SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission file number 0-27042
AlphaNet Solutions, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2554535
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
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(Address of Principal Executive Offices) (Zip Code)
(973) 267-0088
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(Registrant's Telephone Number
Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No: ___
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of April 30, 2001 :
Class Number of Shares Outstanding
- ----- -----------------------------
Common Stock, $.01 par value 6,411,725
ALPHANET SOLUTIONS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.......................................................................... 1
Consolidated Balance Sheets
as of March 31, 2001 (unaudited)
and December 31, 2000......................................................................... 1
Consolidated Statements of Operations
for the Three Months Ended
March 31, 2001, (unaudited) and March 31, 2000 (unaudited)................................... 2
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 2001(unaudited) and March 31, 2000 (unaudited)...................................... 3
Notes to Consolidated Financial Statements (unaudited)........................................ 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 15
PART II. OTHER INFORMATION............................................................................ 16
Item 1. Legal Proceedings........................................................................... 16
Item 6. Exhibits and Reports on Form 8-K............................................................ 16
SIGNATURES..................................................................................................... 17
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
ALPHANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
March 31, December 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 14,519 $ 17,164
Accounts receivable, less allowance for doubtful
accounts of $1,189 at March 31, 2001 and $3,923 at
December 31, 2000 . . . . . . . . . . . . . . . . . 18,932 16,340
Inventories . . . . . . . . . . . . . . . . . . . . 675 858
Income taxes. . . . . . . . . . . . . . . . . . . . 1,576 1,576
Prepaid expenses and other current assets . . . . . 580 426
-------- --------
Total current assets . . . . . . . . . . . 36,282 36,364
Property and equipment, net . . . . . . . . . . . . . . . . 2,920 3,235
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . 2,068 2,134
Other assets. . . . . . . . . . . . . . . . . . . . . . . . 87 92
--------- --------
Total assets . . . . . . . . . . . . . . . $ 41,357 $ 41,825
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations . . . . $ 25 $ 23
Accounts payable . . . . . . . . . . . . . . . . . . 2,809 4,405
Accrued expenses . . . . . . . . . . . . . . . . . . 4,318 3,540
Accrued MTA contract liability. . . . . . . . . . . 2,561 2,093
--------- --------
Total current liabilities . . . . . . . . . 9,713 10,061
Long term liabilities:
Capital lease obligations . . . . . . . . . . . . . . 2 8
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Total liabilities. . . . . . . . . . . . . . . . . . 9,715 10,069
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Shareholders' equity:
Preferred stock -- $0.01 par value; authorized
3,000,000 shares, none issued . . . . . . . . . . . . - -
Common stock -- $0.01 par value; authorized
15,000,000 shares, 6,555,550 and 6,536,209 shares
issued and outstanding at March 31, 2001 and December
31, 2000, respectively. . . . . . . . . . . . . . . . 65 65
Additional paid-in capital. . . . . . . . . . . . . . 35,043 35,013
Accumulated Deficit . . . . . . . . . . . . . . . . . (2,746) (2,602)
Treasury stock - at cost; 150,600 shares at March
31, 2001 and December 31, 2000, respectively. . . . . (720) (720)
--------- --------
Total shareholders' equity . . . . . . . . . 31,642 31,756
--------- --------
Total liabilities and shareholders' equity . $ 41,357 $ 41,825
========= ========
See accompanying notes to consolidated financial statements
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months ended
March 31,
2001 2000
---- ----
Net sales:
Product sales. . . . . . . . . . . . . . $ 7,699 $ 12,209
Services and support . . . . . . . . . . 10,978 11,020
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18,677 23,229
Cost of sales:
Product sales . . . . . . . . . . . . . . 6,809 11,338
Services and support . . . . . . . . . . 7,557 8,241
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14,366 19,579
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Gross Profit:
Product . . . . . . . . . . . . . . . 890 871
Service and support . . . . . . . . . 3,421 2,779
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4,311 3,650
Operating expenses:
Selling, general & administrative . . . 4,686 5,892
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Operating income (loss) . . . . . . . . . . . (375) (2,242)
Other income (expense):
Interest income . . . . . . . . . . . . 225 259
Nex-i.com loss. . . . . . . . . . . . . . - (335)
Other Income . . . . . . . . . . . . . . 6 6
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231 (70)
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Income (loss) before income taxes. . . . . . . (144) (2,312)
Provision (benefit) for income taxes . . . . . - (959)
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Net income (loss). . . . . . . . . . . . . . . $ (144) $ (1,353)
========== ===========
Basic and diluted net income (loss) per share. $ (0.02) $ (0.21)
========== ===========
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . . . . 6,398 6,299
========== ===========
Weighted average number of common and common
equivalent shares outstanding. . . . . . . 6,398 6,299
========== ===========
See accompanying notes to consolidated financial statements.
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months ended
March 31,
2001 2000
---- ----
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (144) $ (1,353)
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 499 632
Provision for accounts receivable. . . . . . . . . . . . . . . . . . . . 83 -
Nex-i.com loss recognition. . . . . . . . . . . . . . . . . . . . . . . . - 335
Deferred income taxes. . . . . . . .. . . . . . . . . . . . . . . . . . . - (959)
Increase (decrease) from changes in:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . (2,292) 9,724
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 (1,671)
Prepaid expenses and other current assets . . . . . . . . . . . . . (154) (178)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . (1,596) 1,131
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 778 985
Accrued MTA contract liability. . . . . . . . . . . . . . . . . . . 467 (1,102)
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Net cash (used in) provided by operating activities . . . . . . . . . . . (2,170) 7,549
Cash flows from investing activities:
Loan to Eureka Broadband. . . . . . . . . . . . . . . . . . . . . . . . . . . . (382) -
Property and equipment expenditures . . . . . . . . . . . . . . . . . . . . . . (119) (558)
Investment in nex-i.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1,800)
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Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . (501) (2,358)
Cash flows from financing activities
Employee stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 183
Repayment (of capital lease) obligations. . . . . . . . . . . . . . . . . . . . (4) (5)
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Net cash provided by financing activities. . . . . . . . . . . . . . . . . 26 178
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Net (decrease) increase in cash and cash equivalents. . . . . . . . . . . . . . . . (2,645) 5,369
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . 17,164 16,485
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Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . . . $14,519 $ 21,854
======== ========
See accompanying notes to consolidated financial statements.
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Description of the Business and Basis of Presentation:
AlphaNet Solutions, Inc. (the "Company") is an information technology
professional services firm specializing in network design, operation,
management, and security. The Company provides services in information security,
network implementation, professional development, project management, and
Internet-related matters. The Company is focused on offering integrated
technology solutions to assist its clients in their migration from distributed
desktop to web-based computing.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
periods. The foregoing financial information reflects all adjustments which are,
in the opinion of management, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows as of the dates and for
the periods presented. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 2000, which were included
as part of the Company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission. Certain prior year amounts have been
reclassified to conform with current year presentation.
Results for the interim periods are not necessarily indicative of
results that may be expected for the entire year.
Note 2 - Net Income Per Share:
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
(unaudited) Three Months
ended
March 31,
2001 2000
---- ----
Net income (loss). . . . . . . . . . . . . . . . . . . . $ (144) $ (1,353)
======= =========
Basic:
Weighted average number of shares outstanding. . . . . 6,398 6,299
======= =========
Net income (loss) per share. . . . . . . . . . . . . $(0.02) $ (0.21)
======= =========
Diluted:
Weighted average number of shares outstanding . . . . 6,398 6,299
Dilutive effects of stock options . . . . . . . . . . - -
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Weighted average number of common and common
Equivalent shares outstanding 6,398 6,299
======= =========
Net income (loss) per share . . . . . . . . . . . . . $(0.02) $ (0.21)
======= =========
Note 3 - Investment in nex-i.com:
In January 2000, the Company invested $1.8 million in exchange
for 3,101,000 shares of Series A Convertible Participating Preferred Stock (the
"Series A Financing") in a private internet start-up--nex-i.com Inc.
("nex-i.com"). The investment represented approximately 30% of nex-i.com equity
on an "as converted" basis. The Company recorded its share of losses to the
extent of its investment based upon its preferred stock funding interest. On
July 27, 2000, nex-i.com received $12,100,000 in a Series B Convertible
Participating Preferred Stock financing (the "Series B Financing"), in which the
Company did not participate. Following the Series B Financing, the Company's
investment in nex-i.com represented approximately 15% of nex-i.com equity on an
"as converted" basis. In connection with the Series B Financing, and in
consideration of the Company's release of nex-i.com from certain commercial
commitments to the Company made at the time of the Series A Financing, the
Company received 100,000 warrants to purchase shares of nex-i.com Series B
Convertible Participating Preferred Stock at an exercise price ranging from
$1.50 to $1.85 per share. In February 2001, a wholly-owned subsidiary of Eureka
Broadband Corporation, a Delaware corporation ("Eureka"), merged with and into
nex-i.com, in connection with which merger the Company received several classes
of preferred stock in Eureka in exchange for the Company's Series A Convertible
Participating Preferred Stock in nex-i.com. Coincident to and as a condition of
the merger, the Company was required to lend $382,098 to Eureka in exchange for
a convertible promissory note. The note bears interest at the rate of 8% per
annum, which may be paid by Eureka in cash on March 31, 2001 (the "Maturity
Date"), or may be converted into shares of Eureka preferred stock on the
Maturity Date, at the discretion of the holders of 51% of the aggregate
outstanding principal of all similar notes. The Maturity Date was subsequently
extended to May 31, 2001. The Company also committed to invest an additional
$382,098 in Eureka, if certain conditions are met. In consideration of the
Company's investment in Eureka, Eureka committed to purchase a minimum of
$145,621 of the Company's network monitoring, cabling, field engineering and
other services during the first twelve months following the closing of the
merger and a minimum of $182,100 of such services during the second twelve
months following the closing. Eureka also committed to use good faith efforts to
ultimately purchase a minimum of $500,000 of the Company's services during the
twenty-four month period following the closing.
The Company's interests in Eureka are subject to two agreements among
Eureka and its shareholders. The rights and restrictions set forth in the two
agreements are not deemed by the Company to be material. The restrictions
include a limitation on transfer of the Company's equity interest in Eureka in
certain circumstances and the requirement to sell the equity interest when a
transfer is approved by a vote of the interest holders. In addition, the
Company, upon the agreement of a substantial amount of other interest holders,
has the right to demand that the Company's equity interest be registered under
the Securities Act of 1933, and the right, without other interest holders, to
have the Company's equity interest included in certain other registrations under
such Act.
Note 4 - Recently Issued Accounting Standards:
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Adoption of SAB No. 101 did not have a material effect on the
Company's results of operations.
Note 5 -MTA Contract:
In December 1997, the Company entered into a four-year, $20.4 million
contract (the "MTA Contract") with New York City Transit, an agency of the
Metropolitan Transportation Authority of the State of New York (the "MTA") to
furnish and install local and wide-area computer network components. The
aggregate amount of this contract was subsequently increased to $20.6 million.
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, per site. 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
and related installation 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. Historically, the project has been
subject to the prevailing wage rate and classification for telecommunications
workers, as determined by the New York City Comptroller'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 the 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 a Notice of Appeal with the DRO in February 2000, and
pursuant to the DRO's request, filed further written submissions and
participated in an arbitral session with the DRO subsequent thereto. In November
2000, the DRO rendered a written decision denying in full the Company's Request
for Equitable Adjustment and Time Extension. In March 2001, the Company appealed
the DRO's denial of the Company's Request to the New York Supreme Court. A
return date of May 9, 2001, has been set for the proceeding. There can be no
assurance the Company will be successful, either in whole or in part, in its
efforts to obtain the adjustment or the requested extension.
On July 19, 2000, the MTA advised the Company of a determination by the
Bureau of Labor Law (hereinafter, the "Bureau") of the New York City
Comptroller's Office, communicated to the MTA by letter from the Bureau dated
June 22, 2000, that, as of July 1, 2000, the labor classification for all low
voltage cabling carrying voice, data, video or any combination thereof is
electrician. The Bureau's determination is based on a New York State Supreme
Court Appellate Division decision dated May 18, 2000. The workers currently and
historically used by the Company to perform cabling work have been classified as
telecommunications workers. The Company believes it is probable that the
Bureau's determination will apply to the Company's cabling activities under the
contract, thereby likely requiring the reclassification of its
telecommunications workers as electricians retroactive to July 1, 2000. Since
the prevailing wage for electricians is substantially higher than that for
telecommunications workers, the Company expects to incur materially increased
labor costs as a result of the Bureau's determination. On October 16, 2000, the
MTA Project Manager denied the Company's request for a change order to
compensate the Company for the increased costs it expects to incur in connection
with the reclassification of certain of its telecommunications workers as
electricians. On January 19, 2001, the Company initiated a "dispute" within the
meaning of the applicable federal regulations governing the MTA Contract by
filing a complaint with the United States Department of Labor. In its complaint,
the Company requests that the Department of Labor adjudicate this dispute, and
either issue a determination affirming that the prevailing wage rate for
telecommunications workers, as originally specified by the MTA, is the
applicable rate for this project, or directing the MTA to compensate the Company
for the change in wage classification made during the performance of the
contract in violation of federal regulations. By letter dated March 12, 2001,
the Department of Labor advised the Company that, without knowing which, if any,
federal wage decision was included in the MTA Contract, it is unable to make a
determination that any violation of federal labor law has occurred. The Company
is currently seeking clarification of the Department's letter. There can be no
assurance the Company will be successful, either in whole or in part, in its
efforts with respect to the prevailing wage rate.
Due to the determination by the Bureau communicated to the Company on
July 19, 2000, as well as lower than anticipated gross margins on networking
activities and higher than expected costs of completion, the Company revised its
estimated costs for the project during the 2000 second quarter. As a result, in
the second quarter of 2000, the Company took a charge of $4.4 million for costs
projected in excess of the contract value. This charge represents the Company's
current estimated loss on the MTA project. As of March 31, 2001, approximately
65% of the value of the contract was completed.
Note 6 -Income Taxes:
Set forth below is a summary of the Company's tax provision (benefit) for the
three months ended March 31, 2001.
Three Months Ended
March 31, 2001
--------------
Federal income tax benefit at statutory rate (34%) ($ 49,000)
State income tax benefit net of Federal effect (10,000)
----------
Income tax benefit (59,000)
Valuation allowance 59,000
---------
$ -
=========
For the three months ended March 31, 2001, the Company has recognized a tax
benefit of $59,000, offset by a tax valuation allowance equal to the tax
benefit.
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------
General
AlphaNet Solutions, Inc. (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. The Company was formed in 1984. The Company is focused on offering
integrated technology solutions to assist its clients in their migration from
distributed desktop to web-based computing.
The Company's results for the first quarter of 2001 include certain
items that affect comparability to prior periods. The Company quantifies the
impact of these items in order to explain its results on a comparable basis.
Such items are collectively referred to as "special charges." Special charges
recorded in the 2001 first quarter consisted of a $174,000 charge for
compensation and related employee costs and $59,000 of income tax valuation
allowances.
Results of Operations
Three Months Ended March 31, 2001 Compared To Three Months Ended March 31, 2000
The Company's results of operations for the three months ended March
31, 2001 showed significant improvement compared to its results of operations
for the three months ended March 31, 2000. During the first quarter of 2001,
excluding special charges, the Company reported net income of $18,000, or
breakeven on a per share basis, as compared to a net loss of approximately
$1,000,000, or $0.16 per share, in the first quarter of 2000. The Company's
gross profit margin was 23.1% in the first quarter of 2001, as compared to 15.7%
in the first quarter of 2000. Selling, general and administrative expenses,
excluding special charges, were $4.6 million in the first quarter of 2001, as
compared to $5.6 million in the first quarter of 2000, a reduction of 17.8%.
These improvements in the Company's operating performance are attributable to
cost reductions, improvements in service delivery and a shift to higher-end
consulting services commanding higher billing rates and profit margins.
Net Sales. Net sales decreased by $4.5 million, to $18.7 million for
the first quarter of 2001 from $23.2 million for the first quarter of 2000. The
decline of $4.5 million was solely due to a continued planned reduction in
product sales. The Company is continuing to pursue its strategy of securing
high- margin consulting engagements and related revenues.
Gross Profit. The Company's gross margin improved from 15.7% in the
first quarter of 2000 to 23.1% in the first quarter of 2001. The Company
recorded $46,000 of special charges reflecting severance costs during the first
quarter of 2001. The increase in gross margin resulted from improvement in both
service and product margins. The Company currently offers technology products as
a convenience to its clients and is therefore more selective in accepting
technology product orders than was previously the case. Consequently, the amount
of sales and related margin associated with technology product sales have
declined; however, the margins on the remaining technology product sales
improved from 7.1% in the first quarter of 2000 to 11.6% in the first quarter of
2001. Competitive pricing pressures continue to impact technology product
margins, and as such technology product margins may vary from quarter to
quarter. Service margins have continued to improve and increased from 25.2% a
year ago to 31.2% in the first quarter of 2001. This marks the fourth
consecutive quarter in which service margins have increased. The Company intends
to continue to focus its efforts on increasing the efficiency of its service
delivery force, as well as expanding its higher-end consulting offerings.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses before special charges in each period were $4.6 million
in the first quarter of 2001, as compared to $5.6 million in the first quarter
of 2000. Special charges of $128,000 reflecting severance costs were recorded in
2001, and severance and other special costs were $275,000 in the first quarter
of 2000.
Interest income, net. Interest income, net totaled $225,000 for the
first quarter of 2001, down slightly from 2000.
nex-i.com. On January 14, 2000, the Company invested $1.8 million in
nex-i.com in exchange for 3,101,000 shares of nex-i.com Series A Convertible
Participating Preferred Stock. The Company recorded its share of losses to the
extent of its investment based upon its preferred stock funding interest. The
Company recorded a first quarter 2000 charge of $335,000 relating to this
investment. The entire cost of the Company's investment was recognized as a loss
in 2000.
Income taxes. During the first three months of 2001, the Company
recorded a $59,000 income tax benefit before an income tax valuation allowance
provision. The Company recorded a tax valuation allowance totaling $59,000, in
the first quarter of 2001. In determining the Company's tax expense for the
quarter, an effective tax rate of 41.0% was utilized. In the first quarter of
2000 the Company recognized a tax benefit of $959,000.
Risks and Uncertainties
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 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") 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. The Company initiated its relationships with Ingram and Tech Data in
1994. In general, the Company orders IT products, including workstations,
servers, enterprise computing products, networking and communications equipment,
and application software from such aggregators on an as-needed basis, thereby
reducing the Company's need to carry large inventories. During the three months
ended March 31, 2001, the Company acquired approximately 29.1%, and 12.1% of its
products for resale from Ingram and Tech Data, respectively, compared to 48.9%
and 21.3%, respectively, during the three months ended March 31, 2000.
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. Both of the Company's primary vendors have
instituted changes in their price protection and inventory management programs
as a direct result of changes in such policies by manufacturers. Specifically,
they (i) limited price protection to that provided by the manufacturer,
generally less than 30 days; and (ii) restricted 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. There can be no
assurances that any such rebates, discounts or incentives will continue at
current 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.
Except for the MTA Contract entered into in December 1997 (see below),
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. The
Company's increased selectivity in selling product resulted in an increase in
gross profit margin attributable to product sales in the first quarter of 2001
as compared to the first quarter of 2000.
The Company offers enterprise network management, information security,
Internet-related, eMobile Solutions, application 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, payroll-related expenses
and training and recruiting costs. Thus, the financial performance of the
Company's service business is based primarily upon billing margins (billable
hourly rates less the costs to the Company of such service personnel on an
hourly basis) and utilization rates (billable hours divided by paid hours). The
future success of the services component of the Company's business will depend
in large part upon its ability to maintain high utilization rates at profitable
billing margins.
The Company believes that its ability to provide a broad range of
technical services and its long-term relationships with large clients, positions
the Company to grow the services component of its business. As such, the Company
anticipates that an increasing percentage of its gross profits in the future
will be derived from the services and support component of its business. During
the three-month period ended March 31, 2001, services revenue, before special
charges, produced approximately 79.4% of the Company's total gross profit
compared to 76.1% during the same period in 2000. However, the Company believes
that product sales will continue to generate a portion of the Company's gross
profit for the foreseeable future.
The Company's net sales, gross profit, operating income and net income
have varied substantially from quarter to quarter and are expected to continue
to do so in the future. 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 transition from product reseller
to IT professional services firm and all expected and unexpected costs and
events related to such transition; intense competition from other IT service
providers; the Company's dependence upon a limited number of key clients for a
significant portion of its business; 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; deficiencies in the
design and operation of the Company's internal control structure as identified
by the Company and its independent accountants; 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. Past operating results and
period-to-period comparisons are not necessarily 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
fixed costs. The Company's expense levels are based in part on expectations of
future revenues. As the Company's business shifts from product-related sales to
services, expense levels may exceed total gross profits as the Company invests
in the expansion of its service offerings. If the Company successfully expands
its service offerings, periods of variability in utilization may continue to
occur. The Company may incur greater technical training costs during such
periods.
In December 1997, the Company entered into a four-year, $20.4 million
contract (the "MTA Contract") with New York City Transit, an agency of the
Metropolitan Transportation Authority of the State of New York (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, per
site. While the Company believes it is currently performing in accordance with
the contract terms, there can be no assurance that any such events of default or
unexcused delays will 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
and related installation 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. Historically, the project has been
subject to the prevailing wage rate and classification for telecommunications
workers, as determined by the New York City Comptroller'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.
On July 19, 2000, the MTA advised the Company of a determination by the
Bureau of Labor Law (hereinafter, the "Bureau") of the New York City
Comptroller's Office, communicated to the MTA by letter from the Bureau dated
June 22, 2000, that, as of July 1, 2000, the labor classification for all low
voltage cabling carrying voice, data, video or any combination thereof is
electrician. The Bureau's determination is based on a New York State Supreme
Court Appellate Division decision dated May 18, 2000. The workers currently and
historically used by the Company to perform cabling work have been classified as
telecommunications workers. The Company believes it is probable the Bureau's
determination will apply to the Company's cabling activities under the contract,
thereby likely requiring the reclassification of its telecommunications workers
retroactive to July 1, 2000. Since the prevailing wage for electricians is
substantially higher than that for telecommunications workers, the Company
expects to incur materially increased labor costs as a result of the Bureau's
determination. On October 16, 2000, the MTA Project Manager denied the Company's
request for a change order to compensate the Company for the increased costs it
expects to incur in connection with the reclassification of certain of its
telecommunications workers as electricians. On January 19, 2001, the Company
initiated a "dispute" within the meaning of the applicable federal regulations
governing the MTA Contract by filing a complaint with the United States
Department of Labor. In its complaint, the Company requests that the Department
of Labor adjudicate this dispute, and either issue a determination affirming
that the prevailing wage rate for telecommunications workers, as originally
specified by the MTA, is the applicable rate for this project, or directing the
MTA to compensate the Company for the change in wage classification made during
the performance of the contract in violation of federal regulations. By letter
dated March 12, 2001, the Department of Labor advised the Company that, without
knowing which, if any, federal wage decision was included in the MTA Contract,
it is unable to make a determination that any violation of federal labor law has
occurred. The Company is currently seeking clarification of the Department's
letter. There can be no assurance the Company will be successful, either in
whole or in part, in its efforts with respect to the prevailing wage rate.
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 further written submissions and
participated in an arbitral session with the DRO subsequent thereto. In November
2000, the DRO rendered a written decision denying in full the Company's Request
for Equitable Adjustment and Time Extension. In March 2001, the Company appealed
the DRO's denial of the Company's Request to the New York Supreme Court. A
return date of May 9, 2001 has been set for the proceeding. There can be no
assurance the Company will be successful, either in whole or in part, in its
efforts to obtain the adjustment for the extension.
Historically, the Company had estimated that project costs would
approximate project revenues and, accordingly, had recognized no gross profit on
the contract. Due to the determination by the Bureau communicated to the Company
on July 19, 2000, as well as lower than anticipated gross margins on networking
activities and higher than expected costs of completion, the Company revised its
estimated costs for the project during the 2000 second quarter. As a result, in
the second quarter of 2000, the Company took a charge of $4.4 million for costs
projected in excess of the contract value. This charge represents the Company's
current estimated loss on the MTA project. As of March 31, 2001, approximately
65% of the value of the contract was completed.
Forward-Looking Statements
Certain statements are included in this Quarterly Report on Form 10-Q
which are not historical and are "forward-looking," within the meaning of The
Private Securities Litigation Reform Act of 1995 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 the Company's business, the timing of the
development and implementation of the Company's new service offerings and the
utilization of such services by the Company's customers, and trends in future
operating performance. Such forward-looking statements include risks and
uncertainties, including, but not limited to: (i) the repositioning of the
Company as an IT professional services firm and all expected and unexpected
costs and events related to such repositioning, including, among other things
(a) the substantial variability of the Company's quarterly operating results
caused by a variety of factors, some of which are not within the Company's
control, (b) intense competition from other IT service providers, (c) the
short-term nature of the Company's customers' commitments, (d) patterns of
capital spending by the Company's customers, (e) the timing, size and mix of
product and service orders and deliveries, (f) the timing and size of new
projects, (g) pricing changes in response to various competitive factors, (h)
market factors affecting the availability of qualified technical personnel, (i)
the timing and customer acceptance of new product and service offerings, (j)
changes in trends affecting outsourcing of IT services, (k) disruption in
sources of supply, (l) changes in product, personnel and other operating costs,
and (m) industry and general economic conditions; (ii) changes in technical
personnel billing and utilization rates; (iii) the intense competition in the
markets for the Company's products and services; (iv) the ability to develop,
market, provide, and achieve market acceptance of new service offerings to new
and existing customers; (v) the Company's ability to attract, hire, train, and
retain qualified technical personnel; (vi) the Company's substantial reliance on
a concentrated number of key customers; (vii) uncertainties relating to
potential acquisitions, if any, made by the Company, such as the Company's
ability to integrate acquired operations and to retain key customers and
personnel of the acquired business; (viii) the Company's reliance on the
continued services of key executive officers and salespersons; and (ix) material
risks and uncertainties associated with the MTA Contract. These risks and
uncertainties could cause actual results to differ materially from results
expressed or implied by forward-looking statements contained in the document.
These forward-looking statements speak only as of the date of this document.
Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Adoption of SAB No. 101 did not have a material effect on the
Company's results of operations.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2001 were $14.5 million,
compared to $17.2 million at December 31, 2000, a decline of $2.7 million
primarily attributable to timing of cash received in April from several major
clients. Working capital at March 31, 2001 was $26.6 million as compared to
$26.3 million at December 31, 2000, representing an increase of $0.3 million.
Since its inception, the Company has funded its operations primarily
from cash generated by operations, as well as with funds from borrowings under a
credit facility and the net proceeds from the Company's public offerings. The
Company's credit agreement with the First Union National Bank expired on
December 31, 2000 and was not renewed.
Cash utilized by operating activities reflected primarily an increase
in Company accounts receivable of approximately $2.3 million and a decrease in
accounts payable of $1.6 million, offset by the increase in accrued liabilities
of $0.8 million. The Company's days sales outstanding in accounts receivable
increased from 65 days at December 31, 2000 to 75 days at March 31, 2001,
primarily due to timing of cash received in April 2001 from several major
clients on amounts outstanding at the end of the period. Cash used in investing
activities included the Company's capital expenditures for the 2001 first
quarter of $119,000 primarily for the purchase of computer equipment and
software used by the Company and the Company's loan to Eureka of $382,098.
Cash utilized by financing activities included $30,000 for employee
stock purchases, reduced by a $4,000 repayment of capital lease obligations.
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. During 2000, 33,548 shares of common stock were sold to employees under
the plan for approximately $117, 000, an average price of $3.51 per share.
During the first three months of 2001, employees purchased 19,341 shares of
stock for approximately $30,000, at an average price of $1.51 per share. The
Company has issued an aggregate of 183,468 shares since the inception of the
Employee Stock Purchase Plan at an average price of $4.54 per share, receiving
total proceeds of approximately $832,000.
The Company purchases certain inventory and equipment through a
financing arrangement with IBM Credit Corporation. At March 31, 2001, there was
an outstanding balance of approximately $1.2 million for IBM Credit Corporation
under this arrangement. Obligations under this financing arrangement 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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Not applicable.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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On July 7, 2000, Polo Ralph Lauren Corporation ("Polo") filed a
counterclaim against the Company in a lawsuit filed by the Company against Polo
on February 16, 2000 in the Superior Court of New Jersey, Law Division (Morris
County) for collection of an overdue receivable in the amount of $893,330. In
its counterclaim, Polo alleges, among other things, that it sustained damages of
$4.7 million as a result of alleged breach of contract, breach of warranty and
negligence by the Company in "failing to maintain accurate shipping records and
documentation." Discovery to date has been limited, and no evidence has yet been
proffered in support of the counterclaim. In October 2000, the Company secured a
commitment from its insurance carrier, subject to a reservation of rights, to
defend against the counterclaim. The Company believes it has meritorious
defenses to the counterclaim and intends to vigorously pursue recovery of all
amounts owing to the Company by Polo.
In connection with the Company's ongoing disputes with the MTA
concerning a contract entered into with the MTA in December 1997, the Company
filed certain legal proceedings as discussed in Part I, Item 2 of this Report
(Management's Discussion and Analysis of Financial Condition and Results of
Operations) at pp.13-14.
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibit.
None.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report on Form 10-Q is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALPHANET SOLUTIONS, INC.
DATE: May 9, 2001 By: STAN GANG _
--------------------------------------------
Stan Gang
Chairman and Chief Executive Officer
(Principal Executive Officer)
DATE: May 9, 2001 By: WILLIAM S. MEDVE _
-------------------------------------
William S. Medve
Executive Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)