SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 0-27042
AlphaNet Solutions, Inc.
--------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2554535
--------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
------------------------------------------------------ -----------
(Address of Principal Executive Offices) (Zip Code)
(973) 267-0088
--------------
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No: ___
---
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of October 31, 2000:
Class Number of Shares Outstanding
----- -----------------------------
Common Stock, $.01 par value 6,388,403
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
TABLE OF CONTENTS
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................................... 1
Consolidated Balance Sheets
as of September 30, 2000 (unaudited)
and December 31, 1999.................................................................................. 2
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 2000 (unaudited) and September 30, 1999 (unaudited).......................................3
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 2000 (unaudited) and September 30, 1999 (unaudited)...................................... 4
Notes to Consolidated Financial Statements (unaudited)................................................ 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 19
PART II. OTHER INFORMATION....................................................................................... 20
Item 1. Legal Proceedings..................................................................................... 20
Item 6. Exhibits and Reports on Form 8-K...................................................................... 20
SIGNATURES................................................................................................................ 21
</TABLE>
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2000 1999
---------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . .. $ 16,150 $ 16,485
Accounts receivable, less allowance for doubtful accounts of
$4,023 at September 30, 2000 and $3,289 at December 31, 1999 . 17,527 26,700
Inventories . . . . . . . . . . . . . . . . . . . . . . . . .. 1,631 2,533
Deferred income tax asset . . . . . . . . . . . . . . . . . .. 1,576 1,889
Prepaid expenses and other current assets . . . . . . . . . .. 494 1,234
Costs in excess of billings . . . . . . . . . . . . . . . . .. 0 481
--------- --------
Total current assets . . . . . . . . . . . . . . .. 37,378 49,322
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . 3,736 4,459
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2,305 2,240
---------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . $ 43,419 $ 56,021
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations . . . . . . . . . $ 22 $ 20
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 4,887 7,473
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 4,886 3,988
Accrued MTA contract liability. . . . . . . . . . . . . . . . 1,655 --
--------- ---------
Total current liabilities . . . . . . . . . . . . . 11,450 11,481
Long term liabilities:
Advance from principal shareholder . . . . . . . . . . . . . . 0 675
Capital lease obligations . . . . . . . . . . . . . . . . . .. 14 31
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . .. 11,464 12,187
--------- ---------
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,
6,538,403 and 6,423,399 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively . . . . 67 64
Additional paid-in capital. . . . . . . . . . . . . . . . . . 35,006 34,150
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . (2,398) 10,340
Treasury stock - at cost; 150,600 and 136,800 shares at
September 30, 2000 and December 31,1999, respectively. (720) (720)
--------- --------
Total shareholders' equity . . . . . . . . . . . . 31,955 43,834
--------- --------
Total liabilities and shareholders' equity . . . . $ 43,419 $ 56,021
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months ended Nine Months ended
September 30, September 30,
----------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Product sales. . . . . . . . . . . . . . . . . . $ 10,194 $ 25,817 $ 35,943 $ 64,075
Services and support . . . . . . . . . . . . . . 11,650 14,420 34,808 38,423
----------- -------- ----------- ----------
21,844 40,237 70,751 102,498
Cost of sales:
Product sales . . . . . . . . . . . . . . . . . 9,093 23,234 33,004 57,362
Services and support . . . . . . . . . . . . .. 8,102 9,278 25,012 26,001
MTA contract loss recognition and other charges 0 0 4,851 0
----------- -------- ----------- ----------
17,195 32,512 62,867 83,363
----------- -------- ----------- ----------
Gross Profit:
Product....................................... 1,101 2,583 2,939 6,713
Service and support........................... 3,548 5,142 9,796 12,422
MTA contract loss recognition and other
charges....................................... -- -- (4,851) --
----------- -------- ----------- ----------
4,649 7,725 7,884 19,135
Operating expenses:
Selling, general & administrative . . . . . . 5,737 7,186 19,085 19,423
Recovery of capitalized asset . . . . . . . . 0 (139) 0 (139)
----------- -------- ----------- ----------
5,737 7,047 19,085 19,284
----------- -------- ----------- ----------
Operating income (loss) . . . . . . . . . . . . . . . . (1,088) 678 (11,201) (149)
Other income (expense):
Interest income . . . . . . . . . . . . . . . 261 212 822 630
Nex-i.com loss . . . . . . . . . . . . . . . . . (642) 0 (2,249) 0
Other Income . . . . . . . . . . . . . . . . . 372 (3) 364 (17)
----------- -------- ----------- ----------
(9) 209 (1,063) 613
----------- -------- ----------- ----------
Income (loss) before income taxes. . . . . . . . . . . (1,097) 887 (12,264) 464
Provision for income taxes . . . . . . . . . . . . . . 0 364 474 187
----------- -------- ----------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . $ (1,097) $ 523 $ (12,738) $ 277
=========== ======== =========== ==========
Basic-Net income (loss) per share . . . . . . . . . . . $ (0.17) $ .08 $ (2.01) $ .04
=========== ======== =========== ==========
Diluted-Net income (loss) per share. . . . . . . . . . $ (0.17) $ .08 $ (2.01) $ .04
=========== ======== =========== ==========
Weighted average number of common shares outstanding . 6,372 6,255 6,339 6,247
=========== ======== =========== ==========
Weighted average number of common and common equivalent
shares outstanding. . . . . . . 6,372 6,260 6,339 6,249
=========== ======== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months ended
September 30,
-----------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (12,738) $ 277
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,903 2,005
Nex-i.com loss recognition 2,249 --
MTA contract loss 4,400 --
Deferred income taxes. . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . 313 (472)
Recovery of capitalized asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (139)
Increase (decrease) from changes in:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,174 (4,924)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 902 (1,369)
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . 740 1,147
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (225) (258)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,584) 1,105
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 898 69
Costs in excess of billings/accrued MTA contract liability, net. . . . . . . (2,264) (1,036)
--------- ---------
Net cash provided (used in) by operating activities . . . . . . . . . . . . . . . . . 2,768 (3,595)
Cash flows from investing activities:
Property and equipment expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,021) (889)
Investment in nex-i.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,833) --
--------- ---------
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,854) (889)
Cash flows from financing activities
Exercises of stock options and employee stock purchases . . . . . . . . . . . . . . . . . . 440 168
Repayment of capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) (11)
Repayment of shareholder advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (675) --
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (53)
--------- ---------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . . . (249) 104
--------- ---------
Net (decrease) in cash and cash equivalents (335) (4,380)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . 16,485 13,377
--------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,150 $ 8,997
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Description of the Business and Basis of Presentation:
AlphaNet Solutions, Inc. (the "Company") is 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 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, 1999, 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.
<PAGE>
Note 2 - Net Income Per Share:
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
(unaudited)
Three Months ended Nine Months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ (1,097) $ 523 $ (12,738) $ 277
Basic:
Weighted average number of shares outstanding. . . . . . 6,372 6,255 6,339 6,247
Net income (loss) per share. . . . . . . . . . . . . . $ (0.17) $ 0.08 $ (2.01) $ 0.04
Diluted:
Weighted average number of shares outstanding . . . . . 6,372 6,255 6,339 6,247
Dilutive effects of stock options . . . . . . . . . . . -- 5 -- 2
---------- ------ -------- -------
Weighted average number of common and common
Equivalent shares outstanding 6,372 6,260 6,339 6,249
Net Income (loss) per share . . . . . . . . . . . . . . $ (0.17) $ 0.08 $ (2.01) $ 0.04
========== ======= ========== =======
</TABLE>
<PAGE>
Note 3 - Investment in nex-i.com:
On January 14, 2000, the Company invested $1.8 million in exchange for
3,101,000 shares of Series A Convertible Participating Preferred Stock 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 has 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, in which the Company did not participate. A further $9,900,000 may be
invested by the Series B investors in February 2001, depending upon nex-i.com's
satisfaction of certain operating performance milestones. Following the July
financing, the Company's investment in nex-i.com represents 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 up to 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. The warrants are exercisable for a
period of five years.
On April 27, 2000, the Company entered into an agreement with Fallen
Angel Capital, LLC, ("Fallen Angel") the general partner of Fallen Angel Equity
Fund, LP., a Delaware limited partnership which owns more than 10% of the
Company's common stock and of which a director of the Company is a principal.
Under the agreement, the Company agreed to issue, and at the Company's Annual
Meeting of Shareholders held on May 19, 2000 the Company's shareholders approved
for issuance, warrants to Fallen Angel to purchase up to 200,000 shares of
common stock of the Company at a purchase price of $5.00 per share for a
one-year period commencing May 19, 2000. The warrants were issued in
consideration for the services provided by Fallen Angel in negotiating the
business and financial terms of the Company's preferred stock investment in
nex-i.com. The warrants, with an estimated fair value of $416,000, were
accounted for as a cost of the Company's preferred stock investment.
As of September 30, 2000, the Company has recognized losses of
$2,249,000, representing a full write-down of the book value of its investment,
and associated investment fees which were capitalized.
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. As amended by SAB 101A and SAB 101Bs, this SAB must be implemented
no later than the fourth quarter of 2000. The Company is evaluating the impact
that SAB101 and related SEC guidance may have on its financial statement upon
implementation and plans to adopt this standard in the 2000 fourth quarter.
Note 5 -Acquisition of Assets of Omnitech Corporate Solutions, Inc.:
In June 2000, the Company acquired certain assets of Omnitech Corporate
Solutions, Inc. ("Omnitech") for $250,000 in cash. The asset acquisition
included all of Omnitech's then-existing information technology and network
infrastructure services business, including all of Omnitech's client contracts
and customer list. Omnitech was a provider of "thin client"/server-based
technology solutions. The Omintech acquisition was accounted for as a business
purchase combination and resulted in goodwill valued at $250,000. The operations
of Omintech have been included in the Company's operations from the date of
acquisition. Pro forma financial data has not been presented, as this
acquisition is not material.
Note 6 -MTA Contract:
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. 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.
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. The Company intends to continue to seek appropriate legal relief
to recover such increased costs, but there can be no assurance the Company will
be successful, either in whole or in part, in such efforts.
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, which the Company believes will likely result in a
reclassification of the Company's cabling labor force, as well as lower than
anticipated gross margins on networking activities and higher than expected
costs going forward, the Company revised its estimated costs for the project
during the 2000 second quarter. As a result, the Company recognized an estimated
contract loss of $4.4 million. This charge represents the Company's current
estimated loss on the MTA project (see pp. 15-16 in Management's Discussion and
Analysis of Financial Condition and Results of Operations for further discussion
of the MTA Contract).
Note 7 -Income Taxes:
Set forth below is a summary of the Company's tax provision benefit for the
three and nine months ended September 30, 2000.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 2000 September 30, 2000
------------------ ------------------
<S> <C> <C>
Federal income tax benefit at statutory rate (34%)
$(373) $ (4,181)
State income tax benefit net of Federal effect
(81) (907)
Valuation allowance 454 5,562
----- --------
$ 0 $ 474
===== ========
</TABLE>
For the nine months ended September 30, 2000, the Company recognized an income
tax valuation allowance of $5,562,000, which reduced its deferred tax asset
balance to $1,576,000, for which the Company has federal income tax carryback
availability.
<PAGE>
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 as an authorized reseller of computer
hardware and software product and, since 1990, has been developing and offering
related IT services.
During the nine month period ended September 30, 2000, the Company has
continued its investment and expansion in the professional services sector
through the following 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. The
Company's 30% interest in nex-i.com was reduced to 15% as a result of an
additional issuance by nex-i.com of preferred stock to a group of
investors in which the Company did not participate.
o Acquisition of assets of Omnitech Corporate Solutions, Inc. In June 2000,
the Company acquired certain assets of Omnitech Corporate Solutions, Inc.,
("Omnitech") a provider of "thin client"/server-based technology
solutions. This acquisition, along with the Company's partnerships with
Citrix Systems, Inc., Microsoft Corporation, and Sun Microsystems, Inc.,
is currently expected to strengthen the Company's thin-client/server
offerings. Through the acquisition of Omnitech, the Company has added
approximately 25 highly specialized engineers, technicians, and business
development professionals to its professional services workforce.
o Principals of Gogh Technology, Inc. joined the Company. The former
principals of Gogh Technology, Inc. joined AlphaNet Solutions, Inc. to
head its information security practice.
The Company's results for the third quarter and first nine months of 2000
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."
The Special Charges recorded in the 2000 third quarter consist of: $642,000
($376,000 after tax) associated with the Company's investment in nex-i.com;
$394,000 ($230,000 after tax) of severance, and $370,000 ($218,000 after tax)
attributable to a gain associated with the settlement of litigation. An
aggregate tax valuation allowance of $454,000 was recorded during the third
quarter.
Results of Operations
Three Months Ended September 30, 2000 Compared To Three Months Ended September
30, 1999
Net Sales. Net sales decreased by 45.7%, or $18.4 million, to $21.8
million for the third quarter of 2000. Product sales decreased by 60.5%, or
$15.6 million, to $10.2 million for the third quarter of 2000. This anticipated
decline in product sales is the continued result of the Company's strategy of
transitioning from a reseller of product to a professional services
organization. For the reasons indicated below, services and support revenue
decreased by 19.2%, or $2.7 million, to $11.7 million for the third quarter of
2000. In 1999, the Company's product and service business benefited from Y2K
activities. Further in prior years, as the Company resold product, various
services, including, among other things, desktop support, configuration and
installation services, were performed to support these sales. The Company is
currently pursuing and obtaining new types of service work independent of its
product business; however the rate of new business has not been equal to the
reduction in servicing its product sales business.
Gross Profit. The Company's gross profit declined by 39.8%, or $3.1
million, to $4.6 million for the third quarter of 2000. Measured as a percentage
of net sales, the Company's overall gross profit margin increased to 21.3% of
net sales for the third quarter of 2000 from 19.2% for the third quarter of
1999. Despite continued downward pricing pressure on product sales, gross profit
margin attributable to product sales increased to 10.8% for the third quarter of
2000 from 10.0% for the third quarter of 1999 as a result of more favorable
product mix. The Company expects that downward pricing pressure on products will
persist due to continued commoditization of computer products. Gross margin
attributable to services and support revenue decreased to 30.5% of services and
support revenue for the third quarter of 2000 from 35.7% for the third quarter
of 1999, but increased from 28.6% in the second quarter of 2000. During the
third quarter of 2000, services and support contributed 76.3% of the Company's
gross margin dollars, as compared to 66.6% during the third quarter of 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses before special charges in each period, were $5.3 million
in the third quarter of 2000, as compared to $5.7 million in the third quarter
of 1999. Special charges of $0.4 million and $1.5 million resulting from
severance costs and bad debt charges were recorded in the third quarter of 2000
and 1999, respectively.
Interest income, net. Interest income, net totaled $261,000 for the third
quarter of 2000, up slightly from 1999.
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 third quarter 2000 charge of $642,000 relating to this
investment. As of September 30, 2000, the Company has, on a cumulative basis,
recognized losses to the extent of its investment basis.
Income taxes. During the three months ended September 30, 2000, the
Company generated a $454,000 benefit before an income tax valuation allowance
provision. The Company recorded a tax valuation allowance totaling $454,000,
maintaining its deferred tax asset balance of $1.6 million, for which the
Company has federal income tax carryback availability. In determining the
Company's tax expense for the quarter, an effective tax rate of 41.5% was
utilized.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Net sales. Net sales decreased by 31.0%, or $31.7 million, to $70.8
million for the first nine months of 2000. Product sales decreased by 43.9%, or
$28.2 million, to $35.9 million for the first nine months of 2000. The
anticipated decline in year-to-date product sales continues to demonstrate the
Company's long-term strategy of transitioning from a product reseller to a
professional services organization. Services and support revenue decreased by
9.4%, or $3.6 million, to $34.8 million for the first nine months of 2000.
Gross Profit. The Company's gross profit decreased by 58.8%, or $11.3
million, to $7.9 million for the first nine months of 2000. Total gross profit
measured as a percentage of net sales decreased to 11.1% of net sales for the
first nine months of 2000 from 18.7% for the first nine months of 1999. This
decline is primarily attributable to second quarter of 2000 special charges of
$4.4 million associated with the Company's contract with the MTA and $0.5
million associated with unrecoverable vendor charges. Gross profit margin
attributable to product sales decreased to 8.2% for the first nine months of
2000 from 10.5% for the first nine months of 1999, primarily due to downward
pricing pressure on product sales. Gross profit margin attributable to services
and support revenue decreased to 28.1% of services and support revenue for the
first nine months of 2000 from 32.3% for the first nine months of 1999. During
the first nine months of 2000, the gross profit percentage in each successive
quarter has increased from 25.1% in the first quarter and 28.6% in the second
quarter to 30.5% in the third quarter. During the first nine months ended
September 30, 2000, services and support revenue contributed 76.9% of the
Company's gross margin dollars, excluding special charges, as compared to 64.9%
during the nine months ended September 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses before special charges in each period, were $17.1
million for the first nine months of 2000, as compared to $17.9 million for the
first nine months of 1999. During the nine months ended September 30, 2000, the
Company incurred special charges which included $1.2 million of severance and
other special compensation payments, and $0.7 million relating to a provision
for uncollectable accounts receivable related to, among other things, various
receivables from the Company's telecom business, which was divested earlier in
the year. In the third quarter of 1999, the Company recorded a provision for
uncollectable accounts receivable of $1.5 million.
Interest income, net. Interest income, net, totaled $822,000 for the
nine months ended September 30, 2000 from $630,000 for the nine months ended
September 30, 1999. This increase is primarily due to higher cash balances being
maintained by the Company during fiscal 2000 than in the prior year.
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 charges during the nine months ended September 30, 2000 of
$2,249,000 relating to this investment. On July 27, 2000, nex-i.com received
$12,100,000 in a Series B Convertible Participating Preferred Stock financing,
in which the Company did not participate. A further $9,900,000 may be invested
by the Series B investors in February 2001, depending upon nex-i.com's
satisfaction of certain performance milestones. Following the July financing,
the Company's investment in nex-i.com represents 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 made at the time of the Series A financing, the Company
received warrants to purchase up to 100,000 shares of Series B Convertible
Participating Preferred Stock at an exercise price ranging from $1.50 to $1.85
per share. The warrants are exercisable for a period of five years.
On April 27, 2000, the Company entered into a letter agreement with
Fallen Angel Capital, LLC ("Fallen Angel"), the general partner of Fallen Angel
Equity Fund, LP., a Delaware limited partnership which owns more than 10% of the
Company's common stock and of which a director of the Company is a principal.
Under terms of the letter agreement, the Company agreed to issue, and at the
Company's Annual Meeting of Shareholders held on May 19, 2000, the Company's
shareholders approved the issuance of, warrants to Fallen Angel to purchase up
to 200,000 shares of common stock of the Company at a purchase price of $5.00
per share for a one-year period commencing May 19, 2000 and ending May 18, 2001.
The warrants were issued to Fallen Angel in consideration of services provided
in negotiating the business and financial terms of the Company's preferred stock
investment in nex-i.com.
As of September 30, 2000, the Company has, on a cumulative basis,
recognized losses to the extent of its investment basis.
Income taxes. For the nine months ended September 30, 2000, the Company
recorded a benefit for income taxes of $5.1 million, which was recorded at a
41.5% effective tax rate. However, the Company has established a valuation
allowance of $5.6 million against this income tax benefit. For the nine months
ended September 30, 1999, an income tax provision of $187,000 was recorded,
which was also based upon a 41.5% effective tax rate.
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 September 30, 2000, the Company acquired approximately 49.9%, and 25.3% of
its products for resale from Ingram and Tech Data, respectively.
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. As the
market for IT products has matured, price competition has intensified and is
likely to continue to intensify. During the three months ended September 30,
2000 as compared to the three months ended September 30, 1999, the Company's
gross profits 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 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, 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 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.
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
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 and nine month periods ended September 30, 2000,
services revenue, before special charges, produced approximately 76.3% and
76.9%, respectively, of the Company's total gross profit. 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. 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. Additionally, 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.
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, as necessary the Company
has utilized and in the future is likely to utilize contract personnel, which
may adversely affect gross margins. If the Company successfully expands 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.
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, 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. The Company intends to continue to
seek appropriate legal relief to recover such increased costs, but there can be
no assurance the Company will be successful, either in whole or in part, in such
efforts.
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 with the DRO in the
first and second quarters of 2000. On August 16, 2000, the DRO conducted a
hearing on the Company's submissions and the MTA's written replies thereto.
Further written submissions from the parties were entertained by the DRO
following the hearing. It is not yet known 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. However, there can
be no assurance the MTA will approve, either in whole or in part, any equitable
adjustment in the contract amount or terms requested by the Company.
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 New York City Comptroller's Office
communicated to the Company on July 19, 2000, which the Company believes will
likely result in a reclassification of the Company's cabling labor force, as
well as lower than anticipated gross margins on networking activities and higher
than expected costs in 2000 and going forward, the Company revised its estimated
costs for the project during the 2000 second quarter. As a result, the Company
has recognized an estimated contract loss of $4.4 million. This charge
represents the Company's current estimated loss on the MTA project. As of
September 30, 2000, approximately 54% of the value of the contract was complete.
Forward-Looking Statements
Certain statements are included in this Quarterly Report on Form 10-Q
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, and are forward-looking statements within the meaning of
The Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include substantial 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 transition from product reseller to IT professional services
firm and all expected and unexpected costs and events related to such
transition, (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 which are likely to be adversely
affected during periods of rapid and concentrated hiring; (iii) the intense
competition in the markets for the Company's products and services; (iv) the
Company's ability to effectively manage its growth which will require the
Company to continue developing and improving its 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)
the Company's ability to attract, hire, train, and retain qualified technical
personnel in an increasingly competitive market; (vii) the Company's substantial
reliance on a concentrated number of key customers; (viii) uncertainties
relating to potential acquisitions, if any, made by the Company, such as the
Company's ability to integrate acquired operations and to retain key customers
and personnel of the acquired business; (ix) the Company's reliance on the
continued services of key executive officers and salespersons; and (x) material
risks and uncertainties associated with the MTA Contract. Such risks and
uncertainties may cause the Company's actual results to differ materially from
the results discussed in the forward-looking statements contained herein.
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. As amended by SAB 101A and SAB101B, this SAB must be implemented no
later than the fourth quarter of 2000. The Company is evaluating the impact
SAB101 and related SEC guidance may have on its financial statements upon
implementation and intends to adopt this standard in the 2000 fourth quarter.
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents at September 30, 2000 were $16.2 million,
compared to $16.5 million at December 31, 1999. Working capital at September 30,
2000 was $25.9 million as compared to $37.8 million at December 31, 1999,
representing a decrease of $11.9 million or 31.5%.
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 facility and the net proceeds from the Company's public
offerings. At September 30, 2000, the Company had no outstanding borrowings
under the credit facility.
Cash provided by operating activities primarily resulted from
collections of accounts receivable of approximately $9.2 million, decreases in
inventory of $0.9 million, and decreases in prepaid assets of $0.7 million,
offset by the net loss for the nine-month period of $12.7 million net of
non-cash charges. The Company's days sales outstanding in accounts receivable
decreased from 72 days at December 31, 1999 to 69 days at September 30, 2000.
Cash used in investing activities related to the Company's $1.8 million
investment in nex-i.com and capital expenditures of $1.0 million. The capital
expenditures were primarily for the purchase of computer equipment and software
used by the Company.
Cash provided by financing activities of $0.2 million primarily relates
to the proceeds from the exercise of employee stock options and employee
purchases of Company stock.
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. Effective January 1, 2000, the Company and the Bank extended the
Company's credit facility through December 31, 2000 on substantially similar
terms; however, the Bank provided $2.0 million of the $15.0 million credit line
to the Company on an uncollateralized basis. Under the credit facility, the
Company is required to maintain a minimum fixed charge coverage ratio and a
total liabilities to net worth ratio. At September 30, 2000, no amounts were
outstanding under the credit facility. At September 30, 2000, the Company was
not in compliance with the fixed charge coverage ratio. In October 2000, the
Company agreed to accept the Bank's offer to waive such non-compliance in
consideration of a cash payment to the Bank of $15,000 and the
re-collateralization of the previously uncollateralized $2.0 million portion of
the credit line.
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 the nine months ended September 30, 2000, 29,642 shares of common
stock were sold to employees under the plan for approximately $111,193, an
average price of $3.75 per share. The Company has issued an aggregate of 160,221
shares since the inception of the Employee Stock Purchase Plan at an average
price of $4.97 per share, receiving total proceeds of $796,000.
The Company purchases certain inventory and equipment through financing
arrangements with Finova Capital Corporation and IBM Credit Corporation. At
September 30, 2000, there were outstanding balances of approximately $2.3
million for Finova Capital Corporation and approximately $0.6 million 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 10, 2000, the Company consummated the settlement of the
lawsuit filed by the Company on February 13, 1996 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") for, among other
things, alleged theft of services, theft of Company property, theft of corporate
opportunity and unauthorized use of Company credit cards by the Defendants. The
Defendants had asserted certain counterclaims against the Company and certain of
its present and former directors. The settlement implemented the terms of an
Order of Disposition issued by the court in August 1999. Pursuant to the terms
of the settlement, the Company received on August 10, 2000 $331,597 from the
Defendants, an insurance carrier and another defendant named by the Company, and
all parties have released one another of all claims and counterclaims filed in
the suit. On September 21, 2000, the Company received the balance of $38,403
which was owing to it from one of the Defendants, thereby concluding this
litigation. Coincident with the settlement, the Company reimbursed Stan Gang,
the Company's Chairman and principal shareholder, for $675,000 of personal funds
which Mr. Gang previously advanced to the Company in connection with the
litigation.
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
Counts One and Two of 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 allegations
contained in Counts One and Two 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report on Form 10-Q is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALPHANET SOLUTIONS, INC.
DATE: November 9, 2000 By: DONALD A. DEIESO
---------------------------------------
Donald A. Deieso
President and Chief Executive Officer
(Principal Executive Officer)
DATE: November 9, 2000 By: WILLIAM S. MEDVE
-------------------------------------
William S. Medve
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
