately $2.0 million for the first nine months of 1998. Accounts
receivable decreased by $11.1 million during the first nine months of 1998,
primarily attributable to the decrease in net sales and the timing of collection
of accounts receivable. As measured in days-sales outstanding, the Company's
accounts receivable decreased from 80 days at December 31, 1997 to 78 days at
September 30, 1998. Accounts payable and accrued expenses decreased by $14.7
million due to timely payment of expenses. The net income of $1.3 million
includes non-cash charges of $4.5 million for depreciation, amortization and
write-off of capitalized software and consulting fees.
The Company's working capital was $36.2 million at September 30, 1998
compared to $33.1 million at December 31, 1997.
The Company repurchased 87,500 shares of its common stock in the third
quarter at an average per share cost of $4.29. The shares are held in treasury
at cost. As of September 30, 1998 a total of 87,500 shares had been repurchased
under the 225,000 share repurchase program announced in August, 1998.
The Company sold 54,231 shares of common stock to employees from
treasury in the third quarter. As of September 30, 1998, a total of 54,231
shares had been sold to employees under the 500,000 share employee stock
purchase program approved by the Company's shareholders in May, 1998. The
Company has received an aggregate of $413,000 from such sales.
The Company invested $3.3 million in property and equipment in the
first nine months of 1998, primarily related to purchases and upgrades of
computer equipment and software utilized in-house and consulting fees relating
to implementation of the Company's MIS. Except for the purchase of Platinum SQL,
there are no other material commitments for capital expenditures currently
outstanding. The Company anticipates additional capital expenditures to continue
the expansion of the services component of its business and for the enhancement
of its MIS infrastructure.
Since December 1996, the Company expended approximately $450,000 for
software, $2.1 million for consultant fees, and $571,000 for Company personnel
in implementing a third party developed enterprise wide data and information
system ("System"), as the foundation for the Company's MIS. The complexity of
the project, the lack of trained and knowledgeable Company technical personnel
in the implementation of the System requiring dependence on consultants, and the
lack of availability of current Company personnel dedicated to the project
resulted in significant project delays and increased costs. In addition, the
Company experienced delays in financial reporting, processing of vendor invoices
and continues to rely on its existing integrated accounting system. During the
third quarter the Company determined successful implementation of the System was
uncertain and that the costs to complete, although estimates, would be
substantially greater than the costs to acquire and install an alternate system
adequate for the Company's requirements. Accordingly, the Company terminated
implementation of the System and purchased Platinum SQL. At the present time, a
project plan prepared by the Company in conjuction with Platinum for
-14-
<PAGE>
installation of Platinum SQL has training and data conversion beginning in
December 1998 and module implementation beginning February 1999 with completion
in May 1999. The Company estimates the costs to purchase and install Platinum
SQL, (approximately $600,000) are substantially less then the costs to complete
implementation of the System. At the present time, there can be no assurance
that the costs to complete implementation of Platinum SQL will not exceed the
estimate or that such exceedance will not be material.
Further, the Company's current integrated accounting system is
inadequate for current operations and is not Year 2000 compliant. Although the
Company will incur costs and dedicate personnel to implement Platinum SQL and
other aspects of its MIS, there can be no assurances that the Company will
complete implementation of its MIS, that implementation can be accomplished
without future delays in monthly closings, or that the costs in rectifying such
delays would not be material.
The Company purchases certain inventory and equipment through financing
arrangements with Finova Capital Corporation and IBM Credit Corporation. At
September 30, 1998, there were outstanding balances of $6.1 million for Finova
Capital Corporation and $2.2 million for IBM Credit Corporation under such
arrangements. Obligations under such financing arrangements are collateralized
by substantially all of the assets of the Company. Under the Loan and Security
Agreement entered into on September 30, 1998 with First Union National Bank (the
"Bank"), the Bank entered into an intercreditor agreement with respect to their
relative interests.
On September 30, 1998, the Company and the Bank executed a Loan and
Security Agreement whereby the Bank extended 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 September 28, 1999, included a $2.5 million sublimit for letters of
credit and a $5.0 million sublimit for acquisition advances. Under the 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.
The Company believes that its available funds, together with existing
and anticipated credit facilities and the cash flow expected to be generated
from operations, will be adequate to satisfy its current and planned operations
for at least the next 24 months.
YEAR 2000 DISCLOSURE
Historically, certain computer programs have been written using two
digits rather than four to define the applicable year, which could result in a
computer recognizing a date using "00" as the year 1900 rather than the year
2000. This, in turn, could result in major system failures or miscalculations,
and is generally referred to as the "Year 2000 Problem". Computer systems that
are able to deal correctly with dates after 1999 are referred to herein as "Year
2000-Compliant". Over the past several years, based upon its business needs, the
Company has purchased and installed hardware and software which is represented
by the manufacturers to be
-15-
<PAGE>
Year 2000-Compliant. The Company has assessed its state of readiness
and has determined that, with the exception of the Company's current integrated
accounting system, which is not Year 2000-Compliant, the Company expects its
installed base of computer hardware and software systems to be Year
2000-Compliant. With respect to the Company's integrated accounting system, in
October of 1998 the Company announced the purchase of Platinum SQL Software to
replace the current integrated accounting system. The project plan establishes
May 1999 for completion of implementation. Based upon the representations of the
manufacturers of hardware and software used by the Company, and the provider of
the Platinum SQL Software, the Company believes upon implementation of Platinum
SQL, the Company's internal business systems, including its computer systems,
will be Year 2000 compliant. There can be no assurance, however, that the Year
2000 Problem relating to the Company's systems will not adversely affect its
business, financial position, results of operations or cash flows.
During the fourth quarter of 1998, the Company will initiate formal
communications with all of its significant suppliers and large customers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 problem. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, will not have a
material adverse effect on the Company.
The Company resells IT products of leading hardware manufacturers and
software developers. As a result, the Company has no control over the
developments of computer systems, software products or other business systems
developed by such third parties. Consequently, there can be no assurance that
the computer systems, software products or other business systems sold by the
Company will accept input of, store, manipulate and/or output dates in the year
2000 or thereafter without error or interruption. As a result, the Company, as a
reseller, may be liable for such failures. Given the Company's role in the
distribution of such products, the Company is not able to accurately determine
the extent, if any, of such potential liability.
In addition, the purchasing patterns of the Company's customers and
potential customers may be affected by issues associated with the Year 2000
Problem. As companies devote significant resources to become Year 2000-
Compliant, these expenditures may result in reduced funds available to purchase
products or obtain services such as those offered by the Company. There can be
no assurance that the Year 2000 Problem will not adversely affect the Company's
business, financial position, results of operations or cash flows.
The total cost of the Year 2000 compliance is being funded through
operating cash flows. The estimated cost to purchase and install Platinum SQL is
approximately $600,000. Excluding costs associated with Platinum SQL and the
write-off of the capitalized software and consulting fees, the Company has
expended approximately $2.0 million on hardware and software upgrades for its
Year 2000 Compliance.
The Company has not developed a contingency plan in the event the
Platinum SQL project is not completed in a timely manner or with respect to any
additional Year 2000- Compliant issues which may arise as a result of the
Company's inquiring of its suppliers and customers.
Statements included in this Year 2000 Disclosure are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements include risks
and uncertainties, including but not limited to the possibility that the
currently installed computer systems, software products or other business
systems of the Company or its distributors, manufacturers or customers, working
either alone or in conjunction
-16-
<PAGE>
with other software or systems, will not accept input of, store, manipulate
and/or output dates in the year 2000 or thereafter without error or
interruption. 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.
-17-
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
In the second quarter of 1998, the Company and its independent auditors
identified significant deficiencies in the design and operation of its internal
control structure. The Company's independent auditors had determined such
deficiencies were "reportable conditions". The Company has implemented policies,
procedures and controls to correct these deficiencies. The Company does not
believe that such deficiencies have had a material effect on the Company's
reported financial results.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit.
10.1 First Amendment to and Reaffirmation of Loan
Documents dated September 30, 1998 by and between First
Union National Bank and AlphaNet Solutions, Inc.
10.2 Revolving Note Dated September 30, 1998 by and Between First
Union National Bank and Alphanet Solutions, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report on Form 10-Q is filed.
-18-
<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, 1998 By:/S/ STAN GANG
------------------------------
Stan Gang,
President and Chief
Executive Officer
(Principal Executive
Officer)
DATE: November 13, 1998 By:/S/ ROBERT G. PETOIA
------------------------------
Robert G. Petoia
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-19-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 First Amendment to and Reaffirmation of Loan
Documents dated September 30, 1998 by and between First
Union National Bank and AlphaNet Solutions, Inc.
10.2 Revolving Note Dated September 30, 1998 by and Between First
Union National Bank and Alphanet Solutions, Inc.
27 Financial Data Schedule
EXHIBIT 10.1
FIRST AMENDMENT TO AND REAFFIRMATION OF LOAN DOCUMENTS
FIRST AMENDMENT TO AND REAFFIRMATION OF LOAN DOCUMENTS (this "First
Amendment") made as of this 30th day of September, 1998 by and among ALPHANET
SOLUTIONS, INC., a New Jersey corporation (the "Company"), NETTEMPS, INC., a New
Jersey corporation (the "Guarantor") and FIRST UNION NATIONAL BANK, a national
banking institution (the "Bank").
W I T N E S S E T H:
WHEREAS, the Bank has agreed to make credit available to the Company on
a revolving basis in the principal amount of up to $15,000,000 (the "Loan"),
pursuant to the terms and conditions of a certain Loan and Security Agreement,
dated June 30, 1997 (as amended and reaffirmed by this First Amendment, the
"Loan Agreement"; all capitalized terms used herein and not defined shall have
the meanings ascribed to them therein); and
WHEREAS, the Loan is evidenced by a certain revolving note of the
Company dated June 30, 1997 (the "Exiting Revolving Note"); and
WHEREAS, as collateral security for its obligations under the Loan
Agreement and the Existing Revolving Note, the Company granted to the Bank liens
and security interests in the Collateral described in the Loan Agreement; and
WHEREAS, the repayment and performance obligations of the Company under
the Loan Agreement and the Existing Revolving Note were guaranteed by the
Guarantor under the Guaranty; and
WHEREAS, as collateral security for its obligations under the Loan
Agreement and the Guaranty, the Guarantor granted to the Bank liens and security
interests in the Collateral described in the Loan Agreement; and
WHEREAS, the Bank, the Company and the Guarantor have agreed that (a)
the Loan Agreement should be amended, among other things, to: (i) extend the
Maturity Date to September 28, 1999; (ii) modify the calculation of the
Commitment Fee; and (iii) amend certain of the definitions set forth therein;
and (b) the other Loan Documents shall be reaffirmed and amended to include the
amendments set forth in the Loan Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein, the Bank, the Company and the Guarantor, do hereby agree as
follows:
1. By executing this First Amendment, each of the Company and the
Guarantor confirms and acknowledges that it has no defenses, offsets or
counterclaims against any of its obligations to the Bank under the Loan
Documents and that all
<PAGE>
amounts outstanding, if any, under the Existing Revolving Note and the other
Loan Documents are owing to the Bank without defense, off-set or counterclaim.
2. A new Section 1.35A to the Loan Agreement is hereby added as
follows:
"FIRST AMENDMENT" means the First Amendment to and
Reaffirmation of Loan Documents, dated as of September 30, 1998, by and among
the Company, the Guarantor and the Bank.
3. Section 1.60 of the Loan Agreement is hereby amended to read as
follows:
"MATURITY DATE" means September 28, 1999.
4. Section 1.72 of the Loan Agreement is hereby amended to read as
follows:
"REVOLVING NOTE" means that certain Revolving Note dated
September 30, 1998 issued by Borrower evidencing the Loan and any revolving note
replacing such note."
5. Section 2.4(A) of the Loan Agreement is hereby amended to read as
follows:
"(A) Borrower agrees to pay to Bank on a quarterly basis the
Commitment Fee on the average daily unused portion of the Commitment from the
Closing Date until the Maturity Date, at a rate equal to one-eighth percent
(.125%) per annum, such payments commencing on September 30, 1998, and
continuing quarterly thereafter on the last day of December, March, June and
September, with such payments terminating on the Maturity Date."
6. The Company shall execute a new Revolving Note dated the date hereof
which shall supersede and replace (but not represent a repayment or novation of)
the Existing Revolving Note. The Revolving Note dated the date hereof shall be
the "Revolving Note" for all purposes of the Loan Agreement and the other Loan
Documents.
7. By executing this First Amendment, the Company and the Guarantor
confirm and acknowledge that (i) the representations and warranties contained in
Article V of the Loan Agreement (pertaining to each of them) are correct as of
the date hereof, (ii) the Company and the Guarantor are in compliance with all
covenants contained in the Loan Agreement and all other Loan Documents, and
(iii) no Event of Default, or an event which with the giving of notice or
passage of time or both would constitute an Event of Default, has occurred and
is continuing.
2
<PAGE>
8. All references to the "Agreement" or "this Agreement" in the Loan
Agreement shall mean the Loan Agreement, as amended and reaffirmed by this First
Amendment; all references to the "Guaranty" in the Loan Agreement shall be
deemed to mean the Guaranty, as amended and reaffirmed by this First Amendment;
and all references to the "Loan Documents" shall mean and include the Loan
Documents, as amended and reaffirmed by this First Amendment, as well as the
Revolving Note (as defined in the Loan Agreement, as amended by this First
Amendment). All references to the "Obligations" in the Loan Agreement shall mean
and include the obligations of the Company and the Guarantor to the Bank
pursuant to the Loan Documents, as amended and reaffirmed pursuant to this First
Amendment, including, but not limited to the Revolving Note (as defined in the
Loan Agreement, as amended by this First Amendment).
9. By executing this First Amendment, the parties hereto confirm the
continued accuracy of all Schedules and Exhibits attached to and made a part of
the Loan Agreement and the other Loan Documents. If any such Schedule or Exhibit
is no longer fully accurate or needs updating, such revised or updated Schedule
or Exhibit shall be delivered to the Bank as a condition precedent to the
effectiveness of this First Amendment and shall be deemed to replace the prior
Schedule or Exhibit for all purposes of the Loan Agreement or such other Loan
Document.
10. The Guaranty, effective the date hereof, is hereby amended to
provide that the term "Obligations" therein shall mean and include the
obligations of the Company to the Bank under the Loan Agreement and the other
Loan Documents, as each is amended and reaffirmed by this First Amendment, and
all references to the "Loan Agreement" and the "Loan Documents" in the Guaranty
shall mean and include such agreements, as amended and reaffirmed by, or
delivered pursuant to, this First Amendment. By executing this First Amendment,
the Guarantor reaffirms and acknowledges the validity of the Guaranty as of the
date hereof and confirms that it guarantees unconditionally the obligations of
the Company under the Revolving Note (as defined in the Loan Agreement, as
amended and reaffirmed by this First Amendment) and the other Loan Documents, as
amended and reaffirmed by this First Amendment.
11. By executing this First Amendment, each of the Company and the
Guarantor confirms the security interests previously granted to the Bank in and
to the Collateral described in the Loan Agreement as security for their
obligations under the Loan Documents (as defined in the Loan Agreement as
amended by this First Amendment), and each of the Company and the Guarantor
hereby grants to the Bank a security interest in the Collateral described in the
Loan Agreement to secure the repayment of their Obligations under the Revolving
Note (as defined in the Loan Agreement as amended by this First Amendment) and
Guaranty (as defined in the Loan Agreement as amended by this First Amendment),
as applicable, and the other Loan Documents, as amended and reaffirmed by this
First Amendment.
3
<PAGE>
12. As conditions precedent to the effectiveness of this First
Amendment, the following shall be delivered to the Bank by the Company and/or
the Guarantor:
(a) This First Amendment, duly executed by all parties hereto;
(b) The Revolving Note, duly executed by the Company;
(c) The Certification (as to jurisdiction of execution);
(d) A corporate resolution, incumbency certificate, and such other
documents as the Bank may reasonably request reflecting the corporate
authorization and approval of the transactions contemplated hereunder by the
Company and the Guarantor; and
(e) Such other documents as the Bank may reasonably request.
13. The Company and the Guarantor hereby covenant and agree to provide
the Bank with such current UCC, tax, judgment and litigation search reports as
the Bank deems necessary or advisable no later than October 31, 1998, all in
form and substance satisfactory to Bank.
14. This First Amendment is incorporated by reference into the Loan
Agreement and the other Loan Documents. Except as otherwise provided herein, all
other provisions of the Loan Agreement and the other Loan Documents are hereby
confirmed and ratified and shall remain in full force and effect as of the date
of this First Amendment.
15. This First Amendment may be executed in any number of counterparts,
each of which shall be an original and all of which shall constitute one and the
same instrument.
16. This First Amendment shall be binding upon the parties hereto and
their heirs, executors, administrators, successors and/or assigns.
17. This First Amendment shall be governed by, and construed in
accordance with, the laws of the State of New Jersey.
18. In the event any provision of this First Amendment or any other
Loan Document executed and delivered in connection herewith shall be held
invalid or unenforceable by a court of competent jurisdiction, such holdings
shall not invalidate or render unenforceable any other provision hereof or
thereof.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the date first above written.
FIRST UNION NATIONAL BANK
By:
-------------------------------------
Name: Christopher M. McLaughlin
Title: Vice President
ATTEST: ALPHANET SOLUTIONS, INC.
By: By:
------------------------ -------------------------------------
Name: Name:
Title: Title:
ATTEST: NETTEMPS, INC.
By: By:
------------------------ -------------------------------------
Name: Name:
Title: Title:
5
EXHIBIT 10.2
REVOLVING NOTE
$15,000,000.00 Morristown, New Jersey
September 30, 1998
FOR VALUE RECEIVED, ALPHANET SOLUTIONS, INC., a New Jersey corporation
(the "Borrower"), promises to pay to the order of FIRST UNION NATIONAL BANK (the
"Bank"), the principal amount of FIFTEEN MILLION and 00/100 DOLLARS
($15,000,000.00), or the aggregate amount of all unpaid Advances made by the
Bank to the Borrower, whichever is less, in lawful money of the United States,
together with interest thereon as hereinafter provided.
1. THE AGREEMENT. This Revolving Note is issued pursuant to a certain
Loan and Security Agreement dated June 30, 1997 by and between the Bank and the
Borrower, as amended (as so amended and as the same may be hereafter amended,
modified or supplemented, the "Agreement"), and is entitled to the benefit of
all of the terms thereof. In this Revolving Note, all words and terms defined in
the Agreement shall have the respective meanings and be construed as provided
therein, unless a different meaning clearly appears from the context. Payment of
the principal amount hereof and accrued and unpaid interest thereon is subject
to acceleration as provided in the Agreement.
2. CALCULATION OF INTEREST. Interest on the unpaid principal amount
hereof shall accrue from the date hereof until the earlier of (i) the occurrence
of an Event of Default or (ii) September 28, 1999 (which is defined in the
Agreement as the "Maturity Date"), at the rates set forth in the Agreement.
Interest shall be computed on the basis of the actual number of days elapsed
over a year of 360 days. From and after the occurrence of an Event of Default,
principal amounts outstanding hereunder shall bear interest at the default rate
as set forth in the Agreement.
3. PAYMENT OF PRINCIPAL AND INTEREST. Interest on the unpaid principal
amount of each (i) Base Rate Advance hereunder shall be due and payable monthly,
on the first day of each month commencing October, 1998, and continuing on the
first day of each consecutive month thereafter and (ii) Adjusted LIBO Rate
Advance hereunder shall be due and payable on the last day of the Interest
Period but in no event less often than quarterly (in which case such payments
shall be made on the last Working Day of such calendar quarter), until the
Maturity Date, on which date the entire principal amount outstanding hereunder
and any accrued and unpaid interest thereon shall become immediately due and
payable in full. Late payments of principal or interest are subject to a late
charge as set forth in the Agreement.
4. REPAYMENTS. The Borrower may, as described in the Agreement, repay
Advances under this Revolving Note; provided, that each partial repayment shall
be in a principal amount of not less than $100,000 or any multiple thereof. In
the event Borrower for any reason repays any Adjusted LIBO Rate Advance on the
day which is not the end of an Interest Period, Borrower shall, upon written
demand by Bank, pay to
<PAGE>
Bank the Repayment Indemnity with respect to such repayment. All outstanding
Advances shall be due and payable, together with any and all accrued interest
thereon, on the Maturity Date.
5. PLACE AND MANNER OF PAYMENT. All payments of principal and interest
shall be made by the Borrower directly to the Bank or as set forth in the
Agreement, and such payments shall be made in immediately available funds.
6. WAIVER. The Borrower hereby waives presentment, demand, protest and
notice of protest, and all other demands and notices in connection with the
payment and enforcement of this Revolving Note, and assents to extensions of the
time of payment, or forbearance or other indulgence, without notice.
7. COLLATERAL. The obligations of the Borrower hereunder are secured by
the Collateral described in the Agreement. The terms of the Agreement and the
other Loan Documents are incorporated herein by reference.
8. GOVERNING LAW. This Revolving Note shall be governed by, and
construed in accordance with, the laws of the State of New Jersey.
9. SUCCESSORS AND ASSIGNS. This Revolving Note shall be binding upon
the Borrower and its successors and/or assigns and shall inure to the benefit of
the Bank and its successors and assigns.
10. PRIOR NOTE. This Note shall supersede, replace and continue, but
shall not be considered a repayment or novation of, the note dated June 30,
1997, by the Borrower to the order of the Bank (the "Prior Note"). All
obligations of the Borrower under the Prior Note shall be evidenced by, and
continued pursuant to, this Note.
IN WITNESS WHEREOF, the Borrower has caused this Revolving Note to be
executed by its duly authorized officer on the day and year first above written
and declare this Revolving Note to be a sealed instrument.
ATTEST: ALPHANET SOLUTIONS, INC.
By: By:
------------------------ -------------------------------------
Name: Name:
Title: Title:
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER
30, 1998 CONTAINED IN THE COMPANY'S QUARTERLY REPORTS ON FORM 10-Q FOR THE
PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,689
<SECURITIES> 0
<RECEIVABLES> 40,653
<ALLOWANCES> 1,340
<INVENTORY> 6,009
<CURRENT-ASSETS> 51,601
<PP&E> 9,794
<DEPRECIATION> 4,387
<TOTAL-ASSETS> 59,460
<CURRENT-LIABILITIES> 15,410
<BONDS> 0
0
0
<COMMON> 63
<OTHER-SE> 43,255
<TOTAL-LIABILITY-AND-EQUITY> 59,460
<SALES> 134,012
<TOTAL-REVENUES> 134,012
<CGS> 108,825
<TOTAL-COSTS> 23,273
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 2,197
<INCOME-TAX> 900
<INCOME-CONTINUING> 1,297
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,297
<EPS-PRIMARY> 0.21<F1>
<EPS-DILUTED> 0.20<F2>
<FN>
<F1> The work "Primary" should be deleted and replaced with the word "Basic".
<F2> This amount is in accordance with Financial Accounting Standard Board
Statement No. 128 and Staff Accounting Bulletin No. 98.
</FN>
</TABLE>
