SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 0-27042
AlphaNet Solutions, Inc.
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2554535
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7 Ridgedale Ave., Cedar Knolls, New Jersey 07927
(Address of Principal Executive Offices) (Zip Code)
(973) 267-0088
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of April 30, 1998:
CLASS NUMBER OF SHARES
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Common Stock, $.01 par value 6,283,310
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ALPHANET SOLUTIONS, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Consolidated Balance Sheets
as of December 31, 1997
and March 31, 1998 (unaudited) 2
Consolidated Statements of Income
for the Three Months Ended
March 31, 1997 (unaudited) and 1998 (unaudited) 3
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1997 (unaudited) and 1998 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7
Results of Operations 10
Liquidity and Capital Resources 11
PART II. OTHER INFORMATION 13
Item 1. Legal Proceedings 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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ALPHANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31, MARCH 31,
1997 1998
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(UNAUDITED)
ASSETS
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Current assets:
Cash and cash equivalents............................................... $ 2,689 $ 7,311
Accounts receivable, net................................................ 50,388 44,783
Inventories............................................................. 4,941 5,589
Deferred income tax asset............................................... 1,651 1,651
Prepaid expenses and other current assets 3,598 2,464
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Total current assets.................................................. 63,267 61,798
Property and equipment, net.................................................. 6,386 7,259
Other assets................................................................. 2,888 2,797
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Total assets.......................................................... $ 72,541 $ 71,854
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 44 $ 25
Accounts payable........................................................ 17,921 16,622
Accrued expenses........................................................ 12,179 11,389
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Total current liabilities ............................................ 30,144 28,036
Advance from principal shareholder........................................... 675 675
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Total liabilities..................................................... 30,819 28,711
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Shareholders' equity:
Preferred stock -- $0.01 par value; authorized
3,000,000 shares, none issued.......................................... -- --
Common stock -- $0.01 par value; authorized
15,000,000 shares, 6,257,610 and 6,269,230 shares issued and
outstanding at December 31, 1997 and March 31, 1998, respectively
63 63
Additional paid-in capital.............................................. 33,172 33,277
Retained earnings....................................................... 8,487 9,803
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Total shareholders' equity............................................ 41,722 43,143
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Total liabilities and shareholders' equity $ 72,541 $ 71,854
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
1997 1998
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Net sales:
Product sales............................................ $ 38,768 $ 31,297
Services and support..................................... 7,733 14,194
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46,501 45,491
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Cost of sales:
Product sales............................................ 34,493 27,377
Services and support..................................... 5,028 9,395
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39,521 36,772
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Gross profit.................................................. 6,980 8,719
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Operating expenses:
Selling expenses......................................... 2,918 3,967
General and administrative expenses 2,036 2,595
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4,954 6,562
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Operating income.............................................. 2,026 2,157
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Other income (expense):
Interest income.......................................... 3 99
Interest expense......................................... (61) (26)
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(58) 73
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Income before income taxes.................................... 1,968 2,230
Provision for income taxes.................................... 807 914
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Net income.................................................... $ 1,161 $ 1,316
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Earnings per share - Basic............................... $ 0.23 $ 0.21
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Weighted average shares outstanding.................. 5,103 6,261
=============== ===============
Earnings per share - Diluted.................................. $ 0.22 $ 0.21
=============== ===============
Weighted average shares
and share equivalents outstanding.......................... 5,293 6,397
=============== ===============
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
1997 1998
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Cash flows from operating activities:
Net income............................................................ $ 1,161 $ 1,316
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization....................................... 311 576
Increase (decrease) from changes in:
Accounts receivable............................................... (4,289) 5,605
Inventories....................................................... 1,215 (648)
Prepaid expenses and other current assets......................... 21 1,134
Other assets...................................................... (37) 91
Accounts payable and accrued expenses............................. (3,312) (2,089)
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Net cash (used in) provided by operating activities (4,930) 5,985
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Cash flows from investing activities:
Property and equipment expenditures................................... (887) (1,449)
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Net cash used in investing activities............................... (887) (1,449)
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Cash flows from financing activities:
Net borrowings of notes payable to bank............................... 4,675 --
Costs of anticipated common stock offering (322) --
Repayment of capital lease obligations................................ (29) (19)
Exercise of stock options............................................. -- 105
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Net cash provided by financing activities 4,324 86
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Net (decrease) increase in cash and cash equivalents (1,493) 4,622
Cash and cash equivalents, beginning of period 1,610 2,689
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Cash and cash equivalents, end of period................................. $ 117 $ 7,311
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
Note 1 -- Basis of Presentation:
The information presented for March 31, 1998 and for the three-month
periods ended March 31, 1997 and 1998 is unaudited, but, in the opinion of the
management of AlphaNet Solutions, Inc. (the "Company"), the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary for
the fair presentation of the Company's financial position as of March 31, 1998
and the results of its operations and its cash flows for the three-month periods
ended March 31, 1997 and 1998. The consolidated financial statements included
herein have been prepared in accordance with generally accepted accounting
principles and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1997, which were included as part of
the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission.
Results for the interim period are not necessarily indicative of
results that may be expected for the entire year.
Note 2 -- 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 and
No. 130. 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.
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ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
The following is a reconciliation of the number of shares used in the
basic EPS and diluted EPS computations:
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COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
QUARTER ENDED MARCH 31,
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1997 1998
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PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
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Basic EPS................. $ 1,161 5,103 $ 0.23 $ 1,316 6,261 $ 0.21
Effect of dilutive stock
options................... -- 190 (0.01) -- 136 --
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Diluted EPS............... $ 1,161 5,293 $ 0.22 $ 1,316 6,397 $ 0.21
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
The Company is a single-source provider of information technology
("IT") products, services and support to Fortune 1000 and other large and
mid-sized companies located primarily in the New York-to-Philadelphia corridor.
The Company was formed in 1984 as an authorized reseller of computer hardware
and software products, and since 1990, has been developing and offering related
IT services. To date, most of the Company's net sales have been derived from IT
product sales. In the first quarter of 1998, net product sales were
approximately 68.8% and services and support revenues were approximately 31.2%
of the Company's net sales.
The Company has entered into distribution agreements with Ingram Micro,
Inc. ("Ingram") and MicroAge Computer Centers, Inc. ("MicroAge"), two of the
nation's largest aggregators, to acquire most of its IT products for resale. The
Company's relationship with MicroAge commenced in 1984 and, as customer demand
for IT products grew, the Company initiated its relationship with Ingram in
1994. The distribution agreements with 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 the three months ended March 31, 1998, the Company acquired approximately
30% and 43% of its products for resale from MicroAge and Ingram, respectively.
In December 1997 the Company entered into a $20.4 million contract
("MTA contract")with the MTA-New York City Transit Authority ("MTA") to furnish
and install local and wide area computer network components throughout the MTA's
over 200 locations, including subway stations, electrical power substations and
a diverse group of train car maintenance facilities. The contract allows for
completion over a four year period although the project schedule currently
anticipates a 24 month schedule. The revenues generated from the MTA contract in
the three months ended March 31, 1998 were not material. Except for the MTA
contract, in general, there are no ongoing written commitments by customers to
purchase products from the Company and all product sales are made on a purchase
order basis. Furthermore, as the market for IT products has matured, price
competition has intensified and is likely to continue to intensify. The
Company's gross profits, margins and results of operations could be adversely
affected by such continued product pricing pressure, 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,
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the Company's service arrangements with its customers may be terminated by such
customers with limited advance notice and without significant penalty. The most
significant cost relating to the services component of the Company's business is
personnel expenses which consist of salaries, benefits and payroll-related
expenses. Thus, the financial performance of the Company's service business is
based primarily upon billing margins (billable hourly rates less the costs to
the Company of such service personnel on an hourly basis) and utilization rates
(billable hours divided by paid hours). The future success of the services
component of the Company's business will depend in large part upon its ability
to maintain high utilization rates at profitable billing margins. The Company's
utilization rates for service personnel likely will be adversely affected during
periods of rapid and concentrated hiring. In addition, the competition for
quality technical personnel has continued to intensify resulting in increased
personnel costs for the Company and many other IT service providers, which has
adversely affected the Company's billing margins.
The Company may receive manufacturer rebates resulting from equipment
sales. In addition, the Company receives volume discounts, 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 employees include direct
sales, sales support and marketing personnel. Sales commissions are recorded as
revenue is recognized. General and administrative expenses consist of all other
operating expenses, including primarily salaries and occupancy costs for
administrative, executive and finance personnel.
The Company believes that its ability to provide a broad range of
technical services, coupled with its traditional strength in satisfying its
clients' IT product requirements and its long-term relationships with large
clients, positions the Company to continue to grow the services component of its
business, while further strengthening its product sales. As such, the Company
anticipates that an increasing percentage of its gross profits in the future
will be derived from the services and support component of its business.
However, in the near term, the Company believes that product sales will continue
to generate a significant percentage of the Company's gross profit. The Company
believes that its ability to be a single-source provider of IT products,
services and support enables it to earn margins higher than it would earn if it
sold products only.
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
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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.
FORWARD LOOKING STATEMENTS
Certain statements included in this Form 10-Q, including, without
limitation, statements regarding the anticipated growth in the IT products and
services markets, the continuation of the trends favoring outsourcing of
management information systems ("MIS") functions by large and mid-sized
companies, the anticipated growth in the services and support component of the
Company's business, the timing of the development and implementation of the
Company's new service offerings and the utilization of such services by the
Company's customers, the Company's objective to grow through strategic
acquisitions, and trends in future operating performance, are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements include risks and
uncertainties, including, but not limited to: (i) the substantial variability of
the Company's quarterly operating results caused by a variety of factors, some
of which are not within the Company's control, including (a) the short-term
nature of the Company's customers' commitments, (b) patterns of capital spending
by customers, (c) the timing, size and mix of product and service orders and
deliveries, (d) the timing and size of new projects, (e) pricing changes in
response to various competitive factors, (f) market factors affecting the
availability of qualified technical personnel, (g) the timing and customer
acceptance of new product and service offerings, (h) changes in trends affecting
outsourcing of IT services, (i) disruption in sources of supply, (j) changes in
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
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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) the MTA's right to terminate its contract with the Company and
the Company's continued compliance with its obligations under the MTA contract;
(ix) 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; (x) the Company's dependence
on vendor authorizations to resell certain computer products and to provide
related services; (xi) the Company's dependence on certain aggregators for a
substantial portion of its products acquired for resale; (xii) the Company's
reliance on the continued services of key executive officers and salespersons;
and (xiii) 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
NET SALES. Net sales decreased by 2.2%, or $1.0 million, from $46.5
million in 1997 to $45.5 million in 1998. Product sales decreased by 19.3%, or
$7.5 million, from $38.8 million in 1997 to $31.3 million in 1998. This decrease
in product sales was primarily attributed to lower average selling prices in
1998 due to continued pricing pressures on hardware manufacturers and, to a
lesser extent, higher customer product demand during the first quarter 1997.
Services and support revenue increased by 83.6%, or $6.5 million, from $7.7
million in 1997 to $14.2 million in 1998. 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 client projects and the addition of several long-term staffing
contracts. During the three months ended March 31, 1998, sales to KPMG Peat
Marwick, the Company's largest customer, accounted for approximately 18.2% of
the Company's net sales. There can be no assurance that such customer will
continue to place orders with the Company or engage the Company to perform
services and support at existing levels.
GROSS PROFIT. The Company's gross profit increased by 24.9%, or $1.7
million, from $7.0 million in 1997 to $8.7 million in 1998. Total gross profit
margin increased from 15.0% of net sales in 1997 to 19.2% in 1998 due to the
increase in higher margin service and support revenues. Gross profit margin
attributable to product sales increased from 11.0% in 1997 to 12.5% in 1998
primarily due to the sales mix of higher margin products. 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 35.0% in 1997 to 33.8% in 1998. The decrease in such
gross profit margin was attributable primarily to securing several
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long-term staffing contracts during 1997, which typically yield lower gross
margins than individual projects. Such decrease reflects a full three months of
revenue generated from such lower margin projects in the first quarter of 1998,
most of which began generating revenue after March 31, 1997. The Company
increased its staff of billable technical personnel from 545 at December 31,
1997 to 558 at March 31, 1998.
SELLING EXPENSES. Selling expenses increased by 35.9%, or $1.0 million,
from $2.9 million in 1997 to $3.9 million in 1998, increasing from 6.3 % to 8.7
% of net sales, respectively. Such increases were primarily attributed to
increased salesperson commissions and other support costs, and the increase in
sales and marketing efforts associated with the Company's service and support
offerings.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased by 27.5 %, or $559,000 from $ 2.0 million in 1997 to $ 2.6
million in 1998, increasing from 4.4% to 5.7 % of net sales, respectively. Such
increases were primarily due to increases in personnel expenses, training costs,
professional fees, depreciation charges and corporate insurance premiums.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily
from cash generated by operations, as well as with funds from borrowings under
the Company's credit facilities and the net proceeds from the Company's public
offerings of its common stock. The Company's cash provided by operations was
approximately $6.0 million for the first quarter of 1998 and consisted primarily
of a decrease in accounts receivable of $5.6 million. The decrease in accounts
receivable is primarily attributable to the timing of collection of accounts
receivable and the decrease in net sales. As measured in days sales outstanding,
the Company's accounts receivable increased from 80 days at December 31, 1997 to
84 days at March 31, 1998. The Company's cash flow from operations has been and
continues to be affected primarily by the timing of collection of accounts
receivable which typically fluctuate in a manner consistent with net sales.
The Company's working capital was $33.8 million at March 31, 1998
compared to $33.1 million at December 31, 1997.
The Company invested $1.4 million in property and equipment in the
first quarter of 1998, primarily related to purchases and upgrades of computer
equipment and software utilized in-house. Although there are no other material
commitments for capital expenditures currently outstanding, the Company
anticipates additional capital expenditures to continue the expansion of the
services component of its business and for the enhancement of its MIS
infrastructure.
The Company purchases certain inventory and equipment through financing
arrangements with IBM Credit Corporation and Finova Capital Corporation. At
March 31, 1998, there were outstanding balances of $4.3 million and $7.3
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
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30, 1997 with First Union National Bank (the "Bank" ), the Bank entered into
an intercreditor agreement with respect to their relative interests.
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 portion to certain other lenders pursuant to intercreditor agreements.
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 March 31, 1998, capital lease
obligations outstanding under these equipment leases, which expire during the
year 1998, totaled $25,000.
The Company believes that its available funds, together with existing
and anticipated credit facilities and the cash flow expected to be generated
from operations, will be adequate to satisfy its current and planned operations
for at least the next 24 months.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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
and has identified areas of non-compliance. The Company has remitted
payment to the State relating to such identified non-compliance for
approximately $25,000. In 1997 the Company recorded an amount for
payment of unpaid wages and possible fines, penalties and
administrative fees. Although the amount recorded is sufficient to pay
the approximate sum of $25,000, there can be no assurance that such
remaining amount will be sufficient for further sums subsequently
determined to be due, or assessed by the State in the future, if any,
as well as any fines, penalties or administrative fees which may be
imposed. In addition, there can be no assurance that any such future
assessment in excess of the remaining amount recorded 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.
ITEM 5. OTHER INFORMATION.
In February 1998 the Company announced the opening of its
Remote Network Management Center located at the Company's headquarters
in Cedar Knolls, New Jersey. The Remote Network Management Center
provides remote network monitoring, resolution management, performance
reporting, desktop management, and system administration services for
clients from a single point in New Jersey.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report on Form 10-Q is filed.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AlphaNet Solutions, Inc.
DATE: May 15, 1998 By:/S/ STAN GANG
-------------
Stan Gang,
President and Chief
Executive Officer
(Principal Executive
Officer)
DATE: May 15, 1998 By:/S/ ROBERT G. PETOIA
--------------------
Robert G. Petoia
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
- 14 -
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited interim consolidated Financial Statements as of
March 31, 1998 and March 31, 1997 contained in the Company's quarterly
reports on Form 10-Q for each of the periods ended March 31, 1998 and
March 31, 1997 and is qualified in its entirety by reference to such
Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 7,311 117
<SECURITIES> 0 0
<RECEIVABLES> 46,038 34,440
<ALLOWANCES> 1,255 303
<INVENTORY> 5,589 3,594
<CURRENT-ASSETS> 61,798 39,977
<PP&E> 10,419 5,756
<DEPRECIATION> 3,160 1,289
<TOTAL-ASSETS> 71,854 46,142
<CURRENT-LIABILITIES> 28,036 25,385
<BONDS> 0 0
0 0
0 0
<COMMON> 63 51
<OTHER-SE> 43,080 20,031
<TOTAL-LIABILITY-AND-EQUITY> 71,854 46,142
<SALES> 31,297 38,768
<TOTAL-REVENUES> 45,491 46,501
<CGS> 27,377 34,493
<TOTAL-COSTS> 36,772 39,521
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 26 61
<INCOME-PRETAX> 2,230 1,968
<INCOME-TAX> 914 807
<INCOME-CONTINUING> 1,316 1,161
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,316 1,161
<EPS-PRIMARY><F2> 0.21 0.23<F1>
<EPS-DILUTED> 0.21 0.22<F1>
<FN>
<F1>This amount was restated in accordance with Financial Accounting Standards
Board Statement No. 128 and Staff Accounting Bulletin No. 98.
<F2>The word "Primary" should be deleted and replaced with the word "Basic".
</FN>
</TABLE>
