SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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(Registrant's Telephone Number
Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No: ___
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of July 30, 1999:
Class Number of Shares Outstanding
- ----- ----------------------------
Common Stock, $.01 par value 6,250,790
<PAGE>
ALPHANET SOLUTIONS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 1
Consolidated Balance Sheets
as of June 30, 1999 (unaudited)
and December 31, 1998....................................... 2
Consolidated Statements of Operations
for the Three and Six Months Ended
June 30, 1999 (unaudited) and June 30, 1998 (unaudited)..... 3
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 1999 (unaudited) and 1998 (unaudited).............. 4
Notes to Consolidated Financial Statements (unaudited)...... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 7
Results of Operations.......................................12
Liquidity and Capital Resources.............................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...14
PART II. OTHER INFORMATION...........................................15
Item 4. Submission of Matters to a Vote by Security Holders.........15
Item 5. Other Information...........................................16
Item 6. Exhibits and Reports on Form 8-K............................17
SIGNATURES...................................................................18
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
1999 1998
---- ----
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 12,088 $ 13,377
Accounts receivable, net . . . . . . . . . . . . . . . . . . . 30,819 33,057
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 5,279 3,505
Deferred income tax asset . . . . . . . . . . . . . . . . . . 1,761 1,761
Prepaid expenses and other current assets . . . . . . . . . . 2,102 2,309
---------- ----------
Total current assets . . . . . . . . . . . . . . . 52,049 54,009
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . 4,838 5,491
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,502 2,394
----------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . $ 59,389 $ 61,894
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations . . . . . . . . . $ 18 $ 17
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 9,769 11,072
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 6,046 6,730
Billings in excess of costs . . . . . . . . . . . . . . . . . 481 815
---------- ----------
Total current liabilities . . . . . . . . . . . . . 16,314 18,634
Long term liabilities:
Advance from principal shareholder . . . . . . . . . . . . . . 675 675
Capital lease obligations . . . . . . . . . . . . . . . . . . 41 49
----------- ----------
Total liabilities . . . . . . . . . . . . . . . . . 17,030 19,358
----------- ----------
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,
6,401,390 and 6,366,228 shares issued and outstanding at June
30, 1999 and December 31, 1998, respectively . . . . . . . . 63 63
Additional paid-in capital . . . . . . . . . . . . . . . . . 34,065 33,942
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 8,951 9,198
Treasury stock - at cost; 150,600 and 136,800 shares at June
30, 1999 and December 31,1998, respectively. (720) (667)
---------- ---------
Total shareholders' equity . . . . . . . . . . . . 42,359 42,536
---------- ---------
Total liabilities and shareholders' equity . . . . $ 59,389 $ 61,894
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Product sales . . . . . . . . . . . . . . . $ 19,566 $29,823 $ 38,258 $ 61,119
Services and support . . . . . . . . . . . . 12,567 15,099 24,003 29,293
-------- -------- -------- ----------
32,133 44,922 62,261 90,412
-------- ------- -------- ----------
Cost of sales:
Product sales . . . . . . . . . . . . . . . 17,519 26,300 34,128 53,580
Services and support . . . . . . . . . . . . 8,585 10,424 16,723 19,915
-------- ------- -------- ----------
26,104 36,724 50,851 73,495
-------- ------- -------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . 6,029 8,198 11,410 16,917
-------- ------- -------- ----------
Operating expenses:
Selling expenses . . . . . . . . . . . . . . 2,953 3,749 5,910 7,716
General and administrative expenses . . . . . 3,052 3,287 6,327 5,882
-------- ------- --------- ----------
6,005 7,036 12,237 13,598
-------- ------- -------- ----------
Operating income (loss) . . . . . . . . . . . . . . . . 24 1,162 (827) 3,319
-------- ------- -------- ----------
Other income (expense):
Interest and other income . . . . . . . . . 156 148 418 248
Interest expense . . . . . . . . . . . . . . (1) (19) (14) (46)
-------- ------- ------ -----------
155 129 404 202
-------- ------- ------ -----------
Income (loss) before income taxes. . . . . . . . . . . 179 1,291 (423) 3,521
Provision (benefit) for income taxes . . . . . . . . . 74 529 (176) 1,443
-------- ------- ------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 105 $ 762 $ (247) $2,078
======== ======= ======= ==========
Basic-Net Income (loss) per share . . . . . . . . . . . $ 0.02 $ 0.12 $ (0.04) $ 0.33
======== ====== ======= ==========
Diluted-Net Income (loss) per share . . . . . . . . . . . $ 0.02 $ 0.12 $ (0.04) $ 0.33
======== ====== ======= ===========
Weighted average number of common shares outstanding . 6,251 6,282 6,243 6,271
======== ===== ======= ==========
Weighted average number of common and common equivalent
shares outstanding. . . . . . . . . . . . . . . . . . . 6,251 6,383 6,243 6,390
======== ===== ====== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . $ (247) $ 2,078
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 1,324 1,298
Increase (decrease) from changes in:
Accounts receivable. . . . . . . . . . . . . . . . . 2,238 12,250
Inventories . . . . . . . . . . . . . . . . . . . . (1,774) (1,648)
Prepaid expenses and other current assets . . . . . 207 1,247
Other assets . . . . . . . . . . . . . . . . . . . . (196) 430
Accounts payable . . . . . . . . . . . . . . . . . . (1,303) (4,125)
Accrued expenses . . . . . . . . . . . . . . . . . . (684) (5,098)
Billings in excess of costs . . . . . . . . . . . . (334) --
------- ------------
Net cash (used in) provided by operating activities . . . (769) 6,432
------- ------------
Cash flows from investing activities:
Property and equipment expenditures . . . . . . . . . . . . . . (583) (2,471)
------- ------------
Net cash used in investing activities . . . . . . . . . . (583) (2,471)
------- ------------
Cash flows from financing activities:
Exercises of stock options and employee stock purchases . . . . 123 258
Repayment of capital lease obligations . . . . . . . . . . . . . (7) (38)
Repurchase of Common Stock . . . . . . . . . . . . . . . . . . . (53) --
------- ------------
Net cash provided by financing activities. . . . . . . . . 63 220
------- ------------
Net (decrease) increase in cash and cash equivalents . . . . . . . . (1,289) 4,181
Cash and cash equivalents, beginning of period . . . . . . . . . . . 13,377 2,689
------- ------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . $12,088 $ 6,870
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Description of the Business and Basis of Presentation:
AlphaNet Solutions, Inc. (the "Company") is a leading supplier of
information technology ("IT"), management consulting, systems integration and
internet-related services to Fortune 1000, as well as mid-range and smaller
companies located primarily in the New York-to-Philadelphia corridor.
The accompanying consolidated financial statements are unaudited and
have been prepared in accordance with generally accepted accounting principles
for interim periods. The foregoing financial information reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows as of the dates and for the periods presented. These consolidated
financial statements should be read in conjunction with the summary of
significant accounting policies and notes to financial statements contained in
the Company's Form 10-K as filed with the Securities and Exchange Commission.
Results for the interim periods 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 EPS 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
number of shares outstanding. The objective of diluted EPS, consistent with that
of basic EPS, 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.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
(unaudited)
Three Months ended Six Months ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 105 $ 762 $ (247) $ 2,078
========= ======== ======== ==========
Basic:
Weighted average number of shares outstanding. . . . . . . . 6,251 6,282 6,243 6,271
========= ======== ======== ==========
Net income (loss) per share. . . . . . . . . . . . . . . . $ 0.02 $ 0.12 $ (0.04) $ 0 .33
========= ======== ======== ==========
Diluted:
Weighted average number of shares outstanding . . . . . . 6,251 6,282 6,243 6,271
Dilutive effects of stock options . . . . . . . . . . . . . -- 101 -- 119
--------- -------- -------- ---------
Weighted average number of common and common
equivalent shares outstanding 6,251 6,383 6,243 6,390
========= ======== ========== =========
Net Income (loss) per share . . . . . . . . . . . . . . . . $ 0.02 $ 0.12 $ (0.04) $ 0.33
========= ======== ========== =========
</TABLE>
- 6 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company is a leading supplier of information technology ("IT"),
management consulting, systems integration and internet-related services to
Fortune 1000, as well as mid-range and smaller 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. In the second quarter and
first half of 1999, net product sales were 60.9% and 61.4%, respectively, and
services and support revenue was 39.1% and 38.6%, respectively, of the Company's
net sales. During the same periods, gross profit from net product sales was
34.0% and 36.2%, respectively, and gross profit from services and support
revenue was 66.0% and 63.8%, respectively, of the Company's gross profit.
During the second quarter and first half of 1999, the Company's total
net sales decreased by 28.5% and 31.1%, respectively. These declines were
primarily attributable to substantially decreased business from two
predominantly low-margin product accounts. See "Results of Operations" at pages
12-13 below.
The Company has entered into distribution agreements with Ingram,
Pinacor, and Tech Data, three of the nation's largest aggregators, pursuant to
which the Company acquires 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 relationships with Ingram and Tech Data
in 1994. The distribution agreements with Ingram, Pinacor, and Tech Data 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 six months ended June 30, 1999, the Company acquired approximately
65.4%, 18.7% and 10.5% of its products for resale from Ingram, Pinacor and Tech
Data, 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. 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.
In response to the above-described developments, the Company is
increasingly emphasizing its services offerings, which typically carry higher
profit margins than its product business. In this connection, the Company
increasingly sells products as part of an overall IT solution including the sale
of services, rather than on a stand-alone basis. The Company believes that this
shift in emphasis from product to services, coupled with ongoing reductions in
sales, general and administrative expenses, will result in continued improvement
in operating performance.
- 7 -
<PAGE>
The Company offers network consulting, workstation support,
applications development, communications installation, professional development,
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
professional development services are fee-based on a per-course basis.
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
other payroll-related expenses. 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 in the current tight labor
market and concomitant increased personnel costs could adversely impact the
contribution of services to the Company's overall profitability, unless the
Company is unable to pass such increased costs to its customers.
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, representing approximately 6% of the Company's
workforce, consisting principally of personnel 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's facilities, 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. To date, these changes in the vendor policies have not had a
material impact on the Company's 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.
- 8 -
<PAGE>
The Company believes that its ability to provide a broad range of
technical services, coupled with its traditional strength in providing IT
solutions 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 currently 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 declining, but still 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 continue
to do so in the future. 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 telecommunications hardware, software
and cabling throughout the MTA's over 200 locations. The Company is the prime
contractor on this project and is 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 MTA 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 assurance that any such events of default or unexcused delays would
not occur. In addition, the MTA 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. 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
telecommunications 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.
The Company has performed services and supplied products to the MTA
since the inception of the MTA Contract. The work performed to date at MTA sites
has required greater than estimated labor and other costs to complete. Such
increased labor and other costs may also be incurred at other sites. In May
1999, the Company submitted a formal request to the MTA for an equitable
adjustment in the contract amount and terms. The Company's submission is under
consideration by the MTA. The Company and the MTA have met and scheduled further
discussions concerning the Company's request. 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 MTA 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.
- 9 -
<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
such programs 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 represented by manufacturers as being 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 are represented by the
manufacturers to be Year 2000-Compliant. As of July 1, 1999, the Company
replaced its former integrated accounting system, which was not Year
2000-Compliant, with Platinum SQL Software, which is Year 2000-Compliant. 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
that all of its internal business systems, including its computer systems, are
now Year 2000-Compliant. There can be no assurance, however, that the Year 2000
Problem will not adversely affect the Company's business, financial position,
results of operation or cash flows.
During the fourth quarter of 1998, the Company initiated formal
communications with 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 has been receiving
and reviewing the responses to these communications and following up with such
suppliers and customers as needed or appropriate. The Company currently believes
that this process will be completed by September 30, 1999. However, there can be
no guarantee that the systems of other companies on which the Company's own
systems 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 such third parties' 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 be Year 2000 Compliant. As a result, the Company, as a
reseller, may be liable for Non-Year 2000 Compliant product it resells. 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.
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.
The total cost of the Company's Year 2000 compliance has been and will
be funded through operating cash flows. The cost to purchase and install
Platinum SQL was approximately $700,000. Excluding costs associated with
Platinum SQL and the write-off of the capitalized software and consulting fees,
the Company has expended approximately $2.0 million on hardware and software
upgrades for its Year 2000 compliance. The Company does not currently anticipate
that it will incur any additional material expenditures for such Year 2000
compliance. These costs do not include any costs associated with any third party
being Non-Year 2000 Compliant, nor do such costs include internal personnel
costs (primarily salaries and benefits), which the Company does not separately
track and do not include any contingency plan costs.
- 10 -
<PAGE>
The Company has not developed a contingency plan with respect to any
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) the intense competition
in the markets for the Company's products and services; (iii) the Company's
ability to develop, market, provide, and achieve market acceptance of new
service offerings to prospective and existing clients; (iv) the Company's
ability to attract, hire, train, and retain qualified technical personnel in a
highly competitive and tight labor market; (v) the Company's substantial
reliance on a concentrated number of key customers; (vi) the Company's
dependence on vendor authorizations to resell certain computer products and to
provide related services; (vii) the Company's dependence on certain aggregators
for a substantial portion of its products acquired for resale; (viii) the
Company's reliance on the continued services of key executive officers and
salespersons; and (ix) 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 herein.
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<PAGE>
Results of Operations
Comparison of Three Months Ended June 30, 1999 and 1998
Net Sales. Net sales decreased by 28.5%, or $12.8 million, to $32.1
million for the second quarter of 1999 from $44.9 million for the second quarter
of 1998. Product sales decreased by 34.4%, or $10.3 million, to $19.5 million
for the second quarter of 1999 from $29.8 million for the second quarter of
1998. This decline in product sales was primarily attributable to substantially
decreased business from two accounts, as well as lower average selling prices
due to increased competition. 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 16.8%, or $2.5 million, to $12.6 million for the
second quarter of 1999 from $15.1 million for the second quarter of 1998. This
decline was primarily attributable to decreased demand from existing customers
and loss of services business directly related to the product accounts
referenced above.
During the three months ended June 30, 1999, sales to Summit Bank and
PSE&G, the Company's largest customers, accounted for approximately 15.1% and
11.6%, 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 26.5%, or $2.2
million, to $6.0 million for the second quarter of 1999 from $8.2 million for
the second quarter of 1998. Measured as a percentage of net sales, the Company's
overall gross profit margin increased to 18.8% of net sales for the second
quarter of 1998 from 18.2% for the second quarter of 1998. Gross profit margin
attributable to product sales decreased to 10.5% for the second quarter of 1999
from 11.8% for the second quarter of 1998 due to downward pricing pressure on
product sales. The Company expects that downward pricing pressure on products
will continue, and there can be no assurance that the Company will be able to
improve its margins on product sales in the future. Gross margin attributable to
services and support revenue increased to 31.7% of services and support revenue
for the second quarter of 1999 from 31.0% for the second quarter of 1998. This
increase was primarily attributable to higher utilization rates for services
personnel during the current quarter. During the three months ended June 30,
1999, services and support contributed 66.0% of the Company's gross margin
dollars, as compared to 57.0% during the three months ended June 30, 1998.
Selling Expenses. Selling expenses decreased by 21.2%, or $0.8 million,
to $2.9 million for the second quarter of 1999 from $3.7 million for the second
quarter of 1998, but increased as a percentage of net sales to 9.2% for the
second quarter of 1999 from 8.3% for the second quarter of 1998. The decrease in
selling expenses was primarily due to decreases in variable costs related to the
decrease in net sales and marketing expenses. The increase as a percentage of
net sales was primarily due to the decrease in net sales during the three months
ended June 30, 1999.
General and Administrative Expenses. General and administrative
expenses decreased by 7.1%, or $0.2 million, to $3.1 million for the second
quarter of 1999 from $3.3 million for the second quarter of 1998, and increased
as a percentage of net sales to 9.5% for the second quarter of 1999 from 7.3%
for the second quarter of 1998. The decrease in general and administrative
expenses in absolute dollars was primarily due to reduced personnel-related
costs, and reduced training costs, partially offset by additional leased
facilities and their related costs and increased depreciation expense. The
increase in general and administrative expenses as a percentage of net sales was
primarily due to the decrease in net sales during the three months ended June
30, 1999.
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<PAGE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30,
1998
Net Sales. Net sales decreased by 31.1%, or $28.2 million, to $62.2
million for the first six months of 1999 from $90.4 million for the first six
months of 1998. Product sales decreased by 37.4%, or $22.9 million, to $38.2
million for the first six months of 1999 from $61.1 million for the first six
months of 1998. The decline in product sales was primarily attributable to
substantially decreased business from two accounts, as well as lower average
selling prices due to increased competition. 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 18.1% or $5.3 million, to $24.0
million for the first six months of 1999 from $29.3 million for the first six
months of 1998. This decline was primarily attributable to decreased demand from
existing customers and loss of services business directly related to the product
accounts referenced above.
In the first six months of 1999, sales to Summit Bank and PSE&G
accounted for approximately 13.2% and 11.1% of the Company's net sales,
respectively. 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 decreased by 32.6%, or $5.5
million, to $11.4 million for the first six months of 1999 from $16.9 million
for the first six months of 1998. Total gross profit margin decreased to 18.3%
of net sales for the first six months of 1999 from 18.7% for the first six
months of 1998. Gross profit margin attributable to product sales decreased to
10.8% for the first six months of 1999 from 12.3% for the first six months of
1998, primarily due to downward pricing pressure on product sales. The Company
expects that downward pricing pressure on products will continue, and there can
be no assurance that the Company will be able to improve its margins on product
sales in the future. Gross profit margin attributable to services and support
revenue decreased to 30.3% of services and support revenue for the first six
months of 1999 from 32.0% for the first six months of 1998. The decrease in such
gross profit margin was primarily attributable to lower utilization of billable
personnel in the first quarter of 1999. During the first six months ended June
30, 1999, services and support revenue contributed 63.8% of the Company's gross
margin dollars, as compared to 55.4% during the six months ended June 30, 1998.
Selling Expenses. Selling expenses decreased by 23.4%, or $1.8 million,
to $5.9 million for the first six months of 1999 from $7.7 million for the first
six months of 1998, and increased to 9.5% from 8.5% of net sales for the first
six months of 1999 and 1998, respectively. The decrease in selling expenses was
primarily attributable to decreases in variable costs related to the decrease in
net sales, decreases in personnel costs and reduced marketing expenses. The
increase as a percentage of net sales was primarily due to the decrease in net
sales during the first six months of 1999.
General and Administrative Expenses. General and administrative
expenses increased by 7.6%, or $0.4 million to $6.3 million for the first six
months of 1999 from $5.8 million for the first six months of 1998, and increased
to 10.2% from 6.5% of net sales for the first six months of 1999 and 1998,
respectively. The increase was primarily due to additional leased facilities and
their related costs and increased depreciation expense. The increase in general
and administrative expenses as a percentage of net sales was primarily due to
the decrease in net sales during the first six months in 1999.
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<PAGE>
Liquidity and Capital Resources
During the first half of 1999, as was the case throughout 1998, the
Company funded its operations primarily from cash generated by operations. The
Company's working capital was $35.7 million at June 30, 1999 and $35.4 million
at December 31, 1998, and the Company remains debt-free with the exception of
$59,000 in capital leases as of June 30, 1999.
During the six months ended June 30, 1999, the Company used $0.8
million in operating activities. This was primarily due to reductions in
accounts payable and increases in inventories, offset by a decrease in accounts
receivable. The decrease in accounts receivable is primarily attributable to the
reduction in net sales. As measured in days sales outstanding, the Company's
accounts receivable increased to 87 days at June 30, 1999 from 78 days at
December 31, 1998.
The Company sold 13,176 shares of common stock to employees in the
second quarter. As of June 30, 1999, a total of 112,490 shares had been sold to
employees under the 500,000 share Employee Stock Purchase Plan approved by the
Company's shareholders in May 1998, and the Company has received an aggregate of
$617,051 from such sales.
The Company purchases certain inventory and equipment through financing
arrangements with Finova Capital Corporation and IBM Credit Corporation,
pursuant to which, as of June 30, 1999, there were outstanding balances of $6.4
million and $1.2 million, respectively. 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 IBM Credit Corporation and
Finova Capital Corporation 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company (the "Meeting") was
held on May 20, 1999.
There were present at the Meeting in person or by proxy shareholders
holding an aggregate of 5,921,706 shares of Common Stock of a total number of
6,388,214 shares of Common Stock issued, outstanding and entitled to vote at the
Meeting. The results of the vote taken at the Meeting with respect to each
nominee for director were as follows:
Nominees For Withheld Abstain
- -------- --- ------------- -------
Stan Gang 5,862,823 58,883 0
Michael Gang 5,862,227 59,479 0
Ira Cohen 5,862,527 59,179 0
Donald A. Deieso 5,862,527 59,179 0
Thomas F. Dorazio 5,862,527 59,179 0
A vote of the shareholders was taken at the Meeting on the proposal to
amend the Company's 1995 Non-Employee Director Stock Option Plan to authorize
the issuance to each such director of 5,000 fully vested options to purchase the
Common Stock and the issuance, in the discretion of management, to any
non-employee director whose term expired as of May 20, 1999 of 10,000 fully
vested options. Of the shares of Common Stock present at the Meeting in person
or by proxy, 5,733,602 shares were voted in favor of such proposal, 153,576 were
voted against such proposal, 34,528 shares abstained from voting and there were
no broker non-votes.
A vote of the shareholders was taken at the Meeting on the proposal to
approve and ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Company for the year ending December 31, 1999. Of the shares
of Common Stock present at the Meeting in person or by proxy, 5,878,736 shares
of Common Stock were voted in favor of such proposal, 32,996 shares of Common
Stock were voted against such proposal, 9,974 shares abstained from voting, and
there were no broker non-votes.
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<PAGE>
Item 5. Other Information.
Expansion of Stock Purchase Program.
------------------------------------
On May 20, 1999, the Company's Board of Directors authorized the
repurchase of up to an additional 225,000 shares of Common Stock for use in
connection with the Company's Employee Stock Purchase Plan, 1995 Stock Plan and
1995 Non-Employee Director Stock Option Plan. Pursuant to a 225,000 share stock
repurchase authorization approved by the Company's Board in May 1998, 150,600
shares had been repurchased as of July 30, 1999 at an average per share price of
$4.78.
Election of New President and CEO.
----------------------------------
Effective June 22, 1999, Donald A. Deieso, an outside member of the
Company's Board of Directors and former president and CEO of three engineering
and professional services firms, was elected President and Chief Executive
Officer of the Company. He succeeds Stanley Gang, who will continue to serve as
Chairman of the Board of the Company.
Subleased Facility.
-------------------
The Company and Datajump, Inc. entered into a sub-sublease agreement
dated May 25, 1999 for approximately 16,038 square feet of office space at 7
Ridgedale Avenue, Cedar Knolls, New Jersey (the Company's headquarters). The
lease term extends through September 29, 2000 at a base rental rate of $18 per
square foot and upon terms similar to the Company's sublease of substantially
the same space from American International Recovery, Inc., a subsidiary of
American International Group. The Company believes that its current facilities
will be adequate for its needs for the foreseeable future, but continues to
evaluate its property needs. The sub-sublease is attached hereto as Exhibit
10.26.
Change-of-Control Agreements.
-----------------------------
Effective June 8, 1999, the Company entered into Change-of-Control
Agreements with certain of its executive officers, including Jack P. Adler,
Senior Vice President, Secretary and General Counsel; John Centinaro, Chief
Operating Officer; David M. Gordon, Vice President, Treasurer and Chief
Financial Officer; Dennis Samuelson, Senior Vice President, Professional
Development; and John E. Warren, III, Vice President, Human Resources. Pursuant
to the agreements (the form of which is attached hereto as Exhibit 10.27), each
such executive is entitled to continuation of salary and benefits for one year
in the event that a "change-of-control" (as defined) results in either the
involuntary termination of the employment of such executive with the Company or
the voluntary resignation of such executive from the Company due to a reduction
in salary or benefits. In addition, in the event of such "change-of-control,"
all stock options previously or hereafter issued to each such executive shall
immediately vest and become exercisable.
For purposes of the aforementioned agreements, a "change-of-control"
shall be deemed to have occurred in the event (i) of the acquisition (including
as a result of a merger) by any "person" (as such term is used in Section 13(d)
of the Securities Exchange Act of 1934, as amended, or persons "acting in
concert" of beneficial ownership, directly or indirectly, of securities of the
Company representing more than 25% of the combined voting power of the then
outstanding securities of the Company entitled to vote generally in the election
of directors of the Company; and (ii) Stanley Gang ceases to be the Chairman of
the Board of the Company.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.26 Sub-Sublease, AlphaNet Solutions, Inc. to Datajump, Inc. dated
May 25, 1999.
10.27 Form of Change-of-Control Agreement dated June 8, 1999 with
Certain Executive Officers of the Company.
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.
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<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: August 12, 1999 By: /s/ Donald A. Deieso
---------------------------------------------
Donald A. Deieso
President and Chief Executive Officer
(Principal Executive Officer)
DATE: August 12, 1999 By: /s/ David M. Gordon
---------------------------------------------
David M. Gordon
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
- 18 -
ALPHANET SOLUTIONS, INC.
EXHIBIT 10.26
STANDARD FORM
SUB-SUBLEASE AGREEMENT
This Sub-Sublease is made as of the 25th day of May, 1999, by and between
ALPHANET SOLUTIONS, INC., a New Jersey corporation (herein referred to as
"Sub-Sublandlord") and DATAJUMP, INC., a New Jersey corporation (hereinafter
referred to as "Sub-Subtenant") with regard to the following facts.
RECITALS
A. American International Recovery, Inc. (hereinafter referred to as
"Sublandlord") is the Tenant under that certain Office Lease dated as of March
14, 1988 (the "Office Lease"), with Sutman Associates, a New Jersey partnership
(the "Landlord"), as amended by that certain Letter Agreement dated July 12,
1988 (the "Letter Agreement") the First Amendment to Lease dated March 29, 1989
(the "First Amendment") and the Second Amendment to Lease dated June 30, 1995
(the "Second Amendment") between Landlord and Sublandlord (the Office Lease,
Letter Agreement, First Amendment and Second Amendment is referred to herein
collectively as the "Master Lease") (a copy of which Master Lease is attached
hereto as Exhibit A and by this reference made a part hereof) concerning
approximately 16,038 rentable square feet of office space (the "Premises")
located on the first floor of the building (the "Building") located at 7
Ridgedale Avenue, New Jersey.
B. Sub-Sublandlord is the Subtenant under a Sublease (the "Master
Sublease") dated as of May 27, 1998 between Sublandlord and Sub-Sublandlord
(therein referred to as "Subtenant"), whereby Sub-Sublandlord subleased from
Sublandlord the Premises consisting of approximately 16,038 rentable square feet
of space (which shall be hereafter referred to as the "Subleased Premises") more
particularly set forth on Exhibit B, attached hereto, upon the terms, covenants
and conditions herein set forth in the Master Sublease (a copy of which Master
Sublease is attached hereto as Exhibit B and by this reference made a part
hereof). Hereinafter the Landlord and the Sublandlord are sometimes referred to
collectively as the "Overlandlords" and the Master Lease and the Master Sublease
are sometimes referred to collectively as the "Overleases." The Tenant under the
Master Lease and the Subtenant under the Master Sublease are sometimes
collectively referred to as the "tenants."
C. Sub-Subtenant desires to sub-sublease from Sub-Sublandlord the
premises consisting of approximately 13,185 rentable square feet of space (which
shall be hereafter referred to as the "Sub-Subleased Premises") more
particularly set forth on Exhibit C, attached hereto, and Sub-Sublandlord has
agreed to sub-sublease the Sub-Subleased Premises to Sub-Subtenant upon the
terms, covenants and conditions herein set forth.
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<PAGE>
In consideration of the mutual covenants contained herein, the
sufficiency of which is hereby acknowledge, the parties hereto agree as follows:
1. Sub-Sublease. Sub-Sublandlord hereby sub-subleases and demises to
Sub-Subtenant and Sub-Subtenant hereby hires and takes Sub-Sublandlord the
Sub-Subleased Premises. Sub-Subtenant shall have access to and the right to use
in common with Sublandlord, at no additional charge, the communications room and
the mechanical room within the Subleased Premises.
2. Term. The term of this Sub-Sublease (the "Term") shall commence on
June 1, 1999 and shall end, unless sooner terminated as provided in the
Overleases, on September 29, 2000.
3. Intentionally Deleted.
4. Services.
4.1. Electric. Sub-Subtenant shall pay $1.50 per rentable square foot
per annum as its proportionate share of tenant electric charges as additional
rent on a monthly basis at the rate of $1,648.13. Sub-Subtenant will pay
directly to Landlord any additional expenses attributable to the Sub-Subleased
Premises incurred for uses of services outside the normal Building Standard
Operation Hours.
4.2 Additional Services. Sub-Subtenant shall pay directly to the
Landlord any additional expenses attributable to the Sub-Subleased Premises
incurred for use of additional Landlord services.
5. Rent. Sub-Subtenant shall pay base rent during the Term of this
Sub-Sublease in the amount of $18.00 per rentable square foot of the
Sub-Subleased Premises or $237,330.00 annually, payable monthly in advance on
the first day of each month in equally monthly installments of $19,777.50. In
the event that the Term of this Sub-Sublease shall begin or end on a date which
is not the first day of a month, base rent shall be prorated as of such date.
Following the complete execution of this Sub-Sublease by the parties and prior
to the Commencement Date, Sub-Subtenant shall deliver to Sub-Sublandlord the
first month's base rent in the amount of $19,777.50. In addition, Sub-Subtenant
shall be responsible for all telephone charges incurred in connection with the
Sub-Subleased Premises during the Term of this Sub-Sublease and shall arrange
with the supplier of the same to have charges directly billed to Sub-Subtenant.
Following the complete execution of this Sub-Sublease by the parties and
prior to the Commencement Date, Sub-Subtenant shall pay the sum of $79,110.00,
determined under Section 6 below to the Sub-Sublandlord, which shall be held as
a security deposit ("Security Deposit"). Provided that Sub-Subtenant has not
defaulted in the payment of base rent or in any other of its obligations under
this Sub-Sublease beyond applicable notice and cure periods, the Security
Deposit shall be applied to the rent due for the last four (4) months of the
Term, subject to the terms specified in Paragraph 6 below.
6. Security Deposit. Following the complete execution of this
Sub-Sublease by the parties and prior to the Commencement Date, as stated in
Section 5 of this Agreement, Sub-Subtenant shall deposit with Sub-Sublandlord a
sum equal to four (4) months of base rent, equal to $79,110.00, as security for
the Sub-Subtenant's faithful performance of all of the terms and conditions of
this Sub-Sublease including the obligation to pay rent. For so long as the
Security Deposit has not been repaid by Sub-Sublandlord or applied to base rent
pursuant to Section 5 of this Agreement, it shall constitute an account payable
by Sub-Sublandlord to Sub-Subtenant within thirty (30) days after the
termination of this Sub-Sublease to the extent, if any, that the Security
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<PAGE>
Deposit has not been applied by Sub-Sublandlord as hereinafter provided. If
Sub-Subtenant shall default beyond any applicable notice and cure periods as
defined herein with respect to any term and condition hereunder, then the
Security Deposit or any part hereof may be applied by Sub-Sublandlord (but
Sub-Sublandlord shall not be obligated to do so) to the actual damages sustained
by Sub-Sublandlord by reason thereof. No such application shall be construed as
an agreement to limit the amount of Sub-Sublandlord's claim, nor as a waiver of
any damage, nor as a release of any indebtedness, and Sub-Sublandlord shall
retain its claims against Sub-Subtenant to the extent not recovered in full from
the Security Deposit. If Sub-Sublandlord has so applied all or any part of the
Security Deposit, Sub-Sublandlord shall have the right (but not the obligation)
at any time thereafter to demand that Sub-Subtenant pay to Sub-Sublandlord a sum
equal to the amount so applied so that Sub-Sublandlord will always be in
possession of a sum equal to the amount of the Security Deposit. Sub-Subtenant
shall make each such remittance within thirty (30) days following such demand by
Sub-Sublandlord. Said remittance shall thereupon constitute a part of the
Security Deposit subject to the terms and provisions hereof. The failure of
Sub-Subtenant to make any such requested remittance within such thirty (30) day
period, and after applicable notice and cure period, may be treated by
Sub-Sublandlord as a failure by Sub-Subtenant to make timely payment of rent and
as an event of default.
7. Use. Sub-Subtenant covenants and agrees to use the Premises in
accordance with the provision of the Overleases and for no other purpose and
otherwise in accordance with the terms and conditions of the Overleases and this
Sub-Sublease.
8. Overleases. As appllied to this Sub-Sublease, the words "Landlord" and
"Tenant" as used in the Master Lease, and the words "Sublandlord" and
"Subtenant" as used in the Master Sublease, shall be deemed to refer to
Sub-Sublandlord and Sub-Subtenant hereunder, respectively. Sub-Subtenant and
this Sub-Sublease shall be subject in all respects to the terms of, and the
rights of the Overlandlords under, the Overleases. Except as otherwise expressly
provided in Section 8 hereof, the covenants, agreements, terms, provisions and
conditions of the Overleases insofar as they relate to the Sub-Subleased
Premises and insofar as they are not inconsistent with the terms of this
Sub-Sublease are made a part of and incorporated into this Sub-Sublease as if
recited herein in full, and the rights and obligations of the Overlandlords and
the tenants under the Overleases shall be deemed the rights and obligations of
Sub-Sublandlord and Sub-Subtenant respectively hererunder and shall be binding
upon and inure to the benefit of Sub-Sublandlord and Sub-Subtenant respectively.
As between the parties hereto only, in the event of a conflict between the terms
of the Overleases and the terms of this Sub-Sublease, the terms of this
Sub-Sublease shall control.
9. Operating Expenses/Real Estate Taxes. This is a "gross" sublease.
Sub-Subtenant shall have no obligation pursuant to Article 7 of the Master Lease
or under paragraph 9 of the Master Sublease, to pay Sub-Sublandlord operating
expenses or real estate taxes.
10. Overlandlords' Performance Under Overleases.
10.1 Sub-Subtenant recognizes that Sub-Sublandlord is not in a position
to render many of the services or to perform many of the obligations required of
Sub-Sublandlord by the terms of this Sub-Sublease. Therefore, notwithstanding
anything to the contrary contained in this Sub-Sublease, Sub-Subtenant agrees
that performance by Sub-Sublandlord of its obligations hereunder are conditional
upon due performance by the Overlandlords of its corresponding obligations under
the Overleases and Sub-Sublandlord shall not be liable to Sub-Subtenant for any
default of the Overlandlords under the Overleases. Sub-Subtenant shall not have
any claim against Sub-Sublandlord by reason of the Overlandlords' failure or
refusal to comply with any of the provisions of the Overleases unless such
failure or refusal is a result of Sub-Sublandlord's act or failure to act. This
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<PAGE>
Sub-Sublease shall remain in full force and effect notwithstanding the
Overlandlords' failure or refusal to comply with any such provision of the
Overleases and Sub-Subtenant shall pay the base rent and all other charges
provided for herein without any abatement, deduction or setoff whatsoever.
Notwithstanding the foregoing, if Overlandlords default in any of their
obligations under the Overleases, Sub-Subtenant shall be entitled to participate
with Sub-Sublandlord in any action undertaken by Sub-Sublandlord in the
enforcement of Sub-Sublandlord's rights against Overlandlords. If
Sub-Sublandlord elects not to take action, whether legal action or otherwise,
for the enforcement of Sub-Sublandlord's rights against Overlandlords,
Sub-Subtenant shall have the right to take such action in its own name and, for
that purpose and only to such extent, all the rights of Sub-Sublandlord under
the Overleases with respect to the Sub-Subleased Premises shall be and are
hereby conferred upon and assigned to Sub-Subtenant, and Sub-Subtenant shall
protect, defend, indemnify and hold Sub-Sublandlord harmless from all claims,
costs and liabilities, including attorney' fees and costs, arising out of or in
connection with any such action by Sub-Subtenant. Sub-Subtenant covenants and
warrants that it fully understands and agrees to be subject to and abide by all
of the covenants, agreements, terms, provisions and conditions of the
Overleases, except as modified herein. Furthermore, Sub-Subtenant and
Sub-Sublandlord further covenant not to take any action or do or perform any act
or fail to perform any act which would result in the failure or breach of any of
the covenants, agreements, terms, provisions or conditions of the Overleases on
the part of the tenants thereunder.
10.2 Whenever the consents of the Overlandlords shall be required by,
or Overlandlords shall fail to perform their obligations under, the Overleases,
Sub-Sublandlord agrees to use its good faith efforts to obtain, at
Sub-Subtenant's sole cost and expense, such consents and/or performance on
behalf of Sub-Subtenant.
10.3 Sub-Sublandlord represents and warrants to and covenants with
Sub-Subtenant that (a) the Overleases is in full force and effect, (b)
Sub-Subtenant has and shall have no obligations with respect to the
Sub-Subleased Premises with respect to tenant restoration of alterations made
prior to the commencement date of the Term of this Sub-Sublease (including the
demising wall to be constructed by Sub-Sublandlord), the correction of damage,
failure to make repairs or other conditions relating thereto, or any other
obligations with respect thereto arising prior to the commencement date of the
Term of this Sub-Sublease, and (c) except with respect to a dispute with the
Overlandlords concerning the payment of certain unbilled utility charges, there
are no outstanding notices, claims or demands from the Overlandlords, nor is
there any state of facts which could give rise to such notices, claims or
demands, relating to any breach or alleged breach of any tenant obligations
under the Overleases.
10.4 Sub-Sublandlord covenants that Sub-Subtenant shall have quiet
enjoyment of the Sub-Subleased Premises during the Term, including, despite the
provisions of the Overleases (including the Master Lease rules), (a) 24-hour,
7-day per week access to the Sub-Subleased Premises, and (b) the right to
maintain a kitchenette with refrigerator and microwave.
11. Variations from Overleases. The following covenants, agreements,
terms, provisions and conditions of the Overleases are hereby modified or not
incorporated herein:
11.1 Notwithstanding anything to the contrary set forth in the
Overleases, the base rent payable under this Sub-Sublease and the Term of this
Sub-Sublease shall be as set forth in Sections 2 and 5. There is no additional
rent payable pursuant to paragraph 9 of the Master Sublease. The provisions of
paragraphs 3, 11.2 and 13 of the Master Sublease shall not apply to this
Sub-Sublease.
11.2 The parties hereto represent and warrant to each other that
neither party dealt with any broker or finder in connection with the
consummation of this Sub-Sublease other than the Delaware Hudson Group, Inc. And
- 4 -
<PAGE>
Krupat Group, Ltd. (the "Brokers"), and each party agrees to indemnify, hold and
save the other party harmless from and against any and all claims for brokerage
commissions or finder's fees, other than to the Brokers, arising out of either
of their acts in connection with this Sub-Sublease. The Sub-Sublandlord shall
pay the Brokers' fees, it being understood and agreed that those fees shall not
exceed 5% of the aggregate base rent payable during the Term of this
Sub-Sublease. The provisions of this Section 11.2 shall survive the expiration
or earlier termination of this Sub-Sublease.
11.3 Notwithstanding anything contained in the Overleases to the
contrary, as between Sub-Sublandlord and Sub-Subtenant only, all insurance
proceeds or condemnation awards received by Sub-Sublandlord under the Overleases
shall be deemed to be the property of Sub-Sublandlord.
11.4 Any notice which may or shall be given by either party hereunder
shall be either delivered personally, sent by certified mail, return receipt
requested, or by overnight express delivery, addressed to the party for whom it
is intended at 28 Bloomfield Avenue, Pine Brook, New Jersey 07058 (if to the
Sub-Subtenant), with a copy to R. Barry Stiger, Esq., Lowenstein Sandler, PC, 65
Livingston Avenue, Roseland, New Jersey 07068, and to AlphaNet Solutions, Inc.,
Attention: Dennis Samuelson, 7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927,
with a copy to Jack Adler, Esq., General Counsel, at the same address (if to the
Sublandlord), or to such other address as may have been designated in a notice
give in accordance with the provisions of this Section 11.4.
11.5 All amounts payable hereunder by Sub-Subtenant shall be payable
directly to Sub-Sublandlord, as follows:
Checks payable to:AlphaNet Solutions, Inc.
Checks mailed to:. 7 Ridgedale Avenue
Cedar Knolls, New Jersey 07927
11.6 The provision of Articles Fifth, Eighth, Ninth, Tenth and Eleventh
of Second Amendment and the provision of Articles Second, Third, Sixth and
Seventh of First Amendment and Article 12 and 39.0 of the Master Lease shall not
apply to this Sub-Sublease.
11.7 Sub-Sublandlord shall deliver and Sub-Subtenant shall accept the
Sub-Subleased Premises in their presently existing "as is" condition, except
that Sub-Sublandlord shall construct a demising wall between the Premises and
the Subleased Premises, comply with all fire codes and deliver a certificate of
occupancy, if legally required, and shall permit the Sub-Subtenant to have
access to the communications room and the mechanical room in order to install
wiring and cabling and to move existing cabling serving the Sub-Subleased
Premises in preparation for the commencement of the Term.
11.8 Sub-Subtenant shall have the right, at Sub-Subtenant's sole cost
and expense, subject to the prior written approval of the Overlandlords and
pursuant to the terms of Article 11 of the Master Lease, to alter and construct
improvements in the Sub-Subleased Premises.
11.9 Sub-Subtenant shall remove any Sub-Subtenant improvements in the
Sub-Subleased Premises and restore the Sub-Subleased Premises to the same
condition existing on the date of Sub-Sublandlord's delivery of the
Sub-Subleased Premises to Sub-Subtenant upon the expiration of the Term hereof.
11.10 Sub-Sublandlord agrees that Sub-Subtenant shall have the right to
use the Building parking facilities pursuant to the terms of the Lease, and is
entitled to fifty (50) unreserved spaces.
- 5 -
<PAGE>
12. Signage Sub-Subtenant shall coordinate directly with the Landlord for
additional directory signage at Sub-Subtenant's sole cost.
13. Security System. Sub-Subtenant shall have the right to install a
security system prior to or at any time during Sub-Subtenant's occupancy,
provided that Sub-Subtenant shall remove the system at its own expense at the
end of the Term if required by the Overlandlords.
14. Indemnity. Sub-Subtenant hereby agrees to protect, defend, indemnify
and hold Sub-Sublandlord harmless from and against any and all liabilities,
claims expenses, losses and damages, including, without limitation, reasonable
attorneys' fees and disbursements, which may at any time be asserted against
Sub-Sublandlord by (a) the Overlandlords for failure of Sub-Subtenant to perform
any of the convenants, agreements, terms, provisions or conditions contained in
the Overleases which by reason of the provisions of this Sub-Sublease
Sub-Subtenant is obligated to perform, or (b) any person by reason of
Sub-Subtenant's use and/or occupancy of the Sub-Subleased Premises or negligent
or intentional acts in or about the Building. The provisions of this Section 12
shall survive the expiration or earlier termination of the Overleases and/or
this Sub-Sublease.
15. Certificates. Sub-Subtenant shall at anytime and from time to time as
requested by Sub-Sublandlord upon not less than ten (10) days prior written
notice, execute, acknowledge and deliver to Sub-Sublandlord a statement in
writing certifying that this Sub-Sublease 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, if any) certifying the date to
which rent and any other charges have been paid and stating whether or not, to
the knowledge of the person signing the certificate, that Sub-Sublandlord is not
in default beyond any applicable grace period provided herein in performance of
any of its obligations under this Sub-Sublease, and if so, specifying each such
fault of which Sub-Subtenant may have knowledge, it being intended that any such
statement delivered pursuant hereto may be relied upon by others with whom
Sub-Sublandlord may be dealing.
16. Assignment or Subletting. Subject further to all of the rights of the
Overlandlords under the Overleases and the restrictions contained in the
Overleases, Sub-Subtenant shall not be entitled to assign this Sub-Sublease or
to sublet all or any portion of the Sub-Subleased Premises without the prior
written consent of Sub-Sublandlord, which consent may be withheld by
Sub-Sublandlord in its sole discretion.
17. Severability. If any term or provision of this Sub-Sublease or
the application thereof to any person or circumstances shall, to the extent, be
invalid and unenforceable, the remainder of this Sub-Sublease or the application
of such term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected thereby and
each term or provision of this Sub-Sublease shall be valid and be enforceable to
the fullest extent permitted by law.
18. Entire Agreement; Waiver. This Sub-Sublease contains the entire
agreement between the parties hereto and shall be binding upon and inure to the
benefit of their respective heirs, representatives, successors and permitted
assigns. Any agreement hereinafter made shall be ineffective to change, modify,
waive, release, discharge, terminate or effect an abandonment herein, in whole
or in part, unless such agreement is in writing and signed by the parties
hereto.
19. Captions and Definitions. Captions to the Sections in this
Sub-Sublease are included for convenience only are not intended and shall not be
deemed to modify or explain any of the terms of this Sub-Sublease.
- 6 -
<PAGE>
20. Further Assurance. The parties hereto agree that each of them, upon
the request of the other party, shall execute and deliver, in recordable form if
necessary, such further documents, instruments or agreements and shall take such
further action that may be necessary or appropriate to effectuate the purposes
of this Sub-Sublease.
21. Governing Law. This Sub-Sublease shall be governed by and in all
respects constructed in accordance with the internal laws of the State of New
Jersey.
22. Consent of Overlandlords. The validity of this Sub-Sublease shall be
subject to the Landlord's prior written consent hereto pursuant to the terms of
the Overleases. The parties shall act use all good faith efforts to obtain the
approvals necessary so that the Commencement Date occurs on June 1, 1999.
IN WITNESS WHEREOF, the parties hereto have caused this
Sub-Sublease to be executed as of the day and year first above written.
"Sub-Sublandlord"
ALPHANET SOLUTIONS, INC.
a New Jersey corporation
By: /s/ Dennis Samuelson
-----------------------------------
Name: Dennis Samuelson
Title: Senior Vice President
"Sub-Subtenant"
DATAJUMP, INC.,
a New Jersey corporation
By: /s/ Peter G. Becan for Datajump
-----------------------------------
Name: Peter G. Becan
Title: CEO/Treasurer
- 7 -
<PAGE>
[DIAGRAM OF OFFICE SPACE DEPICTED]
[OMITTED]
- 8 -
ALPHANET SOLUTIONS, INC.
EXHIBIT 10.27
June 8, 1999
[Name of Executive Officer]
[Title of Executive Officer]
AlphaNet Solutions, Inc.
7 Ridgedale Avenue
Cedar Knolls, New Jersey 07927
Dear [First Name of Executive Officer]:
At its regularly scheduled meeting held on May 20, 1999, the Board of Directors
of AlphaNet Solutions, Inc. (hereinafter, the "Company") approved the issuance
to you of this letter agreement, detailing your rights and obligations in the
event of a "change-of-control" in the ownership and management of the Company
(as more particularly described below).
In consideration of your past and continued service to the Company, in the event
there is a "change-of-control" (as defined below) which results in either the
involuntary termination of your employment with the Company or voluntary
resignation from the Company due to a reduction in salary or benefits, you shall
receive (a) one year of base salary from the Company, payable in equal biweekly
installments; and (b) continuation for one year from date of termination of all
current medical, dental, life and disability insurance benefits, as well as your
current monthly car allowance. In addition, in the event of such
"change-of-control" (as defined below), all stock options previously or
hereafter issued to you under the Company's 1995 Stock Plan, as the same may be
amended from time to time, shall, to the extent such stock options have not
vested as of such date, immediately vest and become exercisable upon your
involuntary or voluntary termination as described above.
The salary and benefit continuation and other provisions referenced in the
immediately foregoing paragraph shall be applicable for a period of two years
from the date of any "change-of-control" as defined below. If within such
two-year period a "change-of-control" (as defined below) has not resulted in
either the involuntary termination of your employment with the Company or
voluntary resignation from the Company due to a reduction in salary or benefits,
this letter agreement and the terms hereof shall be null and void and have no
further force or effect. Similarly, in the event your employment with the
Company is voluntarily or involuntarily terminated in the absence of a
"change-of-control" (as defined), this letter agreement shall be null and void.
For purposes of this letter agreement, a "change-of-control" shall be deemed to
have occurred in the event (i) of the acquisition (including as a result of a
merger) by any `person" (as such term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), or persons "acting in
concert" (which for purposes of this agreement shall include two (2) or more
persons voting together on a consistent basis pursuant to an agreement or
understanding between them to act in concert and/or as a "group" within the
meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act) of beneficial
ownership (within the meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing more than 25% of the
combined voting power of the then outstanding securities of the Company entitled
to vote generally in the election of directors of the Company; and (ii) Stanley
Gang ceases to be the Chairman of the Board of the Company.
Please signify your acceptance of and agreement to the foregoing by signing in
the space provided below for this purpose.
Very truly yours,
/s/ Stanley Gang
----------------
Stanley Gang
Chairman of the Board
ALL OF THE FOREGOING IS
ACCEPTED AND AGREED TO
THIS _______ DAY OF JUNE, 1999:
- ------------------------------------
[Name of Executive Officer]
- 9 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited interim Consolidated Financial Statements as of June 30,
1999 contained in the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999 and is qualified in its entirety by reference to such
Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,088
<SECURITIES> 0
<RECEIVABLES> 32,251
<ALLOWANCES> 1,432
<INVENTORY> 5,279
<CURRENT-ASSETS> 52,049
<PP&E> 11,082
<DEPRECIATION> 6,244
<TOTAL-ASSETS> 59,389
<CURRENT-LIABILITIES> 16,314
<BONDS> 0
0
0
<COMMON> 63
<OTHER-SE> 42,296
<TOTAL-LIABILITY-AND-EQUITY> 59,389
<SALES> 62,261
<TOTAL-REVENUES> 62,261
<CGS> 50,851
<TOTAL-COSTS> 12,237
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> (423)
<INCOME-TAX> (176)
<INCOME-CONTINUING> (247)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (247)
<EPS-BASIC> (0.04)<F1>
<EPS-DILUTED> (0.04)<F1>
<FN>
<F1>This amount is in accordance with Financial Accounting Standards Board
Statement No. 128
</FN>
</TABLE>
