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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File No. 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 of Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
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(Address of Principal Executive Office, including Zip Code)
(973) 267-0088
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(Registrant's telephone number
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
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(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
At February 28, 2001, 6,396,818 shares of Common Stock of the Company
were outstanding. The aggregate market value of Common Stock held by
non-affiliates on February 28, 2001, based on the last sales price on such date,
was approximately $5,994,000.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this
Annual Report on Form 10-K: Portions of the Registrant's definitive Proxy
Statement for its 2001 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.
TABLE OF CONTENTS
Item Page
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PART I 1. Business........................................................................................2
2. Properties.....................................................................................14
3. Legal Proceedings..............................................................................14
4. Submission of Matters to a Vote of Security Holders............................................15
PART II 5. Market for the Company's Common Equity
and Related Shareholder Matters................................................................16
6. Selected Financial Data........................................................................16
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................19
7A. Quantitative and Qualitative Disclosure About Market Risk......................................34
8. Financial Statements and Supplementary Data....................................................34
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.........................................................34
PART III 10. Directors and Executive Officers of the Company................................................35
11. Executive Compensation.........................................................................35
12. Security Ownership of Certain Beneficial
Owners and Management..........................................................................35
13. Certain Relationships and Related Transactions.................................................35
PART IV 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................................................................36
EXHIBIT INDEX.................................................................................................................37
FINANCIAL DATA AND SCHEDULES.................................................................................................F-1
SIGNATURES
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PART I
Item 1. BUSINESS.
General
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AlphaNet Solutions, Inc. ("AlphaNet Solutions" or the "Company") is
an information technology ("IT") 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. Through its
Enterprise Network Management Division, the Company also offers remote network
management, call center support, and managed security services. The Company's
customers are primarily Fortune 1000 and other large and mid-sized companies
located in the New York-to-Philadelphia corridor.
Major professional services customers include PSE&G, Mercedes-Benz of
North America, Summit Bancorp/FleetBoston, Goldman Sachs & Co., MTA New York
City Transit, an agency of the Metropolitan Transportation Authority of the
State of New York (the "MTA"), Nabisco, Matsushita Electronic, Lucent
Technologies, and Barnes & Noble.
AlphaNet Solutions has a 17-year history of responding effectively
to new opportunities in the fast-changing IT field. Starting as a
product-focused reseller of technology hardware, the Company has over the years
met the changing needs of its customers by repositioning itself from a systems
integrator to an IT professional services and networking infrastructure services
firm, focused on meeting the escalating high-technology needs of leading
organizations in virtually every industry, including financial services,
manufacturing, telecommunications, and pharmaceuticals.
The Company has continued to refine its professional service
offerings. In December 1999, the Company exited its low-margin
telecommunications business. Although the Company continues to assist its
clients in sourcing other low-margin computer hardware and software products
("IT products"), its sales and marketing efforts are directed primarily to its
higher-margin professional service offerings. In 2000, the Company expanded its
ability to secure new service offerings through its investment in nex-i.com
Inc., a provider of integrated networks in multi-tenanted office buildings, the
acquisition of Omnitech Corporate Solutions, Inc., a provider of "thin
client"/server based technology offerings and the addition of the former
principals of Gogh, Inc. to expand its information security practice. In January
2001, the Company entered into a strategic alliance with ATX Telecommunications
Services, Inc. to provide IT products and services to ATX and its clients.
The Company continues to assist its clients in sourcing IT products.
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
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competitive pricing and such value-added services as electronic product
ordering, product configuration, testing, warehousing and delivery.
The Company was incorporated in the State of New Jersey in 1984 under
the name AlphaTronics Associates, Inc. In December 1995, the Company changed its
name to AlphaNet Solutions, Inc. The address of its principal executive offices
is 7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927, and its telephone number
is (973) 267-0088.
"AlphaNet Solutions," "eMobile Solutions," "Weird Stuff Happens to
Laptops," and the Company's logo are marks of the Company. All other trade
names, trademarks or service marks appearing in this Annual Report on Form 10-K
are the property of their respective owners and are not the property of the
Company.
Forward-Looking Statements
Certain statements are included in this Annual Report on Form 10-K
which are not historical and are "forward-looking," 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 possible future growth in the IT markets, the status 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 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
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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.
Industry Background
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For most organizations today, IT is no longer just a support
function, but an increasingly essential competitive tool. The need to distribute
and access data on a real-time basis within and between organizations--and the
rapid proliferation of Internet-based technology--is redefining the way people
and organizations "connect."
Companies continue to augment their networks with a large majority
replacing these networks with Web-based infrastructures. The resulting
efficiencies have made possible the creation of worldwide channels of
information that redefine the speed with which people communicate, make
decisions, and conduct business. The design, operation, and maintenance of these
information networks have become increasingly complex tasks for many
organizations. Typically, simply to get the network operational, organizations
must conduct assessments and make decisions in several key areas:
o Workstation platform, peripherals, and software applications.
o Optimal network design.
o Network security.
o The level of network support required to assure reliable, cost-effective
operation.
The sheer complexity of creating, maintaining, and protecting the
networks has spurred an increasing number of organizations to rely on IT
professional service firms to help with every aspect of their IT operations,
freeing them to focus on their core businesses.
The Company engages its clients through professional service
contracts that typically reflect one of three primary forms: project execution,
outsourcing or delegated management, or staff augmentation. In all cases, the
Company applies the talent and project management skills of the organization to
achieve the client's goals.
The Company has proven adept at responding effectively to the needs
of this evolving marketplace as it continues to focus on high-end network
infrastructure services. The Company is positioned to capitalize on the emerging
networking opportunities by helping organizations respond to the needs of their
own changing markets.
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Services
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The Company's wide range of services includes Enterprise Network
Management, information security, server based computing, application and Web
site development, helpdesk, training, desktop services and project management.
In 2000, services accounted for 51.3% of the Company's net sales and 78.1% of
its gross profit before special charges.
Professional Services
The Company's consulting professionals provide customers the
necessary IT expertise and leading-edge technology on a 24-hour,
seven-days-a-week basis.
In addition, the Company's consultants partner and provide services
for many industry-leading manufacturers' products, including Microsoft, Cisco,
Intel, Novell, Sun Microsystems, Nortel Networks, and Compaq.
Enterprise Network Management Services
As part of its overall mission to offer complete IT solutions, the
Company's Enterprise Network Services Center ("Center") provides remote network
monitoring, resolution management, performance reporting, desktop management and
system administration services through dedicated communication links to its
customers' networks. As a single-point-of-contact installation, the Center is a
central component of the Company's total system management and support service
offerings. The Center is operational 24 hours a day, seven days a week and is
staffed with highly trained and experienced network consultants.
The Center offers proactive problem resolution by: (a) monitoring
components of a customer's network, including file servers, routers, database
servers, concentrators, workstations and printers; and (b) managing the
customers' networks to maximize their efficiency and minimize system downtime,
promptly notifying customers of problems as they occur and remedying such
problems. The customers are thereby free to focus on their core business, while
the Company monitors and manages the day-to-day operations of the customers'
network. The Center represents the Company's continued investment in
leading-edge technology and dedication to providing its customers with advanced
IT solutions.
The Company provides end-to-end network services to remote locations
from a single point in New Jersey. The Center allows the Company to market its
services to virtually any networked organization. The Company believes that the
high demand for technical resources, coupled with an increasing need for
operational efficiency and network security, will lead many organizations to
utilize remote network service options as a way to maximize labor resources,
ensure greater network security, and realize cost savings.
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Information Security Services
Vulnerability to security breaches - from hackers to serious
corporate saboteurs - grows in almost direct proportion to the rate at which
companies expand their networks. The Company provides information security
solutions to help its customers protect their networks and mission-critical
business applications and resources. Information security engineers perform
security and risk assessments to identify exposures and the business impact of a
network intrusion or compromise. Information security engineers write and review
information security policies. The Company offers Information Security awareness
training and materials, including on-line Computer Based Training ("CBT"). Based
on the client's risk tolerance, information security engineers design and
implement secure solutions to address vulnerabilities and protect mission-
critical systems and information, such as e-mail, Internet/Intranet and
e-commerce sites, customer data and intellectual property.
The Company maintains Certified Information Systems Security
Professionals ("CISSP's") on staff. CISSP's are recognized throughout the
security industry for the depth and breadth of their security expertise.
The Company maintains strong partnerships with information security
vendors including Checkpoint Software, Nokia Internet Communications, Netscreen
Technologies, Inc., Cisco Systems, WatchGuard Technologies, Inc., and RSA
Security.
Internet Services
The Company provides Internet-related services, including secure
Internet access, training, and web site design, development and maintenance. The
Company offers its customers web sites that are independently maintained on a
secure network through the use of such security technologies as firewalls and
encryption devices. The Company provides the necessary consulting, hardware, and
software installation services so that its customers have direct access to the
Internet while the Company monitors and maintains their web sites using the
Company's state-of-the-art remote network management system.
Web site design, development and maintenance services include user
interface design, web site graphic design, content creation, and management.
Through customized courses at its Learning Centers, the Company also provides
training on Internet access and navigation.
eMobile SolutionsSM
Recognizing that the corporate business community is increasingly
going "mobile," the Company has re-focused the efforts of its existing Product
Support Center ("PSC") into a business offering that focuses on the needs of
mobile users: eMobile SolutionsSM. The eMobile Solutions Business Unit leverages
the Internet to provide innovative infrastructure support services that enable
businesses to support their growing populations of mobile employees. Target
markets include Fortune 1000 corporations with a large population of mobile
assets, such as laptops or other portable computing devices. These assets are
often deployed to a large group of mobile sales people for use in a sales force
automation ("SFA") environment, but they may also be used as desktop
replacements for a subset of their overall user population.
By leveraging the Internet and the eMobile Support Center ("eMSC")
facility, the Company provides fast and reliable system repairs, identical spare
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unit replacements, configuration of hardware and software, data backup and asset
tracking. These services are also designed to leverage the Company's existing
service offerings, so that they can be combined into a tightly integrated
business solution. These include help desk services, network monitoring, and
web-based training services. In addition, the eMSC is ideally suited to
facilitate an organization's technology replacement and upgrade needs. From the
acquisition and deployment of new technology to the collection and disposal of
old technology, the eMSC can provide a complete lifecycle management solution
for corporate mobile workforces.
Application Development
As part of an enterprise management solution, the Company provides
application development consulting services primarily on a time and materials
basis. These services include customized application design and development,
enterprise resource planning, object-oriented and client/server development, and
database development services. The Company's Application Development Consultants
are highly trained professionals with extensive experience in application
development and project management. When developing applications, specific,
proven methodologies are implemented for successful and timely completion of all
projects. The consultants assist customers through all phases of the application
development process, from gathering business requirements to writing
specifications to programming, testing and documenting.
As systems migrate from traditional client/server models to the
highly scalable and distributed model of web-based solutions, many companies
require technical assistance to complete the transition. The Company's
Application Development team helps organizations meet every challenge of this
transition, from accessing information in ERP data warehouses to building
business-to-business applications or solving Intranet and enterprise application
development needs.
Professional Development Services
The Company is authorized and certified by Microsoft, Novell, Lotus,
Citrix, and Gartner Institute to offer training classes related to their
specific technologies. These classes are utilized by a variety of customers,
including network administrators, MIS executives, professional and
administrative end-users, as well as the Company's own employees. Many of the
courses offered provide attendees with the knowledge to earn specific
professional certifications.
The Company offers training in a variety of venues, including the
client's facilities, the Company's two education facilities ("Learning
Centers"), and over the Internet. Training at the Learning Centers focuses on
technical and business skills courses for customers, employees, and the general
public.
The Learning Centers are Prometric Authorized Testing Centers, which
provide independent testing services for industry certifications.
Training revenue is derived primarily from fees charged to corporate
clients for employee training, fees charged to individual students for open
enrollment classes, and fees for self-directed learning that are purchased as
web-delivered courses or self-study books.
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The Professional Development organization provides an ancillary
benefit to the Company by reducing the Company's cost to train its technical
workforce while providing the Company with highly skilled consultants. The
Company believes that its Professional Development organization provides a
strategic benefit in attracting technical talent to the Company.
Help Desk and Call Center Services
The Company's Help Desk offers two distinct services, Help Desk
Support and Help Desk Consulting, providing advanced technical support and
comprehensive software application support to corporate end-users. The Help Desk
is staffed with experienced network consultants ("Help Desk Analysts") trained
in multiple software, hardware and networking products.
Help Desk Support provides corporate end-users with telephone support
on software, hardware and networking products. Help Desk Support is capable of
providing global coverage and its breadth of services includes automatic
dispatching of on-site support, flexible staffing for coverage 24 hours a day,
seven days a week and advanced call reporting.
The Company tracks and maintains Help Desk Support service calls with
a customized call management system. This system allows the Help Desk Analysts
to provide advanced support and dispatch on-site services. The Help Desk
Analysts coordinate with major vendor support systems on a regular basis and
have access to large volumes of technical information and documentation,
personnel and diagnostic techniques.
Workstation Support Services
The Company's workstation support personnel ("Workstation Analysts")
provide customers with a wide array of IT services for end users, including
hardware and software installations, system upgrades and enhancements, remedial
and preventive maintenance, and management services. These support services are
available 24 hours a day, seven-days-a-week, depending on the needs of the
Company's customers. The Workstation Analysts also provide customized
configuration of software and hardware for workstations and servers and perform
asset deployment services to customer sites.
The Company's Workstation Analysts are authorized by many
industry-leading manufacturers, including Compaq, Dell, Hewlett-Packard, IBM,
NEC and Toshiba, to perform both in- and out-of-warranty maintenance services.
The Company offers a warranty upgrade program to provide faster response and
repair times, additional hours of coverage, warranty extensions and warranty
administration services for customers who desire broader service offerings than
those of the manufacturer. Many of the Workstation Analysts employed by the
Company are "A+ Certified." The A+ Certification Program is sponsored by the
Microcomputer Industry Association and is recognized by leading manufacturers as
the industry-wide standard of professional competency for Workstation Analysts.
The Company's Workstation Analysts service and support a wide variety of IT
products, including microcomputers, printers and associated peripherals.
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Products
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As a service to its clients, the Company offers IT products from
leading hardware manufacturers and software developers. In 2000, 48.7% of the
Company's net sales and 21.9% of its gross profits before special charges were
generated from product sales. Such products include workstations, servers,
networking and communications equipment, enterprise computing products and
application software. Through its established vendor alliances with Ingram and
Tech Data, major aggregators of computer hardware and software, the Company
provides its customers with competitive pricing and value-added services such as
electronic product ordering, product configuration, testing, warehousing and
delivery. The Company offers products from numerous industry-leading
manufacturers of computer hardware, software and networking equipment. The
Company obtains products from these manufacturers primarily through its
relationships with Ingram and Tech Data. The Company's relationships with Ingram
and Tech Data allow the Company to minimize inventory risk by ordering products
primarily on an as-needed basis. The Company believes that, in most instances,
the cost-plus purchases from Ingram and Tech Data are at prices lower than those
which could be obtained by the Company independently from the various
manufacturers and other vendors. The Company utilizes electronic ordering and
pricing systems that provide real-time status checks on the aggregators'
extensive inventories. The Company maintains electronic data interchange links
to other suppliers as well, enabling its sales team to schedule shipments
accurately, arrange for product configuration services and provide online
pricing.
Sales and Marketing
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The Company currently focuses its sales and marketing efforts on
three target markets: (i) the Enterprise level-large Fortune 1000 companies with
complex networking needs; (ii) mid-market, medium-size customers that require IT
services, but lack the necessary resources to perform critical initiatives; and
(iii) start-up organizations, or small companies requiring unique networking
capabilities as they continue to grow. Sales and marketing initiatives were
conducted with 31 employees as of December 31, 2000. The Company believes that
its direct sales and support personnel provide effective account penetration and
management, enhanced communications and long-term relationship-building with its
existing customers. The Company focuses its sales and marketing efforts
primarily in the New York-to-Philadelphia corridor. Given the concentration of
major corporations in this region and the trend toward outsourcing of IT
services, the Company does not currently anticipate the need to expand the
geographic scope of its sales and marketing efforts.
Each salesperson's compensation is, in whole or in part,
commission-based. Sales personnel derive sales leads from individual business
contacts, leads generated by the marketing department's efforts and customer
referrals from suppliers and vendors.
The Company's sales and marketing focus continues to be technology
driven, with its Network Consultants and Workstation Analysts participating with
its direct sales personnel as part of the Company's team approach to sales. The
Company's sales personnel also participate in training programs designed by
manufacturers to introduce their new and upgraded products, as well as to
provide industry information and sales technique instruction. The Company
believes that it maintains a competitive advantage by continually educating its
sales force on the latest technologies and through the increased role of
high-level technical personnel in the sales process.
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The Company's Marketing Department is responsible for developing a
strategic plan that focuses on enhancing the Company's brand awareness and
promoting its capabilities. The Company's tactical marketing efforts include the
creation and production of Company literature, executing mail and event
campaigns, website enhancements and building strong relationships with key
vendor partners.
Customers
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The Company's major customers include many Fortune 1000 corporations
in a variety of industries. The Company's major customers include:
PSE&G Nabisco
Mercedes-Benz of North America Matsushita Electric Corp.
Summit Bancorp/FleetBoston Innovex
Goldman, Sachs & Co. Lucent Technologies
MTA New York City Transit Barnes & Noble
During 2000, Summit Bancorp and Goldman, Sachs accounted for 17% and
13%, respectively, of the Company's net sales. During the fiscal year ended
December 31, 1999, PSE&G and Mercedes Benz of North America accounted for
approximately 13% and 12%, respectively of the Company's net sales. During the
fiscal year ended December 31, 1998, KPMG LLP accounted for 15% of the Company's
net sales. No other customer accounted for more than 10% of the Company's net
sales during the three years ended December 31, 2000. Sales to the Company's top
ten customers totaled approximately 73%, 65% and 66% of net sales for the years
ended December 31, 2000, December 31, 1999 and December 31, 1998, respectively.
In December 1997, the Company entered into a four-year, $20.4 million contract
with the MTA ("MTA Contract") to furnish and install local and wide-area
computer network components throughout the MTA's over 200 locations, including
subway stations, electrical power substations and a diverse group of train car
maintenance facilities. The aggregate amount of this contract was subsequently
increased to $20.6 million. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition."
Except for the MTA Contract, there are no ongoing written commitments
by customers to purchase products from the Company. All product sales by the
Company are made on a purchase-order basis. The Company normally ships products
within 30 days of receiving an order and, therefore, does not customarily have a
significant backlog. Almost all services are provided through written
commitments. In December 1997, the Company entered into the MTA Contract, under
which the Company is the prime contractor responsible for project management,
systems procurement and installation.
A significant reduction in orders from any of the Company's largest
customers could have a material adverse effect on the Company's results of
operations. There can be no assurance that the Company's largest customers will
continue to place orders with the Company, or that orders by such customers will
continue at their previous levels. The Company's service contracts generally are
terminable upon relatively short notice. There can be no assurance that the
Company's service customers will continue to enter into service contracts with
the Company or that existing contracts will not be terminated.
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Suppliers
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The Company relies on manufacturers and aggregators of computer
hardware, software and peripherals to develop, manufacture and supply all of the
computer components sold and serviced by the Company. The Company primarily
utilizes Ingram and Tech Data, major aggregators of computer hardware and
software, to procure the majority of its products for resale to its customers.
As the Company expands its business into the high-end, specialized product
market, purchases from companies such as Cisco Systems and Microsoft Select are
increasing.
The distribution agreements with Ingram and Tech Data give the
Company access to these aggregators' extensive inventories and provide the
Company with electronic ordering capability, product configuration and testing,
warehousing and delivery. In general, the Company orders IT products, including
workstations, servers, enterprise computing products, networking and
communications equipment, and applications software from such aggregators on an
as-needed basis, thereby reducing the Company's need to carry large inventories.
The Company purchases computer products from Ingram and Tech Data on
a cost-plus basis. The Company's relationship with Ingram was initiated by the
Company in late 1994 to help assure availability and competitive pricing to the
Company's customers. The Company's purchases from Ingram accounted for
approximately 49%, 57%, and 47% of the Company's total product purchases in
2000, 1999, and 1998, respectively. Such purchases totaled approximately $19.2
million, $41.9 million and $48.4 million during such respective periods. The
agreement with Ingram may be terminated with or without cause by either party
upon 30 days prior written notice. The Company initiated its relationship with
Tech Data in 1998. During 2000, 1999 and 1998, the Company purchased from Tech
Data approximately 22%, 10% and 5%, respectively, of all product purchased by
the Company. These purchases totaled approximately $8.8 million, $7.5 million
and $5.3 million during such respective periods. The agreement with Tech Data
may be terminated with or without cause by either party upon 30 days prior
written notice. The Company's agreements with Ingram and Tech Data provide for
discounted pricing and rebates provided that the Company meets agreed-upon
purchase level targets. In 2000, the Company ceased purchasing product from
Pinacor, Inc., an affiliate of MicroAge, Inc.
In addition to its agreements with Ingram and Tech Data, the Company
maintains standard authorized dealership agreements directly with many leading
manufacturers of computer hardware and software. Under the terms of these
agreements, the Company is authorized to resell to end users and provide
warranty service on the products of such manufacturers. The Company's status as
an authorized reseller facilitates the operation of the Company's business. In
general, the agreements do not require minimum purchases and include termination
provisions ranging from immediate termination to termination upon 90 days prior
written notice. Many of such agreements are based upon the Company's continued
relationships with authorized aggregators. The Company, however, generally does
not purchase products directly from these manufacturers because the Company
believes that Ingram and Tech Data provide it with several advantages, including
competitive pricing, limited inventory risk, ready product availability, product
quality assurance, access to the various vendors which may be required on a
particular project, electronic product ordering, product configuration, testing
and warehousing. The Company has not entered into any long-term contracts with
its suppliers, electing to purchase computers, computer systems, components and
parts on a purchase order basis. As a result, there can be no assurance that
such products will be available as required by the Company at prices or on terms
acceptable to the Company.
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Competition
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The markets for the Company's products and services are intensely
competitive. The Company believes that the principal competitive factors in the
market for IT products and services include price, customer service, breadth of
product and service offerings, technical expertise, the availability of skilled
technical personnel, adherence to industry standards, financial stability and
reputation. The Company's competitors include specialty consulting and other IT
service providers, established computer product manufacturers (some of which
supply products to the Company), distributors, aggregators, computer resellers
(many of which are able to purchase products at prices lower than the Company),
and systems integrators. Many of the Company's current and potential competitors
have longer operating histories and financial, sales, marketing, technical and
other resources substantially greater than those of the Company. As a result,
the Company's competitors may be able to adapt more quickly to changes in
customer needs or to devote greater resources to the sale of IT products and
services. Such competitors could also attempt to increase their presence in the
Company's markets by forming strategic alliances with other competitors or
customers of the Company, offer new or improved products and services to the
Company's customers, or increase their efforts to gain and retain market share
through competitive pricing. As the market for IT products has matured, price
competition has intensified and is likely to continue to do so. This has
resulted in continued industry-wide downward pricing pressure. Competition for
quality technical personnel remains strong, resulting in increased personnel
costs for many IT service providers. Such competition in IT products and
services has adversely affected, and likely will continue to adversely affect,
the Company's gross profits, margins and results of operations. The Company
believes there are low barriers to entry into its markets which enable new
competitors to offer competing products and services. There can be no assurance
that the Company will be able to continue to compete successfully with existing
or new competitors.
The Company believes that it competes effectively by providing
state-of-the-art network design, management, operations and security services
and a wider range of high-quality IT professional services to its corporate
customers. The Company also believes that it distinguishes itself from its
competition on the basis of its technical expertise, competitive pricing, vendor
alliances, relationships with Ingram and Tech Data, direct sales strategy and
customer-service orientation. Based on the level of its recurring business with
many of its large customers, the Company believes that it compares favorably to
many of its competitors with respect to the principal competitive factors set
forth above.
Employees
- ---------
As of December 31, 2000, the Company employed 475 full-time
employees, of whom 371 were technical personnel, 31 were engaged in sales and
marketing, and 73 were engaged in finance, administration and management. As of
December 31, 1999, the Company employed 579 full-time employees. The total
number of technical personnel declined from 450 in 1999 to 371 in 2000. The
Company implemented a reduction-in-force in January 2000 due to
lower-than-expected demand for technical services from certain clients.
-12-
None of the Company's employees are represented by a collective
bargaining agreement. Substantially all employees have executed an invention
assignment and confidentiality agreement. In addition, the Company requires that
all new employees execute such agreement as a condition of employment. The
Company believes that it has been successful in attracting and retaining skilled
and experienced personnel. There is strong competition for experienced sales and
marketing personnel and qualified technical professionals. The Company considers
its relations with its employees to be good.
The Company's success depends in part on its ability to attract,
hire, train and retain qualified managerial, technical and sales and marketing
personnel, particularly for high-end network services. Competition with other
service providers and internal corporate MIS departments for such personnel
remains strong. There can be no assurance that the Company will be successful in
attracting and retaining the technical personnel necessary to conduct and expand
its operations successfully. The Company's ability to implement its strategy to
expand and broaden the services component of its business and its results of
operations could be materially adversely affected if it is unable to attract,
hire, train and retain qualified technical personnel.
-13-
ITEM 2. PROPERTIES.
The Company currently leases or subleases all of its facilities. The
Company leases its headquarters in Cedar Knolls, New Jersey, totaling
approximately 38,000 square feet of office space. An additional 16,000 square
feet was subleased to the Company in 1998 pursuant to a sublease agreement which
expired in September 2000 and was not renewed. The current lease expires in
September 2003 and contains renewal options for two additional five-year terms.
In 1998 the Company entered into a lease for approximately 4,700 square feet of
space at a facility adjacent to the Company's headquarters, which space the
Company has subsequently sublet. The Company also leases a facility in
Parsippany, New Jersey, which totals 5,253 square feet, which the Company has
sublet pursuant to a sublease agreement expiring in May 2001. The Company leases
office space for a Learning Center in Iselin, New Jersey, consisting of 6,710
square feet, as well as its 15,000-square-foot eMobile Support Center located in
East Hanover, New Jersey. The Company leases approximately 5,410 square feet of
office space in King of Prussia, Pennsylvania for the Company's
Philadelphia-area sales office. The Company believes its headquarters, sales
offices, Learning Center and eMobile Support Center are adequate to support its
current level of operations. See Note 8 of Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS.
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 these allegations. 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 further discussed in Item 7 of this Report at
pp. 21-23.
The Company has no knowledge of any other material litigation to which it
is a party or to which any of its property is subject.
-14-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended December 31, 2000.
-15-
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "ALPH." The following table sets forth, for the periods indicated,
the high and low sales prices per share of Common Stock as reported by the
Nasdaq National Market.
QUARTER ENDED 2000 1999
- ------------- ---- ----
High Low High Low
---- --- ---- ---
March 31 (1st qtr.) $11 3/4 $4 1/4 $6 3/4 $3 7/32
June 30 (2nd qtr.) 6 9/16 3 5/8 5 1/2 2 29/32
September 30 (3rd qtr.) 5 2 3/8 5 4 1/16
December 31 (4th qtr.) 4 1/4 1 3/8 5 5/8 3 1/8
The prices shown above represent quotations among securities dealers,
do not include retail markups, markdowns or commissions and may not represent
actual transactions.
On February 28, 2001, the closing sale price for the Common Stock on
the Nasdaq National Market was $1 5/8 per share. As of February 28, 2001, the
approximate number of holders of record of the Common Stock was 314 and the
approximate number of beneficial holders of the Common Stock was 2,532.
Since going public in 1996, the Company has not paid any dividends.
The Company presently has no plans to pay dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below has been
derived from the consolidated financial statements of the Company as audited by
PricewaterhouseCoopers LLP, independent accountants. Consolidated balance sheets
at December 31, 2000 and 1999 and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2000 and notes thereto appear elsewhere
in this Report. The selected financial data presented below at December 31,
1998, 1997 and 1996 and for the years ended December 31, 1998 and 1997 has been
derived from audited financial statements which are not included in this Report.
The selected consolidated financial data set forth below should be
read in conjunction with, and is qualified in its entirety by, the Company's
consolidated financial statements, related notes and other financial information
included elsewhere in this Annual Report on Form 10-K.
-16-
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997(6) 1996(7)
---- ---- ---- ------- -------
(in thousands, except per share data)
Statement of Operations Data:
Net sales:
Product................................... $ 43,967 $83,298 $ 116,908 $147,602 $ 99,468
Services and support...................... 46,373 53,265 54,628 43,790 20,137
--------- ------- --------- -------- ---------
90,340 136,563 171,536 191,392 119,605
--------- ------- --------- -------- ---------
Product................................... 40,212 75,409 103,522 130,314 88,218
Services and support...................... 32,992 35,493 37,058 29,013 12,915
Other charges (1)........................ 4,851 - - - -
--------- ------- --------- -------- ---------
78,055 110,902 140,580 159,327 101,133
--------- ------- --------- -------- ---------
Gross profit:
Product................................... 3,755 7,889 13,386 17,288 11,250
Services and support...................... 13,381 17,772 17,570 14,777 7,222
Other charges (1)........................ (4,851) - - - -
--------- ------- --------- -------- ---------
12,285 25,661 30,956 32,065 18,472
--------- ------- --------- -------- ---------
Operating expenses:
Selling, general & administrative (2)..... 23,969 24,743 27,505 22,761 12,747
(Recovery) write-off of capitalized
asset (3)............................... - (139) 2,476 - -
--------- ------- --------- -------- ---------
23,969 24,604 29,981 22,761 12,747
--------- ------- --------- -------- ---------
Operating income (loss)...................... (11,684) 1,057 975 9,304 5,725
nex-i.com loss (4)........................... (2,249) - - - -
Other income (expense), net (5).............. 1,465 879 359 61 129
--------- ------- --------- -------- ---------
Income before income taxes................... (12,468) 1,936 1,334 9,365 5,854
Provision for income taxes................... 474 794 623 3,844 1,970
Net income (loss)............................ $ (12,942) $ 1,142 $ 711 $ 5,521 $ 3,884
========= ======= ========= ======== =========
Earnings (loss) per share - Basic............ $ (2.04) $ 0.18 $ 0.11 $ 0.97 $ 0.83
========= ======= ========= ======== =========
Weighted average shares outstanding.......... 6,353 6,253 6,272 5,719 4,690
========= ======= ========= ======== =========
Earnings (loss) per share - Diluted.......... $ (2.04) $ 0.18 $ 0.11 $ 0.93 $ 0.82
========= ======= ========= ======== =========
Weighted average shares outstanding.......... 6,353 6,265 6,331 5,905 4,737
========= ======= ========= ======== =========
As of December 31,
-----------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital........................... $26,303 $37,841 $35,375 $33,123 $14,407
Total assets.............................. 41,825 56,021 61,894 72,541 43,647
Long term debt and capital lease
obligations, 8 31 49 - 41
less current portion...................
Shareholders' equity...................... 31,756 43,834 42,536 41,722 18,921
17
(1) In the second quarter of 2000, the Company recorded special charges of
$4.9 million which included a $4.4 million charge for the Company's
estimated cost to complete the MTA Contract, and $0.5 million associated
with unrecoverable vendor charges.
(2) In Fiscal 2000, the Company incurred special charges of $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 during the year. For the third quarter of
1999, the Company recorded a provision for uncollectable accounts
receivable of $1.5 million.
(3) Reflects a one-time write-off in 1998 of capitalized software and
consulting fees associated with the Company's termination of an integrated
accounting software program and implementation thereof. In 1999, the
Company was able to recover $139,000 of such costs.
(4) In January 2000, the Company acquired a 30% equity interest (on an "as
converted basis") in nex-i.com Inc. ("nex-i.com") for $1.8 million and in
May 2000 incurred an additional cost of $416,000 from the issuance of
warrants in connection with such investment. The Company's equity interest
in nex-i.com was subsequently reduced as a result of an additional
financing of nex-i.com in July 2000, in which the Company did not
participate. The Company has taken a charge in 2000 for $2.2 million
related to its investment in nex-i.com. 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 a series of preferred securities of Eureka in
exchange for its equity securities of nex-i.com and loaned $382,098 to
Eureka and committed to invest an additional $382,098 in Eureka, subject
to certain conditions.
(5) In the third quarter of 2000, the Company recorded a gain of $370,000
relating to the settlement of litigation.
(6) On August 1, 1997, the Company consummated the acquisition of certain
assets and assumed certain liabilities of the Lande Group, Inc. ("Lande"),
a computer equipment reseller and provider of systems integration
services, for $1.5 million, including acquisition costs. The original
acquisition price was $1.8 million, subsequently reduced by the return of
$250,000 held in escrow. The operations related to the acquired assets and
liabilities of Lande are included in the accompanying consolidated
financial statements subsequent to August 1, 1997. See Note 2 of Notes to
Consolidated Financial Statements.
(7) On July 24, 1996, the Company acquired certain assets of Lior, Inc., in a
business combination accounted for under the purchase method, for $1.1
million, including acquisition costs, financed with a portion of the
proceeds from the Company's initial public offering. The operations
related to the acquired assets of Lior are included in the accompanying
consolidated financial statements subsequent to July 24, 1996.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
- -------
Founded in 1984, the Company is an IT professional services firm
specializing in network design, operation, management, and security, offering
related products and services to Fortune 1000 and other large and mid-sized
companies located primarily in the New York-to-Philadelphia corridor. As a
result of the Company's shift in focus to the professional services market, the
Company derived 49% of its revenue from assisting its clients in sourcing IT
products, down from approximately 85% of total revenue in 1995. During the same
period, the percentage of revenue related to services has increased from
approximately 15% in 1995 to approximately 51% in 2000. The Company anticipates
that this trend will continue in 2001.
Except for the MTA Contract entered into in December 1997, there are
no ongoing written commitments by customers to purchase products from the
Company and all product sales are made on a purchase-order basis. As the market
for IT products has matured, price competition has intensified and is likely to
continue to intensify. During 2000 and 1999, the Company's gross profits,
margins and results of operations were adversely affected by such continued
product pricing pressure and by a significant reduction in product purchase
orders from the Company's customers. In addition, the Company's gross profits,
margins and results of operations could be adversely affected by a disruption in
the Company's sources of product supply.
The Company offers enterprise network management, information security,
Internet-related, eMobile Solutions, applications development, professional
development, help desk, and workstation support services. Services and support
revenue is recognized as such services are performed. Most of the Company's
services are billed on a time-and-materials basis. The Company's professional
development and services are fee-based on a per-course basis. Generally, the
Company's service arrangements with its customers may be terminated by such
customers with limited advance notice and without significant penalty. The most
significant cost relating to the services component of the Company's business is
personnel costs which consist of salaries, benefits and payroll-related
expenses. Thus, the financial performance of the Company's service business is
based primarily upon billing margins (billable hourly rates less the costs to
the Company of such service personnel on an hourly basis) and utilization rates
(billable hours divided by paid hours). The future success of the services
component of the Company's business will depend in large part upon its ability
to maintain high utilization rates at profitable billing margins. The
competition for quality technical personnel remains strong, resulting in
increased personnel costs for the Company.
In 2000, the Company faced reduced manpower requirements due to completion
of Y2K projects and reduced staffing requirements at certain client accounts,
resulting in a reduction of 31 positions. Adjustments to the size of the
Company's workforce may continue to be necessary in order for the Company to
realize maximum operating efficiency while continuing to meet the needs of its
clients.
The Company may receive manufacturer rebates resulting from equipment
sales. In addition, the Company receives volume discounts and other incentives
from certain of its suppliers.
19
Except for products in transit or products awaiting configuration at a Company
facility, the Company generally does not maintain large inventory balances. The
Company's primary vendors have announced or instituted changes in their price
protection and inventory management programs as a direct result of changes in
such policies by manufacturers. Specifically, they have announced that they will
(i) limit price protection to that provided by the manufacturer, generally less
than 30 days, rather than the unlimited protection previously available; and
(ii) restrict product returns, other than defective returns, to a percentage
(the percentage varies depending on the vendor and when the return is made) of
product purchased, during a defined period, at the lower of the invoiced price
or the current price, subject to the specific manufacturer's requirements and
restrictions. At the present time, the Company does not believe these changes in
the vendor policies will have a material impact on its business. Other than
changes in such price protection and return policies, the Company is unaware
that any of its suppliers or manufacturers have changed or intend to further
change these programs. There can be no assurances that any such rebates,
discounts or incentives will continue at historical levels, if at all. Further
adverse modification, restriction or reduction in such programs could have a
material adverse effect on the Company's financial position, results of
operations, and cash flows.
The Company recognizes sales of products when title and risk of loss
passes to the customer, which takes place either when the products are shipped
or upon delivery to the customer based upon the sales terms of the respective
transactions. Consulting and other services and support revenue is recognized
when the applicable services are rendered. The Company recognizes revenue on
service contracts on a prorated basis over the life of the contracts. Revenues
under the Metropolitan Transit Authority Contract (the "MTA Contract") are
recognized on the percentage-of-completion method based on total costs incurred
relative to total estimated costs. Prepaid fees related to the Company's
training programs are deferred and amortized to income over the duration of the
applicable training program. Deferred revenue is included in accrued expenses
and represents the unearned portion of each service contract and the unamortized
balance of prepaid training fees received as of the balance sheet date.
The Company's cost of sales includes primarily, in the case of product
sales, the cost to the Company of products acquired for resale, and in the case
of services and support revenue, salaries and related expenses for billable
technical personnel. The Company's selling, general and administrative costs
consist of operating expenses, including personnel and related costs, such as
sales commissions earned by employees involved in the sales of IT products,
services and support. Personnel costs also include direct sales, marketing and
sales support, and general and administrative personnel costs. Sales commissions
are recorded as revenue is recognized.
During the last three fiscal years, the gross margins earned on services
and support sales increased from 32.2% for 1998, to 33.4% for 1999, and
decreased to 28.9% for 2000. The Company believes that its ability to provide a
broad range of technical services, coupled with its long-term relationships with
large customers, provides the Company with the potential to grow the services
component of its business. However, in the near term, the Company believes that
product sales will continue to generate a significant percentage of the
Company's gross profit.
20
The Company's net sales, gross profit, operating income and net income and
losses have varied substantially from quarter to quarter and are expected to do
so in the future. Many factors, some of which are not within the Company's
control, have contributed and may in the future contribute to fluctuations in
operating results. These factors include: the short-term nature of the Company's
customers' commitments; patterns of capital spending by customers; the timing,
size, and mix of product and service orders and deliveries; the timing and size
of new projects; pricing changes in response to various competitive factors;
market factors affecting the availability of qualified technical personnel;
timing and customer acceptance of new product and service offerings; changes in
trends affecting outsourcing of IT services; disruption in sources of supply;
changes in product, personnel, and other operating costs; and industry and
general economic conditions. Operating results have been and may in the future
also be affected by the cost, timing and other effects of acquisitions,
including the mix of revenues of acquired companies. The Company believes,
therefore, that past operating results and period-to-period comparisons should
not be relied upon as an indication of future operating performance.
The Company's operating results have been and will continue to be impacted
by changes in technical personnel billing and utilization rates. Many of the
Company's costs, particularly costs associated with services and support
revenue, such as administrative support personnel and facilities costs, are
primarily fixed costs. The Company's overall expense levels are based in part on
expectations of future revenues.
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 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 be increased, decreased, or omitted entirely on 30 days notice. The
MTA has the right to suspend the work on 10 days notice for up to 90 days and/or
terminate the contract, at any time, on notice, paying only for the work
performed to the date of termination. The project is subject to the prevailing
wage rate and classification for telecommunications workers, managed by the New
York City Controller's office, over which the Company has no control, and which
is generally adjusted in June of each year and may be so adjusted in the future.
The Company has performed services and supplied products to the MTA since
the inception of the MTA Contract. The work performed to date at MTA sites has
required greater than originally estimated labor and other costs to complete. In
May 1999, the Company submitted a formal request to the MTA for equitable
adjustment in the amount of approximately $1.5 million and for a time extension.
21
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. Pursuant to the terms of the MTA Contract, in
March 2001, the Company appealed the DRO's denial of the Company's Request to
the New York Supreme Court under an Article 78 proceeding.
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
telecommunication 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 intends to
seek 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.
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
22
current estimated loss on the MTA project. For the years ended December 31, 2000
and 1999, revenues recorded in connection with the MTA Contract amounted to
approximately $5.3 million and $3.5 million, respectively.
23
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales, and the percentage change in the
dollar amount of such data compared to the prior year:
Percentage
Percentage of Net Sales Increase
Year Ended December 31, (Decrease)
----------------------------------------- ----------------------------
2000 1999
Over Over
2000 1999 1998 1999 1998
---- ---- ---- ---- ----
Net sales:
Product ......................................... 48.7 61.0 68.2 (47.2) (28.7)
Services and support............................. 51.3 39.0 31.8 (12.9) (2.5)
----- ----- ----- -------- ------
100.0 100.0 100.0 (33.8) (20.4)
Cost of sales.......................................... 86.4 81.2 82.0 (29.6) (21.1)
----- ----- ----- -------- ------
Gross profit........................................... 13.6 18.8 18.0 (52.1) (17.1)
----- ----- ----- -------- ------
Operating expenses:
Selling, general & administrative:............... 26.5 18.1 16.0 (3.1) (10.0)
(Recovery) write-off of capitalized asset...... 0.0 (0.1) 1.4 - -
----- ----- -----
26.5 18.0 17.4 (2.6) (17.9)
----- ----- ----- -------- ------
Operating income....................................... (12.9) 0.8 0.6 (1,205.4) 8.4
----- ----- ----- -------- ------
Other income (expense), net............................ (0.9) 0.6 0.2 (189.2) 144.8
----- ----- ----- -------- ------
Income before income taxes............................. (13.8) 1.4 0.8 (744.0) 45.1
Provision for income taxes ............................ 0.5 0.6 0.4 (40.3) 27.4
----- ----- ----- -------- ------
Net income............................................. (14.3) 0.8 0.4 (1,233.3) 60.6
===== ===== ===== ======== ======
Gross profit (as a percentage of related net sales):
Product.......................................... 8.5 9.5 11.5 (52.4) (41.1)
Services and support............................. 28.9 33.4 32.2 (24.7) 1.1
Comparison of Years Ended December 31, 2000 and 1999
Net Sales: Net sales in 2000 of $90.3 million decreased 33.8%, or $46.2
million, from net sales of $136.6 million in 1999. The Company has continued to
focus on its strategy of repositioning the Company to a professional services
company. As a result, revenue from sales of products as a percentage of overall
revenues has continued to decline, from 61.0% in 1999 to 48.7% in 2000, while
services and support revenues as a percentage of overall revenues has increased
from 39.0 % in 1999 to 51.3% in 2000. Services and support revenue in 2000 of
$46.4 million decreased 12.9%, or $6.9 million, from $53.3 million in the prior
year. Many of the services performed by the Company in prior years such as
desktop support services, configuration and installation were performed to
support product sales. As product sales declined, a portion of the Company's
service revenues also declined. Product sales in 2000 of $44.0 million decreased
47.2%, or $39.3 million, from $83.3 million in the prior year. The Company's
primary sales effort is directed at selling professional services, and product
sales are offered on a select basis as a supplement to the professional services
offerings. Revenue under the MTA Contract (consisting of both product and
services) amounted to approximately $5.3 million and $3.5 million for the years
ended December 31, 2000 and 1999, respectively.
24
Gross profit: Gross profit in 2000 of $12.3 million decreased 52%, or
$13.4 million, from gross profit of $25.7 million in 1999, decreasing as a
percentage of revenues from 18.8% in 1999 to 13.6% in 2000. The decline is
attributable to a reduction in net sales, lower product and services and support
margins, and to second quarter 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 from services and support activities in 2000 of
$13.4 million decreased 24.7%, or $4.4 million, from $17.8 million in 1999 and
also declined as a percentage of services and support revenues from 33.4% in
1999 to 28.9% in 2000. Gross profit from product sales in 2000 of $3.8 million
decreased 52.4%, or $4.1 million, from $7.9 million in 1999, while declining as
a percentage of product sales from 9.5% in 1999 to 8.5% in 2000.
Selling, general and administrative expenses: Selling, general and
administrative expenses in 2000 of $24.0 million decreased 3.1%, or $0.8
million, from $24.7 million in 1999. In 2000, the Company recorded special
charges of $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, divested during the year. In 1999, the Company recorded a special
charge for uncollectable accounts receivable of $1.5 million.
Interest income, net: Interest income increased from $0.6 million to $1.1
million as a result of higher cash balances throughout 2000.
Nex-i.com: In January 2000, the Company invested in Series A convertible
participating preferred stock of nex-i.com Inc. The Company recorded its share
of losses incurred by nex-i.com to the full extent of the cost of its
investment.
Provision for income taxes: The provision for income taxes in 2000 was
$474,000. Income tax benefits of $4,979,000 were provided for at a 41.0%
effective tax rate for 2000. In 2000, tax adjustments of $5,586,000 were
recorded including a valuation allowance of $5,453,000 and other items of
$133,000. In 1999, the provision for income taxes was $794,000, which was based
upon a 41.0% effective tax rate.
Comparison of Years Ended December 31, 1999 and 1998
Net sales: Net sales decreased by 20.4%, or $34.9 million, from $171.5
million in 1998 to $136.6 million in 1999. Product sales decreased by 28.7%, or
$33.6 million, from $116.9 million in 1998 to $83.3 million in 1999. This
decline in product sales was primarily attributable to two predominantly
low-margin product accounts, partially offset by increased business with other
customers, as well as lower average selling prices due to increased competition
and other product pricing pressures. This trend has been accelerated by the
ability of customers to purchase directly from certain manufacturers at
discounted prices. Services and support revenue decreased by 2.5%, or $1.3
million, from $54.6 million in 1998 to $53.3 million in 1999.
Many of the services performed by the Company in prior years such as
desktop support services, configuration and installation were performed to
support product sales. As the overall product business declines, this type of
service revenue also declines. The Company is now focusing on providing services
25
and support that are independent of product sales such as security, training and
network operations support.
Gross profit: The Company's gross profit declined by 17.1%, or $5.3
million, from $31.0 million in 1998 to $25.7 million in 1999. This reduction in
gross profit is primarily due to the reduction in product sales; however, the
increased gross profit percentage is due to the change in mix of revenue from
the lower margin product sales in 1998 to the higher-margin services and support
revenues in 1999. Gross profit from services and support in 1999 of $17.8
million increased 1.1%, or $202,000, from $17.6 million in 1998, while
increasing as a percentage of service and support revenue from 32.2% in 1998 to
33.4% in 1999.
Selling, general and administrative expenses: Selling, general and
administrative expenses in 1999 of $24.7 million decreased 10.0%, or $2.8
million, from $27.5 million in 1998. This decrease is primarily due to
reductions in operating expenses of approximately $3.9 million relating to
reduced payroll costs, facilities, and telecommunications costs and $1.1 million
due to fourth quarter adjustments related to vacation and other accruals,
partially offset by approximately $2.0 million of bad debt provisions in 1999.
(Recovery) write-off of capitalized asset: In 1998, the Company recorded a
charge of $2.5 million to reflect a one-time write-off of capitalized software
and implementation costs associated with the Company's termination of the
implementation of an integrated accounting software program. In 1999, the
Company was able to recover $139,000 of such costs.
Other Income: Other Income in 1999 of $302,000 was primarily related to
legal settlements received of approximately $200,000 and gains on sales of
marketable securities of approximately $92,000.
Interest income, net: Interest income, net in 1999 of $577,000 increased
by $337,000 from $240,000 in 1998. This increase primarily relates to increased
cash balances maintained throughout 1999 as compared to the prior year.
Provision for income taxes: The provision for income taxes in 1999 was
$794,000. Income taxes were provided for at a 41.0% effective tax rate for 1999.
In 1998, the provision for income taxes was $623,000, which was based upon a
46.7% effective tax rate.
Risk Factors:
- -------------
The Company is focusing significant efforts on evolving its core
business from a company relying mainly on sales of product to a professional
services firm focusing primarily on network design and management. The
implementation of this strategy has resulted in reduced product sales and the
pursuit of higher-margin services revenue. There is no assurance that the
Company will be successful in effectuating this transition.
Recruitment of personnel in the IT industry remains competitive. The
Company's success depends upon its ability to recruit and retain qualified
management, business development and technical personnel. There can be no
assurance that the Company will be successful in attracting and retaining such
26
personnel in the future. Failure to attract and retain highly qualified
personnel could have a material adverse effect on the Company.
The Company's Common Stock is quoted on the Nasdaq National Market
System, and there has been substantial volatility in the market price of the
Company's Common Stock. The trading price of the Company's Common Stock has
been, and is likely to continue to be, subject to significant fluctuations in
response to variations in quarterly operating results, the gain or loss of
significant contracts, changes in management, general trends in the industry,
recommendations by industry analysts, and other events or factors. In addition,
the equity markets in general have experienced extreme price and volume
fluctuations which have affected the market price of the Company's Common Stock,
as well as the stock of many technology companies. Often, price fluctuations are
unrelated to operating performance of the specific companies whose stock is
affected.
Recently Issued Accounting Standards:
- -------------------------------------
("FAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities," is effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Statement standardizes the accounting for derivative instruments by requiring
that an entity recognize those items as assets or liabilities in the statement
of financial position and measure them at fair value. The Company is evaluating
the Statement's provisions to determine the effect on its financial statements.
In addition, the impact of FAS No. 133 will depend on the terms of future
transactions.
In December 1999, the Securities and Exchange Commission (SEC) issued
a Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Adoption of SAB 101 did not have a material effect on the
Company's results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation Number 44 "Accounting for Certain Transaction Involving Stock
Compensation." This interpretation provides changes and clarification to the
Accounting of Employee Stock Compensation. The issuance of this interpretation
did not affect the Company's results of operations.
Liquidity and Capital Resources:
- --------------------------------
Cash and cash equivalents at December 31, 2000 of $17.2 million
increased by 4.1%, or $0.7 million, from $16.5 million at December 31, 1999.
Working capital, which is the excess of current assets over current liabilities,
at December 31, 2000 was $26.3 million as compared to $37.8 million at December
31, 1999 representing a decrease of $11.5 million, or 30.5%. The improvement in
the Company's accounts receivable performance during 2000 increased the
Company's cash and cash equivalents. The decline in working capital was
primarily a result of the Company's losses for the year.
27
Since its inception, the Company has funded its operations primarily
from cash generated by operations, as well as with funds from borrowings under
the Company's credit facilities and the net proceeds from the Company's public
offerings. Cash provided by operations for the fiscal year ended December 31,
2000 was $4.1 million. As measured in day sales outstanding, the Company's
accounts receivable days outstanding decreased from 69 days at December 31, 1999
to 65 days at December 31, 2000.
Capital expenditures of $1.1 million, $1.6 million, and $4.0 million
during the years ended December 31, 2000, 1999, and 1998, respectively, were
primarily for the purchase of computer equipment and upgraded software
implementations. The Company anticipates additional capital expenditures to
expand the services component of its business and enhance its MIS
infrastructure.
On June 30, 1997, the Company and First Union National Bank (the
"Bank") executed a Loan and Security Agreement whereby the Bank expanded the
Company's credit facility to enable the Company to borrow, based upon eligible
accounts receivable, up to $15.0 million for short-term working capital
purposes. Such facility included a $2.5 million sublimit for letters of credit
and a $5.0 million sublimit for acquisition advances. Under the facility, the
Company was permitted to 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 were collateralized by a first priority lien on the Company's accounts
receivable and inventory, except for inventory for which the Bank subordinated
its position to certain other lenders pursuant to intercreditor agreements. On
September 30, 1998, the Company and the Bank executed a Loan and Security
Agreement whereby the Bank extended the Company's credit facility for an
additional year through September 30, 1999. Effective October 1, 1999, the
Company and the Bank extended the Company's credit facility on substantially the
same terms and conditions for an interim period ending December 31, 1999.
Effective January 1, 2000, the Company and the Bank extended the Company's
credit facility for an additional year ending December 31, 2000 on substantially
similar terms; however, the Bank provided $2 million of the $15 million credit
line to the Company on an uncollateralized basis. Under this credit facility,
the Company was required to maintain a minimum fixed charge coverage ratio, and
a total liabilities to net worth ratio. At December 31, 2000, the facility
expired and was not renewed.
In August 1998, the Board of Directors authorized the Company to
repurchase up to 225,000 shares of its outstanding Common Stock at market price.
On May 20, 1999, the Board of Directors authorized the Company to repurchase up
to 225,000 additional shares of its Common Stock at market price. During the
year ended December 31, 1998, 136,800 shares of the Company's Common Stock were
repurchased for approximately $667,000, an average price of $4.87 per share.
During the year ended December 31, 1999, 13,800 shares of the Company's Common
Stock was repurchased for approximately $53,000, an average price of $3.89 per
share. The Company did not repurchase any outstanding shares of stock in 2000.
As of December 31, 2000, a total of 150,600 shares of the Company's Common Stock
has been repurchased for approximately $720,000, an average price of $4.78 per
share since the inception of the repurchase program in August 1998.
28
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. In 2000, employees purchased 33,548 shares of stock at an average price
of approximately $3.51 per share at a total value of $117,000. The Company has
issued an aggregate of 164,127 shares since the inception of the Employee Stock
Purchase Plan at an average price of $4.89 per share, receiving total proceeds
of $803,000.
In January 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 (the "Series B Financing"), in which the Company did not participate.
Following the July 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 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. 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 by Eureka into shares
of Eureka preferred stock on the Maturity Date, in the discretion of the holders
of 51% of the aggregate outstanding principal of all similar notes. 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,
29
without other interest holders, to have the Company's equity interest included
in certain other registrations under such Act.
The Company purchases certain inventory and equipment through
financing arrangements with Finova Capital Corporation and IBM Credit
Corporation. At December 31, 2000, there were outstanding balances of
approximately $1.0 million for Finova Capital Corporation and approximately
$525,000 for IBM Credit Corporation under such arrangements. Obligations under
such financing arrangements are collateralized by substantially all of the
assets of the Company.
The Company believes that its available funds, together with existing
and anticipated credit facilities, will be adequate to satisfy its current and
planned operations for at least the next twelve months.
In the audit of the year-ended December 31, 1999, which was completed
in March 2000, the Company and its independent auditors identified significant
deficiencies in the design and operation of its internal control structure. The
Company's independent auditors determined such deficiencies were "reportable
conditions." The Company has implemented and is in the process of implementing
additional policies, procedures and controls to address these deficiencies.
30
SELECTED UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The table on the following page presents certain condensed unaudited
quarterly financial information for each of the eight most recent quarters
during the period ended December 31, 2000. This information is derived from
unaudited consolidated financial statements of the Company that include, in the
opinion of the Company, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of results of operations for such
periods, when read in conjunction with the audited Consolidated Financial
Statements of the Company and notes thereto appearing elsewhere in this Annual
Report on Form 10-K.
[This space left blank intentionally]
31
----------------------------------------------------------------------------------------
Quarter Ended
----------------------------------------------------------------------------------------
Statement of Income Data: (in thousands, except per share data)
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999 2000 2000 2000 2000
----------- -------- ---------- --------- --------- --------- --------- -------
Net sales:
Product.............................. $18,692 $19,566 $25,817 $19,223 $12,209 $ 13,540 $10,194 $8,024
Services and support................. 11,436 12,567 14,420 14,842 11,020 12,138 11,650 11,565
------- ------- ------- ------- ------- -------- ------ ------
30,128 32,133 40,237 34,065 23,229 25,678 21,844 19,589
------- ------- ------- ------- ------- -------- ------ ------
Cost of sales:
Product (1).......................... 16,609 17,519 23,234 18,047 11,338 12,573 9,093 7,208
Services and support................. 8,138 8,585 9,278 9,492 8,241 8,669 8,102 7,980
Other charges (2)................... - - - - - 4,851 - -
------- ------- ------- ------- ------- -------- ------ ------
24,747 26,104 32,512 27,539 19,579 26,093 17,195 15,188
------- ------- ------- ------- ------- -------- ------ ------
Gross profit:
Product (1).......................... 2,083 2,047 2,583 1,176 871 967 1,101 816
Services and support................. 3,298 3,982 5,142 5,350 2,779 3,469 3,548 3,585
Other charges (2)................... - - - - - (4,851) - -
------- ------- ------- ------- ------- -------- ------ ------
5,381 6,029 7,725 6,526 3,650 (415) 4,649 4,401
------- ------- ------- ------- ------- -------- ----- -----
Operating expenses:
Selling, general and administrative (3). 6,232 6,005 7,186 5,320 5,892 7,456 5,737 4,884
(Recovery) write-off of capitalized
asset (4)............................ - - (139) - - - - -
------- ------- ------- ------- ------- -------- ------ ------
6,232 6,005 7,047 5,320 5,892 7,456 5,737 4,884
------- ------- ------- ------- ------- -------- ------ ------
Operating income (loss)................. (851) 24 678 1,206 (2,242) (7,871) (1,088) (483)
Other income (expense), net (5)......... 249 155 209 266 265 288 633 279
Nex-i.com loss (6)...................... - - - - (335) (1,272) (642) -
------- ------- ------- ------- ------- -------- ------ ------
Income (loss) before income taxes....... (602) 179 887 1,472 (2,312) (8,855) (1,097) (204)
Provision (benefit) for income taxes (7). (250) 74 364 606 (959) 1,433 - -
------- ------- ------- ------- ------- -------- ------- -------
Net income (loss)....................... $ (352) $ 105 $523 $866 $(1,353) $(10,288) $(1,097) $ (204)
======= ======= ======= ======= ======= ======== ======= =======
Net income (loss) per share (diluted)... $ (0.06) $ 0.02 $ 0.08 $ 0.14 $ (0.21) $ (1.62) $ (0.17) $(0.03)
======= ======= ======= ======= ======= ======== ======= ========
As a Percentage of Net Sales:
Net sales:
Product.............................. 62.0% 60.9% 64.2% 56.4% 52.6% 52.7% 46.7% 41.0%
Services and support................. 38.0% 39.1% 35.8% 43.6% 47.4% 47.3% 53.3% 59.0%
------- ------ ------ ------ ------- -------- ------- -------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 82.1% 81.2% 80.8% 80.8% 84.3% 101.6% 78.7% 77.5%
------- ------ ------ ------ ------- -------- ------- -------
Gross profit............................ 17.9% 18.8% 19.2% 19.2% 15.7% (1.6)% 21.3% 22.5%
------- ------ ------ ------ ------- -------- -------- -------
Operating expenses:
Selling, general and administrative (3). 20.7% 18.7% 17.8% 15.6% 25.3% 29.1% 26.3% 24.9%
(Recovery)write-off of capitalized asset (4) - - (0.3)% - - - - -
------- ------ ------ ------ ------- -------- -------- -------
20.7% 18.7% 17.5% 15.6% 25.3% 29.1% 26.3% 24.9%
------- ------ ------ ------ ------- -------- -------- -------
Operating income (loss)................. (2.8)% 0.1% 1.7% 3.5% (9.6)% (30.7)% (5.0)% (2.4)%
Other income (expense), net............. 0.8% 0.5% 0.5% 0.8% (0.3)% (3.8)% 0% 1.4%
------- ------ ------ ------ ------- -------- -------- -------
Income before income taxes.............. (2.0)% 0.6% 2.2% 4.3% (9.9)% (34.5)% (5.0)% (1.0)%
Provision for income taxes.............. (0.8)% 0.2% 0.9% 1.8% 4.1% (5.6)% 0% 0%
------- ------ ------ ------ ------- -------- -------- -------
Net income.............................. (1.2)% 0.3% 1.3% 2.5% (5.8)% (40.1)% (5.0)% (1.0)%
======= ======= ======= ======= ======== ======== ======= =======
Gross profit (as a percentage of
related net sales):
Product (1).......................... 11.1% 10.5% 10.0% 6.1% 7.1% 7.1% 10.8% 10.2%
Services and support................. 28.8% 31.7% 35.7% 36.0% 25.2% 28.6% 30.5% 31.0%
32
(1) The quarters ended December 31, 1999 and 1998 reflect adjustments to
reduce inventories by $455,000 and $450,000, respectively.
(2) During the quarter ended June 30, 2000, the Company recorded special
charges of $4.4 million associated with the Company's contract with the
MTA and $451,000 associated with unrecoverable vendor charges.
(3) During the quarters ended March 31, 2000, June 30, 2000, and September 30,
2000, the Company recorded special charges which included $275,000,
$554,000 and $394,000, respectively, of severance and other special
compensation payments. During the quarter ended June 30, 2000, the company
recorded additional bad debt expenses of $750,000.
(4) Reflects a one-time (recovery) write-off in 1998 of capitalized software
and consulting fees associated with the Company's termination of an
integrated accounting software program and implementation thereof. In
1999, the Company was able to recover $139,000 of such costs.
(5) In the quarter ended September 30, 2000, the Company recognized a gain of
$370,000 associated with the settlement of litigation.
(6) In each of the quarters ended March 31, 2000, June 30, 2000 and September
30, 2000, the Company recorded its share of losses in its investment in
nex-i.Com, Inc., totaling $2,249,000.
(7) In each of the quarters ended June 30, 2000, September 30, 2000 and
December 31, 2000, the Company recorded an income tax valuation allowance
of $5,453,000.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to Item 14(a)(1) and (2) on page F-1 for a list of
financial statements and supplementary data required to be filed pursuant to
this Item 8.
Reference is made to Item 7 "Management's Discussion and Analysis of
Results of Operations and Financial Condition - Selected Unaudited Quarterly
Results of Operations" on pages 19-33 for selected unaudited quarterly financial
data.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information called for by this Item 10 relating to the Company's
directors and executive officers, which will be included under the headings
"Election of Directors" and "Executive Officers" in the Company's definitive
proxy statement for the 2000 Annual Meeting of Shareholders, to be filed within
120 days after the end of the Company's fiscal year, is incorporated herein by
reference to such proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this Item 11, which will be included
under the heading "Executive Compensation" in the Company's definitive proxy
statement for the 2000 Annual Meeting of Shareholders, to be filed within 120
days after the end of the Company's fiscal year, is incorporated herein by
reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this Item 12, which will be included
under the heading "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive proxy statement for the 2000 Annual
Meeting of Shareholders, to be filed within 120 days after the end of the
Company's fiscal year, is incorporated herein by reference to such proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this Item 13, which will be included
under the heading "Certain Relationships and Related Transactions" in the
Company's definitive proxy statement for the 2000 Annual Meeting of
Shareholders, to be filed within 120 days after the end of the Company's fiscal
year, is incorporated herein by reference to such proxy statement.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Consolidated Financial
Statements on page F-1.
(a) (2) Financial Statement Schedules and Supplementary Data.
Schedule II - Valuation and Qualifying Accounts.
All other financial statement schedules are omitted because
the information is not required, or is otherwise included
in the Consolidated Financial Statements or the notes
thereto included in this Annual Report on Form 10-K.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on pages 36-40.
(b) Reports on Form 8-K.
The Company filed no Current Reports on Form 8-K during the
last quarter of the period covered by this Annual Report.
36
EXHIBIT INDEX
Exhibit Description of
No. Exhibit
- ------ --------------
3.1* Amended and Restated Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1*# 1995 Stock Plan of the Company.
4.2*# 1995 Non-Employee Director Stock Option Plan.
4.3*# 401(k) Plan, adopted October 1991.
10.1*# Employment Agreement dated October 1, 1995 between the
Company and Stan Gang.
10.2*# Employment Agreement dated October 1, 1995 between the
Company and Bruce Flitcroft.
10.3*# Employment Agreement dated October 1, 1995 between the
Company and Philip M. Pfau.
10.4*# Employment Agreement dated October 1, 1995 between the
Company and Dennis Samuelson.
10.5*# Employment Agreement dated October 1, 1995 between the
Company and Lawrence Mahon.
10.6*# Employment Agreement dated October 1, 1995 between the
Company and John Centinaro.
10.7*# Employment Agreement dated October 1, 1995 between the
Company and John Crescenzo.
10.8*# Employment Agreement effective November 1, 1995 between
the Company and Gary S. Finkel.
10.9* Lease dated June 27, 1994 by and between Sutman Associates
and the Company, as amended.
10.10* Form of Invention Assignment and Confidentiality Agreement.
37
10.11* Agreement dated July 1, 1994 by and between the Company
and MicroAge Computer Centers, Inc., as amended.
10.12* Reseller Agreement dated November 7, 1994 by and between
the Company and Ingram Alliance Reseller Company, a
division of Ingram Micro, Inc. as amended.
10.13* Agreement for Wholesale Financing dated May 20, 1988
by and between the Company and IBM Credit Corporation.
10.14+ Dealer Loan and Security Agreement by and between the
Company and Finova Capital Corporation dated December
20, 1996.
10.15* Agreement by Stan Gang dated February 19, 1996 to indemnify
the Company for certain losses.
10.16(lambda) Asset Purchase Agreement dated July 18, 1996 by and between
Stan Gang and Lior, Inc.
10.17(lambda) Assignment of Asset Purchase Agreement dated July 24, 1996
by and between Stan Gang and the Company.
10.18** Loan and Security Agreement dated June 30, 1997 by and
between First Union National Bank and the Company.
10.19** Asset Purchase Agreement dated August 1, 1997 by and
between the Company and The Lande Group, Inc.
10.20## Assignment of lease dated August 1, 1997 by and
between The Lande Group, Inc., 460 West 34th
Street Associates, and the Company of a lease dated
December 23, 1996 by and between 460 West 34th Street
Associates and The Lande Group, Inc.
10.21## Form of Indemnification Agreement entered into by past and
present Directors and Officers.
10.22*** First Amendment to and Reaffirmation of Loan Document dated
September 30, 1998 by and between First Union National Bank
and the Company.
10.23*** Revolving Note dated September 30, 1998 by and between
first Union National Bank and the Company.
10.24**** Sublease, American International Recovery, Inc. to the
Company.
38
10.25***** Employee Stock Purchase Plan.
10.26 @ Sub-Sublease Agreement dated as of May 25, 1999 by and
between the Company and Datajump, Inc.
10.27 @ Form of Change of Control Agreements entered into as of
June 8, 1999 with certain executive officers of the
Company.
10.28= Second Amendment to and Reaffirmation of Loan Documents
dated as of September 28, 1999 by and between First Union
National Bank and the Company.
10.29= Revolving Note dated as of September 28, 1999 by and
between First Union National Bank and the Company.
10.30++ Third Amendment to and Reaffirmation of Loan Documents
dated as of January 1, 2000 by and between First Union
National Bank and the Company.
10.31++ Revolving Note A dated as of January 1, 2000 by and between
First Union National Bank and the Company.
10.32++ Revolving Note B dated as of January 1, 2000 by and between
First Union National Bank and the Company.
10.33++ Securities Purchase Agreement dated as of January 14, 2000
by and among the Company, Fallen Angel Equity Fund LP, John
L. Steffens and nex-i.com inc.
10.34++ Registration Rights Agreement dated as of January 14, 2000
by and among the Company, Fallen Angel Equity Fund LP, John
L. Steffens and nex-i.com inc.
10.35++ Co-Sale Agreement dated as of January 14, 2000 by and among
the Company, Fallen Angel Equity Fund LP, John L. Steffens,
nex-i.com inc. and Ira A. Baseman.
10.36 Fourth Amendment to and Reaffirmation of Loan Document
dated December 21, 2000 by and between First Union National
Bank and the Company.
10.37 Revolving Note dated as of December 21, 2000 by and between
First Union National Bank and the Company.
39
10.38 Plan of Merger of Eureka Telecommunications II, Inc. with
and into nex-i.com inc.
10.39 Second Amended and Restated Certificate of Incorporation of
Eureka Broadband Corporation.
21+ Subsidiaries of the Company.
23 Consent of PricewaterhouseCoopers LLP.
- ---------
* Incorporated by reference to the Company's Registration Statement of
Form S-1 (Registration Statement No. 33-97922) declared effective on
March 20, 1996.
** Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 1997, filed with the Commission on
August 13, 1997.
*** Incorporated by reference to the Company's Amended Form 10-Q for the
quarterly period ended September 30, 1998, filed with the Commission
on November 25, 1998.
**** Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 1998, filed with the Commission on
August 14 , 1998.
***** Incorporated by reference to the Company's Registration Statement on
Form S-8 dated June 29, 1998.
(lambda) Incorporated by reference to the Company's Current Report on Form
8-K, filed with the Commission on August 5, 1996.
# A management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
+ Incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1996 filed with the Commission on March 27, 1997.
@ Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 1999, filed with the Commission on
August 12, 1999.
= Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended September 30, 1999, filed with the Commission
on November 12, 1999.
++ Incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1999 filed with the Commission on March 30, 2000.
40
ALPHANET SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants....................................................................................... F-2
Consolidated balance sheets as of December 31, 2000 and 1999............................................................ F-3
Consolidated statements of operations for the years ended December 31, 2000, 1999, and 1998............................. F-4
Consolidated statements of changes in shareholders' equity for the years ended December 31, 2000,
1999 and 1998........................................................................................................... F-5
Consolidated statements of cash flows for the years ended December 31, 2000, 1999 and 1998 ............................. F-6
Notes to consolidated financial statements.............................................................................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of AlphaNet Solutions, Inc.:
In our opinion, the accompanying consolidated financial statements listed in the
accompanying index appearing under Item 14(a)(1) on page 36 present fairly, in
all material respects, the financial position of AlphaNet Solutions, Inc. and
its wholly-owned subsidiary at December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index appearing under
Item 14(a)(2) on page 36 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, NJ
February 22, 2001
F-2
ALPHANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
--------------------------
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents....................................................... $17,164 $16,485
Accounts receivable, less allowance for doubtful accounts of
$3,923 and $3,289 at December 31, 2000 and 1999, respectively............ 16,340 26,700
Inventory....................................................................... 858 2,533
Income taxes.................................................................... 1,576 1,889
Prepaid expenses and other current assets....................................... 426 1,234
Costs in excess of billings................................................... - 481
------- -------
Total current assets...................................................... 36,364 49,322
Property and equipment, net........................................................... 3,235 4,459
Goodwill, net........................................................................ 2,134 2,109
Other assets ....................................................................... 92 131
------- -------
Total assets.............................................................. $41,825 $56,021
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.................................... $ 23 $ 20
Accounts payable................................................................ 4,405 7,473
Accrued expenses................................................................ 3,540 3,988
Accrued contract loss........................................................... 2,093 -
------- -------
Total current liabilities................................................. 10,061 11,481
Advance from principal shareholder.................................................... - 675
Capital lease obligations............................................................. 8 31
------- -------
Total liabilities......................................................... 10,069 12,187
------- -------
Commitments and contingencies (Note 8)................................................
Shareholders' equity:
Preferred stock-- $0.01 par value; authorized 3,000,000 shares,
none issued.................................................................. - -
Common stock-- $0.01 par value; authorized 15,000,000 shares,
6,536,209 and 6,423,399 shares issued and outstanding at
December 31, 2000 and 1999, respectively.................................... 65 64
Additional paid-in capital...................................................... 35,013 34,150
(Accumulated Deficit) Retained earnings......................................... (2,602) 10,340
Treasury stock-- at cost; 150,600 shares at December 31, 2000
and 1999, respectively..................................................... (720) (720)
------- -------
Total shareholders' equity................................................ 31,756 43,834
------- -------
Total liabilities and shareholders' equity............................................. $41,825 $56,021
======= =======
See accompanying notes to consolidated financial statements.
F-3
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
--------------------------------------------
2000 1999 1998
---- ---- ----
Net sales:
Product $43,967 $ 83,298 $ 116,908
Services and support............................................. 46,373 53,265 54,628
-------- -------- --------
90,340 136,563 171,536
-------- -------- --------
Cost of sales:
Product 40,212 75,409 103,522
Services and support............................................. 32,992 35,493 37,058
Other charges.................................................. 4,851 - -
-------- -------- --------
78,055 110,902 140,580
-------- -------- --------
Gross profit............................................ 12,285 25,661 30,956
-------- -------- --------
Operating expenses:
Selling, general and administrative.............................. 23,969 24,743 27,505
(Recovery) write-off of capitalized asset...................... - (139) 2,476
-------- -------- --------
23,969 24,604 29,981
-------- -------- --------
Operating (loss) income............................................... (11,684) 1,057 975
Other income and expenses:
Interest income, net............................................. 1,075 577 240
Nex-i.com........................................................ (2,249) - -
Other income..................................................... 390 302 119
-------- -------- --------
(784) 879 359
(Loss) Income before income taxes...................................... (12,468) 1,936 1,334
Provision for income taxes............................................. 474 794 623
-------- -------- --------
Net (loss) income...................................................... ($12,942) $1,142 $ 711
======== ======== ========
Net (loss) income per share:
Basic............................................................. ($2.04) $ 0.18 $ 0.11
-------- -------- --------
Diluted.... ($2.04) $ 0.18 $ 0.11
-------- -------- --------
Shares used to compute net income (loss) per share:
Basic............................................................. 6,353 6,253 6,272
-------- -------- --------
Diluted........................................................... 6,353 6,265 6,331
-------- -------- --------
See accompanying notes to consolidated financial statements.
F-4
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Common Common Treasury Treasury Paid-In Retained Earnings
Shares Stock Shares Stock Capital (Accumulated Total
Deficit)
-------- ------- -------- --------- ---------- --------------------------------
Balance at December 31, 1997........... 6,257 $ 63 - - $ 33,172 $ 8,487 $ 41,722
Exercise of stock options........ 28 - - - 261 - 261
Employee stock purchases......... 81 - - - 509 - 509
Purchase treasury stock.......... - - (137) (667) - - (667)
Net income....................... - - - - - 711 711
----- ---- ---- ---- -------- ------- --------
Balance at December 31, 1998........... 6,366 $ 63 (137) (667) $ 33,942 $ 9,198 $ 42,536
Exercise of stock options........ 7 - - - 32 - 32
Employee stock purchases......... 50 1 - - 176 - 177
Purchase of treasury stock....... - - (14) (53) - - (53)
Net income....................... - - - - - 1,142 1,142
----- ---- ---- ---- -------- ------- --------
Balance at December 31, 1999........... 6,423 $ 64 (151) ($720) $ 34,150 $10,340 $ 43,834
Exercise of stock options........ 79 1 - - 330 - 331
Employee stock purchases......... 34 - - - 117 - 117
Warrant Issuance................. - - - - 416 - 416
Net loss......................... - - - - - (12,942) (12,942)
----- ---- ---- ---- -------- ------- --------
Balance at December 31, 2000........... 6,536 $ 65 (151) ($720) $ 35,013 ($2,602) $ 31,756
===== ==== ==== ==== ======== ======= ========
See accompanying notes to consolidated financial statements.
F-5
ALPHANET SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
---------------------------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net (loss) income................................................................. ($12,942) $ 1,142 $ 711
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Nex-i.com loss recognition.................................................... 2,249 - -
MTA contract loss............................................................. 4,400 - -
Depreciation and amortization................................................. 2,518 2,666 2,662
Deferred income taxes......................................................... 313 (128) (110)
Loss on disposal of capital asset............................................. - 149 -
Provision for accounts receivable............................................. 923 1,989 414
Provision for inventory....................................................... 32 300 399
(Recovery) write-off of capitalized asset...................................... - (139) 2,476
Increase (decrease) from changes in:
Accounts receivable......................................................... 9,437 4,368 16,917
Inventories................................................................. 1,643 672 1,037
Prepaid expenses and other current assets................................... 808 1,075 1,289
Other assets................................................................ 40 (22) 324
Accounts payable............................................................ (3,068) (3,460) (6,849)
Accrued expenses............................................................ (448) (2,742) (5,449)
Billing in excess of costs.................................................. (1,826) (1,296) 815
-------- ------- -------
Net cash provided by operating activities...................................... 4,079 4,574 14,636
-------- ------- -------
Cash flows from investing activities:
Property and equipment expenditures............................................... (1,091) (1,618) (3,999)
Acquisition of businesses......................................................... (250) - -
Proceeds from sale of equipment.................................................. 22 11 -
Investment in Nex-i.com.......................................................... (1,834) - -
-------- ------- -------
Net cash used in investing activities.......................................... (3,153) (1,607) (3,999)
-------- ------- -------
Cash flows from financing activities:
Repayment of capital lease obligations............................................ (20) (15) (52)
Repayment of Shareholder Advance................................................. (675) - -
Net proceeds from sales of common stock........................................... 117 177 509
Exercise of stock options......................................................... 331 32 261
Purchase of treasury stock........................................................ - (53) (667)
-------- ------- -------
Net cash (used in) provided by financing activities........................... (247) 141 51
-------- ------- -------
Net increase in cash and cash equivalents............................................ 679 3,108 10,688
Cash and cash equivalents, beginning of period....................................... 16,485 13,377 2,689
-------- ------- -------
Cash and cash equivalents, end of period............................................. $ 17,164 $16,485 $13,377
======== ======= =======
See accompanying notes to consolidated financial statements.
F-6
ALPHANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Business:
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.
Basis of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All material intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
has bank balances, including cash equivalents, which at times may exceed
Federally insured limits.
Financial Instruments:
The carrying value of financial instruments such as cash and cash
equivalents, trade receivables, and payables approximates their fair value at
December 31, 2000 and 1999. As of December 31, 2000 and 1999, there were no
amounts outstanding under the Company's credit facility.
Inventory:
Inventory, consisting entirely of goods for resale, are stated at the
lower of cost or market, with cost determined on the weighted average method.
Property and Equipment:
Property and equipment are stated at cost less accumulated depreciation.
Repairs and maintenance costs which do not extend the useful lives of the assets
are expensed as incurred. The Company provides for depreciation on property and
equipment, except for leasehold improvements, on the straight-line method over
the estimated useful lives of the assets, generally two to seven years.
Leasehold improvements are amortized on the straight-line method over the
shorter of the estimated useful lives of the assets or the remaining term of the
applicable lease.
F-7
Costs of computer software developed or obtained for internal use and
costs associated with technology under development are capitalized and amortized
over the estimated useful lives of the assets, generally two-to-five years.
Capitalization of costs begins when conceptual and design activities have been
completed, and when management has authorized and committed to fund a project.
Costs capitalized include external and internal direct costs of labor, materials
and services. Costs associated with training and general and administrative
activities are expensed as incurred.
Recoverability of Long-Lived Assets:
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its long-lived
assets from expected future undiscounted cash flows. If the total expected
future undiscounted cash flows is less than the carrying amount of the assets, a
loss is recognized for the difference between the fair value (computed based
upon the expected future discounted cash flows) and the carrying value of the
assets.
Stock-Based Compensation:
In 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation" ("FAS 123") which requires
companies to measure stock compensation plans based on the fair value method of
accounting or to continue to apply APB No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and to provide pro forma footnote disclosure under the
fair value method. Effective January 1, 1996, the Company adopted the
disclosure-only provisions of FAS 123 and continues to follow APB 25 and related
interpretations to account for the Company's stock compensation plans.
Revenue Recognition:
The Company recognizes sales of products when title and risk of loss
passes to the customer, which takes place either when the products are shipped
or upon delivery to the customer based upon the sales terms of the respective
transactions. Consulting and other services and support revenue is recognized
when the applicable services are rendered. The Company recognizes revenue on
service contracts on a prorated basis over the life of the contracts. Revenues
under the Metropolitan Transit Authority Contract (the "MTA Contract") are
recognized on the percentage-of-completion method based on total costs incurred
relative to total estimated costs. Prepaid fees related to the Company's
training programs are deferred and amortized to income over the duration of the
applicable training program. Deferred revenue is included in accrued expenses
(See Note 5) and represents the unearned portion of each service contract and
the unamortized balance of prepaid training fees received as of the balance
sheet date.
In December 1999, the Securities and Exchange Commission ("SEC") issued a
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC Staff's views in applying
generally accepted accounting principles to revenue recognition in Financial
Statements. Adoption of SAB 101 did not have a material effect on the Company's
results of operations.
F-8
In connection with the Company's product sales, it receives manufacturer
rebates and other incentives on product sales to third parties. The Company
accrues for such rebates and incentives, as earned, and they are recorded as a
reduction to cost of goods sold.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company's most significant accounting estimates include
assessing the collectability of accounts receivable, inventory valuation, rebate
accruals, the realizability of MTA Contract costs, the realizability of deferral
tax assets, and the amortization period of intangibles. Actual results could
differ from those estimates. The markets for the Company's services and products
are characterized by intense competition, technology advances and new
product/service introductions, all of which could impact the future value of the
Company's assets.
In December 1997, the Company entered into a four-year, $20.4 million
contract with the MTA to furnish and install local and wide-area computer
network components including network and telecommunications hardware, software
and cabling throughout certain of 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.
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. Pursuant to the terms of the MTA Contract, in
March 2001, the Company appealed the DRO's denial of the Company's Request to
the New York Supreme Court under an Article 78 proceeding.
F-9
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
telecommunication 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 intends to
seek 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.
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. For the years ended December 31, 2000
and 1999, revenues recorded in connection with the MTA Contract amounted to
approximately $5.3 million and $3.5 million, respectively.
Income Taxes:
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized based upon differences arising from the carrying
amounts of the Company's assets and liabilities for tax and financial reporting
purposes using enacted tax rates in effect for the year in which the differences
are expected to reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period when the change in tax
rates is enacted.
F-10
Reclassifications:
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
Retirement Plan:
The Company adopted a 401(k) retirement plan in 1991. Employees of the
Company who have attained the age of 21 are eligible to participate in the plan.
Employees can elect to contribute up to 15% of their gross salary to the plan.
The Company may make discretionary matching cash contributions up to 2% of the
salary of the participating individual employee. Participants vest in the
Company's contributions to the plan over a six-year period based upon years of
service. Participants are fully vested at all times in their employee
contributions to the plan. The Company's matching contributions were $304,000,
$377,000 and $446,000 to this plan in 2000, 1999 and 1998, respectively.
Concentrations of Credit Risk:
Financial instruments, which potentially subject the Company to
significant concentrations of credit risk, consist principally of
interest-bearing investments and accounts receivable.
The Company maintains cash and cash equivalents and investments with
various major financial institutions. The Company performs periodic evaluations
of the relative credit standing of these financial institutions.
At December 31, 2000, approximately 58.4% of the Company's accounts
receivable were due from ten customers. The Company's customer base is
principally comprised of Fortune 1000 companies and, accordingly, the Company
generally does not require collateral. The Company performs credit evaluations
of customers and establishes credit limits as appropriate.
Business Segments:
The Company operates in one business segment, as a provider of IT
technology solutions for its clients. To provide these solutions, the Company
provides consulting services and, if necessary, products.
F-11
2. Business Combination
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 certain of Omnitech's client
contracts and customer list. Omnitech was a provider of "thin
client"/server-based technology solutions. The Omnitech acquisition was
accounted for as a business purchase combination and resulted in goodwill valued
at $250,000, which is being amortized over three years. The operations of
Omnitech 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.
As of December 31, 2000 and 1999, the Company had goodwill of $2,134,000
and $2,109,000 related to three acquisitions accounted for as purchase business
combinations. The assigned goodwill lives range from 3-15 years. Amortization of
intangible assets for the years ended December 31, 2000, 1999, and 1998 was
approximately $225,000, 176,000, and $170,000, respectively.
3. Inventory
Inventory consists of the following:
---------------------------
December 31,
(in thousands)
---------------------------
2000 1999
---- ----
Inventory-finished products............................................... $1,145 $2,833
Less: Reserve for obsolescence........................................... 287 300
------ ------
$ 858 $2,533
====== ======
4. Property and Equipment, net
Property and equipment, net, consists of the following:
---------------------------
December 31,
(in thousands)
---------------------------
2000 1999
---- ----
Furniture, fixtures and equipment......................................... $11,493 $10,582
Transportation equipment.................................................. 286 286
Leasehold improvements.................................................... 1,146 992
------- -------
12,925 11,860
Less-- Accumulated depreciation and amortization.......................... 9,690 7,401
------- -------
$ 3,235 $ 4,459
======= =======
Depreciation expense and amortization of leasehold improvements for the
years ended December 31, 2000, 1999 and 1998 were, $2,293,000, $2,490,000, and
$2,492,000, respectively.
F-12
5. Accrued Expenses
Accrued expenses consist of the following:
--------------------------
December 31,
(in thousands)
--------------------------
2000 1999
---- ----
Accrued payroll and vacation costs........................................ $1,103 $1,970
Deferred revenue.......................................................... 2,093 1,438
Sales taxes............................................................... 154 300
Other..................................................................... 190 280
------ ------
$3,540 $3,988
F-13
6. Debt and Capital Lease Obligations
Notes Payable -- Bank:
On June 30, 1997, the Company and the Bank executed a Loan and Security
Agreement whereby the Bank expanded the Company's facility (the "Facility") to
enable the Company to borrow, based upon eligible accounts receivable, up to
$15.0 million for short-term working capital purposes. The Facility included a
$2.5 million sublimit for letters of credit and a $5.0 million sublimit for
acquisition advances. Under the Facility, the Company was entitled to borrow,
subject to certain post-closing conditions and covenants, (i) for working
capital purposes at the Bank's prime rate less 0.50% or LIBOR plus 1.25% and
(ii) for acquisitions at the Bank's prime rate less 0.25% or LIBOR plus 1.50%.
The Company's obligations under such facility were collateralized by a first
priority lien on the Company's accounts receivable and inventory, except for
inventory for which the Bank has or will have subordinated its position to
certain other lenders pursuant to intercreditor agreements. Effective January 1,
2000, the Company and the Bank extended the Facility to December 31, 2000 on
substantially similar terms; however, the Bank provided $2.0 million of the
$15.0 million credit line to the Company on a uncollaterlized basis. Under the
Facility, the most restrictive financial covenants required the Company to
maintain a minimum fixed charge coverage ratio and a total liabilities to net
worth ratio. As of December 31, 1999 and 1998, there were no amounts outstanding
under the Facility. The Facility expired on December 31, 2000 and was not
renewed.
7. Stock Ownership and Compensation Plans
At December 31, 2000, the Company had two stock-based compensation plans.
The Company applies APB 25 and related interpretations in accounting for its
plans. During 2000, 1999 and 1998, no compensation cost has been recognized for
its stock option plans, which are described below. Had compensation cost been
determined based on the fair value of the options at the grant dates consistent
with the method prescribed under FAS 123, the Company's pro forma net income and
pro forma earnings per share would have been reduced to the adjusted pro forma
amounts indicated below:
2000 1999 1998
---- ---- ----
(in thousands, except per share amounts)
Net income
As reported..................................................... ($12,942) $1,142 $ 711
Pro forma ...................................................... ($13,363) 789 223
Net income per share:
As reported:....................................................
Basic...................................................... ($2.04) $ 0.18 $0.11
Diluted.................................................. ($2.04) $ 0.18 $0.11
Pro forma:
Basic.................................................... ($2.10) $ 0.13 $0.04
Diluted.................................................. ($2.10) $ 0.13 $0.04
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions for
2000, 1999, and 1998: dividend yield of 0%; expected volatility of approximately
95% for 2000 and 67% for 1999 and 1998; risk free interest rates of
approximately 6%; and an expected holding period of six years.
F-14
1995 Stock Plan:
On August 25, 1995, the Company's 1995 Stock Plan (the "Plan") was adopted
by the Board of Directors and approved by the shareholders of the Company. A
total of 1,000,000 shares is reserved for issuance upon exercise of options
granted or to be granted under the Plan The options expire ten years after the
date of grant. Some of the options issued under the Plan become exercisable in
five equal annual installments commencing one year after the date of grant
provided that the optionee remains an employee at the time of vesting of the
installments. Other options issued under the Plan vest 25% immediately upon
grant and the balance in three equal annual installments.
1995 Non-Employee Director Stock Option Plan:
In 1995, the Board of Directors adopted and the Company's shareholders
approved the Company's 1995 Non-Employee Director Stock Option Plan, which
provides for the grant of options to purchase a maximum of 100,000 shares of
Common Stock of the Company to non-employee Directors of the Company. As
subsequently amended by the Company's shareholders in 1999, the 1995
Non-Employee Director Stock Option Plan provides that each person who is elected
a Director of the Company and who is not also an employee or officer of the
Company shall be granted, on the effective date of such election and each
successive date on which he or she is re-elected a Director, an option to
purchase 5,000 shares of Common Stock, at an exercise price per share equal to
the then fair market value of the shares. The options, which expire ten years
after the date of grant, vest immediately upon grant.
A summary of the stock options granted under the Plan and the 1995
Non-Employee Director Stock Option Plan as of and for the years ended December
31, 2000, 1999, and 1998 is presented below:
F-15
Year Ended December 31,
2000 1999 1998
----------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
----- ----- ----- ----- ----- -----
Outstanding at beginning of year................. 856 $4.37 542 $5.15 670 $10.58
Granted.......................................... 244 4.40 542 4.18 63 6.72
Exercised........................................ (79) 4.20 (7) 4.25 (28) 9.32
Forfeited........................................ (380) 4.34 (221) 4.25 (163) 4.27
--- ---- --- ---- --- -----
Outstanding at end of year....................... 641 4.18 856 4.37 542 5.15
=== ==== === ==== === ====
Options exercisable at end of year............... 352 4.22 289 4.75 213 5.04
=== ==== === ==== === ====
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------------------
Range of Number Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price
------ ----------- ---------------- -------------- ----------- --------------
$2.00 4,500 9.8 $ 2.00 1,125 $ 2.00
$3.13 - $4.62 582,080 8.0 $ 4.06 327,505 $ 4.14
$5.31 - $6.50 54,500 9.3 $ 5.66 23,000 $ 5.54
The weighted-average fair value of options granted during 2000, 1999, and
1998 was $3.05, $2.37 and $4.26, respectively. Effective December 15, 1998, all
then-outstanding stock options were repriced to $4.25 per share, except stock
options issued pursuant to the 1995 Non-Employee Director Stock Option Plan and
2,500 shares previously issued at $4.00.
F-16
8. Commitments and Contingencies
The Company occupies eight facilities under operating leases which expire
at various dates through April 2003 and call for annual base rentals plus real
estate taxes. The future minimum payments under non-cancelable leases as of
December 31, 2000 are as follows:
Net
Lease Sublease Lease
Obligations Rentals Obligations
(in thousands)
2001......................... $ 927 $ 90 $ 837
2002......................... 739 60 679
2003......................... 359 - 359
------ ---- ------
$2,025 $150 $1,875
====== ==== ======
Rent expense, including real estate taxes, for the years ended December
31, 2000, 1999, and 1998 was $898,000, $1,027,000, and $1,178,000, respectively.
The Company has obtained financing terms from IBM Credit Corporation and
Finova Capital Corporation for the purchase of inventory. The payables are
collateralized by substantially all the assets of the Company. The balances
included in accounts payable at December 31, 2000, 1999, and 1998 were
$1,540,000, $2,543,000, and $7,407,000, respectively. On December 26, 2000, the
Company was advised that Finova Capital Corporation was exiting this line of
business. Under the Company's current agreement with IBM Credit Corporation,
there is sufficient availability, to meet the current requirements for the
purchase of inventory.
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 these allegations. 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. See Note 1 - Use of Estimates.
The Company has no knowledge of any other material litigation to which it
is a party or to which any of its property is subject.
F-17
9. Supplementary Cash Flow Information
Following is a summary of supplementary cash flow information for the
years ended December 31, 2000, 1999 and 1998:
Year Ended December 31,
(in thousands)
----------------------------------------
Cash Payments: 2000 1999 1998
------------ ----------- -----------
Interest paid........................................................... $ 10 $ 24 $ 77
Income taxes paid....................................................... 425 273 2,678
Non-cash investing and financing activities:
Equipment acquired under capital lease.................................. - 17 74
Warrants issued in connection with the Company's investment in nex-
i.com................................................................ 416 - -
F-18
10. Income Taxes
The Company accounts for income taxes under the asset and liability method
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of differences between the carrying amounts and
the tax bases of the assets and liabilities.
The components of the provision (benefit) for income taxes for 2000, 1999
and 1998 are as follows:
Year Ended December 31,
(in thousands)
-----------------------------------------------------
2000 1999 1998
-------------- ----------------- ---------------
Current:
Federal........................................ ($2,220) $684 $547
State and local................................ (457) 238 186
---- --- ---
(2,677) 922 733
Deferred:
Federal........................................ (1,886) (95) (82)
State and local................................ (416) (33) (28)
---- --- ---
(2,302) (128) (110)
Valuation allowance........................ 5,453 - -
----- ---- ----
$474 $794 $623
A reconciliation of the Federal statutory rate to the Company's effective
tax rate for 2000, 1999 and 1998 is as follows:
Year Ended December 31,
----------------------------------------------
2000 1999 1998
-------------- ------------- -------------
Tax benefit at statutory rate............................................... (34.0%) 34.0% 34.0%
State and local income taxes (benefit), net of federal tax benefit.......... (7.0%) 7.0% 7.8%
Valuation allowance....................................................... 43.7 - -
Other, net.................................................................. 1.1 - 4.9
---- ---- ----
Effective tax rate.......................................................... 3.8% 41.0% 46.7%
==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset balance at December 31, 2000 and 1999 are
as follows:
Year Ended December 31,
2000 1999
-------- --------
Accounts receivable allowances................................................ $1,608 $1,349
Inventory reserves............................................................ 118 123
Accrual for compensated absences.............................................. 200 287
Accumulated depreciation and amortization..................................... 58 99
Other......................................................................... 192 31
nex-i.com losses.............................................................. 922 -
MTA reserve................................................................... 1,254 -
Net tax operating losses...................................................... 2,677 -
------ -------
Total deferred tax assets..................................................... 7,029 1,889
Valuation Allowance........................................................... (5,453) -
------ ------
$1,576 $1,889
====== ======
F-19
For the year ended December 31, 2000, the Company recognized a
valuation allowance of $5,453,000 resulting in a net deferred tax asset balance
of $1,576,000. The Company's net deferred tax asset balance is expected to be
recovered through the carryback of current year tax loss to prior years in which
it paid federal income taxes. The tax net operating losses can be carried back
two years and forward twenty years with State net operating losses that begin to
expire in seven years. The nex-i.com losses are subject to capital loss
limitation and will expire in five years upon recognition of the loss for tax
purposes. Additionally, should the Company undergo an ownership change as
defined in Section 382 of the Internal Revenue Code, the Company's tax net
operating loss carryforwards generated prior to the ownership change will be
subject to an annual limitation which could reduce or defer the utilization of
these losses.
11. Earnings Per Share
The Financial Accounting Standards Board issued Statement No. 128
"Earnings per Share" ("SFAS No. 128") specifies the computation, presentation ad
disclosure requirements for earnings per share ("EPS") of entities with publicly
held common stock or potential common stock. The statement defines two EPS
calculations, basic and diluted. The objective of basic EPS is to measure the
performance of an entity over the reporting period by dividing income available
to common stockholders by the weighted average number of shares outstanding. The
objective of diluted EPS, consistent with that of basic EPS, is to measure the
performance of an entity over the reporting period, while giving effect to all
dilutive potential common shares that were outstanding during the period. The
calculation of diluted EPS is similar to basic EPS except both the numerator and
denominator are increased for the conversion of potential dilutive common
shares.
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
For the Years Ended December 31,
2000 1999 1998
---- ---- ----
Net income $(12,942) $1,142 $ 711
========= ====== =====
Basic:
Weighted average number of shares outstanding................... 6,353 6,253 6,272
========= ====== ======
Net income per share............................................ $ (2.04) $ 0.18 $0.11
========= ====== ======
Diluted:
Weighted average number of shares outstanding................... 6,353 6,253 6,272
Dilutive effects of stock options - 12 59
--------- ------ ------
Weighted average number of common and common
equivalent shares outstanding............................... 6,353 6,265 6,331
========= ======= ======
Net income per share............................................ $ (2.04) $ 0.18 $ 0.11
========= ======= =======
F-20
12. EMPLOYEE STOCK PURCHASE PLAN
On December 31, 1997, the Company adopted an Employee Stock Purchase Plan
(the "Plan") for employees of the Company and its subsidiaries. The Plan was
approved by the Company's shareholders at its 1998 Annual Meeting. The Plan was
adopted to provide a further incentive for employees to promote the best
interests of the Company and to encourage stock ownership by employees. A total
of 500,000 shares of common stock are authorized for issuance pursuant to the
Plan.
In general, the Plan provides for eligible employees to designate in
advance of specified purchase periods (monthly) a percentage of compensation (up
to 10%) to be withheld from their pay and applied toward the purchase of such
number of whole shares of Common Stock as can be purchased at a price of 85% of
the stock's trading price at the end of each such period. No employee can
purchase more than $15,000 worth of capitalized common stock annually, and no
common stock can be purchased by any person which would result in the purchaser
owning five percent or more of the total combined voting power or value of all
classes of stock of the Company.
The Plan is intended to satisfy the requirements of Section 423(b) of the
Internal Revenue Code of 1986, as amended, which requires that it be approved by
shareholders within one year of the earlier of its adoption by the Board of
Directors or the plan's effective date. In addition, the Plan is intended to
comply with certain requirements of Rule 16b-3 under the Securities Exchange Act
of 1934, as amended.
During the years ended December 31, 2000, 1999 and 1998, employees
purchased 33,548, 49,691 shares and 80,888 shares, respectively, under the Plan
for aggregate proceeds of approximately $117,000, $177,000 and $509,000,
respectively.
13. STOCK REPURCHASE PROGRAM
In August 1998, the Board of Directors authorized the Company to repurchase
up to 225,000 shares of its outstanding common stock at market price. On May 20,
1999, the Board of Directors authorized the Company to repurchase up to 225,000
additional shares of its common stock at market price. During the year ended
December 31, 1998, 136,800 shares of the Company's common stock were repurchased
for approximately $667,000, an average price of $4.87 per share. During the year
ended December 31, 1999, 13,800 shares of the Company's common stock was
repurchased for approximately $53,000, an average price of $3.89 per share. As
of December 31, 2000 and 1999, a total of 150,600 shares of the Company's common
stock has been repurchased for approximately $720,000 at an average price of
$4.78 per share since the inception of the repurchase program in August 1998.
F-21
14. SIGNIFICANT CUSTOMERS AND VENDORS
During 2000, Summit Bancorp and Goldman Sachs accounted for
approximately 17% and 13% of the Company's net sales, respectively. During the
fiscal year ended December 31, 1999, PSE&G and Mercedes Benz of North America
accounted for approximately 13% and 12% respectively of the Company's net sales.
During the fiscal year ended December 31, 1998, KPMG LLP accounted for 15% of
the Company's net sales. No other customer accounted for more than 10% of the
Company's net sales during the three years ended December 31, 2000, 1999, and
1998.
The Company purchases the majority of its products primarily from two
aggregators of computer hardware, software and peripherals. During 2000, the
Company acquired approximately 49%, and 22% of its products for resale from
Ingram and Tech Data, respectively. Agreements with these aggregators provide
for, among other things, certain discount pricing for meeting agreed-upon
purchase levels and minimum purchase commitments.
15. RELATED PARTY TRANSACTIONS
In connection with the Company's 1996 initial public offering, the
Company's Chairman, CEO and principal shareholder agreed to indemnify the
Company for any and all losses which the Company sustained, up to $1,000,000,
arising from or relating to the alleged wrongful conduct of certain former
employees of the Company and their current employer (the "Defendants"). Mr. Gang
advanced $675,000 to the Company in furtherance of this agreement. Pursuant to
an amendment to his indemnification agreement adopted by the Company's Board of
Directors in February 2000, upon consummation of the settlement of the Company's
litigation against the Defendants on August 10, 2000, the Company reimbursed
Mr.Gang for the $675,000 he previously advanced to the Company.
In May 1999, the Company's Board of Directors authorized, subject to
mutually satisfactory terms and conditions, the issuance to Fallen Angel Capital
LLC ("Fallen Angel") of a warrant (the "Warrant") to purchase an aggregate of
200,000 shares of the Company's common stock at a purchase price of $5.00 per
share for a one-year period commencing May 19, 2000, the date shareholder
approval was obtained. The fair value of the warrant was estimated on the date
of shareholder approval using the Black-Scholes option pricing model using the
following assumptions: dividend yield 0%, expected volatility 90.75%, risk-free
interest rate 6.5%, with an expected holding period of 1 year. A member of the
Company's Board of Directors is a principal of Fallen Angel. The Warrant was
issued in consideration for investment banking advisory services rendered by
Fallen Angel in connection with the Company's preferred stock investment in
nex-i.com Inc., in which an affiliate of Fallen Angel, Fallen Angel Equity Fund
L.P., also participated. Fallen Angel Equity Fund L. P. currently owns more than
10% of the Company's outstanding common stock. At the Company's Annual Meeting
of Shareholders held on May 19, 2000, the Company's shareholders approved the
issuance of these warrants to Fallen Angel. 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 December 31, 2000, no warrants issued to Fallen Angel have
been exercised.
F-22
In October 2000, the Company's Board of Directors authorized the
execution of an engagement letter with Fallen Angel, pursuant to which Fallen
Angel was engaged on an exclusive basis as a financial advisor to assist the
Company's management and Board of Directors in examining strategic alternatives
to maximize shareholder value. The engagement, which may be terminated by either
party on thirty days' prior notice, provides for the payment of a "success" fee
to Fallen Angel of the aggregate consideration paid in any transaction. The
engagement letter also contains customary expense reimbursement and
indemnification provisions. A member of the Company's Board of Directors is a
principal of Fallen Angel. To date, no transactions have been consummated
pursuant to this engagement.
F-23
16. 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 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 (the "Series B Financing"), in which the Company did not participate.
Following the July 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 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. In February 2001, a
wholly-owned subsidiary of Eureka Broadband Corporation, a Delware 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 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.
F-24
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2000, 1999 and 1998
Balance at Provision - Deductions - Balance of
Beginning of Charged to Accounts End of
Year Income Written off Year
------------ -------------- -------------- -------
Allowance for doubtful accounts:
2000 $ 3,289 $ 923 $ 289 $ 3,923
1999 1,300 1,989 - 3,289
1998 1,255 414 369 1,300
Inventory Reserve:
2000 $ 300 $ 32 $ 45 $ 287
1999 1,029 300 1,029 300
1998 630 399 - 1,029
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALPHANET SOLUTIONS, INC.
By: STAN GANG
______________________________________
Stan Gang, Chairman of the Board and
Chief Executive Officer (Principal
Executive Officer)
March 22, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Stan Gang Chairman of the Board and March 22, 2001
________________________ Chief Executive Officer
Stan Gang (Principal Executive Officer)
/s/William S. Medve Executive Vice President, Treasurer
________________________ and Chief Financial Officer March 22, 2001
William S. Medve (Principal Financial and
Accounting Officer)
/s/Michael Gang Director March 22, 2001
________________________
Michael Gang
/s/Ira Cohen Director March 22, 2001
________________________
Ira Cohen
/s/Thomas F. Dorazio Director March 22, 2001
_________________________
Thomas F. Dorazio
F-26