SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 Identification No.)
Incorporation or Organization)
7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
(Address of Principal Executive Offices, including Zip Code)
(973) 267-0088
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(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $49,687,898 at February 27, 1998 based on the
last sales price on that date.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of February 27, 1998:
Class Number of Shares
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Common Stock, $.01 par value 6,259,130
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the registrant's definitive Proxy Statement for
its 1998 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
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Item PAGE
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PART I 1. Business................................................2
2. Properties.............................................14
3. Legal Proceedings......................................14
4. Submission of Matters to a Vote of Security Holders....15
PART II 5. Market for the Company's Common Equity
and Related Shareholder Matters........................16
6. Selected Financial Data................................17
7. Management's Discussion and Analysis of
Results of Operations and Financial Condition..........19
8. Financial Statements and Supplementary Data............32
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................32
PART III 10. Directors and Executive Officers of the Company........33
11. Executive Compensation.................................33
12. Security Ownership of Certain Beneficial
Owners and Management..................................33
13. Certain Relationships and Related Transactions.........33
PART IV 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................34
EXHIBIT INDEX.................................................................35
FINANCIAL DATA AND SCHEDULES.................................................F-1
SIGNATURES...................................................................
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PART I
ITEM 1 BUSINESS.
GENERAL
AlphaNet Solutions, Inc. (the "Company") is a single-source provider of
information technology ("IT") products, services and support to Fortune 1000 and
other large and mid-sized companies located primarily in the New
York-to-Philadelphia corridor. The Company is authorized by many
industry-leading manufacturers of IT products, including 3Com, Bay Networks,
Cisco Systems, Compaq, Hewlett-Packard, IBM, Intel, Lucent Technologies,
Microsoft, NEC, Novell and Sun Microsystems to resell their products and provide
related services. Such products include workstations, servers, networking and
communications equipment, enterprise computing products, and application
software. Through its established vendor alliances with Ingram Micro, Inc.
("Ingram") and MicroAge Computer Centers, Inc. ("MicroAge"), major aggregators
of computer hardware and software, the Company provides its customers with
competitive pricing and value-added services such as electronic product
ordering, product configuration, testing, warehousing and delivery.
Additionally, since 1990, the Company has been developing related IT services
and currently offers network consulting, workstation support, education,
application development, communications installation, Help Desk, IT staffing
services, Internet and remote network management. The Company's major customers
include Nabisco, KPMG Peat Marwick, Summit Bank, Innovex, Credit Suisse First
Boston, BASF Corporation, Lucent Technologies, Mercedes-Benz of North America,
PSE&G, and Polo-Ralph Lauren.
On August 1, 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, for
$1.8 million, including acquisition costs. The operations related to the
acquired assets and liabilities of Lande are included in the accompanying
consolidated financial statements subsequent to August 1, 1997.
The Company, a New Jersey corporation, was incorporated in 1984 under
the name AlphaTronics Associates, Inc. In December 1995 the Company changed its
name to AlphaNet Solutions, Inc. The address of the Company's principal
executive offices is 7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927, and its
telephone number is (973) 267-0088.
"AlphaNet Solutions" and the Company's logo are registered trademarks
of the Company. All other trade names, trademarks or service marks appearing in
this Annual Report on Form 10-K are the property of their respective owners and
are not the property of the Company.
Certain statements included in this Annual Report on Form 10-K,
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
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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
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 MIS infrastructure; (v) the Company's ability to
develop, market, provide, and achieve market acceptance of, new service
offerings to new and existing customers; (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; (xi) the Company's reliance on the continued services of
key executive officers and salespersons; and (xii) 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 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.
INDUSTRY BACKGROUND
Many organizations have become increasingly dependent on information
technology as a competitive tool in today's business environment. The need to
access and distribute data on a real-time basis throughout an organization and
between organizations has led to the rapid growth in network computing
infrastructures, which connect numerous and geographically dispersed end users
via local and wide area networks. This growth has been driven by the emergence
of industry standard hardware, software, and communications tools, as well as
the significant improvement in the performance, capacity and utility of such
network-based equipment and applications.
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The acquisition, development and implementation of computer networks
have, however, become increasingly complex for large organizations due to rapid
and continual change in information technology. Organizations must determine:
(i) the type of workstation platform, computer peripherals, and software
applications to purchase among a vast array of product offerings; (ii) the
optimal design of the network, allowing for both the integration of new systems
and the upgrade of and migration from existing systems; and (iii) the level of
ongoing support required by the network and end users. As organizations rely
more heavily on IT as a key component of their operations and as end users
demand the latest technologies, MIS departments must continually adapt to rapid
change and the increasing complexity of designing, implementing, and maintaining
networks and related applications.
As a result of the rapid changes in the IT products market and the
risks associated with large capital expenditures, organizations increasingly
rely on companies which offer and have knowledge of a wide variety of networking
products and the ability to perform related technical services in a
cost-effective manner. Additionally, many businesses are increasingly electing
to outsource some or all of the management and support of their networks. The
Company believes that the trend of outsourcing IT management functions is driven
by the significant costs associated with maintaining a full-service internal MIS
staff. Such organizations increasingly require MIS personnel with diverse
technology skill sets to effectively adapt to such constant change. As a result,
the costs of hiring, maintaining, and continually educating an MIS department
have grown significantly as demand for qualified personnel has intensified.
These factors have motivated organizations to focus their resources on their
core businesses and seek the expertise of independent providers of IT products
and services.
The Company believes that by working with a single-source provider of
IT products, services and support, organizations will be able to adapt more
quickly to technological changes and reduce their overall IT costs. Those
companies which provide a broad range of product and service offerings,
including network consulting, workstation support, education, application
development, communications installation, Help Desk, IT staffing services,
Internet and remote network management, as well as the ability to work as
integral members of their customers' internal MIS teams, should be well
positioned to capitalize on the anticipated growth of the IT products and
services industry.
PRODUCTS
The Company resells IT products from leading hardware manufacturers and
software developers. In 1997, 77.1% of the Company's net sales and 53.9% of its
gross profits were generated from product sales. Such products include
workstations, servers, networking, and communications equipment, enterprise
computing products, and application software. Through its established vendor
alliances with Ingram and MicroAge, major aggregators of computer hardware and
software, the Company provides its customers with competitive pricing and
value-added services such as electronic product ordering, product configuration,
testing, warehousing, and delivery. The Company resells products from numerous
industry-leading manufacturers of computer hardware, software and networking
equipment. Such manufacturers include:
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<TABLE>
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3Com Dell Lexmark Oracle
APC Epson Lotus Seagate
Apple FORE Systems Lucent Technologies Storage Dimensions
AST Hayes Microsoft Sun Microsystems
Bay Networks Hewlett-Packard NEC Sybase
Cisco Systems IBM Network Associates Symantec
Citrix Intel Novell Tektronix
Compaq Kingston Okidata Toshiba
</TABLE>
The Company obtains products from such manufacturers primarily through
its relationships with Ingram and MicroAge. The Company's relationship with
Ingram and MicroAge allow it to minimize inventory risk by ordering products
primarily on an as-needed basis. The Company believes that in most instances,
the cost-plus purchases from Ingram and MicroAge are at prices lower than those
which could be obtained independently from the various manufacturers and other
vendors. The Company utilizes electronic ordering and pricing systems that
provide real-time status checks on the aggregators' extensive inventories. The
Company maintains electronic data interchange links to other suppliers as well,
enabling the Company's sales team to schedule shipments accurately, arrange for
product configuration services, and provide online pricing.
SERVICES
The Company's breadth of services includes, network consulting,
workstation support, education, application development, communications
installation, IT staffing, and Internet services. In addition, in 1997, the
Company introduced additional services, including Help Desk and remote network
management. In 1997, services accounted for 22.9% of the Company's net sales and
46.1% of its gross profit.
NETWORK CONSULTING SERVICES
The Company's network consultants ("Network Consultants") provide
customers with a wide array of IT and network consulting, integration and
support services, including network design, implementation, installation and
administration. The Network Consultants also provide technical staffing and
project management services, including LAN/WAN performance analyses, and system
migration and upgrade services. The Network Consultants also provide new
technology feasibility and impact analyses, end-user group needs analyses, and
formulate disaster recovery plans for customers. The Company provides its
network consulting services 24 hours a day, seven days a week, on an as-needed
basis.
The Network Consultants provide advanced network services and support,
utilizing products of many industry-leading manufacturers including 3Com, Bay
Networks, Cisco Systems, Compaq, Hewlett-Packard, IBM, Intel, Microsoft, Novell
and Sun Microsystems. The Company's Network Consultants have knowledge and
experience in such LAN/WAN platforms as Microsoft Windows NT, Novell NetWare,
UNIX and IBM OS/2; and support both long and short-term engagements at customer
locations. As of December 31, 1997, most of the Company's
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Network Consultants were on-site at various customer locations. The Company
believes that as many large and mid-sized corporations continue to outsource
many of their MIS requirements, there is an opportunity to expand the services
it provides to companies in its target markets.
WORKSTATION SUPPORT SERVICES
The Company's workstation support personnel ("Workstation Analysts")
provide customers with a wide array of IT services for end users, including
hardware and software installations, system upgrades and enhancements, remedial
and preventive maintenance, and equipment management. Several of the Company's
largest customers require the Workstation Analysts to be at the customers'
facilities on a fully dedicated basis. As of December 31, 1997, most of the
Company's Workstation Analysts were on-site at customer locations. Other
customers of the Company rely on the Company's ability to provide dispatched
on-site services in response to customer requests for service. Such support is
available 24 hours a day, seven days a week, depending on the needs of the
customer. In August 1997, the Company opened its 15,000 square foot Customer
Technology Center ("CTC") in East Hanover, New Jersey, allowing the Company's
Workstation Analysts to provide product warehousing, customized configuration
and testing, and depot, or drop off, repair services. The Company tracks service
requests through its customer database, which maintains current status reports
and historical logs of customer communications. The Company's capabilities
include call dispatching, tracking, and escalation. The Workstation Analysts
also provide customized configuration of software and hardware for workstations
and servers and perform asset deployment services to customer sites.
The Workstation Analysts are authorized by many industry-leading
manufacturers, including AST, Compaq, Dell, Hewlett-Packard, IBM, NEC and
Toshiba, to perform both in- and out-of-warranty maintenance services. The
Company offers a warranty upgrade program to provide faster response and repair
times, additional hours of coverage, warranty extensions and warranty
administration services for customers who desire broader service offerings than
those of the manufacturer. Most of the Workstation Analysts employed by the
Company are "A+ Certified". The A+ Certification Program is sponsored by the
Microcomputer Industry Association and is recognized by leading manufacturers as
the industry-wide standard of professional competency for Workstation Analysts.
The Company's Workstation Analysts service and support a wide variety of IT
products, including microcomputers, printers, and associated peripherals.
EDUCATION SERVICES
The Company operates five education facilities ("Learning Centers"),
offering technical education courses for customers, employees, and the general
public. The Company's Learning Centers offer authorized Microsoft, Novell and
Lotus training classes on network operating systems, network hardware products
and application software. These Learning Centers are utilized by a variety of
customers including network administrators, MIS executives, professional and
administrative end users, as well as the Company's own technical staff.
The Company is a Microsoft Authorized Technical Education Center and
provides advanced education courses which lead to various Microsoft
certifications based on specific
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areas of technical expertise. Novell has designated the Company as a Novell
Authorized Education Center to offer training to NetWare, UnixWare and GroupWise
engineers and administrators. Through a series of exams, these professionals
have the opportunity to obtain various levels of Novell Certifications. The
Company is also certified as a Lotus Authorized Education Center and provides
training for Lotus Notes administrators, developers and end users. Additionally,
the Company participates with another training organization to provide Cisco
training classes for network administrators, network specialists and engineers
who configure and/or support multiple protocol internetworks. The Learning
Centers are Prometric Authorized Testing Centers which provide independent
testing services required for many training courses that lead to various
industry certifications.
The Learning Centers provide ancillary benefits to the Company,
reducing the cost to train Network Consultants, Help Desk Analysts, Application
Development Consultants and Workstation Analysts, providing the Company with
highly trained individuals. The Company believes that its education services,
coupled with its IT staffing services, provide it with a talented pool of
available Network Consultants, Help Desk Analysts, Application Development
Consultants and Workstation Analysts.
APPLICATION DEVELOPMENT SERVICES
As part of an enterprise management solution, the Company provides
application development consulting services, including customized application
design and development, enterprise resource planning, object oriented and
client/server development, database development, and Year 2000 consulting
services. The Company's staff of Application Development Consultants are highly
trained professionals with extensive experience in proven methodologies for
application development and project management. When developing applications,
specific methodologies are implemented for successful and timely completion of
all projects. The Company's staff of Application Development Consultants assist
customers through all phases of the application development process including
gathering business requirements, writing specifications, programming, testing
and documenting.
COMMUNICATIONS INSTALLATION SERVICES
As part of its strategy to offer customers a single-source solution for
their IT needs, the Company provides telecommunications and data system cabling
services, often in conjunction with other services. All of the Company's
Communications Engineers are certified by Berk-Tek, Ortronics, Leviton, or
Hubbell. The Company's Communications Engineers design and install cabling
networks for LANs and telecommunication equipment, including telephone, video,
paging, and other telecommunication systems.
Additionally, the Company sells, installs and services
telecommunications systems including the full line of Lucent Technologies'
Enterprise Communications Systems. The Company frequently coordinates with a
regional telephone service company to provide for customers' service
requirements.
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HELP DESK SERVICES
The Company's Help Desk offers two distinct services, Help Desk Support
and Help Desk Consulting, providing advanced technical support and comprehensive
software application support to corporate end-users. The Help Desk is staffed
with experienced network consultants ("Help Desk Analysts") trained in multiple
software, hardware, and networking products.
Help Desk Support provides corporate end-users with telephone support
on software, hardware and networking products. Help Desk Support is capable of
providing global coverage and its breadth of services includes automatic
dispatching of on-site support, flexible staffing for coverage 24 hours a day,
seven days a week, and advanced call reporting.
The Company tracks and maintains Help Desk Support service calls with a
customized call management system with computer telephony integration and
advanced switching capabilities. This system allows the Help Desk Analysts to
provide advanced support, dispatch on-site services or seamlessly transfer to
any call entering the system. The Help Desk Analysts coordinate with major
vendor support systems on a regular basis and have access to large volumes of
technical information and documentation, personnel, and diagnostic techniques.
The Company's Help Desk Consulting services help customers fully
realize the benefits of their own internal Help Desk. The Company establishes a
solutions-oriented support system which encompasses a phased approach to
analyzing, designing and building complete Help Desks. Help Desk Consulting
services includes a support system audit, development of a strategic design,
integration of the solution, and post-implementation review.
IT STAFFING SERVICES
The Company offers recruiting and placement services for technical
personnel for temporary assignments and permanent positions. At December 31,
1997, the Company employed three full-time recruiters. Although such placement
services are available to the Company's customers, to date, these services have
been performed primarily for the Company to fulfill its own technical personnel
needs.
In 1997, the Company initiated its Career Path to Employment ("CPE")
Program. The CPE Program helps the Company meet hiring and staffing needs by
integrating the Company's information technology recruiting efforts with the
education capabilities of its Learning Centers. This accelerated program selects
the most qualified candidates and places them into the CPE's training and
certification programs. As of December 31, 1997, approximately 70 individuals
successfully completed the program, all of whom were hired by the Company.
INTERNET SERVICES
The Company provides Internet services, including secure Internet
access, web site marketing, development and maintenance, and training. As an
Internet Service Provider, the Company's customers web sites are independently
maintained on a secure network through secure mechanisms that include firewalls
and encryption devices. Additionally, the Company
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provides the necessary consulting, hardware, and software installation services
so the customer has direct access to the Internet while maintaining the web site
at the customer's location.
The Company offers web site marketing, development and maintenance
services, including user interface design, web site graphic design, content
creation, and management. Through customized courses at its Learning Centers,
the Company also provides Internet training classes on Internet access and
navigation.
REMOTE NETWORK MANAGEMENT SERVICES
As part of its overall mission to offer complete IT solutions, the
Company's Remote Network Management Center ("Center"), located at its
headquarters in Cedar Knolls, New Jersey, provides remote network monitoring,
resolution management, performance reporting, desktop management and system
administration services by means of dedicated communication links to its
customers' networks. As a single-point-of-contact installation, the Center is a
central component of the Company's total system management and support service
offerings. The Center is operational 24 hours a day, seven days a week and is
staffed with highly trained and experienced Network Consultants.
The Center offers proactive problem resolution by (i) monitoring
components of a customer's network, including file servers, routers, database
servers, concentrators, workstations, and printers; (ii) managing the customer's
networks to maximize their efficiency and minimize system downtime, promptly
notifying customers of problems as they occur and remedying such problems. The
customer then focuses on their own core business, while the Company monitors and
manages the day-to-day operations of the customer's network. The Center
represents the Company's continued investment in leading-edge technology and
dedication to providing its customers with advanced IT solutions.
The Company provides end-to-end network services to remote locations
from a single point in New Jersey. The Company believes that the Center will
allow it to productize and market its services to virtually any networked
organization. The Company believes that the high demand for technical resources,
coupled with an increasing need for operational efficiency and network security,
will lead many organizations to explore remote network service options as a way
to maximize their labor resources and ensure greater security, while realizing
cost savings at the same time.
SALES AND MARKETING
The Company currently focuses its sales and marketing efforts on major
corporations in its target markets through its sales and marketing departments
consisting of 98 people as of December 31, 1997. The Company believes that its
direct sales and support personnel provide effective account penetration and
management, enhanced communications, and long-term relationships with its
existing customers. To date, the Company has focused its sales and marketing
efforts on Fortune 1000 and other large and mid-sized companies located
primarily in the New York-to-Philadelphia corridor. Given the concentration of
major corporations in such region and the trend to outsourcing of IT services,
the Company does not anticipate the need to
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expand the geographic scope of its sales and marketing efforts outside of its
traditional sales area in the near future.
The Company has concentrated its efforts over the past few years on
increasing the size and quality of its direct sales force, expanding its sales
support infrastructure and developing a marketing department dedicated to
supporting the efforts of the Company's various business segments. The Company's
direct sales force is comprised of 41 sales persons as of December 31, 1997.
Each salesperson's compensation is commission based. Sales personnel derive
sales leads from individual business contacts, leads generated by the marketing
department's efforts, and customer referrals from suppliers and vendors.
The Company continues to support the growth of its network consulting
and other services businesses through the hiring of additional direct sales and
support personnel. The Company's sales and marketing focus continues to be
technology-driven, with its Network Consultants and Workstation Analysts
participating with its direct sales personnel as part of the Company's team
approach to sales. The Company's sales personnel also participate in training
programs designed by manufacturers to introduce their new and upgrade products
as well as to provide industry information and sales technique instruction. The
Company believes that it maintains a competitive advantage by continually
educating its sales force on the latest technologies and through the increased
role of high-level technical personnel in the sales process.
The Company's marketing department is responsible for coordinating the
various sales and technical personnel that may be required in soliciting a
particular project. The Company's marketing efforts include the creation and
production of Company brochures, direct mail programs, new business marketing
strategies, and sales presentation materials for prospects.
CUSTOMERS
The Company's major customers include many Fortune 1000 corporations in
a variety of industries. The Company's major customers include:
Nabisco BASF Corporation
KPMG Peat Marwick Lucent Technologies
Summit Bank Mercedes-Benz of North America
Innovex PSE&G
Credit Suisse First Boston Polo-Ralph Lauren
The Company added several new customers during 1997 through its own
sales and marketing efforts and as a result of the Lande acquisition. During
1997, two customers, Nabisco and KPMG Peat Marwick, accounted for approximately
31% of the Company's net sales, 16% and 15% respectively. During each of the
years ended December 31, 1995 and 1996, one customer, Nabisco, accounted for
approximately 20%, and 17% of the Company's net sales, respectively. No other
customer accounted for more than 10% of the Company's net sales during the three
years ended December 31, 1997. Sales to the Company's top 10 customers totaled
approximately 68%, 63% and 69% of net sales for the three years ended December
31, 1997, respectively. In December 1997, the Company entered into a $20.4
million contract ("MTA Contract") with the
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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.
In general, there are no ongoing written commitments by customers to
purchase products from the Company. All product sales by the Company are made on
a purchase order basis. In addition, the Company normally ships products within
30 days of receiving an order and, therefore, does not customarily have a
significant backlog. However, in December 1997, the Company entered into the MTA
Contract. The Company is the prime contractor responsible for project
management, systems procurement, and installation. The contract allows for
completion over a four year period although the project schedule currently
anticipates a 24 month schedule.
A significant reduction in orders from any of the Company's largest
customers could have a material adverse effect on the Company's results of
operations. There can be no assurance that the Company's largest customers will
continue to place orders with the Company, or that orders by such customers will
continue at their previous levels. Although the Company has service contracts
with many of its customers to provide systems integration and other services,
such service contracts generally are terminable upon relatively short notice.
There can be no assurance that the Company's service customers will continue to
enter into service contracts with the Company or that existing contracts will
not be terminated.
SUPPLIERS
The Company relies on manufacturers and aggregators of computer
hardware, software and peripherals to develop, manufacture and supply all of the
computer components sold and serviced by the Company. The Company primarily
utilizes Ingram and MicroAge, major aggregators of computer hardware and
software, to procure the majority of its products for resale to its customers.
The Company has purchased products on a cost-plus basis from MicroAge
since the Company's inception in 1984. In July 1994, the Company renewed its
agreement with MicroAge. Under such agreement, the Company is required to
purchase a minimum of $100,000 of products from MicroAge per quarter. During
1995, 1996 and 1997, the Company purchased from MicroAge approximately 64%, 48%
and 36%, respectively, of the products sold by the Company. Such purchases
totaled approximately $35.2 million, $46.3 million and $47.0 million during such
respective periods. The MicroAge agreement may be terminated by the Company with
or without cause upon 90 days prior written notice and may be terminated by
MicroAge under limited circumstances upon 90 days prior written notice. The
Company also purchases computer products from Ingram on a cost-plus basis. The
Company's relationship with Ingram was initiated by the Company in late 1994 to
help ensure its customers of product availability and competitive pricing. The
Company's purchases from Ingram accounted for approximately 17%, 35% and 50% of
the Company's total product purchases in 1995, 1996 and 1997, respectively. Such
purchases totaled approximately $9.3 million, $33.9 million and $65.1 million
during such respective periods. The agreement with Ingram may be terminated with
or without cause by either party upon 30 days prior written notice. The
Company's agreements with
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MicroAge and Ingram provide for discounted pricing and rebates provided that the
Company meets agreed-upon purchase level targets.
In addition to its agreements with MicroAge and Ingram, the Company
maintains standard authorized dealership agreements directly with many leading
manufacturers of computer hardware and software. Under the terms of these
agreements, the Company is authorized to resell to end users and provide
warranty service on the products of such manufacturers. The Company's status as
an authorized reseller is essential to the operation of the Company's business.
In general, the agreements do not require minimum purchases and include
termination provisions ranging from immediate termination to termination upon 90
days prior written notice. Many of such agreements are based upon the Company's
continued relationships with authorized aggregators. The Company, however,
generally does not purchase products directly from these manufacturers because
the Company believes that MicroAge and Ingram provide it with several
advantages, including competitive pricing, limited inventory risk, ready product
availability, product quality assurance, access to the various vendors which may
be required on a particular project, electronic product ordering, product
configuration, testing and warehousing. The Company has not entered into any
long-term contracts with its suppliers, electing to purchase computers, computer
systems, components and parts on a purchase order basis. As a result, there can
be no assurance that such products will be available as required by the Company
at prices or on terms acceptable to the Company.
COMPETITION
The markets for the Company's products and services are characterized
by intense competition. The Company believes that the principal competitive
factors in the market for IT products and services include price, customer
service, breadth of product and service offerings, product availability,
technical expertise, the availability of skilled technical personnel, adherence
to industry standards, financial stability and reputation. The Company's
competitors include established computer product manufacturers (some of which
supply products to the Company), distributors, aggregators, computer resellers
(many of which are able to purchase products at prices lower than the Company),
systems integrators and IT service providers. Many of the Company's current and
potential competitors have longer operating histories and financial, sales,
marketing, technical and other resources substantially greater than those of the
Company. As a result, the Company's competitors may be able to adapt more
quickly to changes in customer needs or to devote greater resources than the
Company to the sales of IT products and the provision of IT services. Such
competitors could also attempt to increase their presence in the Company's
markets by forming strategic alliances with other competitors or customers of
the Company, offer new or improved products and services to the Company's
customers or increase their efforts to gain and retain market share through
competitive pricing. As the market for IT products has matured, price
competition has intensified and is likely to continue to intensify and has
resulted in continued industry-wide downward pricing pressure. In addition,
competition for quality technical personnel has continued to intensify,
resulting in increased personnel costs for many IT service providers. Such
competition in IT products and services has adversely affected, and likely will
continue to adversely affect, the Company's gross profits, margins and results
of operations. Furthermore, the Company believes there are low barriers to entry
into its markets
-12-
<PAGE>
which enable new competitors to offer competing products and services. There can
be no assurance that the Company will be able to continue to compete
successfully with existing or new competitors.
The Company believes that it competes with its competitors by providing
a single-source solution for its customers' IT products and services needs and
by providing a wider range of high quality services to the MIS departments and
end users of its corporate customers. The Company also believes that it
distinguishes itself from its competition on the basis of its technical
expertise, competitive pricing, vendor alliances, relationships with Ingram and
MicroAge, direct sales strategy, and customer service orientation. Based on the
level of the Company's recurring business with many of its large customers, the
Company believes that it compares favorably to many of its competitors with
respect to the principal competitive factors set forth above.
EMPLOYEES
As of December 31, 1997, the Company employed 738 persons, of whom 545
were technical personnel (consisting of 389 Network Consultants, 132 Workstation
Analysts, 15 Communications Engineers and 9 Instructors), 98 were engaged in
sales and marketing, and 95 were engaged in finance, administration and
management. The total number of technical personnel engaged by the Company has
grown significantly in recent years, from 38 at December 31, 1992, or 36% of its
workforce, to 545 at December 31, 1997, or 74% of its workforce.
None of the Company's employees are represented by a collective
bargaining agreement. Substantially all of the Company's employees have executed
an invention assignment and confidentiality agreement. In addition, the Company
requires that all new employees execute such agreement as a condition of
employment by the Company. The Company believes that it has been successful in
attracting and retaining skilled and experienced personnel. There is increasing
competition for experienced sales and marketing personnel and technical
professionals. The Company considers relations with its employees to be
satisfactory.
The Company's success depends in part on its ability to attract, hire,
train and retain qualified managerial, technical and sales and marketing
personnel, particularly for systems integration, support services and training.
Competition with other service providers and internal corporate MIS departments
for such personnel is intense, as many of the Company's larger competitors
recently have announced their intentions to aggressively hire technical
personnel on a large scale. There can be no assurance that the Company will be
successful in attracting and retaining the technical personnel it requires to
conduct and expand its operations successfully. The Company's ability to
implement its strategy to expand and broaden the services component of its
business and its results of operations could be materially adversely affected if
the Company were unable to attract, hire, train and retain qualified technical
personnel.
-13-
<PAGE>
ITEM 2. PROPERTIES.
The Company currently leases or subleases all of its facilities. The
Company leases its headquarters in Cedar Knolls, New Jersey, totaling
approximately 38,000 square feet of office space. The lease expires in September
2003 and contains renewal options for two additional five-year terms. The
Company has recently entered into a lease for approximately 4,700 square feet
with an option to lease an additional 13,300 square feet at a facility adjacent
to the Company's headquarters. The lease expires in November 2002 and contains a
five-year renewal option. The Company also leases office space for two
additional Learning Centers in Iselin and Saddle Brook, New Jersey as well as
its Customer Technology Center located in East Hanover, New Jersey. The Company
also leases office space in King of Prussia, Pennsylvania for the Company's
Philadelphia-area sales office and Learning Center. In addition, the Company
leases office space in Manhattan for its New York City area sales office and
Learning Center. The Company believes its headquarters, sales offices, Learning
Centers and customer technology center are adequate to support its current level
of operations. See Note 8 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
On February 13, 1996, the Company, as plaintiff, filed a complaint and jury
demand in the Superior Court of New Jersey Chancery Division: Morris County,
against two former employees of the Company and their current employer
(together, the "Defendants"). Such complaint relates to a civil action for
damages, a temporary restraining order and preliminary and permanent injunctive
relief against the Defendants and alleges theft of services, theft of Company
property, theft of corporate opportunity, and unauthorized use of Company credit
cards by the Defendants. The Company is seeking restitution from certain of the
Defendants and additional compensatory damages from another Defendant. The
Company intends to vigorously pursue all available remedies against the
Defendants. Recently, the parties consented to the suspension of discovery
pending mediation of all claims. Therefore, the Company currently is unable to
evaluate the likelihood of a favorable outcome for the Company. The Company
believes that some or all of its damages in connection with the litigation may
be covered by insurance. In any event, Stan Gang, the Company's founder,
Chairman of the Board, President and Chief Executive Officer and majority
shareholder, has agreed to indemnify the Company for any and all losses which
the Company may sustain, up to $1.0 million, arising from or relating to the
alleged wrongful conduct of the Defendants. In connection therewith, Mr. Gang
paid $675,000 of his personal funds to the Company. Pursuant to the terms of the
agreement between the Company and Mr. Gang, the Company shall reimburse Mr. Gang
in the event and to the extent that the Company is awarded and collects damages
from the Defendants, receives sums as a result of a settlement between the
Company and the Defendants, or receives proceeds under an insurance policy.
In September 1997, the Company was audited by the New Jersey Department of
Labor, Division of Wage and Hour Compliance (the "State") regarding the
Company's compensatory and overtime payment practices. Such audit revealed
record keeping errors involving daily and weekly totaling of hours worked on
employee time sheets. Subsequent to the audit, a notice of violation was issued
to the Company with a requirement to perform a self-audit covering the period
from
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<PAGE>
September 1995 through September 1997 identifying all non-exempt employees who
were not paid correctly. The Company requested a pre-hearing conference to
clarify the scope of the self-audit. As a result of the pre-hearing conference,
the Company is in the process of performing the self-audit, but given the early
stage of such self-audit, the Company is currently unable to evaluate the extent
of non-compliance. Accordingly, any amount that may be due to current or former
employees or the State has not been determined at this time. The Company has
recorded an amount for payment of unpaid wages and possible fines, penalties,
and administrative fees. Although there can be no assurance that such amount
will be sufficient or that amounts assessed by the State in the future, if any,
as well as any fines, penalties, or administrative fees which may be imposed,
will not be material, presently, the Company believes that the resolution of
this issue will not have a material impact on the Company's financial position,
results of operations, or cash flows. The Company is in the process of reviewing
its policies and procedures regarding the compensation of its hourly employees
and will implement new control systems as necessary to seek to assure full
compliance in the future.
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
-15-
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol ALPH. The following table sets forth, for the periods indicated, the
high and low sales prices per share of Common Stock as reported by the Nasdaq
National Market.
QUARTER ENDED HIGH LOW
- ------------- ---- ---
March 1996 (from March 21, 1996)........................ $11 1/4 $10
June 1996............................................... 12 8 1/2
September 1996.......................................... 10 5/8 6 3/4
December 1996........................................... 16 3/8 9 1/2
March 1997.............................................. 17 1/4 11 3/4
June 1997............................................... 20 1/2 11 7/8
September 1997.......................................... 17 7/8 13 1/4
December 1997........................................... 15 7/8 9 5/8
The prices shown above represent quotations among securities dealers, do
not include retail markups, markdowns or commissions and may not represent
actual transactions.
On February 27, 1998, the closing sale price for the Common Stock on the
Nasdaq National Market was $13.25 per Share. As of February 27, 1998, the
approximate number of holders of record of the Common Stock was 155 and the
approximate number of beneficial holders of the Common Stock was 4,300.
Prior to the consummation of the Company's initial public offering of its
Common Stock in March 1996, the Company had elected to be treated as an S
Corporation for federal income tax purposes from 1986 and for New Jersey State
income tax purposes from 1994. As a result, the net income of the Company for
federal and certain state income tax purposes for such periods was reported by,
and taxed directly to, the Company's then current shareholders. In 1995 and
1996, the Company made distributions to such shareholders in the form of
dividends ($8.6 million) and net loan payments ($719,000) totaling $9.3 million
(of which $3.1 million was to fund their 1994, 1995 and 1996 tax liabilities and
$6.2 million represented substantially all of the Company's previously taxed but
undistributed S Corporation earnings). See Note 10 of Notes to Consolidated
Financial Statements. Since such distributions and the termination of the
Company's S Corporation status, the Company has applied and currently intends to
continue to apply its retained and current earnings toward the development of
its business and to finance the growth of the Company. Consequently, the Company
currently does not anticipate paying cash
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<PAGE>
dividends in the foreseeable future. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Liquidity and Capital
Resources."
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below have been derived
from the consolidated financial statements of the Company audited by Price
Waterhouse LLP, independent accountants. Consolidated balance sheets at December
31, 1996 and 1997 and the related consolidated statements of income, of changes
in shareholders' equity and of cash flows for each of the three years in the
period ended December 31, 1997 and notes thereto appear elsewhere in this Annual
Report on Form 10-K. The selected financial data presented below at December 31,
1993, 1994 and 1995 and for the years ended December 31, 1993 and 1994 have been
derived from audited financial statements of the Company, which are not included
in this Annual Report on Form 10-K. The selected consolidated financial data set
forth below should be read in conjunction with, and is qualified in its entirety
by, the Company's consolidated financial statements, related notes and other
financial information included elsewhere in this Annual Report on Form 10-K.
-17-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995 1996(1) 1997(2)
---- ---- ---- ------- -------
STATEMENT OF INCOME DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales:
Product sales........................... $ 41,641 $ 62,365 $62,516 $99,468 $147,602
Services and support.................... 5,400 8,103 11,500 20,137 43,790
-------- -------- ------- ------- --------
47,041 70,468 74,016 119,605 191,392
-------- -------- ------- ------- --------
Cost of sales:
Product sales........................... 36,295 54,445 54,579 88,218 130,314
Services and support.................... 3,776 5,127 6,869 12,915 29,013
-------- -------- ------- ------- --------
40,071 59,572 61,448 101,133 159,327
-------- -------- ------- ------- --------
Gross profit:
Product sales........................... 5,346 7,920 7,937 11,250 17,288
Services and support.................... 1,624 2,976 4,631 7,222 14,777
-------- -------- ------- ------- --------
6,970 10,896 12,568 18,472 32,065
-------- -------- ------- ------- --------
Operating expenses:
Selling expenses........................ 2,771 3,946 4,468 7,301 13,224
General and administrative expenses..... 3,547 3,767 3,925 5,446 9,537
-------- -------- ------- ------- --------
6,318 7,713 8,393 12,747 22,761
-------- -------- ------- ------- --------
Operating income.......................... 652 3,183 4,175 5,725 9,304
Other income (expense), net............... (92) (107) (86) 129 61
-------- -------- ------- ------- --------
Income before income taxes................ 560 3,076 4,089 5,854 9,365
Provision for income taxes(3)............. 50 89 124 1,970 3,844
-------- -------- ------- ------- --------
Net income................................ $ 510 $ 2,987 $ 3,965 $ 3,884 $ 5,521
======== ======== ======= ======= =======
Earnings per share - Basic................ $ 0.15 $ 0.88 $ 1.17 $ 0.83 $ 0.97
========= ======== ======= ======= =======
Weighted average shares outstanding....... 3,400 3,400 3,400 4,690 5,719
========= ======== ======= ======= =======
Earnings per share - Diluted.............. $ 0.15 $ 0.88 $ 1.17 $ 0.82 $ 0.93
========= ======== ======= ======= =======
Weighted average shares outstanding....... 3,400 3,400 3,400 4,737 5,905
========= ======== ======= ======= =======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ 2,478 $ 4,524 $ 5,033 $14,407 $33,123
Total assets............................ 9,806 16,697 18,770 43,647 72,541
Long term debt and capital lease
obligations, less current portion......... 1,131 1,455 590 41 ---
Shareholders' equity.................... 2,072 3,909 6,574 18,921 41,722
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On July 24, 1996, the Company acquired certain assets of Lior, Inc., in a
business combination accounted for under the purchase method, for $1.1
million, including acquisition costs, financed with a portion of the
proceeds from the Company's initial public offering. The operations related
to the acquired assets of Lior are included in the accompanying consolidated
financial statements subsequent to July 24, 1996. See Note 2 of Notes to
Consolidated Financial Statements.
(2) On August 1, 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,
for $1.8 million, including acquisition costs. The operations related to the
acquired assets and liabilities of Lande are included in the accompanying
consolidated financial statements subsequent to August 1, 1997. See Note 2
of Notes to Consolidated Financial Statements.
(3) Prior to March 19, 1996, the Company had elected to be treated as an S
Corporation for federal and, in certain cases, state income tax purposes.
Therefore, no provision for federal and a reduced provision for state income
taxes was recorded prior to that date. See Note 10 of Notes to Consolidated
Financial Statements.
-18-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
The Company is a single-source provider of IT products, services and
support to Fortune 1000 and other large and mid-sized companies located
primarily in the New York-to-Philadelphia corridor. The Company was formed in
1984 as an authorized reseller of computer hardware and software products, and
since 1990, has been developing and offering related IT services. To date, most
of the Company's net sales have been derived from IT product sales. In 1997, net
product sales were 77.1% and services and support revenue was 22.9% of the
Company's net sales.
The Company has entered into distribution agreements with Ingram and
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 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, 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 1997, the Company acquired approximately 36% and 50%
of its products for resale from MicroAge and Ingram, respectively.
Except for the MTA Contract entered into in December 1997, 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, workstation support, application
development, communications installation, education, Help Desk, IT staffing
services, Internet and remote network management. Services and support revenue
is recognized as such services are performed. The Company's network consulting,
workstation support and communications installation services are billed on a
time and materials basis. The Company's education and IT staffing services are
fee-based on a per-course and per-placement basis, respectively. Generally, the
Company's service arrangements with its customers may be terminated by such
customers with limited advance notice and without significant penalty. The most
significant cost relating to the services component of the Company's business is
personnel costs 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
-19-
<PAGE>
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, price protection and
other incentives from certain of its suppliers. Although the Company is unaware
that any of its suppliers or manufacturers have or intend to change these
programs, there can be no assurances any such rebates, discounts or incentives
will continue at historical levels, or at all. A significant 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 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 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 customers' IT
product requirements and its long-term relationships with large customers,
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.
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<PAGE>
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". The Company has conducted a
review of its internal business systems for Year 2000 compliance. The Company
believes that based on such review, the Company's internal business systems,
including its computer systems, are Year 2000 compliant. There can be no
assurance, however, that the Year 2000 Problem relating to its systems will not
adversely affect the Company's business, financial position, results of
operations or cash flows.
The Company resells IT products of leading hardware manufacturers and
software developers. As a result, the Company has no control over the
development 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 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.
-21-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales, and the percentage change in the
dollar amount of such data compared to the prior year:
<TABLE>
<CAPTION>
PERCENTAGE
INCREASE
PERCENTAGE OF NET SALES (DECREASE)
-------------------------------- -----------------
YEAR ENDED
DECEMBER 31,
-------------------------------- 1996 1997
OVER OVER
1995 1996(1) 1997(2) 1995 1996
------ --------- --------- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales:
Product Sales.......................................... 84.5% 83.2% 77.1% 59.1% 48.4%
Services and support................................... 15.5 16.8 22.9 75.1 117.5
------- ------- -------
100.0 100.0 100.0 61.6 60.0
Cost of sales............................................. 83.0 84.6 83.2 64.6 57.5
------- ------- -------
Gross profit.............................................. 17.0 15.4 16.8 47.0 73.6
------- ------- -------
Operating expenses:
Selling expenses....................................... 6.1 6.1 6.9 63.4 81.1
General and administrative expenses.................... 5.3 4.5 5.0 38.8 75.1
------- ------- -------
11.4 10.6 11.9 51.9 78.6
------- ------- -------
Operating income.......................................... 5.6 4.8 4.9 37.1 62.5
Other income (expense), net............................... (0.1) 0.1 0.0 250.0 (52.7)
------- ------- -------
Income before pro forma income taxes...................... 5.5 4.9 4.9 43.2 60.0
Pro forma provision for income taxes(3)................... 2.2 2.0 2.0 44.9 95.1
------- ------- -------
Pro forma net income...................................... 3.3% 2.9% 2.9% 42.0% 42.1%
======= ======= =======
Gross profit (as a percentage of related net sales):
Product sales.......................................... 12.7% 11.3% 11.7% 41.7% 53.7%
Service and support.................................... 40.3% 35.9% 33.7% 55.9% 104.6%
</TABLE>
(1) On July 24, 1996, the Company acquired certain assets of Lior, Inc., in a
business combination accounted for under the purchase method, for $1.1
million, including acquisition costs, financed with a portion of the
proceeds from the Company's initial public offering. The operations related
to the acquired assets of Lior are included in the accompanying
consolidated financial statements subsequent to July 24, 1996. See Note 2
of Notes to Consolidated Financial Statements.
(2) On August 1, 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,
for $1.8 million, including acquisition costs. The operations related to
the acquired assets and liabilities of Lande are included in the
accompanying consolidated financial statements subsequent to August 1,
1997. See Note 2 of Notes to Consolidated Financial Statements.
(3) Prior to March 19, 1996, the Company had elected to be treated as an S
Corporation for federal and, in certain cases, state income tax purposes.
Therefore, no provision for federal and a reduced provision for state
income taxes was recorded prior to that date. See Note 10 of Notes to
Consolidated Financial Statements. In the above table, for comparative
purposes, pro forma income taxes have been provided as if the Company was a
C Corporation for periods prior to March 19, 1996.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales. Net sales increased by 60.0%, or $71.8 million, from $119.6
million in 1996 to $191.4 million in 1997. Product sales increased by 48.4%, or
$48.1 million, from $99.5 million in 1996 to $147.6 million in 1997. This
increase was attributable primarily to increased demand from the Company's
established customer base and to product sales resulting from the Company's
August 1997 acquisition of certain assets and liabilities of Lande. Services and
support revenue increased by 117.5%, or $23.7 million, from $20.1 million in
1996 to $43.8 million in 1997. This increase was attributable primarily to
increased demand for the Company's service and support offerings, particularly
its network consulting services, due to an increase in the number and size of
customer projects. In 1997, sales to Nabisco and KPMG Peat Marwick, the
Company's largest customers accounted for approximately 16% and 15% respectively
of the
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<PAGE>
Company's net sales. There can be no assurance that such customers will continue
to place product 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 73.6%, or $13.6
million, from $18.5 million in 1996 to $32.1 million in 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
15.4% of net sales in 1996 to 16.8% in 1997 primarily due to increased
manufacturer rebates and increased volume discounts earned resulting from the
higher sales volume. Gross profit margin attributable to product sales increased
from 11.3% in 1996 to 11.7% in 1997. However, the Company expects that downward
pricing pressure on products will continue and there can be no assurance that
the Company will be able to sustain its margins on product sales in the future.
Gross profit margin attributable to services and support revenue decreased from
35.9% of services and support revenue in 1996 to 33.7% in 1997. The decrease in
such gross profit margin was attributable primarily to the addition of several
long-term staffing contracts, which typically yield lower gross margins than
projects and, to the fact that services and support revenue increased at a
slower rate than related personnel and recruiting costs, as the Company
accelerated the hiring and training of technical personnel in anticipation of
the increased demand for its services. Additionally, higher salary costs for
technical personnel had not been fully passed on to customers. The Company
increased its staff of billable technical personnel from 242 at December 31,
1996 to 545 at December 31, 1997.
SELLING EXPENSES. Selling expenses increased by 81.1%, or $5.9 million,
from $7.3 million in 1996 to $13.2 million in 1997 and from 6.1% in 1996 to 6.9%
in 1997 of net sales. The increase in selling expenses in absolute dollars was
attributable primarily to increased salesperson commissions and other support
costs due to the increase in net sales, the increase in sales and marketing
efforts associated with the Company's service and support offerings, and the
costs associated with the Company's new service offerings. The increase as a
percentage of net sales was due primarily to increased salesperson
commission,additional support personnel and related personnel costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 75.1%, or $4.1 million, from $5.4 million in 1996 to $9.5 million
in 1997, an increase from 4.5% to 5.0% of net sales, respectively. The increase
in general and administrative expenses in absolute dollars was due primarily to
increases in personnel expenses, training costs, professional fees, accounts
receivable allowances, depreciation charges and insurance premiums. The increase
as a percentage of net sales was due primarily to the additional personnel,
personnel costs and depreciation.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales increased by 61.6%, or $45.6 million, from $74.0
million in 1995 to $119.6 million in 1996. Product sales increased by 59.1%, or
$37.0 million, from $62.5 million in 1995 to $99.5 million in 1996. This
increase was attributable primarily to increased demand from the Company's
established customer base and to product sales resulting from the Company's July
1996 acquisition of certain assets and the business of Lior. Services and
support
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<PAGE>
revenue increased by 75.1%, or $8.6 million, from $11.5 million in 1995
to $20.1 million in 1996. This increase was attributable primarily to increased
demand for the Company's service and support offerings, particularly its network
consulting services, due to an increase in the number and size of customer
projects. In 1996, sales to Nabisco, the Company's largest customer, accounted
for approximately 17% of the Company's net sales.
GROSS PROFIT. The Company's gross profit increased by 47.0%, or $5.9
million, from $12.6 million in 1995 to $18.5 million in 1996. Gross profit
margin decreased from 17.0% of net sales in 1995 to 15.4% in 1996. Gross profit
margin attributable to product sales decreased from 12.7% in 1995 to 11.3% in
1996. The decrease in such gross profit margin during 1996 was attributable
primarily to continued industry-wide downward pricing pressure on sales of
computer products, which typically results in margin deterioration on such sales
and increases in certain volume discounts. The Company expects that downward
pricing pressure on products will continue and there can be no assurance that
the Company will be able to sustain its margins on product sales in the future.
In addition, gross profit margin on product sales in the first half of 1995 was
positively impacted by certain higher margin product sales. Gross profit margin
attributable to services and support revenue decreased from 40.3% of services
and support revenue in 1995 to 35.9% in 1996. The decrease in such gross profit
margin was attributable primarily to the fact that services and support revenue
increased at a slower rate than related personnel and recruiting costs, as the
Company accelerated the hiring and training of technical personnel in
anticipation of the increased demand for its services. The Company increased its
staff of billable technical personnel from 107 at December 31, 1995 to 242 at
December 31, 1996.
SELLING EXPENSES. Selling expenses increased by 63.4%, or $2.8 million,
from $4.5 million in 1995 to $7.3 million in 1996, but remained relatively
constant at 6.1% of net sales in both years. The increase in selling expenses in
absolute dollars was attributable primarily to increased salesperson commissions
and other support costs due to the increase in net sales, the increase in sales
and marketing efforts associated with the Company's service and support
offerings, the costs associated with the Company's new service offerings and the
costs incurred and associated with the Company's expansion into the Philadelphia
market.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 38.8%, or $1.5 million, from $3.9 million in 1995 to $5.4 million
in 1996, but decreased from 5.3% to 4.5% of net sales, respectively. The
increase in general and administrative expenses in absolute dollars was due
primarily to increases in personnel expenses, training costs, professional fees,
depreciation charges and corporate insurance premiums. The decrease as a
percentage of net sales was due primarily to the substantial increase in net
sales.
PRO FORMA ADJUSTMENTS FOR INCOME TAXES
Prior to the consummation of the Company's initial public offering of its
Common Stock in March 1996, the Company had elected S Corporation treatment for
federal income tax purposes from 1986 and for New Jersey state income tax
purposes from 1994. As a result, for such tax periods, the Company's earnings
were taxed directly to the Company's then current shareholders.
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<PAGE>
The historical financial statements for the years 1992 through 1995, therefore,
do not include a provision for federal and state income taxes for such periods,
except for certain state income taxes imposed at the corporate level.
Accordingly, for such periods and for the period January 1 through March 19,
1996 (the date on which the Company terminated its S Corporation status and
became subject to federal and state income taxes at applicable C Corporation
income tax rates) pro forma adjustments for income taxes were calculated as if
the Company had been fully subject to federal and state income taxes based on
the tax laws in effect for the respective periods using the criteria established
under Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes". The pro forma effective tax rates for the years ended December 31, 1994,
1995 and 1996 were 40.5%, 40.4% and 40.8%, respectively. See Note 10 of Notes to
Consolidated Financial Statements.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited quarterly
financial information for each of the eight most recent quarters in the period
ended December 31, 1997. This information is derived from unaudited consolidated
financial statements of the Company that include, in the opinion of the Company,
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of results of operations for such periods, when read in
conjunction with the audited Consolidated Financial Statements of the Company
and notes thereto appearing elsewhere in this Annual Report on Form 10-K.
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<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 (1) 1996 1997 1997 1997(2) 1997
---- ---- -------- ---- ---- ---- ------- ----
STATEMENT OF INCOME DATA: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Product sales................. $15,191 $19,677 $25,466 $39,134 $38,768 $31,609 $34,590 $42,635
Services and support.......... 4,105 4,568 5,113 6,351 7,733 10,201 11,902 13,954
------- ------- ------- ------- ------- ------ ------- -------
19,296 24,245 30,579 45,485 46,501 41,810 46,492 56,589
------- ------- ------- ------- ------- ------ ------- -------
Cost of sales:
Product sales................. 13,283 17,624 22,482 34,829 34,493 28,003 30,477 37,341
Services and support.......... 2,609 3,086 3,227 3,993 5,028 6,736 7,962 9,287
------- ------- ------- ------- ------- -------- -------- -------
15,892 20,710 25,709 38,822 39,521 34,739 38,439 46,628
------- ------- ------- ------- ------- -------- -------- -------
Gross profit:
Product sales................. 1,908 2,053 2,984 4,305 4,275 3,606 4,113 5,294
Services and support.......... 1,496 1,482 1,886 2,358 2,705 3,465 3,940 4,667
------- ------- ------- ------- ------- -------- -------- -------
3,404 3,535 4,870 6,663 6,980 7,071 8,053 9,961
------- ------- ------- ------- ------- -------- -------- -------
Operating expenses:
Selling expenses.............. 1,249 1,513 1,919 2,620 2,918 2,943 3,547 3,816
General and administrative
expenses...................... 1,176 1,237 1,367 1,666 2,036 2,197 2,242 3,062
------- ------- ------- ------- ------- -------- -------- -------
2,425 2,750 3,286 4,286 4,954 5,140 5,789 6,878
------- ------- ------- ------- ------- -------- -------- -------
Operating income................ 979 785 1,584 2,377 2,026 1,931 2,264 3,083
Other income (expense), net..... (18) 83 59 5 (58) (67) 140 46
------- ------- ------- ------- ------- --------- -------- -------
Income before income taxes...... 961 868 1,643 2,382 1,968 1,864 2,404 3,129
Provision for income taxes(3)... (32) 352 674 976 807 764 986 1,287
------- ------- ------- ------- ------- -------- -------- -------
Net income...................... $ 993 $ 516 $ 969 $ 1,406 $ 1,161 $ 1,100 $ 1,418 % 1,842
======= ======= ======= ======= ======= ======== ======== =======
Net income per share
(diluted)....................... $ 0.28 $ 0.10 $ 0.19 $ 0.27 $ 0.22 $ 0.20 $ 0.22 $ 0.29
======= ======= ======= ======= ======= ======== ======== =======
AS A PERCENTAGE OF NET SALES:
Net sales:
Product sales................. 78.7% 81.2% 83.3% 86.0% 83.4% 75.6% 74.4% 75.3%
Services and support.......... 21.3 18.8 16.7 14.0 16.6 24.4 25.6 24.7
------ ------- ------- ------- ------- ------ ------ -------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales................... 82.4 85.4 84.1 85.4 85.0 83.1 82.7 82.4
------ ------- ------- ------- ------- ------ ------ -------
Gross profit.................... 17.6 14.6 15.9 14.6 15.0 16.9 17.3 17.6
------ ------- ------- ------- ------- ------ ------ -------
Operating expenses:
Selling expenses.............. 6.4 6.2 6.3 5.7 6.3 7.0 7.7 6.7
General and administrative
expenses...................... 6.1 5.1 4.4 3.7 4.4 5.3 4.8 5.5
------ ------- ------- ------- ------- ------ ------ -------
12.5 11.3 10.7 9.4 10.7 12.3 12.5 12.2
------ ------- ------- ------- ------- ------ ------ -------
Operating income................ 5.1 3.3 5.2 5.2 4.3 4.6 4.8 5.4
Other income (expense), net..... (0.1) 0.3 0.2 0.0 (0.1) (0.2) 0.3 0.1
------ ------- ------- ------- -------- -------- ------ -------
Income before income taxes...... 5.0 3.6 5.4 5.2 4.2 4.4 5.1 5.5
Provision for income taxes...... (0.2) 1.5 2.2 2.1 1.7 1.8 2.1 2.3
------ ------- ------- ------- ------ ------ ------ -------
Net income...................... 5.2% 2.1% 3.2% 3.1% 2.5% 2.6% 3.0% 3.2%
====== ======= ======= ======= ====== ====== ====== =======
Gross profit (as a percentage of
related net sales):
Product sales................. 12.6% 10.4% 11.7% 11.0% 11.0% 11.4% 11.9% 12.4%
Services and support.......... 36.4% 32.4% 36.9% 37.1% 35.0% 34.0% 33.1% 33.4%
</TABLE>
(1) On July 24, 1996, the Company acquired certain assets of Lior, Inc., in a
business combination accounted for under the purchase method, for $1.1
million, including acquisition costs, financed with a portion of the
proceeds from the Company's initial public offering. The operations related
to the acquired assets of Lior are included in the accompanying
consolidated financial statements subsequent to July 24, 1996. See Note 2
of Notes to Consolidated Financial Statements.
(2) On August 1, 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,
for $1.8 million, including acquisition costs. The operations related to
the acquired assets and liabilities of Lande are included in the
accompanying consolidated financial statements subsequent to August 1,
1997. See Note 2 of Notes to Consolidated Financial Statements.
(3) Prior to March 19, 1996, the Company had elected to be treated as an S
Corporation for federal and, in certain cases, state income tax purposes.
Therefore, no provision for federal and a reduced provision for state
income taxes was recorded prior to that date. See Note 10 of Notes to
Consolidated Financial Statements.
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<PAGE>
The Company's net sales, gross profit, operating income, and net income
have varied substantially from quarter to quarter and are expected to do so in
the future. Many factors, some of which are not within the Company's control,
have contributed and may in the future contribute to fluctuations in operating
results. These factors include: the short-term nature of the Company's
customers' commitments; patterns of capital spending by customers; the timing,
size, and mix of product and service orders and deliveries; the timing and size
of new projects; pricing changes in response to various competitive factors;
market factors affecting the availability of qualified technical personnel;
timing and customer acceptance of new product and service offerings; changes in
trends affecting outsourcing of IT services; disruption in sources of supply;
changes in product, personnel, and other operating costs; and industry and
general economic conditions. The Company also believes that, to a limited
degree, its business is seasonal with a greater proportion of the Company's
product sales occurring in the fourth quarter due to the capital budgeting and
spending patterns of some of its larger customers. Operating results have been
and may in the future also be affected by the cost, timing and other effects of
acquisitions, including the mix of product and service revenues of acquired
companies. The Company believes, therefore, that past operating results and
period-to-period comparisons should not be relied upon as an indication of
future operating performance.
The Company experienced a decline in its results of operations during the
quarter ended June 30, 1996 primarily due to a decrease in gross profit margin
on product sales attributable to industry-wide downward pricing pressure on
product sales and increases in certain volume discounts and to a decrease in
gross profit margin on services and support revenue resulting from the fact that
such revenue increased at a slower rate than related costs due to the
accelerated hiring and training of technical personnel and lower utilization
rates.
The Company's operating results have been and in the future will continue
to be impacted by changes in technical personnel billing and utilization rates.
Many of the Company's costs, particularly costs associated with services and
support revenue, such as personnel and facilities costs, are fixed costs. The
Company's expense levels are based in part on expectations of future revenues.
Technical personnel utilization rates have been and are expected to continue to
be adversely affected during periods of rapid and concentrated hiring. Depending
upon the availability of qualified technical personnel, during periods of rapid
growth the Company has utilized and in the future is likely to utilize contract
personnel, which also adversely affects gross margins. Due to these and other
factors, if the Company is successful in expanding its service offerings and
revenue, periods of variability in utilization are likely to reoccur. In
addition, during such periods the Company is likely to incur greater technical
training costs. Quarterly results also may be impacted due to the fact that
certain compensation-based employment taxes are limited per employee per
calendar year and, as a result, the Company experiences a decrease in employment
taxes as a percent of revenue during the calendar year.
In December 1997, the Company entered into a $20.4 million contract with
the MTA to furnish and install local and wide area computer network components
including network and telecommunication hardware, software and cabling
throughout the MTA's over 200 locations to extend the benefits of automation to
the MTA's actual operations besides its administrative offices, including subway
stations, electrical power substations and a diverse group of train car
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<PAGE>
maintenance facilities. The Company is the prime contractor responsible for
project management, systems procurement, and installation. The contract allows
for completion over a four year period although the project schedule currently
anticipates a 24 month schedule. The work is grouped in reasonably contiguous
locations and payment is predicated upon achieving specific milestone events.
While the Company is currently performing in accordance with the contract terms
and project schedule, and is not aware of any circumstances which would prevent
or delay the project, or place the Company in default, there can be no
assurances that any such events would not occur. In the event of default, in
addition to all other remedies at law, the MTA reserves the right to terminate
the services of the Company and complete the contract itself at the Company's
cost. In the event of unexcused delay by the Company, the Company may be
obligated to pay, as liquidated damages, the sum of $100 per day. In addition
the contract is a fixed unit price contract, and the quantities are approximate,
for which the MTA has expressly reserved the right, for each item, to direct the
amount of equipment be increased, decreased, or omitted entirely on 30 days
notice. Further, the MTA has the right to suspend the work on 10 days notice for
up to 90 days and/or terminate the contract, at any time, on notice, paying only
for the work performed to the date of termination. The project is subject to the
prevailing wage rate and classification for telecommunication workers, managed
by the New York City Controller's office, over which the Company has no control,
and which is generally adjusted each June of each year and may be so adjusted in
the future.
BACKLOG
The Company normally ships products within 30 days of receiving an order
and, therefore, does not customarily have a significant backlog. However, in
December 1997, the Company entered into a $20.4 million contract with the
MTA-New York City Transit Authority to furnish and install local and wide area
computer network components including network and telecommunication hardware,
software and cabling throughout the MTA's over 200 locations to extend the
benefits of automation to the MTA's actual operations besides its administrative
offices, including subway stations, electrical power substations and a diverse
group of train car maintenance facilities (See above for material provisions of
this contract).
RECENTLY ISSUED ACCOUNTING STANDARDS
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
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<PAGE>
to become consistent with SFAS No. 128 and No. 130 (as defined below). SAB 98
requires the Company to revise its EPS computations to present historical EPS
including pre IPO periods. The computations for earnings per share contained in
this Report incorporate SAB 98. See Note 11 of Notes to Consolidated Financial
Statements.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 applies to
all companies and is effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a set of financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise during a period
from transactions generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Management believes that the adoption of SFAS No. 130
will not have a material impact on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 applies to all public companies and is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 requires that
business segment financial information be reported in the financial statements
utilizing the management approach. The management approach is defined as the
manner in which management organizes the segments within the enterprise for
making operating decisions and assessing performance. Management believes the
adoption of SFAS No. 131 will not have a material impact on the financial
statements.
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
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<PAGE>
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, 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 referenced above. The Company's cash used in
operations for the years ended December 31, 1996 and 1997 were $4.6 million and
$11.9 million, respectively, and consisted primarily of an increase in accounts
receivable from increased sales of $71.8 million. As measured in days sales
outstanding, the Company's accounts receivable increased from 58 days at
December 31, 1996 to 80 days at December 31, 1997. The increase in accounts
receivable in absolute dollars and in days sales outstanding 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 Company's cash flow from operations has been
and continues to be affected primarily by the collection of accounts receivable,
which accounts receivable have increased as net sales have increased. In
addition, as net sales have increased, the Company's allowance for doubtful
accounts has increased from $263,000 to $1.3 million at December 31, 1996 and
1997, respectively. There can be no assurance that such amounts will be
sufficient or that amounts recorded in the future, if any, for bad debts will
not be material.
The Company's working capital was $14.4 million and $33.1 million at
December 31, 1996 and 1997, respectively.
In 1995 and 1996, the Company made cash distributions to the then current
shareholders of the Company in the form of dividends ($8.6 million) and net loan
payments ($719,000), totaling $9.3 million (of which $3.1 million was to fund
their 1994, 1995 and 1996 tax liabilities and $6.2 million represented
substantially all of the Company's previously taxed but undistributed S
Corporation earnings).
The Company invested $779,000, $3.1 million and $3.8 million in capital
equipment and leasehold improvements in 1995, 1996 and 1997, respectively. The
significant increase in 1997 was due primarily to purchases and upgrades of
computer equipment and software utilized in-house, and development of the
services component of the Company's business. Although there are no other
material commitments for capital expenditures currently outstanding, the Company
intends additional capital expenditures to continue the expansion of the
services component of its business and for the enhancement of its MIS
infrastructure.
The Company purchases certain inventory and equipment through financing
arrangements with IBM Credit Corporation and Finova Capital Corporation. At
December 31, 1997, there were outstanding balances of $8.8 million and $7.1
million, respectively, 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 June 30, 1997
with First Union National Bank (the "Bank"), the Bank 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.
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<PAGE>
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.
On August 1, 1997, the Company consummated the acquisition of certain
assets and assumed certain liabilities of 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, which was paid by the Company at closing, accounts payable and accrued
expenses, and obligations under a lease which expires in April 2008, for New
York City office space. Intangible assets, which are included in other assets,
of approximately $1.8 million resulted from this transaction and are being
amortized over their useful life over periods not to exceed 15 years.
In September 1997, the Company was audited by the New Jersey Department of
Labor, Division of Wage and Hour Compliance (the "State") regarding the
Company's compensatory and overtime payment practices. Such audit revealed
record keeping errors involving daily and weekly totaling of hours worked on
employee time sheets. Subsequent to the audit, a notice of violation was issued
to the Company with a requirement to perform a self-audit covering the period
from September 1995 through September 1997 identifying all non-exempt employees
who were not paid correctly. The Company requested a pre-hearing conference to
clarify the scope of the self-audit. As a result of the pre-hearing conference,
the Company is in the process of performing the self-audit, but given the early
stage of such self-audit, the Company is currently unable to evaluate the extent
of non-compliance. Accordingly, any amount that may be due to current or former
employees or the State has not been determined at this time. The Company has
recorded an amount for payment of unpaid wages and possible fines, penalties,
amd admimistrative fees. Although there can be no assurance that such amount
will be sufficient or that amounts assessed by the State in the future, if any,
as well as any fines, penalties, or administrative fees which may be imposed,
will not be material, presently, the Company believes that the resolution of
this issue will not have a material impact on the Company's financial position,
results of operations, or cash flows. The Company is in the process of reviewing
its
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<PAGE>
policies and procedures regarding the compensation of its hourly employees
and will implement new control systems as necessary to seek to assure full
compliance in the future.
The Company has been notified by the taxing authorities of several
jurisdictions concerning the Company's failure to meet certain reporting and
compliance requirements of such jurisdictions with respect to the Company's
sales tax obligations. The Company recently commenced a review of its reporting
and compliance procedures relating to its sales tax obligations. Such review is
in progress and, therefore, the extent of the Company's non-compliance is
currently not known. As a result, the Company cannot estimate the full impact of
its reporting and compliance delinquencies at this time. The Company has
recorded an amount for payment of unpaid sales taxes and possible fines and
penalties. Although there can be no assurance that such amount will be
sufficient or that amounts assessed by any jurisdiction in the future, if any,
as well as any fines or penalties which may be imposed, will not be material,
presently, the Company believes that the resolution of this issue will not have
a material impact on the Company's financial position, results of operations or
cash flows. The Company is in the process of reviewing its policies and
procedures regarding compliance with applicable sales tax regulations and will
implement new control systems as necessary to seek to assure full compliance in
the future.
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 December 31, 1997, capital lease
obligations outstanding under these equipment leases, which expire in 1998,
aggregated $44,000.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to Item 14(a)(1) and (2) on page 34 for a list of
financial statements and supplementary data required to be filed pursuant to
this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
1998 Annual Meeting of Shareholders is incorporated herein by reference to such
proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 1998 Annual Meeting of Shareholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 1998
Annual Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Consolidated Financial
Statements on Page F-1.
(a) (2) Financial Statement Schedules and Supplementary Data.
All financial statement schedules are omitted because the
information is not required, or is otherwise included in the
Consolidated Financial Statements or the notes thereto
included in this Annual Report on Form 10-K.
Reference is made to Item 7. "Management's Discussion and
Analysis of Results of Operations and Financial Condition -
Selected Quarterly Results of Operations" on page 25 for
selected quarterly financial data.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 35.
(b) Reports on Form 8-K.
The Company filed no current reports on Form 8-K during the
last quarter of the period covered by this annual report.
-34-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF
NO. EXHIBIT
- ----------------- ----------------------------
3.1* Amended and Restated Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1*# 1995 Stock Plan of the Company.
4.2*# 1995 Non-Employee Director Stock Option Plan.
4.3*# 401(k) Plan, adopted October 1991.
4.4# Employee Stock Purchase Plan.
10.1*# Employment Agreement dated October 1, 1995 between
the Company and Stan Gang.
10.2*# Employment Agreement dated October 1, 1995 between
the Company and Bruce Flitcroft.
10.3*# Employment Agreement dated October 1, 1995 between
the Company and Philip M. Pfau.
10.4*# Employment Agreement dated October 1, 1995 between
the Company and Dennis Samuelson.
10.5*# Employment Agreement dated October 1, 1995 between
the Company and Lawrence Mahon.
10.6*# Employment Agreement dated October 1, 1995 between
the Company and John Centinaro.
10.7*# Employment Agreement dated October 1, 1995 between
the Company and John Crescenzo.
10.8*# Employment Agreement effective November 1, 1995
between the Company and Gary S. Finkel.
10.9* Lease dated June 27, 1994 by and between Sutman
Associates and the Company, as amended.
10.10* Form of Invention Assignment and Confidentiality
Agreement.
-35-
<PAGE>
EXHIBIT DESCRIPTION OF
NO. EXHIBIT
- ----------------- ----------------------------
10.11* Agreement dated July 1, 1994 by and between the
Company and MicroAge Computer Centers, Inc., as
amended.
10.12* Reseller Agreement dated November 7, 1994 by and
between the Company and Ingram Alliance Reseller
Company, a division of Ingram Micro, Inc., as
amended.
10.13* Agreement for Wholesale Financing dated May 20, 1988
by and between the Company and IBM Credit
Corporation.
10.14+ Dealer Loan and Security Agreement by and between the
Company and Finova Capital Corporation dated December
20, 1996.
10.15* Agreement by Stan Gang dated February 19, 1996 to
indemnify the Company for certain losses.
10.16/dagger/ Asset Purchase Agreement dated July 18, 1996 by and
between Stan Gang and Lior, Inc.
10.17/dagger/ Assignment of Asset Purchase Agreement dated July
24, 1996 by and between Stan Gang and the Company.
10.18** Loan and Security Agreement dated June 30, 1997 by
and between First Union National Bank and AlphaNet
Solutions, Inc.
10.19** Asset Purchase Agreement dated August 1, 1997 by and
between the Company and The Lande Group, Inc.
10.20 Assignment of lease dated August 1, 1997 by and
between The Lande Group, Inc., 460 West 34th Street
Associates, and the Company of a lease dated December
23, 1996 by and between 460 West 34th Street
Associates and The Lande Group, Inc.
10.21 Form of Indemnification Agreement entered into by
past and present Directors and Officers.
21+ Subsidiaries of the Registrant.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
- ----------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration Statement No. 33-97922) declared effective on March 20,
1996.
-36
- -
<PAGE>
** Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended June 30, 1997, filed with the Commission on August 13, 1997.
+ Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996, filed with the Commission on March 27, 1997.
/dagger/ Incorporated by reference to the Company's Form 8-K, filed with the
Commission on August 5, 1996.
# A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
All other exhibits are filed herewith.
-37-
<PAGE>
ALPHANET SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants......................................... F-2
Consolidated balance sheets as of December 31, 1996 and 1997.............. F-3
Consolidated statements of income for the years ended
December 31, 1995, 1996, and 1997 ........................................ F-4
Consolidated statements of changes in shareholders' equity for the
years ended December 31, 1995, 1996, and 1997............................. F-5
Consolidated statements of cash flows for the years ended
December 31, 1995, 1996, and 1997 ........................................ F-6
Notes to consolidated financial statements................................ F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of AlphaNet Solutions, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of AlphaNet Solutions, Inc. and its subsidiary at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Morristown, NJ
March 26, 1998
F-2
<PAGE>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
ASSETS ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 1,610 $ 2,689
Accounts receivable, net......................................................... 29,848 50,388
Inventories...................................................................... 4,809 4,941
Deferred income tax asset........................................................ 445 1,651
Prepaid expenses and other current assets........................................ 1,705 3,598
---------- ----------
Total current assets........................................................ 38,417 63,267
Property and equipment, net........................................................... 3,856 6,386
Other assets ......................................................................... 1,374 2,888
---------- ----------
Total assets................................................................ $ 43,647 $ 72,541
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations..................................... $ 103 $ 44
Accounts payable................................................................. 17,923 17,921
Accrued expenses................................................................. 5,984 12,179
---------- ----------
Total current liabilities................................................... 24,010 30,144
Advance from principal shareholder.................................................... 675 675
Capital lease obligations............................................................. 41 -
---------- ----------
Total liabilities........................................................... 24,726 30,819
---------- ----------
Commitments and contingencies (Note 8)................................................
Shareholders' equity:
Preferred stock-- $0.01 par value; authorized 3,000,000 shares, none issued...... - -
Common stock -- $0.01 par value; authorized 15,000,000 shares, 5,102,900
and 6,257,610 shares issued and outstanding in 1996 and 1997, respectively............ 51 63
Additional paid-in capital....................................................... 15,904 33,172
Retained earnings................................................................ 2,966 8,487
---------- ----------
Total shareholders' equity.................................................. 18,921 41,722
---------- ----------
Total liabilities and shareholders' equity.................................. $ 43,647 $ 72,541
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997
---------- --------- -------
<S> <C> <C> <C>
Net sales:
Product sales........................................................... $ 62,516 $99,468 $ 147,602
Services and support.................................................... 11,500 20,137 43,790
--------- --------- ----------
74,016 119,605 191,392
--------- --------- ----------
Cost of sales:
Product sales........................................................... 54,579 88,218 130,314
Services and support.................................................... 6,869 12,915 29,013
--------- --------- ----------
61,448 101,133 159,327
--------- --------- ----------
Gross profit................................................................. 12,568 18,472 32,065
--------- --------- ----------
Operating expenses:
Selling expenses........................................................ 4,468 7,301 13,224
General and administrative expenses..................................... 3,925 5,446 9,537
--------- --------- ----------
8,393 12,747 22,761
--------- --------- ----------
Operating income............................................................. 4,175 5,725 9,304
--------- --------- ----------
Other income (expense):
Interest income......................................................... 54 217 219
Interest expense........................................................ (140) (106) (158)
Gain on sale of marketable securities................................... - 18 -
--------- --------- ----------
(86) 129 61
--------- --------- ----------
Income before income taxes................................................... 4,089 5,854 9,365
Provision for income taxes................................................... 124 1,970 3,844
--------- --------- ----------
Net income................................................................... $ 3,965 $ 3,884 $ 5,521
========= ========= ==========
Earnings per share - Basic................................................... $ 1.17 $ 0.83 $ 0.97
========= ========= ==========
Weighted average shares outstanding.......................................... 3,400 4,690 5,719
========= ========= ==========
Earnings per share -Diluted.................................................. $ 1.17 $ 0.82 $ 0.93
========= ========= ==========
Weighted average shares and share equivalents outstanding.................... 3,400 4,737 5,905
========= ========= ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------ ----- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995........................ 3,400 $ 34 $ 156 $ 3,719 $ 3,909
Distributions to S Corporation
shareholders.............................. - - - (1,300) (1,300)
Net income .................................. - - - 3,965 3,965
----------- -------- ---------- ---------- --------
Balance at December 31, 1995 ..................... 3,400 34 156 6,384 6,574
Sales of common stock........................ 1,700 17 15,722 - 15,739
Exercise of stock options.................... 3 - 26 - 26
Distributions to S Corporation
shareholders.............................. - - - (7,302) (7,302)
Net income................................... - - - 3,884 3,884
----------- -------- ---------- ---------- --------
Balance at December 31, 1996...................... 5,103 51 15,904 2,966 18,921
Sales of common stock........................ 1,150 12 17,200 - 17,212
Exercise of stock options.................... 4 - 68 - 68
Net income................................... - - - 5,521 5,521
----------- -------- ---------- ---------- --------
Balance at December 31, 1997...................... 6,257 $ 63 $ 33,172 $ 8,487 $ 41,722
=========== ======== ========== ========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1996 1997
--------- --------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 3,965 $ 3,884 $ 5,521
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 165 651 1,671
Deferred income taxes.................................................. - (445) (1,206)
Gain on sale of marketable securities.................................. - (18) -
Increase (decrease) from changes in:
Accounts receivable................................................. (174) (15,963) (17,978)
Inventories......................................................... 802 (3,863) 35
Prepaid expenses and other current assets........................... (158) (1,288) (1,652)
Other assets........................................................ 10 (255) 302
Accounts payable.................................................... 26 10,647 (4,392)
Accrued expenses.................................................... 1,288 2,030 5,820
-------- -------- --------
Net cash provided by (used in) operating activities.................... 5,924 (4,620) (11,879)
-------- ------ -------
Cash flows from investing activities:
Proceeds from sale of marketable securities.............................. - 26 -
Property and equipment expenditures...................................... (779) (3,087) (3,842)
Acquisition of businesses................................................ (236) (1,060) (380)
Receipt of loan repayments............................................... 160 413 -
-------- -------- --------
Net cash used in investing activities.................................. (855) (3,708) (4,222)
-------- ------ ------
Cash flows from financing activities:
Repayment of long-term debt.............................................. (285) (736) -
Repayment of capital lease obligations................................... (54) (86) (100)
Net payments of note payable-bank........................................ (1,152) -- -
Repayment of loans payable to shareholder................................ (719) -- -
Advance from principal shareholder....................................... - 675 -
Distributions paid to S Corporation shareholders......................... (1,300) (7,302) -
Costs of anticipated common stock offering............................... (399) -- -
Net proceeds from sales of common stock.................................. - 16,138 17,212
Exercise of stock options................................................ - 26 68
-------- -------- --------
Net cash (used in) provided by financing activities.................... (3,909) 8,715 17,180
-------- -------- --------
Net increase in cash and cash equivalents................................... 1,160 387 1,079
Cash and cash equivalents, beginning of period.............................. 63 1,223 1,610
-------- -------- --------
Cash and cash equivalents, end of period.................................... $ 1,223 $ 1,610 $ 2,689
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS:
AlphaNet Solutions, Inc. and its wholly-owned subsidiary (the "Company") is
a single-source provider of information technology products, services and
support. The Company markets computer products and provides a broad range of
information technology services, including network consulting, remote network
management, workstation support, education, communications installation and
technical placement services to Fortune 1000 and other large and mid-sized
companies in various industries located primarily in the New
York-to-Philadelphia corridor. Intercompany balances and transactions are
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
has bank balances, including cash equivalents, which at times may exceed
federally insured limits.
INVENTORIES:
Inventories, consisting entirely of goods for resale, are stated at the
lower of cost or market with cost determined on the weighted average method.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation.
Repairs and maintenance costs which do not extend the useful lives of the assets
are expensed as incurred. The Company provides for depreciation on property and
equipment, except for leasehold improvements, on the straight-line method over
the estimated useful lives of the assets, generally three to seven years.
Leasehold improvements are amortized on the straight-line method over the
shorter of the estimated useful lives of the assets or the remaining term of the
applicable lease.
Costs of computer software developed or obtained for internal use and costs
associated with technology under development are capitalized and amortized over
the estimated useful lives of the assets, generally three to five years.
Capitalization of costs begins when conceptual and design activities have been
completed, and when management has authorized and committed to fund a project.
Costs capitalized include external direct costs of materials and services. Costs
associated with training and general and administrative activities are expensed
as incurred.
RECOVERABILITY OF LONG-LIVED ASSETS:
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its long-lived
assets from expected future cash flows from its operations on an undiscounted
basis.
F-7
<PAGE>
STOCK-BASED COMPENSATION:
In 1995, the Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") which requires companies
to measure stock compensation plans based on the fair value method of accounting
or to continue to apply APB No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and provide pro forma footnote disclosures under the fair value
method. Effective January 1, 1996, the Company adopted the disclosure-only
provisions of FAS 123 and continues to follow APB 25 and related interpretations
to account for the Company's stock compensation plans.
LEASES:
Leases which meet certain criteria evidencing substantive ownership by the
Company are capitalized and the related capital lease obligations are included
in current and long-term liabilities. Amortization and interest are charged to
expense, with rent payments being treated as payments of the capital lease
obligation. All other leases are accounted for as operating leases, with rent
payments being charged to expense as incurred.
REVENUE RECOGNITION:
The Company recognizes sales of products when the products are shipped and
services and support revenue is recognized when the applicable services are
rendered. The Company recognizes revenue on service contracts on a prorated
basis over the life of the contracts. Prepaid fees related to the Company's
training programs are deferred and amortized to income over the duration of the
applicable training program. Deferred revenue is included in accrued expenses
and represents the unearned portion of each service contract and the unamortized
balance of prepaid training fees received as of the balance sheet date.
INCOME TAXES:
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized based upon differences arising from the carrying amounts of the
Company's assets and liabilities for tax and financial reporting purposes using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the change in tax rates is
enacted.
Prior to March 19, 1996, the Company, with the consent of its shareholders,
had elected to be taxed under the Subchapter S of the Internal Revenue Code as
an S Corporation for federal income tax purposes. In lieu of corporate income
taxes, the shareholders of an S Corporation are taxed on their proportionate
share of the Company's taxable income. As a result, the Company was not subject
to federal income taxes prior to March 19, 1996. The Company had also elected S
Corporation status in the State of New Jersey. The accompanying financial
statements include provisions for certain state and local income taxes which
were imposed at the corporate level.
On March 19, 1996, the Company terminated its status as an S Corporation
and became subject to federal and state income taxes thereafter at applicable C
Corporation income tax rates.
RETIREMENT PLAN:
The Company adopted a 401(k) retirement plan in 1991. Employees of the
Company who have attained the age of 21 are eligible to participate in the plan.
Employees can elect to contribute up to 15% of their gross salary to the plan.
The Company may make discretionary matching cash contributions up to 2% of the
salary of the participating individual employee. Participants vest in the
Company's contributions to the plan over a six-year period based upon years of
service. Participants are fully vested at all times in their employee
contributions to the plan. The Company incurred $79, $117 and $277 of expenses
related to this plan in 1995, 1996 and 1997, respectively.
F-8
<PAGE>
NET INCOME 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
(Earnings per Share) and No. 130 (Reporting Comprehensive Income). SAB 98
requires the Company to revise its EPS computations to present historical EPS
including pre IPO periods. The computations set forth in Note 11 incorporate SAB
98.
2. BUSINESS COMBINATIONS
On July 24, 1996, the Company acquired certain assets of Lior, Inc.
("Lior"), a MicroAge affiliate located in Paramus, New Jersey, in a business
combination accounted for under the purchase method, for $1,060, including
acquisition costs, financed through the proceeds raised in its initial public
offering. Intangible assets of $1,060, which are included in other assets, are
being amortized on the straight-line method over periods not exceeding fifteen
years.
On August 1, 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,
which was paid by the Company at closing, accounts payable and accrued expenses,
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. Intangible
assets of approximately $1,800, which are included in other assets, are being
amortized on the straight-line method over periods not exceeding fifteen years.
Amortization of intangible assets for the year ended December 31, 1996 and
1997 was $42 and $101, respectively. The operations related to the acquired
assets of Lior and Lande are included in the accompanying consolidated financial
statements subsequent to their respective dates of acquisition.
The pro forma results of the Lior and Lande acquisitions have not been
presented due to their immaterial effect on net income and net income per share.
F-9
<PAGE>
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
DECEMBER 31,
------------------
1996 1997
------- --------
Accounts receivable.................................... $30,111 $51,643
Less: Allowance for doubtful accounts.................. 263 1,255
------- -------
$29,848 $50,388
======= =======
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
DECEMBER 31,
-----------------
1996 1997
---- ----
Furniture, fixtures and equipment...................... $3,120 $5,665
Transportation equipment............................... 36 109
Leasehold improvements................................. 250 632
Construction in progress............................... 1,464 2,564
------ ------
4,870 8,970
Less-- Accumulated depreciation and amortization....... 1,014 2,584
------ ------
$3,856 $6,386
====== ======
Depreciation expense and amortization of leasehold improvements for the
years ended December 31, 1995, 1996 and 1997 was $165, $609 and $1,570,
respectively.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
--------------
1996 1997
---- ----
Wages and benefits payable................................$1,504 $4,063
Deferred revenue.......................................... 961 2,031
Sales taxes............................................... 833 1,425
Licensing fees payable.................................... 816 483
Sales commissions......................................... 663 1,152
Income taxes payable...................................... 463 1,498
Other..................................................... 744 1,527
------ -------
$5,984 $12,179
====== =======
6. DEBT AND CAPITAL LEASE OBLIGATIONS
NOTES PAYABLE -- BANK:
On June 30, 1997, the Company and First Union National Bank ("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
F-10
<PAGE>
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 December 31,
1997, the Company had no outstanding balance under such credit facility.
At December 31, 1995 and 1996, the Company had standby letters of credit of
$2,068 and $2,038, respectively, of which $2,000 were issued primarily in
support of certain financing agreements for the purchase of inventory. Fees
payable to the Bank range from 1% to 2% per annum based on the amount of the
standby letters of credit issued.
CAPITAL LEASE OBLIGATIONS:
In March 1995, the Company entered into a master lease agreement under
which the Company may lease up to $500 of equipment. The master lease provides
for equipment to be leased for three-year terms with transfer of ownership of
the equipment to the Company at the end of the applicable equipment lease term.
At December 31, 1997, capital lease obligations outstanding under these
equipment leases, which expire in 1998, total $44.
7. STOCK OWNERSHIP AND COMPENSATION PLANS
At December 31, 1997, the Company had two stock-based compensation plans.
The Company applies APB 25 and related interpretations in accounting for its
plans. During 1996 and 1997, no compensation cost has been recognized for its
stock option plans, which are described below. Had compensation cost been
determined based on the fair value of the options at the grant dates consistent
with the method prescribed under FAS 123, the Company's pro forma net income and
pro forma earnings per share would have been reduced to the adjusted pro forma
amounts indicated below:
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---- ---- ----
Net income
As reported.............................. $ 3,965 $ 3,884 $ 5,521
As adjusted for FAS 123 method........... 3,864 3,414 4,843
Earnings per share - diluted
As reported.............................. 1.17 0.82 0.93
As adjusted for FAS 123 method........... 1.14 0.72 0.82
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for 1995,
1996 and 1997: dividend yield of 0%; expected volatility of approximately 67%;
risk free interest rates of approximately 6%; and an expected holding period of
six years.
1995 STOCK PLAN:
On August 25, 1995, the Company's 1995 Stock Plan (the "Plan") was adopted
by the Board of Directors and approved by the shareholders of the Company. A
total of 747,100 shares are reserved for issuance upon exercise of options
granted or to be granted under the Plan. The options which expire ten years
after the date of grant, become exercisable in five equal annual installments
commencing one year after the date of grant provided that the optionee remains
an employee at the time of vesting of the installments.
F-11
<PAGE>
1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN:
On August 25, 1995, the Board of Directors and shareholders adopted the
Company's 1995 Non-Employee Director Stock Option Plan which provides for the
grant of options to purchase a maximum of 100,000 shares of Common Stock of the
Company to non-employee Directors of the Company. Each person who is or who
becomes a Director of the Company after the effective date of the Company's
initial public offering and who is not also an employee or officer of the
Company shall be granted, on the effective date or the date on which he or she
becomes a Director, whichever is later, an option to purchase 20,000 shares of
Common Stock, at an exercise price per share equal to the then fair market value
of the shares. The options which expire ten years after the date of grant,
become exercisable in five equal annual installments commencing one year after
the date of grant provided that the optionee then remains a Director at the time
of vesting of the installments.
A summary of the stock options granted under the Plan and 1995 Non-Employee
Director Stock Plan as of and for the year ended December 31, 1995, 1996 and
1997 is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1995 1996 1997
-------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------ ------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ - $ - 260 $9.00 539 $ 9.44
Granted................................. 260 9.00 290 9.82 203 14.05
Exercised............................... - - (3) 9.00 (5) 9.00
Forfeited............................... - - (8) 9.00 (67) 11.90
------ ------- -------
Outstanding at end of year.............. 260 9.00 539 9.44 670 10.58
====== ======= =======
Options exercisable at end of year...... - - 47 9.00 143 9.36
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
- --------------- -------------- ---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$9.00 - 13.50 489,250 8.16 $ 9.36 143,000 $9.36
13.56 - 15.88 180,200 9.61 13.95 -
------- -------
9.00 - 15.88 669,450 143,000
</TABLE>
The weighted-average fair value of options granted during 1995, 1996 and
1997 were $5.98, $6.56 and $9.35, respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company occupies six facilities under operating leases which expire at
various dates through April 2008 and call for annual base rentals plus real
estate taxes. The future minimum payments under noncancelable leases as of
December 31, 1997 are as follows:
F-12
<PAGE>
YEAR AMOUNT
---- ------
1998........................ $1,202
1999........................ 1,168
2000........................ 1,158
2001........................ 1,137
2002........................ 1,009
Thereafter.................. 1,757
Rent expense including real estate taxes for the years ended December 31,
1995, 1996 and 1997 was $553, $688 and $922, respectively.
The Company has obtained financing terms from IBM Credit Corporation,
Deutsche Financial Services (terminated in 1997) and Finova Capital Corporation
for the purchase of inventory. In exchange for these terms, and subject to the
intercreditor agreements with First Union National Bank, the payables are
collateralized by substantially all the assets of the Company. The balance
included in accounts payable at December 31, 1996 and 1997 was $13,085 and
$15,981, respectively.
The Company has entered into employment agreements which expire at various
dates through 1998 with certain key employees. The agreements provide for
aggregate annual salaries of $1,320.
On February 13, 1996, the Company, as plaintiff, filed a complaint against
two former employees of the Company and their current employer (together, the
"Defendants"). Such complaint alleges theft of services, theft of the Company's
property, theft of corporate opportunity and unauthorized use of Company credit
cards by the Defendants. The Company is seeking restitution from certain of the
Defendants and additional compensatory damages from another Defendant. The
Company intends to vigorously pursue all available remedies against the
Defendants. Recently, the parties consented to the suspension of discovery
pending mediation of all claims. Therefore, the Company currently is unable to
evaluate the likelihood of a favorable outcome for the Company. The Company
believes that some or all of its damages in connection with the litigation may
be covered by insurance. In any event, Stan Gang, the Company's founder,
Chairman of the Board, President and Chief Executive Officer and principal
shareholder, has agreed to indemnify the Company for any and all losses which
the Company may sustain, up to $1,000 arising from or relating to the alleged
wrongful conduct of the Defendants. In connection therewith, Mr. Gang paid $675
of his personal funds to the Company, which is classified as an advance from the
principal shareholder. Pursuant to the terms of the agreement between the
Company and Mr. Gang, the Company shall reimburse Mr. Gang in the event and to
the extent that the Company is awarded and collects damages from the Defendants,
receives sums as a result of a settlement between the Company and the
Defendants, or receives proceeds under an insurance policy. Management is of the
opinion that the ultimate disposition of this matter will not have a material
adverse effect on the results of operations or financial position of the
Company.
9. SUPPLEMENTARY CASH FLOW INFORMATION
Following is a summary of supplementary cash flow information for the years
ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Interest paid.............................................. $ 124 $ 97 $ 159
Income taxes paid.......................................... 130 1,977 3,917
Non cash investing and financing activities:
Equipment acquired under capital lease.................. 284 - -
</TABLE>
F-13
<PAGE>
10. INCOME TAXES
The Company accounts for income taxes under the asset and liability method
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of differences between the carrying amounts and
the tax bases of the assets and liabilities.
The components of the provision for income taxes for 1995, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
------- ------- -----
<S> <C> <C> <C>
Current:
Federal.......................................................... $ - $ 1,733 $ 3,692
State and local.................................................. 124 682 1,358
------- ------- -------
124 2,415 5,050
------- ------- -------
Deferred:
Federal.......................................................... - (178) (841)
State and local.................................................. - (57) (365)
Benefit as a result of change in tax status...................... - (210) -
------- ------- ------
- (445) (1,206)
------- ------- -------
$ 124 $ 1,970 $ 3,844
======= ======= =======
</TABLE>
Prior to March 19, 1996, the Company had elected under the Internal Revenue
Code to be an S Corporation for federal income and, in certain cases, state
income tax purposes. Therefore, no provision or liability for federal and a
reduced provision for state income taxes has been recorded for the year ended
December 31, 1995.
A reconciliation of the Federal statutory rate to the Company's effective
tax rate for 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------ ------ ----
<S> <C> <C> <C>
Taxes at statutory rate...................................................... 34.0% 34.0% 34.0%
State and local income taxes, net of federal tax benefit..................... 6.1% 6.7% 7.0%
Income from S Corporation not subject to federal and state income
taxes..................................................................... (37.4%) (7.2%) -
Other, net................................................................... 0.3% 0.2% -
---- ----- -----
Effective tax rate........................................................... 3.0% 33.7% 41.0%
==== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred income tax asset at December 31, 1996 and 1997 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997
---- ----
<S> <C> <C>
Accounts receivable allowances.................................. $187 $ 515
Inventory reserves.............................................. 95 259
Accrual for compensated absences................................ 233 478
Accumulated depreciation and amortization....................... (70) (118)
Other accruals.................................................. - 517
------ ------
$445 $1,651
====== ======
</TABLE>
F-14
<PAGE>
11. EARNINGS PER SHARE
As described in Note 1 of Notes to Consolidated Financial Statements, the
Company has adopted the provisions of SFAS No. 128 and SAB No. 98. In 1997,
183,300 potential common shares were excluded from the computations of diluted
earnings per share because the effect would have been anti-dilutive. There were
no anti-dilutive common stock equivalents in 1995 and 1996. The following table
is a reconciliation of the numerator and denominator used in the calculation of
basic and diluted earnings per share as required:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------
PER
SHARE
INCOME SHARES AMOUNT
------ ------ ------
<S> <C> <C> <C>
BASIC EPS:
Net income applicable to common shares......................................... $3,965 3,400 $1.17
ASSUMING DILUTION:
Stock Options............................................................... - -
------ -----
$3,965 3,400 $1.17
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------
PER
SHARE
INCOME SHARES AMOUNT
------ ------ ------
<S> <C> <C> <C>
BASIC EPS:
Net income applicable to common shares......................................... $3,884 4,690 $0.83
ASSUMING DILUTION:
Stock Options............................................................... - 47
------ ------
$3,884 4,737 $0.82
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------
PER
SHARE
INCOME SHARES AMOUNT
------ ------ ------
<S> <C> <C> <C>
BASIC EPS:
Net income applicable to common shares......................................... $5,521 5,719 $0.97
ASSUMING DILUTION:
Stock Options............................................................... - 186
------ -----
$5,521 5,905 $0.93
====== ===== =====
</TABLE>
12. EMPLOYEE STOCK PURCHASE PLAN
On December 31, 1997, the Company adopted an Employee Stock Purchase Plan
(the "Plan") for employees of the Company and its subsidiaries by the Board of
Directors and is to be submitted to the shareholders of the Company for approval
at its 1998 annual meeting of shareholders. The Plan was adopted to provide a
further incentive for employees to promote the best interests of the Company and
to encourage stock ownership by employees in order to participate in the
Company's potential economic progress. A total of 500,000 shares of Common Stock
will be made available for purchase pursuant to the Plan.
F-15
<PAGE>
In general, the Plan provides for eligible employees to designate in
advance of specified purchase periods (which will be annual or semi-annual) a
percentage of compensation (up to 10%) to be withheld from their pay and applied
toward the purchase of such number of whole shares of Common Stock as can be
purchased at a price of 85% of the lesser of the stock's trading price at the
beginning or the end of each such period. No employee can purchase more than
$15,000 worth of stock annually, and no stock can be purchased by any person
which would result in the purchaser owning five percent or more of the total
combined voting power or value of all classes of stock of the Company.
The Plan is intended to satisfy the requirements of Section 423(b) of the
Internal Revenue Code of 1986, as amended, which requires that it be approved by
shareholders within one year of the earlier of its adoption by the Board of
Directors or the plan's effective date. In addition, the Plan is intended to
comply with certain requirements of Rule 16b-3 under the Securities Exchange Act
of 1934, as amended.
13. SIGNIFICANT CUSTOMERS AND VENDORS
During 1997, two customers, Nabisco and KPMG Peat Marwick, accounted for
approximately 31% of the Company's net sales, 16% and 15% respectively. During
each of the two years ended December 31, 1995 and 1996, one customer, Nabisco,
accounted for approximately 20%, and 17% of the Company's net sales,
respectively. No other customer accounted for more than 10% of the Company's net
sales during the three years ended December 31, 1997.
The Company purchases the majority of its products primarily from two
aggregators of computer hardware, software and peripherals. Agreements with
these aggregators provide for, among other things, certain discount pricing for
meeting agreed-upon purchase levels and minimum purchase commitments.
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 this 10th day of
April, 1998.
ALPHANET SOLUTIONS, INC.
By:/S/STAN GANG
-----------------------------------------
Stan Gang, Chairman of the Board,
President and Chief Executive
Officer (Principal Executive Officer)
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/STAN GANG
- ------------------------------ Chairman of the Board, President and April 10, 1998
Stan Gang Chief Executive Officer (Principal
Executive Officer)
/s/Robert G. Petoia
- ------------------------------ Vice President and Chief Financial April 10, 1998
Robert G. Petoia Officer(Principal Financial and
Accounting Officer)
/s/Michael Gang
- ------------------------------ Director April 10, 1998
Michael Gang
/s/Michael R. Bruce
- ------------------------------ Director April 10, 1998
Michael R. Bruce
/s/David J. Sorin
- ------------------------------ Director April 10, 1998
David J. Sorin
/s/Susan Wolford
- ------------------------------ Director April 10, 1998
Susan Wolford
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
4.4 Employee Stock Purchase Plan
10.20 Assignment of lease dated August 1, 1997 by and between The Lande Group,
Inc., 460 West 34th Street Associates, and the Company of a lease dated
December 23, 1996 by and between 460 West 34th Street Associates and The
Lande Group, Inc.
10.21 Form of Indemnificatoin Agreement entered into by past and present
Directors and Officers
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule
ALPHANET SOLUTIONS, INC.
EMPLOYEE STOCK PURCHASE PLAN
I. DEFINITIONS
ACCOUNT means the Employee Stock Purchase Plan Account established for
a Participant under Section IX hereunder.
BOARD OF DIRECTORS shall mean the Board of Directors of the Company.
CODE shall mean the Internal Revenue Code of 1986, as amended.
COMMITTEE shall mean the Stock Purchase Plan Committee appointed and
acting in accordance with the terms of the Plan.
COMMON STOCK shall mean shares of the Company's Common Stock, par value
$.01 per share, and any security into which such stock shall be converted or
shall become by reason of changes in its nature such as by way of
recapitalization, reclassification, changes in par value, merger, consolidation
or similar transaction.
COMPANY shall mean AlphaNet Solutions, Inc., a New Jersey corporation.
When used in the Plan with reference to employment, Company shall include
Subsidiaries.
COMPENSATION shall mean the total taxable cash compensation paid to an
Eligible Employee by the Company, as reportable on IRS Form W-2.
EFFECTIVE DATE shall mean January 1, 1998.
ELIGIBLE EMPLOYEES shall mean only those persons who, as of the first
day of a Purchase Period, are Employees and who are not, as of the day preceding
the first day of the Purchase Period, deemed for purposes of Section 423(b)(3)
of the Code to own stock possessing 5% or more of the total combined voting
power or value of all classes of stock of the Company.
EMPLOYEES shall mean all persons who are employed by the Company as
common-law employees, excluding persons (i) whose customary employment is 20
hours or less per week, or (ii) whose customary employment is for not more than
five months in a calendar year.
EXCHANGE ACT shall mean the Securities Exchange Act of 1934, as
amended.
EXERCISE DATE shall mean the last day of a Purchase Period.
1
<PAGE>
FAIR MARKET VALUE shall mean as of any date: (i) the average of the
closing bid and asked prices on such date of the Common Stock as quoted by
Nasdaq; or (ii), as the case may be, the last reported sales price of the Common
Stock on such date as reported by the Nasdaq National Market or the principal
national securities exchange on which such stock is listed and traded, or in
each such case where there is no trading on such date, on the first previous
date on which there is such trading.
PARTICIPANT shall mean an Eligible Employee who elects to participate
in the Plan under Section VII hereunder.
PLAN shall mean the AlphaNet Solutions, Inc. Employee Stock Purchase
Plan, as set forth herein and as amended from time to time.
PURCHASE PERIOD shall mean (a) for 1998, the period commencing on the
Effective Date and ending on June 30, 1998; and (b) thereafter, a period of six
calendar months or one calendar year, in each case as elected by the Committee
not less than 60 days in advance of the commencement of such period. A Purchase
Period shall begin on the first business day of, and end on the last business
day of, each such calendar period. In the absence of any such election, Purchase
Periods subsequent to the first period shall be for six months each. The last
Purchase Period under the Plan shall terminate on or before the date of
termination of the Plan provided in Section XXIII.
SUBSIDIARY shall mean any corporation which is a subsidiary of the
Company within the meaning of Section 425(f) of the Code.
TERMINATION OF SERVICE shall mean the earliest of the following events
with respect to a Participant: his retirement, death, quit, discharge or
permanent separation from service with the Company.
The masculine gender includes the feminine, the singular number
includes the plural and the plural number includes the singular unless the
context otherwise requires.
II. PURPOSE
It is the purpose of this Plan to provide a means whereby Eligible
Employees may purchase Common Stock through payroll deductions. It is intended
to provide a further incentive for Employees to promote the best interests of
the Company and to encourage stock ownership by Employees in order to
participate in the Company's economic progress.
It is the intention of the Company to have the Plan qualify as an
"employee stock purchase plan" within the meaning of Section 423 of the Code and
the provisions of the Plan shall be construed in a manner consistent with the
Code.
2
<PAGE>
III. ADMINISTRATION
The Plan shall be administered by a Committee selected by the Board of
Directors from among its members, which shall consist of not less than two
members. The Committee shall have authority to make rules and regulations for
the administration of the Plan, and its interpretation and decisions with regard
thereto shall be final and conclusive. The Committee shall have all necessary
authority to communicate, from time to time, through the Company's management,
with Eligible Employees and Participants for purposes of administering the Plan,
and shall notify Eligible Employees promptly of its election of the term of each
forthcoming Purchase Period, if other than a six months period, and of its
election to utilize the Trust Administration Option referred to in Section IX.
IV. SHARES
There shall be Five Hundred Thousand (500,000) shares of Common Stock
reserved for issuance to and purchase by Participants under the Plan, subject to
adjustment in accordance with Section XXI hereof. The shares of Common Stock
subject to the Plan shall be either shares of authorized but unissued Common
Stock or shares of Common Stock reacquired by the Company. Shares of Common
Stock involved in any unexercised portion of any terminated option may again be
subject to options to purchase granted under the Plan.
V. PURCHASE PRICE
The purchase price per share of the shares of Common Stock sold to
Participants under this Plan for any Purchase Period shall be the lesser of (a)
85% of the Fair Market Value of a share of Common Stock on the first day of such
Purchase Period, or (b) 85% of the Fair Market Value of a share of Common Stock
on the Exercise Date of such Purchase Period.
VI. GRANT OF OPTION TO PURCHASE SHARES
Each Eligible Employee shall be granted an option effective on the
first day of each Purchase Period to purchase a number of full shares of Common
Stock (subject to adjustment as provided in Section XXI). The maximum number of
shares an Eligible Employee shall be eligible to purchase for any Purchase
Period is $25,000 ($12,500 for a Purchase Period of six months) divided by 100%
of the Fair Market Value of a share of Common Stock on the first day of the
Purchase Period.
Anything herein to the contrary notwithstanding, if, as of the first
day of a Purchase Period, any Eligible Employee entitled to purchase shares
hereunder would be deemed for the purposes of Section 423(b)(3) of the Code to
own stock (including any number of shares which such person would be entitled to
purchase hereunder) possessing 5% or more of the total
3
<PAGE>
combined voting power or value of all classes of stock of the Company, the
maximum number of shares which such person shall be entitled to purchase
pursuant to the Plan shall be reduced to that number which when added to the
number of shares of stock of the Company which such person is so deemed to own
(excluding any number of shares which such person would be entitled to purchase
hereunder), is one less than such 5%.
VII. ELECTION TO PARTICIPATE
An Eligible Employee may elect to become a Participant in this Plan by
completing a "Stock Purchase Agreement" form prior to the first day of the
Purchase Period. In the Stock Purchase Agreement, the Eligible Employee shall
authorize regular payroll deductions from his Compensation subject to the
limitations in Section VIII below. Options granted to Eligible Employees who
fail to authorize payroll deductions will automatically lapse. If a
Participant's payroll deductions allow him to purchase fewer than the maximum
number of shares of Common Stock to which his option entitles him, the option
with respect to the shares which he does not purchase will lapse as of the last
day of the Purchase Period.
The execution and delivery of the Stock Purchase Agreement as between
the Participant and the Company shall be conditioned upon the compliance by the
Company at such time with Federal (and any applicable state) securities laws.
VIII. PAYROLL DEDUCTIONS
An Eligible Employee may authorize payroll deductions from his
Compensation for each payroll period of a specified percentage of such
Compensation, not less than 1% and not more than 10%, in multiples of 1%. The
maximum payroll deduction permitted for an Eligible Employee for any Purchase
Period shall be no greater than $15,000 ($7,500.00 for a Purchase Period of six
months).
The amount of payroll deduction shall be established at the beginning
of a Purchase Period and may not be altered, except for complete discontinuance
under Section XI, XIII or XIV hereunder.
IX. EMPLOYEE STOCK PURCHASE ACCOUNT
AND TRUST ADMINISTRATION OPTION
An Employee Stock Purchase Account will be established for each
Participant in the Plan. Payroll deductions made under Section VIII will be
credited to the individual Accounts. In the event the Committee determines with
respect to any Purchase Period, not to utilize the "Trust Administration Option"
set forth in the next paragraph, no interest or other earnings will be credited
to a Participant's Account.
4
<PAGE>
With respect to any one or more Purchase Periods, the Committee may
elect to utilize, in addition to the separate accounting for payroll deductions
provided in the Plan, the option to administer the funding of the Accounts
through a trust established pursuant to a trust agreement between the Company
and an institution exercising fiduciary powers (the "Trust Administration
Option") as hereinafter set forth in this paragraph. The Company shall provide
for the funding of each Account on a regular basis during each Purchase Period
reflecting payroll deductions of Participants and shall cause such sums to be
deposited within 15 days following such deductions in a trust account at such
institution and upon such terms as are established by the Committee. The trust
account assets shall be invested in shares of a tax-exempt money-market
registered investment company designated in the trust agreement, which
designation shall not be changed during the Purchase Period. Assets deposited in
the aforesaid trust account shall be commingled, but a separate accounting shall
be kept for each Participant's interest therein. Each Participant shall be
credited with his allocable share of the earnings of the trust account, which
credits shall be reflected in each Participant's Account balance hereunder. At
all times, the funds in such trust account shall be considered the property of
the respective Participants, and no part of the trust account assets may at any
time revert to, or be subject to any lien or claim of, the Company; PROVIDED,
HOWEVER, that such trust account assets may be used only for the purchase of
shares as provided in Section X hereof, or payment of any administrative charges
under the Trust Administration Option, or for withdrawal by or return to
Participants (or their beneficiaries) as provided in Sections XI, XIII or XXIII
hereof.
X. PURCHASE OF SHARES
If, as of any Exercise Date, there is credited to the Account of a
Participant an amount at least equal to the purchase price of one share of
Common Stock for the current Purchase Period, as determined in Section V, the
Participant shall buy and the Company shall sell at such price the largest
number of whole shares of Common Stock which can be purchased with the amount in
his Account.
Any balance remaining in a Participant's Account at the end of a
Purchase Period will be carried forward into the Participant's Account for the
following Purchase Period. In no event will the balance carried forward be equal
to or exceed the purchase price of one share of Common Stock as determined in
Section V above. Notwithstanding the foregoing provisions of this paragraph, if
as of any Exercise Date the provisions of Section XV are applicable to the
Purchase Period ending on such Exercise Date, and the Committee reduces the
number of shares which would otherwise be purchased by Participants on such
Exercise Date, the entire balance remaining credited to the Account of each
Participant after the purchase of the applicable number of shares of Common
Stock on such Exercise Date shall be refunded to each such Participant. Except
with respect to a Purchase Period for which the Trust Administration Option has
been elected, no refund of an Account balance made pursuant to the Plan shall
include any amount in respect of interest or other imputed earnings.
Anything herein to the contrary notwithstanding, no Participant may, in
any calendar year, purchase a number of shares of Common Stock under this Plan
which, together with all
5
<PAGE>
other shares of stock of the Company and its Subsidiaries which he may be
entitled to purchase in such year under all other employee stock purchase plans
of the Company and its subsidiaries which meet the requirements of Section
423(b) of the Code, have an aggregate Fair Market Value (measured as of the
first day of each applicable Purchase Period) in excess of $25,000. The
limitation described in the preceding sentence shall be applied in a manner
consistent with Section 423(b)(8) of the Code.
XI. WITHDRAWAL
A Participant may withdraw from the Plan at any time prior to the
Exercise Date of a Purchase Period by filing a notice of withdrawal. Upon a
Participant's withdrawal, the payroll deductions shall cease for the next
payroll period and the entire amount credited to his Account shall be refunded
to him. Any Participant who withdraws from the Plan may again become a
Participant hereunder at the start of the next Purchase Period in accordance
with Section VII.
XII. ISSUANCE OF STOCK CERTIFICATES
The shares of Common Stock purchased by a Participant shall, for all
purposes, be deemed to have been issued and sold at the close of business on the
Exercise Date. Prior to that date, none of the rights or privileges of a
stockholder of the Company shall exist with respect to such shares. Stock
certificates shall be registered either in the Participant's name or jointly in
the names of the Participant and his spouse, as the Participant shall designate
in his Stock Purchase Agreement. Such designation may be changed at any time by
filing notice thereof. Certificates representing shares of purchased Common
Stock shall be delivered promptly to the Participant following issuance.
XIII. TERMINATION OF SERVICE
(a) Upon a Participant's Termination of Service for any reason other
than retirement or death, no payroll deduction may be made from any Compensation
due him as of the date of his Termination of Service and the entire balance
credited to his Account shall be automatically refunded to him.
(b) Upon a Participant's retirement from the Company after age 55, no
payroll deduction shall be made from any Compensation due him as of the date of
his retirement. Such a Participant may, prior to Retirement, elect:
(1) to have the entire amount credited to his Account as of the
date of his retirement refunded to him, or
(2) to have the entire amount credited to his Account held therein
and utilized to purchase shares on the Exercise Date as
provided in Section X.
6
<PAGE>
(c) Upon the death of a Participant, no payroll deduction shall be made
from any Compensation due him at time of death, and the entire balance in the
deceased Participant's Account shall be paid to the Participant's designated
beneficiary, or otherwise to his estate.
XIV. TEMPORARY LAYOFF, AUTHORIZED LEAVE
OF ABSENCE, DISABILITY
Payroll deductions shall cease during a period of absence without pay
from work due to a Participant's temporary layoff, authorized leave of absence,
disability or for any other reason. If such Participant shall return to active
service prior to the Exercise Date for the current Purchase Period, payroll
deductions shall be resumed in accordance with his prior authorization.
If the Participant shall not return to active service prior to the
Exercise Date for the current Purchase Period, the balance of his Stock Purchase
Account will be used to purchase shares on the Exercise Date as provided in
Section X, unless the Participant elects to withdraw from the Plan in accordance
with Section XI.
XV. PROCEDURE IF INSUFFICIENT SHARES AVAILABLE
In the event that on any Exercise Date the aggregate funds available
for the purchase of shares of Common Stock pursuant to Section X hereof would
result in purchases of shares in excess of the number of shares of Common Stock
then available for purchase under the Plan, the Committee shall proportionately
reduce the number of shares which would otherwise be purchased by each
Participant on the Exercise Date in order to eliminate such excess, and the
provisions of the second paragraph of Section X shall apply.
XVI. RIGHTS NOT TRANSFERABLE
The right to purchase shares of Common Stock under this Plan is
exercisable only by the Participant during his lifetime and is not transferable
by him. If a Participant attempts to transfer his right to purchase shares under
the Plan, he shall be deemed to have requested withdrawal from the Plan and the
provisions of Section XI hereof shall apply with respect to such Participant.
XVII. NO OBLIGATION TO EXERCISE OPTION
Granting of an option under this Plan shall impose no obligation on an
Eligible Employee to exercise such option.
7
<PAGE>
XVIII. NO GUARANTEE OF CONTINUED EMPLOYMENT
Granting of an option under this Plan shall imply no right of continued
employment with the Company for any Eligible Employee.
XIX. NOTICE
Any notice which an Eligible Employee or Participant files pursuant to
this Plan shall be in writing and shall be delivered personally or by mail
addressed to the Committee, c/o Chief Executive Officer at 7 Ridgedale Avenue,
Cedar Knolls, New Jersey 07927, or such other person or location as may be
specified by the Committee.
XX. REPURCHASE OF STOCK
The Company shall not be required to repurchase from any Participant
shares of Common Stock acquired under this Plan.
XXI. ADJUSTMENT FOR RECAPITALIZATION, MERGER, ETC.
The aggregate number of shares of Common Stock which may be purchased
pursuant to options granted hereunder, the number of shares of Common Stock
covered by each outstanding option, and the purchase price thereof for each such
option shall be appropriately adjusted for any increase or decrease in the
number of outstanding shares of Common Stock resulting from a stock split or
other subdivision or consolidation of shares of Common Stock or for other
capital adjustments or payments of stock dividends or distributions or other
increases or decreases in the outstanding shares of Common Stock affected
without receipt of consideration of the Company.
Subject to any required action by the stockholders, if the Company
shall be the surviving corporation in any merger, reorganization or other
business combination, any option granted hereunder shall cover the securities or
other property to which a holder of the number of shares of Common Stock would
have been entitled pursuant to the terms of the merger. A dissolution or
liquidation of the Company or a merger or consolidation in which the Company is
not the surviving entity shall cause every option outstanding hereunder to
terminate.
The foregoing adjustments and the manner of application of the
foregoing provisions shall be determined by the Committee in its sole
discretion. Any such adjustment shall provide for the elimination of any
fractional share which might otherwise become subject to an option.
8
<PAGE>
XXII. AMENDMENT OF THE PLAN
The Board of Directors may, without the consent of the Participants,
amend the Plan at any time, provided that no such action shall adversely affect
options theretofore granted hereunder, and provided that no such action by the
Board of Directors, without approval of the Company's stockholders, may:
(a) increase the total number of shares of Common Stock which may
be purchased by all Participants, except as contemplated in
Section XXI;
(b) change the class of Employees eligible to receive options
under the Plan;
(c) decrease the minimum purchase price under Section V;
(d) extend a Purchase Period hereunder; or
(e) extend the term of the Plan.
XXIII. TERM OF THE PLAN
This Plan shall become effective as of the Effective Date upon its
adoption by the Board of Directors, provided that it is approved at a duly-held
meeting of stockholders of the Company, by an affirmative majority of the total
votes present and voting thereat, within 12 months after the earlier of the
Effective Date or the date of adoption by the Board of Directors. If the Plan is
not so approved, no Common Stock shall be purchased under the Plan and the
balance of each Participant's Account shall be promptly returned to the
Participant. The Plan shall continue in effect through the December 31st
following the fourth anniversary of the Effective Date, unless terminated prior
thereto pursuant to Section XV or XXI hereof, or pursuant to the next succeeding
sentence. The Board of Directors shall have the right to terminate the Plan at
any time, effective as of the next succeeding Exercise Date. In the event of the
expiration of the Plan or its termination, outstanding options shall not be
affected, except to the extent provided in Section XV and any remaining balance
credited to the Account of each Participant as of the applicable Exercise Date
shall be refunded to each such Participant.
9
Please Attach This to Your Lease
For and in consideration of the sum of One (1) Dollar and other good
and valuable consideration, We
THE LANDE GROUP, INC.
hereby assign, transfer and set over the lease dated December 23, 1996
for the space consisting of the entire nineteenth (19th) floor in the building
known as No. 460 West 34th Street, New York, NY 10001 in the Borough of
Manhattan, City of New York, NY in
AlphaNet SOLUTIONS, INC.
from August 1, 1997, together with security in the amount of $43,333.33
and under the following condition:
The Lande Group, Inc., must be up-to-date with base rent and all other
charges.
In Witness Whereof, we have hereunder set our hands and seals this 12th
day of August, 1997
Witness: THE LANDE GROUP, INC.
By:________________________
Stewart Lande, President
In order to induce the Landlord to consent to the foregoing assignment,
we hereby agree to remain liable to the Landlord for the prompt performance of
all the covenants and conditions of the lease aforesaid.
In Witness Whereof, we have hereunto set our hands and seals this 12th
day of August, 1997
Witness: THE LANDE GROUP, INC.
By:________________________
Stewart Lande, President
<PAGE>
We,
AlphaNet SOLUTIONS, INC.
hereby assume and agree to carry out the terms and conditions in the
above lease mentioned by the tenant to be performed from August 1st, 1997 to
April 30, 2008.
In Witness Whereof, we have hereunto set our hands and seals this 12th
day of August, 1997
Witness: ALPHANET SOLUTIONS, INC.
By:________________________
STAN GANG, President
The landlord hereby consents to the above assignment on condition,
however, that the said consent shall not be deemed a waiver of any rights said
Landlord may have against the Tenant or assignee of said lease, and shall not be
deemed a waiver of the requirements of the Landlord's written consent to any
other or future assignment or subletting of the lease, on said premises, or any
interest therein or part thereof.
ACCEPTED AND AGREED:
460 WEST 34TH STREET ASSOCIATES
By:____________________________
<PAGE>
------------------------------------------------------------------------
STANDARD FORM OF OFFICE LEASE
------------------------------------------------------------------------
AGREEMENT OF LEASE
dated as of this 23rd day of December 1996, between 460 WEST 34TH
STREET ASSOCIATES, having an office c/o KAUFMAN MANAGEMENT COMPANY, 450 Seventh
Avenue, New York, New York, party of the first part, hereinafter referred to as
OWNER and/or LANDLORD, and THE LANDE GROUP, a New York corporation, having an
office at 120 West 44th Street, New York, New York, party of the second part,
hereinafter referred to as TENANT.
WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from
Owner the entire rentable area on the nineteenth (19th) floor (the "demised
premises" or Demised Premises") in the building known as 460 West 34th Street,
New York, New York, in the Borough of Manhattan, City of New York, for the term
of eleven (11) years and for four (4) months (or until such term shall sooner
cease and expire) to commence on January 1, 1997 and to end on April 30, 2008
and at annual rental rates as provided in Article 37 hereof, which Tenant agrees
to pay in lawful money of the United States, which shall be legal tender in
payment of all debts and dues, public and private, at the time of payment, in
equal monthly installments in advance on the first day of each month during said
term, at the office of Owner or such other place as Owner may designate, without
any set off or deduction whatsoever, except that Tenant shall pay the first
monthly installment(s) on the execution hereof.
In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, successors and assigns, hereby
covenant as follows:
Rent: 1. Tenant shall pay the rent as above and as hereinafter
provided.
Occupancy: 2. Tenant shall use and occupy the Demised Premises for
offices and warehouse purposes and for no other purpose
(see Article 43).
Tenant Alterations:
3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, and to the provisions of this article. Tenant at Tenant's
expense, may make alterations, installations, additions or improvements which
are nonstructural and which do not affect utility services or
<PAGE>
plumbing and electrical lines, in or to the interior of the demised premises by
using contractors or mechanics first approved by Owner Tenant shall, before
making any alterations, additions, installations or improvements, at its
expense, obtain all permits, approvals and certificates required by any
governmental or quasi governmental bodies and (upon completion) certificates of
final approval thereof and shall deliver promptly duplicates of all such
permits, approvals and certificates to Owner and Tenant agrees to carry and will
cause Tenant's contractors and sub-contractors to carry such workman's
compensation, general liability, personal and property damage insurance as Owner
may require. If any mechanic's lien is filed against the demised premises, or
the building of which the same forms a part, for work claimed to have been done
for, or materials furnished to Tenant, whether or not done pursuant to this
article, the same shall be discharged by Tenant within thirty days thereafter,
at Tenant's expense, by filing the bond required by law. All fixtures and all
paneling, partitions, railings and like installations, installed in the premises
at any time, either by Tenant or by Owner in Tenant's behalf shall, upon
installation, become the property of Owner and shall remain upon and be
surrendered with the demised premises unless Owner, by notice to Tenant no later
than twenty days prior to the date fixed as the termination of this lease,
elects to relinquish Owner's right thereto and to have them removed by Tenant,
in which event the same shall be removed from the premises by Tenant prior to
the explanation of the lease, at Tenant's expense. Nothing in this Article shall
be construed to give Owner title to or to prevent Tenant's removal of trade
fixtures, moveable office furniture and equipment, but upon removal of any such
from the premises or upon removal of other installations as may be required by
Owner, Tenant shall immediately and at its expense, repair and restore the
premises to the condition existing prior to installation and repair any damage
to the demised premises or the building due to such removal. All property
permitted or required to be removed, by Tenant at the end of the term remaining
in the premises after Tenant's removal shall be deemed abandoned and may, at the
election of Owner, either be retained as Owner's property or may be removed from
the premises by Owner, at Tenant's expense.
Maintenance and Repairs
4. Tenant shall, throughout the term of this lease, take good care of
the demised premises and the fixtures and appurtenances therein. Tenant shall be
responsible for all damage or injury to the demised premises or any other part
of the building and the systems and equipment thereof, whether requiring
structural or nonstructural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents,
employees, invitees or licensees, or which arise out of any work, labor, service
or equipment done for or supplied to Tenant or any subtenant or arising out of
the installation, use or operation of the property or equipment of Tenant or any
subtenant. Tenant shall also repair all damage to the building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only the contractor for
the trade or trades in question, selected from a list of at least two
contractors per trade submitted by Owner. Any other repairs in or to the
building or the facilities and systems thereof for which Tenant is responsible
shall be performed by Owner at the Tenant's expense. Owner shall maintain in
good working order and repair the exterior and the structural portions of the
building, including the structural portions of its demised premises, and the
public portions of the building interior and the building
<PAGE>
plumbing, electrical, heating and ventilating systems (to the extent such
systems presently exist) serving the demised premises. Tenant agrees to give
prompt notice of any defective condition in the premises for which Owner may be
responsible hereunder. There shall be no allowance to Tenant for diminution of
rental value and no liability on the part of Owner by reason of Inconvenience,
annoyance or injury to business arising from Owner or others making repairs,
alterations, additions or improvements in or to any portion of the building or
the demised premises or in and to the fixtures, appurtenances or equipment
thereof. It is specifically agreed that Tenant shall not be entitled to any
setoff or reduction of rent by reason of any failure of Owner to comply with the
covenants of this or any other article of this Lease. Tenant agrees that
Tenant's sole remedy at law in such instance will be by way of an action for
damages for breach of contract. The provisions of this Article 4 shall not apply
in the case of fire or other casualty which are dealt with in Article 9 hereof.
Window Cleaning:
5. Tenant will not clean nor require, permit, suffer or allow any
window in the demised premises to be cleaned from the outside in violation of
Section 202 of the Labor Law or any other applicable law or of the Rules of the
Board of Standards and Appeals, or of any other Board or body having or
asserting jurisdiction.
Requirements of Law, Fire Insurance, Floor Loads:
6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, Insurance Services Office, or any similar body which shall impose
any violation, order or duty upon Owner or Tenant with respect to the demised
premises, whether or not arising out of Tenant's use or manner of use thereof,
(including Tenant's permitted use) or, with respect to the building if arising
out of Tenant's use or manner of use of the premises or the building (including
the use permitted under the lease). Nothing herein shall require Tenant to make
structural repairs or alterations unless Tenant has, by its manner of use of the
demised premises or method of operation therein, violated any such laws,
ordinances, orders, rules, regulations or requirements with respect thereto.
Tenant may, after securing Owner to Owner's satisfaction against all damages,
interest, penalties and expenses, including, but not limited to, reasonable
attorney's fees, by cash deposit or by surety bond in an amount and in a company
satisfactory to Owner, contest and appeal any such laws, ordinances, orders,
rules, regulations or requirements provided same is done with all reasonable
promptness and provided such appeal shall not subject Owner to prosecution for a
criminal offense or constitute a default under any lease or mortgage under which
Owner may be obligated, or cause the demised premises or any part thereof to be
condemned or vacated. Tenant shall not do or permit any act or thing to be done
in or to the demised premises which is contrary to law, or which will invalidate
or be in conflict with public liability, fire or other policies of insurance at
any time carried by or for the benefit of Owner with respect to the demised
premises or the building of which the demised premises form a part, or
<PAGE>
which shall or might subject Owner to any liability or responsibility to any
person or for property damage. Tenant shall not keep anything in the demised
premises except as now or hereafter permitted by the Fire Department, Board of
Fire Underwriters, Fire Insurance Rating Organization or other authority having
jurisdiction, and then only in such manner and such quantity so as not to
increase the rate for fire insurance applicable to the building, nor use the
premises in a manner which will increase the insurance rate for the building or
any property located therein over that in effect prior to the commencement of
Tenant's occupancy. Tenant shall pay all costs, expenses, fines, penalties, or
damages, which may be imposed upon Owner by reason of Tenant's failure to comply
with the provisions of this article and if by reason of such failure the fire
insurance rate shall, at the beginning of this lease or at any time thereafter,
be higher than it otherwise would be, then Tenant shall reimburse Owner, as
additional rent hereunder, for that portion of all fire insurance premiums
thereafter paid by Owner which shall have been charged because of such failure
by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a
schedule or "make-up" of rate for the building or demised premises issued by the
New York Fire Insurance Exchange, or other body making fire insurance rates
applicable to said premises shall be conclusive evidence of the facts therein
stated and of the several items and charges in the fire insurance rates than
applicable to said premises. Tenant shall not place a load upon any floor of the
demised premises exceeding the floor load per square foot area which it was
designed to carry and which is allowed by law. Owner reserves the right to
prescribe the weight and position of all safes, business machines and mechanical
equipment. Such installations shall be placed and maintained by Tenant, at
Tenant's expense, in settings sufficient, in Owner's judgment, to absorb and
prevent vibration, noise and annoyance.
Subordination:
7. This lease is subject and subordinate to all ground or underlying
leases and to all mortgages which may now or hereafter affect such leases or the
real property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall execute promptly any certificate that Owner may request.
Property - Loss, Damage, Reimbursement, Indemnity:
8. Owner or its agents shall not be liable for any damage to property
of Tenant or of others entrusted to employees of the building, nor for loss of
or damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees. Owner or its agents will not be liable for any such damage caused by
other tenants or persons in, upon or about said building or caused by operations
in construction of any private, public or quasi public work.
<PAGE>
If at any time any windows of the demised premises are
temporarily closed, darkened or bricked up (or permanently closed, darkened, or
bricked up, if required by law) for any reason whatsoever including, but not
limited to Owner's own acts, Owner shall not be liable for any damage Tenant may
sustain thereby and Tenant shall not be entitled to any compensation therefor
nor abatement or diminution of rent nor shall the same release Tenant from its
obligations hereunder nor constitute an eviction. Tenant shall indemnify and
save harmless Owner against and from all liabilities, obligations, damages,
penalties, claims, costs and expenses for which Owner shall not be reimbursed by
insurance, including reasonable attorneys fees, paid, suffered or incurred as a
result of any breach by Tenant, Tenant's agents, contractors, employees,
invitees, or licensees, of any convenant or condition of this lease, or the
carelessness, negligence or improper conduct of the Tenant, Tenant's agents,
contractors, employees, invitees or licensees. Tenant's liability under this
lease extends to the acts and omissions of any sub-tenant, and any agent,
contractor, employee, invitee or licensee of any sub-tenant. In case any action
or proceeding is brought against Owner by reasons of any such claim, Tenant,
upon written notice from Owner, will at Tenant's expense, resist or defend such
action or proceeding by counsel approved by Owner in writing, such approval not
to be unreasonably withheld.
Destruction, Fire and Other Casualty:
9. (a) If the demised premises or any part thereof shall be damaged by
fire or other casualty, Tenant shall give immediate notice thereof to Owner and
this lease shall continue in full force and effect except as hereinafter set
forth. (b) If the demised premises are partially damaged or rendered partially
unusable by fire or other casualty, the damages thereto shall be repaired by and
at the expense of Owner and the rent, until such repair shall be substantially
completed, shall be apportioned from the day following the casualty according to
the part of the premises which is usable. (c) If the demised premises are
totally damaged or rendered wholly unusable by fire or other casualty, then the
rent shall be proportionately paid up to the time of the casualty and thence
forth shall cease until the date when the premises shall have been repaired and
restored by Owner, subject to Owner's right to elect not to restore the same as
hereinafter provided. (d) If the demised premises are rendered wholly unusable
or (whether or not the demised premises are damaged in whole or in part) if the
building shall be so damaged that Owner shall decide to demolish it or to
rebuild it, then, in any of such events, Owner may elect to terminate this lease
by written notice to Tenant, given within 90 days after such fire or casualty,
specifying a date for the expiration of the lease, which date shall not be more
than 60 days after the giving of such notice, and upon the date specified in
such notice the term of this lease shall expire as fully and completely as if
such date were the date set forth above for the termination of this lease and
Tenant shall forthwith quit, surrender and vacate the premises without prejudice
however, to Landlord's rights and remedies against Tenant under the lease
provisions in effect prior to such termination, and any rent owing shall be paid
up to such date and any payments of rent made by Tenant which were on account of
any period subsequent to such date shall be returned to Tenant. Unless Owner
shall serve a termination notice as provided for herein, Owner shall make the
repairs and restorations under the conditions of (b) and (c) hereof, with all
reasonable expedition, subject to delays due to adjustment of insurance claims,
labor troubles and causes beyond Owner's control. After any such casualty,
Tenant shall cooperate with Owner's restoration by removing from the premises as
promptly as reasonably possible, all of Tenant's
<PAGE>
salvageable inventory and movable equipment, furniture, and other property.
Tenant's liability for rent shall resume five (5) days after written notice from
Owner that the premises are substantially ready for Tenant's occupancy. (e)
Nothing contained hereinabove shall relieve Tenant from liability that may exist
as a result of damage from fire or other casualty. Notwithstanding the
foregoing, each party shall look first to any insurance in its favor before
making any claim against the other party for recovery for loss or damage
resulting from fire or other casualty, and to the extent that such insurance is
in force and collectible and to the extent permitted by law, Owner and Tenant
each hereby releases and waives all right of recovery against the other or any
one claiming through or under each of them by way of subrogation or otherwise.
The foregoing release and waiver shall be in force only of both releasors'
insurance policies contain a clause providing that such a release or waiver
shall not invalidate the insurance. If, and to the extent, that such waiver can
be obtained only by the payment of additional premiums, then the party
benefiting from the waiver shall pay such premium within ten days after written
demand or shall be deemed to have agreed that the party obtaining insurance
coverage shall be free of any further obligation under the provisions herof with
respect to waiver of subrogation. Tenant acknowledges that Owner will not carry
insurance on Tenant's furniture and/or furnishings or any fixtures or equipment,
improvements, or appurtenances removable by Tenant and agrees that Owner will
not be obligated to repair any damage thereto or replace the same. (f) Tenant
hereby waives the provisions of Section 227 of the Real Property Law and agrees
that the provisions of this article shall govern and control in lieu thereof.
Eminent Domain:
10. If the whole or any part of the demised premises shall be acquired
or condemned by Eminent Domain for any public or quasi public use or purpose,
then and in that event, the term of this lease shall cease and terminate from
the date of title vesting in such proceeding and Tenant shall have no claim for
the value of any unexpired term of said lease and assigns to Owner, Tenant's
entire interest in any such award.
Assignment, Mortgage, Etc.:
11. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors and assigns, expressly
covenants that it shall not assign, mortgage or encumber this agreement, nor
underlet, or suffer or permit the demised premises or any part thereof to be
used by others, without the prior written consent of Owner in each instance.
Transfer of the majority of the stock of a corporate Tenant shall be deemed an
assignment. If this lease be assigned, or if the demised premises or any part
thereof be underlet or occupied by anybody other than Tenant, Owner may, after
default by Tenant, collect rent from the assignee, under-tenant or occupant, and
apply the net amount collected to the rent herein reserved, but no such
assignment, underletting, occupancy or collection shall be deemed a waiver of
this covenant, or the acceptance of the assignee, under-tenant or occupant as
tenant, or a release of Tenant from the further performance by Tenant of
covenants on the part of Tenant herein contained. The consent by Owner to an
assignment or underletting shall not in any wise be construed to relieve Tenant
from obtaining the express consent in writing of owner to any further assignment
or underletting.
<PAGE>
Electric Current*:
12. Rates and conditions in respect to submetering or rent inclusion,
as the case may be, to be added in RIDER attached hereto. Tenant covenants and
agrees that at all times its use of electric current shall not exceed the
capacity of existing feeders to the building or the risers or wiring
installation and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of electric service shall in no wise make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain. (See Article 44 and Elec. Rider)
Access to Premises:
13. Owner or Owner's agents shall have the right (but shall not be
obligated) to enter the demised premises in any emergency at any time, and, at
other reasonable times, to examine the same and to make such repairs,
replacements and improvements as Owner may deem necessary and reasonably
desirable to the demised premises or to any other portion of the building or
which Owner may elect to perform. Tenant shall permit Owner to use and maintain
and replace pipes and conduits in and through the demised premises and to erect
new pipes and conduits therein provided they are concealed within the walls,
floor, or ceiling. Owner may, during the progress of any work in the demised
premises, take all necessary materials and equipment into said premises without
the same consisting an eviction nor shall the Tenant be entitled to any
abatement of rent while such work is in progress nor to any damages by reason of
loss or interruption of business or otherwise. Throughout the term hereof Owner
shall have the right to enter the demised premises at reasonable hours for the
purpose of showing the same to prospective purchasers or mortgagees of the
building, and during the last six months of the term for the purpose of showing
the same to prospective tenants. If Tenant is not present to open and permit an
entry into the premises, Owner or Owner's agents may enter the same whenever
such entry may be necessary or permissible by master key or forcibly and
provided reasonable care is exercised to safeguard Tenant's property, such entry
shall not render Owner or its agents liable therefor, nor in any event shall the
obligations of Tenant hereunder be affected. If during the last month of the
term Tenant shall have removed all or substantially all of Tenant's property
therefrom, Owner may immediately enter, alter, renovate or redecorate the
demised premises without limitation or abatement of rent, or incurring liability
to Tenant for any compensation and such act shall have no effect on this lease
or Tenant's obligations hereunder.
Vault, Vault Space, Area:
14. No Vaults, vault space or area, whether or not enclosed or covered,
not within the property line of the building is leased hereunder, anything
contained in or indicated on any sketch, blue print or plan, or anything
contained elsewhere in this lease to the contrary notwithstanding. Owner makes
no representation as to the location of the property line of the building. All
vaults and vault space and all such areas not within the property line of the
building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied
- -------------------------
* Rider to be added if necessary.
<PAGE>
under a revocable license, and if any such license be revoked, or if the amount
of such space or area be diminished or required by any federal, state or
municipal authority or public utility, Owner shall not be subject to any
liability nor shall Tenant be entitled to any compensation or diminution or
abatement of rent, nor shall such revocation, diminution or requisition be
deemed constructive or actual eviction. Any tax, fee or charge of municipal
authorities for such vault or area shall be paid by Tenant.
Occupancy:
15. Tenant will not at any time use or occupy the demised premises in
violation of the certificate of occupancy issued for the building of which the
demised premises are a part. Tenant has inspected the premises and accepts them
as is, subject to riders annexed hereto with respect to Owner's work, if any. In
any event, Owner makes no representation as to the condition of the premises and
Tenant agrees to accept the same subject to violations, whether or not of
record.
Bankruptcy:
16. (a) Anything elsewhere in this lease to the contrary
notwithstanding, this lease may be cancelled by Owner by the sending of a
written notice to Tenant within a reasonable time after the happening of any one
or more of the following events: (1) the commencement of a case in bankruptcy or
under the laws of any state naming Tenant as the debtor; or (2) the making by
Tenant of an assignment or any other arrangement for the benefit of creditors
under any state statute. Neither Tenant nor any person claiming through or under
Tenant, or by reason of any statute or order of court, shall thereafter be
entitled to possession of the premises demised but shall forthwith quit and
surrender the premises. If this lease shall be assigned in accordance with its
terms, the provisions of this Article 16 shall be applicable only to the party
then owning Tenant's interest in this lease.
(b) It is stipulated and agreed that in the event of the termination of
this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any
other provisions of this lease to the contrary, be entitled to recover from
Tenant as and for liquidated damages an amount equal to the difference between
the rent reserved hereunder for the unexpired portion of the term demised and
the fair and reasonable rental value of the demised premises for the same
period. In the computation of such damages the difference between any
installment of rent becoming due hereunder after the date of termination and the
fair and reasonable rental value of the demised premises for the period for
which such installment was payable shall be discounted to the date of
termination at the rate of four percent (4%) per annum. If such premises or any
part thereof be relet by the Owner for the unexpired term of said lease, or any
part thereof, before presentation of proof of such liquidated damages to any
court, commission or tribunal, the amount of rent reserved upon such reletting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the premises so re-let during the term of the re-letting. Nothing
herein contained shall limit or prejudice the right of the Owner to prove for
and obtain as liquidated damages by reason of such termination, an amount equal
to the maximum allowed by any statute or rule of law in effect at the time when,
and governing the proceedings in which, such damages
<PAGE>
are to be proved, whether or not such amount be greater, equal to, or less than
the amount of the difference referred to above.
Default:
17. (1) If Tenant defaults in fulfilling any of the covenants of this
lease other than the covenants for the payment of rent or additional rent; or if
the demised premises becomes vacant or deserted; or if any execution or
attachment shall be issued against Tenant or any of Tenant's property whereupon
the demised premises shall be taken or occupied by someone other than Tenant; or
if this lease be rejected under ss.235 of Title 11 of the U.S. Code (bankruptcy
code); or if Tenant shall fail to move into or take possession of the premises
within fifteen (15) days after the commencement of the term of this lease, then,
in any one or more of such events, upon Owner serving a written five (5) days
notice upon Tenant specifying the nature of said default and upon the expiration
of said five (5) days, if Tenant shall have failed to comply with or remedy such
default, or if the said default or omission complained of shall be of a nature
that the same cannot be completely cured or remedied within said five (5) day
period, and if Tenant shall not have diligently commenced during such default
within such five (5) day period, and shall not thereafter with reasonable
diligence and in good faith, proceed to remedy or cure such default, then Owner
may serve a written three (3) days' notice of cancellation of this lease upon
Tenant, and upon the expiration of said three (3) days this lease and the term
thereunder shall end and expire as fully and completely as if the expiration of
such three (3) day period were the day herein definitely fixed for the end and
expiration of this lease and the term thereof and Tenant shall then quit and
surrender the demised premises to Owner but Tenant shall remain liable as
hereafter provided.
(2) If the notice provided for in (1) hereof shall have been given, and
the term shall expire as aforesaid; or if Tenant shall make default in the
payment of the rent reserved herein or any item of additional rent herein
mentioned or any part of either or in making any other payment herein required:
then and in any of such events Owner may without notice, re-enter the demised
premises either by force or otherwise, and dispossess Tenant by summary
proceedings or otherwise, and the legal representative of Tenant or other
occupant of demised premises and remove their effects and hold the premises as
if this lease had not been made, and Tenant hereby waives the service of notice
of intention to re-enter or to institute legal proceedings to that end. If
Tenant shall make default hereunder prior to the date fixed as the commencement
of any renewal or extension of this lease, Owner may cancel and terminate such
renewal or extension agreement by written notice..
Remedies of Owner and Waiver of Redemption:
18. In case of any such default, re-entry, expiration and/or dispossess
by summary proceedings or otherwise, (a) the rent shall become due thereupon and
be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner
may re-let the premises or any part or parts thereof, either in the name of
Owner or otherwise, for a term or terms, which may at Owner's option be less
than or exceed the period which would otherwise have constituted the balance of
the term of this lease and may grant concessions or free rent or charge a higher
rental
<PAGE>
than that in this lease, and/or (c) Tenant or the legal representatives of
Tenant shall also pay Owner as liquidated damages for the failure of Tenant to
observe and perform said Tenant's convenants herein contained, any deficiency
between the rent hereby reserved and/or covenanted to be paid and the net
amount, if any, of the rents collected on account of the lease or leases of the
demised premises for each month of the period which would otherwise have
constituted the balance of the term of this lease. The failure of Owner to
re-let the premises or any part or parts thereof shall not release or affect
Tenant's liability for damages. In computing such liquidated damages there shall
be added to the said deficiency such expenses as Owner may incur in connection
with re-letting, such as legal expenses, attorneys' fees, brokerage, advertising
and for keeping the demised premises in good order or for preparing the same for
re-letting. Any such liquidated damages shall be paid in monthly installments by
Tenant on the rent day specified in this lease and any suit brought to collect
the amount of the deficiency for any month shall not prejudice in any way the
rights of Owner to collect the deficiency for any month shall not prejudice in
any way the rights of Owner to collect the deficiency of any subsequent month by
a similar proceeding. Owner, inputting the demised premises in good order or
preparing the same for re-rental may, at Owner's option, make such alterations,
repairs, replacements, and/or decorations in the demised premises as Owner, in
Owner's sole judgment, considers advisable and necessary for the purpose of
re-letting the demised premises, and the making of such alterations, repairs,
replacements, and/or decorations shall not operate or be construed to release
Tenant from liability hereunder as aforesaid. Owner shall in no event be liable
in any way whatsoever for failure to re-let the demised premises, or in the
event that the demised premises are re-let, for failure to collect the rent
thereof under such re-letting, and in no event shall Tenant be entitled to
receive any excess, if any, of such net rents collected over the sums payable by
Tenant to Owner hereunder. In the event of a breach or threatened breach by
Tenant or any of the convenants or provisions hereof, Owner shall have the right
of injunction and the right to invoke any remedy allowed at law or in equity as
if re-entry, summary proceedings and other remedies were not herein provided
for. Mention in this lease of any particular remedy, shall not preclude Owner
from any other remedy, in law or in equity. Tenant hereby expressly waives any
and all rights of redemption granted by or under any present or future laws in
the event of Tenant being evicted or dispossessed for any cause, or in the event
of Owner obtaining possession of demised premises, by reason of the violation by
Tenant of any of the covenants and conditions of this lease, or otherwise.
Fees and Expenses:
19. If Tenant shall default in the observance or performance of any
term or covenant on Tenant's part to be observed or performed under or by virtue
of any of the terms or provisions in any article of this lease, then, unless
otherwise provided elsewhere in this lease, Owner may immediately or at any time
thereafter and without notice perform the obligation of Tenant thereunder. If
Owner, in connection with the foregoing or in connection with any default by
Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs
any obligations for the payment of money, including but not limited to
attorney's fees, in instituting, prosecuting or defending any action or
proceeding, then Tenant will reimburse Owner for such sums so paid or
obligations incurred with interest and costs. The foregoing expenses incurred by
reason of Tenant's default shall be deemed to be additional rent hereunder and
shall be paid by Tenant to
<PAGE>
Owner within five (5) days of rendition of any bill or statement to Tenant
therefor. If Tenant's lease term shall have expired at the time of making of
such expenditures or incurring of such obligations, such sums shall be
recoverable by Owner as damages.
Building Alterations and Management:
20. Owner shall have the right at any time without the same
constituting an eviction and without incurring liability to Tenant therefor to
change the arrangement and/or location of public entrances, passageways, doors,
doorways, corridors, elevators, stairs, toilets or other public parts of the
building and to change the name, number or designation by which the building may
be known. There shall be no allowance to Tenant for diminution of rental value
and no liability on the part of Owner by reason of inconvenience, annoyance or
injury to business arising from Owner or other Tenants making any repairs in the
building or any such alterations, additions and improvements. Furthermore,
Tenant shall not have any claim against Owner by reason of Owner's imposition of
such controls of the manner of access to the building by Tenant's social or
business visitors as the Owner may deem necessary for the security of the
building and its occupants.
No Representations by Owner:
21. Neither Owner nor Owner's agents have made any representations or
promises with respect to the physical condition of the building, the land upon
which it is erected or the demised premises, the rents, leases, expenses of
operation or any other matter or thing affecting or related to the premises
except as herein expressly set forth and no rights, easements or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth in
the provisions of this lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition and agrees to take
the same "as is" and acknowledges that the taking of possesion of the demised
premises by Tenant shall be conclusive evidence that the said premises and the
building of which the same form a part were in good and satisfactory condition
at the time such possession was so taken, except as to latent defects. All
understandings and agreements heretofore made between the parties hereto are
merged in this contract, which alone fully and completely expresses the
agreement between Owner and Tenant and any executory agreement hereafter made
shall be ineffective to change, modify, discharge or effect an abandonment of it
in whole or in part, unless such executory agreement is in writing and signed by
the party against whom enforcement of the change, modification, discharge or
abandonment is sought.
End of Term:
22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not required
to repair as provided elsewhere in this lease excepted, and Tenant shall remove
all its property. Tenant's obligation to observe or perform this covenant shall
survive the expiration or other termination of this lease. If the last day of
the term of this Lease or any renewal thereof, falls on Sunday, this lease shall
expire at
<PAGE>
noon on the preceding Saturday unless it be a legal holiday in which case it
shall expire at noon on the preceding business day.
Quiet Enjoyment:
23. Owner covenants and agrees with Tenant that upon Tenant paying the
rent and additional rent and observing and performing all the terms, covenants
and conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the premises hereby demised, subject, nevertheless,
to the terms and conditions of this lease including, but not limited to, Article
31 hereof and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.
Failure to Give Possession:
24. If Owner is unable to give possession of the demised premises on
the date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant, or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or for any other reason, Owner shall not be subject to any liability
for failure to give possession on said date and the validity of the lease shall
not be impaired under such circumstances, nor shall the same be construed in any
wise to extend the term of this lease, but the rent payable hereunder shall be
abated (provided Tenant is not responsible for Owner's inability to obtain
possession) until after Owner shall have given Tenant written notice that the
premises are substantially ready for Tenant's occupancy. If permission is given
to Tenant to enter into the possession of the demised premises or to occupy
premises other than the demised premises prior to the date specified as the
commencement of the term of this lease, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the terms, covenants, conditions and
provisions of this lease, except as to the covenant to pay rent. The provisions
of this article are intended to constitute "an express provision to the
contrary" within the meaning of Section 223-a of the New York Real Property Law.
No Waiver:
25. The failure of Owner to seek redress for violation of, or to insist
upon the strict performance of any covenant or condition of this lease or of any
of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not
prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Owner of rent with knowledge of the breach of any covenant of this lease shall
not be deemed a waiver of such breach and no provision of this lease shall be
deemed to have been waived by Owner unless such waiver be in writing signed by
Owner. No payment by Tenant or receipt by Owner of a lesser amount than the
monthly rent herein stipulated shall be deemed to be other than on account of
the earliest stipulated rent, nor shall any endorsement or statement of any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Owner may accept such check or payment without
prejudice to Owner's right to recover the balance of such rent or pursue any
other remedy in this lease
<PAGE>
provided. No act or thing done by Owner or Owner's agents during the term hereby
demised shall be deemed an acceptance of a surrender of said premises, and no
agreement to accept such surrender shall be valid unless in writing signed by
Owner. No employee of Owner or Owner's agent shall have any power to accept the
keys of said premises prior to the termination of the lease and the delivery of
keys to any such agent or employee shall not operate as a termination of the
lease or a surrender of the premises.
Waiver of Trial by Jury:
26. It is mutually agreed by and between Owner and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commences any summary proceeding for
possession of the premises, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding including a counterclaim
under Article 4.
Inability to Perform:
27. This Lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures if Owner is prevented or delayed from so doing by reason of strike or
labor troubles or any cause whatsoever including, but not limited to, government
preemption in connection with a National Emergency or by reason of any rule,
order or regulation of any department or subdivision thereof of any government
agency or by reason of the conditions of supply and demand which have been or
are affected by war or other emergency.
Bills and Notices:
28. Except as otherwise in this lease provided, a bill, statement,
notice or communication which owner may desire or be required to give to Tenant,
shall be deemed sufficiently given or rendered if, in writing, delivered to
Tenant personally or sent by registered or certified mail addressed to Tenant at
the building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time when the same is delivered to Tenant, mailed, or left at the
premises as herein provided. Any notice by Tenant to Owner must be served by
registered or certified mail addressed to Owner at the address first hereinabove
given or at such other address as Owner shall designate by written notice.
<PAGE>
Services Provided by Owners
29. As long as Tenant is not in default under any of the covenants of
this lease, Owners shall provide: (a) necessary elevator facilities on business
days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m. to 1 p.m. and have one
elevator subject to call at all other times; (b) heat to the demised premises
when and as required by law, on business days from 8 a.m. to 6 p.m. and on
Saturdays from 8 a.m. to 1 p.m.; (c) water for ordinary lavatory purposes, but
if Tenant uses or consumes water for any other purposes or in unusual quantities
(of which fact Owner shall be the sole judge), Owner may install a water meter
at Tenant's expense which Tenant shall thereafter maintain at Tenant's expense
in good working order and repair to register such water consumption and Tenant
shall pay for water consumed as shown on said meter as additional rent as and
when bills are rendered; said premises are to be kept clean by Tenant, at
Tenant's sole expense, in a manner satisfactory to Owner and no one other than
persons approved by Owner shall be permitted to enter said premises or the
building of which they are a part for such purpose. Tenant shall pay Owner the
cost of removal of any of Tenant's refuse and rubbish from the building; (e) If
the demised premises is serviced by Owner's air conditioning/cooling and
ventilating system, air conditioning/cooling will be furnished to tenant from
May 15th through September 30th on business days (Mondays through Fridays,
holidays excepted) from 8:00 a.m. to 6:00 p.m., and ventilation will be
furnished on business days during the aforesaid hours except when air
conditioning/cooling is being furnished as aforesaid. If Tenant requires air
conditioning/cooling or ventilation for more extended hours or on Saturdays,
Sundays or on holidays, as defined under Owner's contract with Operating
Engineers Local 94-94A, Owner will furnish the same at Tenant's expense. RIDER*
to be added in respect to rates and conditions for such additional service; (f)
Owner reserves the right to stop services of the heating, elevators, plumbing,
air conditioning, power systems or cleaning or other services, if any, when
necessary by reason of accident or for repairs, alterations, replacements or
improvements necessary or desirable in the judgment of Owner for as long as may
be reasonably required by reason thereof. If the building of which the demised
premises are a part supplies manually-operated elevator service, Owner at any
time may substitute automatic-control elevators service and upon ten days'
written notice to Tenant, proceed with alterations necessary therefor without in
any wise affecting this lease or the obligation of Tenant hereunder. The same
shall be done with a minimum of inconvenience to Tenant and Owner shall pursue
the alteration with due diligence.
Captions:
30. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provisions thereof.
Definitions:
31. The term "office", or "offices", wherever used in this lease, shall
not be construed to mean premises used as astore or stores, for the sale or
display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop,
- -------------------
* Rider to be added if necessary.
<PAGE>
or for other similar purposes or for manufacturing. The term "Owner" means a
landlord or lessor, and as used in this lease means only the owner, or the
mortgagee in possession, for the time being of the land and building (or the
owner of a lease of the building or of the land and building) of which the
demised premises form a part, so that in the event of any sale or sales of said
land and building or of said lease, or in the event of a lease of said building,
or of the land and building, the said Owner shall be and hereby is entirely
freed and relieved of all covenants and obligations of Owner hereunder, and it
shall be deemed and construed without further agreement between the parties or
their successors in interest, or between the parties and the purchaser, at any
such sale, or the said lessee of the building, or of the land and building, that
the purchaser or the lessee of the building has assumed and agreed to carry out
any and all covenants and obligations of Owner, hereunder. The words "re-enter"
and "re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease shall exclude Saturdays
(except such portion thereof as is covered by specific hours in Article 29
hereof), Sundays and all days observed by the State or Federal Government as
legal holidays and those designated as holidays by the applicable building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service.
Adjacent Excavation - Shoring:
32. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises form a
part from injury or damage and to support the same by proper foundations without
any claim for damages or indemnity against Owner, or diminution or abatement of
rent.
Rules and Regulations
33. Tenant and Tenant's servants, employees, agents, visitors and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations and such other and further reasonable Rules and Regulations as Owner
or Owner's agents may from time to time adopt. Notice of any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter made
or adopted by Owner or Owner's agents, the parties hereto agree to submit the
question of the reasonableness of such Rule or Regulation for decision to the
New York office of the American Arbitration Association, whose determination
shall be final and conclusive upon the parties hereto. The right to dispute the
reasonableness of any additional Rule or Regulation upon Tenant's part shall be
deemed waived unless the same shall be asserted by service of a notice, in
writing upon Owner within ten (10) days after the giving of notice thereof.
Nothing in this lease contained shall be construed to impose upon Owner any duty
or obligation to enforce the Rules and Regulations or terms, covenants or
conditions in any other lease, as against any other tenant and Owner shall not
be liable to Tenant for violation of the same by any other tenant, its servants,
employees, agents, visitors or licenees.
<PAGE>
Security:*
34. Tenant has deposited with Owner the sum of $43,333.33 as security
for the faithful performance and observance by Tenant of the terms, provisions
and conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including,
but not limited to, the payment of rent and additional rent, Owner may use,
apply or retain the whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Owner may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this lease, including but not limited to, any
damages or deficiency in the re-letting of the premises, whether such damages or
deficiency accrued before or after summary proceedings or other re-entry by
Owner. In the event that Tenant shall fully and faithfully comply with all of
the terms, provisions, covenants and conditions of this lease, the security
shall be returned to Tenant after the date fixed as the end of the Lease and
after delivery of entire possession of the demised premises to Owner. In the
event of a sale of the land and building or leasing of the building, of which
the demised premises form a part, Owner shall have the right to transfer the
security to the vendee or lessee and Owner shall thereupon be released by Tenant
from all liability for the return of such security; and Tenant agrees to look to
the new Owner solely for the return of said security, and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new Owner. Tenant further convenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Owner nor its successors or assigns shall be bound by
any such assignment, encumbrance, attempted assignment or attempted encumbrance:
Estoppel Certificate
35. Tenant, at any time, and from time to time, upon at least 10 days'
prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or
to any other person, firm or corporation specified by Owner, a statement
certifying that this Lease is unmodified and in full force and effect (or, if
there have been modifications, that the same is in full force and effect as
modified and stating the modifications), stating the dates to which the rent and
additional rent have been paid, and stating whether or not there exists any
default by Owner under this Lease, and, if so, specifying each such default.
Successors and Assigns:
36. The covenants, conditions and agreements contained in this lease
shall bind and inure to the benefit of Owner and Tenant and their respective
heirs, distributees, executors, administrators, successors, and except as
otherwise provided in this lease, their assigns.
SEE RIDER ANNEXED HERETO AND MADE A PART HEREOF.
- ----------------------
* Space to be filled in or deleted.
<PAGE>
In Witness Whereof, Owner and Tenant have respectively signed and
sealed this lease as of the day and year first above written.
<TABLE>
<CAPTION>
<S> <C> <C>
LANDLORD: CORP.
460 WEST 34TH STREET ASSOCIATES SEAL
Witness for Owner:
/s/........................................ By:/s/......................................... [L.S.]
TENANT: CORP.
THE LANDE GROUP, INC. SEAL
Witness for Tenant:
/s/........................................ By:/s/......................................... [L.S.]
</TABLE>
ACKNOWLEDGMENTS
CORPORATE OWNER
STATE OF NEW YORK, ss.:
County of
On this day of , 19 , before me personaly came to me known, who
being by me duly sworn, did depose and say that he resides in
that he is the of
the corporation described in and which executed the foregoing instrument, as
OWNER; that he knows the seal of said corporation; that the sale affixed to said
instrument is such corporate seal; that it was so affixed by order of the Board
of Directors of said corporation, and that he signed his name thereto by like
order.
..........................................................................
INDIVIDUAL OWNER
STATE OF NEW YORK, ss.:
County of
On this day of , 19 , before me
personally came , to me known and known to me to
be the individual described in and who, as OWNER; executed the ]
foregoing instrument and acknowledged to me that he executed the same.
..........................................................................
CORPORATE TENANT
STATE OF NEW YORK, ss.:
County of
<PAGE>
On this day of , 19 , before me personaly came to me known,
who being by me duly sworn, did depose and say that he resides
in that he is the of
the corporation described in and which executed the foregoing instrument, as
TENANT; that he knows the seal of said corporation; that the sale affixed to
said instrument is such corporate seal; that it was so affixed by order of the
Board of Directors of said corporation, and that he signed his name thereto by
like order.
..........................................................................
INDIVIDUAL TENANT
STATE OF NEW YORK, ss.:
County of
On this day of , 19 , before me
personally came , to me known and known to me to be the
individual described in and who, as TENANT; executed the foregoing
instrument and acknowledged to me that he executed the same.
..........................................................................
<PAGE>
RIDER TO LEASE
BETWEEN
460 WEST 34TH STREET ASSOCIATES
("Owner" or "Landlord")
AND
THE LANDE GROUP, INC.
("Tenant")
37. Tenant shall pay to Landlord basic rent as follows ("Basic Rent" or "basic
rent," whether capitalized or not).
Lease Year 1 $200,000 per annum
Lease Year 2 $205,000 per annum
Lease Year 3 $210,000 per annum
Lease Year 4 $240,000 per annum
Lease Year 5 $250,000 per annum
Lease Year 6 $260,000 per annum
Lease Year 7 $280,000 per annum
Lease Year 8 $290,000 per annum
Lease Year 9 $295,000 per annum
Lease Year 10 $315,000 per annum
Basic rent shall be payable in equal monthly installments, in advance,
on the first day of each month during the term of this lease, without set-off,
counterclaim or deduction whatsoever, except that Tenant shall pay the first
monthly installment upon the execution hereof.
"Lease Year" shall mean the twelve (12) month period commencing on the
Rent Commencement Date (hereinafter defined) and each successive twelve (12)
month period thereafter occurring during the term of this lease.
"Commencement Date" shall, irrespective of the status of completion of
Landlord's Work (hereinafter defined), mean January 1, 1997, and the Expiration
Date shall mean April 30, 2008.
The term "Rent Commencement Date" shall mean May 1, 1998.
Notwithstanding anything to the contrary contained in this Article 37,
Tenant's obligation to pay Basic Rent shall be abated (irrespective of the
status of completion of Landlord's Work) for the sixteen (16) month period
commencing January 1, 1997 and ending April 30, 1998, and Basic Annual Rent
payments for Lease Year 1 shall commence as of the Rent Commencement Date, i.e.
May 1, 1998.
<PAGE>
38. In order to reflect presently unascertainable increases in expenses of
Landlord in connection with the ownership, operation and/or maintenance of the
land or Building of which the Demised Premises forms a part, Tenant agrees that
the basic rent shall be increased annually in accordance with the following
escalations:
A. If the Real Estate taxes levied on the land and the improvements
thereon (known as Tax Lot 1, Block 731) of which the Demised Premises are a part
shall, for any year after fiscal tax year 1996/1997 be in excess of the Real
Estate Taxes levied against the said property for the fiscal year 1996/1997
(hereinafter defined the "base tax year") for the Tenant shall pay to Landlord
as additional rent an amount equal to 4.3% (the "Tenant's Share") of such
excess, if any. Tenant's Share has been computed, without representation, by
dividing the rentable area of the Demised Premises by the rentable area of the
Building. The submission of a photocopy of the original tax bill of the Landlord
shall be deemed conclusive evidence of the amount of the taxes payable by
Landlord for each year and shall be the basis for the computation of Tenant's
Share. Tenant's Share of such tax increases shall be payable by Tenant within
ten (10) days after rendition of a statement setting forth the tax payment due.
Presently, the tax payment collection practice adopted by Landlord for
substantially all Building tenants is a one time annual tax payment.
The term Real Estate Taxes shall mean all the taxes and
assessments, special or otherwise, levied, assessed or imposed by the federal,
state or local governments or district management associations (pursuant to
Article l9A of the General Municipal Law or any successor statute) against or
upon the building and improvements of which the Demised Premises form a part or
the land upon which it is erected. If due to a future change in the method of
taxation, any franchise, income, profit or other tax, or other payment, shall be
levied in whole or in part in substitution for or in lieu of any tax which would
otherwise constitute a Real Estate Tax, such franchise, income, profit, or other
tax or payment, shall be deemed to be a Real Estate Tax for purposes hereof. All
assessments and charges levied under Article 19-A of the General Municipal Law
shall be deemed to be Real Estate Taxes for the purposes of this Lease.
If Landlord receives any refund of Real Estate Taxes for any
fiscal year in which Tenant has made a payment pursuant to this Article 38,
Landlord shall pay Tenant, Tenant's Share, i.e. 4.3%, less Tenant's Share (4.3%)
of the expenses incurred in connection therewith. .
B. If subsequent to December 31, 1997 the Wage Rate (as hereinafter
defined) shall exceed the Basic Wage Rate (as hereinafter defined) Tenant shall
pay Landlord, as additional rent an amount (the "Expense Escalation") equal to
the product obtained by multiplying the Multiplication Factor (as hereinafter
defined) by 100% times each (1(cent)) that such Wage Rate is over the Basic Wage
Rate. Landlord shall notify Tenant whether or not any Expense Escalation is due,
and if so, the amount thereof and furnish Tenant with reasonable documentation
showing how such Expense Escalation was calculated. Failure by Landlord to
notify Tenant of any Escalation Expense shall not be deemed a waiver thereof.
Tenant agrees to pay such Expense Escalation. Such Expense Escalation shall
commence as of the effective date of such increase in Wage Rate and shall be
paid monthly by Tenant to Landlord reflecting one-twelfth (1/12) of the annual
amount of such adjustment, and such escalation shall be effective until a new
escalation
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becomes effective pursuant to the terms of this paragraph. Any such escalation
for less than a year or for less than a month shall be prorated.
"Wage Rate" shall mean the minimum regular hourly wage rate
(exclusive of all "fringe benefits") of porters engaged in the general
maintenance and operation of the building or an office building in the same
category as the building pursuant to a collective bargaining agreement between
the Realty Advisory Board on Labor Relations, Inc., (or any successor thereto)
and Local 32B of the Building Employees International Union AFL-CIO (or any
successor thereto). If any such agreement is not entered into then the Wage Rate
shall mean the rate of wages paid to such employees (either by Landlord or by
the contractor furnishing such services) in said building.
"Basic Wage Rate" shall mean the Wage Rate in effect on
January 1997.
"Multiplication Factor" shall mean 20,000.
Amounts payable under this Article 38 shall be deemed
additional rent and shall be due and payable, without any set-off deduction. The
obligation of Tenant with respect to such additional rent is applicable
throughout the term of this Lease and any accrued amount on expiration of the
term shall survive such expiration.
39. A. In accordance with both a preliminary plan which Tenant hereby approves,
and a copy of which is annexed hereto and made a part hereof as Exhibit A, and a
mechanical plan to be approved by Tenant and also annexed to the Lease (said
preliminary plan and the mechanical plan are herein collectively called the
"Plans"), Landlord will make and complete in and to the Demised Premises the
work and installations (hereinafter called "Landlord's Work") specified in the
Plans. Landlord and Tenant may by notations on the Plans or by Side Letter
Agreement, make mutually agreed upon minor modifications to the Plans that do
not increase the scope or aggregate cost of Landlord's Work.
B. Except as provided in this Article, Landlord shall not be required
to spend any money or to do any work to prepare the Demised Premises for
Tenant's occupancy. The specification of Landlord's Work represents the limit of
Landlord's responsibilities in connection with the preparation of the Demised
Premises and except as so provided, Tenant shall take the Demised Premises
"as-is". Any other improvements, alterations or additions shall be performed by
Tenant, but subject to all of the terms, conditions and covenants of this Lease.
C. Landlord agrees, subject to "Force Majeure Delays", to commence
Landlord's Work immediately after execution of this lease and to utilize its
best efforts to substantially complete Landlord's Work in the warehouse portion
of the Demised Premises during or prior to the end of January 1997, and in the
balance of the Demised Premises (i.e., the office space portion thereof) by no
later than April 1, 1997.
The term "Force Majeure Delays" as used in this Paragraph
shall mean any period of delay which arises from or through Acts of God;
strikes, lockouts or labor difficulty; explosion, sabotage, accident, riot or
civil commotion; acts of war; fire or other casualty; legal
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requirements; delays caused by Tenant; and other cases (not including the lack
of money) beyond the reasonable control of Landlord. Any delays caused by
Landlord shall not be deemed a "Force Majeure Delay" and any such Landlord delay
shall accelerate the respective outside dates specified above.
D. "Substantially completed" and "substantial completion" shall mean
the date when Landlord's Work then remaining to be done, if any, consists of
minor "punchlist items" and shall have reached that stage of completion such
that Tenant could either use or occupy the Demised Premises or Tenant could then
proceed to performance of any of Tenant's initial installations without
substantial interference.
E. All work performed by Landlord, shall, upon installation, become
Landlord's property and shall be surrendered at the expiration or sooner
termination of the term of this Lease, in good condition, reasonable wear and
tear excepted.
F. Tenant specifically acknowledges and agrees that the cost of
Landlord's Work will increase and there will be delay in completion of
Landlord's Work by reason of (collectively, "Tenant Delay") (i) Tenant's failure
or unreasonable delay to consult with Landlord to enable Landlord to prepare
plans or specifications; (ii) unreasonable delay or failure by Tenant in
supplying information, approving estimates or giving authorizations; (iii)
Tenant's making changes or additions in the plans or specifications or materials
originally approved; (iv) interference by Tenant or Tenant's contractors with
the performance of Landlord's Work; (v) delay or failure of any special or
additional new materials selected by Tenant. Accordingly, for each day of Tenant
Delay (i.e., not any delay constituting a Landlord delay as aforesaid), the Rent
Commencement Date shall be accelerated by one (1) day.
40. A. Tenant shall not do, and shall not permit persons under Tenant's control
to do any act or thing in or upon the Demised Premises or the building which
will violate any laws and ordinances Tenant shall comply with all laws and
ordinances which impose any violation, order or duty upon Landlord or Tenant
arising from, in, or in connection with, the Tenant's occupancy, use or manner
of use thereof or any alterations made by or at the request of tenant therein,
or required by reason of a breach of any such Tenant's covenants or agreement
hereunder, whether or not such laws and ordinances shall be presently in effect
or hereafter enacted or issued, and whether or not any work required shall be
ordinary or extraordinary or foreseen or unforeseen at this time.
B. If Tenant receives written notice of any violation of any laws or
ordinances applicable to the Demised Premises, Tenant shall give prompt notice
thereof to Landlord.
C. Tenant shall not be obligated to comply with any laws or ordinances
requiring any structural alteration of the Demised Premises, unless such
alteration is required by reason of the Tenant's manner of use of the Demised
Premises.
D. Tenant shall not violate any federal, state or local law, ordinance
or regulation relating to any "hazardous substance" or "toxic substance" (as
hereinafter defined), brought or used by Tenant, Tenant's employees, invitees or
agents within the building or the Demised
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Premises. Tenant agrees to indemnify, defend and hold Landlord and its employees
and agents harmless from any claims, judgments, damages, penalties, fines,
costs, liabilities and losses, including attorney fees, which arise as result of
any such violation during or after the term of this Lease. The term "hazardous
substances" or "toxic substances", shall include those covered by the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, and those substances defined as "hazardous wastes" or "hazardous
materials" in the laws of the State of New York.
41. Each party represents and warrants to the other that it has dealt with no
broker other than Daniel Idan (the "Broker") in connection with the negotiation
of this Lease. Each party agrees to indemnify and hold the other harmless from
any and all claims of brokers (other than Broker) and expenses in connection
therewith arising out of or in connection with the entering into of this lease
by Landlord and Tenant. Landlord shall pay the Broker pursuant to separate
agreement.
42. A. Notwithstanding anything to the contrary contained in this Lease, Tenant
may, upon 30 days prior written notice to Landlord and without obtaining the
consent of Landlord or triggering Landlord's recapture option pursuant to
paragraphs C and D of this Article 42, assign or transfer its entire interest in
this Lease to a successor of Tenant (as hereinafter defined), provided that
Tenant shall not be in default beyond any applicable grace or cure period in the
performance of any of its obligations under this Lease. A "successor", as used
herein shall mean (a) a corporation or other business entity into which Tenant,
its corporate or partnership successors or assigns, is merged or consolidated,
in accordance with applicable statutory provisions for the merger or
consolidation of corporations, or in accordance with an amendment or restatement
of the existing partnership or joint venture agreement of Tenant, provided that
by operation of law or by effective provisions contained in the instruments of
merger or consolidation the liabilities of the corporations or other business
entities participating in such merger or consolidation, amendment or restatement
are assumed by the corporation of other business entities surviving such merger
or consolidation or (b) a corporation or other business entity which purchases
all or substantially all of the capital stock of Tenant or purchases all or
substantially all of the assets of Tenant, its corporate or partnership
successors and assigns, or (c) any corporate or partnership successor to a
successor corporation or partnership becoming such by either of the methods
described in subdivisions (a) and (b) above; provided that immediately after
giving effect to any such merger or consolidation, or such acquisition, and
assumption, as the case may be, the corporation or other business entity
surviving such merger or created by such consolidation or acquiring such assets
and assuming such liabilities, as the case may be, shall have a net worth, as
determined in accordance with generally accepted accounting principles, at least
equal to the net worth, similarly determined, of Tenant prior to such merger,
consolidation, acquisition or assumption. Upon the delivery to Landlord by any
successor corporation or business entity to whom this Lease may be and is
assigned or transferred pursuant to the provisions of this Section, of the
current balance sheet of such successor corporation, certified by its chief
financial officer, together with the agreement of such corporation or business
entity to assume all the terms of this Lease to be performed by Tenant, and all
obligations arising under this Lease (whether prior to or after such transfer or
assignment), and to be bound thereby, Tenant shall thereafter be released from
any obligations arising under this Lease.
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<PAGE>
B. Subject to subparagraph D below, the Tenant may, from time to time
during the term of this lease, sublet a portion of the Demised Premises (not to
exceed 50% of the rentable area thereof) subject to the Landlord's prior written
consent, which consent shall not be unreasonably withheld or delayed, on the
basis of the following terms and conditions:
(1) The Tenant shall provide to the Landlord the name and
address of the sublessee.
(2) The sublessee shall enter into a sublease, by written
instrument, a copy of such sublease agreement shall be
furnished to the Landlord within ten (10) days of its
execution but at least ten (10) business days before the
effectiveness thereof.
(3) There shall be no more than one subtenant of the Demised
Premises at any one time during the term of this Lease; and
(4) In any event, the acceptance by the Landlord of any rent
from the subtenant or the failure of the Landlord to insist
upon a strict performance of any of the terms, conditions and
covenants herein shall not release the Tenant herein nor any
assignee assuming this Lease, from any and all of the
obligations herein, during and for the entire term of this
Lease.
C. Subject to subparagraph D below, commencing 12 months after the
Commencement Date, and at any time thereafter, Landlord shall not unreasonably
withhold its consent to an assignment of this Lease or a subletting of all of
the Demised Premises to a single subtenant (or a portion of the Demised Premises
not to exceed 50% of the rentable area thereof) provided that prior to such
assignment or subletting Tenant shall submit to Landlord in writing (1) a notice
of Tenant's intention to assign or sublet and the name of the proposed assignee
or subtenant; (2) the essential terms and conditions of the proposed assignment
or subletting; (3) the reputation and business experience of the principals of
the proposed assignee or subtenant and any other information reasonably
requested by Landlord; (4) a financial statement of the proposed assignee or
subtenant, certified by a principals of the assignee or subtenant or certified
public accountant as of a date not more that six months prior thereto; and (5)
an agreement by Tenant to indemnify, defend and hold Landlord harmless against
any claim or liability for real estate brokerage commission payable with respect
to any sublease or assignment by Tenant.
In determining reasonableness, Landlord may take into consideration all
relevant factors surrounding the proposed assignment or sublease, including,
without limitation, the financial stability, reputation and business experience
of the proposed assignee or subtenant.
Tenant shall deliver to Landlord a duly executed original of the
assignment or sublease within 10 days after execution but at least 7 business
days before the effectiveness thereof.
D. In case of a proposed assignment of this Lease (other than pursuant
to subparagraph A above) or a proposed sublet exceeding 25% of the area of the
Demised Premises, Landlord shall have the option, to be exercised within 30 days
from submission of the request for consent to such assignment or sublet (which
request shall contain the essential terms
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<PAGE>
and conditions of the assignment or sublease and shall include a copy of all
agreements, if any, relating to the sublease or assignment) to recapture the
within Lease if an assignment or the space to be sublet if a sublet so that such
prospective subtenant or assignee may then become the sole tenant of Landlord
hereunder with respect to the space to be subleased or assigned and the Tenant
shall be fully released from any and all obligations hereunder with respect to
such space to be recaptured, provided, however, that Landlord shall be
responsible for the payment of any brokerage in connection with such assignment
or sublet.
43. Supplementing Article 2 hereof, Tenant shall use the Demised Premises for
offices and warehouse use only, provided, however, that in no event shall the
warehouse portion thereof and Tenant's use of said warehouse area ever exceed
5,000 gross square feet.
44. The rate specified by Landlord as the base rate for the attached electric
rider is building service classification no. 4 ("SC No. 4"), together with an
overhead/administrative charge of 10% to cover Landlord's overhead and
administrative expenses.
45. In case of a conflict between the rider and the printed form, the rider
shall govern.
46. The submetering company referred to in the electricity rider to this Lease
shall be deemed an agent of Landlord for the purposes of submetering the
electric service to the Demised Premises and Landlord guarantees the submetering
Company's performance under the electricity rider for so long as the building
operates on a submetered basis.
47. Air conditioning shall be furnished to the Demised Premises through the two
existing package units and as part of the Work Letter, an additional package
unit, which package units shall contain controls so that Tenant may regulate the
amount and hours of air conditioning use thereof, subject, however, to payment
of all electrical charges consumed in the operation of the packaged units
pursuant to the annexed Electrical Rider.
The package units are designed subject to applicable government
regulations, to keep the Demised Premises in reasonable proximity to the
following specifications: an inside temperature of 76o when the outside
temperature is 95o Fahrenheit dry bulb and interim relative humidity of 50% when
the outside relative humidity is 95%.
48. ADDENDUM TO PRINTED PORTION OF LEASE.
(1) reasonably
(2) provided, however, that nothing contained hereinabove shall require
Tenant to utilize union labor;
(3) On or prior to the Commencement Date, Landlord shall at Landlord's
expense, clean the exterior windows of the Demised Premises, provided, however,
that any subsequent window cleaning shall be performed by Tenant at Tenant's
sole cost and expense.
49. ADDENDUM TO ARTICLE 34.
<PAGE>
Supplementing the provisions of Article 34 hereof, Landlord shall
deposit the security in an interest-bearing account, interest to accrue to the
benefit of Tenant, less the 1% administration expense allowed Landlord pursuant
to the General Obligations Law of New York.
LANDLORD:
460 WEST 34TH STREET ASSOCIATES
By:____________________________
TENANT:
THE LANDE GROUP INC.
By:____________________________
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ELECTRICAL RIDER TO LEASE DATED DECEMBER 23, 1996 BETWEEN THE LANDE GROUP, INC.
AS TENANT AND 460 WEST 34TH STREET ASSOCIATES, AS OWNER.
The Tenant agrees to purchase from Consolidated Electric Meter Co.,
Inc. (hereinafter referred to as the "Meter Company") and Owner agrees to
provide through the Meter Company all electric current consumed, used or to be
used in the demised premises. The amount to be paid by the Tenant for current
consumed shall be determined by the meter or meters on the premises or to be
installed at the expense of the Owner or the Meter Company and billed according
to each meter. Bills for current consumed shall be rendered by the Meter Company
to the Tenant at such times as the Meter Company may elect, but not more
frequently than once a month. The Meter Company shall have the right, in the
event of any nonpayment by the Tenant of such bill within ten (10) days after
rendition, to discontinue and cut off the use of electric current to the Tenant
without releasing the Tenant from any liability under this lease, and without
the Landlord or said Meter Company incurring any liability for any damage caused
by such discontinuance of service; provided, however, that the Meter Company may
not discontinue service to the premises unless it shall give the Tenant ten (10)
days prior written notice of its intention to do so and Tenant during such ten
(10) day period shall not have paid all amounts as it may owe to the Meter
Company. Tenant agrees to pay for all electric current consumed at the rate
specified in Article 44 of the Rider to this lease. Subject to Owner's
obligation to supply electrical service pursuant to Article 44 of the Rider to
this lease, if in the reasonable opinion of the Meter Company Tenant's
electrical consumption exceeds the capacity of the Building, and thereby
installation overloads any riser or risers, and/or switch or switches, and/or
meter or meters in the building of which the demised premises are a part, the
Tenant will at the Tenant's own expense, provide, install and maintain any
additional risers or switches, as may be necessary. All meters, if any, that are
so installed will be purchased from the Meter Company at commercially reasonable
prices and all risers, switches and meters, if any, that are so installed shall
be, become and remain the property of the building. Any tax or charge now in
effect or hereinafter imposed upon the receipts of the Meter Company from the
sale or resale of electrical energy to the Tenant by any Municipal, State or
Federal agency, not including, however, taxes on the business of the Meter
Company, such as income, franchise, and similar taxes, shall be passed on to the
Tenant and included in the bill and paid by the Tenant to the Meter Company.
In the event the sale of the electric current in the building
containing the demised premises is hereafter prohibited by any law hereinafter
enacted, or by any order or ruling of the Public Service Commission of the State
of New York, or by an judicial decision of any appropriate court, then the Meter
Company, by reason of such prohibition and if effectuated pursuant to a
building-wide policy, (I.E, not mandated for Tenant only) may, at its option and
in its sole and absolute discretion, elect to terminate the practice of
submetering in the building containing the demised premises; and upon such
election, the Tenant will, upon notice from the Metering Company, apply within
ten (10) days thereafter to the appropriate Public Service Corporation servicing
the building containing the demised premises for electric service, and comply
with all the rules and regulations of such Public Service Corporation, and all
costs associated with and pertaining thereto, and the Meter Company shall, upon
the commencement of electrical service by such Public Service Corporation, be
relieved of any further obligation to furnish electric current to the Tenant
pursuant to this rider. The Meter Company may, however,
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if it so elects pursuant to a building-wide policy (I.E., not mandated for
Tenant only), furnish unmetered current to Tenant, and the Tenant shall pay to
the Meter Company on the first day of the month next following such furnishing
of unmetered current to be pro rated to the first of the month and monthly
thereafter during the term of this lease, so long as unmetered electric current
is furnished to the Tenant, a sum equal to one-twelfth of the invoices billed to
the Tenant for all electric current consumed in the demised premises for the
twelve month period directly preceding the month in which the furnishing of
unmetered current to the Tenant is commenced by the Meter Company. In the event
the Meter Company supplies unmetered electric current to the Tenant, all
security already on deposit with the Meter Company from the Tenant to secure
payment for current consumed shall be held by the Meter Company to secure
payment of Tenant's monthly charge for the supply of unmetered current to the
Tenant by the Meter Company. The Meter Company shall have the right, in the
event of any non-payment by the Tenant of such bill within ten (10) days after
rendition, to discontinue and cut off the use of electric current to the Tenant
without further notice without releasing the Tenant from any liability under
this lease, and without the Landlord or said Meter Company incurring any
liability for any damage caused by such discontinuance of service provided,
however, that the Meter Company may not discontinue service to the premises
unless it shall give to Tenant ten (10) days prior written notice of its
intention to do so and Tenant during same ten (10) day period shall not have
paid all amounts as it may owe to the Meter Company. If after the date the Meter
Company commences supplying unmetered current to the Tenant, any additional
electrically operated equipment is installed in the premises or the hours of
usage of the electric installation are increased in the demised premises, then
the monthly payment to the Meter Company shall be increased to equal the value
of the additional electric current consumed by such newly installed electrically
operated equipment and/or increased hours of usage of the electric installation,
such increased value to be determined in accordance with Article 44 of the Rider
to this lease. If after the date the Meter Company commences supplying unmetered
current to the tenant, any electrically operated equipment is removed from the
premises, or the hours of usage of the electrical installation are decreased,
then the monthly payment to the Meter Company shall be decreased to equal the
diminished value of the electrical current then consumed, such decreased value
to be determined in accordance with Article 44 of the rider to this Lease.
Tenant shall pay the amount of such increase or increases or be entitled to such
rebate retroactively to the date of the installation or removal of all
electrically operated equipment and/or the increase or decrease in usage by the
Tenant. If after the date the Meter Company commences supplying unmetered
electric current to the Tenant there is any increase in the utility rate
described in Article #45 of the Rider to this lease, such increase or increases
shall be charged to and paid by the Tenant so that Tenant's electrical charges
are increased by the percentage of increase in such rate. If for any reason the
Meter Company terminates the furnishing of unmetered current, as hereinabove
described, or in the event permission is granted to the Tenant by the Meter
Company for direct service from the utility company, the Tenant may, at no
additional charge from Owner, utilize all risers, service wiring, switches,
meter equipment and meters in connection with its electrical service. In the
event any legislature, order of the Public Service Commission or any judicial or
governmental body enacts any law, ruling or regulation to effect the service
classification, rate or charge under which the Tenant receives unmetered
electric current from the Meter Company, then and in such event Tenant will pay
to the Meter Company that rate or charge as set forth by said legislature, order
of the Public Service Commission or judicial or governmental body.
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<PAGE>
Notwithstanding anything hereinabove set forth, the Tenant agrees to pay to the
Meter Company for metered or unmetered electric current a minimum charge of
$25.00 per month. Anything to the contrary notwithstanding, no current shall be
furnished unless all equipment of the Tenant complies with all legal
requirements with respect thereto. The Tenant shall make no changes in and/or
additions to the wiring in the demised premises, without the written consent of
the Owner first had and obtained, which consent shall not be unreasonably
withheld or delayed. Rigid conduit only will be allowed by the Owner for exposed
work.
Notwithstanding anything to the contrary set forth above, Tenant shall
pay for electricity at a rate based upon Landlord's average cost per kilowatt
hour plus average cost per kilowatt applied to the tenant's metered consumption
plus ten (10%) percent and all applicable sales taxes thereon.
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ALPHANET SOLUTIONS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of October 14,
1996, by and between AlphaNet Solutions, Inc., a New Jersey corporation (the
"Company"), and DIRECTOR OR OFFICER NAME ("Indemnitee").
WHEREAS, Indemnitee is an officer of the Company and performs a
valuable service in such capacity for the Company;
WHEREAS, the Company and Indemnitee recognize the difficulty in
obtaining liability insurance for its directors, officers, employees, agents and
fiduciaries, the significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and the Indemnitee and other
directors, officers, employees, agents and fiduciaries of the Company may not be
willing to continue to serve in such capacities without additional protection;
and
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve the Company and, in
part, in order to induce Indemnitee to continue to provide services to the
Company as an officer and director, wishes to provide for the indemnification
and advancing of expenses to Indemnitee to the maximum extent permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
(a) INDEMNIFICATION OF EXPENSES. The Company shall indemnify Indemnitee
to the fullest extent permitted by law if Indemnitee was or is or becomes a
party to or witness or other participant in, or is threatened to be made a party
to or witness or other participant in, any threatened, pending or completed
action, suit, proceeding or alternative dispute resolution mechanism, or any
hearing, inquiry or investigation that Indemnitee in good faith believes might
lead to the institution of any such action, suit, proceeding or alternative
dispute resolution mechanism, whether civil, criminal, administrative,
investigative or other (collectively hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
<PAGE>
Indemnitee is or was a director, officer, employee, agent or fiduciary of the
Company, or any subsidiary of the Company, or is or was serving at the request
of the Company as a director, officer, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust or other enterprise, or by reason
of any action or inaction on the part of Indemnitee while serving in such
capacity (hereinafter an "Indemnifiable Event") against any and all expenses
(including attorneys' fees and all other costs, expenses and obligations
incurred in connection with investigating, defending, being a witness in or
participating in (including on appeal), or preparing to defend, be a witness in
or participate in, any such Claim), judgments, fines, penalties and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement (collectively,
hereinafter "Expenses"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than thirty (30) days after written demand by Indemnitee therefor is
presented to the Company.
(b) REVIEWING PARTY. Notwithstanding the foregoing, (i) the obligations
of the Company under Section l(a) shall be subject to the condition that the
Reviewing Party (as described in Section 10(e) hereof) shall not have determined
(in a written opinion, in any case in which the Independent Legal Counsel
referred to in Section 1(c) hereof is involved) that Indemnitee would not be
permitted to be indemnified under applicable law, and (ii) the obligation of the
Company to make an advance payment of Expenses to Indemnitee pursuant to Section
2(a) (an "Expense Advance") shall be subject to the condition that, if, when and
to the extent that the Reviewing Party determines that Indemnitee would not be
permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any
Expense Advance shall be unsecured and no interest shall be charged thereon. If
there has not been a Change in Control (as defined in Section 10(c) hereof), the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section l(c) hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall have the right to commence
litigation seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, including the legal
or factual bases therefor, and the Company hereby consents
-2-
<PAGE>
to service of process and to appear in any such proceeding. Any determination by
the Reviewing Party otherwise shall be conclusive and binding on the Company and
Indemnitee.
(c) CHANGE IN CONTROL. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to payments of Expenses and Expense
Advances under this Agreement or any other agreement or under the Company's
Certificate of Incorporation or Bylaws as now or hereafter in effect, the
Company shall seek legal advice only from Independent Legal Counsel (as defined
in Section 10(d) hereof) selected by Indemnitee and approved by the Company
(which approval shall not be unreasonably withheld). Such counsel, among other
things, shall render its written opinion to the Company and Indemnitee as to
whether and to what extent Indemnitee would be permitted to be indemnified under
applicable law. The Company agrees to pay the reasonable fees of the Independent
Legal Counsel referred to above and to fully indemnify such counsel against any
and all expenses (including attorneys' fees), claims, liabilities and damages
arising out of or relating to this Agreement or its engagement pursuant hereto.
(d) MANDATORY PAYMENT OF EXPENSES. Notwithstanding any other provision
of this Agreement other than Section 9 hereof, to the extent that Indemnitee has
been successful on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, in defense of any Claim referred to in
Section (1)(a) hereof or in the defense of any claim, issue or matter therein,
Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in
connection therewith.
2. EXPENSES; INDEMNIFICATION PROCEDURE.
(a) ADVANCEMENT OF EXPENSES. The Company shall advance all Expenses
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
(5) days after written demand by Indemnitee therefor to the Company.
(b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a condition
precedent to Indemnitee's right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any Claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). In addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) NO PRESUMPTIONS; BURDEN OF PROOF. For purposes of this Agreement,
the termination of any Claim, by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption
-3-
<PAGE>
that Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court has determined that indemnification is not
permitted by applicable law. In addition, neither the failure of the Reviewing
Party to have made a determination as to whether Indemnitee has met any
particular standard of conduct or had any particular belief, nor an actual
determination by the Reviewing Party that Indemnitee has not met such standard
of conduct or did not have such belief, prior to the commencement of legal
proceedings by Indemnitee to secure a judicial determination that Indemnitee
should be indemnified under applicable law, shall be a defense to Indemnitee's
claim or create a presumption that Indemnitee has not met any particular
standard of conduct or did not have any particular belief. In connection with
any determination by the Reviewing Party or otherwise as to whether the
Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
(d) NOTICE TO INSURERS. If, at the time of the receipt by the Company
of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
(e) SELECTION OF COUNSEL. In the event the Company shall be obligated
hereunder to pay the Expenses of any Claim, the Company, if appropriate, shall
be entitled to assume the defense of such Claim with counsel approved by
Indemnitee, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, approval of such counsel by Indemnitee and
the retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall
have the right to employ Indemnitee's counsel in any such Claim at Indemnitee's
expense and (ii) if (A) the employment of counsel by Indemnitee has been
previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Claim, then the fees and expenses
of Indemnitee's counsel shall be at the expense of the Company.
3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
(a) SCOPE. The Company hereby agrees to indemnify the Indemnitee to the
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a New Jersey corporation to indemnify
a member of its board of directors or an officer, employee, agent or fiduciary,
it is the intent of the
-4-
<PAGE>
parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits afforded by such change. In the event of any change in any applicable
law, statute or rule which narrows the right of a New Jersey corporation to
indemnify a member of its board of directors or an officer, employee, agent or
fiduciary, such change, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement, shall have no effect on this
Agreement or the parties' rights and obligations hereunder.
(b) NONEXCLUSIVITY. The indemnification provided by this Agreement
shall be in addition to any rights to which Indemnitee may be entitled under the
Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of
stockholders or disinterested directors, the New Jersey Business Corporation
Act, or otherwise. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in an
indemnified capacity even though Indemnitee may have ceased to serve in such
capacity.
4. NO DUPLICATION OF PAYMENTS.
The Company shall not be liable under this Agreement to make any
payment in connection with any Claim made against Indemnitee to the extent
Indemnitee has otherwise actually received payment (under any insurance policy,
Certificate of Incorporation, Bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
5. PARTIAL INDEMNIFICATION.
If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for some or a portion of Expenses in the
investigation, defense, appeal or settlement of any civil or criminal Claim, but
not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion of such Expenses to which
Indemnitee is entitled.
6. MUTUAL ACKNOWLEDGMENT.
Both the Company and Indemnitee acknowledge that in certain instances,
Federal law or applicable public policy may prohibit the Company from
indemnifying its directors, officers, employees, agents or fiduciaries under
this Agreement or otherwise. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
Securities and Exchange Commission to submit the question of indemnification to
a court in certain circumstances for a determination of the Company's right
under public policy to indemnify Indemnitee.
-5-
<PAGE>
7. LIABILITY INSURANCE.
To the extent the Company maintains liability insurance applicable to
directors, officers, employees, agents or fiduciaries, Indemnitee shall be
covered by such policies in such a manner as to provide Indemnitee the same
rights and benefits as are accorded to the most favorably insured of the
Company's directors, if Indemnitee is a director; or of the Company's officers,
if Indemnitee is not a director of the Company but is an officer; or of the
Company's key employees, agents or fiduciaries, if Indemnitee is not an officer
or director but is a key employee, agent or fiduciary.
8. EXCEPTIONS.
Any other provision herein to the contrary notwithstanding, the Company
shall not be obligated pursuant to the terms of this Agreement:
(a) EXCLUDED ACTION OR OMISSIONS. To indemnify Indemnitee for acts,
omissions or transactions from which Indemnitee may not be relieved of liability
under applicable law.
(b) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to
Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except (1) with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such suit, or (iii) as
otherwise required under Section 14A:3-5 of the New Jersey Business Corporation
Act, regardless of whether Indemnitee ultimately is determined to be entitled to
such indemnification, advance expense payment or insurance recovery, as the case
may be.
(c) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) CLAIMS UNDER SECTION 16(B). To indemnify Indemnitee for expenses
and the payment of profits arising from the purchase and sale, or sale and
purchase, by Indemnitee of securities in violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, or any similar successor statute.
9. PERIOD OF LIMITATIONS.
No legal action shall be brought and no cause of action shall be
asserted by or in the right of the Company against Indemnitee, Indemnitee's
estate, spouse, heirs, executors or personal or legal representatives after the
expiration of two years from the date of accrual of such cause of
-6-
<PAGE>
action, and any claim or cause of action of the Company shall be extinguished
and deemed released unless asserted by the timely filing of a legal action
within such two-year period; PROVIDED, HOWEVER, that if any shorter period of
limitations is otherwise applicable to any such cause of action, such shorter
period shall govern.
10. CONSTRUCTION OF CERTAIN PHRASES.
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees, agents or
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee, agent or fiduciary of the Company
which imposes duties on, or involves services by, such director, officer,
employee, agent or fiduciary with respect to an employee benefit plan, its
participants or its beneficiaries; and if Indemnitee acted in good faith and in
a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing more than 20% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
-7-
<PAGE>
reason to constitute a majority thereof, or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all of the
Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three years (other than
with respect to matters concerning the rights of Indemnitee under this
Agreement, or of other indemnitees under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean any
appropriate person or body consisting of a member or members of the Company's
Board of Directors or any other person or body appointed by the Board of
Directors who is not a party to the particular Claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean any
securities of the Company that vote generally in the election of directors.
11. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall constitute an original.
12. BINDING EFFECT; SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and their respective successors and assigns,
including any direct or indirect successor by purchase, merger, consolidation or
otherwise to all or substantially all of the business and/or assets of the
Company, spouses, and any heirs, and personal and legal representatives of the
Indemnitee. The Company shall require and cause any successor (whether direct or
indirect by purchase, merger, consolidation or otherwise) to all, substantially
all, or a substantial part, of the business and/or assets of the Company, by
written agreement in form and substance satisfactory to Indemnitee, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform if no such succession had
taken place. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as a director of the Company or of any other
enterprise at the Company's request.
-8-
<PAGE>
13. ATTORNEYS' FEES.
In the event that any action is instituted by Indemnitee under this
Agreement or under any liability insurance policies maintained by the Company to
enforce or interpret any of the terms hereof or thereof, Indemnitee shall be
entitled to be paid all Expenses incurred by Indemnitee with respect to such
action, regardless of whether Indemnitee is ultimately successful in such
action, and shall be entitled to the advancement of Expenses with respect to
such action, unless as a part of such action the court of competent jurisdiction
over such action determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in
defense of such action (including costs and expenses incurred with respect to
Indemnitee's counterclaims and cross-claims made in such action), and shall be
entitled to the advancement Expenses with respect to such action, unless as a
part of such action the court having jurisdiction over such action determines
that each of Indemnitee's material defenses to such action were made in bad
faith or were frivolous.
14. NOTICE.
All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed duly given (i) if delivered by
hand and receipted for by the party addressee, on the date of such receipt, or
(ii) if mailed by domestic certified or registered mail with postage prepaid, on
the third business day after the date postmarked. Addresses for notice to either
party are as shown on the signature page of this Agreement, or as subsequently
modified by written notice.
15. CONSENT TO JURISDICTION.
The Company and Indemnitee each hereby irrevocably consent to the
jurisdiction of the courts of the State of New Jersey for all purposes in
connection with any action or proceeding which arises out of or relates to this
Agreement and agree that any action instituted under this Agreement shall be
commenced, prosecuted and continued only in the Superior Court of the State of
New Jersey in and for Morris County, which shall be the exclusive and only
proper forum for adjudicating such a claim.
16. SEVERABILITY.
The provisions of this Agreement shall be severable in the event that
any of the provisions hereof (including any provision within a single section,
paragraph or sentence) are held by a court of competent jurisdiction to be
invalid, void or otherwise unenforceable, and the remaining provisions shall
remain enforceable to the fullest extent permitted by law. Furthermore, to the
-9-
<PAGE>
fullest extent possible, the provisions of this Agreement (including, without
limitation, each portion of this Agreement containing any provision held to be
invalid, void or otherwise unenforceable, that is not itself invalid, void or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.
17. CHOICE OF LAW.
This Agreement shall be governed by and its provisions construed and
enforced in accordance with the laws of the State of New Jersey, as applied to
contracts between New Jersey residents, entered into and to be performed
entirely within the State of New Jersey, without regard to the conflict of laws
principles thereof.
18. SUBROGATION.
In the event of payment under this Agreement, the Company shall be
subrogated to the extent of such payment to all of the rights of recovery of
Indemnitee, who shall execute all documents required and shall do all acts that
may be necessary to secure such rights and to enable the Company effectively to
bring suit to enforce such rights.
19. AMENDMENT AND TERMINATION.
No amendment, modification, termination or cancellation of this
Agreement shall be effective unless it is in writing signed by both the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
20. INTEGRATION AND ENTIRE AGREEMENT.
This Agreement sets forth the entire understanding between the parties
hereto and supersedes and merges all previous written and oral negotiations,
commitments, understandings and agreements relating to the subject matter hereof
between the parties hereto.
21. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT.
Nothing contained in this Agreement shall be construed as giving
Indemnitee any right to be retained in the employ of the Company or any of its
subsidiaries.
*****
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
AlphaNet Solutions, Inc.
By:_____________________________________
Stan Gang, Chairman of the Board,
President and Chief Executive Officer
AGREED TO AND ACCEPTED
INDEMNITEE:
__________________________
Name:
__________________________
(Street Address)
__________________________
(City, State and Zip)
-11-
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement of AlphaNet Solutions, Inc. on Form S-8 (relating to the Company's
1995 Stock Plan and 1995 Non-Employee Director Stock Option Plan) filed on
January 31, 1997 (Registration No. 333-20851), of our report dated March 26,
1998 relating to the consolidated financial statements of AlphaNet Solutions,
Inc. which are included in this Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
Morristown, New Jersey
April 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF ALPHANET SOLUTIONS, INC. AS OF DECEMBER 31,
1997 AND FOR THE 12 MONTH PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,689,000
<SECURITIES> 0
<RECEIVABLES> 51,643,000
<ALLOWANCES> 1,255,000
<INVENTORY> 4,941,000
<CURRENT-ASSETS> 63,267,000
<PP&E> 8,970,000
<DEPRECIATION> 2,584,000
<TOTAL-ASSETS> 72,541,000
<CURRENT-LIABILITIES> 30,144,000
<BONDS> 0
0
0
<COMMON> 63,000
<OTHER-SE> 41,659,000
<TOTAL-LIABILITY-AND-EQUITY> 72,541,000
<SALES> 191,392,000
<TOTAL-REVENUES> 191,392,000
<CGS> 159,327,000
<TOTAL-COSTS> 22,761,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158,000
<INCOME-PRETAX> 9,365,000
<INCOME-TAX> 3,844,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,521,000
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.93
</TABLE>
