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, 1999
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 Avenue, 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, 1999:
Class Number of Shares
Common Stock, $.01 par value 6,251,414
<PAGE>
ALPHANET SOLUTIONS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION...................................... 1
Item 1. Financial Statements........................................ 1
Consolidated Balance Sheets
as of December 31, 1998
and March 31, 1999 (unaudited)............................. 2
Consolidated Statement of Operations
for the Three Months Ended
March 31, 1998 (unaudited) and 1999 (unaudited)............ 3
Consolidated Statement of Changes in Shareholders' Equity
for the Three Months Ended
March 31, 1999 (unaudited) ................................ 4
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1998 (unaudited) and 1999 (unaudited)............ 5
Notes to Consolidated Financial Statements (unaudited)..... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 8
Results of Operations......................................13
Liquidity and Capital Resources............................14
PART II. OTHER INFORMATION..........................................15
Item 6. Exhibits and Reports on Form 8-K............................15
SIGNATURES..................................................................16
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
December 31, 1998 March 31, 1999
(unaudited)
----------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 13,377 $ 15,079
Accounts receivable, net . . . . . . . . . . . . . . . . . . 33,057 29,489
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 3,505 4,801
Deferred income tax asset . . . . . . . . . . . . . . . . . . 1,761 1,761
Prepaid expenses and other current assets . . . . . . . . . . 2,309 773
-------- --------
Total current assets . . . . . . . . . . . . . . . 54,009 51,903
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 5,491 5,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,394 2,348
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . $ 61,894 $ 59,251
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations . . . . . . . . . . $ 17 $ 16
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 11,072 9,819
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 6,730 6,329
Billings in excess of costs . . . . . . . . . . . . . . . . . . 815 104
-------- --------
Total current liabilities . . . . . . . . . . . . . . 18,634 16,268
Long term liabilities:
Advance from principal shareholder . . . . . . . . . . . . . . . 675 675
Capital lease obligations . . . . . . . . . . . . . . . . . . . 49 46
-------- --------
Total Liabilities . . . . . . . . . . . . . . . . . . 19,358 16,989
-------- --------
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,
6,366,228 and 6,388,214 shares issued and outstanding at
December 31, 1998 and March 31, 1999, respectively . . . . . . . 63 63
Treasury Stock - at cost; 136,800 shares
in 1998 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . (667) (667)
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 33,942 34,020
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . 9,198 8,846
Total shareholders' equity . . . . . . . . . . . . . 42,536 42,262
-------- --------
Total liabilities and shareholders' equity . . . . . $ 61,894 $ 59,251
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
For the Three Months
Ended March 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Net sales:
Product sales . . . . . . . . . . . . . . . . . . . $31,297 $ 18,692
Services and support . . . . . . . . . . . . . . . 14,194 11,436
-------- --------
45,491 30,128
-------- --------
Cost of sales:
Product sales . . . . . . . . . . . . . . . . . . . 27,377 16,609
Services and support . . . . . . . . . . . . . . . 9,395 8,138
-------- --------
36,772 24,747
-------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . 8,719 5,381
-------- --------
Operating expenses:
Selling expenses . . . . . . . . . . . . . . . . . 3,967 2,957
General and administrative expenses . . . . . . . . 2,595 3,275
-------- --------
6,562 6,232
-------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . . 2,157 (851)
-------- --------
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . 99 262
Interest expense . . . . . . . . . . . . . . . . . (26) (13)
-------- --------
73 249
-------- --------
Income (loss) before income taxes . . . . . . . . . . . . . . 2,230 (602)
Provision (benefit) for income taxes . . . . . . . . . . . . . 914 (250)
-------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 1,316 $ (352)
======== ========
Earnings (loss) per share - Basic . . . . . . . . . . . . . . $ 0.21 $ (0.06)
======== =========
Weighted average shares . . . . . . . . . . . . . . . . . . . 6,261 6,236
======== =========
Earnings (loss) per share - Diluted. . . . . . . . . . . . . . $ 0.21 $ (0.06)
======== =========
Weighted average shares and share equivalents outstanding. . . 6,397 6,236
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands)
Additional
Common Common Treasury Treasury Paid-In Retained
Shares Stock Shares Stock Capital Earnings Total
------ ----- ------ ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 6,366 $ 63 (137) $ (667) $ 33,942 $9,198 $ 42,536
Exercise of stock options 4 -- -- -- 15 -- 15
Employee stock purchases 18 -- -- -- 63 -- 63
Net income (loss) -- -- -- -- -- (352) (352)
-------- ----- ----- ------ -------- ------- ---------
Balance at March 31, 1999 6,388 $ 63 (137) $(667) $ 34,020 $8,846 $ 42,262
======== ===== ===== ====== ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
For the Three Months
Ended March 31,
--------------------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,316 $ (352)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 594 663
Increase (decrease) from changes in:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 5,605 3,568
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . (649) (1,296)
Prepaid expenses and other current assets . . . . . . . . . . . . . 1,135 1,536
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 2
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (1,298) (1,253)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . (790) (401)
Billings in excess of costs . . . . . . . . . . . . . . . . . . . -- (711)
-------- ---------
Net cash provided by operating activities . . . . . . . . . . . . . . . . 5,986 1,756
Cash flows from investing activities:
Property and equipment expenditures . . . . . . . . . . . . . . . . . . . . . . (1,450) (128)
-------- ---------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . (1,450) (128)
-------- ---------
Cash flows from financing activities:
Net proceeds from sales of common stock . . . . . . . . . . . . . . . . . . . -- 63
Exercises of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . 105 15
Repayment of capital lease obligations . . . . . . . . . . . . . . . . . . . . (19) (4)
-------- ---------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . 86 74
-------- ---------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . 4,622 1,702
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . 2,689 13,377
-------- ---------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . $ 7,311 $ 15,079
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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 1999, and for the
three-month periods then ended, is unaudited, but, in the opinion of the
management of AlphaNet Solutions, Inc. (the "Company"), the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary for
the fair presentation of the Company's financial position as of March 31, 1999
and the results of its operations and its cash flows for the three-month periods
ended March 31, 1998 and 1999. 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, 1998, 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 stockholders 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 potential exercise of stock options. 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.
Net income per share is computed using the weighted average shares and
share equivalents outstanding during the period. Pursuant to the requirements of
the Securities and Exchange Commission, stock options issued by the Company
during the twelve months immediately preceding the Company's initial public
offering have been included in the weighted average shares or equivalents used
in computing net income per share.
<PAGE>
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
(in thousands, except per share amounts)
For the Three Months
Ended March 31,
--------------------
1998 1999
---- ----
<S> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,316 $ (352)
======= ========
Weighted average shares and share equivalents outstanding:
Common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,269 6,236
Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 --
-- --
6,397 6,236
======= ========
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.21 $ (0.06)
======= ========
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 1999, net product sales were 62.0% and
services and support revenue was 38.0% of the Company's net sales.
The Company has entered into distribution agreements with Ingram and
Pinacor, two of the nation's largest aggregators, to acquire most of its IT
product for resale. The Company's relationship with Pinacor commenced in 1984
and, as customer demand for IT products grew, the Company initiated its
relationship with Ingram in 1994. The distribution agreements with Ingram and
Pinacor 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, 1999, the Company
acquired approximately 61% and 22% of its products for resale from Ingram and
Pinacor, respectively.
Except for the $20.4 million contract with the MTA-New York City Transit
Authority ("MTA") entered into in December 1997 (see below), 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, applications
development, communications installation, education, help desk, remote network
management, IT staffing and internet-related services. Services and support
revenue is recognized as such services are performed. The Company's network
consulting, workstation support and communications installation services are
billed on a time and materials basis. The Company's education and IT staffing
services are fee-based on a per-course and per-placement basis, respectively.
Generally, the Company's service arrangements with its customers may be
terminated by such customers with limited advance notice and without significant
penalty. The most significant cost relating to the services component of the
Company's business is personnel costs which consist of salaries, benefits and
payroll-related expenses. Thus, the financial performance of the Company's
services business is based primarily upon billing margins (billable hourly rates
less the costs to the Company of such services 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 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 implemented a reduction-in-force in June 1998 due to
lower-than-expected demand for the Company's services from certain clients. In
addition, in January 1999, the Company implemented a second reduction,
eliminating 42 positions consisting principally of persons supporting product
sales.
The Company may receive manufacturer rebates resulting from equipment
sales. In addition, the Company receives volume discounts and other incentives
from certain of its suppliers. Except for products in transit or products
awaiting configuration at the Company facility, the Company generally does not
maintain large inventory balances. In 1998 the Company's primary vendors
announced or instituted changes in their price protection and inventory
management programs as a direct result of changes in such policies by
manufacturers. Specifically, they announced that they will (i) limit price
protection to that provided by the manufacturer, generally less than 30 days,
rather than the unlimited protection previously available; and (ii) restrict
product returns, other than defective returns, to a percentage (the percentage
varies depending on the vendor and when the return is made) of product
purchased, during a defined period, at the lower of the invoiced price or the
current price, subject to the specific manufacturer's requirements and
restrictions. At the present time, the Company does not believe these changes in
the vendor policies will have a material impact on its business. Other than
changes in such price protection and return policies, the Company is unaware
that any of its suppliers or manufacturers has changed or intends to further
change these programs. There can be no assurances that any such rebates,
discounts or incentives will continue at historical levels, if at all. Further
adverse modification, restriction or reduction in such programs could have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
The Company's cost of sales includes primarily, in the case of product
sales, the cost to the Company of products acquired for resale, and in the case
of services and support revenue, salaries and related expenses for billable
technical personnel. The Company's 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 related expenses,
depreciation and occupancy costs.
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. 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
the 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.
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. Operating results have been and may in the future
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.
In December 1997, the Company entered into a four-year, $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 operations, including subway stations, electrical power
substations and a diverse group of train car maintenance facilities. The Company
is the prime contractor responsible for project management, systems procurement,
and installation. The work is grouped in contiguous locations and payment is
predicated upon achieving specific milestone events. 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. While the
Company is currently performing in accordance with the contract terms, there can
be no assurances that any such events would not occur. 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 in June of each year and may be so adjusted in
the future.
<PAGE>
The Company has performed services and supplied products to the MTA since
the inception of the MTA Contract. The work performed to date has required
greater than estimated labor and other costs to complete. Such increased labor
and other costs may also be incurred at other sites. The Company has formally
requested the MTA for an equitable adjustment in the contract amount and terms.
However, there can be no assurance the MTA will approve, either in whole or in
part, any equitable adjustment in the contract amount or terms requested by the
Company. There can be no assurance that the Company can complete the contract
without incurring a loss. Currently, the Company is recording revenues under the
MTA Contract equal to costs incurred. However, if the Company is unsuccessful in
obtaining equitable adjustments, realizing increased performance efficiencies or
otherwise improving its margins, the Company believes it will sustain a loss
under the contract.
<PAGE>
Year 2000 Readiness Disclosure
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in 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 herein as the "Year 2000 Problem." Computer systems that
are able to deal correctly with dates after 1999 are referred to as "Year
2000-Compliant." Over the past several years, based upon its business needs, the
Company has purchased and installed hardware and software which is represented
by the manufacturers to be Year 2000-Compliant. The Company has reviewed its
state of readiness and has determined that, with the exception of the Company's
current integrated accounting system, which is not Year 2000-Compliant, the
Company believes its installed base of computer hardware and software systems to
be Year 2000-Compliant. With respect to the Company's integrated accounting
system, in October 1998 the Company announced the purchase of Platinum SQL
Software, to replace the current integrated accounting system. The project plan
currently establishes June 1999 for completion of implementation. The Company
believes it is currently on track for timely completion of such implementation.
Based upon the representations of the manufacturers of hardware and software
used by the Company, and the provider of the Platinum SQL Software, the Company
believes upon implementation of Platinum SQL, the Company's internal business
systems, including its computer systems, will be Year 2000-Compliant. There can
be no assurance, however, that the Year 2000 Problem relating to the Company's
systems will not adversely affect its business, financial position, results of
operation or cash flows.
During the fourth quarter of 1998, the Company initiated formal
communications with all of its significant suppliers and large customers to
determine the extent to which the Company is vulnerable to the failure of those
third parties to remediate their own Year 2000 problem. The Company expects to
be receiving and reviewing the responses to these communications and following
up with such suppliers and customers as needed or appropriate. The Company
expects this phase to be substantially completed by approximately June 30, 1999.
However, there can be no guarantee that the systems of other companies on which
the Company's system rely will be remedied in a timely manner, or that a failure
to remedy by another company, will not have a material adverse effect on the
Company.
The Company resells IT products of leading hardware manufacturers and
software developers. As a result, the Company has no control over the
developments of computer systems, software products or other business systems
developed by such third parties. Consequently, there can be no assurance that
the computer systems, software products or other business systems sold by the
Company will accept input of, store, manipulate and/or output dates in the year
2000 or thereafter without error or interruption. As a result, the Company, as a
reseller, may be liable for such failures. Given the Company's role in the
distribution of such products, the Company is not able to accurately determine
the extent, if any, of such potential liability.
In addition, the purchasing patterns of the Company's customers and
potential customers may be affected by issues associated with the Year 2000
problem. As companies devote significant resources to become Year
2000-Compliant, these expenditures may result in reduced funds available to
purchase products or obtain services such as those offered by the Company. There
can be no assurance that the Year 2000 Problem will not adversely affect the
Company's business, financial position, results of operations or cash flows.
The total cost of the Company's Year 2000 compliance is being funded
through operating cash flows. The estimated cost to purchase and install
Platinum SQL is approximately $600,000. Excluding costs associated with Platinum
SQL and the write-off of the capitalized software and consulting fees, the
Company has expended approximately $2 million on hardware and software upgrades
for its Year 2000 compliance. The Company does not currently anticipate that it
will incur any additional material expenditures for such Year 2000 compliance.
The aforementioned costs do not include any costs associated with any third
party being Year 2000 non-compliant, nor do such costs include internal
personnel costs (primarily salaries and benefits), which the Company does not
separately track. Such costs also do not include any contingency plan costs at
this point.
The Company has not developed a contingency plan in the event the Platinum
SQL project is not completed in a timely manner or with respect to any
additional Year 2000 compliance issues which may arise as a result of the
Company's inquiries of its suppliers and customers. Such plans may be developed
as and if the need for any such plans arise.
Statements included in this Year 2000 Readiness Disclosure are
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. Such forward-looking statements include risks and
uncertainties, including but not limited to the possibility that the currently
installed computer systems, software products or other business systems of the
Company or its distributors, manufacturers or customers, working either alone or
in conjunction with other software or systems, will not accept input of, store,
manipulate and/or output dates in the year 2000 or thereafter without error or
interruption. Such risks and uncertainties may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements contained in this Report.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. 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; (iii) the intense competition in the markets
for the Company's products and services; (iv) the Company's ability to manage
its growth effectively which will require the Company to continue developing and
improving its operational, financial and other internal systems, including a
major upgrade of the Company's internal management information systems ("MIS")
infrastructure; (v) the Company's ability to develop, market, provide, and
achieve market acceptance of new service offerings to new and existing clients;
(vi) the Company's ability to attract, hire, train, and retain qualified
technical personnel in an increasingly competitive market; (vii) the Company's
substantial reliance on a concentrated number of key customers; (viii)
uncertainties relating to potential acquisitions, if any, made by the Company,
such as its ability to integrate acquired operations and to retain key customers
and personnel of the acquired business; (ix) the Company's dependence on vendor
authorizations to resell certain computer products and to provide related
services; (x) the Company's dependence on certain aggregators for a substantial
portion of its products acquired for resale; (xi) the Company's reliance on the
continued services of key executive officers and salespersons. Such risks and
uncertainties may cause the Company's actual results to differ materially from
the results discussed in the forward-looking statements contained herein.
<PAGE>
Results of Operations
Comparison of Three Months Ended March 31, 1998 and 1999
Net Sales. Net sales decreased by 33.8%, or $15.4 million, from $45.5
million for the first quarter of 1998 to $30.1 million for the first quarter of
1999. Product sales decreased by 40.3%, or $12.6 million, from $31.3 million for
the first quarter of 1998 to $18.7 million for the first quarter of 1999. This
decline in product sales was primarily attributable to increased competition,
reduced unit volumes and lower average selling prices. This trend has been
accelerated by the ability of customers to purchase directly from certain
manufacturers at discounted prices and the Company's decision not to pursue
low-margin business. Services and support revenue decreased by 9.4%, or $2.8
million, from $14.2 million for the first quarter of 1998 to $11.4 million for
the first quarter of 1999. This decline was primarily attributable to decreased
demand from certain customers.
During the three months ended March 31, 1999, sales to Summit Bank and
PSE&G, the Company's largest customers, accounted for approximately 11.2% and
10.5%, respectively, of the 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 declined by 38.3%, or $3.3
million, from $8.7 million for the first quarter of 1998 to $5.4 million for the
first quarter of 1999. The Company's overall gross profit margin decreased from
19.2% of net sales for the first quarter of 1998 to 17.9% for the first quarter
of 1999. Gross profit margin attributable to product sales decreased from 12.5%
for the first quarter of 1998 to 11.1% for the first quarter of 1999 due to
downward pricing pressure on products. Gross margin attributable to services and
support revenue decreased from 33.8% of services and support revenue for the
first quarter of 1998 to 28.8% for the first quarter of 1999. This decrease was
attributable primarily to costs associated with performance of the MTA Contract,
increased personnel and related costs, and more long-term staffing contracts
which typically carry lower gross profit margins.
Selling Expenses. Selling expenses decreased by 25.5%, or $1.0 million,
from $3.9 million for the first quarter of 1998 to $2.9 million for the first
quarter of 1999, but increased as a percentage of net sales from 8.7% for the
first quarter of 1998 to 9.8% for the first quarter of 1999. The increase as a
percentage of net sales was due primarily to the decrease in net sales during
the first three months in 1999.
General and Administrative Expenses. General and administrative expenses
increased by 26.2%, or $680,000, from $2.5 million for the first quarter of 1998
to $3.2 million for the first quarter of 1999, and increased as a percentage of
net sales from 5.7% for the first quarter of 1998 to 10.9% for the first quarter
of 1999. The increase in general and administrative expenses in absolute dollars
was due primarily to personnel expenses, training costs, professional fees,
depreciation charges, additional leased facilities and their related costs and
insurance premiums. The increase in general and administrative expenses as a
percentage of net sales was also due to the decrease in net sales during the
first three months in 1999.
<PAGE>
Liquidity and Capital Resources
Since its inception, the Company has funded its operations primarily from
cash generated by operations, as well as with funds from borrowings under the
Company's credit facilities and the net proceeds from the Company's public
offerings of its Common Stock in 1996. The Company's cash provided by operations
was $1.8 million for the first quarter 1999, which consisted primarily of a
decrease in accounts receivable of $3.6 million offset by a decrease in accounts
payable and accrued expenses of $1.7 million. The decrease in accounts
receivable is primarily attributable to the decrease in net sales. As measured
in day sales outstanding, the Company's accounts receivable increased from 78
days at December 31, 1998 to 86 days at March 31, 1999. The Company's cash flow
from operations has been and continues to be affected primarily by the
collection of accounts receivable.
The Company's working capital was $35.4 million at December 31, 1998 and
$35.6 million at March 31, 1999.
The Company sold 18,426 shares of common stock to employees in the first
quarter. As of March 31, 1999, a total of 99,314 shares had been sold to
employees under the 500,000 share Employee Stock Purchase Plan approved by the
Company's shareholders in May 1998. The Company has received an aggregate of
$572,101 from such sales.
The Company purchases certain inventory and equipment through financing
arrangements with IBM Credit Corporation and Finova Capital Corporation. At
March 31, 1999, there were outstanding balances of $2.1 million and $5.5
million, respectively, under such arrangements. Obligations under such financing
arrangements are collateralized by substantially all of the assets of the
Company. In connection with the Loan and Security Agreement entered into on
September 30, 1998 with First Union National Bank (the "Bank") (see below), the
Bank entered into an intercreditor agreement with respect to their relative
interests in the aforementioned collateral.
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 includes a $2.5 million
sublimit for letters of credit and a $5.0 million sublimit for acquisition
advances. Under the facility, the Company may borrow, subject to certain
post-closing conditions and covenants by the Company, (i) for working capital
purposes at the Bank's prime rate less 0.50% or LIBOR plus 1.25% and (ii) for
acquisitions at the Bank's prime rate less 0.25% or LIBOR plus 1.50%. The
Company's obligations under such facility are collateralized by a first priority
lien on the Company's accounts receivable and inventory, except for inventory
for which the Bank has or will have subordinated its position to certain other
lenders pursuant to intercreditor agreements. On September 30, 1998, the Company
and the Bank executed a Loan and Security Agreement whereby the Bank extended
the Company's credit facility for an additional year through September 30, 1999.
The Company believes that its available funds, together with existing and
anticipated credit facilities, will be adequate to satisfy its current and
planned operations for at least the next 24 months.
<PAGE>
PART II. OTHER INFORMATION
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.
<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 13, 1999 By: /s/ Stan Gang
----------------------------------------
Stan Gang
President and Chief Executive Officer
(Principal Executive Officer) and
Acting Chief Financial Officer
(Principal Financial and Accounting
Officer)
<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,
1999 contained in the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1999 and is qualified in its entirety by reference to such
Financial Statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,012
<SECURITIES> 67
<RECEIVABLES> 30,678
<ALLOWANCES> 1,189
<INVENTORY> 4,801
<CURRENT-ASSETS> 51,903
<PP&E> 10,629
<DEPRECIATION> 5,629
<TOTAL-ASSETS> 59,251
<CURRENT-LIABILITIES> 16,268
<BONDS> 0
0
0
<COMMON> 63
<OTHER-SE> 42,199
<TOTAL-LIABILITY-AND-EQUITY> 59,251
<SALES> 30,128
<TOTAL-REVENUES> 30,128
<CGS> 24,747
<TOTAL-COSTS> 6,232
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> (602)
<INCOME-TAX> (250)
<INCOME-CONTINUING> (352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (352)
<EPS-PRIMARY><F2> (0.06)<F1>
<EPS-DILUTED> (0.06)<F1>
<FN>
<F1>This amount is 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>
