SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No. 0-27042
ALPHANET SOLUTIONS, INC.
------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2554535
- --------------------------------- ------------------------------------
(State of Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
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(Address of Principal Executive Office, including Zip Code)
(973) 267-0088
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(Registrant's telephone number
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
<PAGE>
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------------ ------------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At February 29, 2000, 6,313,130 shares of Common Stock of the Company
were outstanding. The aggregate market value of Common Stock held by
non-affiliates on February 29, 2000, based on the last sales price on such date,
was approximately $31,095,000.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this
Annual Report on Form 10-K: Portions of the Registrant's definitive Proxy
Statement for its 2000 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.
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TABLE OF CONTENTS
Item
Page
PART I 1. Business......................................................2
2. Properties...................................................14
3. Legal Proceedings............................................14
4. Submission of Matters to a Vote of Security Holders..........15
PART II 5. Market for the Company's Common Equity
and Related Shareholder Matters..............................16
6. Selected Financial Data......................................16
7. Management's Discussion and Analysis of
Results of Operations and Financial Condition................18
7A. Quantitative and Qualitative Disclosure About Market Risk....32
8. Financial Statements and Supplementary Data..................32
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................32
PART III 10. Directors and Executive Officers of the Company..............33
11. Executive Compensation.......................................33
12. Security Ownership of Certain Beneficial
Owners and Management........................................33
13. Certain Relationships and Related Transactions...............33
PART IV 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................................34
EXHIBIT INDEX................................................................35
FINANCIAL DATA AND SCHEDULES................................................F-1
SIGNATURES
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PART I
Item 1. Business.
General
AlphaNet Solutions, Inc. ("AlphaNet Solutions" or the "Company") is
an information technology ("IT") professional services firm specializing in
network design, operation, management, and security. Through its Enterprise
Network Management Division, the Company also offers remote network management,
call center support, and managed security services. The Company's customers are
primarily Fortune 1000 and other large and mid-sized companies located in the
New York-to-Philadelphia corridor.
Major professional services customers include PSE&G, Mercedes-Benz of
North America, Summit Bank, Goldman Sachs & Co., Nabisco, Innovex, Matsushita
Electronic, UGO Networks, Inc., Mobius Management and New York City Transit, an
agency of the Metropolitan Transportation Authority of the State of New York
(the "MTA").
AlphaNet Solutions has a 15-year history of responding effectively
to new opportunities in the fast-changing IT field. Starting as a
product-focused reseller of technology hardware, the Company has over the years
met the changing needs of its customers by transforming itself from a systems
integrator to the Company it is today: an IT professional services and
networking infrastructure services firm, focused on meeting the escalating
high-technology needs of leading organizations in virtually every industry,
including financial services, manufacturing, telecommunications, and
pharmaceuticals.
The Company's continued expansion of its capabilities in the
high-end, networking infrastructure professional services sector was evidenced
by two recent key events:
o The purchase of a 30% preferred stock interest in nex-i.com inc.
nex-i.com is a Princeton, New Jersey-based network services provider that
installs fully integrated networks in multi-tenanted office buildings,
so-called "Smart Buildings." As of January 2000, nex-i.com's services were
used in seven buildings in New Jersey and metropolitan Philadelphia,
representing over 1.5 million square feet of office space. Another 43
buildings, representing an additional 5.5 million square feet of office
space, are under contract and being added to nex-i.com's network. The
Company's investment in nex-i.com enables the Company to expand its
presence and penetration within the small to mid-sized business sector by
offering a wide range of network management, information security, network
implementation, and Internet-related services to nex-i.com's customers.
o The divestiture of the Company's telecommunications business. Effective
December 31, 1999, the Company divested its telecommunications business
consistent with the Company's migration strategy from the low-margin
product-provider niche to the high-end IT network infrastructure
consulting services field.
The Company is authorized by many leading manufacturers of IT
products, such as 3Com, Cisco Systems, Compaq, Hewlett-Packard, IBM, Intel,
Lucent Technologies, Microsoft, NEC, Nortel Networks, Novell and Sun
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Microsystems to resell their products and provide related services. Such
products include workstations, servers, networking and communications equipment,
enterprise computing products, and application software. Through its established
vendor alliances with major aggregators of computer hardware and software,
Ingram Micro, Inc. ("Ingram"), Pinacor, Inc., an affiliate of MicroAge, Inc.
("Pinacor"), and Tech Data Corporation ("Tech Data"), the Company provides its
customers with competitive pricing and such value-added services as electronic
product ordering, product configuration, testing, warehousing and delivery.
AlphaNet Solutions was incorporated in the State of New Jersey in
1984 under the name AlphaTronics Associates, Inc. In December 1995, the Company
changed its name to AlphaNet Solutions, Inc. The address of its principal
executive offices is 7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927, and its
telephone number is (973) 267-0088.
"AlphaNet Solutions," eMobile Solutions and the Company's logo are
marks of the Company. All other trade names, trademarks or service marks
appearing in this Annual Report on Form 10-K are the property of their
respective owners and are not the property of the Company.
Forward-Looking Statements
Certain statements are included in this Annual Report on Form 10-K
which are not historical and are "forward-looking," and may be identified by
such terms as "expect," "believe," "may," "will," and "intend" or similar terms.
These forward-looking statements may include, without limitation, statements
regarding the anticipated growth in the IT markets, the continuation of the
trends favoring outsourcing of management information systems ("MIS") functions
by large and mid-sized companies, the anticipated growth and higher margins in
the services and support component of our business, the timing of the
development and implementation of AlphaNet Solutions' new service offerings and
the utilization of such services by our customers, and trends in future
operating performance, 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: (i)
the substantial variability of our quarterly operating results caused by a
variety of factors, some of which are not within our control, including (a) the
short-term nature of our customers' commitments, (b) patterns of capital
spending by our customers, (c) the timing, size and mix of product and service
orders and deliveries, (d) the timing and size of new projects, (e) pricing
changes in response to various competitive factors, (f) market factors affecting
the availability of qualified technical personnel, (g) the timing and customer
acceptance of new product and service offerings, (h) changes in trends affecting
outsourcing of IT services, (i) disruption in sources of supply, (j) changes in
product, personnel and other operating costs, and (k) industry and general
economic conditions; (ii) changes in technical personnel billing and utilization
rates which are likely to be adversely affected during periods of rapid and
concentrated hiring; (iii) the intense competition in the markets for our
products and services; (iv) our ability to effectively manage our growth which
will require us to continue developing and improving our operational, financial
and other internal systems; (v) the ability to develop, market, provide, and
achieve market acceptance of new service offerings to new and existing
customers; (vi) our ability to attract, hire, train, and retain qualified
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technical personnel in an increasingly competitive market; (vii) our substantial
reliance on a concentrated number of key customers; (viii) uncertainties
relating to potential acquisitions, if any, made by AlphaNet Solutions, such as
our ability to integrate acquired operations and to retain key customers and
personnel of the acquired business; and (ix) our reliance on the continued
services of key executive officers and salespersons. The possibility that the
currently installed computer systems, software products or other business
systems of our distributors, manufacturers or customers, working either alone or
in conjunction with other software or systems, will not accept input of, store,
manipulate and output dates in the year 2000 or thereafter without error or
interruption. Such risks and uncertainties may cause our actual results to
differ materially from the results discussed in the forward-looking statements
contained in this Annual Report.
Industry Background
For most organizations today, IT is no longer just a support
function, but an increasingly essential competitive tool. The need to distribute
and access data on a real-time basis within and between organizations--and the
rapid proliferation of Internet-based technology--is redefining the way people
and organizations "connect."
Wide Area Network (WAN) and Local Area Network (LAN) connections are
being augmented--and in an increasing number of cases, replaced--by web-based
infrastructures. The resulting efficiencies have made possible the creation of
worldwide channels of information that redefine the speed with which people
communicate, make decisions, and conduct business. The design, operation, and
maintenance of these information networks have become increasingly complex tasks
for many organizations. Typically, to simply get the network operational,
organizations must conduct assessments and make decisions in several key areas:
o Workstation platform, peripherals, and software applications.
o Optimal network design.
o Network security.
o The level of network support required to assure reliable,
cost-effective operation.
The sheer complexity of creating, maintaining, and protecting the
networks has spurred an increasing number of organizations to rely on IT
professional service firms to help with every aspect of their IT operations,
freeing them to focus on their core businesses.
With the demand for IT professionals dramatically exceeding supply--a
market condition expected to continue--AlphaNet Solutions is well-positioned for
growth. We engage our clients through professional service contracts that
typically reflect one of three primary forms: project execution, outsourcing or
delegated management, or staff augmentation. In all cases, AlphaNet Solutions
applies the talent and project management skills of the organization to achieve
the client's goals.
AlphaNet Solutions has proven adept at responding effectively to the
needs of this evolving marketplace. As it transforms to a high-end network
infrastructure services company, AlphaNet Solutions is becoming uniquely
positioned to capitalize on the emerging networking opportunities by helping
organizations respond to the needs of their own changing markets.
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Services
AlphaNet Solutions' wide range of services includes remote network
management, information security services, Internet-related services, network
consulting, workstation support, application development, help desk, and
professional development services. In 1999, services accounted for 39% of the
Company's net sales and 69% of its gross profit.
Professional Services
The Company's Professional Services organization provides customers
with a wide array of IT services on a 24-hour, seven-days-a-week basis. Services
include:
o Network and systems design
o Local and Wide Area Network implementation, installation and administration
o Complete project management services
o Technical staffing for strategic IT projects
o LAN/WAN performance analyses and messaging systems
o System migration and upgrade services
o New technology feasibility studies and impact analyses
o End-user support services and system requirement analyses
The Professional Services Division also provides advanced network
support services for many industry-leading manufacturers' products including
Microsoft, Cisco, Intel, Novell, Sun Microsystems, Nortel Networks, and Compaq.
As many large and mid-sized corporations continue to outsource
portions of their MIS requirements, the Company will continue to expand its
services to companies in its target markets.
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Enterprise Network Management Services
As part of its overall mission to offer complete IT solutions, the
Company's Enterprise Network Services Center ("Center") provides remote network
monitoring, resolution management, performance reporting, desktop management and
system administration services through dedicated communication links to its
customers' networks. As a single-point-of-contact installation, the Center is a
central component of the Company's total system management and support service
offerings. The Center is operational 24 hours a day, seven days a week and is
staffed with highly trained and experienced Network Consultants.
The Center offers proactive problem resolution by monitoring
components of a customer's network, including file servers, routers, database
servers, concentrators, workstations and printers; and managing the customers'
networks to maximize their efficiency and minimize system downtime, promptly
notifying customers of problems as they occur, and remedying such problems. The
customers are thereby free to focus on their core business, while the Company
monitors and manages the day-to-day operations of the customers' network. The
Center represents the Company's continued investment in leading-edge technology
and dedication to providing its customers with advanced IT solutions.
The Company provides end-to-end network services to remote locations
from a single point in New Jersey. The Center allows the Company to market its
services to virtually any networked organization. The high demand for technical
resources, coupled with an increasing need for operational efficiency and
network security, will lead many organizations to utilize remote network service
options as a way to maximize labor resources, ensure greater network security,
and realize cost savings.
Information Security Services
Vulnerability to security breaches - from hackers to serious
corporate saboteurs - grows in almost direct proportion to the rate at which
companies expand their networks. The Company provides Information Security
solutions to help its customers protect their networks and mission-critical
business applications and resources. Information Security Engineers perform
security and risk assessments to identify exposures and the business impact of a
network intrusion or compromise. Information Security Engineers write and review
Information Security Policies. The Company offers Information Security awareness
training and materials, including on-line Computer Based Training (CBT). Based
on the client's risk tolerance, Information Security Engineers will design and
implement secure solutions to address vulnerabilities and protect mission
critical systems and information, such as e-mail, Internet/Intranet and
e-commerce sites, customer data and intellectual property.
The Company maintains Certified Information Systems Security
Professionals (CISSP's) on staff. CISSP's are recognized throughout the security
industry for the depth and breadth of their security expertise.
The Company maintains strong partnerships with information security
vendors including WatchGuard Technologies, Inc., Cisco Systems, Checkpoint
Software, and RSA Security.
Internet Services
The Company provides Internet-related services, including secure
Internet access, training, and web site design, development and maintenance. The
Company offers its customers web sites that are independently maintained on a
secure network through the use of such security technologies as firewalls and
encryption devices. The Company provides the necessary consulting, hardware, and
software installation services so that its customers have direct access to the
Internet while AlphaNet Solutions monitors and maintains their web sites using
the Company's state-of-the-art remote network management system.
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Web site design, development and maintenance services include user
interface design, web site graphic design, content creation, and management.
Through customized courses at its Learning Centers, the Company also provides
training on Internet access and navigation.
eMobile SolutionsSM
Recognizing that the corporate business community is going "mobile,"
the Company has re-focused the efforts of its existing Product Support Center
(PSC) into a new business offering that focuses on the needs of mobile users:
eMobile SolutionsSM. The eMobile Solutions Business Unit leverages the Internet
to provide innovative infrastructure support services that enable businesses to
support their growing population of mobile employees. Target markets include
Fortune 1000 corporations with a large population of mobile assets, such as
laptops or other portable computing devices. These assets are often deployed to
a large group of mobile sales people for use in a sales force automation (SFA)
environment, but they may also be used as desktop replacements for a subset of
their overall user population.
By leveraging the Internet and the eMobile Support Center (eMSC)
facility, AlphaNet Solutions provides fast and reliable system repairs,
identical spare unit replacements, configuration of hardware and software, data
backup and asset tracking. These services are also designed to leverage existing
AlphaNet Solutions service offerings that can be combined into a tightly
integrated business solution. These include help desk services, network
monitoring, and web-based training services. In addition, the eMSC is ideally
suited to facilitate an organization's technology replacement and upgrade needs.
From the acquisition and deployment of new technology to the collection and
disposal of old technology, the eMSC can provide a complete life cycle
management solution for corporate mobile workforces.
Application Development
As part of an enterprise management solution, the Company provides
application development consulting services primarily on a time and materials
basis. These services include customized application design and development,
enterprise resource planning, object-oriented and client/server development, and
database development services. The Company's Application Development Consultants
are highly trained professionals with extensive experience in application
development and project management. When developing applications, specific,
proven methodologies are implemented for successful and timely completion of all
projects. The Consultants assist customers through all phases of the application
development process, from gathering business requirements to writing
specifications to programming, testing and documenting.
As systems migrate from traditional client/server models to the
highly scalable and distributed model of web-based solutions, many companies
require technical assistance to complete the transition. The Company's
Application Development team helps organizations meet every challenge of this
transition, from accessing information in ERP data warehouses to building
business-to-business applications or solving Intranet and enterprise application
development needs.
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Professional Development Services
AlphaNet Solutions is authorized and certified by Microsoft, Novell,
Lotus, Citrix, HyCurve and Gartner Institute to offer training classes related
to their specific technologies. These classes are utilized by a variety of
customers, including network administrators, MIS executives, professional and
administrative end-users, as well as the Company's own employees. Many of the
courses offered provide attendees with the knowledge to earn specific
professional certifications.
The Company offers training in a variety of venues, including the
client's facilities, the Company's two education facilities ("Learning
Centers"), and over the Internet. Training at the Learning Centers focuses on
technical and business skills courses for customers, employees, and the general
public.
The Learning Centers are Prometric Authorized Testing Centers, which
provide independent testing services for industry certifications.
Training revenue is derived primarily from fees charged to corporate
clients for employee training, fees charged to individual students for open
enrollment classes, and fees for self-directed learning purchased as
web-delivered courses or self-study books.
The Professional Development organization provides an ancillary
benefit to the Company by reducing the Company's cost to train its technical
workforce while providing the Company with highly skilled consultants. The
Company believes that its Professional Development organization provides a
strategic benefit in attracting technical talent to AlphaNet Solutions.
Help Desk and Call Center Services
The Company's Help Desk offers two distinct services, Help Desk
Support and Help Desk Consulting, providing advanced technical support and
comprehensive software application support to corporate end-users. The Help Desk
is staffed with experienced network consultants ("Help Desk Analysts") trained
in multiple software, hardware and networking products.
Help Desk Support provides corporate end-users with telephone support
on software, hardware and networking products. Help Desk Support is capable of
providing global coverage and its breadth of services includes automatic
dispatching of on-site support, flexible staffing for coverage 24 hours a day,
seven days a week and advanced call reporting.
The Company tracks and maintains Help Desk Support service calls with
a customized call management system. This system allows the Help Desk Analysts
to provide advanced support and dispatch on-site services. The Help Desk
Analysts coordinate with major vendor support systems on a regular basis and
have access to large volumes of technical information and documentation,
personnel and diagnostic techniques.
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Workstation Support Services
The Company's workstation support personnel ("Workstation Analysts")
provide customers with a wide array of IT services for end users, including
hardware and software installations, system upgrades and enhancements, remedial
and preventive maintenance, and management services. These support services are
available 24 hours a day, seven days a week, depending on the needs of the
Company's customers. The Workstation Analysts also provide customized
configuration of software and hardware for workstations and servers and perform
asset deployment services to customer sites.
The Company's Workstation Analysts are authorized by many
industry-leading manufacturers, including Compaq, Dell, Hewlett-Packard, IBM,
NEC and Toshiba, to perform both in- and out-of-warranty maintenance services.
The Company offers a warranty upgrade program to provide faster response and
repair times, additional hours of coverage, warranty extensions and warranty
administration services for customers who desire broader service offerings than
those of the manufacturer. Many of the Workstation Analysts employed by the
Company are "A+ Certified." The A+ Certification Program is sponsored by the
Microcomputer Industry Association and is recognized by leading manufacturers as
the industry-wide standard of professional competency for Workstation Analysts.
The Company's Workstation Analysts service and support a wide variety of IT
products, including microcomputers, printers and associated peripherals.
Products
AlphaNet Solutions resells IT products from leading hardware
manufacturers and software developers. In 1999, 61.0% of the Company's net sales
and 31.0% of its gross profits were generated from product sales. Such products
include workstations, servers, networking and communications equipment,
enterprise computing products and application software. Through its established
vendor alliances with Ingram, Pinacor and Tech Data, major aggregators of
computer hardware and software, AlphaNet Solutions provides its customers with
competitive pricing and value-added services such as electronic product
ordering, product configuration, testing, warehousing and delivery. The Company
resells products from numerous industry-leading manufacturers of computer
hardware, software and networking equipment. The Company obtains products from
these manufacturers primarily through its relationships with Ingram, Pinacor and
Tech Data. The Company's relationships with Ingram, Pinacor and Tech Data allow
it to minimize inventory risk by ordering products primarily on an as-needed
basis. The Company believes that, in most instances, the cost-plus purchases
from Ingram, Pinacor and Tech Data are at prices lower than those which could be
obtained independently from the various manufacturers and other vendors. The
Company utilizes electronic ordering and pricing systems that provide real-time
status checks on the aggregators' extensive inventories. The Company maintains
electronic data interchange links to other suppliers as well, enabling its sales
team to schedule shipments accurately, arrange for product configuration
services and provide online pricing.
Sales and Marketing
The Company currently focuses its sales and marketing efforts on
major corporations in its target markets through its sales and marketing
departments consisting of 45 employees as of December 31, 1999. The Company
believes that its direct sales and support personnel provide effective account
penetration and management, enhanced communications and long-term
relationship-building with its existing customers. To date, the Company has
focused its sales and marketing efforts on Fortune 1000 and other large and
mid-sized companies located primarily in the New York-to-Philadelphia corridor.
Given the concentration of major corporations in this region and the trend
toward outsourcing of IT services, the Company does not currently anticipate the
need to expand the geographic scope of its sales and marketing efforts.
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During 1999, the Company initiated a reorganization of its sales
force to focus its solutions offerings to key business sectors: Banking,
Healthcare, Insurance, Chemicals, Internet, Investment and Commercial Banking,
Manufacturing, Pharmaceuticals, Telecommunications, Transportation, and
Utilities. The Company has identified several target clients within each of
these sectors and focuses principal attention on cultivating new and additional
business from these clients. In addition, the Company has initiated intensive
efforts to market its remote network management services to middle-market and
smaller companies that lack or do not wish to invest in the IT infrastructure
and personnel otherwise required to maintain their networks.
Each salesperson's compensation is, in whole or in part,
commission-based. Sales personnel derive sales leads from individual business
contacts, leads generated by the marketing department's efforts and customer
referrals from suppliers and vendors.
The Company's sales and marketing focus continues to be technology
driven, with its Network Consultants and Workstation Analysts participating with
its direct sales personnel as part of the Company's team approach to sales. The
Company's sales personnel also participate in training programs designed by
manufacturers to introduce their new and upgraded products, as well as to
provide industry information and sales technique instruction. The Company
believes that it maintains a competitive advantage by continually educating its
sales force on the latest technologies and through the increased role of
high-level technical personnel in the sales process.
The Company's marketing department is responsible for coordinating
the various sales and technical personnel that may be required in soliciting a
particular project. The Company's marketing efforts include the creation and
production of Company brochures, direct mail programs, new business marketing
strategies and sales presentation materials for prospects.
Customers
The Company's major customers include many Fortune 1000 corporations
in a variety of industries. The Company's major customers include:
PSE&G Nabisco
Mercedes-Benz of North America Innovex
Summit Bank Matsushita Electric
Goldman, Sachs & Co. UGO Networks, Inc.
Credit Suisse First Boston Mobius Management
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During 1999, PSE&G and Mercedes-Benz of North America accounted for
13% and 12%, respectively, of the Company's net sales. During the fiscal year
ended December 31, 1998, KPMG LLP accounted for approximately 15% of the
Company's net sales. During the fiscal year ended December 31, 1997, Nabisco and
KPMG LLP accounted for 16% and 15%, respectively, of the Company's net sales. No
other customer accounted for more than 10% of the Company's net sales during the
three years ended December 31, 1999. Sales to the Company's top ten customers
totaled approximately 65%, 66% and 69% of net sales for the years ended December
31, 1999, December 31, 1998 and December 31, 1997, respectively. In December
1997, the Company entered into a four-year, $20.4 million contract ("MTA
Contract") with the MTA to furnish and install local and wide-area computer
network components throughout the MTA's over 200 locations, including subway
stations, electrical power substations and a diverse group of train car
maintenance facilities. The aggregate amount of this contract was subsequently
increased to $20.6 million. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition."
In general, there are no ongoing written commitments by customers to
purchase products from the Company. All product sales by the Company are made on
a purchase-order basis. In addition, the Company normally ships products within
30 days of receiving an order and, therefore, does not customarily have a
significant backlog. Almost all services are provided through written
commitments. In December 1997, the Company entered into the MTA Contract, under
which the Company is the prime contractor responsible for project management,
systems procurement and installation.
A significant reduction in orders from any of the Company's largest
customers could have a material adverse effect on the Company's results of
operations. There can be no assurance that the Company's largest customers will
continue to place orders with the Company, or that orders by such customers will
continue at their previous levels. The Company's service contracts generally are
terminable upon relatively short notice. There can be no assurance that the
Company's service customers will continue to enter into service contracts with
the Company or that existing contracts will not be terminated.
Suppliers
The Company relies on manufacturers and aggregators of computer
hardware, software and peripherals to develop, manufacture and supply all of the
computer components sold and serviced by the Company. The Company primarily
utilizes Ingram, Pinacor and Tech Data, major aggregators of computer hardware
and software, to procure the majority of its products for resale to its
customers.
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The Company has purchased products on a cost-plus basis from Pinacor
since the Company's inception in 1984. In July 1994, the Company renewed its
agreement with Pinacor. Under such agreement, the Company is required to
purchase a minimum of $100,000 of products from Pinacor per quarter. During
1999, 1998 and 1997, the Company purchased from Pinacor approximately 22%, 29%
and 36%, respectively, of the products sold by the Company. Such purchases
totaled approximately $16.5 million, $30.1 million, and $47.0 million during
such respective periods. The Pinacor agreement may be terminated by the Company
with or without cause upon 90 days prior written notice and may be terminated by
Pinacor under limited circumstances upon 90 days prior written notice. The
Company also purchases computer products from Ingram and Tech Data on a
cost-plus basis. The Company's relationship with Ingram was initiated by the
Company in late 1994 to help assure availability and competitive pricing to the
Company's customers. The Company's purchases from Ingram accounted for
approximately 57%, 47% and 50% of the Company's total product purchases in 1999,
1998 and 1997, respectively. Such purchases totaled approximately $41.9 million,
$48.4 million and $65.1 million during such respective periods. The agreement
with Ingram may be terminated with or without cause by either party upon 30 days
prior written notice. The Company initiated its relationship with Tech Data in
1998. During 1999 and 1998, the Company purchased from Tech Data approximately
10% and 5%, respectively, of the products sold by the Company. These purchases
totaled approximately $7.5 million and $5.3 million during such respective
periods. The agreement with Tech Data may be terminated with or without cause by
either party upon 30 days prior written notice. The Company's agreements with
Ingram, Pinacor and Tech Data provide for discounted pricing and rebates
provided that the Company meets agreed-upon purchase level targets. The balance
of the Company's purchased products were obtained from multiple sources, none of
which accounted for 10% or more of the products sold by the Company.
In addition to its agreements with Ingram, Pinacor and Tech Data, the
Company maintains standard authorized dealership agreements directly with many
leading manufacturers of computer hardware and software. Under the terms of
these agreements, the Company is authorized to resell to end users and provide
warranty service on the products of such manufacturers. The Company's status as
an authorized reseller facilitates the operation of the Company's business. In
general, the agreements do not require minimum purchases and include termination
provisions ranging from immediate termination to termination upon 90 days prior
written notice. Many of such agreements are based upon the Company's continued
relationships with authorized aggregators. The Company, however, generally does
not purchase products directly from these manufacturers because the Company
believes that Ingram, Pinacor and Tech Data provide it with several advantages,
including competitive pricing, limited inventory risk, ready product
availability, product quality assurance, access to the various vendors which may
be required on a particular project, electronic product ordering, product
configuration, testing and warehousing. The Company has not entered into any
long-term contracts with its suppliers, electing to purchase computers, computer
systems, components and parts on a purchase order basis. As a result, there can
be no assurance that such products will be available as required by the Company
at prices or on terms acceptable to the Company.
12
<PAGE>
Competition
The markets for the Company's products and services are intensely
competitive. The Company believes that the principal competitive factors in the
market for IT products and services include price, customer service, breadth of
product and service offerings, technical expertise, the availability of skilled
technical personnel, adherence to industry standards, financial stability and
reputation. The Company's competitors include specialty consulting and other IT
services providers, established computer product manufacturers (some of which
supply products to the Company), distributors, aggregators, computer resellers
(many of which are able to purchase products at prices lower than the Company),
and systems integrators. Many of the Company's current and potential competitors
have longer operating histories and financial, sales, marketing, technical and
other resources substantially greater than those of the Company. As a result,
the Company's competitors may be able to adapt more quickly to changes in
customer needs or to devote greater resources to the sale of IT products and
services. Such competitors could also attempt to increase their presence in the
Company's markets by forming strategic alliances with other competitors or
customers of the Company, offer new or improved products and services to the
Company's customers, or increase their efforts to gain and retain market share
through competitive pricing. As the market for IT products has matured, price
competition has intensified and is likely to continue to do so. This has
resulted in continued industry-wide downward pricing pressure. Competition for
quality technical personnel has continued to intensify, resulting in increased
personnel costs for many IT service providers. Such competition in IT products
and services has adversely affected, and likely will continue to adversely
affect, the Company's gross profits, margins and results of operations. The
Company believes there are low barriers to entry into its markets which enable
new competitors to offer competing products and services. There can be no
assurance that the Company will be able to continue to compete successfully with
existing or new competitors.
The Company believes that it competes effectively by providing
state-of-the-art networking design and management services and a wider range of
high-quality IT professional services to the MIS departments and end users of
its corporate customers. The Company also believes that it distinguishes itself
from its competition on the basis of its technical expertise, competitive
pricing, vendor alliances, relationships with Ingram, Pinacor and Tech Data,
direct sales strategy and customer-service orientation. Based on the level of
its recurring business with many of its large customers, the Company believes
that it compares favorably to many of its competitors with respect to the
principal competitive factors set forth above.
Employees
As of December 31, 1999, the Company employed 579 full-time
employees, of whom 450 were technical personnel (consisting of 260 Network
Consultants, 162 Workstation Analysts, 13 Communications Technicians and 15
Instructors), 45 were engaged in sales and marketing, and 84 were engaged in
finance, administration and management. The total number of technical personnel
declined from 483 in 1998 to 450 in 1999. The Company implemented a
reduction-in-force in June 1998 due to lower-than-expected demand for technical
services from certain clients. In January 1999, the Company implemented a second
reduction, eliminating 42 positions consisting principally of persons supporting
products.
13
<PAGE>
None of the Company's employees are represented by a collective
bargaining agreement. Substantially all employees have executed an invention
assignment and confidentiality agreement. In addition, the Company requires that
all new employees execute such agreement as a condition of employment. The
Company believes that it has been successful in attracting and retaining skilled
and experienced personnel. There is increasing competition for experienced sales
and marketing personnel and technical professionals. The Company considers its
relations with its employees to be good.
The Company's success depends in part on its ability to attract,
hire, train and retain qualified managerial, technical and sales and marketing
personnel, particularly for high-end network services. Competition with other
service providers and internal corporate MIS departments for such personnel is
intense, as many of its larger competitors are aggressively hiring technical
personnel on a large scale. There can be no assurance that the Company will be
successful in attracting and retaining the technical personnel necessary to
conduct and expand its operations successfully. The Company's ability to
implement its strategy to expand and broaden the services component of its
business and its results of operations could be materially adversely affected if
it is unable to attract, hire, train and retain qualified technical personnel.
Item 2. Properties.
The Company currently leases or subleases all of its facilities. The
Company leases its headquarters in Cedar Knolls, New Jersey, totaling
approximately 54,000 square feet of office space, of which 16,000 square feet
was subleased to the Company in 1998 pursuant to a sublease agreement expiring
in September 2000. Of this 16,000 square feet, almost 13,000 square feet was
sublet by the Company commencing June 1999, which sublease expires in September
2000. The Company is currently negotiating for the direct lease from the
landlord of the remaining 3,000 square feet through September 2003. The lease
for the balance of the 54,000 square feet expires in September 2003 and contains
renewal options for two additional five-year terms. During 1998, the Company
entered into a lease for approximately 4,700 square feet of space at a facility
adjacent to the Company's headquarters, which space the Company has subsequently
sublet. The Company also leases a facility in Parsippany, New Jersey, which
totals 5,253 square feet, which the Company has sublet pursuant to a sublease
agreement expiring in May 2001. The Company leases office space for a Learning
Center in Iselin, New Jersey, as well as its 15,000 square foot eMobile Support
Center located in East Hanover, New Jersey. The Company leases approximately
5,410 square feet of office space in King of Prussia, Pennsylvania for the
Company's Philadelphia-area sales office. The Company leased approximately
19,000 square feet of office space in Manhattan for its New York City area sales
office and Learning Center. In October 1999, the Company entered into an
agreement with the landlord of this space for early termination of its
occupancy. The Company subsequently leased two smaller "shared office"
facilities in New York City. The Company believes its headquarters, sales
offices, Learning Center and eMobile Support Center are adequate to support its
current level of operations. See Note 7 of Notes to Consolidated Financial
Statements.
Item 3. Legal Proceedings.
On February 13, 1996, the Company, as plaintiff, filed a complaint
and jury demand in the Superior Court of New Jersey Chancery Division, Morris
County, against two former employees of the Company and their current employer
(together, the "Defendants"). The complaint asserted a civil action for damages,
a temporary restraining order and preliminary and permanent injunctive relief
against the Defendants and alleged theft of services, theft of Company property,
theft of corporate opportunity, and unauthorized use of Company credit cards by
the Defendants. The Company sought restitution from certain of the Defendants
and additional compensatory damages from another Defendant. The Defendants
asserted certain counterclaims against the Company and certain of its present
and former directors. In January 1998, the parties consented to the suspension
of discovery proceedings pending mediation of all claims. In August 1999, the
parties entered into a settlement in principle, subject to the execution of
mutually acceptable settlement agreements and releases, and the court issued an
Order of Disposition. Pursuant to the terms of the Order of Disposition, the
Defendants agreed to pay the Company approximately $370,000 in consideration of
a full release of all claims by the Company against the Defendants. (With
respect to this matter, the Company previously received approximately $183,000
from an insurance carrier.) The Defendants also agreed to drop their
counterclaims against the Company and its directors. Subsequent to the issuance
of the Order of Disposition, the parties were unable to agree upon the terms of
a definitive settlement agreement, precipitating the need for further mediation
of the litigation, which is ongoing. In connection with this litigation, the
Company's Chairman and principal shareholder agreed in connection with the
Company's 1996 initial public offering to indemnify the Company for any and all
losses which the Company sustained, up to $1,000,000, arising from or relating
to the alleged wrongful conduct of the Defendants. The Chairman paid $675,000 of
his personal funds to the Company in furtherance of this agreement. Pursuant to
an amendment to the indemnification agreement adopted by the Company's Board of
Directors in February 2000, upon collection by the Company of the aforementioned
settlement proceeds, the Company will reimburse the Chairman for the $675,000
which he previously advanced to the Company.
14
<PAGE>
On June 30, 1998, Bruce Flitcroft ("Flitcroft"), the Company's former
Corporate Vice President, Technology Services, filed suit in the Superior Court
of New Jersey, Morris County, against the Company and the Chairman of the
Company alleging, among other things, breach by the Company of Flitcroft's
employment agreement and failure to pay an alleged bonus arising from the
Company's 1990 acquisition of Datar IDS Corp. and/or pay, pursuant to an alleged
oral promise, an alleged one million-dollar severance payment in lieu of such
bonus. On July 16, 1998, without knowledge of the suit filed by Flitcroft, the
Company filed suit against Flitcroft and Alliant Technologies, Inc. ("Alliant"),
a company believed to be owned and/or operated by Flitcroft, alleging, among
other things, breach of contract and conspiracy to usurp corporate assets and
opportunities. The Court directed arbitration of the claims, which commenced in
March 1999. The Company obtained insurance coverage for some of the claims in
dispute. The Company's Board of Directors authorized the Company to defend the
Chairman of the Company and approved his indemnification by the Company. In
August 1999, the parties settled all of their claims against one another.
The Company has no knowledge of any other material litigation to which it
is a party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
15
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder Matters.
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "ALPH." The following table sets forth, for the periods
indicated, the high and low sales prices per share of Common Stock as reported
by the Nasdaq National Market.
Quarter ended
1999 1998
High Low High Low
---- --- ---- ---
March 31 (1st qtr.) $6 3/4 $3 7/32 $14 5/8 $11 1/2
June 30 (2nd qtr.) 5 1/2 2 29/32 14 3/8 9 1/2
September 30 (3rd qtr.) 5 4 1/16 11 3/8 4 3/8
December 31 (4th qtr.) 5 5/8 3 1/8 5 7/8 2 7/8
The prices shown above represent quotations among securities dealers,
do not include retail markups, markdowns or commissions and may not represent
actual transactions.
On February 29, 2000, the closing sale price for the Common Stock on
the Nasdaq National Market was $8.625 per share. As of February 29, 2000, the
approximate number of holders of record of the Common Stock was 295 and the
approximate number of beneficial holders of the Common Stock was 3,900.
Since going public in 1996, the Company has not paid any dividends.
The Company presently has no plans to pay dividends in the foreseeable future.
Item 6. Selected Financial Data.
The selected consolidated financial data presented below has been derived
from the consolidated financial statements of the Company as audited by
PricewaterhouseCoopers LLP, independent accountants. Consolidated balance sheets
at December 31, 1999 and 1998 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999 and notes thereto appear elsewhere in this
Annual Report on Form 10-K. The selected financial data presented below at
December 31, 1997, 1996 and 1995 and for the years ended December 31, 1997 and
1996 has been derived from audited financial statements which are not included
in this Annual Report on Form 10-K.
The selected consolidated financial data set forth below should be read in
conjunction with, and is qualified in its entirety by, the Company's
consolidated financial statements, related notes and other financial information
included elsewhere in this Annual Report on Form 10-K.
16
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------------------
1999 1998 1997(1) 1996(2) 1995
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales:
Product................................... $ 83,298 $ 116,908 $147,602 $ 99,468 $ 62,516
Services and support...................... 53,265 54,628 43,790 20,137 11,500
-------- --------- -------- -------- --------
136,563 171,536 191,392 119,605 74,016
-------- --------- -------- -------- --------
Cost of sales:
Product................................... 75,409 103,522 130,314 88,218 54,579
Services and support...................... 35,493 37,058 29,013 12,915 6,869
-------- --------- -------- -------- --------
110,902 140,580 159,327 101,133 61,448
-------- --------- -------- -------- --------
Product................................... 7,889 13,386 17,288 11,250 7,937
Services and support...................... 17,772 17,570 14,777 7,222 4,631
-------- --------- -------- -------- --------
25,661 30,956 32,065 18,472 12,568
-------- --------- -------- -------- --------
Operating expenses:
Selling, general & administrative......... 24,743 27,505 22,761 12,747 8,393
(Recovery) write-off of capitalized asset(3) (139) 2,476 - - -
-------- --------- -------- -------- --------
24,604 29,981 22,761 12,747 8,393
-------- --------- -------- -------- --------
Operating income............................. 1,057 975 9,304 5,725 4,175
Other income (expense), net.................. 879 359 61 129 (86)
-------- --------- -------- -------- --------
Income before income taxes................... 1,936 1,334 9,365 5,854 4,089
Provision for income taxes(4)................ 794 623 3,844 1,970 124
-------- --------- -------- -------- --------
Net income................................... $ 1,142 $711 $ 5,521 $ 3,884 $ 3,965
======== ========= ======== ======== ========
Earnings per share - Basic................... $ 0.18 $ 0.11 $ 0.97 $ 0.83 $ 1.17
======== ========= ======== ======== ========
Weighted average shares outstanding.......... 6,253 6,272 5,719 4,690 3,400
======== ========= ======== ======== ========
Earnings per share - Diluted................. $ 0.18 $ 0.11 $ 0.93 $ 0.82 $ 1.17
======== ========= ======== ======== ========
Weighted average shares outstanding.......... 6,265 6,331 5,905 4,737 3,400
======== ========= ======== ======== ========
<CAPTION>
As of December 31,
-----------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital........................... $37,841 $35,375 $33,123 $14,407 $ 5,033
Total assets.............................. 56,021 61,894 72,541 43,647 18,770
Long term debt and capital lease obligations,
less current portion................... 31 49 - 41 590
Shareholders' equity...................... 43,834 42,536 41,722 18,921 6,574
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On August 1, 1997, the Company consummated the acquisition of certain
assets and assumed certain liabilities of the Lande Group, Inc. ("Lande"),
a computer equipment reseller and provider of systems integration
services, for $1.5 million, including acquisition costs. The original
acquisition price was $1.8 million, subsequently reduced by the return of
$250,000 held in escrow. The operations related to the acquired assets and
liabilities of Lande are included in the accompanying consolidated
financial statements subsequent to August 1, 1997. See Note 2 of Notes to
Consolidated Financial Statements.
(2) On July 24, 1996, the Company acquired certain assets of Lior, Inc., in a
business combination accounted for under the purchase method, for $1.1
million, including acquisition costs, financed with a portion of the
proceeds from the Company's initial public offering. The operations
related to the acquired assets of Lior are included in the accompanying
consolidated financial statements subsequent to July 24, 1996.
(3) Reflects a one-time write-off in 1998 of capitalized software and
consulting fees associated with the Company's termination of an integrated
accounting software program and implementation thereof. In 1999, the
Company was able to recover $139,000 of such costs.
(4) Prior to March 19, 1996, the Company had elected to be treated as an S
Corporation for federal and, in certain cases, state income tax purposes.
Therefore, prior to such date, the Company recorded no provision for
federal income taxes and recorded a reduced provision for state income
taxes.
17
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
General
The Company is an IT professional services firm specializing in
network design, operation, management, and security, offering related products
and services 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, a
majority of the Company's net sales continue to be derived from IT product
sales. However, as a result of the Company's decision to de-emphasize low-end
product sales and focus on the high-end professional services market, the
percentage of the Company's revenue from product sales has declined sharply from
approximately 85% of total revenue in 1995 to approximately 61% of total revenue
in 1999, while the percentage of revenue related to services has increased
during the same period from approximately 15% in 1995 to approximately 39% in
1999. The Company anticipates that this trend will continue in 2000.
The Company has entered into distribution agreements with Ingram, Pinacor
and Tech Data, three of the nation's largest aggregators, to acquire most of its
IT products 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 Company initiated its relationship with
Tech Data in 1998. The distribution agreements with Pinacor, Ingram and Tech
Data give the Company access to these 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 1999, the Company acquired approximately 57%, 22% and
10% of its products for resale from Ingram, Pinacor and Tech Data, respectively.
Except for the MTA Contract entered into in December 1997, 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. During 1999 and 1998, the Company's gross profits,
margins and results of operations were adversely affected by such continued
product pricing pressure and by a significant reduction in product purchase
orders from the Company's customers. In addition, the Company's gross profits,
margins and results of operations could be adversely affected by a disruption in
the Company's sources of product supply.
The Company offers enterprise network management, information security,
Internet-related, eMobile Solutions, applications development, professional
development, help desk, and workstation support services. Services and support
revenue is recognized as such services are performed. Most of the Company's
services are billed on a time-and-materials basis. The Company's professional
development and 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 payroll-related
expenses. Thus, the financial performance of the Company's service business is
based primarily upon billing margins (billable hourly rates less the costs to
the Company of such service personnel on an hourly basis) and utilization rates
(billable hours divided by paid hours). The future success of the services
component of the Company's business will depend in large part upon its ability
to maintain high utilization rates at profitable billing margins. The
competition for quality technical personnel has continued to intensify resulting
in increased personnel costs for the Company and many other IT service
providers. This intense competition has caused the Company's billing margins to
be lower than they might otherwise have been.
18
<PAGE>
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
January 1999, the Company implemented a second reduction, eliminating 42
positions, consisting principally of persons supporting product sales which, as
noted earlier, the Company is de-emphasizing. Adjustments to the size of the
Company's workforce will continue as necessary in order for the Company to meet
the needs of its clients.
The Company may receive manufacturer rebates resulting from equipment
sales. In addition, the Company receives volume discounts and other incentives
from certain of its suppliers. Except for products in transit or products
awaiting configuration at a Company facility, the Company generally does not
maintain large inventory balances. The Company's primary vendors have announced
or instituted changes in their price protection and inventory management
programs as a direct result of changes in such policies by manufacturers.
Specifically, they have announced that they will (i) limit price protection to
that provided by the manufacturer, generally less than 30 days, rather than the
unlimited protection previously available; and (ii) restrict product returns,
other than defective returns, to a percentage (the percentage varies depending
on the vendor and when the return is made) of product purchased, during a
defined period, at the lower of the invoiced price or the current price, subject
to the specific manufacturer's requirements and restrictions. At the present
time, the Company does not believe these changes in the vendor policies will
have a material impact on its business. Other than changes in such price
protection and return policies, the Company is unaware that any of its suppliers
or manufacturers have changed or intend to further change these programs. There
can be no assurances that any such rebates, discounts or incentives will
continue at historical levels, if at all. Further adverse modification,
restriction or reduction in such programs could have a material adverse effect
on the Company's financial position, results of operations, and 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, general and administrative costs
consist of operating expenses, including personnel and related costs, such as
sales commissions earned by employees involved in the sales of IT products,
services and support. Personnel costs also include direct sales, marketing and
sales support, and general and administrative personnel costs. Sales commissions
are recorded as revenue is recognized.
19
<PAGE>
During the last three fiscal years, the gross margins earned on services
and support sales decreased from 33.7% for 1997, to 32.2% for 1998, and then
increased to 33.4% for 1999. The previous decline in gross margins was
attributable to increased competition, lower utilization rates, the impact of
the MTA Contract, and services and support revenue increasing at a slower rate
than related personnel and recruiting costs. Also, declines in product and
services support sales resulted in lower utilization rates and margins. In
response to these trends, the Company emphasized its higher margin, value-added
services and support offerings, including network integration, applications
development and Internet-related offerings. As a result of the focus on higher
margin services, the gross margins earned in 1999 increased to 33.4%.
The Company believes that its ability to provide a broad range of
technical services, coupled with its traditional strength in satisfying its
customers' IT product requirements and its long-term relationships with large
customers, positions the Company to continue growing 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
product sales will continue to generate a significant percentage of the
Company's gross profit. The Company believes that, as a single-source provider
of IT products, services and support, it is able 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
also be affected by the cost, timing and other effects of acquisitions,
including the mix of revenues of acquired companies. The Company believes,
therefore, that past operating results and period-to-period comparisons should
not be relied upon as an indication of future operating performance.
The Company's operating results have been and will continue to be
impacted by changes in technical personnel billing and utilization rates. Many
of the Company's costs, particularly costs associated with services and support
revenue, such as administrative support personnel and facilities costs, are
primarily fixed costs. The Company's expense levels are based in part on
expectations of future revenues. Technical personnel utilization rates have been
and are expected to continue to be adversely affected during periods of rapid
and concentrated hiring. Depending upon the availability of qualified technical
personnel, during periods of rapid growth, the Company has utilized, and in the
future is likely to utilize, contract personnel, which adversely affects gross
margins. If the Company continues to successfully expand its service offerings,
periods of variability in utilization may continue to occur. In addition, the
Company is likely to incur greater technical training costs during such periods.
20
<PAGE>
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 aggregate amount of
this contract was subsequently increased to $20.6 million. 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 to
$200 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 originally estimated labor and other costs to
complete. In May 1999, the Company submitted a formal request to the MTA for
equitable adjustment in the amount of approximately $1.5 million and for a time
extension. This request was supplemented with a further submission in October
1999. In January 2000, the Project Manager for the MTA Contract denied the
Company's request, thereby triggering the Company's right under the contract to
appeal the Project Manager's denial to the MTA's Dispute Resolution Office (the
"DRO"). The Company filed its Notice of Appeal with the DRO in February 2000,
and pursuant to the DRO's request, filed a further written submission with the
DRO on March 23, 2000. It is not yet known when or how the DRO will rule on the
Company's appeal. Under the terms of the MTA Contract, the Company is entitled
to appeal any adverse determination of the DRO to the trial-level court in the
State of New York. The Company believes that its request for equitable
adjustment constitutes a valid claim under the MTA Contract. 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. However, as
a result of changes in work rules and operating procedures, increased
cooperation from MTA personnel, realization of increased operating efficiencies,
improvements in project management and potential outsourcing of certain future
cabling work, the Company currently estimates that aggregate costs will
approximate contract revenues, excluding any equitable adjustment which may be
approved by the MTA. Consequently, the Company is recording revenues under the
MTA Contract equal to costs incurred. For the years ended December 31, 1999 and
1998, revenues recorded in connection with the MTA Contract amounted to
approximately $3.5 million and $6.0 million, respectively, and no profit has
been recognized.
21
<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 that are represented by the
manufacturers to be Year 2000-Compliant. In July 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
Year 2000-Compliant.
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 are Year 2000 Compliant. The Company, as a reseller, may be
liable for Non-Year 2000 Compliant product it resells. However, to date, the
Company has not received any claims with respect to Year 2000 compliance. 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 total cost of the Company's Year 2000 compliance has been funded
through operating cash flows. The costs incurred to date to purchase and install
Platinum SQL were approximately $1.2 million. Excluding costs associated with
Platinum SQL and the write-off of the capitalized software and consulting fees
during 1999, the Company expended approximately $2.0 million in 1998 and 1999 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.
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 this Report.
22
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales, and the percentage change in the
dollar amount of such data compared to the prior year:
<TABLE>
<CAPTION>
Percentage
Percentage of Net Sales Increase
Year Ended December 31, (Decrease)
------------------------------------- -------------------------------
1999 1998
Over Over
1999 1998 1997(1) 1998 1997
---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales:
Product ......................................... 61.0 68.2 77.1 (28.7) (20.8)
Services and support............................. 39.0 31.8 22.9 (2.5) 24.7
----- ----- -----
100.0 100.0 100.0 (20.4) (10.4)
Cost of sales.......................................... 81.2 82.0 83.2 (21.1) (11.8)
----- ----- -----
Gross profit........................................... 18.8 18.0 16.8 (17.1) (3.5)
----- ----- -----
Operating expenses:
Selling, general & administrative:............... 18.1 16.0 11.9 (10.0) 20.8
(Recovery) write-off of capitalized asset (2) . (0.1) 1.4 - - 100.0
----- ----- -----
18.0 17.4 11.9 (17.9) 31.7
----- ----- -----
Operating income....................................... 0.8 0.6 4.9 8.4 (89.5)
----- ----- -----
Other income (expense), net............................ 0.6 0.2 0.0 144.8 488.5
----- ----- -----
Income before income taxes............................. 1.4 0.8 4.9 45.1 (85.8)
Provision for income taxes ............................ 0.6 0.4 2.0 27.4 (83.8)
----- ----- -----
Net income............................................. 0.8 0.4 2.9 60.6 (87.1)
===== ===== =====
Gross profit (as a percentage of related net sales):
Product.......................................... 9.5 11.5 11.7 (41.1) (22.6)
Services and support............................. 33.4 32.2 33.7 1.1 18.9
</TABLE>
(1) On August 1, 1997, the Company consummated the acquisition of certain
assets and assumed certain liabilities of the Lande Group, Inc. ("Lande"),
a computer equipment reseller and provider of systems integration
services, for $1.5 million, including acquisition costs. The original
acquisition price was $1.8 million, subsequently reduced by the return of
$250,000 held in escrow. The operations related to the acquired assets and
liabilities of Lande are included in the accompanying consolidated
financial statements subsequent to August 1, 1997. See Note 2 of Notes to
Consolidated Financial Statements.
(2) Reflects a one-time write-off in 1998 of capitalized software and
consulting fees associated with the Company's termination of an integrated
accounting software program and implementation thereof. In 1999, the
Company was able to recover $139,000 of such costs.
Comparison of Years Ended December 31, 1999 and 1998
Net Sales: Net sales in 1999 of $136.6 million decreased 20.4% or $34.9
million, from net sales of $171.5 million in 1998. The Company has continued to
focus on the strategy of transitioning AlphaNet Solutions from primarily a
reseller of product to a professional services company. As a result of this
transition, revenue from sales of products as a percentage of overall revenues
has continued to decline, from 68.2% in 1998 to 61.0% in 1999, while services
and support revenues as a percentage of overall revenues has increased from
31.8% in 1998 to 39.0% in 1999. Services and support revenue in 1999 of $53.3
million decreased 2.5%, or $1.3 million, from $54.6 million in the prior year.
Many of the services performed by the Company in prior years such as desktop
support services, configuration and installation were performed to support the
product sales. As the overall product business declines, this type of service
revenue also declines. The Company is now focusing on providing services and
support that are independent of product sales such as security, training, and
network operations support. Product sales in 1999 of $83.3 million decreased
23
<PAGE>
28.7%, or $33.6 million, from $116.9 million in the prior year. The decline in
product sales is primarily due to substantially reduced business from two
predominantly low-margin product accounts, partially offset by increased
business with other customers, as well as lower average selling prices due to
increased competition and product pricing pressures. 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 focus its
resources on the pursuit of low-margin product business. Revenue under the MTA
Contract (consisting of both product and services) amounted to approximately
$3.5 million and $6.0 million for the years ended December 31, 1999 and 1998,
respectively.
Gross profit: Gross profit in 1999 of $25.7 million decreased 17.1%, or
$5.3 million, from gross profit of $31.0 million in 1998, while increasing as a
percentage of revenues from 18.0% in 1998 to 18.8% in 1999. This reduction in
gross profit is primarily due to the reduction in product sales; however, the
increased gross profit percentage is due to the change in the mix of revenues
from the lower margin product sales in 1998 to the higher margin services and
support revenues in 1999. Gross profit from services and support in 1999 of
$17.8 million increased 1.1%, or $202,000, from $17.6 million in 1998, while
increasing as a percentage of services and support revenues from 32.2% in 1998
to 33.4% in 1999. Gross profit from product sales in 1999 of $7.9 million
decreased 41.1%, or $5.5 million, from $13.4 million in 1998, while declining as
a percentage of product sales from 11.5% in 1998 to 9.5% in 1999. This decline
in the gross profit percentage is primarily due to continued downward pricing
pressure on product sales. Product margins for the years ended December 31, 1999
and 1998 also reflect adjustments to reduce inventories by $455,000 and
$450,000, respectively. Revenues under the MTA Contract are being recognized to
the extent of costs incurred, therefore negatively affecting the Company's
overall gross profit percentage.
Selling, general and administrative expenses: Selling, general and
administrative expenses in 1999 of $24.7 million decreased 10.0%, or $2.8
million, from $27.5 million in 1998. This decrease is primarily due to
reductions in operating expenses of approximately $3.9 million relating to
reduced payroll costs, facilities, and telecommunications costs and $1.1 million
due to fourth quarter adjustments related to vacation and other accruals,
partially offset by approximately $2.0 million of bad debt provisions in 1999.
(Recovery) write-off of capitalized asset: In 1998, the Company recorded a
charge of $2.5 million to reflect a one-time write-off of capitalized software
and implementation costs associated with the Company's termination of the
implementation of an integrated accounting software program. In 1999, the
Company was able to recover $139,000 of such costs.
Other income: Other income in 1999 of $302,000 primarily relates to legal
settlements received of approximately $200,000 and gains on sales of marketable
securities of approximately $92,000.
Interest income, net: Interest income, net in 1999 of $577,000 increased
by $337,000 from $240,000 in 1998. This increase primarily relates to increased
cash balances maintained throughout 1999 as compared to the prior year.
24
<PAGE>
Provision for income taxes: The provision for income taxes in 1999 was
$794,000. Income taxes were provided for at a 41.0% effective tax rate for 1999.
In 1998, the provision for income taxes was $623,000, which was based upon a
46.7% effective tax rate.
Comparison of Years Ended December 31, 1998 and 1997
Net sales. Net sales decreased by 10.4% or $19.9 million, from $191.4
million in 1997 to $171.5 million in 1998. Product sales decreased by 20.8%, or
$30.7 million, from $147.6 million in 1997 to $116.9 million in 1998. This
decline in product sales was primarily attributable to increased competition,
reduced unit volume and lower average selling prices. This trend has been
accelerated by the ability of customers to purchase directly from certain
manufacturers at discounted prices. Services and support revenue increased by
24.7%, or $10.8 million, from $43.8 million in 1997 to $54.6 million in 1998.
This increase was primarily attributable to increased demand for the Company's
services and support offerings, particularly its network consulting services,
and an increase in the number and size of customer projects. Notwithstanding the
year-to-year increase in services and support revenue, the Company experienced a
decline in such revenue in the fourth quarter of 1998 as compared to the fourth
quarter of 1997. This decline was primarily attributable to decreased demand
from certain customers. In response, the Company is emphasizing its higher
margin, value-added services and support offerings, including, among other
services, network integration, applications development and internet-related
offerings. In 1998, sales to KPMG LLP accounted for approximately 15% of the
Company's net sales. There can be no assurance that such customer will continue
to place orders with the Company or engage the Company to perform services and
support at existing levels.
Gross profit. The Company's gross profit declined by 3.5%, or $1.1
million, from $32.1 million in 1997 to $31.0 million in 1998. The Company's
overall gross profit margin increased from 16.8% of net sales in 1997 to 18.0%
in 1998 primarily due to the improved sales mix resulting from higher services
and support revenue. Gross profit margin attributable to product sales decreased
from 11.7% in 1997 to 11.5% in 1998 due to downward pricing pressure on
products. The Company is addressing this trend by increasing its emphasis on
comprehensive, higher-margin solution-based offerings. Gross profit margin
attributable to services and support revenue decreased from 33.7% of services
and support revenue in 1997 to 32.2% in 1998. This decrease was attributable
primarily to lower utilization of billable personnel, the effect of the MTA
Contract, several long-term staffing contracts, which typically yield lower
gross margins than projects, and services and support revenue increasing at a
slower rate than related personnel and recruiting costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 20.8% or $4.7 million from $22.8 million in
1997 to $27.5 million in 1998. This increase was primarily attributable to
increased general and administrative personnel and related costs, training
costs, professional fees, depreciation and amortization charges, additional
leased facilities and related costs, communication costs and insurance premiums.
(Recovery) write-off of capitalized asset. In connection with the
one-time write-off of capitalized software and consulting fees associated with
the Company's termination of implementation of an integrated accounting software
program, the Company recorded a charge of $2.5 million.
25
<PAGE>
Risk Factors:
AlphaNet Solutions is focusing significant efforts on evolving its
core business from a company relying mainly on sales of product to a
professional services firm focusing primarily on network design and management.
The implementation of this strategy has resulted in reduced product sales and
the pursuit of higher-margin services revenue. There is no assurance that the
Company will be successful in effectuating this transition.
Recruitment of personnel in the IT industry is highly competitive.
The Company's success depends upon its ability to recruit and retain qualified
management, business development, and technical personnel. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel in the future. Failure to attract and retain highly qualified
personnel could have a material adverse effect on the Company.
The Company's common stock is quoted on the Nasdaq National Market
System, and there has been substantial volatility in the market price of the
Company's common stock. The trading price of the Company's common stock has
been, and is likely to continue to be, subject to significant fluctuations in
response to variations in quarterly operating results, the gain or loss of
significant contracts, changes in management, general trends in the industry,
recommendations by industry analysts, and other events or factors. In addition,
the equity markets in general have experienced extreme price and volume
fluctuations which have affected the market price of the Company's common stock,
as well as the stock of many technology companies. Often, price fluctuations are
unrelated to operating performance of the specific companies whose stock is
affected.
Recently Issued Accounting Standards:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Statement standardizes the accounting for derivative instruments by requiring
that an entity recognize those items as assets or liabilities in the statement
of financial position and measure them at fair value. The Company is evaluating
the Statement's provisions to determine the effect on its financial statements.
In addition, the impact of SFAS No. 133 will depend on the terms of future
transactions.
In December 1999, the Securities and Exchange Commission (SEC) issued
a Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Based upon information currently available, SAB 101 is not expected
to have a significant impact on the Company's financial position or results of
operations.
26
<PAGE>
Liquidity and Capital Resources:
Cash and cash equivalents at December 31, 1999 of $16.5 million
increased by 23.2% or $3.1 million from $13.4 million at December 31, 1998.
Working capital, which is the excess of current assets over current liabilities,
at December 31, 1999 was $37.8 million as compared to $35.4 million at December
31, 1998 representing an increase of $2.4 million or 7.0%. The increase in the
Company's cash and cash equivalents and working capital is primarily the result
of the Company's earnings for the year and the Company's improvement in accounts
receivable performance.
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. The Company's cash provided by operations from the fiscal year ended
December 31, 1999 was $4.6 million which consisted primarily of a decrease in
accounts receivable of $6.4 million, primarily attributable to the decrease in
net sales and the improvement in days sales outstanding. As measured in day
sales outstanding, the Company's accounts receivable decreased from 78 days at
December 31, 1998 to 69 days at December 31, 1999. The Company's cash provided
by operations for the fiscal year ended December 31, 1998 was $14.6 million.
Accounts receivable decreased by $17.3 million during 1998, primarily
attributable to the decrease in net sales and the timing of collection of
accounts receivable. However, the Company's cash used in operations from the
fiscal year ended December 31, 1997 was $11.9 million which consisted primarily
of an increase in accounts receivable from increased sales. During fiscal year
1999, accounts payable and accrued expenses decreased by $6.2 million due
principally to the decrease in the Company's product sales and fourth quarter
adjustments to vacation and other accruals.
Capital expenditures of $1.6 million, $4.0 million and $3.8 million
during the years ended December 31, 1999, 1998, and 1997, respectively, were
primarily for the purchase of computer equipment and upgraded software
implementations. The Company anticipates additional capital expenditures to
continue the expansion of the services component of its business and for the
enhancement of its MIS infrastructure.
On June 30, 1997, the Company and First Union National Bank (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. Effective October 1, 1999, the
Company and the Bank extended the Company's credit facility on substantially the
same terms and conditions for an interim period ending December 31, 1999.
Effective January 1, 2000, the Company and the Bank extended the Company's
credit facility for an additional year ending December 31, 2000 on substantially
similar terms; however, the Bank has provided $2 million of the $15 million
credit line to the Company on an uncollateralized basis. Under this credit
facility, the Company is required to maintain a minimum fixed charge coverage
ratio, and a total liabilities to net worth ratio. At December 31, 1999, no
amounts were outstanding under the credit facility.
27
<PAGE>
In August 1998, the Board of Directors authorized the Company to
repurchase up to 225,000 shares of its outstanding common stock at market price.
On May 20, 1999, the Board of Directors authorized the Company to repurchase up
to 225,000 additional shares of its common stock at market price. During the
year ended December 31, 1998, 136,800 shares of the Company's common stock were
repurchased for approximately $667,000, an average price of $4.87 per share.
During the year ended December 31, 1999, 13,800 shares of the Company's common
stock was repurchased for approximately $53,000, an average price of $3.89 per
share. As of December 31, 1999, a total of 150,600 shares of the Company's
common stock has been repurchased for approximately $720,000, an average price
of $4.78 per share since the inception of the repurchase program in August 1998.
On June 18, 1997, the Company completed a secondary public offering
of 2,000,000 shares of its Common Stock at an offering price of $16.50 per
share. Of the 2,000,000 shares offered, 1,150,000 shares were issued and sold by
the Company and 850,000 shares were sold by Stan Gang, the Company's Chairman
and The Gang Annuity Trust. The Company received $15.51 per share, before
offering expenses, yielding net proceeds of approximately $17,200,000.
The Company's Employee Stock Purchase Plan was approved by the
Company's shareholders in May 1998. During 1998, 80,888 shares of common stock
were sold to employees under the plan for approximately $509,000, an average
price of $6.29 per share. During 1999, employees purchased an additional 49,691
shares under the plan for approximately $177,000, an average price of $3.54 per
share. The Company has issued an aggregate of 130,579 shares since the inception
of the Employee Stock Purchase Plan at an average price of $5.25 per share,
receiving total proceeds of $685,000.
In January 2000, the Company acquired a 30% preferred stock equity
interest in nex-i.com Inc. for approximately $1.8 million in cash.
The Company purchases certain inventory and equipment through
financing arrangements with Finova Capital Corporation and IBM Credit
Corporation. At December 31, 1999, there were outstanding balances of
approximately $2.0 million for Finova Capital Corporation and approximately
$500,000 for IBM Credit Corporation under such arrangements. Obligations under
such financing arrangements are collateralized by substantially all of the
assets of the Company.
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 12 months.
28
<PAGE>
In 1997 and 1998, the Company was notified by the taxing authorities
of several jurisdictions concerning the Company's failure to meet certain
reporting and compliance requirements of such jurisdictions with respect to the
Company's tax obligations. During 1998, the Company implemented aggressive
actions to resolve any tax reporting and compliance delinquencies by properly
reporting and paying its obligations. The Company has recorded an amount for any
unpaid taxes, interest and/or penalties. The Company believes that the
resolution of these matters will not have a material impact on the Company's
financial position, results of operations, or cash flows.
The Company and its independent auditors have identified significant
deficiencies in the design and operation of its internal control structure. The
Company's independent auditors have determined such deficiencies are "reportable
conditions." The Company has implemented and is in the process of implementing
additional policies, procedures and controls to correct these deficiencies. The
Company does not believe that such deficiencies have had a material effect on
the Company's reported financial results. However, there can be no assurance
that such deficiencies will not have a material adverse effect on the Company's
ability to record, process, summarize and/or report its financial information.
29
<PAGE>
SELECTED UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The table on the following page presents certain condensed unaudited
quarterly financial information for each of the eight most recent quarters
during the period ended December 31, 1999. This information is derived from
unaudited consolidated financial statements of the Company that include, in the
opinion of the Company, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of results of operations for such
periods, when read in conjunction with the audited Consolidated Financial
Statements of the Company and notes thereto appearing elsewhere in this Annual
Report on Form 10-K.
[This space left blank intentionally]
30
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------------
Statement of Income Data: (in thousands, except per share data)
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Product.............................. $31,297 $29,823 $ 30,388 $25,400 $18,692 $ 19,566 $ 25,817 $ 19,223
Services and support................. 14,194 15,099 13,212 12,123 11,436 12,567 14,420 14,842
-------- --------- --------- -------- -------- -------- -------- --------
45,491 44,922 43,600 37,523 30,128 32,133 40,237 34,065
-------- --------- --------- -------- -------- -------- -------- --------
Cost of sales:
Product (2).......................... 27,377 26,300 26,669 23,176 16,609 17,519 23,234 18,047
Services and support................. 9,395 10,424 8,661 8,578 8,138 8,585 9,278 9,492
-------- --------- --------- -------- -------- -------- -------- --------
36,772 36,724 35,330 31,754 24,747 26,104 32,512 27,539
-------- --------- --------- -------- -------- -------- -------- --------
Gross profit:
Product (2).......................... 3,920 3,523 3,719 2,224 2,083 2,047 2,583 1,176
Services and support................. 4,799 4,675 4,551 3,545 3,298 3,982 5,142 5,350
-------- --------- --------- -------- -------- -------- -------- --------
8,719 8,198 8,270 5,769 5,381 6,029 7,725 6,526
-------- --------- --------- -------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative (3). 6,562 7,036 7,199 6,708 6,232 6,005 7,186 5,320
(Recovery)write-off of capitalized asset (1) - - 2,476 - - - (139) -
-------- --------- --------- -------- -------- -------- -------- --------
6,562 7,036 9,675 6,708 6,232 6,005 7,047 5,320
-------- --------- --------- -------- -------- -------- -------- --------
Operating income (loss)................. 2,157 1,162 (1,405) (939) (851) 24 678 1,206
Other income (expense), net............. 73 129 81 76 249 155 209 266
-------- --------- --------- -------- -------- -------- -------- --------
Income (loss) before income taxes....... 2,230 1,291 (1,324) (863) (602) 179 887 1,472
Provision (benefit) for income taxes.... 914 529 (543) (277) (250) 74 364 606
-------- --------- --------- -------- -------- -------- -------- --------
Net income (loss)....................... $ 1,316 $ 762 $ (781) $ (586) $ (352) $ 105 $ 523 $ 866
======== ========= ========= ======== ======== ======== ======== ========
Net income (loss) per share (diluted)... $ 0.21 $ 0.12 $ (0.12) $ (0.09) $ (0.06) $ 0.02 $ 0.08 $ 0.14
======== ========= ========= ======== ======== ======== ======== ========
As a Percentage of Net Sales:
Net sales:
Product.............................. 68.8% 66.4% 69.7% 67.7% 62.0% 60.9% 64.2% 56.4%
Services and support................. 31.2% 33.6% 30.3% 32.3% 38.0% 39.1% 35.8% 43.6%
-------- -------- -------- -------- -------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 80.8% 81.8% 81.0% 84.6% 82.1% 81.2% 80.8% 80.8%
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............................ 19.2% 18.2% 19.0% 15.4% 17.9% 18.8% 19.2% 19.2%
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative (3). 14.4% 15.7% 16.5% 17.9% 20.7% 18.7% 17.8% 15.6%
(Recovery)write-off of capitalized asset (1) - - 5.7% - - - (0.3)% -
-------- -------- -------- -------- -------- -------- -------- --------
14.4% 15.7% 22.2% 17.9% 20.7% 18.7% 17.5% 15.6%
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss)................. 4.7% 2.6% (3.2)% (2.5)% (2.8)% 0.1% 1.7% 3.5%
Other income (expense), net............. 0.2% 0.3% 0.2% 0.2% 0.8% 0.5% 0.5% 0.8%
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes.............. 4.9% 2.9% (3.0)% (2.3)% (2.0)% 0.6% 2.2% 4.3%
Provision for income taxes.............. 2.0% 1.2% (1.2)% (0.7)% (0.8)% 0.2% 0.9% 1.8%
-------- -------- -------- -------- -------- -------- -------- --------
Net income.............................. 2.9% 1.7% (1.8)% (1.6)% (1.2)% 0.3% 1.3% 2.5%
======== ======== ======== ======== ======== ======== ======== ========
Gross profit (as a percentage of
related net sales):
Product (2).......................... 12.5% 11.8% 12.2% 8.8% 11.1% 10.5% 10.0% 6.1%
Services and support................. 33.8% 31.0% 34.4% 29.2% 28.8% 31.7% 35.7% 36.0%
</TABLE>
(1) Reflects a one-time (recovery) write-off in 1998 of capitalized software
and consulting fees associated with the Company's termination of an
integrated accounting software program and implementation thereof. In
1999, the Company was able to recover $139,000 of such costs.
(2) The quarters ended December 31, 1999 and 1998 reflect adjustments to
reduce inventories by $455,000 and $450,000, respectively. (3) During the
quarter ended September 30, 1999, the Company recorded additional bad debt
expense of approximately $1.5 million. During the quarter ended December
31, 1999, the Company adjusted approximately $1.1 million of vacation and
other accruals as a reduction of selling, general and administrative
expense.
31
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Reference is made to Item 14(a)(1) and (2) on page F-1 for a list of
financial statements and supplementary data required to be filed pursuant to
this Item 8.
Reference is made to Item 7 "Management's Discussion and Analysis of
Results of Operations and Financial Condition - Selected Unaudited Quarterly
Results of Operations" on pages 32-33 for selected unaudited quarterly financial
data.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
32
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company.
The information called for by this Item 10 relating to the Company's
directors and executive officers, which will be included under the headings
"Election of Directors" and "Executive Officers" in the Company's definitive
proxy statement for the 2000 Annual Meeting of Shareholders, to be filed within
120 days after the end of the Company's fiscal year, is incorporated herein by
reference to such proxy statement.
Item 11. Executive Compensation.
The information called for by this Item 11, which will be included
under the heading "Executive Compensation" in the Company's definitive proxy
statement for the 2000 Annual Meeting of Shareholders, to be filed within 120
days after the end of the Company's fiscal year, is incorporated herein by
reference to such proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by this Item 12, which will be included
under the heading "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive proxy statement for the 2000 Annual
Meeting of Shareholders, to be filed within 120 days after the end of the
Company's fiscal year, is incorporated herein by reference to such proxy
statement.
Item 13. Certain Relationships and Related Transactions.
The information called for by this Item 13, which will be included
under the heading "Certain Relationships and Related Transactions" in the
Company's definitive proxy statement for the 2000 Annual Meeting of
Shareholders, to be filed within 120 days after the end of the Company's fiscal
year, is incorporated herein by reference to such proxy statement.
33
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Consolidated Financial
Statements on page F-1.
(a) (2) Financial Statement Schedules and Supplementary Data.
Schedule II - Valuation and Qualifying Accounts.
All other financial statement schedules are omitted because
the information is not required, or is otherwise included
in the Consolidated Financial Statements or the notes
thereto included in this Annual Report on Form 10-K.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on pages 37-40.
(b) Reports on Form 8-K.
The Company filed no Current Reports on Form 8-K during the
last quarter of the period covered by this Annual Report.
34
<PAGE>
EXHIBIT INDEX
Exhibit Description of
No. Exhibit
- ------ ------------
3.1* Amended and Restated Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1*# 1995 Stock Plan of the Company.
4.2*# 1995 Non-Employee Director Stock Option Plan.
4.3*# 401(k) Plan, adopted October 1991.
10.1*# Employment Agreement dated October 1, 1995 between the
Company and Stan Gang.
10.2*# Employment Agreement dated October 1, 1995 between the
Company and Bruce Flitcroft.
10.3*# Employment Agreement dated October 1, 1995 between the
Company and Philip M. Pfau.
10.4*# Employment Agreement dated October 1, 1995 between the
Company and Dennis Samuelson.
10.5*# Employment Agreement dated October 1, 1995 between the
Company and Lawrence Mahon.
10.6*# Employment Agreement dated October 1, 1995 between the
Company and John Centinaro.
10.7*# Employment Agreement dated October 1, 1995 between the
Company and John Crescenzo.
10.8*# Employment Agreement effective November 1, 1995 between the
Company and Gary S. Finkel.
10.9* Lease dated June 27, 1994 by and between Sutman Associates
and the Company, as amended.
10.10* Form of Invention Assignment and Confidentiality Agreement.
10.11* Agreement dated July 1, 1994 by and between the Company and
MicroAge Computer Centers, Inc., as amended.
35
<PAGE>
10.12* Reseller Agreement dated November 7, 1994 by and between
the Company and Ingram Alliance Reseller Company, a
division of Ingram Micro, Inc. as amended.
10.13* Agreement for Wholesale Financing dated May 20, 1988 by and
between the Company and IBM Credit Corporation.
10.14+ Dealer Loan and Security Agreement by and between the
Company and Finova Capital Corporation dated December 20,
1996.
10.15* Agreement by Stan Gang dated February 19, 1996 to indemnify
the Company for certain losses.
10.16(lambda) Asset Purchase Agreement dated July 18, 1996 by and between
Stan Gang and Lior, Inc.
10.17(lambda) Assignment of Asset Purchase Agreement dated July 24, 1996
by and between Stan Gang and the Company.
10.18** Loan and Security Agreement dated June 30, 1997 by and
between First Union National Bank and AlphaNet Solutions,
Inc.
10.19** Asset Purchase Agreement dated August 1, 1997 by and
between the Company and The Lande Group, Inc.
10.20## Assignment of lease dated August 1, 1997 by and between The
Lande Group, Inc., 460 West 34th Street Associates, and the
Company of a lease dated December 23, 1996 by and between
460 West 34th Street Associates and The Lande Group, Inc.
10.21## Form of Indemnification Agreement entered into by past and
present Directors and Officers.
10.22*** First Amendment to and Reaffirmation of Loan Document dated
September 30, 1998 by and between First Union National Bank
and AlphaNet Solutions, Inc.
10.23*** Revolving Note dated September 30, 1998 by and between
First Union National Bank and AlphaNet Solutions, Inc.
10.24**** Sublease, American International Recovery, Inc. to AlphaNet
Solutions, Inc.
36
<PAGE>
10.25***** Employee Stock Purchase Plan.
10.26@ Sub-Sublease Agreement dated as of May 25, 1999 by and
between AlphaNet Solutions, Inc. and Datajump, Inc.
10.27@ Form of Change of Control Agreements entered into as of
June 8, 1999 with certain executive officers of AlphaNet
Solutions, Inc.
10.28= Second Amendment to and Reaffirmation of Loan Documents
dated as of September 28, 1999 by and between First Union
National Bank and AlphaNet Solutions, Inc.
10.29= Revolving Note dated as of September 28, 1999 by and
between First Union National Bank and AlphaNet Solutions,
Inc.
10.30 Third Amendment to and Reaffirmation of Loan Documents
dated as of January 1, 2000 by and between First Union
National Bank and AlphaNet Solutions, Inc.
10.31 Revolving Note A dated as of January 1, 2000 by and between
First Union National Bank and AlphaNet Solutions, Inc.
10.32 Revolving Note B dated as of January 1, 2000 by and between
First Union National Bank and AlphaNet Solutions, Inc.
10.33 Securities Purchase Agreement dated as of January 14, 2000
by and among AlphaNet Solutions, Inc., Fallen Angel Equity
Fund LP, John L. Steffens and nex-i.com Inc.
10.34 Registration Rights Agreement dated as of January 14, 2000
by and among AlphaNet Solutions, Inc., Fallen Angel Equity
Fund LP, John L. Steffens and nex-i.com Inc.
10.35 Co-Sale Agreement dated as of January 14, 2000 by and among
AlphaNet Solutions, Inc., Fallen Angel Equity Fund LP, John
L. Steffens, nex-i.com Inc. and Ira A. Baseman.
21+ Subsidiaries of the Company.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
- ---------
37
<PAGE>
* Incorporated by reference to the Company's Registration Statement of
Form S-1 (Registration Statement No. 33-97922) declared effective on
March 20, 1996.
** Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 1997, filed with the Commission on
August 13, 1997.
*** Incorporated by reference to the Company's Amended Form 10-Q for the
quarterly period ended September 30, 1998, filed with the Commission
on November 25, 1998.
**** Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 1998, filed with the Commission on
August 14 , 1998.
***** Incorporated by reference to the Company's Registration Statement on
Form S-8 dated June 29, 1998.
(lambda) Incorporated by reference to the Company's Current Report on Form
8-K, filed with the Commission on August 5, 1996.
# A management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
@ Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 1999, filed with the Commission on
August 12, 1999.
= Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended September 30, 1999, filed with the Commission
on November 12, 1999.
+ Incorporated by reference to the Company's form 10-K for the year
ended December 31, 1996 filed with the Commission on March 27, 1997.
All other exhibits are filed herewith.
38
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
<S> <C>
Report of Independent Accountants....................................................................................... F-2
Consolidated balance sheets as of December 31, 1999 and 1998............................................................ F-3
Consolidated statements of income for the years ended December 31, 1999, 1998, and 1997................................. F-4
Consolidated statements of changes in shareholders' equity for the years ended December 31, 1999,
1998 and 1997........................................................................................................... F-5
Consolidated statements of cash flows for the years ended December 31, 1999, 1998 and 1997 ............................. F-6
Notes to consolidated financial statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of AlphaNet Solutions, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index appearing under Item 14(a)(1) on page 34 present fairly, in all material
respects, the financial position of AlphaNet Solutions, Inc. and its Subsidiary
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index appearing under Item 14(a)(2) on page 34 presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Florham Park, NJ
March 21, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
--------------------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $16,485 $13,377
Accounts receivable, less allowance for doubtful accounts of
$3,289 and $1,300 at December 31, 1999 and 1998, respectively............ 26,700 33,057
Inventory....................................................................... 2,533 3,505
Deferred income taxes .......................................................... 1,889 1,761
Prepaid expenses and other current assets....................................... 1,234 2,309
Costs in excess of billings..................................................... 481 -
------- -------
Total current assets...................................................... 49,322 54,009
Property and equipment, net........................................................... 4,459 5,491
Other assets ....................................................................... 2,240 2,394
------- -------
Total assets.............................................................. $56,021 $61,894
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.................................... $ 20 $ 17
Accounts payable................................................................ 7,473 11,072
Accrued expenses................................................................ 3,988 6,730
Billings in excess of costs..................................................... - 815
------- -------
Total current liabilities................................................. 11,481 18,634
Advance from principal shareholder.................................................... 675 675
Capital lease obligations............................................................. 31 49
------- -------
Total liabilities......................................................... 12,187 19,358
------- -------
Commitments and contingencies (Note 8)................................................
Shareholders' equity:
Preferred stock-- $0.01 par value; authorized 3,000,000 shares,
none issued.................................................................. - -
Common stock-- $0.01 par value; authorized 15,000,000 shares,
6,423,399 and 6,366,228 shares issued and outstanding at
December 31, 1999 and December 31, 1998, respectively....................... 64 63
Additional paid-in capital...................................................... 34,150 33,942
Retained earnings............................................................... 10,340 9,198
Treasury stock-- at cost; 150,600 shares and 136,800 shares at
December 31, 1999 and 1998, respectively.................................... (720) (667)
------- -------
Total shareholders' equity................................................ 43,834 42,536
------- -------
Total liabilities and shareholders' equity............................................. $56,021 $61,894
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Year Ended December 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales:
Product $ 83,298 $116,908 $147,602
Services and support............................................. 53,265 54,628 43,790
-------- -------- --------
136,563 171,536 191,392
-------- -------- --------
Cost of sales:
Product 75,409 103,522 130,314
Services and support............................................. 35,493 37,058 29,013
-------- -------- --------
110,902 140,580 159,327
-------- -------- --------
Gross profit............................................ 25,661 30,956 32,065
-------- -------- --------
Operating expenses:
Selling, general and administrative.............................. 24,743 27,505 22,761
(Recovery) write-off of capitalized asset........................ (139) 2,476 -
-------- -------- --------
24,604 29,981 22,761
Operating income....................................................... 1,057 975 9,304
Other income:
Interest income, net............................................. 577 240 61
Other income..................................................... 302 119 -
-------- -------- --------
879 359 61
-------- -------- --------
Income before income taxes............................................. 1,936 1,334 9,365
Provision for income taxes............................................. 794 623 3,844
-------- -------- --------
Net income $ 1,142 $ 711 $ 5,521
======== ======== ========
Net income per share:
Basic............................................................. $ 0.18 $ 0.11 $ 0.97
-------- -------- --------
Diluted........................................................... $ 0.18 $ 0.11 $ 0.93
-------- -------- --------
Shares used to compute net income per share:
Basic............................................................. 6,253 6,272 5,719
-------- -------- --------
Diluted........................................................... 6,265 6,331 5,905
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Common Common Treasury Treasury Paid-In Retained
Shares Stock Shares Stock Capital Earnings Total
-------- --------- ------------- -------------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........... 5,103 $ 51 - - $ 15,904 $ 2,966 $ 18,921
Sales of common stock............ 1,150 12 - - 17,200 - 17,212
Exercise of stock options........ 4 - - - 68 - 68
Net income....................... - - - - 5,521
- 5,521
----- ---- -------- -------- --------
Balance at December 31, 1997........... 6,257 $ 63 - - $ 33,172 $ 8,487 $ 41,722
Exercise of stock options........ 28 - - - 261 - 261
Employee stock purchases......... 81 - - - 509 - 509
Purchase of treasury stock....... - - (137) (667) - - (667)
Net income....................... - - - - - 711 711
----- ---- ----- ----- -------- -------- --------
Balance at December 31, 1998........... 6,366 $ 63 (137) ($667) $ 33,942 $ 9,198 $ 42,536
Exercise of stock options........ 7 - - - 32 - 32
Employee stock purchases......... 50 1 - - 176 - 177
Purchase of treasury stock....... - - (14) (53) - - (53)
Net income....................... - - - - - 1,142 1,142
----- ---- ----- ------ -------- -------- --------
Balance at December 31, 1999........... 6,423 $ 64 (151) ($720) $ 34,150 $10,340 $ 43,834
===== ==== ===== ====== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 1,142 $ 711 $ 5,521
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.................................................... 2,666 2,662 1,671
Deferred income taxes............................................................ (128) (110) (1,206)
Loss on disposal of capital asset.............................................. 149 - -
Provision for accounts receivable.............................................. 1,989 414 992
Provision for inventory........................................................ 300 399 400
(Recovery) write-off of capitalized asset........................................ (139) 2,476 -
Increase (decrease) from changes in:
Accounts receivable........................................................... 4,368 16,917 (18,970)
Inventories................................................................... 672 1,037 (365)
Prepaid expenses and other current assets..................................... 1,075 1,289 (1,652)
Other assets.................................................................. (22) 324 302
Accounts payable.............................................................. (3,460) (6,849) (4,392)
Accrued expenses.............................................................. (2,742) (5,449) 5,820
Billing in excess of costs.................................................... (1,296) 815 -
------- ------- --------
Net cash provided by (used in) operating activities.............................. 4,574 14,636 (11,879)
------- ------- --------
Cash flows from investing activities:
Property and equipment expenditures................................................. (1,618) (3,999) (3,842)
Acquisition of businesses........................................................... - - (380)
Proceeds from sale of equipment 11
------- ------- --------
Net cash used in investing activities............................................ (1,607) (3,999) (4,222)
------- ------- --------
Cash flows from financing activities:
Repayment of capital lease obligations.............................................. (15) (52) (100)
Net proceeds from sales of common stock............................................. 177 509 17,212
Exercise of stock options........................................................... 32 261 68
Purchase of treasury stock.......................................................... (53) (667) -
------- ------- --------
Net cash provided by financing activities........................................ 141 51 17,180
------- ------- --------
Net increase in cash and cash equivalents.............................................. 3,108 10,688 1,079
Cash and cash equivalents, beginning of period......................................... 13,377 2,689 1,610
------- ------- --------
Cash and cash equivalents, end of period............................................... $16,485 $13,377 $ 2,689
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Business:
AlphaNet Solutions, Inc. ("AlphaNet Solutions" or the "Company") is an
information technology ("IT") professional services firm specializing in network
design, operation, management, and security. Through its Enterprise Network
Management Division, the Company also offers remote network management, call
center support, and managed security services. The Company's customers are
primarily Fortune 1000 and other large and mid-sized companies located in the
New York-to-Philadelphia corridor.
Basis of Consolidation:
The consolidated financial statements include the accounts of AlphaNet
Solutions, Inc. and its wholly-owned subsidiary. All material intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
has bank balances, including cash equivalents, which at times may exceed
Federally insured limits.
Financial Instruments:
The carrying value of financial instruments such as cash and cash
equivalents, trade receivables, and payables approximates their fair value at
December 31, 1999 and 1998. As of December 31, 1998 and 1998, there were no
amounts outstanding under the Company's credit facility.
Inventory:
Inventory, consisting entirely of goods for resale, are stated at the
lower of cost or market with cost determined on the weighted average method.
Property and Equipment:
Property and equipment are stated at cost less accumulated depreciation.
Repairs and maintenance costs which do not extend the useful lives of the assets
are expensed as incurred. The Company provides for depreciation on property and
equipment, except for leasehold improvements, on the straight-line method over
the estimated useful lives of the assets, generally two to seven years.
Leasehold improvements are amortized on the straight-line method over the
shorter of the estimated useful lives of the assets or the remaining term of the
applicable lease.
F-7
<PAGE>
Costs of computer software developed or obtained for internal use and
costs associated with technology under development are capitalized and amortized
over the estimated useful lives of the assets, generally two-to-five years.
Capitalization of costs begins when conceptual and design activities have been
completed, and when management has authorized and committed to fund a project.
Costs capitalized include external and internal direct costs of labor, materials
and services. Costs associated with training and general and administrative
activities are expensed as incurred.
Recoverability of Long-Lived Assets:
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its long-lived
assets from expected future undiscounted cash flows. If the total expected
future undiscounted cash flows is less than the carrying amount of the assets, a
loss is recognized for the difference between the fair value (computed based
upon the expected future discounted cash flows) and the carrying value of the
assets.
Stock-Based Compensation:
In 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation" ("FAS 123") which requires
companies to measure stock compensation plans based on the fair value method of
accounting or to continue to apply APB No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and to provide pro forma footnote disclosure under the
fair value method. Effective January 1, 1996, the Company adopted the
disclosure-only provisions of FAS 123 and continues to follow APB 25 and related
interpretations to account for the Company's stock compensation plans.
Revenue Recognition:
The Company recognizes sales of products when the products are shipped and
title passes. Consulting and other services and support revenue is recognized
when the applicable services are rendered. The Company recognizes revenue on
service contracts on a prorated basis over the life of the contracts. Revenues
under the Metropolitan Transit Authority Contract (the "MTA Contract") are
recognized on the percentage-of-completion method based on total costs incurred
relative to total estimated costs. Currently, total contract costs are estimated
to be equal to the total contract revenue and, accordingly, revenues are
recognized to the extent of costs incurred. Prepaid fees related to the
Company's training programs are deferred and amortized to income over the
duration of the applicable training program. Deferred revenue is included in
accrued expenses (See Note 4) and represents the unearned portion of each
service contract and the unamortized balance of prepaid training fees received
as of the balance sheet date.
In connection with the Company's product sales, it receives manufacturer
rebates and other incentives on product sales to third parties. The Company
accrues for such rebates and incentives, as earned, and they are recorded as a
reduction to cost of goods sold.
F-8
<PAGE>
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company's most significant accounting estimates include
assessing the collectability of accounts receivable, inventory valuation, rebate
accruals, the realizability of MTA Contract costs, the realizability of deferral
tax assets, and the amortization period of intangibles. Actual results could
differ from those estimates. The markets for the Company's services and products
are characterized by intense competition, technology advances and new
product/service introductions, all of which could impact the future value of the
Company's assets.
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 aggregate amount of
this contract was subsequently increased to $20.6 million. 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 to
$200 per day.
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 originally estimated labor and other costs to complete. In
May 1999, the Company submitted a formal request to the MTA for equitable
adjustment in the amount of approximately $1.5 million and for a time extension.
This request was supplemented with a further submission in October 1999. In
January 2000, the Project Manager for the MTA Contract denied the Company's
request, thereby triggering the Company's right under the contract to appeal the
Project Manager's denial to the MTA's Dispute Resolution Office (the "DRO"). The
Company filed its Notice of Appeal with the DRO in February 2000, and pursuant
to the DRO's request, filed a further written submission with the DRO on March
23, 2000. It is not yet known when or how the DRO will rule on the Company's
appeal. Under the terms of the MTA Contract, the Company is entitled to appeal
any adverse determination of the DRO to the trial-level court in the State of
New York. The Company believes that its request for equitable adjustment
constitutes a valid claim under the MTA Contract. 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. However, as a result of
changes in work rules and operating procedures, increased cooperation from MTA
personnel, realization of increased operating efficiencies, improvements in
project management and potential outsourcing of certain future cabling work, the
Company currently estimates that aggregate costs will approximate contract
revenues, excluding any equitable adjustment which may be approved by the MTA.
Consequently, the Company is recording revenues under the MTA Contract equal to
costs incurred. For the years ended December 31, 1999 and 1998, revenues
recorded in connection with the MTA Contract amounted to approximately $3.5
million and $6.0 million, respectively, and no profit has been recognized. As of
December 31, 1999, costs in excess of billings under the MTA Contract amounted
to approximately $481,000. As of December 31, 1998, billings in excess of costs
under the MTA Contract amounted to approximately $815,000.
F-9
<PAGE>
Income Taxes:
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized based upon differences arising from the carrying
amounts of the Company's assets and liabilities for tax and financial reporting
purposes using enacted tax rates in effect for the year in which the differences
are expected to reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period when the change in tax
rates is enacted.
Reclassifications:
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
Retirement Plan:
The Company adopted a 401(k) retirement plan in 1991. Employees of the
Company who have attained the age of 21 are eligible to participate in the plan.
Employees can elect to contribute up to 15% of their gross salary to the plan.
The Company may make discretionary matching cash contributions up to 2% of the
salary of the participating individual employee. Participants vest in the
Company's contributions to the plan over a six-year period based upon years of
service. Participants are fully vested at all times in their employee
contributions to the plan. The Company's matching contributions were $377,000,
$446,000 and $277,000 to this plan in 1999, 1998 and 1997, respectively.
Concentrations of Credit Risk:
Financial instruments, which potentially subject the Company to
significant concentrations of credit risk, consist principally of
interest-bearing investments and accounts receivable.
The Company maintains cash and cash equivalents and investments with
various major financial institutions. The Company performs periodic evaluations
of the relative credit standing of these financial institutions.
At December 31, 1999, approximately 71% of the Company's accounts
receivable were due from its top ten customers. The Company's customer base is
principally comprised of Fortune 1000 companies and, accordingly, the Company
generally does not require collateral. The Company performs credit evaluations
of customers and establishes credit limits as appropriate.
Business Segments:
The Company operates in one business segment, the provision of IT
technology solutions for its clients. To provide these solutions, the Company
provides consulting services and, if necessary, products.
F-11
<PAGE>
2. Business Combination
On August 1, 1997, the Company consummated the acquisition of certain
assets and assumed certain liabilities of The Lande Group, Inc. ("Lande"), a
computer equipment reseller and provider of systems integration services located
in New York City. The Company acquired certain assets and liabilities of Lande
for approximately $1.8 million, subsequently reduced by the return of $250,000
held in escrow. In connection with this acquisition, the Company recognized
goodwill in the amount of $1,537,000, which is being amortized over a 15 year
period.
Amortization of intangible assets for the years ended December 31, 1999,
1998, and 1997 was approximately $176,000, $170,000
and $101,700, respectively.
3. Inventory
Inventory consist of the following:
<TABLE>
<CAPTION>
---------------------------
December 31,
(in thousands)
---------------------------
1999 1998
---- ----
<S> <C> <C>
Inventory..................................................... $2,833 $4,534
Less: Reserve for obsolescence............................... 300 1,029
------ ------
$2,533 $3,505
====== ======
<CAPTION>
4. Property and Equipment, net
Property and equipment, net, consists of the following:
---------------------------
December 31,
(in thousands)
---------------------------
1999 1998
---- ----
Furniture, fixtures and equipment............................. $10,582 $ 9,035
Transportation equipment...................................... 286 157
Leasehold improvements........................................ 992 912
Construction in progress...................................... - 397
11,860 10,501
Less-- Accumulated depreciation and amortization.............. 7,401 5,010
------- --------
$ 4,459 $ 5,491
======= ========
</TABLE>
Depreciation expense and amortization of leasehold improvements for the
years ended December 31, 1999, 1998 and 1997 were, $2,490,000, $2,492,000 and
$1,570,000, respectively.
5. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
--------------------------
December 31,
(in thousands)
--------------------------
1999 1998
---- ----
<S> <C> <C>
Accrued payroll and vacation costs....................... $1,970 $2,498
Deferred revenue.......................................... 1,438 1,888
Sales taxes............................................... 300 986
Other..................................................... 280 1,358
------ ------
$3,988 $6,730
====== ======
</TABLE>
6. Debt and Capital Lease Obligations
Notes Payable -- Bank:
On June 30, 1997, the Company and the Bank executed a Loan and Security
Agreement whereby the Bank expanded the Company's facility (the "Facility") to
enable the Company to borrow, based upon eligible accounts receivable, up to
$15.0 million for short-term working capital purposes. The 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, (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. Effective January 1, 2000, the
Company and the Bank extended the Facility to December 31, 2000 on substantially
similar terms; however, the Bank has provided $2.0 million of the $15.0 million
credit line to the Company on a uncollaterlized basis. Under the Facility, the
most restrictive financial covenants require the Company to maintain a minimum
fixed charge coverage ratio and a total liabilities to net worth ratio. As of
December 31, 1999 and 1998, there were no amounts outstanding under the
Facility.
7. Stock Ownership and Compensation Plans
At December 31, 1999, the Company had two stock-based compensation plans.
The Company applies APB 25 and related interpretations in accounting for its
plans. During 1999, 1998 and 1997, no compensation cost has been recognized for
its stock option plans, which are described below. Had compensation cost been
determined based on the fair value of the options at the grant dates consistent
with the method prescribed under FAS 123, the Company's pro forma net income and
pro forma earnings per share would have been reduced to the adjusted pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net income
As reported.......................................... $1,142 $ 711 $5,521
Pro forma ........................................... 789 223 4,843
Net income per share:
As reported:.........................................
Basic........................................... $ 0.18 $0.11 $ 0.97
Diluted......................................... $ 0.18 $0.11 $ 0.93
Pro forma:
Basic........................................... $ 0.13 $0.04 $ 0.85
Diluted......................................... $ 0.13 $0.04 $ 0.82
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions for
1999, 1998 and 1997: dividend yield of 0%; expected volatility of approximately
67%; risk free interest rates of approximately 6%; and an expected holding
period of six years.
F-13
<PAGE>
1995 Stock Plan:
On August 25, 1995, the Company's 1995 Stock Plan (the "Plan") was adopted
by the Board of Directors and approved by the shareholders of the Company. A
total of 1,000,000 shares is reserved for issuance upon exercise of options
granted or to be granted under the Plan. Of the 1,000,000 shares, 250,000 shares
were approved for issuance as non-qualified options by the Company's Board of
Directors in June 1999. Such issuance will be submitted for ratification by the
Company's shareholders at the Company's 2000 Annual Meeting. If such issuance is
ratified by the Company's shareholders, such 250,000 shares will become
available for issuance as incentive stock options. As of December 31, 1999, the
Company has granted options for 106,355 shares in excess of those currently
available to be granted as incentive stock options under the Plan. These shares
could result in a non-cash compensation charge in the year ended December 31,
2000. The options expire ten years after the date of grant. Some of the options
issued under the Plan become exercisable in five equal annual installments
commencing one year after the date of grant provided that the optionee remains
an employee at the time of vesting of the installments. Other options issued
under the Plan vest 25% immediately upon grant and the balance in three equal
annual installments.
1995 Non-Employee Director Stock Option Plan:
In 1995, the Board of Directors adopted and the Company's shareholders
approved the Company's 1995 Non-Employee Director Stock Option Plan, which
provides for the grant of options to purchase a maximum of 100,000 shares of
Common Stock of the Company to non-employee Directors of the Company. As
subsequently amended by the Company's shareholders in 1999, the 1995
Non-Employee Director Stock Option Plan provides that each person who is elected
a Director of the Company and who is not also an employee or officer of the
Company shall be granted, on the effective date of such election and each
successive date on which he or she is re-elected a Director, an option to
purchase 5,000 shares of Common Stock, at an exercise price per share equal to
the then fair market value of the shares. The options, which expire ten years
after the date of grant, vest immediately upon grant.
A summary of the stock options granted under the Plan and the 1995
Non-Employee Director Stock Option Plan as of and for the years ended December
31, 1999, 1998 and 1997 is presented below:
F-14
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
--------------------------- ------------------------ ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................. 542 $5.15 670 $10.58 539 $ 9.44
Granted.......................................... 542 4.18 63 6.72 203 14.05
Exercised........................................ (7) 4.25 (28) 9.32 (5) 9.00
Forfeited........................................ (221) 4.25 (163) 4.27 (67) 11.90
----- ---- ---
Outstanding at end of year....................... 856 4.37 542 5.15 670 10.58
===== ==== ===
Options exercisable at end of year............... 289 4.75 213 5.04 143 9.36
===== ==== ===
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------- -----------------------------------
Range of Exercise Number Average Remaining Weighted Average Number Weighted Average
Prices Outstanding at Contractual Life Exercise Price Exercisable Exercise Price
12/31/99 at 12/31/99
<S> <C> <C> <C> <C>
$ 3.81-4.44 832,355 8.44 $ 4.19 265,193 $ 4.19
$ 10.50-11.38 24,000 6.28 10.94 24,000 10.94
------- -------
856,355 289,193
======= =======
</TABLE>
The weighted-average fair value of options granted during 1999, 1998 and
1997 was $2.37, $4.26 and $9.35, respectively. Effective December 15, 1998, all
stock options were repriced to $4.25 per share, except stock options issued
pursuant to the 1995 Non-Employee Director Stock Option Plan and 2,500 shares
previously issued at $4.00.
F-15
<PAGE>
8. Commitments and Contingencies
The Company occupies eight facilities under operating leases which expire
at various dates through April 2003 and call for annual base rentals plus real
estate taxes. The future minimum payments under non-cancelable leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Net
Lease Sublease Lease
Obligations Rentals Obligations
----------- ------- -----------
(in thousands)
<S> <C> <C> <C>
2000.......................................... $1,229 $278 $ 951
2001.......................................... 922 90 832
2002.......................................... 736 60 676
2003.......................................... 359 0 359
------ ---- -------
$3,246 $428 $2,818
====== ==== =======
</TABLE>
Rent expense, including real estate taxes, for the years ended December
31, 1999, 1998 and 1997 was $1,027,000, $1,178,000 and $922,000, respectively.
The Company has obtained financing terms from IBM Credit Corporation and
Finova Capital Corporation for the purchase of inventory. In exchange for these
terms, and subject to the intercreditor agreements with the Company's Bank, the
payables are collateralized by substantially all the assets of the Company. The
balances included in accounts payable at December 31, 1999, 1998 and 1997 were
$2,543,000, $7,407,000 and $15,981,000, respectively.
On February 13, 1996, the Company, as plaintiff, filed a complaint and
jury demand in the Superior Court of New Jersey Chancery Division, Morris
County, against two former employees of the Company and their current employer
(together, the "Defendants"). The complaint asserts a civil action for damages,
a temporary restraining order and preliminary and permanent injunctive relief
against the Defendants and alleges theft of services, theft of Company property,
theft of corporate opportunity, and unauthorized use of Company credit cards by
the Defendants. The Company sought restitution from certain of the Defendants
and additional compensatory damages from another Defendant. The Defendants
asserted certain counterclaims against the Company and certain of its present
and former directors. In January 1998, the parties consented to the suspension
of discovery proceedings pending mediation of all claims. In August 1999, the
parties entered into a settlement in principle, subject to the execution of
mutually acceptable settlement agreements and releases, and the court issued an
Order of Disposition. Pursuant to the terms of the Order of Disposition, the
Defendants agreed to pay the Company approximately $370,000 in consideration of
a full release of all claims by the Company against the Defendants. (With
respect to this matter, the Company previously received approximately $183,000
from an insurance carrier.) The Defendants also agreed to drop their
counterclaims against the Company and its directors. Subsequent to the issuance
of the Order of Disposition, the parties were unable to agree upon the terms of
a definitive settlement agreement, precipitating the need for further mediation
of the litigation, which is ongoing. In connection with this litigation, the
Company's Chairman and principal shareholder agreed in connection with the
Company's 1996 initial public offering to indemnify the Company for any and all
losses which the Company sustained, up to $1,000,000, arising from or relating
to the alleged wrongful conduct of the Defendants. The Chairman advanced
$675,000 to the Company in furtherance of this agreement. Pursuant to an
amendment to the indemnification agreement adopted by the Company's Board of
Directors in February 2000, upon collection by the Company of the aforementioned
settlement proceeds, the Company will reimburse the Company's Chairman for the
$675,000 which he previously advanced to the Company.
F-16
<PAGE>
On June 30, 1998, Bruce Flitcroft ("Flitcroft"), the Company's former
Corporate Vice President, Technology Services, filed suit in the Superior Court
of New Jersey, Morris County, against the Company and the Company's Chairman
alleging, among other things, breach by the Company of Flitcroft's employment
agreement and failure to pay an alleged bonus arising from the Company's 1990
acquisition of Datar IDS Corp. and/or pay, pursuant to an alleged oral promise,
an alleged one million-dollar severance payment in lieu of such bonus. On July
16, 1998, without knowledge of the suit filed by Flitcroft, the Company filed
suit against Flitcroft and Alliant Technologies, Inc. ("Alliant"), a company
believed to be owned and/or operated by Flitcroft, alleging, among other things,
breach of contract and conspiracy to usurp corporate assets and opportunities.
The Court directed arbitration of the claims commencing in March 1999. The
Company obtained insurance coverage for some of the claims in dispute. The
Company's Board of Directors authorized the Company to defend its Chairman and
approved his indemnification by the Company. In August 1999, the parties settled
all of their claims against one another.
The Company has no knowledge of any material litigation to which it is a
party or to which any of its property is subject.
9. Supplementary Cash Flow Information
Following is a summary of supplementary cash flow information for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands)
----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Interest paid.............................................................. $ 24 $ 77 $ 159
Income taxes paid.......................................................... 273 2,678 3,917
Non-cash investing and financing activities:
Equipment acquired under capital lease.................................. 17 74 -
</TABLE>
F-17
<PAGE>
10. Income Taxes
The Company accounts for income taxes under the asset and liability method
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of differences between the carrying amounts and
the tax bases of the assets and liabilities.
The components of the provision for income taxes for 1999, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands)
-----------------------------------------------------
1999 1998 1997
-------------- ----------------- ---------------
<S> <C> <C> <C>
Current:
Federal........................ $684 $547 $ 3,692
State and local................ 238 186 1,358
----- ---- -------
922 733 5,050
----- ---- -------
Deferred:
Federal........................ (95) (82) (841)
State and local................ (33) (28) (365)
----- ---- -------
(128) (110) (1,206)
----- ---- -------
$794 $623 $ 3,844
===== ==== =======
</TABLE>
A reconciliation of the Federal statutory rate to the Company's effective
tax rate for 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Taxes at statutory rate......................................... 34.0% 34.0% 34.0%
State and local income taxes, net of federal tax benefit........ 7.0% 7.8% 6.7%
Other, net...................................................... - 4.9% 0.3%
---- ----- -----
Effective tax rate.............................................. 41.0% 46.7% 41.0%
==== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset balance at December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
1999 1998
---------------- ---------------
<S> <C> <C>
Accounts receivable allowances...................................... $1,349 $ 540
Inventory reserves.................................................. 123 428
Accrual for compensated absences.................................... 287 520
Accumulated depreciation and amortization........................... 99 (11)
Other accruals...................................................... 31 284
------ ------
$1,889 $1,761
====== ======
</TABLE>
F-18
<PAGE>
11. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings per Share" ("SFAS No. 128") which specifies the
computation, presentation ad 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 dilutive common shares.
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
For the Years Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income..................................................................... $ 1,142 $ 711 $ 5,521
======= ====== =======
Basic:
Weighted average number of shares outstanding................................ 6,253 6,272 5,719
======= ====== =======
Net income per share ........................................................ $ 0.18 $ 0.11 $ 0.97
======= ====== =======
Diluted:
Weighted average number of shares outstanding............................... 6,253 6,272 5,719
Dilutive effects of stock options........................................... 12 59 186
------- ------ -------
Weighted average number of common and common
equivalent shares outstanding.............................................. 6,265 6,331 5,905
======= ====== =========
Net income per share........................................................ $ 0.18 $ 0.11 $ 0.93
======= ====== ========
</TABLE>
F-19
<PAGE>
12. Employee Stock Purchase Plan
On December 31, 1997, the Company adopted an Employee Stock Purchase Plan
(the "Plan") for employees of the Company and its subsidiaries. The Plan was
approved by the Company's shareholders at its 1998 Annual Meeting. The Plan was
adopted to provide a further incentive for employees to promote the best
interests of the Company and to encourage stock ownership by employees. A total
of 500,000 shares of common stock are authorized for issuance pursuant to the
Plan.
In general, the Plan provides for eligible employees to designate in
advance of specified purchase periods (monthly) a percentage of compensation (up
to 10%) to be withheld from their pay and applied toward the purchase of such
number of whole shares of Common Stock as can be purchased at a price of 85% of
the stock's trading price at the end of each such period. No employee can
purchase more than $15,000 worth of capitalized common stock annually, and no
common stock can be purchased by any person which would result in the purchaser
owning five percent or more of the total combined voting power or value of all
classes of stock of the Company.
The Plan is intended to satisfy the requirements of Section 423(b) of the
Internal Revenue Code of 1986, as amended, which requires that it be approved by
shareholders within one year of the earlier of its adoption by the Board of
Directors or the plan's effective date. In addition, the Plan is intended to
comply with certain requirements of Rule 16b-3 under the Securities Exchange Act
of 1934, as amended.
During the years ended December 31, 1999 and 1998, employees purchased
49,691 shares and 80,888 shares, respectively, under the Plan for aggregate
proceeds of approximately $177,000 and $509,000, respectively.
13. Stock Repurchase Program
In August 1998, the Board of Directors authorized the Company to repurchase
up to 225,000 shares of its outstanding common stock at market price. On May 20,
1999, the Board of Directors authorized the Company to repurchase up to 225,000
additional shares of its common stock at market price. During the year ended
December 31, 1998, 136,800 shares of the Company's common stock were repurchased
for approximately $667,000, an average price of $4.87 per share. During the year
ended December 31, 1999, 13,800 shares of the Company's common stock was
repurchased for approximately $53,000, an average price of $3.89 per share. As
of December 31, 1999, a total of 150,600 shares of the Company's common stock
has been repurchased for approximately $720,000 at an average price of $4.78 per
share since the inception of the repurchase program in August 1998.
F-20
<PAGE>
14. Significant Customers and Vendors
During 1999, PSE&G and Mercedes-Benz of North America accounted for
approximately 13% and 12% of the Company's net sales, respectively. During the
fiscal year ended December 31, 1998, KPMG LLP accounted for approximately 15% of
the Company's net sales. During the fiscal year ended December 31, 1997, Nabisco
and KPMG LLP accounted for 16% and 15% of the Company's net sales, respectively.
No other customer accounted for more than 10% of the Company's net sales during
the three years ended December 31, 1999, 1998 and 1997.
The Company purchases the majority of its products primarily from two
aggregators of computer hardware, software and peripherals. During 1999, the
Company acquired approximately 57%, 22%, and 10% of its products for resale from
Ingram, Pinacor and Tech Data, respectively. Agreements with these aggregators
provide for, among other things, certain discount pricing for meeting
agreed-upon purchase levels and minimum purchase commitments.
15. Related Party Transactions
In connection with the Company's 1996 initial public offering, the
Company's Chairman and principal shareholder agreed to indemnify the Company for
any and all losses which the Company sustained, up to $1,000,000, arising from
or relating to the alleged wrongful conduct of certain former employees of the
Company and their current employer (the "Defendants"). The Chairman advanced
$675,000 of his personal funds to the Company in furtherance of this agreement.
Pursuant to an amendment to his indemnification agreement adopted by the
Company's Board of Directors in February 2000, upon collection by the Company of
the anticipated settlement proceeds from the Company's litigation against the
Defendants, the Company will reimburse the Chairman for the $675,000 previously
advanced.
In May 1999, the Company's Board of Directors authorized, subject to
mutually satisfactory terms and conditions, the issuance to Fallen Angel Capital
LLC ("Fallen Angel") of a warrant (the "Warrant") to purchase up to an aggregate
of 200,000 shares of the Company's common stock. A member of the Company's Board
of Directors is a principal of Fallen Angel. The Warrant was issued in
consideration for investment banking advisory services rendered by Fallen Angel
in connection with the Company's preferred stock investment in nex-i.com Inc.,
in which an affiliate of Fallen Angel, Fallen Angel Equity Fund L.P., also
participated. Fallen Angel Equity Fund L. P. currently owns approximately 10% of
the Company's outstanding common stock. The Company currently intends to submit
the Warrant for shareholder approval at the Company's 2000 Annual Meeting.
F-21
<PAGE>
16. Subsequent Event
In January 2000, the Company acquired a 30% preferred stock equity
interest in nex-i.com Inc. for approximately $1.8 million in cash.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998 and 1997
Balance at Provision - Deductions - Balance of End
Beginning of Year Charged to Income Accounts Written of Year
off
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1999 $ 1,300 $ 1,989 $ - $ 3,289
1998 1,255 414 369 1,300
1997 263 992 - 1,255
Inventory Reserve:
1999 $ 1,029 $ 300 $ 1,029 $ 300
1998 630 399 - 1,029
1997 230 400 - 630
</TABLE>
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized,
ALPHANET SOLUTIONS, INC.
By: /s/ Donald A. Deieso
------------------------
Donald A. Deieso, President and Chief
Executive Officer (Principal Executive
Officer)
March 30, 2000
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
/s/Stan Gang Chairman of the Board March 30, 2000
- ------------------------------------
Stan Gang
/s/Donald A. Deieso President and Chief Executive
- ------------------------------------ Officer (Principal Executive March 30, 2000
Officer)
/s/David M. Gordon Vice President, Treasurer
- ------------------------------------- and Chief Financial Officer March 30, 2000
David M. Gordon (Principal Financial and
Accounting Officer
/s/Michael Gang Director March 30, 2000
- -------------------------------------
Michael Gang
/s/Ira Cohen Director March 30, 2000
- -------------------------------------
Ira Cohen
/s/Thomas F. Dorazio Director March 30, 2000
- -------------------------------------
Thomas F. Dorazio
</TABLE>
F-24
THIRD AMENDMENT TO AND REAFFIRMATION OF LOAN DOCUMENTS
THIRD AMENDMENT TO AND REAFFIRMATION OF LOAN DOCUMENTS (this "Third
Amendment") made as of the 1st day of January, 2000 by and among ALPHANET
SOLUTIONS, INC., a New Jersey corporation (the "Company"), THE LEARNINGNET, INC.
f/k/a NETTEMPS, INC., a New Jersey corporation (the "Guarantor") and FIRST UNION
NATIONAL BANK, a national banking institution (the "Bank").
W I T N E S S E T H:
WHEREAS, the Bank has agreed to make credit available to the Company
on a revolving basis in the principal amount of up to $15,000,000 (the "Loan"),
pursuant to the terms and conditions of a certain Loan and Security Agreement,
dated June 30, 1997, as amended (as so amended and as amended and reaffirmed by
this Third Amendment, the "Loan Agreement"; all capitalized terms used herein
and not defined shall have the meanings ascribed to them therein); and
WHEREAS, the Loan is evidenced by a certain revolving note of the
Company dated September 28, 1999 (the "Existing Revolving Note"); and
WHEREAS, as collateral security for its obligations under the Loan
Agreement and the Existing Revolving Note, the Company granted to the Bank liens
and security interests in the Collateral described in the Loan Agreement; and
WHEREAS, the repayment and performance obligations of the Company
under the Loan Agreement and the Existing Revolving Note were guaranteed by the
Guarantor under the Guaranty; and
WHEREAS, as collateral security for its obligations under the Loan
Agreement and the Guaranty, the Guarantor granted to the Bank liens and security
interests in the Collateral described in the Loan Agreement; and
WHEREAS, the Bank, the Company and the Guarantor have agreed that (a)
the Loan Agreement should be amended, among other things, to: (i) extend the
Maturity Date to December 31, 2000; (ii) modify the existing $15,000,000 secured
revolving credit facility to provide for an unsecured revolving credit facility
in the amount of $2,000,000 and a secured revolving credit facility in the
amount of $13,000,000, (iii) modify the interest rates applicable to the Loan,
(iv) modify the Commitment Fee, (v) modify certain financial covenants, and (vi)
amend certain of the definitions set forth therein; and (b) the other Loan
Documents shall be reaffirmed and amended to include the amendments set forth in
the Loan Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein, the Bank, the Company and the Guarantor, do hereby agree as
follows:
1. By executing this Third Amendment, each of the Company and the
Guarantor confirms and acknowledges that it has no defenses, offsets or
counterclaims against any of its obligations to the Bank under the Loan
Documents and that all amounts outstanding, if any, under the Existing Revolving
Note and the other Loan Documents are owing to the Bank without defense, off-set
or counterclaim.
2. The following new or revised definitions are hereby added to
Article I of the Loan Agreement:
1.15 "Borrowing Base" means the lesser of (A) Thirteen
Million and 00/100 Dollars ($13,000,000.00), or (B) the Eligible
Loan Value of Eligible Accounts.
1.30 "Eligible Loan Value of Eligible Accounts" means up
to eighty percent (80%) of the face amount of Eligible Accounts,
less returns and discounts, offsets, contra balances, credits or
allowances of any nature, at any time issued, owing, granted or
outstanding.
1.35C "Third Amendment" means the Third Amendment to and
Reaffirmation of Loan Documents, dated as of January 1, 2000, by
and among the Company, the Guarantor and the Bank.
1.55 "Loan" means either or both of Loan A and Loan B.
1.55A "Loan A" means the revolving loan in the maximum
principal amount of up to TWO MILLION DOLLARS ($2,000,000.00) made
available by Bank pursuant to Section 2.1(A) hereof.
1.55B "Loan B" means the revolving loan and Letters of
Credit in the maximum principal amount of up to THIRTEEN MILLION
DOLLARS ($13,000,000.00) made available by Bank pursuant to
Section 2.1(B) hereof.
1.56 "Loan Documents" means this Agreement, the
Revolving Notes, the Guaranty, the Intercreditor Agreements, any
Letter of Credit Agreement, all notes or other documents executed
and delivered by Borrower or any other Obligor hereunder, and any
amendments, renewals, modifications or supplements thereto, or
substitutions therefor.
1.60 "Maturity Date" means December 31, 2000.
1.72 "Revolving Notes" means (a) that certain Revolving
Note dated as of January 1, 2000 issued by Borrower evidencing the
Loan A and any revolving note replacing such note ("Revolving Note
A") and (b) that certain Revolving Note dated as of January 1,
2000 issued by Borrower evidencing Loan B and any revolving note
replacing such note ("Revolving Note B")."
3. Section 2.1 of the Loan Agreement is hereby amended to read as
follows:
"2.1 LOAN AND LETTERS OF CREDIT
(A) Loan A. Subject to the terms and conditions
hereinafter set forth, and provided that no Default or Event of
Default shall have occurred and be continuing or would result from
the making of any Advance, from time to time hereafter, through
the Maturity Date, Bank shall extend credit under Loan A to
Borrower by making Advances (excluding Acquisition Advances);
provided, however that at no time shall the total principal amount
of Advances then outstanding under Loan A exceed $2,000,000.
Borrower shall have the right, upon thirty (30) days prior written
notice to Bank, to terminate all or part of the unused portion of
the Loan A, without premium or penalty. The first two million
dollars ($2,000,000) of Advances (excluding Acquisition Advances)
then outstanding from time to time shall be deemed to be Advances
under Loan A.
(B) Loan B and Letters of Credit. Within the collateral
limits of the Borrowing Base, subject to the terms and conditions
hereinafter set forth, and provided that no Default or Event of
Default shall have occurred and be continuing or would result from
the making of any Advance or issuance of any Letter of Credit,
from time to time hereafter, through the Maturity Date, Bank shall
extend credit under Loan B to Borrower by (i) making Advances and
(ii) the issuance of Letters of Credit; provided, however that at
no time shall (x) the total amount of Letter of Credit Obligations
exceed Two Million Five Hundred Thousand Dollars ($2,500,000), (y)
the total principal amount of Acquisition Advances exceed Five
Million Dollars ($5,000,000) and (z) the total amount of Letter of
Credit Obligations plus the total principal amount of Advances
then outstanding under Loan B exceed the Borrowing Base. Borrower
shall have the right, upon thirty (30) days prior written notice
to Bank, to terminate all or part of the unused portion of the
Loan B, without premium or penalty."
4. The first sentence of Section 2.2(A) of the Loan Agreement is
hereby amended to read as follows:
"(A) On all Base Rate Advances, Borrower shall pay to
Bank monthly interest on the first day of each month until all
such Advances are paid in full, and on all Adjusted LIBO Rate
Advances, Borrower shall pay to Bank interest on the last day of
the Interest Period but in no event less often than quarterly (in
which case such payments shall be made on the last Working Day of
such calendar quarter), until all such Advances are paid in full,
which interest shall be computed on the basis of a 360 day year,
for the actual number of days elapsed, on the daily unpaid balance
of such Advances, at the rate selected by Borrower by written
notice to Bank equal to the following: (x) one-half of one percent
(1/2%) per annum below the Base Rate or (y) the Adjusted LIBO Rate
for such Interest Period plus one and one-half percent (1 1/2%)."
5. Section 2.2(B) of the Loan Agreement is hereby amended to read
as follows:
"(B) Subject to Section 2.5, if, at any time, the outstanding
Advances under Loan B exceed the Borrowing Base, Borrower shall pay to Bank
monthly interest computed on the basis of a 360 day year for the actual number
of days elapsed, on that portion of the daily unpaid balance of such Advances
under Loan B which is in excess of the Borrowing Base, at the default rate set
forth in Section 9.7."
6. Section 2.4(A) of the Loan Agreement is hereby amended to read
as follows:
"(A) Borrower agrees to pay to Bank on a quarterly basis the
Commitment Fee on the average daily unused portion of the Commitment from the
Closing Date until the Maturity Date, at a rate equal to one-quarter percent
(1/4%) per annum, such payments commencing on January 1, 2000, and continuing
quarterly thereafter on the last day of March, June, September and December,
with such payments terminating on the Maturity Date."
7. Section 2.5 of the Loan Agreement is hereby amended to read as
follows:
"2.5 Prepayment (A) If on any day the sum of the
aggregate outstanding principal balance of the Advances under
Section 2.1(A) hereof shall exceed the limitations set forth in
Section 2.1(A), Borrower shall, on such day, prepay such Advances
by an amount equal to such excess together with the Repayment
Indemnity, if any. The failure to make any such payment shall be
an Event of Default. (B) If on any day the sum of the aggregate
outstanding principal balance of the Advances under Section 2.1(B)
plus the Letter of Credit Obligations hereof shall exceed the then
Borrowing Base on such day or the other limitations set forth in
Section 2.1(B), Borrower shall, on such day, prepay such Advances
by an amount equal to such excess together with the Repayment
Indemnity, if any. The failure to make any such payment shall be
an Event of Default."
8. The second sentence of Section 2.6 of the Loan Agreement is
hereby amended to read as follows:
"The notice to Bank requesting an Advance under Loan B shall
also include evidence that based upon the most recent Borrowing Base
Certificate, there exists sufficient availability of funds for such Advance.
9. Section 3.1 of the Loan Agreement is hereby amended to read as
follows:
"3.1 Cross Collateral All of the Collateral heretofore,
herein or hereafter given or assigned to Bank
hereunder or in any other Loan Document shall secure payment of
(A) all Obligations of Borrower and Guarantor to Bank and (B) all
Indebtedness and any Snd all other obligations of any of the other
Obligors to Bank; excluding, however, the principal amount
outstanding under Loan A."
10. The last sentence of Section 2.14 of the Loan Agreement is
hereby amended to read as follows:
"Nothing herein shall prohibit Bank from pledging or
assigning the Revolving Notes to any Federal Reserve Bank in accordance with
applicable law."
11. Section 6.1(D) of the Loan Agreement is hereby amended to read
as follows:
"(D) In the event any Advances or Letters of Credit in excess
of $100,000 in the aggregate are outstanding at a month's end, not later than
the 15th day after the end of such month, an accounts receivable aging and
corresponding Borrowing Base Certificate;".
12. Section 7.2 of the Loan Agreement is hereby amended to read as
follows:
"(A) Total Liabilities/Tangible Net Worth. The Obligors will
not, on a consolidated basis, allow its ratio of Total Liabilities to Tangible
Net Worth to exceed 1.00:1.00.
(B) Fixed Charge Coverage Ratio. The Obligors will not allow
its Fixed Charge Coverage Ratio, on a consolidated basis, to be less than (x)
2.50:1.00 for the quarters ended December 31, 1999 and March 31, 2000 and (y)
3.00:1.00 thereafter.
The foregoing financial covenants shall be calculated and measured
on a rolling, trailing four quarter basis."
13. The Company shall execute new Revolving Notes dated the date
hereof which shall supersede and replace (but not represent a repayment or
novation of) the Existing Revolving Note. The Revolving Notes dated the date
hereof shall be the "Revolving Notes" for all purposes of the Loan Agreement and
the other Loan Documents.
14. By executing this Third Amendment, the Company and the
Guarantor confirm and acknowledge that (i) the representations and warranties
contained in Article V of the Loan Agreement (pertaining to each of them) are
correct as of the date hereof, (ii) the Company and the Guarantor are in
compliance with all covenants contained in the Loan Agreement (except as
otherwise agreed to by the Bank in writing) and all other Loan Documents, and
(iii) no Event of Default, or an event which with the giving of notice or
passage of time or both would constitute an Event of Default, has occurred and
is continuing.
15. All references to the "Agreement" or "this Agreement" in the
Loan Agreement shall mean the Loan Agreement, as amended and reaffirmed by this
Third Amendment; all references to the "Guaranty" in the Loan Agreement shall be
deemed to mean the Guaranty, as amended and reaffirmed by this Third Amendment;
and all references to the "Loan Documents" shall mean and include the Loan
Documents, as amended and reaffirmed by this Third Amendment, as well as the
Revolving Notes (as defined in the Loan Agreement, as amended by this Third
Amendment). All references to the "Obligations" in the Loan Agreement shall mean
and include the obligations of the Company and the Guarantor to the Bank
pursuant to the Loan Documents, as amended and reaffirmed pursuant to this Third
Amendment, including, but not limited to the Revolving Notes (as defined in the
Loan Agreement, as amended by this Third Amendment).
16. By executing this Third Amendment, the parties hereto confirm
the continued accuracy of all Schedules and Exhibits attached to and made a part
of the Loan Agreement and the other Loan Documents. If any such Schedule or
Exhibit is no longer fully accurate or needs updating, such revised or updated
Schedule or Exhibit shall be delivered to the Bank as a condition precedent to
the effectiveness of this Third Amendment and shall be deemed to replace the
prior Schedule or Exhibit for all purposes of the Loan Agreement or such other
Loan Document.
17. The Guaranty, effective the date hereof, is hereby amended to
provide that the term "Obligations" therein shall mean and include the
obligations of the Company to the Bank under the Loan Agreement and the other
Loan Documents, as each is amended and reaffirmed by this Third Amendment, and
all references to the "Loan Agreement" and the "Loan Documents" in the Guaranty
shall mean and include such agreements, as amended and reaffirmed by, or
delivered pursuant to, this Third Amendment. By executing this Third Amendment,
the Guarantor reaffirms and acknowledges the validity of the Guaranty as of the
date hereof and confirms that it guarantees unconditionally the repayment and
other obligations of the Company under the Revolving Notes (as defined in the
Loan Agreement, as amended and reaffirmed by this Third Amendment) and the other
Loan Documents, as amended and reaffirmed by this Third Amendment.
18. By executing this Third Amendment, each of the Company and the
Guarantor confirms the security interests previously granted to the Bank in and
to the Collateral described in the Loan Agreement as security for their
obligations under the Loan Documents (as defined in the Loan Agreement as
amended by this Third Amendment), and each of the Company and the Guarantor
hereby grants to the Bank a security interest in the Collateral described in the
Loan Agreement to secure the repayment of their Obligations under Revolving Note
B (as defined in the Loan Agreement as amended by this Third Amendment) and
Guaranty (as defined in the Loan Agreement as amended by this Third Amendment),
as applicable, and the other Loan Documents, as amended and reaffirmed by this
Third Amendment.
19. As conditions precedent to the effectiveness of this Third
Amendment, the following shall be delivered to the Bank by the Company and/or
the Guarantor:
(a) This Third Amendment, duly executed by all parties hereto;
(b) The Revolving Notes, duly executed by the Company;
(c) The Certification (as to jurisdiction of execution);
(d) A corporate resolution, incumbency certificate, and such other
documents as the Bank may reasonably request reflecting the corporate
authorization and approval of the transactions contemplated hereunder by the
Company and the Guarantor; and
(e) Such other documents as the Bank may reasonably request.
20. This Third Amendment is incorporated by reference into the
Loan Agreement and the other Loan Documents. Except as otherwise provided
herein, all other provisions of the Loan Agreement and the other Loan Documents
are hereby confirmed and ratified and shall remain in full force and effect as
of the date of this Third Amendment.
21. This Third Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one and the same instrument.
22. This Third Amendment shall be binding upon the parties hereto
and their heirs, executors, administrators, successors and/or assigns.
23. This Third Amendment shall be governed by, and construed in
accordance with, the laws of the State of New Jersey.
24. In the event any provision of this Third Amendment or any
other Loan Document executed and delivered in connection herewith shall be held
invalid or unenforceable by a court of competent jurisdiction, such holdings
shall not invalidate or render unenforceable any other provision hereof or
thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amendment as of the date first above written.
FIRST UNION NATIONAL BANK
By: Nancy Angell
-----------------------------------
Name: Angell
Title: AVP
ATTEST: ALPHANET SOLUTIONS, INC.
By: Jack P. Adler By: David M. Gordon
----------------------------- ----------------------
Name: Jack P. Adler Name: David M. Gordon
Title: Secretary Title: Vice President, Treasurer & CFO
ATTEST: THE LEARNINGNET, INC. f/k/a
NETTEMPS, INC.
By: Jack P. Adler By: Stan Gang
----------------------------- ----------------
Name: Jack P. Adler Name: Stan Gang
Title: Secretary Title: Chairman of the Board
REVOLVING NOTE A
$2,000,000.00 As of January 1, 2000
FOR VALUE RECEIVED, ALPHANET SOLUTIONS, INC., a New Jersey
corporation (the "Borrower"), promises to pay to the order of FIRST UNION
NATIONAL BANK (the "Bank"), the principal amount of TWO MILLION and 00/100
DOLLARS ($2,000,000.00), or the aggregate amount of all unpaid Advances under
Loan A made by the Bank to the Borrower, whichever is less, in lawful money of
the United States, together with interest thereon as hereinafter provided.
1. The Agreement. This Revolving Note is issued pursuant to
a certain Loan and Security Agreement dated June 30, 1997 by and between the
Bank and the Borrower, as amended (as so amended and as the same is being and
may be hereafter amended, modified or supplemented, the "Agreement"), and is
entitled to the benefit of all of the terms thereof. In this Revolving Note, all
words and terms defined in the Agreement shall have the respective meanings and
be construed as provided therein, unless a different meaning clearly appears
from the context. Payment of the principal amount hereof and accrued and unpaid
interest thereon is subject to acceleration as provided in the Agreement.
2. Calculation of Interest. Interest on the unpaid
principal amount hereof shall accrue from the date hereof until the earlier of
(i) the occurrence of an Event of Default or (ii) December 31, 2000 (which is
defined in the Agreement as the "Maturity Date"), at the rates set forth in the
Agreement. Interest shall be computed on the basis of the actual number of days
elapsed over a year of 360 days. From and after the occurrence of an Event of
Default, principal amounts outstanding hereunder shall bear interest at the
default rate as set forth in the Agreement.
3. Payment of Principal and Interest. Interest on the
unpaid principal amount of each (i) Base Rate Advance hereunder shall be due and
payable monthly, on the first day of each month commencing January, 2000, and
continuing on the first day of each consecutive month thereafter and (ii)
Adjusted LIBO Rate Advance hereunder shall be due and payable on the last day of
the Interest Period but in no event less often than quarterly (in which case
such payments shall be made on the last Working Day of such calendar quarter),
until the Maturity Date, on which date the entire principal amount outstanding
hereunder and any accrued and unpaid interest thereon shall become immediately
due and payable in full. Late payments of principal or interest are subject to a
late charge as set forth in the Agreement.
4. Repayments. The Borrower may, as described in the
Agreement, repay Advances under this Revolving Note; provided, that each partial
repayment shall be in a principal amount of not less than $100,000 or any
multiple thereof. In the event Borrower for any reason repays any Adjusted LIBO
Rate Advance on the day which is not the end of an Interest Period, Borrower
shall, upon written demand by Bank, pay to Bank the Repayment Indemnity with
respect to such repayment. All outstanding principal hereunder shall be due and
payable, together with any and all accrued interest thereon, on the Maturity
Date.
5. Place and Manner of Payment. All payments of principal
and interest shall be made by the Borrower directly to the Bank or as set forth
in the Agreement, and such payments shall be made in immediately available
funds.
6. Waiver. The Borrower hereby waives presentment, demand,
protest and notice of protest, and all other demands and notices in connection
with the payment and enforcement of this Revolving Note, and assents to
extensions of the time of payment, or forbearance or other indulgence, without
notice.
7. Agreement. The terms of the Agreement and the other Loan
Documents are incorporated herein by reference.
8. Governing Law. This Revolving Note shall be governed by,
and construed in accordance with, the laws of the State of New Jersey.
9. Successors and Assigns. This Revolving Note shall be
binding upon the Borrower and its successors and/or assigns and shall inure to
the benefit of the Bank and its successors and assigns.
10. Prior Note. This Revolving Note shall supersede,
replace and continue, but shall not be considered a repayment or novation of,
the note dated September 28, 1999, by the Borrower to the order of the Bank (the
"Prior Note"). All obligations of the Borrower under the Prior Note shall be
evidenced by, and continued pursuant to, this Revolving Note.
IN WITNESS WHEREOF, the Borrower has caused this Revolving
Note to be executed by its duly authorized officer on the day and year first
above written and declares this Revolving Note to be a sealed instrument.
ATTEST: ALPHANET SOLUTIONS, INC.
By: Jack P. Adler By: David M. Gordon
---------------------- -------------------------
Name: Jack P. Adler Name: David M. Gordon
Title: Secretary Title: Vice President, Treasuer & CFO
REVOLVING NOTE B
$13,000,000.00 As of January 1, 2000
FOR VALUE RECEIVED, ALPHANET SOLUTIONS, INC., a New Jersey
corporation (the "Borrower"), promises to pay to the order of FIRST UNION
NATIONAL BANK (the "Bank"), the principal amount of THIRTEEN MILLION and 00/100
DOLLARS ($13,000,000.00), or the aggregate amount of all unpaid Advances under
Loan B made by the Bank to the Borrower, whichever is less, in lawful money of
the United States, together with interest thereon as hereinafter provided.
1. The Agreement. This Revolving Note is issued pursuant to
a certain Loan and Security Agreement dated June 30, 1997 by and between the
Bank and the Borrower, as amended (as so amended and as the same is being and
may be hereafter amended, modified or supplemented, the "Agreement"), and is
entitled to the benefit of all of the terms thereof. In this Revolving Note, all
words and terms defined in the Agreement shall have the respective meanings and
be construed as provided therein, unless a different meaning clearly appears
from the context. Payment of the principal amount hereof and accrued and unpaid
interest thereon is subject to acceleration as provided in the Agreement.
2. Calculation of Interest. Interest on the unpaid
principal amount hereof shall accrue from the date hereof until the earlier of
(i) the occurrence of an Event of Default or (ii) December 31, 2000 (which is
defined in the Agreement as the "Maturity Date"), at the rates set forth in the
Agreement. Interest shall be computed on the basis of the actual number of days
elapsed over a year of 360 days. From and after the occurrence of an Event of
Default, principal amounts outstanding hereunder shall bear interest at the
default rate as set forth in the Agreement.
3. Payment of Principal and Interest. Interest on the
unpaid principal amount of each (i) Base Rate Advance hereunder shall be due and
payable monthly, on the first day of each month commencing January, 2000, and
continuing on the first day of each consecutive month thereafter and (ii)
Adjusted LIBO Rate Advance hereunder shall be due and payable on the last day of
the Interest Period but in no event less often than quarterly (in which case
such payments shall be made on the last Working Day of such calendar quarter),
until the Maturity Date, on which date the entire principal amount outstanding
hereunder and any accrued and unpaid interest thereon shall become immediately
due and payable in full. Late payments of principal or interest are subject to a
late charge as set forth in the Agreement.
4. Repayments. The Borrower may, as described in the
Agreement, repay Advances under this Revolving Note; provided, that each partial
repayment shall be in a principal amount of not less than $100,000 or any
multiple thereof. In the event Borrower for any reason repays any Adjusted LIBO
Rate Advance on the day which is not the end of an Interest Period, Borrower
shall, upon written demand by Bank, pay to Bank the Repayment Indemnity with
respect to such repayment. All outstanding principal hereunder shall be due and
payable, together with any and all accrued interest thereon, on the Maturity
Date.
5. Place and Manner of Payment. All payments of principal
and interest shall be made by the Borrower directly to the Bank or as set forth
in the Agreement, and such payments shall be made in immediately available
funds.
6. Waiver. The Borrower hereby waives presentment, demand,
protest and notice of protest, and all other demands and notices in connection
with the payment and enforcement of this Revolving Note, and assents to
extensions of the time of payment, or forbearance or other indulgence, without
notice.
7. Collateral. The obligations of the Borrower hereunder
are secured by the Collateral described in the Agreement. The terms of the
Agreement and the other Loan Documents are incorporated herein by reference.
8. Governing Law. This Revolving Note shall be governed by,
and construed in accordance with, the laws of the State of New Jersey.
9. Successors and Assigns. This Revolving Note shall be
binding upon the Borrower and its successors and/or assigns and shall inure to
the benefit of the Bank and its successors and assigns.
10. Prior Note. This Revolving Note shall supersede,
replace and continue, but shall not be considered a repayment or novation of,
the note dated September 28, 1999, by the Borrower to the order of the Bank (the
"Prior Note"). All obligations of the Borrower under the Prior Note shall be
evidenced by, and continued pursuant to, this Revolving Note.
IN WITNESS WHEREOF, the Borrower has caused this Revolving
Note to be executed by its duly authorized officer on the day and year first
above written and declares this Revolving Note to be a sealed instrument.
ATTEST: ALPHANET SOLUTIONS, INC.
By: Jack P. Adler By: David M. Gordon
----------------------------- ----------------------
Name: Jack P. Adler Name: David M. Gordon
Title: Secretary Title: Vice President, Treasurer & CFO
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (the "Agreement") is entered into
as of January 14, 2000, by and among NEX-I.COM INC., a New Jersey corporation
(the "Company"), with its principal office located at 7 Wall Street, Princeton,
New Jersey 08540, ALPHANET SOLUTIONS, INC., a New Jersey corporation with its
principal office located at 7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
("AlphaNet") and FALLEN ANGEL EQUITY FUND, L.P., a Delaware limited partnership,
with its principal office located at 960 Holmdel Road, Holmdel, New Jersey 07733
("Fallen Angel"), and JOHN L. STEFFENS, an individual residing at 358 Wendover
Drive, Princeton, New Jersey 08540 ("Steffens," and together with AlphaNet and
Fallen Angel, the "Purchasers").
RECITALS
WHEREAS, the Company and Purchasers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("Regulation D"), as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "Securities Act");
WHEREAS, the Company is contemporaneously offering to AlphaNet the
right of first refusal to provide certain services to the Company on an
exclusive basis;
WHEREAS, Purchasers desire to purchase at the Closing (as hereinafter
defined), upon the terms and conditions stated in this Agreement, an aggregate
of three million nine hundred thirty seven thousand five hundred (3,937,500)
shares of the Company's Series A Convertible Participating Preferred Stock (the
"Preferred Shares"), convertible into shares of the Company's Common Stock, par
value $0.01 per share (the "Common Stock"), as set forth herein (a
"Conversion"), for the aggregate purchase price of Two Million Two Hundred Fifty
Thousand One and 69/100 U.S. Dollars ($2,250,001.69). The shares of Common Stock
to be issued to the Purchasers upon conversion of the Preferred Shares are
referred to herein as the "Common Shares." The Preferred Shares and the Common
Shares are collectively referred to herein as the "Securities;" and
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement in the form attached hereto as Exhibit A (the "Registration Rights
Agreement"), pursuant to which the Company has agreed to provide certain
registration rights under the Securities Act, the rules and regulations
promulgated thereunder and applicable state securities laws.
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing promises and the
undertakings set forth herein, the Company and each Purchaser hereby agree as
follows:
<PAGE>
ARTICLE I
CORPORATE ORGANIZATION OF THE COMPANY
The Company warrants to the Purchasers that nex-i.com, L.L.C. (the
"LLC"), a New Jersey limited liability company, (i) has merged with and into the
Company (the "Merger"), and pursuant to the Merger, all assets of the LLC have
become the assets of the Company, and (ii) that prior to the Merger, nex-i.com
inc. had no liabilities and conducted no business. References herein to the
"Company" shall include the LLC together with the Company.
ARTICLE II
PURCHASE AND SALE OF PREFERRED SHARES
2.1 Purchase of Preferred Shares. Subject to the terms and conditions
of this Agreement, the issuance, sale and purchase of the Preferred Shares shall
be consummated at Closing (as hereinafter defined). On the date of the Closing,
subject to the satisfaction or waiver of the conditions set forth in Articles
VII and VIII hereof, the Company shall issue and sell to the Purchasers, and the
Purchasers severally and not jointly agree to purchase from the Company, an
aggregate of 3,937,500 Preferred Shares, as specified below the signature for
each such Purchaser on this Agreement, for an aggregate $2,250,001.69, or
$0.571429 per share (the "Purchase Price"). The certificates representing the
Preferred Shares shall be substantially in the form of Exhibit B annexed hereto.
2.2 Form of Payment. AlphaNet and Fallen Angel shall pay the Purchase
Price for the Preferred Shares that they are acquiring by wire transfer to an
account designated by the Company. Steffens shall pay for the Preferred Shares
that he is acquiring by the forgiveness of a promissory note, dated December 23,
1999, owing from the Company to Steffens. Upon receipt of payment of the
Purchase Price, the Company shall deliver the Preferred Shares to the Purchasers
2.3 Closing Date. Subject to the satisfaction (or waiver) of the
conditions set forth in Articles VII and VIII hereof, the date and time of the
Closing shall be at 2:00 p.m. New Jersey time, on January 14, 2000 (the
"Closing").
ARTICLE III
TERMS OF THE PREFERRED SHARES
Prior to Closing, the Company shall amend its Certificate of
Incorporation to create the Preferred Shares, which shall have the terms which
are set forth on Exhibit C annexed hereto (the "Terms of the Preferred Shares").
The Company agrees that the Terms of the Preferred Shares as specified in
Exhibit C shall be set forth in, and made a part of, the Company's Certificate
of Incorporation.
ARTICLE IV
PURCHASERS' REPRESENTATIONS AND WARRANTIES
Each Purchaser represents and warrants to the Company as of the date
hereof and as of the date of Closing, severally and solely with respect to
itself and its purchase hereunder and not with respect to any other Purchaser,
as set forth in this Article IV. Each Purchaser makes no other representations
or warranties, express or implied, to the Company in connection with the
transactions contemplated hereby and any and all prior representations and
warranties, if any, which may have been made by the Purchaser to the Company in
connection with the transactions contemplated hereby shall be deemed to have
been merged in this Agreement and any such prior representations and warranties,
if any, shall not survive the execution and delivery of this Agreement.
4.1 Investment Purpose. Purchasers are purchasing the Preferred
Shares for each Purchaser's own account for investment only and not with a
present view toward or in connection with the public sale or distribution
thereof in violation of the applicable securities laws. Purchasers will not,
directly or indirectly, offer, sell, pledge or otherwise transfer the Securities
or any interest therein except pursuant to transactions that are exempt from the
registration requirements of the Securities Act and/or sales registered under
the Securities Act, the rules and regulations promulgated pursuant thereto and
applicable state securities laws. By making the representations in this Section
4.1, each Purchaser does not agree to hold the Securities for any minimum or
other specific term and reserves the right to dispose of the Securities at any
time in accordance with or pursuant to a registration statement or an exemption
from registration under the Securities Act and any applicable state securities
laws.
4.2 Accredited Investor Status. Each Purchaser is an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D, and each
Purchaser has indicated on a duly executed Investor Questionnaire and
Representation Agreement in the form attached hereto as Exhibit D in which
capacity that it so qualifies as an "accredited investor."
4.3 Reliance on Exemptions. Each Purchaser understands that the
Preferred Shares are being offered and sold to Purchasers in reliance upon
specific exemptions from the registration requirements of United States federal
and state securities laws and that the Company is relying upon the truth and
accuracy of, and each Purchaser's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of each Purchaser set
forth herein in order to determine the availability of such exemptions and the
eligibility of each Purchaser to acquire the Preferred Shares.
4.4 Information. Each Purchaser has been furnished the Company
Documents (as defined in Section 5.6 hereof), including, without limitation and
to the fullest extent applicable, the Financial Statements (as defined in
Section 5.6 hereof). The Purchasers have been afforded the opportunity to ask
questions of the Company and have received what Purchasers believe to be
complete and satisfactory answers to any such inquiries. Neither such inquiries
nor any other due diligence investigation conducted by Purchasers or any of
their representatives nor any other disclosures or documents (including without
limitation the Company Documents) shall modify, amend or affect Purchasers'
right to rely on the Company's representations and warranties contained in this
Agreement or in any Exhibit hereto or in any certificate issued in connection
herewith or therewith.
4.5 Governmental Review. Purchasers understand that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
4.6 Transfer or Resale. Purchasers understand that (i) except as
provided in the Registration Rights Agreement, the Securities have not been and
are not being registered under the Securities Act or any state securities laws,
and may not be offered, sold, pledged or otherwise transferred unless
subsequently registered thereunder or an exemption from such registration is
available (which exemption the Company expressly agrees may be established as
contemplated in clauses (b) and (c) of Section 7.1 hereof); (ii) any sale of
such Securities made in reliance on Rule 144 under the Securities Act (or a
successor rule) ("Rule 144") may be made only in accordance with the terms of
Rule 144 and further, if Rule 144 is not applicable, any resale of such
Securities without registration under the Securities Act under circumstances in
which the seller may be deemed to be an underwriter (as that term is defined in
the Securities Act) may require compliance with some other exemption under the
Securities Act or the rules and regulations of the SEC thereunder, and (iii)
neither the Company nor any other person is under any obligation to register
such Securities under the Securities Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder (in each case,
other than pursuant to this Agreement or the Registration Rights Agreement).
Notwithstanding the foregoing or anything else contained herein to the contrary,
the Securities may be pledged as collateral in connection with any margin
account or other lending arrangement.
4.7 Legends. Purchasers understand that, subject to Article VII
hereof, the certificates for the Preferred Shares and, until such time as the
Common Shares have been registered under the Securities Act as contemplated by
the Registration Rights Agreement or otherwise may be sold by Purchaser pursuant
to Rule 144 (subject to and in accordance with the procedures specified in
Article VII hereof), the certificates for the Common Shares, will bear a
restrictive legend (the "Legend") in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR
TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
4.8 Authorization: Enforcement. This Agreement and the Registration
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of Purchasers and are valid and binding agreements of Purchasers
enforceable in accordance with their respective terms, except (i) to the extent
that such validity or enforceability may be subject to or affected by any
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of, creditors' rights or
remedies of creditors generally, or by other equitable principles of general
application, and (ii) as rights to indemnity and contribution under the
Registration Rights Agreement may be limited by Federal or state securities
laws.
4.9 Residency. Each Purchaser is a resident of the jurisdiction set
forth under Purchaser's name on the signature page of this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchasers as of the date
hereof and as of the date of Closing as set forth in this Article V. The Company
makes no other representations or warranties, express or implied, to the
Purchasers in connection with the transactions contemplated hereby and any and
all prior representations and warranties, if any, which may have been made by
the Company to the Purchasers in connection with the transactions contemplated
hereby shall be deemed to have been merged in this Agreement and any such prior
representations and warranties, if any, shall not survive the execution and
delivery of this Agreement.
5.1 Organization and Qualification. Prior to the Merger, the Company
existed as a limited liability company and was duly organized and existing in
good standing under the laws of the State of New Jersey. Upon the effectiveness
of the Merger, the Company became, and presently is, a corporation duly
organized and existing in good standing under the laws of the State of New
Jersey. The Company, and its subsidiaries, if any, have the requisite corporate
power to own its properties and to carry on its business as now being conducted.
The Company has no subsidiaries other than as set forth in Schedule 5.1 hereof,
and is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction where the failure so to qualify or be in good
standing would have a Material Adverse Effect. "Material Adverse Effect" means
any effect which, individually or in the aggregate with all other effects, is or
could reasonably be expected to be materially adverse to the business,
operations, properties, financial condition, operating results or prospects of
the Company, and its subsidiaries, taken as a whole on a consolidated basis or
on the transactions contemplated hereby or on any of the Securities.
5.2 Authorization: Enforcement.
(a) The Company has the requisite corporate power and
authority to enter into and perform this Agreement and the Registration Rights
Agreement, and to issue, sell and perform its obligations with respect to the
Preferred Shares in accordance with the terms hereof and the terms of the
Preferred Shares, to issue the Common Shares upon conversion of the Preferred
Shares, in accordance with the terms and conditions of the Preferred Shares; (b)
the execution, delivery and performance of this Agreement and the Registration
Rights Agreement by the Company and the consummation by it of the transactions
contemplated hereby and thereby (including without limitation the issuance of
the Preferred Shares and the issuance and reservation for issuance of the Common
Shares) have been duly authorized by all necessary corporate action and, except
as set forth on Schedule 5.2 hereof and except as contemplated by Section 5.5
hereof, no further consent or authorization of the Company, its board of
directors, or its stockholders or any other person, body or agency, and no
filing with any person, body or agency, is required with respect to any of the
transactions contemplated hereby or thereby; (c) this Agreement has been, and
upon Closing, the Registration Rights Agreement and the certificates for the
Preferred Shares will have been duly executed and delivered by the Company; and
(d) this Agreement constitutes, and upon Closing, the Registration Rights
Agreement and the Preferred Shares will constitute, legal, valid and binding
obligations of the Company enforceable against the Company in accordance with
their respective terms, except (i) to the extent that such validity or
enforceability may be subject to or affected by any bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors' rights or remedies of
creditors generally, or by other equitable principles of general application,
and (ii) as rights to indemnity and contribution under the Registration Rights
Agreement may be limited by Federal or state securities laws.
5.3 Capitalization. The capitalization of the Company, including the
authorized capital stock, the number of shares issued and outstanding, the
number of shares reserved for issuance pursuant to the Company's stock option
plans, the number of shares reserved for issuance pursuant to securities (other
than the Preferred Shares) exercisable for, or convertible into or exchangeable
for any shares of Common Stock and the number of shares to be reserved for
issuance upon conversion of the Preferred Shares is set forth in Schedule 5.3.
All of such outstanding shares of capital stock have been, or upon issuance will
be, validly issued, fully paid and nonassessable. No shares of capital stock of
the Company (including the Common Shares) are subject to preemptive rights or
any other similar rights of the stockholders of the Company or of any other
person or entity which have not been satisfied or waived, or any liens or
encumbrances. Except as disclosed in Schedule 5.3, as of the date of this
Agreement and as of the Closing Date, (i) there are no outstanding options,
warrants, scrip, rights to subscribe for, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exercisable
or exchangeable for, any shares of capital stock of the Company or any of its
subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries,
and (ii) issuance of the Securities will not trigger antidilution or similar
rights for any other present or future outstanding or authorized securities of
the Company or any of its subsidiaries, and (iii) there are no agreements or
arrangements under which the Company or any of its subsidiaries are obligated to
register the sale of any of its or their securities under the Securities Act
(except the Registration Rights Agreement). The Company has furnished to each
Purchaser true and correct copies of the Company's Certificate of Formation and
Operating Agreement, as in effect prior to the Merger, the Company's Certificate
of Incorporation as in effect on the date hereof and on the date of Closing
("Certificate of Incorporation"), and the Company's By-laws as in effect on the
date hereof and on the date of Closing (the "By-laws"). The Company has set
forth on Schedule 5.3 all instruments and agreements (other than the Certificate
of Incorporation and By-laws) governing or concerning securities convertible
into or exercisable or exchangeable for Common Stock of the Company (and the
Company shall provide to each Purchaser copies thereof upon the request of such
Purchaser).
5.4 Issuance of Shares. The Common Shares are duly authorized and
reserved for issuance, and, upon conversion of the Preferred Shares, will be
validly issued, fully paid and non-assessable, and free from all taxes, liens,
claims and encumbrances directly or indirectly imposed or suffered by the
Company or any of its subsidiaries, will be entitled to all rights and
preferences accorded to a holder of Common Stock, shall be entitled to be traded
on any markets and exchanges as the other shares of Common Stock of the Company
may be traded, and will not be subject to preemptive rights or other similar
rights of stockholders of the Company or of any other person or entity. The
Preferred Shares are duly authorized and validly issued, fully paid and
nonassessable, and free from all liens, claims and encumbrances directly or
indirectly imposed or suffered by the Company, any of its subsidiaries or any of
its affiliates and will not be subject to preemptive rights or other similar
rights of stockholders of the Company or of any other person or entity.
5.5 No Conflicts. The execution, delivery and performance of this
Agreement, the Preferred Shares and the Registration Rights Agreement by the
Company, and the consummation by the Company of transactions contemplated hereby
and thereby (including, without limitation, the issuance and reservation for
issuance, as applicable, of the Preferred Shares and the Common Shares) will not
(a) result in a violation of the Certificate of Incorporation or By-laws or (b)
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its subsidiaries is a
party, or (c) result in a violation of any law, rule, regulation, order,
judgment or decree (including U.S. federal and state securities laws and
regulations) applicable to the Company or any of its subsidiaries, or by which
any property or asset of the Company or any of its subsidiaries, is bound or
affected. Neither the Company nor any of its subsidiaries is in violation of its
Certificate of Incorporation or other organizational documents, and neither the
Company nor any of its subsidiaries is in default (and no event has occurred
which has not been waived which, with notice or lapse of time or both, would put
the Company or any of its subsidiaries in default) under, nor has there occurred
any event giving others (with notice or lapse of time or both) any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its subsidiaries is a
party, except for possible violations, defaults or rights as would not,
individually or in the aggregate, have a Material Adverse Effect. The businesses
of the Company and its subsidiaries are not being conducted, and shall not be
conducted so long as any of the Purchasers (or any direct or indirect
transferee, assignee or participant of a Purchaser or of such transferee,
assignee or participant in a transaction of the type referred to in Section
7.1(b) below ("Purchaser Transferee")) owns any of the Securities, in violation
of any law, ordinance or regulation of any governmental entity, except for
possible violations the sanctions for which either individually or in the
aggregate would not have a Material Adverse Effect. Except as set forth on
Schedule 5.5, or except (A) such as may be required under the Securities Act in
connection with the performance of the Company's obligations under the
Registration Rights Agreement, (B) filing of a Form D with the SEC, and (C)
compliance with the state securities or Blue Sky laws of applicable
jurisdictions, the Company is not required to obtain any consent, authorization
or order of, or make any filing or registration with, any court or governmental
agency or any regulatory or self-regulatory agency in order for it to execute,
deliver or perform any of its obligations under this Agreement, the Preferred
Shares or the Registration Rights Agreement or to perform its obligations in
accordance with the terms hereof or thereof.
5.6 Information. Except as disclosed in Schedule 5.6 hereof, the
Company has delivered to each Purchaser true and complete copies of all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Securities which have been
specifically requested by the Purchasers (collectively, the "Company Documents")
which include, without limitation and to the fullest extent applicable (i) the
Company's monthly financial statements for the period of the duration of the
Company through November 30, 1999 and (ii) in the event that Closing occurs
after January 31, 2000, the Company's audited Financial Statements for the year
ended December 31, 1999. The financial statements referenced in Section 5.6(i)
and (ii) are collectively referred to herein as the "Financial Statements." The
Financial Statements have been prepared in accordance with United States
Generally Accepted Accounting Principles ("GAAP"), consistently applied (except
(A) as may be otherwise indicated in such Financial Statements or the notes
thereto, or (B) in the case of unaudited interim statements, to the extent they
do not include footnotes or are condensed or summary statements) and, fairly
present in all material respects the consolidated financial position of the
Company and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal, immaterial
year-end audit adjustments). None of the Financial Statements or any of the
other Company Documents delivered to the Purchasers contain any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
Except as set forth in the Financial Statements or the notes thereto, the
Company has no liabilities, contingent or otherwise, other than (1) liabilities
incurred in the ordinary course of business consistent with past practice
subsequent to the date of such financial statements and (2) obligations under
contracts and commitments incurred in the ordinary course of business consistent
with past practice and (3) liabilities not required under generally accepted
accounting principles to be reflected in the Financial Statements, which,
individually or in the aggregate, are not material to the financial condition,
business, operations, properties, operating results or prospects of the Company
and its subsidiaries or to the transactions contemplated hereby or to the
Securities. Except as set forth in Schedule 5.6, none of the Company, its
subsidiaries or, to the best knowledge of the Company, any of the other parties
thereto, is in breach or violation of any contract, which breach or violation
could reasonably be expected to have a Material Adverse Effect. No event,
occurrence or condition exists which, with the lapse of time, the giving of
notice, or both, would become a default by the Company or its subsidiaries
thereunder which could reasonably be expected to have a Material Adverse Effect.
5.7 Absence of Certain Changes. Since November 30, 1999, there has
been no material adverse change and no material adverse development in the
business, properties, operations, financial condition, results of operations or
prospects of the Company, except as disclosed in Schedule 5.7.
5.8 Absence of Litigation. Except as disclosed in Schedule 5.8, there
is no action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, or self-regulatory organization or body pending
or, to the knowledge of the Company or any of its subsidiaries, threatened
against or affecting the Company, any of its subsidiaries, or any of their
respective directors or officers in their capacities as such, which could
reasonably be expected to result in an unfavorable decision, ruling or finding
which would have a Material Adverse Effect or would adversely affect the
transactions contemplated by this Agreement or any of the documents contemplated
hereby or which would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of such other documents. There are no facts known to the
Company which, if known by a potential claimant or governmental authority, could
reasonably be expected to give rise to a claim or proceeding which, if asserted
or conducted with results unfavorable to the Company or any of its subsidiaries,
could reasonably be expected to have a Material Adverse Effect.
5.9 Disclosure. No information, statement or representation relating
to or concerning the Company or any of its subsidiaries set forth in this
Agreement contains an untrue statement of a material fact. No information
relating to or concerning the Company or any of its subsidiaries set forth in
any of the Company Documents or the Financial Statements contains a statement of
material fact that was untrue as of the date or dates such Company Document was
delivered to the Purchasers. The Company has not herein or in the Company
Documents omitted to state a material fact necessary in order to make the
statements and representations made herein or therein, in light of the
circumstances under which they were made, not misleading.
5.10 Acknowledgment. Regarding Purchasers' Purchase of the
Securities, the Company acknowledges and agrees that Purchasers are not acting
as financial advisors or fiduciaries of the Company or any of its subsidiaries
(or in any similar capacity) with respect to this Agreement or the transactions
contemplated hereby, that this Agreement and the transaction contemplated
hereby, and the relationship between the Purchasers and the Company, are
"arms-length," and that any statement made by a Purchaser (except as set forth
in Article IV) or any of their respective representatives or agents, in
connection with this Agreement, and the transactions contemplated hereby is not
advice or a recommendation, is merely incidental to such Purchaser's purchase of
the Securities and (except as set forth in Article IV) has not been relied upon
as such in any way by the Company, its officers or directors. The Company
further represents to Purchaser that the Company's decision to enter into this
Agreement and the transactions contemplated hereby have been based solely on an
independent evaluation by the Company and its representatives.
5.11 No General Solicitation. Neither the Company nor any distributor
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as described in Rule 502(c) under
Regulation D, with respect to any of the Securities being offered hereby.
5.12 No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would either require registration of
any of the Securities under the Act or prevent the parties hereto from
consummating, or delay or interfere with the consummation of, the transactions
contemplated hereby pursuant to an exemption from the registration under the
Securities Act pursuant to the provisions of Regulation D. The transactions
contemplated hereby are exempt from the registration requirements of the
Securities Act, assuming the accuracy of the relevant representations and
warranties herein contained of the Purchasers to the extent relevant for such
determination.
5.13 No Brokers. Except as set forth on Schedule 5.13, the Company
has taken no action, directly or indirectly, which would give rise to any claim
by any person for brokerage commissions, finder's fees or similar payments by
Purchasers relating to this Agreement or the transactions contemplated hereby.
The Company will indemnify the Purchasers from and against any fees and expenses
(including without limitation reasonable attorneys fees and expenses) sought or
other claims made any broker.
5.14 Intellectual Property. Except as disclosed in Schedule 5.14,
each of the Company and its subsidiaries owns, is licensed to use, or possesses
adequate and enforceable rights to use all material patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") used or necessary for the conduct of its
business as now being conducted. To the Company's best knowledge, except as
disclosed in Schedule 5.14, neither the Company nor any subsidiary of the
Company infringes on or is in conflict with any right of any other person with
respect to any Intangibles nor is there any claim of infringement made by a
third party against or involving the Company or any of its subsidiaries, which
infringement, conflict or claim, individually or in the aggregate, could
reasonably be expected to result in an unfavorable decision, ruling or finding
which would have a Material Adverse Effect.
5.15 Key Employees. Each Key Employee (as defined below) is currently
serving the Company in the capacity disclosed in Schedule 5.15. No Key Employee,
to the best of the knowledge of the Company and its subsidiaries, is, or is now
expected to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its subsidiaries to any liability with respect to any of the
foregoing matters. No Key Employee has, to the best of the knowledge of the
Company and its subsidiaries, any intention to terminate his employment with, or
services to, the Company or any of its subsidiaries. "Key Employee" means Ira
Baseman and Michael Markulek.
5.16 No "Poison Pill". The Company does not have in effect a
shareholders rights plan or similar plan in the nature of a "poison pill." If
the Company adopts such a plan, none of the Purchasers' Preferred Shares and
Common Shares will be deemed to trigger such plan.
<PAGE>
5.17 Dilution. The Company acknowledges that the number of Common
Shares may increase substantially in certain circumstances (subject to the
limitation on issuance of Common Shares set forth in the Company's Certificate
of Incorporation). The Company understands and acknowledges the potentially
dilutive effect to the Common Stock upon the issuance of the Common Shares upon
conversion of the Preferred Shares. The Company further acknowledges that its
obligation to issue Common Shares upon conversion of the Preferred Shares in
accordance with this Agreement and the Company's Certificate of Incorporation is
absolute and unconditional regardless of the dilutive effect such issuance has
on the ownership interests of other stockholders of the Company.
5.18 Certain Transactions. Except as disclosed in Schedule 5.18, and
except for arm's length transactions pursuant to which the Company or any of its
direct or indirect subsidiaries makes payments in the ordinary course of
business upon terms no less favorable than the Company or any of its direct or
indirect subsidiaries could obtain from third parties, none of the officers,
directors, or employees of the company is presently a party to any transaction
with the Company or any of its direct or indirect subsidiaries (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
5.19 Permits; Compliance. The Company and each of its direct and
indirect subsidiaries is in possession of all franchises, grants,
authorizations, licenses, permits, easements, variances, exemptions, consents,
certificates, approvals and orders necessary to own, lease and operate its
properties and to carry on its business as it is now being conducted
(collectively, the "Company Permits"), and there is no action pending or, to the
knowledge of the Company, threatened regarding suspension or cancellation of any
of the Company Permits except for such Company Permits the failure of which to
possess, or the cancellation or suspension of which, would not, individually or
in the aggregate, have a Material Adverse Effect. Neither the Company nor any of
its direct or indirect subsidiaries is in conflict with, or in default or
violation of, any of the Company Permits, except for any such conflicts,
defaults or violations which, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect. Since December 1,
1999, neither the Company nor any of its direct or indirect subsidiaries has
received any notification with respect to possible conflicts, defaults or
violations of applicable laws, except for notices relating to possible
conflicts, defaults or violations, which conflicts, defaults or violations could
not reasonably be expected to have a Material Adverse Effect.
5.20 Insurance. The Company and each of its direct and indirect
subsidiaries are insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as management of the Company
believes to be prudent and customary in the businesses in which the Company and
its direct and indirect subsidiaries are engaged. Neither the Company nor any
such direct or indirect subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse Effect.
5.21 Year 2000. The Company represents and warrants that, to the best
of its knowledge, its internal computer systems and software (collectively, the
"Computer Products") shall, when applicable, accept, record, store, process,
display, calculate and present the calendar dates falling on or after January 1,
2000 with the same functionality as such Computer Products accept, record,
store, process, display, calculate and present all other calendar dates falling
on or before December 31, 1999, and in all other aspects, the Computer Products
shall not in any way lose functionality or degrade in performance as a
consequence of such Computer Products operating at a date later than December
31, 1999.
5.22 Issuance of Shares Under Employee Benefit Plans. The Company has
not issued, and will not issue any shares of Common Stock under any Employee
Benefit Plan (as such term is defined by the Employee Retirement Income Security
Act ("ERISA")) or Plans adopted by the Company prior to Closing, except for
additional issuances which are approved by the Board of Directors, including the
approval of both of the two directors elected by the holders of the Preferred
Shares.
5.23 Tax Matters. Except as identified on Schedule 5.23:
(a) the Company has filed all tax returns, which include
any return, declaration, report, claim for refund or information return or
statement relating to Taxes, including any schedule or attachment thereto and
any amendment thereof (collectively, "Tax Returns"), and other reports which it
was required to file and each such return or other report was correct and
complete in all respects, and the Company has paid all taxes, including all
federal, state, county, local or foreign taxes, charges, fees, levies, other
assessments or withholding taxes or charges imposed by any governmental entity
and any interest and penalties (civil or criminal) on or additions to any such
taxes (collectively, "Taxes") due and owing by it (whether or not shown on any
Tax Return or other report) and has withheld and paid over all Taxes which it is
obligated to withhold from amounts paid or owing to any employee, independent
contractor, stockholder, partner, creditor or other third party;
(b) no Tax audits are pending or being conducted with
respect to the Company;
(c) there are no liens on any Common Stock, Preferred
Shares or any of the Company's assets that arose in connection with any failure
(or alleged failure) to pay any Tax;
(d) no information related to Tax matters has been
requested by any Taxing authority and the Company has not received notice
indicating an intent to open an audit or other review from any Taxing authority;
(e) there are no unresolved disputes or claims concerning
the Tax liability of the Company;
(f) no claim has ever been made by any jurisdiction in
which the Company does not file Tax Returns to the effect that the Company is or
may be subject to any Tax imposed by that jurisdiction;
(g) the Company is not a party to any agreement that could
obligate it to make any payments that would not be deductible pursuant to Code
Section 280G:
(h) the Company has not made an election pursuant to Code
Section 341(f);
(i) the Company has not waived any statute of limitations
in respect of Taxes or agreed to an extension of time with respect to any Tax
assessment or deficiency; and
(j) the Company is not a party to any Tax sharing or
allocation agreement, and the Company has no liability for the Taxes of any
person under Section 1.1502-6 of the Treasury Regulations (or any similar
provision of state, local or foreign law), as a transferee or successor, by
contract, or otherwise.
5.24 Contracts and Commitments.
(a) Contracts. Other than this Agreement or as identified
on Schedule 5.24, the Company is not a party to any written or oral:
(i) pension, profit sharing, stock option,
employee stock purchase or other plan or arrangement providing for deferred or
other compensation to employees or any other employee benefit, welfare or stock
plan or arrangement which is not identified on Schedule 5.24, or any contract
with any labor union, or any severance agreement;
(ii) contract for the employment or engagement as
an independent contractor of any person, including any individual, partnership,
corporation, association, limited liability company, joint stock company, trust,
joint venture, unincorporated organization and governmental entity or any
department, agency or political subdivision thereof (collectively, a "Person")
on a full-time, part-time, consulting or other basis;
(iii) contract pursuant to which the Company has
advanced or loaned funds, or agreed to advance or loan funds, to any other
Person;
(iv) contract or indenture relating to any
Indebtedness or the mortgaging, pledging or otherwise placing a lien on any of
the Common Stock, the Preferred Shares or any of the assets of the Company;
(v) contract pursuant to which the Company is the
lessee of, or holds or operates, any real or personal property owned by any
other Person;
(vi) contract pursuant to which the Company is
the lessor of, or permits any third party to hold or operate, any real or
personal property owned by the Company or of which the Company is a lessee;
(vii) assignment, license, indemnification or
other contract with respect to any intangible property (including any
intellectual property owned by or licensed to the Company) which is not
identified on Schedule 5.24;
(viii) contract or agreement with respect to
services rendered or goods sold or leased to or from others, other than any
customer purchase order accepted in the ordinary course of business and in
accordance with the Company's past practice which both (A) does not require
delivery after the date which is six months after the Closing Date and (B) does
not involve a sale price of more than $10,000;
(ix) contract prohibiting the Company from freely
engaging in any business anywhere in the world;
(x) independent sales representative or
distributorship agreement which is not identified on Schedule 5.24; or
(xi) any other contract which is material to the
Company or involves a consideration in excess of $10,000.
(b) Enforceability. Each item identified on Schedule 5.24
(the "Contracts") is valid, binding and enforceable in accordance with its
terms, except as such enforceability may be limited by (i) applicable
insolvency, bankruptcy, reorganization, moratorium or other similar laws
affecting creditors' rights generally and (ii) applicable equitable principles
(whether considered in a proceeding at law or in equity).
(c) Compliance. The Company has performed all obligations
required to be performed by it under each Contract, and, to the best of the
Company's knowledge, the Company is not in default under or in breach in any
material respect of (nor is it in receipt of any claim of default or breach
under) any such obligation. No event has occurred which with the passage of time
or the giving of notice (or both) would result in a default, breach or event of
noncompliance in any material respect under any obligation of the Company
pursuant to any Contract. The Company has no present expectation or intention of
not fully performing any obligation of the Company pursuant to any Contract, and
the Company has no knowledge of any breach or anticipated breach by any other
party to any Contract.
(d) Leases. With respect to each Contract which is a lease
of personal property, the Company holds a valid and existing leasehold interest
under such lease for the term set forth with respect to such lease identified on
Schedule 5.24.
(e) Affiliated Transactions. Except as identified on
Schedule 5.24(e), no officer, director, stockholder or Affiliate of the Company
(and no individual related by blood or marriage to any such Person, and no
entity in which any such Person or individual owns any beneficial interest) is a
party to any agreement, contract, commitment or transaction with the Company
(other than this Agreement) or has any material interest in any material
property used by the Company.
(f) Copies. Purchaser's legal counsel has been supplied
with a true and correct copy of each written Contract, each as currently in
effect.
5.25 Compliance with Laws.
(a) Generally. Except as identified on Schedule 5.25(a),
the Company has not violated any requirement arising under any action, law,
treaty, rule or regulation, determination or direction of an arbitrator or
governmental entity, including any environmental and safety requirement
(collectively, a "Legal Requirement"), and the Company has not received notice
alleging any such violation.
(b) Environmental and Safety Matters. Without limiting the
generality of Section 5.25(a):
(i) The Company does not own, control or occupy
any real property except the office space that it occupies at its address set
forth above and the Company does not maintain therein a laboratory and does not
conduct thereon any fabrication or manufacturing. The Company has complied and
is in compliance with all federal, state, local and foreign statutes,
regulations, ordinances and other provisions having the force or effect of law,
all judicial and administrative orders and determinations, all contractual
obligations and all common law, in each case concerning public health and
safety, worker health and safety and pollution or protection of the environment
(including all those relating to the presence, use, production, generation,
handling, transport, treatment, storage, disposal, distribution, labeling,
testing, processing, discharge, release, threatened release, control or clean-up
of any hazardous substance (collectively, "Environmental and Safety
Requirements").
(ii) Without limiting the generality of the
foregoing, the Company has obtained and complied with, and is in compliance
with, all permits, licenses and other authorizations that may be required
pursuant to Environmental and Safety Requirements for the occupation of its
facilities and the operation of the Business. All such permits, licenses and
other authorizations are identified on Schedule 5.25(b).
(iii) The Company has not received any written or
oral notice, report or other information regarding any liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise) or investigatory,
remedial or corrective obligations, relating to it or its facilities and arising
under Environmental and Safety Requirements.
(iv) Except as identified on Schedule 5.25(c) and
except as disclosed on Schedule 5.25(b), the Company is not aware that any of
the following exists at any property or facility owned or operated by the
Company:
(1) underground storage tanks or surface
impoundments
(2) asbestos-containing material in any form or
condition; or
(3) materials or equipment containing
polychlorinated biphenyls.
(v) The Company has not treated, stored, disposed
of, arranged for or permitted the disposal of, transported, handled, or released
any substance, including any hazardous substance, or owned or operated any
facility or property, so as to give rise to liabilities of the Company for
response costs, natural resource damages or attorneys' fees pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), or similar state or local Environmental and Safety
Requirements.
(vi) Neither this Agreement nor the consummation
of the transactions contemplated hereby will result in any obligations for site
investigation or cleanup, or notification to or consent of any government entity
or third parties, pursuant to any so-called "transaction-triggered" or
"responsible property transfer" Environmental and Safety Requirements.
(vii) The Company has not, either expressly or by
operation of law, assumed or undertaken any liability, including any obligation
for corrective or remedial action, of any other Person relating to any
Environmental and Safety Requirements.
(viii) No environmental lien has attached to any
property now or previously owned, leased or operated by the Company.
(ix) Without limiting the foregoing, no facts,
events or conditions relating to the Company's owned or leased properties or
other past or present facilities, properties or operations of the Company will
prevent, hinder or limit continued compliance with Environmental and Safety
Requirements, give rise to any investigatory, remedial or corrective obligations
pursuant to Environmental and Safety Requirements, or give rise to any other
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise)
pursuant to Environmental and Safety Requirements, including any relating to
onsite or offsite releases or threatened releases of hazardous substances,
personal injury, property damage or natural resource damage.
5.26 ERISA. Except as identified on Schedule 5.26:
(a) with respect to all current employees (including those
on lay-off, disability or leave of absence), former employees, and retired
employees of the Company (the "Employees"), the Company neither maintains nor
contributes to any (i) employee welfare benefit plans (as defined in Section
3(1) of ERISA) ("Employee Welfare Plans"), or (ii) any plan, policy or
arrangement which provides nonqualified deferred compensation, bonus or
retirement benefits, severance or "change of control" (as set forth in Code
Section 280G) benefits, or life, disability accident, vacation, tuition
reimbursement or other material fringe benefits ("Other Plans");
(b) the Company does not maintain, contribute to, or
participate in any defined benefit plan or defined contribution plan which are
employee pension benefit plans (as defined in Section 3(2) of ERISA) ("Employee
Pension Plans");
(c) the Company does not contribute to or participate in
any multiemployer plan (as defined in Section 3(37) of ERISA) (a "Multiemployer
Plan");
(d) the Company does not maintain or have any obligation to
contribute to or provide any post-retirement health, accident or life insurance
benefits to any Employee, other than limited medical benefits required to be
provided under Code Section 4980B;
(e) all Plans (and all related trusts and insurance
contracts) comply in form and in operation in all material respects with the
applicable requirements of ERISA and the Code;
(f) all required reports and descriptions (including all
Form 5500 Annual Reports, Summary Annual Reports, PBGC-1s and Summary Plan
Descriptions) with respect to all Plans have been properly filed with the
appropriate government entity or distributed to participants, and the Company
has complied substantially with the requirements of Code Section 4980B;
(g) with respect to each Plan, all contributions, premiums
or payments which are due on or before the Closing Date have been paid to such
Plan; and
(h) the Company has not incurred any liability to the
Pension Benefit Guaranty Corporation (the "PBGC"), the United States Internal
Revenue Service, any multiemployer plan or otherwise with respect to any
employee pension benefit plan or with respect to any employee pension benefit
plan currently or previously maintained by members of the controlled group of
companies (as defined in Sections 414(b) and (c) of the Code) that includes the
Company (the "Controlled Group") that has not been satisfied in full, and no
condition exists that presents a material risk to the Company or any member of
the Controlled Group of incurring such a liability (other than liability for
premiums due the PBGC) which could reasonably be expected to have any adverse
effect on Purchaser or the Company after the Closing.
(i) the Company has not evaluated, prepared or submitted a
request to the Internal Revenue Service for a compliance statement with respect
to an operational or plan design defect under any Employee Plans.
5.27 Promissory Note. On December 23, 1999, the Company received
$250,000 advanced by Steffens pursuant to a promissory note delivered by the
Company to Steffens at such time (the "Steffens Note"). The issuance of the
Preferred Shares to Steffens will fully satisfy the Company's obligations to
Steffens pursuant to the Steffens Note and the Company will not owe any amounts
to Steffens in connection with the Steffens Note at such time.
ARTICLE VI
COVENANTS
6.1 Best Efforts. The parties shall use their reasonable best efforts
to timely satisfy each of the conditions described in Articles VIII and IX of
this Agreement.
6.2 Securities Laws. The Company agrees to timely file a Form D with
respect to the Securities with the SEC as required under Regulation D and to
provide a copy thereof to each Purchaser promptly after such filing. The Company
shall, on or prior to the date of the Closing, take such action as is necessary
to qualify the Securities for sale to the Purchasers at the Closing in
compliance with applicable securities laws of the states of the United States or
obtain exemption therefrom, and shall provide evidence of any such action so
taken to the Purchasers on or prior to the date of the Closing.
6.3 Listing. Upon registration, the Company shall use its best
efforts to list and trade the Common Shares on the AMEX, the Nasdaq National
Market, the Nasdaq SmallCap Market or the New York Stock Exchange and comply in
all material respects with the Company's reporting, filing and other obligations
under the By-laws and rules of such exchange or Nasdaq, as applicable, until
such time as the Company's Board of Directors (the "Board") may determine that
it is no longer in the best interests of the Company and its shareholders to do
so, provided, that such determination of the Board must be approved by both of
the two directors elected by the holders of the Preferred Shares.
6.4 Prospectus Delivery Requirement. The Purchasers each understand
that the Securities Act may require delivery of a prospectus relating to the
Common Shares in connection with any sale thereof pursuant to a registration
statement under the Securities Act covering the resale by the Purchaser of the
Common Shares being sold, and the Purchaser shall comply with the applicable
prospectus delivery requirements of the Securities Act, if any, in connection
with any such sale.
6.5 Pre-emptive Right to Participate in Future Private Equity
Financings.
(a) The Company shall not, prior to the date of
effectiveness of a registration statement with respect to the resale of the
Common Shares (the "Release Date"), issue Common Shares or securities which are
convertible into or exercisable for Common Shares or any other classes of common
shares of the Company (a "Private Equity Financing"), except for Permitted
Issuances (as defined below) and except as hereafter set forth in this Section
6.5. If at any time after the Closing and prior to conversion or redemption of
all of the Preferred Shares, the Company proposes a Private Equity Financing,
other than a Permitted Issuance, the Company shall give each Purchaser the
opportunity to purchase its pro rata share (as calculated below) of such Private
Equity Financing on the same terms as offered to other persons, on the terms
described below. For purposes of this Section 6.5(a), "Permitted Issuance" means
any issuance (i) pursuant to the conversion of the Preferred Shares, (ii)
pursuant to any stock dividend in, on, or upon any subdivision or combination of
shares of the Common Stock or the Preferred Shares, (iii) pursuant to a firm
commitment underwritten public offering, (iv) in connection with an acquisition
or merger of another company by or with the Company (v) in connection with any
future equity financing whereby Common Stock, or warrants or options to purchase
Common Stock or securities convertible into Common Stock, are issued to a
Strategic Investor (as defined in Section 6.5(d) hereof) or (vi) in connection
with the issuance by the Company of stock options or other equity incentives
pursuant to employee stock option plans and incentive warrant plans as may
hereafter be approved by the Board of Directors, including the approval of both
of the two directors elected by the holders of the Preferred Shares.
<PAGE>
(b) Each Purchaser shall have the right to purchase its pro
rata share of such Private Equity Financing based on the ratio of (x) the Common
Shares issuable on conversion or exercise of Preferred Shares purchased by such
Purchaser on the Closing Date to (y) all of the then issued and outstanding
Common Stock of the Company plus the Common Shares then issuable upon conversion
or exercise of any preferred stock, any warrants and any convertible debentures,
options and other warrants then outstanding, before giving effect to the
proposed Private Equity Financing.
(c) The Company shall deliver to each Purchaser, at least
five (5) business days prior to the closing of such Private Equity Financing,
written notice describing the terms and conditions of the proposed Private
Equity Financing, and providing each Purchaser the opportunity to purchase its
pro rata share (as calculated above) of the Private Equity Financing. Any
portion of the Private Equity Financing required to be so offered and so offered
which is not purchased (or irrevocably committed to be purchased) by a Purchaser
within five (5) business days following the receipt by the Purchasers of such
offer may be sold by the Company at any time thereafter on the same terms set
forth in the offer, provided, however, that if the Company does not consummate
such Private Equity Financing within 45 business days after receipt by the
Purchasers of the written notice noted in this Section 6.5(c), the rights of the
Purchasers under this Section 6.5 shall again apply to such Private Equity
Financing.
(d) For the purposes of this Section 6.5, "Strategic
Investor" shall mean any person or entity which has a material business,
technology or commercial relationship with the Company, in addition to any
equity financing provided by such person or entity, as determined in good faith
by the Board, including the approval of both of the two directors elected to the
Board by the holders of the Preferred Shares.
6.6 Strategic Relationship with AlphaNet. The Company hereby grants
to AlphaNet the enforceable exclusive right of first refusal to provide any
services required by the Company or the Company's clients requiring, purchasing,
or otherwise entailing, but not limited to, any of the following services:
(a) Network hardware design, installation and
maintenance;
(b) Network security and security audits;
(c) Firewall management;
(d) Server installation, configuration and
management;
(e) Network management and monitoring;
(f) Help Desk;
(g) Applications and Development;
(h) Consulting Services;
(i) Website Development and other e-business related
activities;
(j) Cabling;
(k) Any other services AlphaNet is capable of
performing.
To effect such exclusive right of first refusal, the Company shall
refer to AlphaNet all opportunities coming to the Company's attention for the
provision of any of the aforementioned services before submitting the need for
such services to any other provider. If AlphaNet is willing to provide such
services to the Company or to the Company's clients on commercially reasonable
terms and conditions, the Company will purchase such services from AlphaNet.
As soon as practicable following the Closing, the Company and
AlphaNet will develop mutually acceptable operating procedures to facilitate the
implementation of the provisions of this Section 6.6.
6.7 Provision of Financial Statements to Purchasers. Until the
Release Date, the Company shall provide each Purchaser copies of the Company's
quarterly financial statements within 45 days after the close of each of the
Company's first three fiscal quarters, and annual financial statements, prepared
in accordance with GAAP, within 90 days after the close of the Company's fiscal
year, for so long as such Purchaser remains a holder of Preferred Shares.
6.8 Approval of Annual Budgets. Until the Release Date and for so
long as AlphaNet and Fallen Angel, or their affiliates, control a majority of
the then outstanding Preferred Shares, the Company shall adopt annual operating
and capital budgets ("Budgets") by the 31st of March of each calendar year,
which must be (i) unanimously approved and adopted by the Board, or (ii)
approved by both of the two directors elected by the holders of the Preferred
Shares and adopted by the entire Board, or (iii) in the event that a proposed
Budget is neither unanimously approved and adopted by the Board nor approved by
both of the two directors elected by the holders of the Preferred Shares, such
proposed budget shall be submitted to a vote of the holders of the Preferred
Shares for their approval, and the Company shall be required to obtain the
consent of no less than 60% of the issued and outstanding Preferred Shares,
voting together as a single class, to adopt such proposed Budget.
6.9 Put Rights. After January 14, 2006 (the "Put Date"), upon the
election of no less than 60% of the outstanding Preferred Shares, the Purchasers
may, at such time and at any time thereafter, require the Company to purchase,
and the Company shall purchase, any Preferred Shares or Common Shares that they
may hold in the Company at the then fair market value, to be determined by a
national investment banking firm agreed upon by the Purchasers and the Company
(the "Put Rights"). In the event that Ira Baseman voluntarily terminates his
full-time employment with the Company, the Put Date shall be accelerated to the
date of such termination and the Purchasers shall have the right to exercise
their Put Rights at any time thereafter.
6.10 Board of Directors. At Closing, the Board of Directors of the
Company (the "Board") shall consist of four directors and one vacancy, including
(i) two persons, including Ira Baseman, elected by the holders of the Common
Stock, (ii) two persons elected by the holders of the Preferred Shares, and
(iii) one vacancy to be filled by an additional director to be elected after
Closing by the foregoing four persons.
6.11 Approval of Directors Elected by Holders of Preferred Shares.
With respect to any action under this Agreement and under any of the agreements
executed in connection therewith which requires for the approval thereof the
approval of both of the two directors elected by the holders of the Preferred
Shares, if the holders of Preferred Shares are no longer entitled to elect such
directors, then the approval of the holders of 60% of the then outstanding
Preferred Shares must be obtained to take such action.
ARTICLE VII
LEGEND REMOVAL, TRANSFER, CERTAIN SALES, ADDITIONAL SHARES
7.1 Removal of Legend. Any restrictive legend on the certificates for
the Preferred Shares or, until such time as the Common Shares have been
registered under the Securities Act as contemplated by the Registration Rights
Agreement or otherwise may be sold by Purchasers pursuant to Rule 144, the
certificates for the Common Shares, the Legend (as defined in Section 4.6
hereof) shall be removed and the Company shall issue, or shall cause to be
issued, a certificate without such Legend to the holder of any Security upon
which it is stamped, and a certificate for a security shall be originally issued
without the Legend, if: (a) the resale of such Security is registered under the
Securities Act; or (b) such holder provides the Company with an opinion of
counsel, in form, substance and scope customary for opinions of counsel in
comparable transactions and reasonably satisfactory to the Company and its
counsel (the reasonable cost of which shall be borne by the Company if neither
an effective registration statement under the Securities Act or Rule 144 is
available in connection with such sale) to the effect that a public sale or
transfer of such Security may be made without registration under the Securities
Act pursuant to an exemption from such registration requirements; or (c) such
Security can be sold pursuant to Rule 144, the Holder provides the Company with
reasonable assurances that the Security can be so sold without restriction, and
a registered broker dealer provides to the Company's transfer agent and counsel
copies of (i) a "will sell" letter satisfying the guidelines established by the
SEC and its staff from time to time and (ii) a customary seller's representation
letter with respect to such a sale to be made pursuant to Rule 144 and (iii) a
Form 144 in respect of such Security executed by such holder and filed (or
mailed for filing) with the SEC; or (d) such Security can be sold pursuant to
Rule 144(k). Each Purchaser agrees to sell all registered Securities, including
those represented by a certificate(s) from which the Legend has been removed, or
which were originally issued without the Legend, pursuant to an effective
registration statement, in accordance with the manner of distribution described
in such registration statement and, if required by the Securities Act, to
deliver a prospectus in connection with such sale or in compliance with an
exemption from the registration requirements of the Securities Act. In the event
the Legend is removed from any Security or any Security is issued without the
Legend and the Security is to be disposed of other than pursuant to the
registration statement or pursuant to Rule 144, then prior to, and as a
condition to, such disposition such Security shall be re-legended as provided
herein in connection with any disposition if the subsequent transfer thereof
would be restricted under the Securities Act. Also, in the event the Legend is
removed from any Security or any Security is issued without the Legend and
thereafter the effectiveness of a registration statement covering the resale of
such Security is suspended or the Company determines that a supplement or
amendment thereto is required by applicable securities laws, then upon
reasonable advance notice to Purchaser holding such Security, the Company may
require that the Legend be placed on any such Security that cannot then be sold
pursuant to an effective registration statement or Rule 144 or with respect to
which the opinion referred to in clause (b) next above has not been rendered,
which Legend shall be removed when such Security may be sold pursuant to an
effective registration statement or Rule 144 or such holder provides the opinion
with respect thereto described in clause (b) next above.
7.2 Transfer Agent Instructions. The Company shall instruct its
transfer agent, in a form satisfactory to the Purchasers, to issue certificates,
registered in the name of the Purchaser or its nominee, for the Common Shares in
such amounts specified from time to time by the Purchaser upon conversion or
exercise of the Preferred Shares. Such certificates shall bear the Legend only
to the extent provided by Section 7.1 above. The Company covenants that no
instruction other than such instructions referred to in this Article VII, and
stop transfer instructions to give effect to Section 4.6 hereof in the case of
the Common Shares prior to registration of the Common Shares under the
Securities Act or "black-out" periods as provided in the Registrations Rights
Agreement between the Company and the Purchasers, dated of the date hereof, will
be given by the Company to its transfer agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company.
Nothing in this Section shall affect in any way the Purchasers' obligations and
agreement set forth in Section 7.1 hereof to resell the Securities pursuant to
an effective registration statement and to deliver a prospectus as required in
Section 7.1 in connection with such sale or in compliance with an exemption from
the registration requirements of applicable securities laws. If (a) a Purchaser
provides the Company with an opinion of counsel, which opinion of counsel shall
be in form, substance and scope customary for opinions of counsel in comparable
transactions and reasonably satisfactory to the Company and its counsel, to the
effect that the Securities to be sold or transferred may be sold or transferred
pursuant to an exemption from registration or (b) a Purchaser transfers
Securities to an affiliate which is an accredited investor (within the meaning
of Regulation D under the Securities Act) and which delivers to the Company in
written form the same representations, warranties and covenants made by such
Purchaser hereunder or pursuant to Rule 144, the Company shall permit the
transfer, and, in the case of the Common Shares, promptly instruct its transfer
agent to issue one or more certificates in such name and in such denomination as
specified by the Purchaser.
ARTICLE VIII
CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL
8.1 The obligation of the Company hereunder to issue and sell the
Preferred Shares to the Purchasers at the Closing is subject to the
satisfaction, as of the date of the Closing, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion:
(i) The Purchasers shall have executed the
signature page to this Agreement and the Registration Rights Agreement and
delivered the same to the Company. The Purchasers shall have completed and
executed the Investor Questionnaire and Representation Agreement and delivered
the same to the Company.
(ii) The Purchasers shall have wired the Purchase
Price to an account designated by the Company.
(iii) The representations and warranties of the
Purchasers shall be true and correct in all material respects as of the date
when made and as of the Closing as though made at that time (except for
representations and warranties that speak as of a specific date, which
representations and warranties shall be true and correct as of such date), and
the Purchasers shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Purchasers at or
prior to the Closing.
(iv) No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction or any self-regulatory organization having authority over the
matters contemplated hereby which restricts or prohibits the consummation of any
of the transactions contemplated by this Agreement.
ARTICLE IX
CONDITIONS TO THE PURCHASER'S OBLIGATION TO PURCHASE
9.1 The obligation of the Purchasers hereunder to purchase the
Preferred Shares to be purchased by them on the date of the Closing is subject
to the satisfaction as of the date of the Closing, of each of the following
conditions, provided that these conditions are for the sole benefit of the
Purchasers and may be waived by the Purchasers at any time in the Purchasers'
sole discretion:
(i) The Company shall have completed the Merger
and shall be organized and in good standing as a corporation under the laws of
the State of New Jersey, with a Certificate of Incorporation and By-laws
substantially in the form of Exhibit E annexed hereto;
(ii) The Company shall have executed the
signature page to this Agreement and the Registration Rights Agreement and
delivered the same to Purchasers;
(iii) The Company shall have delivered to the
Purchasers duly issued Preferred Shares being so purchased by each Purchaser at
the Closing;
(iv) The representations and warranties of the
Company shall be true and correct in all material respects as of the date when
made and as of the Closing as though made at that time, and as though any
reference to the date of this Agreement is a reference to the date of the
Closing (except for representations and warranties that speak as of a specific
calendar date, which representations and warranties shall be true and correct as
of such date), and the Company shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by the Company at or
prior to the Closing. Purchasers shall have received a certificate, executed by
the President, Chief Executive Officer or Chief Financial Officer of the
Company, dated as of the Closing to the foregoing effect.
(v) No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction or any self-regulatory organization having authority over the
matters contemplated hereby which prohibits the consummation of any of the
transactions contemplated by this Agreement.
(vi) Purchasers shall have received an opinion of
Smith, Stratton, Wise, Heher & Brennan, counsel to the Company, dated as of the
Closing, in the form attached hereto as Exhibit F.
(vii) The Company's Amendment to its Certificate
of Incorporation setting forth the terms of the Preferred Shares shall have been
filed with the Secretary of State of New Jersey and shall have become effective.
(viii) The Common Shares required to be
authorized and reserved pursuant to the Company's Certificate of Incorporation
shall have been duly authorized and reserved by the Company.
(ix) The approval of the transactions
contemplated by this Agreement and the Registration Rights Agreement by the
shareholders of the Company shall have been duly obtained, and a copy of the
minutes of the meeting of the shareholders of the Company, certified by the
Secretary of the Company as being true and correct, reflecting such approval
shall have been provided to each Purchaser.
(x) The Co-Sale Agreement (in the form of Exhibit
G annexed hereto) shall have been duly executed by the Company and Ira Baseman,
respectively.
(xi) No material adverse change in the Company's
business prospects shall have occurred prior to Closing.
ARTICLE X
GOVERNING LAW; MISCELLANEOUS
10.1 Governing Law: Jurisdiction. This Agreement shall be governed by
and construed in accordance with the laws of the State of New Jersey other than
the laws with respect to conflicts. The parties hereto irrevocably consent to
the jurisdiction of the United States federal courts in the State of New Jersey
and the state courts located in the County of Morris in the State of New Jersey
in any suit or proceeding based on or arising under this Agreement or the
transactions contemplated hereby and irrevocably agree that all claims in
respect of such suit or proceeding may be determined in such courts. The Company
and each Purchaser irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding in such forum. The Company and each
Purchaser further agrees that service of process upon the Company or such
Purchaser, as applicable, mailed by the first class mail in accordance with
Section 10.6 shall be deemed in every respect effective service of process upon
the Company or such Purchaser in any suit or proceeding arising hereunder.
Nothing herein shall affect any Purchaser's or the Company's right to serve
process in any other manner permitted by law. The parties hereto agree that a
final judgment in any such suit or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on such judgment or in any other lawful
manner. The parties hereto irrevocably waive any right to trial by jury under
applicable law.
10.2 Counterparts. This Agreement may be executed in two or more
counterparts, including, without limitation, by facsimile transmission, all of
which counterparts shall be considered one and the same agreement and shall
become effective when counterparts have been signed by each party and delivered
to the other party. In the event any signature page is delivered by facsimile
transmission, the party using such means of delivery shall promptly cause
additional original executed signature pages to be delivered to the other
parties.
10.3 Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
10.4 Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.
10.5 Entire Agreement: Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Purchaser makes any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be waived other than by an instrument in
writing signed by the party to be charged with enforcement and no provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and each Purchaser.
10.6 Notice. Any notice herein required or permitted to be given
shall be in writing and may be personally served or delivered by
nationally-recognized overnight courier or by facsimile machine confirmed
telecopy, and shall be deemed delivered at the time and date of receipt (which
shall include telephone line facsimile transmission). The addresses for such
communications shall be:
If to the Company:
nex-i.com inc.
7 Wall Street
Princeton, New Jersey 08540
Attention: Ira A. Baseman, President and CEO
Telephone No. (609) 497-9400
Facsimile No. (609) 497-9433
<PAGE>
With a copy to:
Smith, Stratton, Wise, Heher & Brennan
600 College Road East
Princeton, New Jersey 08540
Attention: Richard J. Pinto, Esq.
Telephone No. (609) 987-6650
Facsimile No. (609) 987-6651
If to AlphaNet:
AlphaNet Solutions, Inc.
7 Ridgedale Avenue
Cedar Knolls, New Jersey 07927
Attention: Jack Adler, Esq., Senior VP,
Secretary and General Counsel
Telephone No. (973) 889-3813
Facsimile No. (973) 898-9694
With a copy to:
Pitney, Hardin, Kipp & Szuch LLP
P.O. Box 1945
Morristown, New Jersey 07962-1945
Attention: Michael W. Zelenty
Telephone No. (973) 966-8200
Facsimile No. (973) 966-1550
If to Fallen Angel:
Fallen Angel Equity Fund, L.P.
c/o Fallen Angel Capital LLC
960 Holmdel Road
Holmdel, New Jersey 07733
Attention: Ira Cohen
Telephone No. (732) 946-2000
Facsimile No. (732) 946-0519
With a copy to:
Pitney, Hardin, Kipp & Szuch LLP
P.O. Box 1945
Morristown, New Jersey 07962-1945
Attention: Michael W. Zelenty
Telephone No. (973) 966-8200
Facsimile No. (973) 966-1550
If to Steffens:
John L. Steffens
358 Wendover Drive
Princeton, New Jersey 08540
Each party shall provide notice to the other party of any change in address.
10.7 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. Neither
the Company nor the Purchaser shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other except,
with respect to the Company, in accordance with the Company's Certificate of
Incorporation. Notwithstanding the foregoing, a Purchaser may subject to and in
compliance with Section 7.2 hereof, assign all or part of its rights and
obligations without the consent of the Company so long as such transferee is an
accredited investor (within the meaning of Regulation D under the Securities
Act) and agrees in writing to be bound by this Agreement.
10.8 Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns (including transferees permitted in accordance with Section 10.7) and is
not for the benefit of, nor may any provision hereof be enforced by, any other
person.
10.9 Survival; Indemnity. The representations and warranties of the
Company and the Purchaser and the agreements and covenants set forth herein
shall survive the Closing hereunder through the date three months following the
sixth anniversary of this Agreement notwithstanding any due diligence
investigation conducted by or on behalf of the Company or any Purchaser as the
case may be. The Company agrees to indemnify and hold harmless each Purchaser
and each of such Purchaser's respective officers, directors, employees,
partners, agents and affiliates for loss or damage or expenses (including
reasonable attorneys fees) arising as a result of or related to any breach or
alleged breach by the Company of any of its respective representations or
covenants set forth herein, in the Company's Certificate of Incorporation or in
the Registration Rights Agreement, including advancement of expenses as they are
incurred.
10.10 Further Assurances. Each party shall do and perform, or cause
to be done and performed, all such further acts and things, and shall execute
and deliver all such other agreements, certificates, instruments and documents,
as the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
10.11 Remedies. No provision of this Agreement providing for any
remedy to a Purchaser or the Company shall limit any remedy which would
otherwise be available to such Purchaser or the Company at law or in equity.
Nothing in this Agreement shall limit any rights a Purchaser may have under any
applicable federal or state securities laws with respect to the investment
contemplated hereby. The Company and each Purchaser acknowledges that a breach
by it of its respective obligations hereunder will cause irreparable harm to
each Purchaser, in the case of the Company, and the Company, in the case of a
Purchaser. Accordingly, the Company and each Purchaser acknowledges that the
remedy at law for a material breach of its respective obligations under this
Agreement will be inadequate and agrees, in the event of a breach or threatened
breach by the Company or a Purchaser, as the case may be, of the provisions of
this Agreement, that a Purchaser or the Company, as the case may be, shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate compliance, without the necessity
of showing economic loss and without any bond or other security being required.
IN WITNESS WHEREOF, the undersigned Purchasers and the
Company have caused this Agreement to be duly executed as of the date first
above written.
NEX-I.COM INC.
By: /s/ Ira Baseman
- --------------------------------
Name: Ira Baseman
Title: President & CEO
Residence: New Jersey
PURCHASERS:
/s/ John L. Steffens
- --------------------------------
John L. Steffens
Residence: New Jersey
Number of Preferred Shares
Purchased at Closing: 437,500 shares
Purchase Price Paid at Closing (in U.S. Dollars): $250,000.19
ALPHANET SOLUTIONS, INC.
By: /s/ Donald A. Deieso
- --------------------------------
Name: Donald A. Deieso
Title: President and CEO
Residence: New Jersey
Number of Preferred Shares
Purchased at Closing: 3,101,000 shares
Purchase Price Paid at Closing (in U.S. Dollars): $1,772,001.33
FALLEN ANGEL EQUITY
FUND, L.P.
By: /s/ Ira Cohen
- --------------------------------
Name: Ira Cohen
Title: Limited Partner
Residence: New Jersey
Number of Preferred Shares
Purchased at Closing: 399,000 shares
Purchase Price Paid at Closing (in U.S. Dollars): $228,000.17
<PAGE>
Exhibit A
FORM OF REGISTRATION RIGHTS AGREEMENT
Omitted.
<PAGE>
Exhibit B
FORM OF SERIES A CONVERTIBLE
PARTICIPATING PREFERRED SHARE CERTIFICATE
Omitted.
<PAGE>
Exhibit C
TERMS OF PREFERRED SHARES
Omitted.
<PAGE>
Exhibit D
FORM OF INVESTOR QUESTIONNAIRE AND REPRESENTATION AGREEMENT
Omitted.
<PAGE>
Exhibit E
FORM OF COMPANY'S
CERTIFICATE OF INCORPORATION AND BYLAWS
Omitted.
<PAGE>
Exhibit F
FORM OF OPINION OF COMPANY'S COUNSEL
Omitted.
<PAGE>
Exhibit G
FORM OF CO-SALE AGREEMENT
Omitted.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, (the "Agreement") is entered into
as of January 14, 2000, by and among NEX-I.COM INC., a New Jersey corporation
(the "Company"), with its principal office located at 7 Wall Street, Princeton,
New Jersey 08540, ALPHANET SOLUTIONS, INC., a New Jersey corporation with its
principal office located at 7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
("AlphaNet") and FALLEN ANGEL EQUITY FUND, L.P., a Delaware limited partnership,
with its principal office located at 960 Holmdel Road, Holmdel, New Jersey 07733
("Fallen Angel") and JOHN L. STEFFENS, an individual residing at 358 Wendover
Drive, Princeton, New Jersey 08540 ("Steffens," and together with AlphaNet and
Fallen Angel, the "Purchasers").
W I T N E S S E T H :
WHEREAS, in connection with the Securities Purchase Agreement dated
as of the date hereof, between the Purchasers and the Company (the "Purchase
Agreement"), the Company has agreed, upon the terms and subject to the
conditions of the Purchase Agreement, to issue and sell to the Purchasers (the
"Offering") 3,937,500 shares of the Company's Series A Convertible Participating
Preferred Shares (the "Preferred Shares"), convertible into shares of the
Company's Common Stock, par value $0.01 per share (the "Common Stock"). The
shares of Common Stock of the Company into which the Preferred Shares are
convertible are referred to herein as the "Common Shares;" and
WHEREAS, to induce the Purchasers to execute and deliver the Purchase
Agreement and to purchase the Preferred Shares, the Company has agreed to
provide certain registration rights under the Securities Act of 1933, as
amended, and the rules and regulations thereunder, or any similar successor
statute (collectively, the "Securities Act"), and applicable state securities
laws with respect to the Common Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Purchasers hereby agree as follows:
1. Definitions. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings set forth in the Purchase
Agreement. As used in this Agreement, the following terms shall have the
following meanings:
(a) "Purchasers" means the Purchasers and any transferee or
assignee of the Purchasers who agrees to become bound by the provisions of this
Agreement in accordance with Section 9 hereof.
(b) "Registrable Securities" means the Common Shares,
together with any shares of Common Stock which may be issued as a dividend or
other distribution and any additional shares of the Common Stock which may be
issued due to anti-dilution adjustments with respect to the Preferred Shares or
Common Shares, which are required to be included in a Registration Statement
pursuant to Section 2(a) below.
(c) "Registration Period" means the period between the date
of this Agreement and the earlier of (i) the date on which all of the
Registrable Securities have been sold, or (ii) the date on which all the
Registrable Securities (in the opinion of Purchasers' counsel) may be
immediately sold without registration pursuant to Rule 144(k) under the
Securities Act without being subject to any volume limitations.
(d) "Registration Statement" means a registration statement
filed with the Securities and Exchange Commission (the "SEC") under the
Securities Act and any subsequent Registration Statement filed to register
additional Registrable Securities.
(e) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a Registration
Statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of effectiveness of such
Registration Statement by the SEC.
2. Registration.
(a) Mandatory Registration. In the event that the holders
of no less than 30% of the Registrable Securities request (counting, for this
purpose, the number of Common Shares then issuable on conversion of Preferred
Shares or owned by the holders of Preferred Shares) that the Company file a
Registration Statement with the SEC registering the Registrable Securities for
resale for an aggregate amount of no less than $5 million (a "Registration
Request"), the Company shall use its best efforts to cause such shares to be
registered; provided, however, that the Company shall not be obligated to effect
any such registration prior to the earlier of (i) January 14, 2003 or (ii) six
months after the effective date of the Company's first Registration Statement
filed with the SEC relating to a public offering of the Common Stock (an "IPO").
To the extent allowable under the Securities Act (including Rule 416), the
Registration Statement shall include the Common Shares and such indeterminate
number of additional shares of the Common Stock as may become issuable upon
conversion of the Preferred Shares (i) to prevent dilution resulting from stock
splits, stock dividends or similar transactions, or (ii) by reason of changes in
the conversion price of the Preferred Shares in accordance with the terms
thereof. The number of shares of Common Stock initially included in such
Registration Statement shall be no less than 1 million Common Shares. The
Registration Statement (and each amendment or supplement thereto) shall be
provided to, and subject to the approval of, the Purchasers and their counsel,
such approval not to be unreasonably withheld or delayed. The Company shall use
its best efforts to cause such Registration Statement to be declared effective
by the SEC in a timely manner, but in no event later than 120 days after the
Company is notified of the Registration Request (the "Required Effective Date").
Such best efforts shall include, but not be limited to, promptly responding to
all comments received from the staff of the SEC. The Purchasers shall use
reasonable efforts to cause their counsel to provide any comments or approve of
any amendment to the Registration Statement within two business days of receipt.
Once declared effective by the SEC, the Company shall cause such Registration
Statement to remain effective throughout the Registration Period, and any
amendment of such Registration Statement that may be necessary shall not relieve
the Company of its obligation to cause the Registration Statement to remain
effective under this Agreement. A maximum of two Registration Requests may be
made by the Purchasers pursuant to this Section 2(a), and the Company shall not
be obligated under this Section 2(a) to comply with more than two such
Registration Requests.
(b) Grace Period After Registration. The Corporation will
not be obligated to effect any registration pursuant to Section 2(a) within
ninety (90) days after the effective date of a registration in which the holders
were entitled to include all of the Registrable Securities in a registration
statement pursuant to Section 2(e) hereof. The Corporation may postpone for up
to ninety (90) days the filing of a registration statement for a registration
pursuant to Section 2(a) if the Corporation has delivered to the holders of the
Registrable Securities a certificate signed by its Chief Executive Officer
stating that the Board of Directors has determined in its good faith judgment,
that the filing and completion of the such registration would be seriously
detrimental to the Corporation and its stockholders because such registration
might require premature public disclosure with respect to pending confidential
matters (the "Board Deferral Right"); provided, that (i) in such event the
holders requesting the registration will be entitled to withdraw such request
and, if such request is withdrawn, such registration will not count as a
registration hereunder and (ii) the Board may not exercise its Board Deferral
Right more than once in any twelve (12) month period.
(c) Holdback Agreements. Each holder of Registrable
Securities agrees (i) not to effect any public sale or distribution (including
sales pursuant to Rule 144) of the Registrable Securities during the seven (7)
days prior to and the ninety (90) day period beginning on the effective date of
the Registration Statement for an IPO, unless the underwriters managing such
offering otherwise agree and (ii) that all Registrable Securities which are
excluded from any other underwriting by reason of the underwriter's marketing
limitation and all other Registrable Securities not originally requested to be
included in an underwriting shall not be included in the registration for such
underwriting and shall be withheld from the market by the holders thereof for a
period not to exceed the period commencing seven (7) days prior to, and ending
ninety (90) days following, the effective date of such Registration Statement,
which the managing underwriter reasonably determines is necessary to effect the
underwritten public offering.
(d) Late Registration Payments. If the Registration
Statement required pursuant to Section 2(a) above has not been declared
effective by the Required Effective Date, the Company will make cash payments to
the Purchasers as partial compensation for such delay (the "Late Registration
Payments"). The Late Registration Payments will be equal to one percent (1.0%)
of the Purchase Price (as defined in, and adjusted in accordance with the terms
of, the Purchase Agreement and the terms of the Preferred Shares set forth in
the Company's Certificate of Incorporation) paid for the Preferred Shares for
each month following the Required Effective Date, continuing through the date
the Registration Statement is declared effective by the SEC. The Late
Registration Payments will be prorated on a daily basis for partial months and
will be paid to the Purchasers in cash within five (5) business days following
the earlier of: (i) the end of each month following the Required Effective Date,
or (ii) the effective date of the Registration Statement. Nothing herein shall
limit any Purchaser's right to pursue actual damages for the Company's failure
to file a Registration Statement or to have the Registration Statement declared
effective by the SEC on or prior to the Required Effective Date in accordance
with the terms of this Agreement.
(e) Piggyback Registrations. If, at any time prior to the
expiration of the Registration Period, the Company decides to register any of
its securities for its own account or for the account of others (excluding
registrations relating to equity securities to be issued solely in connection
with an acquisition of any entity or business or in connection with stock option
or other employee benefit plans), the Company will promptly give the Purchasers
written notice thereof, and will use its best efforts to include in such
registration all or any part of the Registrable Securities (excluding any
Registrable Securities previously included in a Registration Statement which has
become effective) so requested by such Purchasers (a "Piggyback Registration").
Each Purchaser's request for registration must be given to the Company in
writing within ten (10) days after receipt of the notice from the Company. If
the registration for which the Company gives notice is a public offering
involving an underwriting, the Company will so advise the Purchasers as part of
the above-described written notice. In such event, if the managing
underwriter(s) of the public offering impose a limitation on the number of
shares of Common Stock which may be included in the Registration Statement
because, in such underwriter(s)' judgment, such limitation would be necessary to
effect an orderly public distribution, then the Company will be obligated to
include only such limited portion, if any, of the Registrable Securities with
respect to which such Purchasers have requested inclusion hereunder. Any
exclusion of Registrable Securities shall be made pro-rata among all holders of
the Company's securities seeking to include shares of Common Stock (including,
for purposes of this Section 2(e) holders of securities of the Company other
than the Registrable Securities who hold and are attempting to exercise
registration rights) in proportion to the number of shares of Common Stock
sought to be included by such holders; provided, however, that the Company will
not exclude any Registrable Securities unless the Company has first excluded all
outstanding securities the holders of which are not entitled by right to
inclusion of securities in such Registration Statement and that Registerable
Securities may not be reduced below 33% of the total securities offered by the
Company in such Registration Statement. No right to registration of Registrable
Securities under this Section 2(e) shall be construed to limit in any way the
registration required under Section 2(a) above. The obligations of the Company
under this Section 2(e) will expire upon the earlier of: (i) after the Company
has afforded to the Purchasers the opportunity for the Purchasers to exercise
registration rights under this Section 2(e) for two registrations; provided,
however, that any Purchaser who shall have had any Registrable Securities
excluded from any Registration Statement in accordance with this Section 2(e)
shall be entitled to include in any additional Registration Statement filed by
the Company the Registrable Securities so excluded; or (ii) when all of the
Registrable Securities held by any Purchaser may be sold by such Purchaser under
Rule 144(k) under the Securities Act without being subject to any volume
restrictions.
(f) Unlimited S-3 Registration Rights. In the event that
the Company becomes eligible to register shares with the SEC on a Form S-3
Registration Statement or similar form ("Form S-3"), the holders of no less than
30% of the then outstanding Registrable Securities may, on an unlimited number
of occasions (while the Company remains eligible to file on Form S-3), require
the Company to register at least $1 million worth of Registrable Securities on
Form S-3 (an "S-3 Registration").
3. Additional Obligations of the Company. In connection
with the registration of the Registrable Securities, the Company shall have the
following additional obligations:
(a) The Company shall keep each Registration Statement
required by Section 2(a) hereof effective pursuant to Rule 415 under the
Securities Act at all times during the Registration Period as defined in Section
1(c) above.
(b) The Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) filed by the Company
shall not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein, or necessary to make the statements
therein, not misleading. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to the
Registration Statement and the prospectus used in connection with the
Registration Statement as may be necessary to keep the Registration Statement
effective at all times during the Registration Period, and, during such period,
shall comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities of the Company covered by the
Registration Statement until such time as all of such Registrable Securities
have been disposed of in accordance with the intended methods of disposition by
the sellers thereof as set forth in the Registration Statement. In the event the
number of shares of Common Stock included in a Registration Statement filed
pursuant to this Agreement (excluding Piggyback Registrations as provided for in
Section 2(e) above) is insufficient to cover all of the Registrable Securities,
the Company shall amend the Registration Statement and/or file a new
Registration Statement so as to cover all of the Registrable Securities as soon
as practicable, but in no event more than twenty (20) business days after the
Company first determines (or reasonably should have determined) the need
therefor. The Company shall use its best efforts to cause such amendment and/or
new Registration Statement to become effective as soon as practicable following
the filing thereof. The Late Registration Payment provisions of Section 2(d)
above shall become applicable with respect to the effectiveness of such
amendment and/or new Registration Statement on the sixtieth (60th) day following
the date the Company first determines (or reasonably should have determined) the
need for the amendment and/or new Registration Statement.
(c) The Company shall furnish to each Purchaser whose
Registrable Securities are included in the Registration Statement (i) promptly
after the Registration Statement is prepared and publicly distributed, filed
with the SEC or received by the Company, one copy of the Registration Statement
and any amendment thereto; each preliminary prospectus and final prospectus and
each amendment or supplement thereto; and, in the case of the Registration
Statement required under Section 2(a) above, each letter written by or on behalf
of the Company to the SEC and each item of correspondence from the SEC, in each
case relating to such Registration Statement (other than any portion of any item
thereof which contains information for which the Company has sought confidential
treatment); and (ii) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto, and such
other documents as such Purchaser may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Purchaser.
(d) The Company shall use its best efforts to (i) register
and qualify the Registrable Securities covered by the Registration Statement
under such other securities or blue sky laws of such jurisdictions as the
Purchasers reasonably request, (ii) prepare and file in those jurisdictions such
amendments (including post-effective amendments) and supplements to such
registrations as may be necessary to maintain the effectiveness thereof during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period, and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions.
Notwithstanding the foregoing provision, the Company shall not be required in
connection therewith or as a condition thereto to (i) qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (ii) subject itself to general taxation in any such
jurisdiction, (iii) file a general consent to service of process in any such
jurisdiction, (iv) provide any undertakings that cause more than nominal expense
or burden to the Company, or (v) make any change in its charter or bylaws, which
in each case the Board of Directors of the Company determines to be contrary to
the best interests of the Company and its shareholders.
(e) In the event Purchasers who hold a majority in interest
of the Registrable Securities being offered in an offering in which no less than
50% of such offering is comprised of Registrable Securities select underwriters
for such offering, the Company shall enter into and perform its obligations
under an underwriting agreement in usual and customary form including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering. If the Registration Statement required
pursuant to Section 2(a) is not then effective, the Company shall be responsible
for payment of the reasonable attorney fees and costs incurred by one law firm
selected by such Purchasers to represent their interests in the underwritten
offering.
(f) The Company shall notify each Purchaser who holds
Registrable Securities being sold pursuant to a Registration Statement of the
happening of any event of which the Company has knowledge as a result of which
(i) the prospectus included in the Registration Statement as then in effect
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein,
not misleading, or (ii) sales cannot be made pursuant to such Registration
Statement in compliance with the securities laws for any other reason (a
"Suspension Event"). The Company shall make such notification as promptly as
practicable after the Company becomes aware of such Suspension Event, shall
promptly use its best efforts to prepare a supplement or amendment to the
Registration Statement to correct such untrue statement or omission, and shall
deliver a number of copies of such supplement or amendment to each Purchaser as
such Purchaser may reasonably request. If a Purchaser reasonably believes that a
Suspension Event is in effect, but has not received notice thereof from the
Company, such Purchaser may deliver a written request, setting forth in
reasonable detail the basis and source (including any individual) for such
belief, that the Company confirm that no Suspension Event is in effect. The
Company shall respond to any such request with a letter executed by an executive
officer of the Company stating that, in consultation with its counsel, the
Company has determined that a Suspension Event is or is not in effect, on or
before the third business day following receipt of such request. If the Company
fails to respond within such time period, a Suspension Event shall be deemed to
be in effect commencing retroactively as of the day that the Purchaser delivered
its request to the Company, and shall continue until the Purchaser is otherwise
notified by the Company. Notwithstanding the foregoing provision, the Company
shall not be required to maintain the effectiveness of the Registration
Statement or to amend or supplement the Registration Statement for a period (a
"Delay Period") beginning on the date of occurrence of the Suspension Event and
expiring upon the earlier to occur of (i) the date on which such material
information is disclosed to the public or ceases to be material, (ii) the date
on which the Company is able to comply with its disclosure obligations and SEC
requirements related thereto, or (iii) thirty (30) days after the occurrence of
the Suspension Event; provided, however, that there shall not be more than two
Delay Periods in any twelve (12) month period. In the event that the total
number of days in any Delay Period(s) within a twelve-month period exceeds
thirty (30) days, the Company shall extend the conversion date of the Preferred
Shares for a number of days equal to the total number of days in such Delay
Period(s). In the event that the number of days in all Delay Period(s) taken
together within a twelve-month period exceeds sixty (60) days, or in the event
that there are more than two Delay Periods in any twelve-month period,
regardless of the duration, the Company shall compensate the Purchasers for such
delay by making monthly cash payments, prorated on a daily basis, to each such
Purchaser of one percent (1.0%) of the Purchase Price (as defined in, and in
accordance with the terms of, the Purchase Agreement) paid for the Registrable
Shares still held by such Purchaser at such time for each month, continuing
through the date the Delay Period ceases (the "Delay Compensation"). The Delay
Compensation will begin to accrue on the sixty-first (61st) day falling within
one or more Suspension Events in any twelve-month period (or on the first day of
any Delay Period in excess of the first two Delay Periods) and will be payable
thirty days from that date and each thirty days thereafter until the
Registration Statement is brought effective.
(g) The Company shall use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement and, if such an order is issued, shall use its best
efforts to obtain the withdrawal of such order at the earliest possible time and
to notify each Purchaser who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance of
such order and the resolution thereof.
(h) The Company shall permit counsel designated by the
Purchasers who hold Registrable Securities being sold pursuant to such
registration to review the Registration Statement and all amendments and
supplements thereto (as well as all requests for acceleration or effectiveness
thereof) a reasonable period of time prior to their filing with the SEC, and
shall not file any document in a form to which such counsel reasonably objects.
(i) The Company shall make generally available to its
security holders as soon as practical, but not later than ninety (90) days after
the close of the period covered thereby, an earnings statement (in a form
complying with the provisions of Rule 158 under the Securities Act) covering a
twelve-month period beginning not later than the first day of the Company's
fiscal quarter following the effective date of the Registration Statement.
(j) At the request of any Purchaser who holds Registrable
Securities being sold pursuant to such registration, the Company shall furnish
on the date that Registrable Securities are delivered to an underwriter for sale
in connection with the Registration Statement (i) a letter, dated such date,
from the Company's independent certified public accountants in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed, if permitted by the
then applicable rules or the American Institute of Certified Public Accountants,
to the Purchasers; and (ii) an opinion, dated such date, from counsel
representing the Company for purposes of such Registration Statement, in form
and substance as is customarily given in an underwritten public offering,
addressed to the underwriters and Purchasers.
(k) The Company shall make available for inspection by any
Purchaser whose Registrable Securities are being sold pursuant to such
registration, any underwriter participating in any disposition pursuant to the
Registration Statement, and any attorney, accountant or other agent retained by
any such Purchaser or underwriter (collectively, the "Inspectors"), all
pertinent financial and other records, pertinent corporate documents and
properties of the Company (collectively, the "Records"), as shall be reasonably
necessary to enable each Inspector to exercise its due diligence responsibility,
and cause the Company's officers, directors and employees to supply all
information which any Inspector may reasonably request for purposes of such due
diligence; provided, however, that each Inspector shall hold in confidence and
shall not make any disclosure (except to a Purchaser) of any Records or other
information which the Company determines in good faith to be confidential, and
of which determination the Inspectors are so notified, unless (i) the disclosure
of such Records is necessary to avoid or correct a misstatement or omission in
any Registration Statement, (ii) the release of such Records is ordered pursuant
to a subpoena or other order from a court or government body of competent
jurisdiction, or is reasonably necessary in connection with litigation or other
legal process, or (iii) the information in such Records has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company shall not be required to disclose any confidential
information in such Records to any Inspector until and unless such Inspector
shall have entered into confidentiality agreements (in form and substance
satisfactory to the Company) with the Company with respect thereto,
substantially in the form of this Section 3(k). Each Purchaser agrees that it
shall, upon learning that disclosure of such Records is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to the Company and allow the Company, at the Company's expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. Nothing herein shall be deemed to
limit any Purchaser's ability to sell Registrable Securities in a manner which
is otherwise consistent with applicable laws and regulations.
(l) The Company shall hold in confidence and shall not make
any disclosure of information concerning a Purchaser provided to the Company
pursuant hereto unless (i) disclosure of such information is necessary to comply
with federal or state securities laws, (ii) the disclosure of such information
is necessary to avoid or correct a misstatement or omission in any Registration
Statement, (iii) the release of such information is ordered pursuant to a
subpoena or other order from a court or governmental body of competent
jurisdiction, or is reasonably necessary in connection with litigation or other
legal process, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this or any other agreement. The
Company agrees that it shall, upon learning that disclosure of such information
concerning a Purchaser is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt notice to such
Purchaser and allow such Purchaser, at its expense, to undertake appropriate
action to prevent disclosure of, or to obtain a protective order for, such
information.
(m) The Company shall use its best efforts either to (i)
cause all the Registrable Securities covered by the Registration Statement to be
listed on Nasdaq (as defined below), the AMEX or the NYSE if similar securities
issued by the Company are then listed, and on each additional national
securities exchange on which similar securities issued by the Company are then
listed, if any, if the listing of such Registrable Securities is then permitted
under the rules of such exchange or market, or (ii) secure designation of all
the Registrable Securities covered by the Registration Statement as a National
Association of Securities Dealers Automated Quotations System ("Nasdaq")
"national market system security" within the meaning of Rule 11Aa2-1 of the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the quotation of the Registrable Securities on the Nasdaq National Market System
or the Nasdaq SmallCap Market or, if, despite the Company's best efforts to
satisfy the preceding clause (i) or (ii), the Company is unsuccessful in
satisfying the preceding clause (i) or (ii), to arrange for at least two market
makers to register with the National Association of Securities Dealers, Inc.
("NASD") as such with respect to such Registrable Securities.
(n) The Company shall provide for a transfer agent and
registrar for the Registrable Securities, which may be a single entity,
effective no later than ten (10) days before the filing of any Registration
Statement on behalf of the Company, and the Company shall deliver the
instructions to the transfer agent, substantially in the form of Exhibit A
annexed hereto (the "Instructions to the Transfer Agent"), to the transfer agent
within five days following the appointment of the transfer agent (as provided in
Section 3(o) below).
(o) The Company shall cooperate with the Purchasers who
hold Registrable Securities being sold and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be sold pursuant to the Registration Statement and enable
certificates to be in such denominations or amounts as the case may be, and
registered in such names as the managing underwriter or underwriters, if any, or
the Purchasers may reasonably request; and, within five business days after a
Registration Statement which includes Registrable Securities is ordered
effective by the SEC, the Company shall deliver, and shall cause legal counsel
selected by the Company to deliver, to the transfer agent for the Registrable
Securities (with copies to the Purchasers whose Registrable Securities are
included in such Registration Statement) the Instructions to the Transfer Agent,
instructing the transfer agent to issue new stock certificates without a legend
and an opinion of such counsel that the Common Shares have been registered.
(p) The Company shall take all other reasonable actions
necessary to expedite and facilitate disposition by the Purchaser of the
Registrable Securities pursuant to the Registration Statement.
4. Obligations of the Purchasers. In connection with the registration
of the Registrable Securities, the Purchasers shall have the following
obligations:
(a) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Agreement with respect to each
Purchaser that such Purchaser shall furnish to the Company such information
regarding itself, the number of Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required by the rules of the SEC to effect the registration of the
Registrable Securities. At least ten (10) business days prior to the first
anticipated filing date of the Registration Statement, the Company shall notify
each Purchaser of the information the Company requires from each such Purchaser
(the "Requested Information") if such Purchaser elects to have any of such
Purchaser's Registrable Securities included in the Registration Statement. If
within ten (10) business days of such notice the Company has not received the
Requested Information from a Purchaser (a "Non-Responsive Purchaser"), then the
Company may file the Registration Statement without including Registrable
Securities of such Non-Responsive Purchaser.
(b) Each Purchaser, by such Purchaser's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Purchaser has notified the Company
in writing of such Purchaser's election to exclude all of such Purchaser's
Registrable Securities from the Registration Statement.
(c) In the event Purchasers holding a majority in interest
of the Registrable Securities being registered determine to engage the services
of an underwriter, each Purchaser agrees to enter into and perform such
Purchaser's obligations under an underwriting agreement, in usual and customary
form, including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Purchaser has notified
the Company in writing of such Purchaser's election to exclude all of such
Purchaser's Registrable Securities from the Registration Statement.
(d) Each Purchaser agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in Section
3(f) or 3(g), such Purchaser will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Purchaser's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(f) or order
contemplated by Section 3(g) and, if so directed by the Company, such Purchaser
shall deliver to the Company (at the expense of the Company) or destroy (and
deliver to the Company a certificate of destruction) all copies in such
Purchaser's possession, of the prospectus covering such Registrable Securities
current at the time of receipt of such notice.
(e) No Purchaser may participate in any underwritten
registration hereunder unless such Purchaser (i) agrees to sell such Purchaser's
Registrable Securities on the basis provided in any underwriting arrangements
approved by the Purchasers entitled hereunder to approve such arrangements, (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements, and (iii) agrees to pay its pro rata share of
all underwriting discounts and commissions and other fees and expenses of
investment bankers and any manager or managers of such underwriting and legal
expenses of the underwriter applicable with respect to its Registrable
Securities, in each case to the extent not payable by the Company pursuant to
the terms of this Agreement.
5. Expenses of Registration. All reasonable expenses, other than
underwriting discounts and commissions, incurred in connection with
registrations, filings or qualifications pursuant to Sections 2 and 3,
including, without limitation, all registration, listing and qualifications
fees, printers and accounting fees, the fees and disbursements of counsel for
the Company, and the reasonable fees and disbursements of one counsel selected
by the Purchasers pursuant to Section 3(e) hereof, shall be borne by the
Company.
6. Indemnification. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Purchaser who holds such Registrable
Securities, the directors, if any, of such Purchaser, the officers, if any, of
such Purchaser, each person, if any, who controls any Purchaser within the
meaning of the Securities Act or the Exchange Act, any underwriter (as defined
in the Securities Act) for the Purchasers, the directors, if any, of such
underwriter and the officers, if any, of such underwriter, and each person, if
any, who controls any such underwriter within the meaning of the Securities Act
or the Exchange Act (each, an "Indemnified Person"), against any losses, claims,
damages, expenses or liabilities (joint or several) (collectively "Claims") to
which any of them become subject under the Securities Act, the Exchange Act or
otherwise, insofar as such Claims (or actions or proceedings, whether commenced
or threatened, in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations in the Registration Statement, or
any post-effective amendment thereof, or any prospectus included therein: (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus if used prior to the effective date of such
Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, not misleading, or (iii) any
violation or alleged violation by the Company of the Securities Act, the
Exchange Act or any state securities law or any rule or regulation (the matters
in the foregoing clauses (i) through (iii) being, collectively, "Violations").
Subject to the restrictions set forth in Section 6(c) with respect to the number
of legal counsel, the Company shall reimburse the Purchasers and each such
underwriter or controlling person, promptly as such expenses are incurred and
are due and payable, for any legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (A) shall not apply to a Claim by any
Indemnified Person or Underwriter for such Indemnified Person arising out of or
based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by such Indemnified Person or
underwriter for such Indemnified Person expressly for use in connection with the
preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (B) with respect to any preliminary prospectus
shall not inure to the benefit of any such person from whom the person asserting
any such Claim purchased the Registrable Securities that are the subject thereof
(or to the benefit of any person controlling such person) if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected in the prospectus, as then amended or supplemented, if a
prospectus was timely made available by the Company pursuant to Section 3(c)
hereof; and (C) shall not apply to amounts paid in settlement of any Claim if
such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Indemnified Persons and shall survive the transfer of the Registrable
Securities by the Purchasers pursuant to Section 9.
(b) In connection with any Registration Statement in which
a Purchaser is participating, each such Purchaser agrees to indemnify and hold
harmless, to the same extent and in the same manner set forth in Section 6(a),
the Company, each of its directors, each of its officers who signs the
Registration Statement, each person, if any, who controls the Company within the
meaning of the Securities Act or the Exchange Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Purchaser expressly for use in
connection with such Registration Statement, and such Purchaser will promptly
reimburse any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such Claim; provided, however, that the
indemnity agreement contained in this Section 6(b) shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of such Purchaser, which consent shall not be unreasonably
withheld; provided further, however, that the Purchasers shall be liable under
this Section 6(b) for only that amount of a Claim as does not exceed the net
proceeds to such Purchaser as a result of the sale of Registrable Securities
pursuant to such Registration Statement. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall survive the transfer of the Registrable Securities
by the Purchasers pursuant to Section 9. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
(c) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and such indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying parties; provided, however, that an Indemnified Person or
Indemnified Party shall have the right to retain its own counsel, with the fees
and expenses to be paid by the indemnifying party, if, in the reasonable opinion
of counsel retained by the indemnifying party, the representation by such
counsel of the Indemnified Person or Indemnified Party and the indemnifying
party would be inappropriate due to actual or potential differing interests
between such Indemnified Person or Indemnified Party and other party represented
by such counsel in such proceeding. The Company shall pay for only one separate
legal counsel for the Purchasers; such legal counsel shall be selected by the
Purchasers holding a majority in interest of the Registrable Securities. The
failure to deliver written notice to the indemnifying party within a reasonable
time of the commencement of any such action shall not relieve such indemnifying
party of any liability to the Indemnified Person or Indemnified Party under this
Section 6, except to the extent that the indemnifying party is prejudiced in its
ability to defend such action. The indemnification required by this Section 6
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as such expense, loss, damage or liability is
incurred and is due and payable.
7. Contribution. To the extent any indemnification provided for
herein is prohibited or limited by law, the indemnifying party agrees to make
the maximum contribution with respect to any amounts for which it would
otherwise be liable under Section 6 to the fullest extent permitted by law;
provided, however, that (i) no contribution shall be made under circumstances
where the maker would not have been liable for indemnification under the fault
standards set forth in Section 6, (ii) no seller of Registrable Securities
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any seller of
Registrable Securities who was not guilty of such fraudulent misrepresentation,
and (iii) contribution by any seller of Registrable Securities shall be limited
in amount to the net amount of proceeds received by such seller from the sale of
such Registrable Securities.
8. Reports under the Exchange Act. With a view to making available to
the Purchasers the benefits of Rule 144 promulgated under the Securities Act or
any other similar rule or regulation of the SEC that may at any time permit the
Purchasers to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) File with the SEC in a timely manner and make and keep
available all reports and other documents required of the Company under the
Exchange Act so long as the Company remains subject to such requirements and the
filing and availability of such reports and other documents is required for the
applicable provisions of Rule 144;
(b) Furnish to each Purchaser so long as the Company is not
subject to Section 13 or 15(d) of the Exchange Act, such other information
necessary for compliance with Rule 144(c)(2) of the Exchange Act; and
(c) Furnish to each Purchaser so long as such Purchaser
holds Registrable Securities, promptly upon request, (i) a written statement by
the Company that it has complied with the reporting requirements of Rule 144 and
the Exchange Act, (ii) a copy of the most recent annual or quarterly report of
the Company and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested to permit the
Purchasers to sell such securities pursuant to Rule 144 without registration.
9. Assignment of Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement may be assigned or
otherwise transferred by a Purchaser to (a) any affiliate of such Purchaser, (b)
any family member or trust for the benefit of any individual Purchaser, or (c)
any transferee who acquires no less than 50,000 shares of Registrable Securities
(collectively, "Permitted Transferrees"), provided that (i) the Purchaser agrees
in writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment, (ii) the Company is, within a reasonable time prior to such transfer
or assignment, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being transferred or assigned, (iii) following such
transfer or assignment the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act and applicable
state securities laws, (iv) at or before the time the Company received the
written notice contemplated by clause (ii) of this sentence, the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
contained herein, (v) such transfer shall have been made in accordance with the
applicable requirements of the Purchase Agreement, and (vi) such transferee
shall be an "accredited investor" as that term is defined in Rule 501 of
Regulation D promulgated under the Securities Act.
10. Amendment of Registration Rights. Provisions of this Agreement
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively) only with the
written consent of the Company and Purchasers who hold a majority interest of
the Registrable Securities. Any amendment or waiver effected in accordance with
this Section 10 shall be binding upon each Purchaser and the Company.
11. Miscellaneous.
(a) Conflicting Instructions. A person or entity is deemed
to be a holder of Registrable Securities whenever such person or entity owns of
record such Registrable Securities. If the Company receives conflicting
instructions, notices or elections from two or more persons or entities with
respect to the same Registrable Securities, the Company shall act upon the basis
of instructions, notice or election received from the registered owner of such
Registrable Securities.
(b) Notices. Any notices required or permitted to be given
under the terms of this Agreement shall be sent by certified or registered mail
(with return receipt requested) or delivered personally or by courier (including
a nationally recognized overnight delivery service) or by facsimile
transmission. Any notice so given shall be deemed effective three days after
being deposited in the U.S. Mail, or upon receipt if delivered personally or by
courier or facsimile transmission, in each case addressed to a party at the
following address or such other address as each such party furnishes to the
other in accordance with this Section 11(b):
If to the Company:
nex-i.com inc.
7 Wall Street
Princeton, New Jersey 08540
Attention: Ira A. Baseman, President and CEO
Telephone No. (609) 497-9400
Facsimile No. (609) 497-9433
With a copy to:
Smith, Stratton, Wise, Heher & Brennan
600 College Road East
Princeton, New Jersey 08540
Attention: Richard J. Pinto, Esq.
Telephone No. (609) 987-6650
Facsimile No. (609) 987-6651
If to AlphaNet:
AlphaNet Solutions, Inc.
7 Ridgedale Avenue
Cedar Knolls, New Jersey 07927
Attention: Jack Adler, Esq., Senior VP,
Secretary and General Counsel
Telephone No. (973) 889-3813
Facsimile No. (973) 898-9694
With a copy to:
Pitney, Hardin, Kipp & Szuch LLP
P.O. Box 1945
Morristown, New Jersey 07962-1945
Attention: Michael W. Zelenty
Telephone No. (973) 966-8200
Facsimile No. (973) 966-1550
If to Fallen Angel:
Fallen Angel Equity Fund, L.P.
c/o Fallen Angel Capital LLC
960 Holmdel Road
Holmdel, New Jersey 07733
Attention: Ira Cohen
Telephone No. (732) 946-2000
Facsimile No. (732) 946-0519
With a copy to:
Pitney, Hardin, Kipp & Szuch LLP
P.O. Box 1945
Morristown, New Jersey 07962-1945
Attention: Michael W. Zelenty
Telephone No. (973) 966-8200
Facsimile No. (973) 966-1550
If to Steffens:
John L. Steffens
358 Wendover Drive
Princeton, New Jersey 08540
Each party shall provide notice to the other party of any change in address.
(c) Waiver. Failure of any party to exercise any right or
remedy under this Agreement or otherwise, or delay by a party in exercising such
right or remedy, shall not operate as a waiver thereof.
(d) Governing Law: Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of New Jersey
other than the conflict laws. The parties hereto irrevocably consent to the
jurisdiction of the United States federal courts in New Jersey and state courts
located in the County of Morris in the State of New Jersey, in any suit or
proceeding based on or arising under this Agreement or the transactions
contemplated hereby and irrevocably agree that all claims in respect of such
suit or proceeding may be determined in such courts. The Company and each
Purchaser irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding in such forum. The Company and each
Purchaser further agrees that service of process upon the Company or such
Purchaser, as applicable, mailed by the first class mail in accordance with
Section 11(b) shall be deemed in every respect effective service of process upon
the Company or such Purchaser in any suit or proceeding arising hereunder.
Nothing herein shall affect any Purchaser's right to serve process in any other
manner permitted by law. The parties hereto agree that a final non-appealable
judgment in any such suit or proceeding shall be conclusive and may be enforced
in other jurisdictions by suit on such judgment or in any other lawful manner.
The parties hereto irrevocably waive any right to trial by jury under applicable
law.
(e) Severability. In the event that any provision of this
Agreement is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any provision hereof which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
hereof.
(f) Entire Agreement. This Agreement and the Purchase
Agreement (including all schedules and exhibits thereto) constitute the entire
agreement among the parties hereto with respect to the subject matter hereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein or therein. This Agreement supersedes all
prior agreements and understandings among the parties hereto with respect to the
subject matter hereof.
(g) Successors and Assigns. Subject to the requirements of
Section 9 hereof, this Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties hereto.
(h) Use of Pronouns. All pronouns and any variations
thereof refer to the masculine, feminine or neuter, singular or plural, as the
context may require.
(i) Headings. The headings and subheadings in the Agreement
are for convenience of reference only and shall not limit or otherwise affect
the meaning hereof.
(j) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same agreement. This Agreement, once executed by a
party, may be delivered to the other party hereto by facsimile transmission, and
facsimile signatures shall be binding on the parties hereto.
(k) Further Acts. Each party shall do and perform, or cause
to be done and performed, all such further acts and things, and shall execute
and deliver all such other agreements, certificates, instruments and documents,
as the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
(l) Remedies. No provision of this Agreement providing for
any remedy to any party shall limit any remedy which would otherwise be
available to such Purchaser at law or in equity. Nothing in this Agreement shall
limit any rights a Purchaser may have with any applicable federal or state
securities laws with respect to the investment contemplated hereby. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to a Purchaser. Accordingly, the Company and the Purchasers
acknowledge that the remedy at law for a breach of their respective obligations
under this Agreement will be inadequate and that, in the event of a breach or
threatened breach by the Company or the Purchasers, respectively, of the
provisions of this Agreement, that a Purchaser or the Company, respectively,
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate compliance, without the necessity
of showing economic loss and without any bond or other security being required.
(m) Consents. All consents and other determinations to be
made by the Purchasers pursuant to this Agreement shall be made by Purchasers
holding a majority of the Registrable Securities, determined as if all shares of
Preferred Stock of the Company issued in the offering had been converted into or
exercised for Registrable Securities.
IN WITNESS WHEREOF, the parties have caused this Agreement
to be duly executed as of the date first above
written.
NEX-I.COM INC.
By: /s/ Ira Baseman
- -------------------------------
Name: Ira Baseman
Title: President & CEO
PURCHASERS:
/s/ John S. Steffens
- -------------------------------
John L. Steffens
ALPHANET SOLUTIONS, INC.
By: /s/ Donald A. Deieso
- -------------------------------
Name: Donald A. Deieso
Title: President and CEO
FALLEN ANGEL EQUITY FUND, L.P.
By: /s/ Ira Cohen
- -------------------------------
Name: Ira Cohen
Title: Limited Partner
<PAGE>
Exhibit A
TRANSFER AGENT INSTRUCTIONS
________ __, 2000
[Transfer Agent]
[Street Address]
[City, State, Zip]
Reference is made to that certain Securities Purchase Agreement,
dated as of January 14, 2000 (the "Purchase Agreement"), by and among nex-i.com
inc., a New Jersey corporation (the "Company"), and each of AlphaNet Solutions,
Inc., Fallen Angel Equity Fund, L.P. and John L. Steffens (collectively, the
"Holders"), pursuant to which the Company is issuing to the Holders shares of
the Company's Series A Convertible Participating Preferred Shares, Par Value
$0.01 per share (the "Preferred Shares"). This letter shall serve as our
irrevocable authorization and direction to you (provided that you are the
transfer agent of the Company at such time) to issue up to ___________ shares of
the Company's common stock, par value $0.01 per share (the "Common Stock") upon
conversion of the Preferred Shares (the "Conversion Shares") to or upon the
order of a Holder from time to time upon:
1. Surrender to you by the Company of a properly completed and duly
executed Conversion Notice, in the form attached hereto as Exhibit A,
and delivery to the Company of certificates representing Preferred
Shares being converted (or an indemnification undertaking with
respect to such shares in the case of their loss, theft or
destruction);
AND
2. Written confirmation from counsel to the Company that a
registration statement covering resales of the Conversion Shares has
been declared effective by the Securities and Exchange Commission
under the Securities Act of 1933, as amended.
Certificates representing the Conversion Shares shall not bear any
legend restricting transfer of the Conversion Shares thereby and should not be
subject to any stop-transfer restriction; provided, however, that if the
Conversion Shares are not registered for resale under the Securities Act of
1933, as amended, or otherwise may not be sold pursuant to Rule 144, then the
certificates for Conversion Shares shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE
OFFERED OR SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR
TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS."
and, provided, further that the Company may from time to time notify you to
place stop-transfer restrictions on the certificates for the Conversion Shares
in the event a registration statement covering the Conversion Shares is subject
to amendment.
Please be advised that the Holders are relying upon this letter as an
inducement to enter into the Purchase Agreement and, accordingly, each Holder is
a third party beneficiary to these instructions.
Should you have any questions concerning this matter, please contact
me at 609-497-9400.
Very truly yours,
NEX-I.COM INC.
By: _____________________________________
Ira A. Baseman, President
ACKNOWLEDGED AND AGREED:
[TRANSFER AGENT]
By: ____________________________________
Name: __________________________________
Title: _________________________________
Date: __________________________________
<PAGE>
Exhibit A
NOTICE OF CONVERSION
To: nex-i.com inc.
7 Wall Street
Princeton, New Jersey 08540
Telecopy: (609) 497-9400
Attention: President
The undersigned hereby irrevocably elects to convert _____ Preferred Shares (the
"Conversion"), into ______ shares of Common Stock ("Common Shares") of nex-i.com
inc. (the "Company") according to the conditions set forth in the Certificate of
Amendment of the Certificate of Incorporation of the Company (the "Certificate
of Amendment") as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion except for transfer taxes, if any. A copy of the
certificate evidencing the shares being converted is attached hereto (or
evidence of loss, theft or destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Preferred Shares shall be made pursuant to registration of the Common Shares
under the Securities Act of 1933, as amended (the "Act") or pursuant to an
exemption from registration under the Act.
In the event of partial conversion, please reissue an appropriate certificate(s)
for the Preferred Shares which shall not have been converted.
Effective Date of Conversion: ___________________
Applicable Conversion Price: ___________________
Amount of Accrued and Unpaid Dividends to be Converted, if any:
__________________
Amount of Illiquidity Payments to be Converted, if any: ____________________
Amount of Delay Compensation to be Converted, if any: ___________________
Amount of Delisting Payments to be Converted, if any: ____________________
Number of Common Shares to be Issued: ___________________
Issue Common Shares in the Name of: ___________________
Signature:
Name:
Address:
* The Company is not required to issue Common Shares until the original
Preferred Share certificates (or evidence of loss, theft or destruction thereof)
to be converted are received by the Company or its transfer agent. The Company
shall issue and deliver Common Shares to the holder not later than the later of
(a) three (3) business days following receipt of this Notice of Conversion and
(b) the date of surrender of the Preferred Share certificates or evidence of
loss, theft, or destruction thereof).
AGREED TO BY NEX-I.COM INC.
- --------------------------------------
By: Name:
Title:
CO-SALE AGREEMENT
THIS CO-SALE AGREEMENT, (the "Agreement") is entered into as of
January 14, 2000, by and among NEX-I.COM INC. a New Jersey corporation (the
"Company"), with its principal office located at 7 Wall Street, Princeton, New
Jersey 08540, ALPHANET SOLUTIONS, INC., a New Jersey corporation with its
principal office located at 7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
("AlphaNet"), FALLEN ANGEL EQUITY FUND, L.P., a Delaware limited partnership,
with its principal office located at 960 Holmdel Road, Holmdel, New Jersey 07733
("Fallen Angel"), JOHN L. STEFFENS, an individual residing at 358 Wendover
Drive, Princeton, New Jersey 08540 ("Steffens," and together with AlphaNet and
Fallen Angel, the "Purchasers") and IRA A. BASEMAN, an individual residing at 5
Van Kirk Road, Princeton, New Jersey 08540 ("Baseman," together with the
Purchasers and the Company, the "Parties," and each separately, a "Party").
W I T N E S S E T H :
WHEREAS, in connection with the Securities Purchase Agreement dated
as of the date hereof, by and among the Purchasers and the Company (the
"Purchase Agreement") and the Registration Rights Agreement dated as of the date
hereof, by and between the Purchasers and the Company (the "Registration Rights
Agreement"), the Company has agreed, upon the terms and subject to the
conditions of the Purchase Agreement, to issue and sell to the Purchasers (the
"Offering") 3,937,500 shares of the Company's Series A Convertible Participating
Preferred Shares (the "Preferred Shares"), convertible into shares of the
Company's Common Stock, par value $0.01 per share (the "Common Stock"). The
shares of Common Stock of the Company into which the Preferred Shares are
convertible are referred to herein as the "Common Shares;"
WHEREAS, the Purchasers and the Company have agreed that in the event
that the Company proposes to offer equity securities or any other securities
which are convertible into equity securities of the Company or options therefor
("Securities") to any person (with certain exceptions set forth in Section
1.1.1(b) hereof), the Purchasers shall have the right to purchase up to each
Purchaser's pro-rata portion of such equity securities at a price and upon the
same terms and conditions as the proposed offer to such person (defined more
fully in Section 1.1.1(a)(i) herein as, the "Right of First Refusal");
WHEREAS, the Purchasers and the Company have agreed that the Right of
First Refusal shall not be applicable to the initial public offering of the
Common Stock by the Company pursuant to the filing of a Registration Statement
with the Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended (the "IPO"), and that the Right of First Refusal will terminate
upon an IPO or subsequent public offering in which all of the outstanding
Preferred Shares are converted into Common Shares, whereby the public offering
price is not less than $10.00 per share, adjusted for any stock splits, stock
combinations, stock dividends and other such recapitalizations, which results in
the Company receiving no less than $20 million, net of underwriting commissions
and expenses (a "Qualified IPO");
WHEREAS, Baseman holds 3,282,920 shares of Common Stock (the "Baseman
Shares");
WHEREAS, the Purchasers and the Company have agreed that as a
condition to the Closing of the transactions contemplated by the Purchase
Agreement, the Purchasers, the Company and Baseman shall agree that (i) in the
event that Baseman proposes to transfer the Baseman Shares, or any part thereof,
prior to the consummation of a Qualified IPO, the Company shall have the right
to purchase the Baseman Shares from Baseman, and (ii) in the event that the
Company fails to purchase the Baseman Shares, or any part thereof, under such
circumstances, then the Purchasers (or their permitted successors or assigns)
shall have the right to either purchase such shares, or any portion thereof not
purchased by the Company, on a pro rata basis, prior to any such sale or
transfer (defined more fully in Section 1.1.3(a) herein as, the "Baseman Shares
Right of First Refusal") or participate in the proposed transfer or sale by
Baseman as hereinafter set forth; and
WHEREAS, the Purchasers, the Company and Baseman agree that the
Baseman Shares Right of First Refusal shall not be applicable to the IPO and
that the Baseman Shares Right of First Refusal will terminate upon the
consummation of a Qualified IPO.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the Parties hereby agree as follows:
ARTICLE I
1.1. Proposed Offers by the Company.
1.1.1 Right of First Refusal.
(a) In the event that, at any time or from time
to time on or before January 13, 2006, the Company proposes to offer Securities
(a "Proposed Offering"), other than in a Permitted Offering (as defined in
Section 1.1.1(b) hereof), the Company shall provide each of the Purchasers with
at least 20 days prior written notice of such offer (the "Company Sale Notice"),
setting forth the terms and conditions of the Proposed Offering.
(i) Each Purchaser (or such
Purchaser's permitted successors or assigns) shall have the right to purchase
its pro rata share of the Proposed Offering based on the ratio (the "Purchase
Ratio") of (1) the Common Shares issuable on conversion or exercise of Preferred
Shares purchased by such Purchaser on the Closing Date to (2) all of the then
issued and outstanding Common Stock of the Company plus the Common Shares then
issuable upon conversion or exercise of any preferred stock, any warrants and
any convertible debentures, options and other warrants then outstanding, before
giving effect to the Proposed Offering (the "Right of First Refusal"). In the
event that any Purchaser does not exercise such Right of First Refusal or
exercises such Right of First Refusal only in part, the Purchasers who exercise
their Right of First Refusal in full may purchase such portion of the Proposed
Offering not purchased in full by the Purchasers exercising their Right of First
Refusal, pro rata among such Purchasers, based upon the Purchase Ratio.
(ii) The Right of First Refusal shall
be exercisable by the Purchasers by written notice to the Parties not later than
10 days after the Purchasers receive the Company Sale Notice.
(b) Notwithstanding the provisions of Section
1.1.1(a) hereof, the Right of First Refusal shall not apply to (i) up to 1
million shares of Common Stock sold to Strategic Investors (as defined in
Section 1.1.1(c) hereof), (ii) any issuance by the Company of stock options or
other equity incentives pursuant to employee stock option plans and incentive
warrant plans as may hereafter be approved by the Board of Directors, including
the approval of both of the two directors elected by the holders of the
Preferred Shares, (iii) any issuance pursuant to the conversion of the Preferred
Shares, (iv) any issuance pursuant to any stock dividend in on, or upon any
subdivision or combination of shares of the Common Stock or the Preferred
Shares, (v) any issuance pursuant to a firm commitment underwritten public
offering, (vi) the IPO or (vii) any issuance in connection with an acquisition
of, or merger with, another company by the Company (collectively, "Permitted
Offerings").
(c) For the purposes of this Agreement, a
"Strategic Investor" shall mean any person or entity which has a material
business, technology or commercial relationship with the Company, in addition to
any equity financing provided by such person or entity, as determined in good
faith by the Board, including the approval of both of the two directors elected
to the Board by the holders of the Preferred Shares, provided, that if the
holders of Preferred Shares are no longer entitled to elect such directors, then
the approval of the holders of 60% of the then outstanding Preferred Shares must
be obtained to make such determination.
(d) The Right of First Refusal shall terminate
upon the consummation of a Qualified IPO.
1.2 Proposed Offers by a Purchaser.
1.2.1 Right of First Refusal and Tag Along Rights
(a) In the event that prior to the consummation
of a Qualified IPO, a Purchaser (a "Selling Purchaser") desires to sell any
Securities held by such Selling Purchaser ("Sale Shares") to any Accredited
Investor (as defined in Section 1.2.1(b) hereof), such Purchaser shall provide
each other Purchaser (the "Non-Selling Purchasers"), the Company and Baseman
with at least 20 days prior written notice of such sale (the "Purchaser Sale
Notice"), setting forth the terms and conditions thereof.
(i) Right of First Refusal. Upon
receipt of the Purchaser Sale Notice, the Company may purchase from the Selling
Purchaser any and all of the Securities offered by such Purchaser prior to any
proposed transfer, and, in the event that the Company fails to purchase all such
Securities, or any part thereof, then Baseman and each Non-Selling Purchaser (or
their permitted successors or assigns), in lieu of exercising the Purchaser Sale
Tag-Along Options (as defined in Section 1.2.1(a)(ii) hereof), shall have the
right to purchase their Pro-Rata Share of all of the Securities not purchased by
the Company (based on the percentage of the Conversion Shares owned by each
Purchaser), prior to any transfer (the "Purchaser Sale Right of First Refusal").
The Purchaser Sale Right of First Refusal shall not apply to the IPO, and will
terminate upon the consummation of a Qualified IPO. The Purchaser Sale Right of
First Refusal shall be exercisable by the Non-Selling Purchasers and Baseman by
written notice to the each of the Parties not later than 10 days after the
Non-Selling Purchasers and Baseman receive the Purchaser Sale Notice.
Notwithstanding the foregoing, collectively, Baseman and the Non-Selling
Purchasers shall exercise the Purchaser Sale Right of First Refusal with respect
to either (A) all of the Sale Shares or (B) none of the Sale Shares. In the
event that Baseman, a Non-Selling Purchaser or Non-Selling Purchasers exercise
their Purchaser Sale Right of First Refusal with respect to the Sale Shares,
Baseman, such Non-Selling Purchaser or Non-Selling Purchasers (as the case may
be) must collectively purchase 100% of the Sale Shares.
(ii) Tag-Along Rights. Each
Non-Selling Purchaser and Baseman (or their permitted successors or assigns)
shall have the option (the "Purchaser Sale Tag-Along Option"), in lieu of
exercising the Purchaser Sale Right of First Refusal, to join in the sale as to
the same percentage of Conversion Shares held by the Non-Selling Purchasers and
Baseman as the percentage of Sale Shares to be sold bears to the Conversion
Shares held by the Selling Purchaser, and on the same purchase price per share
and other terms as the Sale Shares (including the payment of expenses with
respect to such sale on a pro-rata basis). The Purchaser Sale Tag-Along Option
shall be exercisable by the Non-Selling Purchasers and Baseman by written notice
to the Selling Purchaser and the Company not later than 10 days after the
Non-Selling Purchasers and Baseman receive the Purchaser Sale Notice. In the
event that the proposed transferees of Sale Shares are unwilling to purchase the
total shares proposed to be transferred by the Non-Selling Purchasers and
Baseman pursuant to the Purchaser Sale Tag-Along Option (the "Tag-Alongs") and
the Selling Purchaser's shares, the number of shares offered to the transferees
by each of Baseman, the Selling Purchaser and the Tag-Alongs shall be reduced
pro rata so that the offer consists of pro rata portions of the Baseman Shares
and the shares offered by the Tag-Alongs. The Purchaser Sale Tag-Along Option
shall be exercisable by each of the Non-Selling Purchasers and Baseman by
written notice to each of the Parties not later than 10 days after the
Non-Selling Purchasers and Baseman receive the Purchaser Sale Notice.
(b) For the purposes of this Agreement, an
"Accredited Investor" shall mean any Person who qualifies as an accredited
investor within the meaning of Regulation D under the Securities Act of 1933, as
amended (the "Securities Act"). A "Person" shall mean any individual,
corporation, limited liability company, partnership, limited liability
partnership, joint venture, trust or unincorporated organization, joint stock
Company or other similar organization, government or political subdivision
thereof, court or any other legal entity, whether acting in an individual,
fiduciary or other capacity.
<PAGE>
1.3 Proposed Offers by Baseman.
1.3.1 Right of First Refusal and Tag-Along Rights.
(a) In the event that at any time, or from time
to time, prior to the consummation of a Qualified IPO, Baseman proposes to sell
or otherwise transfer the Baseman Shares, or any part thereof, to any Accredited
Investor or Accredited Investors, Baseman shall provide each Purchaser and the
Company with at least 30 days prior written notice of such sale (the "Baseman
Sale Notice"), setting forth the terms and conditions thereof.
(i) Baseman Shares Right of First
Refusal. Upon receipt of the Baseman Sale Notice, the Company may purchase from
Baseman all or any part of the Baseman Shares offered by Baseman prior to any
proposed transfer, and, in the event that the Company fails to purchase the
Baseman Shares, or any part thereof, then the Purchasers (or their permitted
successors or assigns), in lieu of exercising their Baseman Sale Tag-Along
Options (as defined in Section 1.3.1(a)(ii) hereof), shall have the right to
purchase each Purchaser's Pro-Rata Share of the Baseman Shares (based on the
percentage of Conversion Shares owned by each Purchaser) not purchased by the
Company, or any part thereof, prior to any sale or transfer (the "Baseman Shares
Right of First Refusal"). The Baseman Shares Right of First Refusal shall not
apply to the IPO, and will terminate upon the consummation of a Qualified IPO.
The Baseman Shares Right of First Refusal shall be exercisable by the Purchasers
by written notice to Baseman and the Company not later than 10 days after the
Purchasers receive the Baseman Sale Notice. Notwithstanding the foregoing,
collectively, the Purchasers shall exercise the Baseman Shares Right of First
Refusal with respect to either (A) all of the Baseman Shares or (B) none of the
Baseman Shares. In the event that a Purchaser or Purchasers exercise the Baseman
Shares Right of First Refusal with respect to the Baseman Shares, such Purchaser
or Purchasers must collectively purchase 100% of the Baseman Shares.
(ii) Tag-Along Rights. Each of the
Purchasers shall have the option (the "Baseman Sale Tag-Along Option"), in lieu
of exercising the Baseman Shares Right of First Refusal, to join in the sale as
to the same percentage of Conversion Shares held by the Purchasers as the
percentage of the Baseman Shares to be sold, and on the same purchase price per
share and other terms as the Baseman Shares to be sold (including the payment of
expenses with respect to such sale on a pro-rata basis). The Baseman Sale
Tag-Along Option (i) shall be exercisable by the Purchasers by written notice to
Baseman and the Company not later than 10 days after the Purchasers receive the
Baseman Sale Notice, and (ii) shall not be applicable to the IPO, and will
terminate upon the consummation of a Qualified IPO. In the event that the
proposed transferees of the Baseman Shares are unwilling to purchase the shares
proposed to be transferred by the Purchasers (the "Tag-Along Purchasers")
pursuant to the Baseman Sale Tag-Along Option, the number of shares offered to
the transferees by each of Baseman and the Baseman Sale Tag-Along Purchasers
shall be reduced pro rata so that the offer consists of pro rata portions of the
Baseman Shares and the Securities offered by the Baseman Sale Tag-Along
Purchasers. The Baseman Sale Tag-Along Option shall be exercisable by the
Purchasers by written notice to Baseman and the Company not later than 10 days
after the Purchasers receive the Baseman Sale Notice.
(b) The Company and Baseman hereby represent and
warrant that all shares of Securities held by Baseman are free and clear of
liens and all other encumbrances and are not subject to any other agreements or
understanding (either oral or written) which oblige Baseman to sell, offer to
sell or give notice of sale to any person, except as provided herein.
ARTICLE II
2.1 Governing Law: Jurisdiction. This Agreement shall be governed by
and construed in accordance with the laws of the State of New Jersey other than
the laws with respect to conflicts. The parties hereto irrevocably consent to
the jurisdiction of the United States federal courts in the State of New Jersey
and the state courts located in the County of Morris in the State of New Jersey
in any suit or proceeding based on or arising under this Agreement or the
transactions contemplated hereby and irrevocably agree that all claims in
respect of such suit or proceeding may be determined in such courts. The Parties
each irrevocably waive the defense of an inconvenient forum to the maintenance
of such suit or proceeding in such forum. The Parties further agree that service
of process upon the each of the Parties, as applicable, mailed by the first
class mail in accordance with Section 2.6 shall be deemed in every respect
effective service of process upon such Party in any suit or proceeding arising
hereunder. Nothing herein shall affect any Party's right to serve process in any
other manner permitted by law. The Parties agree that a final judgment in any
such suit or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on such judgment or in any other lawful manner. The
Parties irrevocably waive any right to trial by jury under applicable law.
2.2 Counterparts. This Agreement may be executed in two or more
counterparts, including, without limitation, by facsimile transmission, all of
which counterparts shall be considered one and the same agreement and shall
become effective when counterparts have been signed by each Party and delivered
to the other Parties. In the event any signature page is delivered by facsimile
transmission, the Party using such means of delivery shall promptly cause
original executed signature pages to be delivered to the other Parties.
2.3 Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
2.4 Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement or
the validity or enforceability of this Agreement in any other jurisdiction.
2.5 Entire Agreement: Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the Parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, none of the Parties makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be waived other than by an instrument in writing signed by the
party to be charged with enforcement and no provision of this Agreement may be
amended other than by an instrument in writing signed by each of the Parties.
2.6 Notices. Any notice herein required or permitted to be given
shall be in writing and may be personally served or delivered by
nationally-recognized overnight courier or by facsimile machine confirmed
telecopy, and shall be deemed delivered at the time and date of receipt (which
shall include telephone line facsimile transmission). The addresses for such
communications shall be:
If to the Company or to Ira A. Baseman:
nex-i.com inc.
7 Wall Street
Princeton, New Jersey 08540
Attention: Ira A. Baseman, President & CEO
Telephone No. (609) 497-9400
Facsimile No. (609) 497-9433
With a copy to:
Smith, Stratton, Wise, Heher & Brennan
600 College Road East
Princeton, New Jersey 08540
Attention: Richard J. Pinto, Esq.
Telephone No. (609) 987-6650
Facsimile No. (609) 987-6651
If to AlphaNet:
AlphaNet Solutions, Inc.
7 Ridgedale Avenue
Cedar Knolls, New Jersey 07927
Attention: Jack Adler, Esq., Senior VP,
Secretary & General Counsel
Telephone No. (973) 889-3813
Facsimile No. (973) 898-9694
With a copy to:
Pitney, Hardin, Kipp & Szuch LLP
P.O. Box 1945
Morristown, New Jersey 07962-1945
Attention: Michael W. Zelenty
Telephone No. (973) 966-8200
Facsimile No. (973) 966-1550
<PAGE>
If to Fallen Angel:
Fallen Angel Equity Fund, L.P.
c/o Fallen Angel Capital LLC
960 Holmdel Road
Holmdel, New Jersey
Attention: Ira Cohen
Telephone No. (732) 946-2000
Facsimile No. (732) 946-0519
With a copy to:
Pitney, Hardin, Kipp & Szuch LLP
P.O. Box 1945
Morristown, New Jersey 07962-1945
Attention: Michael W. Zelenty
Telephone No. (973) 966-8200
Facsimile No. (973) 966-1550
If to Steffens:
John L. Steffens
358 Wendover Drive
Princeton, NJ 08540
Each party shall provide notice to the other party in accordance with this
Section 2.6 of any change in address.
2.7 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Parties and their successors and assigns. The
Parties shall not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the other Parties except, with respect to
the Company, in accordance with the Company's Certificate of Incorporation.
Notwithstanding the foregoing, a Purchaser may, subject to and in compliance
with Section 7.2 of the Purchase Agreement, assign all or part of its rights and
obligations without the consent of the Company, and without the consent of
Baseman, so long as such transferee is an Accredited Investor and agrees in
writing to be bound by this Agreement.
2.8 Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns (including transferees permitted in accordance with Section 2.7 and is
not for the benefit of, nor may any provision hereof be enforced by, any other
person.
2.9 Further Assurances. Each Party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
2.10 Remedies. No provision of this Agreement providing for any
remedy to a Party shall limit any remedy which would otherwise be available to
such Party at law or in equity. Nothing in this Agreement shall limit any rights
a Party may have under any applicable federal or state securities laws with
respect to the purchase of securities contemplated hereby. Each Party
acknowledges that a breach by it of its respective obligations hereunder will
cause irreparable harm to each other Party. Accordingly, the Parties acknowledge
that the remedy at law for a material breach of its respective obligations under
this Agreement will be inadequate and agree, in the event of a breach or
threatened breach by the a Party of the provisions of this Agreement, that the
remaining Parties shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach and requiring immediate
compliance, without the necessity of showing economic loss and without any bond
or other security being required.
[SIGNATURE PAGE TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this
Agreement to be duly executed as of the date first above
written.
NEX-I.COM INC.
By: /s/ Ira Baseman
- -----------------------
Name: Ira Baseman
Title: President & CEO
/s/ Ira A. Baseman
- ------------------
IRA A. BASEMAN
/s/ John L. Steffens
- --------------------
JOHN L. STEFFENS
ALPHANET SOLUTIONS, INC.
By: /s/ Donald A. Deieso
- ------------------------------
Name: Donald A. Deieso
Title: President and CEO
FALLEN ANGEL EQUITY
FUND, L.P.
By: /s/ Ira Cohen
- --------------------------------
Name: Ira Cohen
Title: Limited Partner
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Registration Nos. 333-20851, 333-58009 and 333-86521),
of AlphaNet Solutions, Inc. and its Subsidiary of our report dated March 21,
2000 relating to the financial statements and financial statement schedule,
which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule cotnains summary financial informatoin extracted from the Audited
consolidated Financial Stateents of AlphaNet Solutions, Inc. as of December 31,
1999 and for the 12-month period ended December 31, 1999 and is qualified in
its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 16,485
<CASH> 0
<SECURITIES> 29,989
<RECEIVABLES> 3,289
<ALLOWANCES> 2,533
<INVENTORY> 49,322
<CURRENT-ASSETS> 11,860
<PP&E> 7,401
<DEPRECIATION> 56,021
<TOTAL-ASSETS> 11,481
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 64
<OTHER-SE> 43,770
<TOTAL-LIABILITY-AND-EQUITY> 56,021
<SALES> 136,563
<TOTAL-REVENUES> 136,563
<CGS> 110,902
<TOTAL-COSTS> 24,604
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,936
<INCOME-TAX> 794
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,142
<EPS-BASIC> 0.18<F1>
<EPS-DILUTED> 0.18<F1>
<FN>
<F1>
This amount is in accordance with Financial Accounting Standards Board
Statement No. 128.
</FN>
</TABLE>
