SCHEDULE 14C INFORMATION
Information Statement Pursuant
to Section 14(c) of the
Securities Exchange Act of 1934
Check the appropriate box:
X Preliminary Information Statement
X Confidential, for Use of the Commission Only (as permitted
by Rule 14c-5(d)(2))
- - Definitive Information Statement
APPLIED INTELLIGENCE GROUP, INC.
(Name of Registrant as Specified in Charter)
Payment of Filing Fee (Check the appropriate box)
- No fee required
X Fee computed on table below per
Exchange Act Rule 14c-5(g) and 0-11
1) Title of each class of securities to which transaction applied:
Class B Preferred Stock convertible
share-forshare into Common Stock, $.001 par
value per share, of The Netplex Group, Inc.
2) Aggregate number of securities to which transaction applied:
1,287,540 shares of Class B Preferred
Stock convertible to Common Stock
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act rule 0-11 (Set forth the
amount on which the filing fee is
calculated and state how it was determined) $1.55335 per share
4) Proposed maximum aggregate value of transaction: $6,500,000
5) Total fee paid: $1,918
- Fee paid previously with preliminary materials.
- Check box if any part of the fee is offset as
provided by Exchange Act rule 0-11(a)(2)
and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by
registration statement number, or the Form
or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
APPLIED INTELLIGENCE GROUP, INC.
13800 Benson Road
Edmond, Oklahoma 73013- 6417
INFORMATION STATEMENT
SUMMARY
This Information Statement is being furnished
to the shareholders of Applied Intelligence Group, Inc., an
Oklahoma corporation, (the "Company"), in connection
with the following:
(i) the sale to The Netplex Group, Inc., a
New York corporation ("Netplex Group"), of the
Company's Retail and Store Systems Consulting
Division (the "Consulting Division");
(ii) amendment of the Certificate of
Incorporation changing the name of the Company to
"The viaLink Company";
(iii) amendment of the Applied Intelligence
Group, Inc. 1995 Stock Option Plan (the "1995 Stock
Option Plan") to (A) permit the grant of non-
incentive stock options ("NSO Options") to non-
employees and permit option holders to exercise
such stock options through the end of applicable
option period without requiring continued
employment with the Company or its affiliate as a
condition of exercise and (B) increase the number
of shares of common stock, $.001 par value
per share of the Company (the "Common
Stock") authorized and reserved for issuance under the
Stock Option Plan from 300,000 to 800,000 (the
"1995 Plan Amendment"), substantially in the
form of the 1998 Amendment to the Applied
Intelligence Group, Inc. 1995 Stock Option Plan as
fully set forth in the Shareholder Consent as
Appendix C., and
(iv) amendment of the Applied Intelligence
Group, Inc., 1998 Non-Qualified Stock Option Plan
(the "1998 Stock Option Plan") to (A) permit
the grant of non-incentive stock options ("NSO
Options") to all employees and non-employees who
have benefited or could benefit the Company and
(B) increase the number of shares of Common Stock
authorized and reserved for issuance under the 1998
Stock Option Plan from 300,000 to 800,000
(the "1998 Plan Amendment") substantially in the
form of the 1998 Amendment to the Applied Intelligence
Group, Inc. 1998 Non-Qualified Stock Option as fully
set forth in the Shareholder Consent as Appendix C.
The Consulting Division provides management
consulting, computer system integration support services
and markets software products and applications,
including the Company's proprietary software products,
Retail Service Applications ("RSA") and CHAINLINKr,
and resells computer hardware and point-of-sale
systems. The Consulting Division's revenues during
the six months ended June 30, 1998, and the year ended
December 31, 1997, were $5,396,315 and $7,544,679,
respectively, representing 88% and 84% of total
revenues, respectively, during such periods.
Furthermore, during the six months ended June 30, 1998
and the year ended December 31, 1997, net income from
operations of the Consulting Division before
provision for income taxes was $1,840,955,
and $197,995, respectively. After giving
effect to the sale of the Consulting Division (the
"Consulting Division Sale"), on a pro forma basis, the
Company would have had a loss of $1,805,564, and
$3,345,940, during the six months ended June 30, 1998,
and the year ended December 31, 1997, respectively.
Pro forma loss per share for the six months ended
June 30, 1998 and the year ended December 31, 1997
was $.66 and $1.23, respectively. See Unaudited Pro
Forma Consolidated Financial Statements of the Company
appearing elsewhere in this Information Statement.
The Company's Board of Directors (the "Board") on
August 31, 1998, unanimously approved the Asset
Acquisition Agreement between Netplex Group and the Company
in the form substantially as attached hereto as Appendix A-1 and
on September 8, 1998, unanimously approved an
amendment to the Asset Acquisition Agreement in
the form substantially as attached hereto as
Appendix A-2 (collectively, the "Acquisition
Agreement"). As allowed by the Company's Certificate of Incorporation
and Bylaws and by Section 1073 of the Oklahoma
General Corporation Act ("Oklahoma Law'), it is
anticipated that the Company's executive officers and
directors, who collectively own approximately 56% of the
outstanding shares of common stock, $.001 par value
per share, of the Company (the "Common Stock") will
execute a written consent to approve the Acquisition
Agreement, substantially in the form attached hereto
as Appendix D (the "Shareholder
Consent"). In connection with the Consulting Division
Sale and pursuant to the Acquisition Agreement, the
Company is required to change its name and it will change
its name to "The viaLink Company" by amending its Certificate of
Incorporation (the "Name Change Amendment"), which
was also unanimously approved by the Board. In
addition, the Board unanimously approved the 1995 Plan
Amendment and the 1998 Plan Amendment on September 4,
1998.
It is anticipated that the Shareholders Consent will be
executed 20 days following mailing of this Information
Statement to the Shareholders and one day thereafter the
Consulting Division Sale will be closed. Immediately
after execution of the Shareholder Consent, the
Company will file the Name Change Amendment with the
Secretary of State of Oklahoma and the 1995 Plan
Amendment and 1998 Plan Amendment will be deemed
approved by the Shareholders and will become effective as
of September 1, 1998. Consequently, further
shareholder vote or approval will not be required to
consummate the Consulting Division Sale, effectuate the
Name Change Amendment, the 1995 Plan Amendment and the
1998 Plan Amendment. ACCORDINGLY, WE ARE NOT ASKING
YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
On August 28 and September 1, 1998, the
trading day preceding and following the public
announcement of the Consulting Division Sale, the
closing sale price of the Company's Common
Stock as reported on the Nasdaq SmallCap Market was
$2.50 and $3.25, respectively. Furthermore, on such
dates, the closing sale price of the Netplex Group
Common Stock as reported on the Nasdaq SmallCap Market
was $1.31 and $1.44, respectively
This Information Statement is first being sent
to the Company's shareholders on or about September 20,
1998.
RECORD DATE AND VOTING SECURITIES
This Information Statement is being sent to
shareholders of record at the close of business on
September 11, 1998 (the "Record Date").
As of the Record Date, there were 2,740,990 shares of
Common Stock outstanding and entitled to vote in
connection with the matters covered by the Shareholder
Consent. Each share is entitled to one vote. There
are no other issued and outstanding securities of the
Company entitled to vote in connection with such
matters.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
General
The following table presents certain information
as to the beneficial ownership of the Common Stock on
the Record Date by (i) each person known by the
Company to own beneficially 5% or more of the Common
Stock; (ii) each director of the Company, and (iii)
all executive officers and directors of the Company as
a group. There are no family relationships among the
executive officers and directors.
<TABLE>
<CAPTION>
As of September 9, 1998
--------------------------
Common Stock
Shares Percent of
Name (and Address) of Beneficial Owner Beneficially Outstanding
Owned Shares
- -------------------------------------- -------------- -----------
<S> <C> <C>
Robert L. Barcum(1) 554,616 20.2%
Robert N. Baker(1) 554,529 20.2%
Russell L. Reinhardt(1) 316,081 11.5%
David B. North(1)(2) 109,861 4.0%
Lewis B. Kilbourne, Ph.D(3) 50,000 1.8%
Jimmy M. Wright(3) 27,500 1.0%
Executive Officers and Directors as a group 1,642,644 59.9%
(seven persons)(4)
- ------------
(1) The business address of the named person is
13800 Benson Road, Edmond, Oklahoma 73013-6414.
(2) The shares beneficially owned and percentage of
outstanding shares includes 35,000 shares of Common Stock
issuable pursuant to stock options held by Mr. North.
(3) The shares beneficially owned and percentage of
outstanding shares consists of shares of Common
Stock issuable pursuant to stock options held by
Messrs. Kilbourne and Wright, respectively .
(4) The number of shares and percent include 142,556
shares of Common Stock issuable pursuant to
stock options held and exercisable by the
executive officers of the Company.
</TABLE>
Each of Messrs. Barcum, Baker, Reinhardt and North, or their
proxy will execute the Shareholders Consent
approving the Consulting Division Sale, the Name
Change Amendment, the 1995 Plan Amendment and 1998
Plan Amendment.
DISSENTERS' RIGHTS OF APPRAISAL
Under the Oklahoma General Corporation
Act, upon consummation of the Consulting Division Sale,
Shareholders will not have any appraisal, dissenters'
or similar rights (i.e., the right to seek a judicial
determination of the "fair value" of the issued and
outstanding shares of Common Stock and to compel the
Company to purchase their Common Stock for cash in that
amount), and such rights will not be voluntarily
accorded to the Shareholders by the Company.
CONSULTING DIVISION SALE
The Company's Board of Directors on August 31, 1998,
unanimously approved the Asset Acquisition Agreement
between Netplex Group and the Company in the form
substantially as attached hereto as Appendix A-1 (the "Acquisition
Agreement") and on September 8, 1998 unanimously
approved an amendment of the Acquisition Agreement,
in the form substantially as attached hereto as
Appendix A-2. As allowed by the Company's Certificate
of Incorporation and Bylaws and by Section 1073 of the
Oklahoma General Corporation Act ("Oklahoma Law'), it
is anticipated that the Company's executive officers
and directors, who collectively own approximately 56%
of the outstanding shares of Common Stock of the
Company will execute the Shareholder Consent which
will constitute majority shareholder approval of
the Acquisition Agreement. In connection with the
Consulting Division Sale and in accordance with
Acquisition Agreement, the Company is required to
change its name to permit assignment and transfer of
the name "Applied Intelligence Group" to Neplex Group.
Based in McLean, Virginia with 12 offices
throughout the U.S., The Netplex Group, Inc., together with its
wholly owned subsidiaries ("Netplex Group"), is an
information technology company that provides the
people, technology, and processes to build, manage,
and protect business information systems. The
principal executive offices of Netplex Group at located
at 8260 Greensboro Drive, 5th Floor, McLean
Virginia 22102 and its telephone number is (703)
356-3001. See "Business and Property of Netplex
Group."
Background of the Consulting Division Sale
In early 1998, management of the Company began to
reconsider its continued focus on both consulting and
network services due to capital requirements for
further development, implementation and marketing of
viaLink and ijob. Accordingly, management decided
to pursue sale of the Consulting Division to
provide additional capital for and narrow the Company's
focus on further development, implementation, and
marketing of network services, including viaLink and
ijob. In June 1998, representatives of the Company
were introduced to Netplex Group by representatives
of Ampton Investments Inc. In connection with introduction, the
Company agreed to pay Ampton Investments Inc. 3% of the sale
price of the Consulting Division in the event
of purchase by Netplex Group. Representatives
of the Company and Netplex Group opened
discussions regarding the possible sale and
purchase of the Consulting Division. On July 31,
1998, the Company and Netplex Group executed a letter
of intent preliminarily setting forth the terms of the
sale and purchase. On August 31, 1998, the Board of
Directors of the Company and of Netplex Group
unanimously approved the Acquisition Agreement, and
the Company and Netplex Group executed the
Acquisition Agreement. Subsequent to execution
of the Acquisition Agreement, representatives of the
Company and Netplex Group met with representatives of
Seidman & Co. in order to determine the fairness
of the terms of the Consulting Division Sale from a
financial point of view. On September , 1998,
the Company and Netplex Group executed an
amendment to the Acquisition Agreement , a copy of
which is attached hereto as Appendix A-2. On
September 8, 1998, Seidman & Co. submitted to the
Board of Directors of the Company a letter indicating
that, in the opinion of Seidman & Co., the Consulting
Division Sale is fair, from a financial point of
view, to the Company and its shareholders. See
"Opinion of Seidman & Co." and Appendix D.
Terms of the Acquisition and Earnout Agreements
Description of Consulting Division Assets.
Pursuant to the Acquisition Agreement, the Company will sell to
and Netplex Group will purchase the assets (other than
cash and accounts receivable) related to the
Consulting Division, generally including technical consulting
services and solutions business, which provides technical
consulting services and solutions to the retail
and distribution industries, and will acquire the rights to use the
name "Applied Intelligence Group," and ChainLink of
the Consulting Division. The Company's ChainLink
software will be licensed to Netplex Group for resale
and marketing. The terms and conditions of the
license agreement will be negotiated prior to the
closing of the Consulting Division Sale. The assets
and operations of the Company's network services,
including viaLink and ijob, will be retained by
the Company. ViaLink develops, markets and
implements proprietary software products, information content
and related services to facilitate electronic commerce. ijob
provides an internet based solution job referral and
candidate evaluation service for both employers and
employees. It is anticipated that the Consulting
Division Sale will be consummated and completed on
the day following execution of the Shareholder
Consent (the "Closing"), which is expected to be
October , 1998; however, the effective date of
the Consulting Division Sale will be September 1,
1998, for accounting and other business purposes
(the "Effective Date"). The Asset Acquisition Agreement will
be closed into escrow on or about September 30, 1998 ("Preliminary
Close"). (See First Amendment, Appendix A-2) References to the
consummation of the agreement in the remainder of this description
are intended to refer to the Preliminary Close, with the final
closing to follow as elsewhere described.
Consideration to be Received. At Closing, Netplex
will pay or deliver to the Company (i) $3,000,000 in
immediately available funds and (ii) 643,770 shares of
Netplex Class B Preferred Stock (the "Netplex
Preferred Stock"), each of which will be
convertible into one share of common stock, $.001 par
value, of Netplex (the "Netplex Common Stock"). As
of September 4, 1998, the closing sale price of the
Netplex Common Stock as reported on the Nasdaq SmallCap
Market was $1.5625.
Although the final terms of the Certificate of
Designation for the Netplex Group Preferred Stock are
being negotiated, it is anticipated that the Netplex
Group Preferred Stock (i) will be junior in priority
to the Netplex Group Class A 10% Cumulative Convertible
Preferred Stock but senior to all other outstanding classes
of Netplex Group stock; (ii) will be issued pursuant to
exemption from the registration requirements of the
Securities Act of 1933, as amended (the "1933 Act")
and the rules and regulations promulgated thereunder;
(iii) will be convertible, at the option of the
Company, into Netplex Group common stock, $.001 par
value per share (the "Netplex Group Common Stock") on
a one-for-one basis; and (iv) will be subject to
appropriate adjustment in the event of any merger,
consolidation, recapitalization, reclassification,
stock dividend, stock split or similar
transaction. For a further description of the
Netplex Group Preferred Stock, see "Description of
NetPlex Group Securities."
Furthermore, in connection with the Consulting
Division Sale and as a condition of the Acquisition
Agreement, the Company and Netplex Group will enter
into the Earnout Agreement which will require to
operate the Consulting Division in a manner that will
give the Company the opportunity to receive
additional cash consideration from Netplex Group and
Netplex Group Preferred Stock. A copy of the Earnout
Agreement is attached hereto as
Appendix A-3. Under the Earnout Agreement, during
each of the six calendar quarters ending March 31,
2000 ("Earnout Period"), Netplex Group will pay the
Company 50% of the Net Profit, as defined below,
earned by the Consulting Division as operated by
Netplex. The cumulative, maximum cash amount that
the Company may receive under the Earnout Agreement
is $1,500,000. For purposes of determining the amount
to be paid under the Earnout Agreement, "Net Profit" will be
calculated based on the earnings of the Consulting Division
before interest, taxes, depreciation and amortization.
Under the terms of the Earnout Agreement, if the
cumulative Net Profit of the Consulting Division for the period
commencing September 1, 1998 and ending December 31, 2000,
exceeds $5,000,000 (the "Net Profit Threshold"), the Company may
become entitled to receive up to 643,770 additional shares of
Netplex Group Preferred Stock. For purposes of
determining the amount of additional Netplex Group
Preferred Stock that may be issued pursuant to the Earnout
Agreement, the Net Profit for the period commencing September 1, 1998
and ending December 31, 2000 will be limited to $9,000,000.
In the event the cumulative Net Profit during such
period is less than $5,000,000, the Company will not be
entitled to receive any additional shares of Netplex
Group Preferred Stock. In the event the Net Profit
Threshold is obtained, the number of additional shares
of Netplex Group Preferred Stock that the Company
will be entitled to receive will be determined
on or before March 1, 2001 by multiplying
the number of shares of Netplex
Group Preferred Stock initially received by the
Company and that have not been converted to
Netplex Group Common Stock on or before December 31,
1999, by the quotient of the difference between
$9,000,000 (less $5,000,000) and the Net Profit of the Consulting
Division for the period ending December 31, 2000 divided
by $4,000,000. For example only, if the Consulting
Division were to earn a Net Profit of
$9,000,000 (less $5,000,000) during the period ending
December 31, 2000, the Company will
be entitled to receive one additional share of
Netplex Group Preferred Stock for each share of
Netplex Group Preferred Stock that has not been
converted to Netplex Common Stock on or before
December 31, 2000. By further example, if the
Consulting Division earns a Net Profit of
$7,500,000 (less $5,000,000) during the nine
quarters ending December 31, 2000, the Company will
be entitled to receive an additional .625
share of Netplex Group Preferred Stock for each
share of Netplex Group Preferred Stock initially
received by the Company that was not converted to
Netplex Common Stock on or before December 31, 1999.
There is no public market for the Netplex
Preferred Stock and it is anticipated that a market will not develop;
although as mentioned above, each share of the
Netplex Preferred Stock is convertible, at the
option of the Company, into Netplex Common Stock on
a share-for-share basis. However, in the event the
Company elects to convert all or any portion of
the Netplex Preferred Stock to Netplex Common Stock
prior to December 31, 1999, for any reason, including
the need for additional working
capital or reduction of borrowings, the number of
additional shares of Netplex Preferred Stock that the Company
may become entitled to receive under the Earnout
Agreement will be reduced or fully eliminated if all
shares of the Netplex Preferred Stock have been
converted to Netplex Common Stock.
Certain Other Terms of the Acquisition Agreement.
At or prior to Closing, Netplex will extend employment
offers to most of the Company's employees who currently work in or
support the Consulting Division. The employees who
will be offered employment with Netplex will be determined at or
prior to Closing.
The Company has agreed that for a period of
four years following the Closing, the Company will
not compete with the Consulting Division, except to
the extent that competition may result from the
Company's developing, marketing, licensing,
installing, using, implementating and/or supporting the
Company's viaLink products and services. Furthermore,
in the event the Company is
acquired by a competitor of Netplex Group, the
acquiring competitor will not be bound by the non-
competition provisions of the Acquisition Agreement.
Netplex agreed to continue to operate the
Consulting Division and retain the key management
employees of the Consulting Division if the acquired business
meets certain minimum Net Profit targets. The
cumulative Minimum Net Profit target for the period commencing
September 1, 1998 and ending December 31, 2000 is $3,150,000.
Netplex Group agreed, at its sole cost and
expense, to register the Netplex Group Common Stock
underlying the Netplex Group Preferred Stock. See "-
Restrictions on Resale of Common Stock; Registration
Rights."
Consummation of the Consulting Division Sale and
the related transactions is contingent on final
negotiation of certain agreements, including a
premises sublease, agreements relating to the sharing
of facilities at the Company's headquarters, and an
agreement concerning the assumption by Netplex Group
of certain liabilities relating to certain ongoing
contracts and agreements.
Conditions; Termination; Amendment.
Consummation of the Consulting Division Sale is subject
to approval of the Acquisition Agreement and the Name Change
Amendment by holders of a majority of the issued and outstanding
shares of Common Stock. Although a voting agreement
has not been entered into by Robert L. Barcum,
Robert N. Baker, Russell L. Reinhardt and David B.
North, it is anticipated that they or their proxy
will execute the Shareholder Consent which will
constitute majority shareholder approval of the
Acquisition Agreement and the Name Change Amendment.
Consummation of the Consulting Division Sale is
also subject to (i) absence of any order, decree or
injunction of any court or governmental authority
prohibiting consummation of the Consulting Division
Sale, (ii) absence of any action, claim, suit or
proceeding seeking to enjoin, restrain, or prohibit
consummation of the Consulting Division Sale, (iii) execution
of the Employment Agreements by Netplex Group and each
of Messrs. Barcum, North and Davenport, (iv) all required
regulatory approvals have been obtained (v) the consent of the
Company's landlord of its headquarter office
facility is obtained and, Netplex and the Company
shall have entered into a mutually satisfactory
sublease agreement for a portion of the office
facility, (vi) assignment and transfer of all
Consulting Division contracts and work in progress
to Netplex Group, and (vii) execution of all
related agreements, including a remarketing agreement
for the Company's CHAINLINK software, an office support
and administrative services sharing agreement, a
computer equipment lease agreement and agreement regarding the
liabilities and obligations to be assumed by
Netplex. In addition, consummation is also subject
to Netplex Group obtaining certain lender financing
and the sale of $1,500,000 of equity securities of
NetPlex Group, Inc. There is no approval of
governmental authorities or other persons required
or that has not been obtained as of the date of
this Information Statement, other than (i) filings
that will be required under applicable Oklahoma Law
and (ii) any additional filings that may be
required under applicable federal and state
securities laws, and (iii) the consent of the
Company's landlord regarding sublease of the
Company's headquarter office facility to Netplex Group.
In addition, the obligations of the Company
and Netplex Group under the Acquisition Agreement
are subject to the fulfillment, prior to the Closing, of
certain conditions precedent, any of which may be waived by the party
benefitting therefrom. Such conditions include: (i)
the continuing accuracy of the various representations
and warranties; (ii) the performance, compliance
with and satisfaction in all material respects
of all covenants and agreements; and (iii) no material
adverse change in the business, prospects or financial
condition of the Company and Netplex Group.
The Acquisition Agreement may be terminated at
any time prior to the Closing (i) by mutual consent
of the Company and Netplex Group, (ii) by either the
Company or Netplex in the event the Closing does not
occur on or before September 30, 1998, (iii) by either
the Company or Netplex Group in the event the Board of
Director of the Company or Netplex Group shall have
withdrawn, or modified in any manner adverse to the
Netplex Group or the Company, as the case may be,
its approval or recommendation of the Acquisition
Agreement, or shall have recommended another offer
or shall have resolved to day of the foregoing, (iv)
by either the Company or Netplex Group in the event
there shall have been instituted or threatened against
the Company or Netplex or any of their respective
directors or officers, any action, suit or proceeding
by or before any governmental authority that would
restrain or prohibit consummation of the Consulting
Division Sale or which otherwise is reasonably
likely to have a material adverse effect on the
business, properties, assets, condition (financial or
otherwise), results of operations or prospects of the
Company, or (v) by either the Company or Netplex Group
in the event there shall be pending any suit, action or
proceeding which has a reasonable possibility of
success, or there shall be pending by any other
person any suit, action or proceeding, which
substantial likelihood of success, seeking to prohibit
or limit the ownership or operation by Netplex Group
of a material portion of the business or assets of
acquired as a portion of the Consulting Division,
or seeking to prohibit Netplex Group for effectively
controlling in any material respect the Consulting
Division.
Amendment of the Certificate of Incorporation
In connection with the Consulting Division
Sale and in accordance with the Acquisition
Agreement, the Company has agreed to assign and
transfer all of its rights in the name, "Applied
Intelligence Group" to Netplex Group which will require
amendment of the Certificate of Incorporation of the
Company (the "Name Change Amendment"). On
September 4, 1998, the Board of Directors
unanimously approved the Amendment to the Certificate
of Incorporation which upon proper filing with the
Secretary of State of the State of Oklahoma, will change the
name of the Company to "The viaLink Company". A copy
of the Amendment to the Certificate of
Incorporation is attached as Appendix B.
Immediately following execution of the Shareholder Consent
approving of the Name Change Amendment, the
Amendment to the Certificate of Incorporation will be filed with the
Secretary of State of Oklahoma.
Fees and Expenses
Each of the Company and Netplex will pay its
costs and expenses incurred in connection with the
sale or purchase of the Consulting Division,
regardless of whether the Consulting Division Sale
is consummated. Upon consummation of the
Consulting Division Sale, all of the expenses of
the Company associated the Consulting Division
Sale will be paid from proceeds of the Consulting
Division Sale. In addition, on June 11, 1998, the
Company agreed to pay at closing of the Consulting
Division Sale to Ampton Investments, Inc. an amount
equal to 3% of the purchase price of the Consulting Division
($120,000) for the introduction of the Company to
Netplex. Furthermore, it is anticipated that in the
event the Company becomes entitled to additional
purchase price consideration under the Earnout
Agreement, the Company will be obligated to
pay Ampton Investments, Inc. 3% of such additional
purchase price consideration. In addition, the
Company agreed to pay Lewis B. Kilbourne Ph.D. a fee
of $30,000 for his services in consummating the
Consulting Division Sale. The additional expenses
expected to be incurred by the Company in connection
with the Consulting Division Sale, including filing
fees, printing and mailing expenses, and legal
and accounting fees and expenses, are estimated to
be $45,000.
Employment Agreements
In connection with the Consulting Division
Sale, the employment of Robert L. Barcum, David B.
North, and Larry R. Davenport with the Company will
be terminated. See "Resignation of Executive
Officers." Each of Messrs. Barcum, North
and Davenport will become an employee of Netplex
Group pursuant to an Employment Agreement as a
member of management of the Consulting Division.
Each Employment Agreement provides for (i) annual
compensation, (ii) bonuses based on the Net Profit of
the Consulting Division, (iii) standard employment
benefits offered other similarly positioned Netplex
Group employees and (iv) Netplex Group stock
options. Entitlement to bonus under the Employment
Agreements will be subject to minimum cumulative Net
Profit amounts ("Minimum Net Profit") being
earned by the Consulting Division. If at the end of
any quarter, the minimum net profit is not met, no
bonus will be paidfor that quarter. The amount of the bonus, if any,
will be determined and paid quarterly. The bonus will
be equal to 3% of the quarterly Net Profit of the
Consulting Division, plus an additional 1.5% of the Net
Profit in excess of the Minimum Net Profit.
Pursuant to the Employment Agreements of Messrs.
Barcum and North, each will agree to not compete for a
period of one year and non-solicitation periods of two
years in the event he terminates his employment
with Netplex. Mr. Davenport's agreement provides for a two-year
non-solicitation period if he terminates his employment
with Netplex.
Mr. Barcum's annual salary under his Employment
Agreement will initially be $175,000, and he will
receive stock options exercisable for the purchase
of 65,000 shares of Netplex Common Stock. Mr.
North's annual salary under his Employment Agreement
will initially be $130,000, and he will receive
stock options exercisable for the purchase of 50,000
shares of Netplex Common Stock. Mr. Davenport's
annual salary under his Employment Agreement will
initially be $116,400, and he will receive stock
options exercisable for the purchase of 50,000 shares
of Netplex Common Stock.
Reasons for and Certain Consequences of the Consulting
Division Sale
After several years of development, in 1996
the Company first made available through its network
services division the viaLink subscription services.
In the same year the Company completed its initial
public offering, the proceeds of which were used
principally for further development, marketing and
deployment of network services, including viaLink and
ijob. In late 1997, it became apparent to management of the
Company that further development and marketing of
viaLink would require capital resources that were
not available to the Company. In
order to provide cash flows for continuing
operations, the Company shifted a majority of the
professional staff from network
services to the Consulting Division; although
management believes that the building of a base of
recurring revenue and cash flows offers significantly
greater benefits compared to time and project
based revenues which are characteristic of
providing consulting services. Furthermore, although
the providing of consulting services was the
foundation for growth of the Company, the nature of
the consulting service business generally does not
build a base of long-life assets, but rather creates
short-life accounts receivable or cash
equivalents at significant professional and
administrative costs. Because of the short-life of
accounts receivable, establishment of long-term
financing arrangements is difficult compared to non-
professional service providing business activities,
and typically expensive relatively due to the higher
discount of the accounts receivable borrowing base
due to collectibility risk and the difficulty of
ascertaining the value of the accounts receivable for
borrowing base purposes.
In late 1997, the Company had exhausted bank
borrowing ability, and in early 1998 established a
credit facility with Trinity Capital, Inc. with a
relatively conservative borrowing base. In
March 1998, management concluded that, unless
additional capital resources were obtained for
further development and marketing of viaLink there was a risk
of loss of investment in the development and
implementation of viaLink. Accordingly, management
concluded that it would be in the best interest of
the Company and its shareholders to either sell the
the network services division and simply continue
to provide consulting services or sell the
Consulting Division for the purpose of providing
additional capital resources for repayment of
borrowings and other indebtedness, and further
development and marketing of viaLink. Accordingly,
management of the Company elected to sell the
Consulting Division to Netplex after initiating
preliminary purchase negotiations with a number of
potential purchasers.
Cash proceeds from the Consulting Division Sale
will be used to reduce outstanding borrowing and
accounts payable and allow the Company to focus on
building its recurring revenue base through the
viaLink, ijob solutions and other network services.
From the sale proceeds, 11 separate three-year
promissory notes held by the executive officers of
the Company, which total $482,830 and bear
interest at rates of 8.5 percent to
11.5 percent per annum, will be paid along with the related
interest totaling approximately $76,000. In addition,
the Company will pay off its credit facility with
Trinity Capital, Inc., a commercial lender, the
outstanding principal of which bears interest at
11.5% per annum. As of August 31, 1998 this credit
facility had an outstanding balance of $692,693.
Furthermore, the Company plans to pay certain accounts payable
totaling approximately $400,000 out of the sale
proceeds.
It is estimated that the expenses of the
Consulting Division Sale will be $195,000. See
"Consulting Division Sale-Costs and Expenses." The
balance of the cash proceeds will provide capital for
continued marketing and implementation of the
Company's viaLink product, although other sources of
capital will have to be secured.
The estimated net cash proceeds of the
Consulting Division Sale to be received by the Company,
without giving effect to any additional amounts that
the Company may become entitled to receive under
the Earnout Agreement or obtained from resale of the
Netplex Group Preferred Stock or Netplex Group Common
Stock, will be $2,805,000, assuming costs and
expenses of the the Consulting Division Sale are
$195,000. See "-Fees and Expenses."
Pending use, the net proceeds will be invested by the
Company in investment grade, short-term, interest-
bearing securities. The estimated cash proceeds
will be utilized to reduce outstanding borrowings and
for working capital as follows:
<TABLE>
<CAPTION>
Use of Cash Proceeds: Amount Percent
- --------------------------------------- -------------- ------------
<S> <C> <C>
Cash proceeds without giving effect to
any additional amounts that the
Company may become entitled to receive
under the Earnout Agreement or
obtained from resale of the Netplex
Group Preferred Stock or Netplex Group
Common Stock $3,000,000 100.0%
Application of Proceeds:
Payment of finder's fee to Ampton,
Inc., (3% of cash proceeds and
$1,000,000 value of the Netplex Group
Common Stock underlying the Netplex
Preferred Stock) 120,000 4.0%
Payment of accounting, legal, printing
and distribution costs 45,000 1.5%
_________ _____
Net cash proceeds before payment of
long-term debt, accounts payable and 2,835,000 94.5%
executive officers and directors
Repayment of outstanding borrowings
(with accrued interest) owed under the
credit facility with Trinity Capital,
Inc. which bears interest at 11.5%
per annum, and at August 31, 1998, had
an outstanding balance of $692,693 692,693 23.1%
Payment of accounts payable (estimated) 400,000 13.6%
Payments to Executive Officers and
Directors:
Repayment of the Robert L. Barcum
loans to the Company (including
accrued interest of $21,134), which
bear interest of 8.5% to 11.5% per
annum, become due on March 8, 1999
through December 31, 2001, and at
August 31, 1998, had an aggregate
outstanding balance of $143,655 164,789 5.5%
Repayment of the Robert N. Baker
loans to the Company (including
accrued interest of $21,729), which
bear interest of 8.5% to 11.5% per
annum, become due on March 8, 1999
through December 31, 2001, and at August
31, 1998, had an aggregate outstanding
balance of $147,800 169,529 5.7%
Repayment of the Russell L. Reinhardt
loans to the Company (including
accrued interest of $25,926), which
bear interest of 8.5% to 11.5% per
annum, become due on March 8, 1999
through December 31, 2001, and at
August 31, 1998, had an aggregate
outstanding balance of $152,000 177,926 5.9%
Repayment of the David B. North loan
to the Company (including accrued
interest of $7,379), which bears
interest of 10% per annum, becomes due
November 15, 2000, and at August 31,
1998, had an outstanding balance of 46,754 1.6%
$39, 375.
Payment to Lewis B. Kilbourne, Ph.D. 30,000 1.0%
___________ _____
Net Cash Proceeds Available for Future
Operations:
Further operations and development,
marketing and implementation of
viaLink, ijob and other network
services and working capital $1,153,309 38.1%
========== =====
</TABLE>
With respect to the repayment of the borrowings,
the Company may reborrow such amounts under other
financing arrangements for general corporate purposes,
including working capital. Following consummation of
the Consulting Division Sale, the Company will focus
its business efforts and activities on further
development, marketing and implementation of viaLink,
ijob and other network services. See "Business and
Property of the Company-Network Services."
Restrictions on Resale of Common Stock; Registration
Rights
The shares of Netplex Group Preferred Stock (and
the Netplex Group Common Stock issuable upon
conversion) to be received by the Company will
constitute "restricted securities" under within the
meaning of Rule 144 promulgated under the 1933
Act ("Rule 144") the 1933 Act.
Until a registration statement covering the
shares of Netplex Group Preferred Stock (or Netplex
Group Common Stock to be issued upon conversion)
issued to the Company in connection with the
Consulting Division Sale, such shares may be sold
only in accordance with the provisions of Rule 144,
pursuant to an effective registration statement
under the 1933 Act or in transactions exempt
from registration thereunder. Rule 144 provides,
in general, that such Common Stock may be sold by an
affiliate only if the shares have been held for at
least one year and (i) there is available adequate
public information with respect to the Company;
(ii) the affiliate has held the Common Stock for at
least two years; (iii) the sale of such Common Stock
by the affiliate, when aggregated with all other
sales by such affiliate during the immediately
preceding three months, does not exceed the greater
of (A) one percent of the shares of Common Stock
outstanding as shown by the most recent report or
statement published by the Company, (B) if the Common
Stock is then listed on a national securities
exchange or quoted by an automated quotation
system of a registered securities association, the
average weekly reported volume of trading in the
Common Stock during the four-week period preceding
the notice of sale under
Rule 144, or if no such notice is required, the date
of receipt of the order to execute the transaction by
the broker or the date of execution of the
transaction directly with a market maker, or (C) the
average weekly volume of trading in the Common
Stock reported through the consolidated transaction
reporting system contemplated by Rule 11Aa3-1 under
the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), during the four-week period
specified in (B); and (iv) the shares of Common Stock
are sold in "brokers' transactions" within the meaning
of Rule 144.
Pursuant to the Acquisition Agreement, Netplex
Group agreed, at its sole cost and expense to either
(i) include in its next registration statement or
(ii) register no later than 12 months after the
Closing, which ever first occurs, sufficient Netplex
Group Common Stock to permit conversion of the
Netplex Group Preferred Stock and to maintain
effectiveness of such registration statement
until such time that the Netplex Group Common
Stock underlying the Netplex Group Preferred Stock
and following conversion may be sold pursuant to Rule
144(k).
Accounting and Tax Treatment
The Consulting Division Sale will be treated as
the sale and discontinuance of a business segment or
division. To the extent that the market value of
the consideration received by the Company in
connection with the Consulting Division Sale, exceeds
the carrying value of the Consulting Division and its
assets and the liabilities assumed by Netplex Group,
the Company will record a gain on sale or
discontinuance.
For federal and state income tax purposes, the
Consulting Division Sale will be a taxable event. To
the extent that the market value of consideration
received by the Company in connection with the
Consulting Division Sale exceeds the adjusted tax
basis of the assets of the Consulting Division, the
Company will realize taxable gain. However, any
taxable gain realized on the sale of the
Consulting Division will be offset by
carryforward tax losses for federal income tax
purposes.
Description of Preferred Stock
The final terms of the Certificate of
Designations, Preferences and Other Rights and
Qualification of the Class B Preferred Stock
setting forth the terms of the Netplex Group
Preferred Stock have not been determined.
However, it is anticipated that the Netplex Group
Preferred Stock (i) will be junior in priority to
the outstanding Netplex Group Class A Preferred
Stock but senior to all other classes of Netplex
Group outstanding capital stock; (ii) will be
convertible, on a sharefor-share basis into Netplex
Group Common Stock; and (iii) will contain anti-
dilution provisions. For a further description of
the Netplex Group Preferred Stock, the Netplex Group
Common Stock and the other outstanding class of
preferred stock, see "Description of Netplex Securities."
Resignation of Executive Officers
Upon completion of the Consulting Division Sale,
Robert L. Barcum, Chief Executive Officer, David B.
North, Vice President - Consulting Services and
Assistant Secretary, and Larry R. Davenport, Vice
President - Marketing and Sales, will resign as
executive officers of the Company. Upon
completion of the Consulting Division Sale, Lewis
B. Kilbourne, Ph.D. will become acting President and
Chief Executive Officer of the Company until
appointment of a successor to Mr. Barcum. Mr.
Barcum will continue to serve as Chairman of the
Board of the Company following completion of the
Consulting Division Sale.
Opinion of Seidman & Co
Seidman & Co. rendered its opinion as set
forth in Appendix D to this Information
Statement, as to the fairness, from a financial point
of view, of the Consulting Division Sale to the Company
and its shareholders. Such opinion is based upon and subject
to the matters referenced therein. The Seidman & Co. will receive a
fee of $30,000 and reimbursement of its expenses in connection
with rendering its opinion. In addition, the Company has
agreed to indemnify the Seidman & Co. against,
and make contribution with respect to, certain liabilities to
which the Seidman & Co. may become subject in connection with
rendering their services to the Company.
The Seidman & Co. were selected by the Company
based upon the experience of Seidman & Co. in
rendering fairness opinions in transactions similar to
the Consulting Division Sale. Seidman & Co. is an independent
investment banking firm based in New York and has provided investment
banking services for approximately 30 years.
Beginning in August 1998, the Seidman & Co.
provided advice to the Company concerning the possible sale
of the Consulting Division to Netplex Group and other
related financial matters. Except as described above, the
Company and its executive officers and directors have not
had any other relationship with Seidman & Co..
In reaching their opinion, Seidman & Co.
examined and considered all available information and
data which Seidman & Co. deemed relevant, including
(i) the Annual Reports on Form 10-KSB and related
information of the Company for the year ended
December 31, 1997, and the Quarterly Report on Form
10-QSB for the three and six months ended June 30,
1998, of the Company, (ii) historic and current
operating data and balance sheets for the Consulting Division
and the Company, actual and pro forma for the
Consulting Division Sale, (iii) comparative statistical
analysis of the operating performance and balance sheets
of selected companies comparable to the Consulting Division which
have publicly traded common stock, and from this data,
deriving financial and capitalization ratios typical
of management and systems consluting companies, (iv)
financial and operating forecasts provided by management of the
Company, (v) cash flows analyses of the Consulting Division
and the network services division, (vi) conditions
in, and outlook for the management and systems consulting
industry in the United States and the United States economy, interest
rates and financial markets, and (vii) other studies, analyses,
and investigations deemed appropriate.
As a result of their review, Seidman & Co. is of the opinion
that the Consulting Division Sale is fair, from a financial
point of view, to the Company and its shareholders.
In connection with the review conducted in
preparing their fairness opinion, Seidman & Co.
relied upon and assumed the accuracy and
completeness of the financial and other information
furnished to them by the Company and the assurances
of management of the Company that they are
unaware of any information or factors regarding the
Company that would make the information supplied to Seidman
& Co. incomplete or misleading. Seidman & Co. did
not undertake any independent verification of the
accuracy or completeness of such information or any independent
appraisal or evaluation of the assets or liabilities of the
Company. Seidman & Co. were not authorized to and
did not solicit third parties who might be
interested in making an investment in or acquiring
the Company or Netplex Group or all or any
part of their respective assets. The
consideration to be received by the Company in
connection with the Consulting Division Sale was
determined by the Netplex Group and the Company
and not recommended or negotiated by Seidman &
Co. The valuation fairness tests include a matrix of
fair market valuations of the Consulting Division,
and the comparison of these valuations with the
total consideration to be paid the Company under the
terms of the Acquisition Agreement and the Earnout
Agreement. Two generally accepted methods were
employed in determining the Consulting Division's
fair market value, the "market comparable method"
and the "discounted cash flow method." The market
comparable method of valuation relates to a
subject company's operating and balance sheet
financial capitalizing multiples based on rations
derived for a universe of publicly-traded market comparable
companies. The discounted cash flow method of
valuation derives the present value of a company
from a future stream of free cash flows.
For further information relating to the
matters considered, procedures followed, the basis for and
methods of arriving at the fairness opinion, and
limitations on the scope of the opinion, see the
full text of the opinion, attached as Appendix D.
Amendments to the Stock Option Plans
1995 Stock Option Plan. The Applied
Intelligence Group, Inc. 1995 Stock Option
Plan (the "1995 Stock Option Plan") provides that
non-qualified or non-incentive stock
options ("NSO Options") may only be granted to
key management employees, directors, key
professional employees, and key professional non
employee service providers of the Company. Further,
the Plan provides that NSO Options are exercisable
only during the period the holder thereof is employed
by the Company and for a period of three months
following termination of the holder's employment with
the Company. Accordingly, unless NSO Options are exercised within
three months following termination of the option
holders employment with the Company, the NSO Options will expire.
In connection with the Consulting Division
Sale, it is anticipated that most of the Consulting Division
employees will become employees of Netplex Group
and, accordingly, will terminate their employment
with the Company. Therefore, unless the NSO Options
held by such employees are exercisedwithin three months
following their employment terminations, such NSO Options
will expire. The Board unanimously approved the 1995 Plan
Amendment on September 4, 1998. The Stock
Option Plan Amendment, upon approval by a majority vote of the
shareholders of the Company, will (A) permit NSO
Options to be granted to nonemployees and permit the
option holders to exercise such stock options
through the end of applicable option period
without requiring continued employment with the
Company as a condition of exercise and (B) increase
the number of shares of common stock, $.001 par value
per share of the Company (the "Common Stock") authorized
and reserved for issuance under the 1995 Stock Option
Plan from 300,000 to 800,000 ("1995 Plan Amendment").
Immediately after execution of the Shareholder
Consent, the 1995 Plan Amendment will be effective
as of September 1, 1998. A copy of the 1995 Plan
Amendment is fully set forth in the Shareholder
Consent as Appendix C.
1998 Non-Qualified Stock Option Plan.
The Applied Intelligence Group, Inc. 1998 Non-
Qualified Stock Option Plan (the "1998 Non-
Qualified Stock Option Plan") provides that non
qualified stock options and stock appreciation rights
may only be granted to directors, executive
officers, key employees and independent
contractors and consultants of the Company. On
September 4, 1998, the Board of Directors
unanimously approved the 1998 Plan Amendment to
permit the grant of non-qualified stock options
and stock appreciation rights to any employee of
the Company, and not solely to "key" employees and
to increase the number of shares of Common Stock
authorized and reserved for issuance under the
1998 Stock Option Plan from 500,000 to 800,000.
Immediately after execution of the Shareholder
Consent, the 1998 Plan Amendment will be effective
as of September 1, 1998. A copy of the 1998 Plan
Amendment fully set forth in the Shareholder Consent
as Appendix C.
OFFICER AND DIRECTOR COMPENSATION
Executive Officer Compensation
The following table sets forth the total cash
compensation of the President and each named
executive officer that during 1997, 1996 and 1995
received compensation in excess of $100,000 during
1997.
<TABLE>
<CAPTION>
Director and Executive Officer Compensation
Long-Term
Compensation
----------------------
Annual
Compensation(1) Award of Options
------------------------ ----------------------
Name and Principal Position Year Salary(2) Bonus Number of Shares
- --------------------------- ---- --------- ------ ----------------------
<S> <C> <C> <C> <C>
Robert L. Barcum(3) 1997 $169,716 $ -
President and Chief 1996 169,150 - -
Executive Officer 1995 170,710 - -
Robert N. Baker(3) 1997 169,940 -
Vice President-Network 1996 169,159 - -
Services and Secretary 1995 170,389 - -
Russell L. Reinhardt(3) 1997 171,774 - -
Vice President 1996 171,840 - -
1995 171,256 - -
David B. North 1997 125,817 - 35,000
Vice President-Consulting 1996 116,248 - -
Services and Assistant 1995 109,194 - -
Secretary
(1) The named executive officer received additional non-
cash compensation, perquisites and other personal benefits;
however, the aggregate amount and value thereof did not
exceed 10% of the total annual salary and bonus
paid to and accrued for the named executive
officer during the year.
(2) Dollar value of base salary (both cash and non-cash) earned
during the year.
(3) During each of the years 1997, 1996 and 1995, Robert L.
Barcum, Robert N. Baker and Russell L. Reinhardt each were paid the
same annual base salary of $175,127. The differences in the
amounts presented above are due to different levels of participation
of each individual in the Section 125 Cafeteria Plan offered by the
Company to all employees on a nondiscriminatory basis.
Aggregate Option Grants and Exercises in 1997 and Year-End
Option Values
Stock Options and Option Values. The following table sets
forth information related to options granted to the named
executive officers during 1997.
</TABLE>
<TABLE>
<CAPTION>
Individual Grants(1) Potential Realizable
Value at
Assumbed Rates of Stock
---------------------------------------- ------------------------
Percent of Total
Number Options Exercise or Price per Appreciation
of Options Granted Base Price for Option Term
Granted to Per Share ----------------------
Employees Expiration Five Ten
Name in 1997 Date Percent Percent
- ---------- --------- ---------- --------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. - - % $ - - $ - $ -
Barcum
Robert N. - - % $ - - $ - $ -
Baker
Russell L. - - % $ - - $ - $ -
Reinhardt.
David B. 35,000 29.3% $3.875 March 17, 2002 $16,751 $21,138
</TABLE>
- ------------
(1) The potential realizable value portion of the foregoing
table illustrates the value that might be
realized upon exercise of the options
immediately prior to the expiration of their
term, assuming the specified compound rates
of appreciation of the Common Stock over the
term of the options. These amounts do not
take into consideration provisions restricting
transferability and represent certain assumed
rates of appreciation only. Actual gains on
stock option exercises are dependent on the
future performance of the Common Stock and
overall stock market conditions. There can be
no assurance that the potential values reflected
in this table will be achieved. All amounts
have been rounded to the nearest whole dollar
amount.
Aggregate Stock Option Exercise and Year-End
and Option Values. The following table sets forth information
related1 to the number and value of options held by the named
executive officers at the end of 1997. During 1997, there were
no options to purchase the Common Stock exercised
by the named executive officers.
<TABLE>
<CAPTION>
Number of Options Value of Unexercised In-the-Money
--------------------------------
as of December 31, 1997 Options as of December 31, 1997(1)
------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Robert L. Barcum - - $ - $ -
Robert N. Baker - - - -
Russell L. Reinhardt - - - -
David B. North 15,000 20,000 $5,625 $7,500
- ------------
(1) The closing sale price of the Common Stock as quoted on
Nasdaq SmallCap Market on December 31, 1997, was $3.50.
Value is calculated on the basis of the difference
between the option exercise price and $3.50 multiplied
by the number of shares of Common Stock underlying the
option.
</TABLE>
Director Compensation
All present directors who are executive officers of the
Company receive no additional compensation for their services as
directors or as members of the Board Committees upon which
they serve. In 1998, the Board of Directors adopted
the Applied Intelligence Group, Inc. 1998 Non-
Qualified Stock Option Plan to
attract, retain and motivate directors, executive
officers, key employees and independent
contractors of the Company and its subsidiaries by
way of granting non-qualified stock options with
stock appreciation rights attached. In addition to
the grant of non-qualified stock, directors who are not officers
or employees of, or consultants to, the Company receive $2,500
cash compensation per quarter regardless of the number
of Board of Directors' meetings at which they are present
and for each Committee meeting at which they
are present not held in conjunction with a meeting of the Board of
Directors. Outside directors are also reimbursed
for their expenses for each Board and committee meetings attended.
As of August 31, 1998, the Company had granted
77,500 stock options to two outside directors. Each
of these stock options is exercisable for the
purchase of one share of Common Stock for $3.125
per share. Furthermore, these stock options are
only exercisable while the option holder is serving
as a member of the Board of Directors during the
period commencing December 31, 1998 through December
31, 2000.
Stock Option Plan
In connection with the Consulting Divisions
Sale, it is anticipated that the Stock Option Plan will be
approved by the shareholders of the Company and
will become effective upon execution the
Shareholder Consent. See "Consulting Division
Sale-Stock Option Plan Amendment."
The Company established the Applied Intelligence
Group, Inc. 1995 Stock Option Plan (the "Stock Option
Plan" or the "Plan") in March 1995, and amended the
Plan on April 29, 1996. The Plan provides for
the issuance of incentive stock options ("ISO
Options") and non-incentive stock options ("NSO
Options") to key management, directors, key
professional employees and key professional non-employee
service providers of the Company. The
number of shares of Common Stock authorized and
reserved for issuance under the Plan is 300,000.
Under the Plan, as of December 31, 1997, options to purchase
a total of 173,078 shares of Common Stock at prices ranging
from $.63 to $3.88, with a weighted average
exercise price of $2.71 per share,
were outstanding, of which 112,328 were exercisable at
an average exercise price of $2.08.
The Stock Option Committee, which is currently
comprised of Ms. Kay H. Titchenal and Mr. Barcum
and Baker, administers and interpret the Plan and
has authority to grant options to all eligible
participants and determine the types of options
granted, the terms, restrictions and conditions of
the options at the time of grant.
The option price of the Common Stock is
determined by the Stock Option Committee. The
option price of NSO Options may not be less than 75
percent of the fair market value of the shares on the
grant date of the option. In the case of an ISO
Option, the option price may not be less than the
fair market value of the Common Stock on the date
of the grant of the ISO Option. The fair market value
of a share of the Common Stock is determined by the Stock
Option Committee. Upon the exercise of an option, the option
price must be paid in full, in cash, Common Stock (at the fair market
value thereof) or a combination thereof. For a
period of two years ending November 21, 1998, the
Company has agreed with Barron Chase Securities,
Inc., the underwriter of the Company's initial
public offering not to grant more than 25,000 NSO
Options having an option price of less than fair
market value of the shares on the date of grant of
the option, without written consent of Barron Chase
Securities, Inc.
Options are exercisable during employment and
for a period of three months after the participant
ceases to be an employee, a director, or non-
employee service provider of the Company;
however, in the event of death or disability of the
participant, the ISO Options are exercisable for
a period of one year following death or
disability. In any event, options may not be
exercised beyond the expiration date of the option.
NSO Options may be granted to key management
employees, directors, key professional employees
or key professional non-employee service providers
of the Company, while ISO Options may only be
granted to key management or key professional
non-employee service providers of the Company.
No option may be granted after February 28, 2005.
Options are not transferable except by will or by
the laws of descent and distribution.
All outstanding options granted pursuant to the
Plan will become fully vested and immediately
exercisable in the event that (i) within any 12-
month period, the Company sells an amount of Common
Stock that exceeds 50 percent of the number of shares
of Common Stock outstanding immediately prior to
such 12-month period, (ii) the Company completes an
initial public offering of its stock, or (iii) a
"change of control" occurs. For purposes of the
Plan, a "change of control" is defined as the
acquisition in a transaction or series of
transactions by any person, entity or group (two or
more persons acting as a partnership, limited
partnership, syndicate or other group for the
purpose of acquiring securities of the Company) of beneficial
ownership of 50 percent or more (or less than 50
percent as determined by a majority of the
directors of the Company) of either the then
outstanding shares of Common Stock or the combined
voting power of the Company's then outstanding
voting securities.
Non-Qualified Stock Option Plan
Unrelated to the Consulting Divisions
Sale, it is anticipated that the 1998 Plan Amendment will be
approved by the shareholders of the Company and
will become effective upon execution the
Shareholder Consent. See "Consulting Division
Sale-Stock Option Plan Amendments."
On February 9, 1998, the Board of Directors of
the Company adopted the 1998 Non-Qualified Stock
Option Plan (the "NonQualified Stock Plan" or
"Plan"), to attract, retain and motivate directors,
executive officers, key employees and independent
contractors of the Company and its subsidiaries
by way of granting non-qualified stock options
with stock appreciation rights attached. The Non-
Qualified Stock Plan authorizes and reserves up
to 300,000 shares of Common Stock for issuance and
options under the Plan. The option price shall not
be less than 85 percent of the fair market value of
the Common Stock on the date of grant. All options
pursuant to the Plan expire after ten years from
the date of grant. The Board of Directors has the
discretion to fix the period and the time at which
any options granted under the Plan may be exercised.
As of June 30, 1998, the Company has issued
87,500 stock options to two outside directors and
one independent contractor, with exercise dates from
December 31, 1998 through December 31, 2000, at an
exercise price of $3.125 per share, as long as the
individuals continue to serve the Company.
Stock Grant Plan
On February 10, 1998, the Board of Directors of
the Company adopted the 1998 Stock Grant Plan (the
"Stock Grant Plan" or "Plan") to attract, retain
and motivate consultants, independent contractors and
key employees of the Company and its subsidiaries by
way of granting shares of stock in the Company.
The Stock Grant Plan authorizes and reserves up to
150,000 shares of Common Stock of the Company for
issuance under the Plan. Shares of Common Stock
received pursuant to the Stock Grant Plan restrict
the sale, transfer or other disposal of said shares
for a period of one year. As of June 30, 1998,
5033 shares of Common Stock had been issued under
the Stock Grant Plan.
Employee Stock Purchase Plan
The Company established the Applied Intelligence
Group, Inc. Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan" or "Plan" in April
1997, and it was approved by the shareholders at the
Annual Meeting of Shareholders on June 3, 1997. The
Employee Stock Purchase Plan provides the
opportunity for employees to purchase the Company's Stock
through payroll deductions, to encourage participation in the
ownership and economic progress of the Company. The
number of shares of Common Stock authorized and
reserved for issuance under the Plan is 100,000
shares. As of June 30, 1998, 4,633 shares of
Common Stock have been purchased at an average
price of $2.92 by employees of the Company.
The Plan provides for the granting of stock
options to eligible employees of the Company. It is
intended that the Plan and the stock options
granted under the Plan will meet the
qualification requirements set forth in the Internal
Revenue Code of 1986, as amended (the "Code"). The
Plan is administered by the Board of Directors or a
committee appointed by and serving at the pleasure
of the Board of Directors, consisting of not less
than two members of the Board of Directors.
The Board or committee administers and
interprets the Plan and has the authority to
establish, adopt or revise rules and regulations
with respect to the Plan. The interpretation of the
Plan by the Board or the committee is final,
binding, and conclusive on all employees and
participants.
All full-time employees (i.e., whose customary
employment is 20 hours or more per week and more than five
months in any calendar year), who have been
continuously employed more than six months will be
eligible to participate in the Plan by entering into
an option agreement to purchase shares of Common
Stock of the Company. Provided, however, the employees who
own or would own five percent or more of the
Company's Common Stock, including shares owned by family
members and indirectly through a
corporation, partnership or trust, immediately after
the options are granted in accordance with the
option agreement after giving effect to and
assuming exercise of such options and any other
stock options held by the employee-participant, are
not eligible to participate in the Plan.
The total number of shares of Common Stock
authorized and reserved for issuance under the Plan is 100,000.
The number of shares of Common Stock is subject to appropriate
adjustment in the event of any merger,
consolidation, recapitalization, reclassification,
stock dividend, stock split or similar
transaction. Plan participants may contribute up to
$20 per pay period into their account to purchase
whole shares of the Common Stock of the Company at
pre-determined calendar quarter grant dates or
exercise dates. The option price will be 85 percent
of the per share fair market value on the granting
date or the exercise date, whichever is the lesser, of the
purchase period.
During each quarterly purchase period, a participant
will not be permitted to purchase more than 50
shares of Common Stock. Any remaining balance in
the Participants' accounts after the
purchase of shares during a quarterly purchase
period will be carried over to the next quarterly
purchase period and exercise date.
The stock options may not be assigned,
encumbered or otherwise transferred by the participants,
except by will or under laws of inheritance.
The Plan will remain in force until March 31,
2002. The Board of Directors may amend the Plan in
any respect consistent with Sections 421 and 423
of the Code, except that, without approval of the
stockholders, no amendment shall (i) increase the maximum number
of shares of Common Stock reserved under the Plan other than
in connection with a merger, consolidation, recapitalization,
reclassification, stock split, combination of shares, stock dividend
or (ii) make the Plan available to any person who
is not an employee of the Company.
Other Stock Options
In connection with the merger of Vantage
Capital Resources, Inc. with and into the Company,
the Company issued 360,000 stock options at an
exercise price of $5.00 per share. Furthermore, in
connection with the transaction with ijob, Inc.,
the Company issued 50,000 stock options at an
exercise price of $3.50 per share. As of December 31,
1997, under all stock options granted
by the Company, options to purchase a total of
583,078 shares of Common Stock ranging in price from
$.63 to $5.00, with a weighted average exercise
price of $4.19 per share were outstanding, of
which, 522,328 were exercisable at a weighted
average exercise price of $4.23.
Profit Sharing Plan
In 1987, the Company adopted the Applied
Intelligence Group, Inc. Profit Sharing Plan (the
"Profit Sharing Plan"). The Profit Sharing Plan
covers all employees of the Company who have
completed at least one year of service with the
Company as of the enrollment date under the Profit
Sharing Plan. The Company may
make an annual contribution to the Profit Sharing
Plan on behalf of employees which, if made, begins
to vest for each employee's account after the
employee has completed two years of service with
the Company. Thereafter, each employee's account
vests ratably as to 20 percent of the employee's
account following each subsequent year of completed
service with the Company. Vested contributions
will normally be distributed to an employee upon
(i) the employee's retirement, (ii) the
employee's death or disability, (iii) the
termination of the employee's employment with the
Company or (iv) the termination of the Profit
Sharing Plan. The Company did not make any
contributions to the Profit Sharing Plan for the
fiscal years ended December 31, 1995, 1996 and 1997.
In 1995, the Company amended the Profit
Sharing Plan to include a 401(k) deferred
compensation feature, whereby eligible participants
may elect to defer up to 15 percent of their
salaries, not to exceed the annual statutory limits,
pursuant to a voluntary salary
reduction agreement. The Company may
determine matching levels of contributions from time
to time, at the discretion of the administrative
committee. No matching contributions were made
by the Company during 1995, 1996 and 1997. All
employee contributions under the 401(k) feature are
fully vested at all times.
CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING
INFORMATION
Statements of the Company's or management's
intentions, beliefs, anticipations, expectations
and similar expressions concerning future events
contained in this Report constitute "forward
looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. As with
any future event, there can be no assurance that
the events described in forward looking statements
made in this Report will occur or that the results
of future events will not vary materially from those
described in the forward looking statements.
Important factors that could cause the Company's
actual performance and operating results to differ
materially from the forward looking statements
include, but are not limited to, changes in the
general level of economic activity in the markets
served by the Company, introduction of new products
or services by competitors, delays in further
development and implementation of the Company's
viaLink and ijob services, the availability of
capital sufficient to support the Company's level
of activity, and the ability of the Company to
implement its business strategies. The Company's
expectations with respect to future results of
operations that may be embodied in oral and
written forward looking statements, including any
forward looking statements that may be included in
this Report, are subject to risks and
uncertainties that must be considered when
evaluating the likelihood of the Company's
realization of such expectations. The Company's
actual results could differ materially.
BUSINESS AND PROPERTY OF THE COMPANY
General
Applied Intelligence Group, Inc. (the
"Company") is engaged in the business of providing
a diversified range of management consulting and
computer systems information integration services
and technology to the retail and wholesale
distribution industries. Since its
formation in 1985, the Company's
operations have included consulting services, which
are primarily focused on the planning, designing,
building, and installation of computerized
information management systems and computerized
checkout or point-of-sale systems in the retail and
distribution industry. The Company continues to provide these
consulting services. In 1993, the Company
commenced the design and development of viaLink,
a subscription service on the World Wide Web of the
Internet (the "Internet"). viaLink was announced in
April 1996 and the viaLink Item Catalog service was
brought on line in January 1997. viaLink services
currently include the Item Catalog, Exchange
Manager, Item Express, and CSP
MARKETLinkT. In 1994, the Company commenced
development work on its Retail Services
Application ("RSA"), a complete store point-of-
sale solution to the retailer and their chain
stores. RSA was released in August 1995. In
connection with RSA, the Company also offers
CHAINLINK, a communication system, which transfers
information (e.g., sales or inventory)
electronically between the store and the retailer's
headquarters.
Beginning in late 1996 and during 1997,
the Company designed, developed and introduced
in April 1997, ijob, an Internet based human
resources application. During the second quarter
of 1997, ijob, Inc. was formed as a wholly-
owned subsidiary of the Company, and commenced
operations as a separate entity on June 30, 1997. The
principal offices of ijob, Inc. are located in the
Company's Headquarters in Edmond, Oklahoma.
The Company's Internet home page can be located
on the World Wide Web of the Internet ("Internet") at
http://www.aig.vialink.com. The Company's
principal executive offices and headquarters are
located at 13800 Benson Road, Edmond, Oklahoma
73013-6417, and its telephone number is (405) 936-
2300.
ijob, Inc.
On April 25, 1997, the Company completed the
organization of its wholly-owned subsidiary, ijob,
Inc. Pursuant to the Asset Purchase Agreement
dated June 12, 1997, the Company, through ijob,
Inc., completed the acquisition of certain assets
and intellectual property of Human Technologies,
Inc. ("HT"), including software programs know as
"HT1", "HT2", "Hal-1" and "ijob-internet", the
related trademarks, trade names, sales marks,
logos and marketing concepts, and the original
technical and instructional documentation, source
and executable code of the programs relating
thereto. Furthermore, the Company received all
copyright powers and benefits related to the
software programs and the right to produce, sell,
modify, distribute, license and copy in full or in
part those software programs (the "HT Assets").
The Company paid to the owners of HT $100 and
issued stock options and warrants exercisable for the
purchase of 50,000 shares of Common Stock at $3.50
per share on or before June 12, 1999.
Furthermore the Company agreed to pay the HT
owners 50 percent of the (i) distributable earnings
of ijob, (ii) distributable proceeds from the sale
of ijob assets and (iii) distributable gross
royalties received by ijob from the sale or other
transfer of ijob assets, (collectively the
"Distributable Amounts"). The Distributable Amounts
are determined from time to time by the Board of
Directors of ijob, Inc.
In connection with the acquisition of the HT
Assets, the Company entered into an at will
employment agreement with the former president of
HT to become president of ijob, Inc. Among
other duties, the president is a member of the Board
of Directors of ijob, Inc.
Vantage Capital Resources Inc. Acquisition
On June 12, 1996, Vantage Capital Resources,
Inc. ("VCRI"), an Oklahoma corporation, merged
with and into the Company
pursuant to an Agreement and Plan of Merger dated
May 8, 1996 (the "Merger"). On June 5, 1996,
VCRI completed a private offering of 250,000
shares of its Common Stock at an offering price
of $1.75 per share and received net proceeds of
approximately $394,567 (the "Private Placement Offering").
In consummation of the Merger, the Company exchanged
610,000 shares of its Common Stock, on a one-for-
one basis, for the outstanding Common Stock of
VCRI. The merger was accounted for as an
acquisition of VCRI by the Company in a manner
similar to the pooling of interests method of
accounting. Pursuant to an Exchange Agreement
dated October 14, 1996, each of John Simonelli and
Larry E. Howell, exchanged 180,000 shares of Common
Stock of the Company received in connection with
the Merger for stock options, each exercisable on
or after November 20, 1998, and on or before
November 30, 2001, for the purchase of Common Stock
for $5.00 per share. Furthermore, during October
1996, the Company redeemed 22,500 shares of Common
Stock issued to David B. North, an executive
officer of the Company, pursuant to the Merger and
1,000 shares of Common Stock issued to a former
executive officer pursuant to the Merger for $1.75
per share (the offering price of the VCRI Common
Stock under the Private Placement Offering) for an
aggregate amount of $39,375 and $1,750, respectively.
Overview of Products and Services
The Company is engaged in the business
of providing management consulting and technology
systems information services to retail companies
and to the manufacturers, wholesalers, and other
suppliers who provide the products that these
retail companies sell (the "Retail Supply Chain").
These information systems services include (i)
management consulting and computer system
integration services, (ii) proprietary software
products and applications, and (iii) network
services and network-based computer applications.
The Company is currently organized in two business
areas to provide all its services and product
offerings: Retail and Store Systems Consulting,
including RSA and CHAINLINK, and systems integration
(the "Consulting Division"); and, Network Services,
including viaLink and ijob internet based
offerings, and production/operations of web-site
hosting. The Company is also a reseller of
various computer software, hardware and point-of-
sale systems.
Consulting Division and Systems Integration Services
Upon approval of the Consulting Division
Sale, the Consulting Division will be purchased by Netplex
Group. The Company's consulting services include designing,
building, installing, and implementing headquarters and store
systems and integrated custom software products for
customers in the retail and distribution
industries. The Company also selects and then
customizes and installs third-party software for
many of its customers.
The Company's consulting services include
determination of business and technology
requirements, operating system planning and
implementation, situational and due diligence
studies, information technology plans,
business and technology recommendations, and
training. A typical consulting arrangement will
last from two to six months or longer for more
complex projects. A single consulting and systems integration
arrangement may include multiple projects, using a
wide range of the Company's professional staff.
The Company's systems integration services
include various computer architectures and
operating systems for personal computer ("PC") based
systems (i.e., DOS, Windows, Windows NT,
UNIX, OS/2, 4680/OS, 4690/OS) and intermediate to
large systems (AS/400, RS/6000, HP, MVS, and VSE).
The Company has significant development and
support experience with industry-standard
technologies, such as COBOL, SQL, DB2 and ORACLE.
The Company is also developing software
applications using object-oriented technology, such
as the Smalltalk programming language, provided by
Object Share, Inc. Solutions, Software Products,
Licenses and Applications ("Solutions"). Many of
the Company's customers are retail chains, who are
attempting to implement information management
systems in their headquarters and/or store locations,
in addition to accounting, payroll and other
financial management information systems. A typical
in-store retail system includes the following
components:
1. a "front-end" system (i.e., "checkout
system", "cash register system" or "point-of-
sale system") which records sales, provides
a cash drawer, prints customer receipts, etc.
Most front-end systems utilize PC hardware,
and include programs that operate the PC
and specialized hardware, such as the cash
drawer or barcode scanner;
2. a "back-office" system, which typically
coordinates the operation of the registers,
and provides store management applications,
such as receiving and inventory control; and
3. a "communication" system, which transfers
information (e.g., sales or inventory)
electronically between the store and the
retailer's headquarters.
4. a "headquarters" system, which processes the
information about the business for accounting
and merchandising systems.
The Company is a business partner of
International Business Machine Corp. ("IBM") and an
authorized reseller of IBM hardware and point-of-
sale software. When implementing in-store systems
for retailers, the Company has historically
relicensed and customized one or more IBM software
programs, and installed these programs on IBM
hardware that, in many cases, the Company sold to the
retailer. Such hardware includes point-of-sale
registers, radio frequency hand-held terminals, in-
store processors, and other in-store equipment.
The Company also provides programming services to
personalize and customize the in-store software,
implementation services related to software
installation and personnel training.
In 1994, the Company began development of a
software system that would operate on a wide
range of computer hardware, including different
models of IBM and non-IBM hardware, and on a variety
of non-IBM operating systems such as UNIX and Windows
NT. The Company subsequently developed its
proprietary in-store software applications for
licensing to retailers, as an alternative to
relicensing and customizing IBM software
applications and programs. The Company's RSA software
application was first licensed and implemented in a retail chain
in 1995. Because the Company's software
applications operate on a variety of PC
operating systems, and with a wide variety of PC
hardware, the Company's software applications
address a broader market. RSA allows retailers to
selectively install new in-store systems without storewide
or company-wide replacement of existing hardware.
The Company is also a global solutions partner
of the NCR Corporation ("NCR"). This relationship,
along with the Company's IBM relationship, enables
the Company to provide a full-service, single-source
solution for the store automation needs of
retailers. The contractual relationships with
IBM and NCR provide the Company with the ability
to relicense software, resell hardware, and gain
access to technical support for the Company's
customers.
The Company has also developed CHAINLINK, a
cost-effective, easy to-use store communications
program, which provides reliable and consistent
movement of data between stores and headquarters.
CHAINLINK is designed to work with RSA, as
well as other point-of-sale software packages.
CHAINLINK is currently in use in at least twelve retail
chains, representing close to 1,000 stores, in the
United States as of March 23, 1998. Together, RSA
and CHAINLINK provide the retailer with store
management and point-of-sale applications,
including checkout at the cash register, back office and
store to headquarters communications. RSA can be customized to
meet the specific needs of the retailer. RSA can provide the
store managers and cashiers with the same "look and feel" on a
variety of installed point-of-sale computer systems,
while giving the retailer's information
management systems staff a consistent interface to
all of its store systems. RSA is currently
installed in four retail chains, representing
approximately 650 stores as of March 23, 1998.
The primary target market for RSA is general
merchandise retailers who generally have more than
70 stores, and more than $100 million in sales. RSA
and CHAINLINK sales in 1997 totaled $131,800.
Network Services
The Company provides a full range of
network services including its viaLink
subscription service, telecommunications
planning and consulting, Internet-based applications
development, and maintenance and hosting of internal
and external web-sites. Through its internal
customer support network, the Company provides
web-site hosting and maintenance. Following
completion of the Consulting Division Sale, the
Company's products and services will be limited,
at least in the near term, to the providing of
network services.
viaLink Subscription Services
viaLink is an industry-specific, shared business
application subscription service, developed and
maintained by the Company, with access through
telecommunications, including private networks, and the Internet.
Through viaLink, the Company is a content provider on the
Internet. viaLink offers a moderately-priced electronic
commerce service for manufacturers, suppliers, retail headquarters and
individual retail stores through which
subscribing customers are connected via the
Internet to a database maintained on the
Company's computer systems. Using a PC and
commonly available computer programs,
participants can subscribe to the viaLink service and
avoid the purchase, installation,
implementation and maintenance of a
complex information system. viaLink provides a
common set of business systems and support
offerings to subscribers, and is priced as a
monthly subscription service.
In April 1996, the Company introduced
the viaLink subscription service primarily for the
convenience store industry, which consists of
approximately 68,000 stores operated by
approximately 1,650 companies. viaLink has
application in other operations within the retail
industry. According to the National Association of
Convenience Stores ("NACS"), only a small percentage
of convenience store companies have implemented
instore computerized retail information systems.
In order to implement computerization and
scanning in a retail store, the retail chain must
first develop and then maintain a "pricebook" which
contains information for all items offered for sale in
the store. The pricebook typically contains descriptions of the
items, along with their Universal Product Codes
("UPCs"), purchase costs, retail sales prices, and any discounts
or rebates to be received from the supplier. A
convenience store chain may have hundreds of
suppliers, and each supplier may have different prices
on the items it supplies to the chain, depending on
the locations of the stores being supplied, which
makes pricebook maintenance difficult, but
essential. Pricebook maintenance typically involves
inefficient manual entry of item information, which can
introduce errors into the pricebook. According to NACS,
maintenance of the pricebook often poses the most
significant challenge to computerization of the
convenience store's purchases and sales.
A subscribing retailer can use the viaLink
Item Catalog Service to electronically retrieve
product item information (e.g., item numbers,
UPCs, descriptions, pricing information, deal and
promotional pricing) that has been placed in the
database by manufacturers, wholesalers, or other
product suppliers. This information can be electronically
loaded into the retailer's pricebook to improve the accuracy and
reliability of the pricebook. Product manufacturers
can use viaLink to efficiently introduce new
products, by electronically providing product
information to retailers and wholesalers. Wholesalers
and other suppliers can use viaLink to provide
product and pricing information to retailers by
placing this information in the viaLink database, and
allowing the retailers to access these prices. The
database in viaLink is specifically designed to
manage the complexity of the arrangements that
exist between retailers and their wholesalers and
suppliers, especially related to prices and promotions.
In January 1997, the Company brought the
viaLink Item Catalog Service on line with a
retailer and three suppliers. Since that time, the
viaLink Item Catalog subscriber base has grown to 60
retailers, representing approximately 5,580 stores,
and 117 suppliers as of August 31, 1998. The Company
is in the process of implementing the Item Catalog
Service with these retail chains and suppliers.
The Company has begun to further develop and
implement its business plan and strategy for viaLink
with new product offerings of Exchange Manager,
ItemXpress and CSP MARKETLink, all of which are
available for market and industry use. Revenues from
all viaLink activities in the six months ended June
30, 1998 totaled $38,610 , an increase of $32,165 from
revenues of $6,445 in the same period in 1997 and
in the year ended December 31, 1997 totaled
$45,125, an increase of $44,025 from revenues of
$1,100 in 1996. In addition to the convenience store industry, the
Company has deployed viaLink in the grocery store
industry. The Company also intends to deploy viaLink applications
into other segments of the retail industry, who
share much of the same supply chain (manufacturers and
distributors) with the convenience and grocery store industries.
The Company announced the beta test of the
viaLink Exchange Manager, an invoice and purchase order
processing system, in the summer of 1997. The system
was ready for general distribution in March 1998.
Along with the Exchange Manager, the Company made the
viaLink ItemXpress Service available in March of 1998.
The viaLink ItemXpress Service allows retailers to
select from the extensive information of merchandise
data in the viaLink database and download the
information into their headquarters price and item
management system.
In the third quarter of 1997 the Company
and EPIC Communications, Inc., launched CSP
MARKETLink, the first Internet-based, interactive
communications service between manufacturers and convenience
store operators. CSP MARKETLink is powered by the
viaLink application and provides product and
merchandising information that saves time for both
manufacturers and retailers. It also gives retailers
access to a broader range of information, while
affording manufacturers direct access to a broader
range of retailers. Created as a joint venture
between the Company and EPIC Communications, Inc.,
which publishes CSP Magazine, CSP MARKETLink
goes far beyond typical banner advertising on
passive web pages. It utilizes the latest "push"
technology to deliver supplier messages into the
subscribing store's e-mail in-box. The retailer
can then preview new products, promotions and media plans,
obtain category information and research, participate in surveys,
e-mail questions or suggestions, and then look or listen to the
latest consumer advertising campaigns on video
transmitted directly to his PC. The new service
is also the first electronic commerce tool to
provide manufacturers with immediate feedback from
retailers, as well as verification that their
information was received and read by decision-makers
at targeted retail companies. A number of leading
manufacturers joined Miller Brewing Co. in
providing input into the development and design
of CSP MARKETLink, including American Chicle, Kraft
Foods, M&M Mars, and Proctor and Gamble.
The Company also constructs Internet-based
information applications for its customers, such
as NACS. The Company constructed, operates
and maintains the Internet-based
applications and directories, which allow NACS to
offer services on the Internet. This site or
"home page" is known as "C-Store Central" and
can be found on the Internet at
http://www.cstorecentral.com. NACS places daily news
about the convenience store industry on this site
which also allows members easy access to the viaLink
services.
ijob
Commencing in late 1996 and during 1997,
the Company designed, developed and completed
ijob an Internet employer subscription service.
ijob is a network based human resource recruiting
application accessible through either the Internet
or by telephone. ijob uses these communications
systems as a medium to bring together job seekers
and employers. ijob utilizes a database to
collect, catalog, and match information to
pre-qualified job candidates with the human
resource needs of ijob subscribing employers. The
Company believes ijob represents a technological
improvement over current Internet "resume web
sites" where career material is simply posted on
unscreened databases or on bulletin boards.
Utilizing ijob subscription services, an employer
benefits by receiving a list of
pre-qualified registrants who have greater
probability of meeting the employer's human
resource needs. Computer assisted, structured
interviews and skill testing are used to screen job
applicants which enables employers to efficiently
conduct focused employee recruiting. Job seekers
also benefit by using the ijob system on a cost-
free basis. A job seeker's information is
maintained in the ijob database until the registrant
requests its withdrawal.
During the six months ended June 30, 1998 and
the year ended December 31, 1997, ijob, Inc, earned
$434,816 and $610,689 in revenues, respectively.
Since the inception of ijob, Inc. through June 30, 1998,
the Company has made cash expenditures of
approximately $833,000 in excess of revenues, to
launch and implement the ijob service. Of these
cash expenditures, the Company capitalized $198,290
in development costs associated with the design and
ongoing development of ijob.
ijob conducts its operations as a wholly owned
subsidiary of the Company, under the name ijob, Inc.
and as of August 31, 1998, employed 10 full-time and
two part-time employees. Of the total of 12
employees, one is in sales and marketing, including
the president of ijob, Inc., three full-time
employees and one part time employee are in
technical and product development, and the remaining
employees are in operations and customer support.
Customer Support
The Company's customer support group provides
customers of the Company telephone and on-line
technical support. As of March 23, 1998, the
Company's customer support group consisted of four
full time representatives. However, all the
Company's technical staff can be used, when
appropriate, for resolving technical problems and
supporting specific customer needs.
Sales and Marketing
The Company's services and products are marketed
directly to the Company's customers through its
sales and marketing support group and senior staff
members. During all of 1997, the Company operated
without a sales and marketing executive. As of
August 31, 1998, the Company's sales and
marketing support group consisted of 13 full-time
employees including the President of the Company,
and those in the Company's wholly owned subsidiary,
ijob, Inc. Also included in that total are a Vice
President of Sales and Marketing, hired in January
1998 to assume full-time leadership of marketing
and sales, and two additional sales executives
added in the first quarter of 1998. The sales and
marketing team is responsible for sales-lead
generation, follow-up on customer referrals, and
providing input into the Company's ongoing services
and product development efforts based on customer
feedback and market data. Sales and marketing leads
are generated through advertising, customer
referrals, public relations, trade shows, and
strategic relationships with hardware manufacturers
and customers. The Company also utilizes a variety
of other consulting and contractor relationships to
help develop and promote viaLink.
Licenses and Intellectual Property
The Company regards its software as
proprietary, which is generally licensed under
written license agreements. Because the Company's
software products allow customers to customize
their applications without altering source
programs, the source programs for the
Company's products are typically neither
licensed nor provided to customers.
The Company has no patents or patent
applications pending. The Company attempts to
protect its products through a combination of
copyright, trademark and trade secret laws.
CHAINLINK and viaLink are registered trademarks of
the Company and trademark applications are pending
with the United States Patent and Trademark Office
for Retail Services Application and ijob. The
Company also requires employee and third-party
non-disclosure and confidentiality agreements.
Despite these precautions, it may be possible for
unauthorized parties to copy certain portions of
the Company's software products, reverse engineer,
or obtain and use information that the Company
regards as proprietary.
Because the software development industry is
characterized by rapid technological change, the
Company believes that factors such as the
technological and creative skills of its personnel,
new product developments, frequent product
enhancements, name recognition and reliable product
maintenance, are more important to establishing and
maintaining a technology leadership position, than
the various legal protections available for its
technology.
Software License Agreements
From time to time, the Company licenses third-
party software components for inclusion principally
in its software application RSA. In January 1994,
the Company entered into a non-exclusive confidential
software license agreement with Applied Retail
Solutions Corporation ("ARSC") related to certain
computer software programs, development tools, interfaces
and codes (the "ARS Software") used by the Company
in the development and marketing of RSA for
use on certain identified point-of-sale computer
terminals. This agreement had an initial term of
two years and, following the initial term, the
agreement has continued on the same terms and conditions
and is subject to termination on 90 days' notice. The
agreement requires the Company to pay periodic
license and support fees. The ARS
Software and all modifications and enhancements
to the ARS Software by the Company remain the
property of ARSC.
In March 1994, the Company entered into
a five-year confidential Agreement for Licensing of IBM
Software with IBM pursuant to which the Company
became an authorized reseller and technical support
provider of certain IBM software. Furthermore, in February
1995, the Company entered into a two-year
confidential IBM Business Partner Agreement and
became an authorized remarketer of IBM computer
hardware. This agreement was renewed in 1997 for
another two years. Pursuant to these agreements,
the Company receives discounts on the purchase of IBM
software and hardware products. With respect to
IBM software, the Company is required to pay IBM a
one-time royalty on each distributed or installed
copy of the IBM software.
Under a Global Solutions Partner Agreement
effective April 28, 1997, the Company continued
its relationship as a Global Solutions Partner
with NCR Corporation. The Global Solutions Partner
Program is designed so that NCR and various
independent software vendors can work together to
enhance each other's marketing and product
programs. Pursuant to such agreement the Company
receives discounts on NCR hardware and software
purchases and maintenance, personnel education
and training, software support, and certain
commissions and fees associated with NCR equipment
and software installations.
Employees and Consultants
As of August 31, 1998, the Company had
102 full-time employees and two part-time
employees, including those of its wholly-owned
subsidiary, ijob, Inc. Of the 104 employees, 14
were employed in sales and marketing support,
including the President of the Company, 19 were
employed in product research and development and
technical support, 59 were employed in
professional services, operations and customer
support, and 12 were employed in human resources,
administration and finance. The Company's future
performance depends in significant part upon the
continued service of its key technical and senior
management personnel, and its continuing ability
to attract and retain qualified and motivated
personnel in all areas of its operations. Competition
for such personnel is intense, and there can be no
assurance that the Company will retain key
managerial and technical employees or that it can
attract, assimilate or retain other highly
qualified personnel in the future. None of the
Company's employees are represented by a labor
union. The Company has not experienced any work stoppages and
considers its relations with its employees to be
good.
Following completion of the Consulting Division
Sale, it is anticipated that the Company will have
approximately 40 full-time employees and 2 part-
time employees, including those of its wholly-
owned subsidiary, ijob, Inc. Of the 40 employees,
it is anticipated that 8 will be employed in
sales and marketing support, 16 will be employed
in product research and development and technical
support, 7 will be employed in professional
services, operations and customer support, and 9 will
be employed in human resources, administration and
finance.
Government Regulation
The Company is not currently subject to direct
regulation by any government agency, other than
regulations applicable to businesses in general.
There are currently few laws or regulations directly
applicable to access to or commerce on the Internet;
however, due to the increasing popularity and use of the
Internet, it is possible that a number of federal and state laws
and regulations may be enacted or adopted with
respect to the Internet, covering issues such as
user privacy, taxation, encryption, authentication
technology, pricing, quality of products or services. The
enactment or adoption of any such laws and regulations may
decrease the growth of the Internet and increase the cost of
commerce on the Internet, which could affect the
marketability of viaLink, and, in such event, could
have an adverse effect on the Company's operating
results and financial condition. Furthermore, the
applicability to the Internet of existing laws
governing issues such as property ownership, libel
and personal privacy is uncertain.
Competition
The environment within which the Company
operates is intensely competitive and subject to rapid change.
To maintain or increase its market share position
in the retail, supplier, and wholesale distribution
industries, the Company will need to continually
develop additional products, introduce new product
features and enhancements, and expand its
professional services capability. The Company
currently competes principally on the basis of
the specialized nature of its services and
products. Specifically, the features and
functions of the Company's
software products include adaptability and
scalability and their interoperability with other
network products, the ability to deploy complex
systems, product quality, ease-of-use, reliability
and performance, company reputation and
professional service, integration with other
enterprise and network applications, and
availability on popular computer operating systems,
databases and communications hardware architecture.
The Company believes its products and services
compete favorably in all of these areas.
Competitors vary in size and in the scope and
breadth of the products and services offered. The Company
encounters competition from a number of sources, including
the big-five accounting firms, IBM and other software
developers and hardware manufacturers, local and
regional consulting and software companies,
most of whom are privately-held, third-party
professional service organizations, and management
information systems departments of potential
customers who are developing custom software. In
the market place of the retail and wholesale
distribution industries, the Company competes
with numerous, smaller, privately-held companies
based on product features and functionality, as
well as larger, publicly-held companies with
greater resources and having greater product
and market diversification. The Company competes with these
companies based upon the specialized nature of its
focus on the rtail and wholesale distribution
industries and company reputation.
With respect to its proprietary retail software
products, many of the Company's current and potential
competitors, both privately-held and publicly-
held, have greater financial, technical,
marketing and distribution resources than those of
the Company. As a result, they may be able to
respond more quickly to new or emerging
technologies and changes in customer requirements,
and devote greater resources to the development and
distribution of their products. In addition, because
there are relatively low barriers to entry in the
software marketplace, the Company expects additional
competition from other established or emerging
companies as the network services market continues
to expand. Increased competition may result in
pricing pressures, reduced gross margins and loss
of market share, any of which could materially
adversely affect the Company's business and
results of operations. The Company also
believes that competition will increase as a result of
software industry consolidations. There can be no
assurance that the Company will be able to
compete successfully against current and future
competitors or that competitive pressures faced by
the Company will not materially adversely affect its
business and results of operations.
Clients and Customers
The Company's clients and customers range
from small, rapidly growing companies to large
corporations, principally within the retail and
wholesale distribution industries. The following
is a partial list of the Company's consulting
and viaLink clients as of August 31, 1998.
<TABLE>
<CAPTION>
Consulting Division customers:
<S> <C>
ALDI Inc. Brinker, International
Dollar General Corporation Duckwall-ALCO Stores, Inc.
Fleming Companies, Inc. Fox Photo,Inc.
Fred's Inc. Genovese Drug Stores, Inc.
Jan-Bell Marketing, Inc. Michaels Stores, Inc.
Petro, PSC, L.P. Trans World Entertainment
Sonic Corp. Western Family Foods, Inc.
viaLink customers:
Suppliers
Coca-Cola Cons. of La Vergne Crowley Foods, Inc.
Fleming Companies of Altoona Frito-Lay, Inc.
J.T. Davenport & Sons Pepsi Cola Marketing Group
Retailers
Nice N Easy Grocery Shoppes Petr-All Petroleum Corp
Quick Stop Food Mart, Inc. R&H Maxxon, Inc.
Store 24 Companies, Inc. Sugar Creek Stores, Inc.
</TABLE>
In the six months ended June 30, 1998, three
individual customers each accounted for 18, 13,
and 12 percent of the Company's revenues. In
1997, three individual customers each accounted
for 20, 13, and 10 percent of the Company's
revenues. In 1996, three individual customers each
accounted for 17, 14 and 10 percent of the
Company's revenues. In the six months ended June
30, 1998, five of the Company's customers accounted
for 58 percent of the Company's total revenues.
Furthermore, in 1997 and 1996, five of the
Company's customers accounted for 57 percent of
the Company's total revenues.
Other Business Strategies
The Company is a recognized leader in
providing business solutions through technology
to the retail industry. The
Company's viaLink services combine electronic
commerce and leading-edge Internet-based applications to
provide consumer product manufacturers,
distributors and retailers the capability of doing
business electronically with all of their
trading partners (the retail supply chain). The
subscription based viaLink services allow
supply chain participants to
electronically send and receive product, cost, and
promotional information in a format that is
compatible with any party's system, regardless of
their technological sophistication, and at a
fraction of the cost of traditional EDI
(Electronic Data Interchange) services and
systems. Utilizing the Company's experience and expertise
in the retail and distribution industries, the Company's
principal strategy is to continue further development and
enhancement of viaLink and ijob. Sucess of these strategies are
contingent upon the Company obtaining the necessary resources to
complete their business strategy.
Security Technologies
To minimize the security risks associated
with a shared network on the Internet, the
Company has implemented security protocols in
viaLink and ijob. The services provide encryption
protection of confidential information as it passes
through the Internet. The Company has also
constructed a double "firewall" between its
services and the Internet, which is intended to
restrict unauthorized use and prevent security
breaches. Although the Company has implemented these
security measures, viaLink and ijob are vulnerable
to break-ins and similar security breaches that
jeopardize the security of the information stored
in and transmitted through the computer systems of
viaLink and ijob users, which may result in
significant liability to the Company and also deter
potential customers. Moreover, the security and
privacy concerns of potential customers, as well
as concerns related to computer viruses, may
inhibit the marketability of viaLink and ijob.
The Company does not currently have product
liability insurance to protect against these risks,
and there can be no assurance that such insurance
will be available to the Company on commercially
reasonable terms or at all.
Product Development and Enhancement
The Company will continue to make significant
investments in product development, and
enhancement, as it is able, to continue to
provide technological solutions to its customers'
business needs. Historically, the Company has
obtained customer funding to develop products and
services which jointly met the Company's needs to
remain competitive and the customer's need to solve
information management problems. Currently, the
dynamic nature of the information technology industry places large
research and development demands on
businesses that desire to remain
competitive. Competing with larger firms with
substantially greater capital resources, the
Company has devoted significant portions of available
resources to stay abreast of industry developments and to
offer competitive products and services.
As of August 31, 1998, the Company's product
development staff and technical support staff
consisted of 19 full-time employees, including
ijob, Inc., but consisted of up to 30 employees
from time to time during 1997 and six months ended
June 30, 1998. The Company's total expenditures for
product development of viaLink, Solution services (RSA
and CHAINLINK), and ijob during 1997 were approximately
$945,000, $400,000 and $530,000, respectively, for
a total of approximately $1,875,000. Such
expenditures in 1996 were approximately $584,000,
$598,000 and $22,000, respectively for a
total of approximately $1,204,000. The Company's
total expenditures for product development of viaLink,
Solution services (RSA and CHAINLINK), and ijob during
the six months ended June 30, 1998 were approximately $579,000.
These expenditures represented approximately 21 percent
and 13 percent of total revenues for 1997 and 1996, respectively, and
approximately nine percent of total revenues for
the six months ended June 30, 1998. Of the product development
expenditures, the Company capitalized
software development costs and interest totaling
$752,158 and $655,248 in 1997 and 1996,
respectively, and $346,496 in the six months ending
June 30, 1998. The Company anticipates that it
will continue to commit substantial resources
to product development in the future, including further
development and enhancement of viaLink and ijob;
however, the amount of such capital required is
undeterminable at this time.
Properties
The Company's corporate headquarters
consists of a two-story office facility of approximately 30,000
square feet at 13800 Benson Road, Edmond, Oklahoma, which the
Company first occupied in January 1996. The office facility is
occupied under a ten year lease requiring monthly rental payments
of $24,545 during the first 36 months, $27,500
during the next 48 months, and $28,750 during the
remaining term of the lease. The lease expires on
June 30, 2006. In connection with the Consulting
Division Sale, Netplex will sublease from
the Company approximately 15,000 square feet of the office
facility for monthly rental payments of approximately $14,100.
The headquarters facility of the Company
has internal systems consisting of a local area
computer network with associated servers, a
wide-area network, high speed ("T1") connectivity
to the Internet, two RS/6000's, an AS/400,
approximately 140 workstations and several testing
labs of pointof-sale equipment. The facility is
designed to support a projected increase in
staff for both traditional and viaLink services
and the increased office space required to house
a production computer operations facility.
Legal Proceedings
From time to time, the Company may be
involved in litigation relating to claims arising
out of its operations in the normal course of
business. The Company is not currently a party to
any legal proceedings.
MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Common Stock and the Redeemable Common
Stock Purchase Warrants began trading separately in
November 1996 (subsequent to the initial public
offering) on the Nasdaq SmallCap Market under
the symbols "IQIQ" and "IQIQW", respectively.
The following table sets forth the high and low
closing bid quotations of the Common Stock and
Redeemable Common Stock Purchase Warrants as
reported by the National Association of
Securities Dealers Automated Quotation System
("NASDAQ"). The bid quotation reflects inter-
dealer prices without adjustment for retail
markups, markdowns or commissions and may not
reflect actual transactions. Prior to the
fourth quarter of 1996, no established public
trading market existed for the Common Stock and
Redeemable Common Stock Purchase Warrants.
<TABLE>
<CAPTION>
Redeemable Common Stock
Common Stock Price Purchase Warrants Price
------------------ -----------------------
High Low High Low
------- --------- ------- -------
<S> <C> <C> <C> <C>
1996
Fourth Quarter $6.00 $4.38 $1.75 $.75
1997
First Quarter $5.38 $3.63 $1.69 $.63
Second Quarter $4.50 $2.88 $1.00 $.38
Third Quarter $5.88 $3.00 $1.50 $.50
Fourth Quarter $4.50 $2.94 $1.13 $.50
1998
First Quarter $4.50 $2.88 $1.00 $.38
Second Quarter $5.13 $2.38 $1.19 $.63
</TABLE>
As of September 4, 1998, the closing sale price of
the Common Stock and the Redeemable common Stock Purchase
Warrants was $2.88 and $.70, respectively. As of September
4, 1998 the number of record holders of the
Company's Common Stock was approximately 825.
The Company has not paid a dividend with
respect to its Common Stock nor does the Company
anticipate paying dividends in the foreseeable
future. The proceeds of sale of the Consulting
Division will be retained by the Company for further
development and marketing of viaLink and ijob.
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATION
Overview
As of the date of this Information Statement,
the Company is engaged in the business of selling
computerized information management systems and
providing consulting and network industry solutions
services to retail companies and the product
suppliers of such retailers (i.e., manufacturers,
wholesalers and other distributors). The Company
is currently organized in two divisions. The
Network Services Division offers subscription
services through telecommunications (including
private networks and the World Wide Web of the
Internet), which include the Company's viaLink
and ijob services, network-based computer
applications, and the production and operation
of web site hosting on the Company's computer systems. The
Retail and Store Systems Consulting Division
provides management consulting, computer system
integration support services ("customer
support"), and markets software products and
applications ("solutions"), including the
Company's proprietary software
products, RSA and CHAINLINK, and resells computer
hardware and point-of-sale systems ("hardware
and product sales").
The following tables set forth selected results of
operations for the fiscal years ended December 31, 1997 and 1996
and for the six months ended June 30, 1998 and 1997, which are
derived from the financial statements of the Company.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1997 1996
--------------------- --------------------
Amount Percent Amount Percent
----------- -------- ---------- --------
<S> <C> <C> <C> <C>
Revenues $ 9,022,842 100.0% $9,507,370 100.0%
Expenses:
Direct Cost of sales 2,211,956 24.5% 2,570,840 27.0%
Salaries and benefits 6,174,503 68.4% 5,167,571 54.4%
Selling, general and
administrative 2,708,351 30.0% 2,007,999 21.1%
Interest expense, net 73,581 .8% 219,089 2.3%
Depreciation and amortization 827,396 9.2% 591,205 6.2%
----------- ----- --------- -----
Total expenses 11,995,787 132.9% 10,556,704 111.0%
----------- ----- ---------- -----
Income (loss) before income
taxes $(2,972,945) (32.9%) $(1,049,334) (11.0%)
=========== ====== ========== =====
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
----------------------------------------------
1998 (unaudited) 1997 (unaudited)
---------------------- ----------------------
Amount Percent Amount Percent
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Revenues $ 6,145,703 100.0% $3,925,936 100.0%
Expenses:
Direct Cost of sales 981,114 16.0% 691,045 17.6%
Salaries and benefits 3,393,260 55.1% 2,915,294 74.2%
Selling, general and
administrative 1,146,251 18.7% 1,253,881 31.9%
Interest expense, net 100,654 1.6% 30,102 0.8%
Depreciation and amortization 502,187 8.2% 395,732 10.8%
----------- ----- -------- -----
Total expenses 6,123,466 99.6% 5,286,054 134.6%
----------- ------ ---------- -----
Income (loss) before income
taxes $ 22,237 .4% $(1,049,334) (34.6)%
=========== ====== =========== ======
</TABLE>
Results of Operations
Comparison of the Six-Month Periods Ended June 30, 1998 and 1997
Statements of the Company's or management's
intentions, beliefs, anticipations, expectations
and similar expressions concerning future events
contained in this Report constitute "forward-
looking statements" as defined in the Private
Securities Litigation Reform Act of 1995
("Act"). Any forward-looking statements are made by
the Company in good faith, pursuant to the safe-
harbor provisions of the Act. As with any future
event, there can be no assurance that the events
described in forward-looking statements made in this Report will
occur or that the results of future events will not
vary materially from those described in the
forward-looking statements. These
forward-looking statements reflect management's
current views and projections regarding economic
conditions, industry environments and Company
performance. Important factors that could cause the
Company's actual performance and operating results
to differ materially from the forward-looking
statements include, but are not limited to, changes
in the general level of economic activity in the
markets served by the Company, introduction of
new products or services by competitors, sales
performance, expense levels, interest rates,
changes in the Company's financial condition,
availability of capital sufficient to support the
Company's level of activity, delays in
implementing further enhancements to the Company's
viaLink and ijob services, and the ability of the
Company to implement its business strategies.
The Company's expectations with respect to
future results of operations that
may be embodied in oral and written
forward-looking statements, including any
forward-looking statements that may be included in
this Report, are subject to risks and
uncertainties that must be considered when evaluating
the likelihood of the Company's realization of such
expectations. The Company's actual results could
differ materially.
Revenues. Revenues increased $2,219,767 (57
percent) from $3,925,936 for the first six months of 1997 to
revenues of $6,145,703 for the first six months of
1998. All categories of the Company's revenues
increased other than commissions. No
commissions were earned on referrals of certain
hardware sales during the first six months 1998, as
all hardware sales were made directly by the
Company rather than on a referral basis and
directly through the vendor to the customer.
Hardware and Product Sales. Hardware and
product sales increased $297,225 (38 percent) from
sales of $776,013 for the six months ended June
30, 1997 to $1,073,238 for the same period in 1998. The increase was
the result of two large equipment sales totaling approximately $255,000.
These sales were attributable to referrals from a large retail
software company, with whom the Company has an
informal agreement to serve as a preferred supplier
of hardware to its customers.
Solutions. Solutions revenues for the first six
months of 1998 were $288,269, an increase of
232,637 (418 percent) from $55,632 for the same
period of 1997. The increase was principally due to a sale
of the Company's RSA software for approximately
$155,000 in the first quarter of 1998 and the sale
of additional RSA software licenses to a current
RSA user for $70,000 in the second quarter of 1998.
Consulting and System Integration Fees.
Consulting fees for the first six months of 1998
totaled $3,812,076 compared to $2,277,922 for the
same period in 1997, an increase of $1,534,154
(67 percent). Beginning in the fourth quarter
of 1997 the Company refocused its resources on
the consulting and systems integration area. In
the first quarter of 1998 a Vice-President of Sales
and Marketing and an additional sales
representative were hired to focus primarily on
sales in the consulting area. The Company
aggressively pursued new clients and projects and
assigned consulting personnel and programmers
from internal projects to consulting and systems
integration projects.The increase for
the six month period was the result of these efforts.
Customer support. Revenues for the six months
ended June 30, 1998 increased $72,673 (30 percent)
to $318,009 from $245,336 for the six months ended
June 30, 1997. The increases were due to additional
customer support contracts obtained throughout 1997
and in the first six months of 1998. The increase
was also due to a rate increase upon renewal of
certain support contracts and higher levels of
billings for hours in excess of the standard
contract levels.
Network services and applications. Revenues
from the Company's network services and network
based computer applications for the six months ended June 30, 1998
were $654,111 compared to $425,654 for the same
period in 1997, an increase of $228,457 (54
percent). The increase was principally the result
of an increase in ijob revenues attributable to a
major contract being in effect for a full six months
in 1998. Revenue for ijob increased $193,783 (83
percent) from $233,258 for the first six months of
1997 to $427,041 for the first six months of 1998.
The remaining increase was attributable to an
increase in web site maintenance, hosting, and
viaLink services. The Company has and will continue
to make significant expenditures for investment and
development of its network subscription services
in order to further develop a recurring base of
revenues.
Since the fourth quarter of 1997, a major
customer of ijob has provided approximately $70,000
in revenue per month. As of June 30, 1998, the
Company made its final $70,000 billing in regard to
this contract for its ijob services, as this client
did not renew their contract. Minimal amounts of
revenue will be earned from this customer in the
third quarter of 1998 and no revenues are expected
from this customer in the fourth quarter of 1998.
Although the Company has replaced a portion of the
revenues lost in connection with the major
contract through new, but smaller customers, and
is currently negotiating with several major
customers for ijob services, the Company has not
yet obtained contracts to replace the lost revenues
in connection with the major customer, and there can
be no assurance that these revenues will be replaced
in the near term.
As of August 6, 1998, ijob has closed its
two satellite offices in Oklahoma City as a result
of the major contract that was not renewed. Using
the two satellite offices the employees of ijob were
running the application for the major customer as an
outsource function. They performed the recruiting,
screening, evaluation and tracking functions of the
their job applicants. As a result of the work done
with this major client and further market research
ijob has shifted it focus from this type of
outsource service to a license arrangement whereby
the customer purchases the ijob application, the
"ijob in Source Human Resource Hiring Suite", and
the customer performs these functions. As a result
of this shift ijob has moved from a universal database
application to a proprietary searchable database.
Direct Cost of Sales. Direct cost of sales,
which consists of hardware and certain software purchases for
resale, and costs associated with the Company's
proprietary software products for the first six
months ended June 30, 1998 increased $290,069 (42
percent) to $981,114 from $691,045 for the first six
months of 1997. The increase was attributable to
increased hardware and product sales and solutions
revenues.
Salaries and Benefits. Salaries, wages, taxes
and related benefits, and contract labor expenses
for the six months ended June 30, 1998 these
expenses increased $477,966 (16 percent) to
$3,393,260 from $2,915,294 for the six months
ended June 30, 1997.
During the first six months of 1998, the
Company utilized contract programmers for client
engagements to a greater extent than in the same
period in 1997 to meet the skill demands and
workload of clients' projects. Contract labor
expenses totaled $188,886 during the three months
ended June 30, 1998 compared to a total of $158,890
during the three months ended June 30, 1997. For the
six months ended June 30, 1998 contract labor
totaled $535,550 compared to $280,666 for the six
months ended June 30, 1997.
Direct payroll costs of salaries and wages
increased to $2,862,100 for the six months
ended June 30, 1998 from $2,605,347. This
increase was in part associated with the start-
up of ijob, which was not fully staffed until June
1997. During the six months ended June 30, 1997,
the Company had a total average of 124 full time
employees, compared to a total average of 123 for
the Company during the six months ended June 30,
1998.
Selling, General and Administrative Expenses.
For the six months ended June 30, 1998 selling,
general and administrative expenses decreased
$107,630 (nine percent) to $1,146,251 from
$1,253,881 for the six months ended June 30, 1997.
Occupancy expenses, including rent expense,
utilities, equipment rentals and leases, for the
first six months of 1998 increased $46,803 (23
percent) to $247,613 from $200,810 for the same
period in 1997. The increases for both the quarter
and the first six months were primarily due to
increased expenses for an equipment lease entered
into in the third quarter of 1997. The
lease provided new equipment for staff growth and
production and development equipment for the
continued development of viaLink.
As of August 6, 1998, ijob, Inc. has
closed its two satellite offices in Oklahoma
City. Management does not anticipate reopening
these or other satellite offices. See
"-Network Services and Applications", above.
General insurance increased $43,148 (554
percent) from $7,792 for the first six months of
1997 to $50,940 for the same period in 1998. These
increases were primarily due to additional insurance
coverage obtained by the Company. Employee
practice liability insurance was obtained for ijob,
Inc. beginning in the third quarter of 1997 due to
the nature of the services of ijob, Inc. In
addition, directors and officers insurance was
obtained for the Company due to the addition of two
independent members to the Board of Directors who
began serving in December 1997 and January 1998.
Telecommunications expense increased $47,674
(47 percent) for the six months ended June 30,
1998 to $148,836 from$101,162 for the same period
in 1997. These increases were due to the expansion
of the Company's communication systems for
viaLink, ijob and web site hosting services and greater
long distance usage due to the increased marketing
activities of the Company.
Supplies and resources, which consists of
office supplies, miscellaneous hardware and software
expenses, printing and copy charges, memberships
and subscriptions, decreased $91,652 (64 percent)
from $142,837 for the six months ended June 30, 1997
to $51,185 for the six months ended June 30, 1998.
In the first and second quarter of 1997 approximately
$19,000 of the supplies and resources costs were
associated with the start-up of ijob, Inc., these
non-recurring costs were not incurred during the
first and second quarter of 1998, which,
contributed to the overall decrease in supplies
and resources. The remaining decrease was the
result of cost reduction and control measures
implemented by the Company.
Professional fees decreased $108,987 (38
percent) to $175,023 for the six months ended June 30, 1998,
compared to $284,010 for the six months ended June
30, 1997. The decrease was primarily a result of
the decrease in professional services used by
ijob, Inc. in the first six months of 1998 compared
to the first quarter of 1997, when legal and
consultant services of approximately $98,000 were
used to assist in the development and start-up of
ijob, Inc.
Net Interest Expense. Net interest
expense increased $70,552 (234 percent) to $100,654
for the six months ended June 30, 1998 from
$30,102 for the same period in 1997. Proceeds of the
Company's initial public offering in November 1996
were used to pay off the Company's total
outstanding bank debt at that time. There were
no outstanding borrowings on the bank line-of-
credit at the end of the first quarter of 1997.
During the second, third, and fourth quarter of 1997,
certain borrowings were made under the Company's bank
line-of-credit and during the first quarter of
1998, the Company completed a new credit
facility with a commercial lender that replaced and
increased the working line-of-credit with the bank.
As of June 30, 1998, the new credit facility had
an outstanding balance of $753,196. Average total
outstanding debt, including shareholder loans and
capital leases, during the first six months of
1998 was $1,283,000 compared to average total outstanding
debt in the first six months of 1997 of $816,000.
Depreciation and Amortization. Depreciation and
amortization expense totaled $502,187 for the six
months ended June 30, 1998 compared to $395,732 for
the same period ended June 30, 1997, an increase of
$106,455 (27 percent). The increase was due
primarily to total capital asset expenditures made
during 1997 totaling $332,987, and being depreciated
during the first six months of 1998. In 1998, the
Company has reduced its capital expenditures to
only absolutely necessary items, and totaled
$30,679 for the six months ended June 30,
1998. Software development costs capitalized
throughout 1997 totaled $751,158, and are being
depreciated during the first six months of 1998.
During the six months ended June 30, 1998,
the Company capitalized $346,496 of software development costs.
As of August 11, 1998, the Company had no major
capital commitments, and will continue to only
make capital additions on a specific and
necessary basis.
Tax Provision (Benefit). SFAS 109, "Accounting
for Income Taxes," requires, among other things,
the separate recognition, measured at currently
enacted tax rates, of deferred tax assets and
deferred tax liabilities for the tax effect of
temporary differences between the financial
reporting and tax reporting bases of assets and
liabilities, and net operating loss and tax
credit carryforwards for tax purposes. A
valuation allowance must be established for
deferred tax assets if it is "more likely than
not" that all or a portion will not be realized.
The Company recorded a tax of $8,450 related to
the pre-tax income of $22,237 for the six months
ended June 30, 1998. As of
June 30, 1998 the Company had a cumulative net
deferred tax asset of $1,040,990. Management
believes it is more likely than not that net
deferred tax assets will be realized based
upon expected future taxable income and therefore a
valuation allowance has not been provided.
Comparison of Years Ended December 31, 1997,
1996 and 1995
Revenues. 1997 revenues decreased by $484,528
(5 percent) to$9,022,842 from total revenues of $9,507,370
in 1996. Revenues in 1996 decreased by $2,082,854 (18 percent)
from total revenues of $11,590,224 in 1995. The
decrease in gross revenues for 1997 was due to an
overall decrease of $566,461 (11 percent) in
consulting fees, a decrease of $865,699 (87
percent) in solutions and license sales, and a
decrease of $120,284 (4 percent) in sales of
hardware and software for 1997. These
decreases of $1,552,444 were offset by increases
in recurring revenues, customer support fees,
and commissions for 1997. Recurring revenue for
1997, consisting of fees earned for viaLink services,
ijob operations, web-site hosting, and certain
other items, increased $816,527 (439 percent).
The Company earned commissions on referrals for
certain hardware sales for 1997 of $175,860,
whereas no commissions were earned in 1996.
Customer support revenues increased $75,529 (19
percent) for 1997 over 1996.
The $2,082,854 (18 percent) decrease in gross
revenues from 1995 to 1996 was principally due
to overall decreases of $1,098,084 (28 percent) in
hardware sales, $674,193 (40 percent) in solutions
and licenses sales, and $526,151 (9 percent) in
consulting fees. The decreases were offset by an
increase of $215,574 (59 percent) in recurring
revenues and customer support fees.
Hardware and product sales. Hardware and
product sales decreased $120,284 (4 percent) from
revenues of $2,784,380 in 1996 to revenues of
$2,664,096 in 1997. The decrease was generally
due to one client purchasing directly from the
vendor in the early part ofthe year, lower overall
hardware requirements and point-of-sale equipment roll-out
schedules of the Company's current client base,
plus a changing focus by the Company to higher
margin revenue streams. The direct purchases by
one client, however, created earned commissions of
$175,860, which were not present in 1996. These
commissions more than offset the gross margin
decrease on hardware sales in 1997. Hardware and
product sales in 1996 decreased $1,098,084 (28
percent) compared to sales of $3,882,464 in 1995.
The decrease in hardware sales revenue was the
result of the completion of two large point-of-sale
hardware installations in 1995, while orders and
installations by customers were generally lower in
1996.
Solutions. Solutions and licenses revenues,
which consists of sales of the
Company's proprietary software products,
decreased $865,699 (87 percent) in 1997 to $131,800,
compared to $997,499 in 1996. A single sale of
the Company's RSA product totaling approximately
$898,000 was made in 1996, whereas RSA and CHAINLINK
sales in 1997 totaled only $131,800. Solutions
revenue decreased $674,193 (40 percent) from
$1,671,692 in 1995, when the Company made its first
significant sale of RSA for approximately
$1.3 million.
Consulting fees. Consulting fees earned
during 1997 totaled $4,576,234, a decrease of $566,461 (11
percent) from consulting revenues of $5,142,695 in
1996. The decrease was due, in part, to the
conclusion of the revenue stream from several
large consulting projects in the first and second
quarters of 1997 that were not completely replaced
with consulting revenue from new sales until the fourth quarter of 1997.
The decrease was also a result of the transition
and changing of focus to recurring revenue streams, viaLink and ijob,
which moved personnel from the consulting area to these
recurring revenue areas. Beginning in the fourth quarter of 1997
the Company refocused more resources than in the previous
quarters on the consulting and systems integration area,
aggressively pursuing new clients and projects.
As a result of these efforts, consulting fees
from the third quarter of 1997 to the fourth
quarter of 1997 increased $643,300 (78 percent) from
$827,506 in the third quarter to $1,470,806 in
the fourth quarter. Consulting fees for 1996 decreased $526,151 (9
percent) from 1995 consulting fees of $5,668,846.
The 1996 decrease was primarily a result of an
overall lower level of consulting and systems
integration work having been performed by the
Company for its customers and due to an
increase in utilization of consulting
personnel and programmers for internal research
and development of viaLink.
Customer support. Customer support
revenues increased $75,529 (19 percent) to $472,325
for 1997 from $396,796 for 1996. Customer support
revenues for 1996 increased $29,754 (8 percent) over
1995 revenues of $367,222. These increases were
due to additional contracts obtained in both 1997 and 1996
and higher levels of billings for hours in excess
of the standard contract levels in both years.
Network services and applications. Network
services and applications represented a new
recurring revenue stream for the Company
commencing in late 1996, that continued to grow
and develop in 1997. Revenues from the Company's
network services and network based computer
applications in 1997 were $1,002,527, an increase
of $816,527 (439 percent) over the initial 1996
revenues of $186,000. The 1997 total includes
revenues from ijob, Inc. of $567,841, which
commenced operations in 1997.
The remaining revenues of $434,686 were derived
from web-site maintenance and hosting fees and viaLink services
fees. The viaLink subscriber list for both retailers and
suppliers has grown from 20 in January 1997 to
95 at March 23, 1998, representing more than
4,500 stores. The Company has and will continue to
make significant expenditures for investment
in and development of these services in order to shift
the Company's focus from only single consulting
projects to recurring network service revenues with expected
higher profit margins and increasing revenue. The Company believes the
investments made in 1997 will provide further growth
in recurring revenue in 1998; however, there can be
no such assurance.
Direct Cost of Sales. Direct cost of sales,
which consists of purchased hardware and certain
software for resale, and costs associated with the
Company's proprietary software products, decreased
$358,884 (14 percent) to $2,211,956 for 1997
from $2,570,840 for 1996. The decrease in cost of
sales is generally in line with the decrease in
revenues from product and hardware sales and
solutions and license sales for the year. Direct
cost of sales in 1996 also decreased by $1,045,847
(29 percent), from $3,616,687 in 1995. This
decrease in direct cost of sales was
attributable to the decrease sales in hardware
and software during 1996.
Salaries and Benefits. Total employee costs
of salaries, wages, taxes and related benefits,
and contract labor expenses totaled $6,174,503 for
1997 compared to $5,167,571 for 1996, an increase of
$1,006,932 (19 percent). These costs for 1995 totaled
$5,673,034, a decrease of $505,463 (9 percent) from
1995 to 1996. During 1997, the Company utilized
contract programmers for client engagements to a
greater extent than in 1996, which during such year
virtually no contract programmers were utilized. In
addition, late in the first quarter of 1997, a
contract sales executive was hired to promote
sales in the solutions business area of the
Company. Contract labor expenses totaled $488,710
for 1997 compared to a total of $84,696 for 1996, an
increase of $404,014 (477 percent). The start-up
costs and expenses of ijob, Inc. during 1997
included $134,984 of such contract labor
expenses, which were not present anytime in 1996.
Certain of the ijob, Inc. contract labor expenses
were converted to salaried employees after June
30, 1997. Contract labor expenses in 1996 decreased
from $416,286 in 1995 by $331,590 (80 percent). In
1995 temporary programmers were hired to meet the
demand and workload.
Direct payroll costs of salaries and
wages increased $677,059 (14 percent) from
$4,880,030 in 1996 to $5,557,089 in 1997. The
increases were due to increased employed personnel
for the Company, increasing from 105 employees at the
end of 1996 to 115 employees at the end of 1997,
and also the addition of new staff and personnel
in ijob, Inc. during the year to a total of 21 at
the end of 1997. In 1996, total salaries and wages
costs actually decreased by $45,112 (1 percent),
from a total salaries and wages costs of
$4,925,142 in 1995. The Company's total employment
base remained relatively constant at 105 staff
throughout 1996.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
(SG&A) increased a total of $700,352 (35 percent) to $2,708,351
for 1997, compared to $2,007,999 for 1996. Over
half (54 percent), or $377,299 of this increase is
due to the start-up costs and ongoing operations of
ijob, Inc. throughout 1997. SG&A in 1996 increased
by $419,344 (26 percent) compared to $1,588,655 in
1995.
Other than the operations of ijob, Inc.,
SG&A increased $323,053 (16 percent) in 1997 when
comparing the operations for the Company to 1996,
when no ijob Inc. operations were present.
Recruiting and staffing costs decreased $44,751 (45
percent) from $99,483 in 1996 to $54,732 in 1997,
due to reduced requirements for new employee
relocations in 1997 compared to 1996 and 1995.
Recruiting and staffing expenses totaled $90,825 in
1995, only a small increase of $8,658 (9 percent) to
$99,483 in 1996.
Travel expenses for 1997 of $406,937 increased
$26,736 (7 percent) from $380,201 in 1996. The
increase for 1997 was primarily attributable to
the travel expenses incurred by three full-time
viaLink sales representatives that the Company
began hiring in February of 1997, and by travel
expenses associated with sales and marketing
activities of the ijob product. Travel expenses for
1996 increased $9,039 (2 percent) from $371,162 in
1995.
Occupancy expenses, including rent expense,
utilities, equipment rentals and leases, and
insurance increased a total of $118,633 (25 percent)
to $599,300 in 1997 from $480,667 in 1996. ijob,
Inc. accounted for $52,330 (44 percent) of this
increase, with the start-up of two satellite offices
and ongoing operations. The remainder of the increase, $66,303,
was primarily due to increased expenses for an
equipment lease to provide new equipment for
staff growth and production and development
equipment for the continued development of
viaLink. Occupancy costs increased by $142,315 (42
percent) over $338,352 in 1995, as a result of the
Companies relocation to its new leased office
facilities, which was completed in January of 1996,
and due to the leasing of additional
equipment for the development, production and
implementation of viaLink.
Telecommunications expense increased $106,040
(68 percent) from $154,975 for 1996 to $261,015 in
1997. ijob, Inc. accounted for $51,738 (49
percent) of this increase, with expenses for
telecommunications requirements for the Internet,
Interactive Voice Response systems, and the
telecommunications needs at the two satellite
offices of ijob, Inc. The remaining increases were
due to the expansion of the Company's communication
systems for viaLink and web-site hosting services
and greater long distance usage due to the increased
sales and marketing activities of the Company.
Telecommunications expense increased $47,792
(45 percent) during 1996 compared to $107,183 in 1995,
primarily due to the relocation to the Company's
new facilities in 1996 that allowed for increased
telecommunications capabilities.
Advertising and promotion expenses of
$217,319 for 1997 compared to $69,967 in 1996,
increased $147,352 (211 percent). ijob, Inc.
accounted for $54,451 (37 percent) of this increase
for ijob advertising and marketing activities, and
the balance of the increase, $92,901, was due to
increased sales and marketing promotion activities
of viaLink. During 1997, the Company
intensified its marketing and sales activities
of viaLink, including travel, long distance, and
advertising and promotion. The Company anticipates
that advertising and promotion expenses will
continue to be at higher levels than in prior years
due to the increased efforts associated with
marketing of viaLink and ijob, and with the
addition of a Vice President of Sales and
Marketing in January 1998. Expected revenues from
viaLink and ijob due to higher levels of selling
and marketing expenses may not occur until late 1998
or may not occur at all, depending upon market
acceptance. Advertising expense in 1996 increased
$20,046 (40 percent) over 1995 balances of
$49,921 due to initial marketing associated with
viaLink in 1996.
Professional fees increased $254,477 (104
percent) to $498,689 in 1997 compared to
$244,212 in 1996. Of the total increase, ijob,
Inc. accounted for $137,985 (54 percent) of the
increase, which was used for legal and consultant
fees in the development and start-up of the ijob
subsidiary. The remaining increase of $116,492
relates to legal fees, accounting fees, and the use
of professional consultants for the continued
marketing and further development of the Company's
viaLink Item Catalog Service and newly introduced
CSP MARKETLink. These projects are part of the
recurring revenue business area, as the Company
continues to shift its focus from only single
consulting projects to recurring network service
revenues with expected higher profit margins on
growing revenue streams. Professional fees in 1995
totaled $266,986, an increase of $22,774 (9 percent)
over 1996 fees.
Interest Expense. Net interest expense
decreased $145,508 (66 percent) to $73,581 for
1997 from $219,089 for 1996. The decrease was
generally due to the repayment of outstanding bank
debt in the fourth quarter of 1996, which was used
largely to finance the development of viaLink, RSA
and CHAINLINK during the preceding two years.
Proceeds of the Company's initial public
offering in November 1996 were utilized to pay off
the bank debt. During the second, third and fourth
quarter of 1997, certain borrowings were made
under the Company's bank line-of- credit, which had
an outstanding balance of $490,000 at December 31,
1997. Interest expense increased $70,047 (47
percent) in 1996 from $149,042 in 1995. Average
total outstanding debt, including shareholder loans,
during 1997, 1996 and 1995 was $910,772,
$2,277,000 and $1,392,000, respectively.
Depreciation and Amortization. Depreciation and
amortization expense totaled $827,396 for 1997
compared to $591,205 for 1996, an increase of
$236,191 (40 percent). The increase was due to
capital asset expenditures made during 1997 and
1996 totaling $332,987 and $625,893,
respectively, and capitalized software development
costs of $752,158 and $655,248, respectively. Of
the total capitalized costs in 1997, $104,044 of
the costs were associated with the development
of ijob. Furthermore, the Company commenced
amortization of software development costs
associated with the viaLink Item Catalog Service
system placed in service in January 1997. Depreciation
and amortization for 1996 increased $79,711 (16
percent) from a total of $511,494 in 1995,
generally due to the expenditure during 1995 on
fixed assets and software development costs of
$376,541 and $650,158, respectively.
Tax Benefit. The Company recorded a tax
benefit of $1,112,127 related to the pre-tax loss of $2,972,945
for the year ended December 31, 1997 and a tax
benefit of $366,925 related to the pre-tax loss of
$1,049,334 for the year ended December 31, 1996.
Such tax benefits were the results of net operating
loss carryforwards of $4,500,000 which, if not
utilized, will expire in 2011 and 2012. The
cumulative net deferred tax asset at December 31,
1997 is $1,049,440. Management believes realization
of such deferred tax benefit is more likely than not
based upon expected future taxable income and
therefore a valuation allowance has not been provided.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting
Standards Board issued a Statement of Financial
Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related
Information", which establishes standards for reporting
information about operating segments in annual
and interim financial statements issued to the
shareholders. This Statement also establishes
standards for related disclosures about products and
services, geographic areas, and major customers. The
Company plans to adopt this Statement in 1998.
Readiness for Year 2000 Issues
In 1997, the Company initiated a complete risk
evaluation and assessment study to determine the
preparedness level of the Company, customers,
vendors, and other service providers for the Year
2000 and the subsequent impact on the Company. The
review will be completed in 1998 and based upon
the results of the review, ongoing Year 2000-
impact analysis and risk assessment will continue
as management deems appropriate. The Company expects
to incur internal staff costs as well as
consulting and other expenses related to the risk
evaluation and assessment project. Although cost
estimates for the project are not yet available,
management does not anticipate that the remaining
costs associated with assuring that its internal
systems will be Year 2000 compliant will be
material to its business, operations or financial
condition.
Liquidity and Capital Resources
As of June 30, 1998 the Company had
cash and cash equivalents of $176,338, and working
capital of $37,116, with a working capital ratio
of 1.02 to 1, as compared to a working capital
deficit of $331,366 as of December 31, 1997. During
the first quarter of 1998, the Company completed
a new credit facility with a commercial lender that
replaced and increased the Company's former line-of-
credit with a bank. Under the new credit
facility the Company may borrow up to $1,000,000;
however, amounts borrowed are limited to 75% of the
Company's accounts receivable as defined by the
new facility. The facility is collateralized by
accounts receivable and all tangible assets of the
Company and is guaranteed by three principal officers
of the Company. As of June 30, 1998, the Company had
borrowed $753,196 under the new credit facility,
bearing interest at 11.25%. In addition, during
the first quarter of 1998 the
Company obtained a credit facility including a
$1,000,000 large sale financing option with IBM
Credit Corp., whereby the Company may finance
directly with IBM Credit Corp. large sales of
hardware and software. As of June 30, 1998, there
was $142,172 financed under the IBM Credit Corp.
arrangement, which was included in accounts payable.
As of August 11, 1998, the working capital
line-of-credit has been extended to July 15, 2000
from the original due date of July 1999 under
essentially the same terms and conditions. As of
August 11, 1998, the Company had borrowed $649,100
under its working capital line-of-credit and had an
unused line-of-credit of $350,000; however, under
the terms of the borrowing base the actual
availability was $88,535.
During the six months ended June 30,
1998, net cash increased a total of $95,569. Net
cash provided by operating activities for the first
six months of 1998 was $278,152 compared to net
cash used in the first six months of 1997 of
$320,522. This increase in cash was due the
improved operating income levels during the six
month periods ending June 30, 1998 compared to 1997.
Income of $13,787 for the six months ended June 30,
1998 was recorded compared to a loss of $908,273
for the same period of 1997. Accounts receivable
increased a net $386,020 during the six months
ended June 30, 1998, from $1,337,332 at December
31, 1997, to $1,723,342 at June 30, 1998, primarily
due to increased revenues for the period.
Accounts payable and accrued liabilities increased
a net of $224,956 primarily due to liabilities
associated with the purchase of hardware for resale.
During the six months ended June 30, 1998,
the Company expended $30,679 for investing
activities in various fixed assets and $346,496 for
software development costs of its proprietary
software products, compared to total expenditures of
$326,322 and $271,190, respectively, for the same
items in the six months ended June 30, 1997. As
of August 11, 1998, the Company had no material firm
cash commitments for capital expenditures, nor does
the Company expect to incur any material cash
commitments for capital expenditures for the
remainder of 1998, other than capitalized
internal staff costs for software development of ijob and
viaLink, and only as those
resources are available for internal development.
During the three months ended June 30,
1998, financing activities provided net cash of
$194,592, which was mainly provided by net
borrowings under the new credit facility of
$263,196. Payments on the Company's capital lease
obligations of $72,003 and a decrease in the book
overdraft of $23,619 offset the borrowings. During
the six months ended June 30, 1997 the Company used
net cash of $72,493 in financing activities.
The Company anticipates that its operations and
strategies will be funded through cash and cash
equivalents and is seeking strategic partners for its
viaLink services and resources to implement its business
strategy. The Company believes that these sources of funds
will be sufficient to satisfy the Company's
operating and capital requirements for at least
12 months. There may be circumstances,
however, that would accelerate the Company's use
of such financing sources. If this occurs, the
Company may, from time to time, incur indebtedness or
issue, in public or private transactions,
equity or debt securities. There can be no
assurance that the Company will be able to obtain
requisite financing when needed on acceptable
terms.
At August 31, 1998, pursuant to ten separate
three-year promissory notes, Robert L. Barcum, Robert N. Baker
and Russell L. Reinhardt, shareholders and executive
officers of the Company, had aggregate outstanding
loans to the Company of $443,455 (the "Shareholders'
Loans"). The proceeds of the Shareholders' Loans
were utilized to fund operating costs and
development of the Company's viaLink network
subscription services and RSA software application.
The Shareholders' Loans bear interest at rates of
8.5 percent to 11.5 percent per annum, and mature
commencing March 8, 1999 through December 21, 2001.
In addition, on October 15, 1996, the Company issued
a promissory note to David B. North, a shareholder
and executive officer of the Company, in redemption
of 22,500 shares of Common Stock of the Company
issued to Mr. North in connection with the merger
of VCRI, in the principal amount of $39,375,
bearing interest at the rate of 10 percent per annum,
with a maturity date of November 15, 2000. The
proceeds from the sale of the Consulting division
will be used to pay the promissory notes held by
the executive officers plus accrued interest of
approximately $72,000.
BUSINESS AND PROPERTY OF NETPLEX GROUP
All information contained in this Information Statement
regarding Netplex was furnished by the Netplex for
inclusion herein or obtained from the Annual Report
on Form 10-KSB for the year ended December 31, 1997,
as filed with the Securities and Exchange Commission
(the "Commission") on April 15, 1998, the Quarterly
Report on Form 10-QSB for the quarter ended June 30,
1998, as filed with the Commission on August 19,
1998, and the Form 8-K dated June 22, 1998, as filed
with the Commission on July 2, 1998. See "Available Information."
Corporate Profile
Based in McLean, Virginia with twelve offices throughout
the U.S., The Netplex Group, Inc., together with
its wholly owned subsidiaries ("Netplex Group"),
is an Information Technology (IT) company that
provides the people, technology, and processes to
build, manage, and protect business information
systems. Through the strategic teaming of business consulting
practice areas, operating units, and
wholly owned subsidiaries, Netplex Group believes that it is
positioned to deliver:
* IT Solutions - Design and implementation of systems
solutions to address IT related business needs;
* IT Staffing - Staff augmentation and flexible task
outsourcing; and
* IT Contractor Resources - Business services for the
independent IT Consultant.
The following describes these three business
areas and provides an at-a-glance look at the
industries served, strategic alliances, geographic
positioning, and engagement confidence that Netplex Group
believes makes Netplex Group a preeminent supplier of information
technology services and solutions.
Netplex Group was incorporated in 1986. From
1986 to June 1996, Netplex Group, under
the name CompLink, Ltd., developed
and marketed a communications software product.
On June 7, 1996, Netplex Group (formerly known as
CompLink, Ltd. or "CompLink") acquired and merged
with Netplex Group, Inc. and America's Work
Exchange, Inc. (combined entities referred to as " Old Netplex")
by issuing approximately 3,245,000 shares of Common Stock.
The agreement also provided for CompLink to issue 1,691,000 options
to purchase its Common Stock in exchange for the
1,691,000 outstanding options to purchase the
Common Stock of Old Netplex. The mergers have
been accounted for under the purchase method of
accounting as a reverse merger, since the
shareholders of the acquirees, who have common control, received
the larger percentage of the voting rights of the combined
entity. The mergers resulted in a recapitalization of Old Netplex,
so that the resulting capitalization
after the mergers will be that of CompLink's,
giving effect to the new share issuance and the elimination
of CompLink's accumulated deficit. The acquisition of the
assets and liabilities of CompLink has been accounted for at book
value, which approximates fair value.
* IT Solutions
Through a collection of specialized systems
integration and IT consulting practices, each
capable of providing focused business solutions
by combining in-depth expertise, proven methods, and
leading technologies, Netplex Group believes it delivers
superior quality and measurable
results. The Netplex Group IT Solutions practice
areas are:
. Network Systems Integration (NSI): providing
networked office automation solutions;
. Enterprise Network Management (ENM): providing
network management solutions;
. Enterprise Systems Management (ESM): providing
solutions to manage the systems that run businesses; and
. Business Protection Services (BPS): providing
solutions that keep businesses in business.
These IT Solutions practice areas span several
performance disciplines, including:
* Strategic Planning * Custom Software Development
* Information Security * Technology Integration
* Hardware Product
Fulfillment * Software Product Fulfillment
* Project Management * Systems Training
* Network Management * Systems Management
* Systems Integration * Business Resumption Planning
Each practice area employs a team of subject-
matter experts to help businesses develop, implement, and support
their IT objectives. Adherence to comprehensive management
techniques helps ensure that every detail in a
project plan is subject to quality control and
measures of technical excellence. This commences
with an evaluation of the current user environment
and IT goals and ends with a review process for
determining the impact of value-added improvements.
Many hardware and software suppliers
have engaged Netplex Group to manage the implementation
of their technologies (see "Strategic Alliances").
The IT Solutions Market
The IT solutions market is experiencing
record growth in the commercial and government sectors.
The IT services industry is estimated at over $126 billion in the
U.S. and even larger internationally. It is growing at
an estimated 18% average annual rate. The demand for
IT services is growing, driven by the Year 2000 problem,
the Internet, short technology cycles, business process
reengineering, increasing global competition,
and other factors. While mainframes continue to be the largest
area of demand for work assignments, client/server
and network technology demand is on the rise.
The consulting segment, which includes information
systems integration services, feasibility studies,
business protection services, cost-effectiveness
analysis, and technical and management program
assistance, continues to be the fastest growing
sector of the IT professional services
industry. This segment is forecast to grow at a rate
of 21.1% to reach $18.3 billion in aggregate revenue
by 2001.
* IT Staffing
Netplex Group recognizes the need for
technical staff augmentation. IT Staffing Services provides
help to organizations confronted with technical
staffing needs. Clients gain access to the Netplex Group
recruiting team, which maintains a proprietary Database of a
qualified pool of 40,000+ IT professionals with
the talent and flexibility to undertake virtually
any technical task. Netplex Group believes that
the ability of its consultants enables it to
deliver qualified, results-oriented technical staffing services.
Seasoned professionals with many years of business
experience provide strategic direction, planning, and input
on complex technical issues. Consultants, engineers,
project managers, analysts, developers, technicians, and other IT
professionals provide additional capacity to
solve technical staffing needs. Whether a need for
technical services arises during peak periods,
systems planning sessions, project
roll-outs, or technology transitions, Netplex
Group IT Staffing believes it can apply a qualified,
customized skill-set to quickly fulfill a client engagement.
The Company, in business to serve as an
extension of the client's IT organization, believes it is
capable of providing staff to manage any IT operation. The
Netplex Group technical staff accepts direction from the client in
fulfilling all project objectives; thus, allowing
the client to maintain full control over the timeline and
project course. Netplex Group IT Staffing Services
provides the human and technical resources to keep its client's
on-schedule, technology-aware, and quality-fastened.
Netplex Group's staffing services are located primarily in New York,
New Jersey, and Washington, D.C., where The PSS Group, Inc., a wholly-owned
subsidiary of Netplex Group acquired in January, 1998, has been providing
technical personnel for engagements throughout the Washington, D.C.
metropolitan area since 1991.
The IT Staffing Market
The IT Staffing industry continues to
grow. Recent Bureau of Labor statistics indicate
Personnel Supply Services added 43,000 jobs
(seasonally adjusted) in February of 1998.
Compared to a year earlier, February's job growth
was up 5.6% in Personnel Supply, the highest year-
to-year percentage growth since April and March
of 1997, respectively. Staffing growth is
expected to remain strong throughout 1998 with a
growth rate of over 25% in information technology
and other professional specialties. INPUT, a
market research firm, estimates the total IT
market in the U.S. at $231 billion in 1997.
According to INPUT, compound annual growth in
the U.S. Information Technology
Commercial Professional Services
Market will continue at a rate of 17.3% through
2001. In 1996, every segment of the IT
professional services industry grew faster than forecast
by INPUT evidencing ongoing, rising demand for these services.
Organizations are increasingly turning to external
IT services organizations to develop,
support and enhance their internal IT systems.
By outsourcing IT services, companies are able to
(i) focus on their core business, (ii) access
specialized technical skills, (iii) implement IT
solutions more rapidly, (iv) benefit from flexible staffing,
providing a variable cost solution to a
fixed cost issue, and (v) reduce the cost of
recruiting, training, and adjusting the number
of employees as IT requirements change.
Netplex Group, through its wholly owned
subsidiary Software Resources of New Jersey, now
known as Contractor's Resources ("CR"),
believes it can offer a specially tailored program
to both IT consultants and business. This
service arrangement enables the independent
contractor to escape the administrative burdens
of incorporation; thereby, focusing
on providing the technical skills that
businesses seek.
Consultant Advantage - CR allows an
independent contractor consultant to reap the benefits of
incorporation, without incorporating. These IT consultants
become CR employees set up with their own personal
profit centers administered by CR. This enables these professionals
to pursue a vast array of assignments that would
otherwise be impractical or cost prohibitive.
The business services that CR provides IT
consultants include:
* Contract Review and Administration * Financial Reporting
* Group Medical, Dental, etc. * 401K and Pension
Administration
* Payroll Administration * Personal Account Management
Personal Account Management is coordinated through a
designated Profit Center Manager- a highly-trained service
professional who helps consultants manage their business from the
review of a consultant's contract to the seamless
administration of benefits and financial planning.
Business Advantage - CR offers businesses a
convenient solution for consolidating the
administration and delivery of employee services to
their existing independent contractor base. Because CR
alleviates the administrative burdens that independent
contractors face, while offering a premier set of benefits and
"employment services" to help the independent
contractor function more seamlessly, businesses
are able to reap the benefits of consolidated
billing, central administration processing, and
focused application of a consultant's technical skills.
CR attracts independently-minded IT consultants who want to
take advantage of today's favorable market for independent contractors and be
free of the arduous and time-consuming tasks associated with managing
their own corporation. Businesses want to keep the administrative burdens
that contractors face to a minimum allowing their
consultants to concentrate on their assignments.
The IT Contractor Resources Market
The Department of Labor estimates that
by the year 2000 at least 44% of all workers will be in
data services, gathering, processing, retrieving,
or analyzing information. Already an estimated two-
thirds of U.S. employees work in the services
sector. This environment calls for
different organizations and different kinds of workers. As
recently as the 1960's, almost one-half of all workers in the
industrialized countries were involved in making or
helping to make things. It is predicted that by
the year 2000, however, no developed country will have more than
one-sixth or one-eighth of its workforce in the traditional
roles of making and moving goods. It is these trends that are driving
the contractor resources market as more and more
people shift from permanent to flexible and part-time
employment, many as independent contractors. It is
estimated that less than half the workforce in
the industrialized world will be holding
conventional full-time jobs in organizations by the
year 2000. Those full-timer or insiders will be
the new minority. Every year more and more
people will be self-employed. The U.S. contingent
workforce of temporaries, self-employed,
part-timers, or consultants grew by 57% during the
decade of the 80's.
Industries Served by Netplex Group
Netplex Group has supplied services around
the world within the public and private sector,
but has tailored its service offerings, primarily, to U.S.-based
commercial organizations. Presently, Netplex Group delivers
information solutions, technical staff
augmentation, and IT contractor services to several well-known
organizations within many industries including Telecom/Communications,
Retail, Insurance, Legal & Professional Services, Pharmaceutical,
Associations, Utilities, Health Care, Distribution,
Manufacturing, and Financial Services. Although the in-roads Netplex
Group has made to these markets are expansive, the diverse picture it
presents is only a sample of the range of services
and solutions that Netplex Group believes it provides
on a daily and on-going basis.
Strategic Alliances
Netplex Group has engaged in strategic
partnerships (i.e., compliance with certified
training programs) with leading software and
hardware producers to become a full-service
Information Solutions provider. Among the
companies for which Netplex Group is certified to re-sell
and implement technologies are:
Compaq IBM Remedy
Envive Microsoft Tivoli
Hewlett-Packard Novell Unisys
In addition, Netplex Group has provided
services to many other organizations over the past
three years, including:
Amdahl Charles Schwab New York Life
America Online Chase Manhattan SIAC
Arthur Andersen Hewlett-Packard U.S. West
AT&T Hoffman-LaRoche Union Camp
Bell Atlantic Mobile Lucent Technologies
Unisys BellSouth MCI
United Nations CNA Insurance World Bank
Geographic Positioning
Netplex Group is strategically positioned in the
Northeast, Mid-West, and Mid-Atlantic region of the U.S., and
has offices in Chicago, Connecticut, New Jersey,
New York, North Carolina, and Washington, D.C.
Netplex Group has assisted organizations throughout
the United States with their networked information
systems goals and internationally has served
clients in such countries as Ireland and Turkey.
Netplex Group intends to open new offices in
other geographic markets. To date, however, the
Company has not entered into any leases with
respect to such offices and there can be no
assurance that Netplex Group will in fact open
such offices.
Engagement Confidence
Netplex Group is aware of the threats posed
to business from unreliable information systems,
insecure environments, lack of technical
resources, and unnecessary downtime. Netplex Group
believes that experience enables it to provide the
answers to some common and not-so-common
problems dealing with
information systems. Netplex Group believes this
knowledge, coupled with its technical resource
base, industry experience, and growth, reinforces
the ability of Netplex Group to fulfill virtually
any technical request.
Growth Strategy
Expand Existing IT Staffing Locations and Open
New Branches
Netplex Group believes it can significantly increase
revenue in its three existing IT staffing locations in New York,
New Jersey, and Washington, D.C. Netplex Group will attempt to achieve
this growth by expanding the sales and recruiting
organization in each location and increase business
to existing customers.
The Company will also open locations in
cities that it believes to have high growth and
market potential. Netplex Group intends to
accomplish this goal in part by recruiting a skilled
Branch Manager for each new location. These
managers will be responsible for developing
local accounts and building the
branch by hiring sales people, technical
recruiters, administrators and replicating the systems and
procedures from the existing operations. The
expansion of IT Staffing also provides a greater
supply of technical talent to the IT Solutions practice.
Expand Existing IT Solutions Practices
Netplex Group believes that it can
significantly expand its present IT Solutions
practice by expanding its sales staff, encouraging
practice area cross-selling, and promoting lead
generation from the IT staffing and IT
contractor organizations. The natural project oriented
migration of personnel across practice units, enhanced
with business opportunity recognition training,
marketing skills development, and market lead generation incentives,
will create an effective low cost marketing force.
Netplex Group believes that effective utilization
of this force will give the IT Solutions Practice a
competitive and cost efficient advantage over marketing approaches
of traditional IT solution providers and will enable the Company
as a whole to cross sell its varied services between practice units
IT staffing and IT contractor resources.
Expand Contractors Resources Business
The Company believes that the trend of predicted
continued growth of the free-lance worker in the
market will naturally fuel the expansion of the IT
Contractors Resource business. The realization by these
professional services providers that their hours spent on clients
are more profitable to them than hours spent performing
"back-office" administrative tasks should direct them
to an outsource solution. Netplex Group intends to
build upon this trend by education and recruitment campaigns
through first time marketing in publications and participation
in job fairs. Netplex Group will also focus on encouraging large
organizations employing independent consultants to
become advocates of the "contractor employee" approach
thus reducing their risk of tax audits and the potential tax penalties
of having "independent contractors" deemed employees
by the Internal Revenue Service. The expansion
of the Contractors Resources business also
provides Netplex Group with access to a unique
reservoir of high talent IT consultants.
Strategic Acquisitions
Netplex Group believes that acquisitions are
a valuable and important means of achieving
critical mass, enhancing market share, increasing capabilities
to deliver large, complex solutions, and supplementing internal
growth. Netplex Group will seek to acquire
companies in the IT Staffing industry to
facilitate its expansion into new territories or to
acquire IT solutions businesses that offer
additional strength to existing practice areas.
Netplex Group currently expects that
acquisitions will be limited to profitable
companies. Netplex Group is not currently
negotiating to acquire any other business and
has no commitments, understandings or arrangements
with respect to any such acquisition.
Netplex Group's ability to expand
successfully by acquisition depends on many factors, including the
successful identification and acquisition of
businesses and management's ability to integrate and
operate the new businesses effectively. The anticipated
benefits from any acquisition may not be achieved unless the
operations of the acquired business are
successfully combined with those of Netplex Group
in a timely manner. Netplex Group's senior
management team is experienced in identifying acquisition
targets and has already successfully integrated
businesses into Netplex Group's existing infrastructure.
Operations and Support Services
From its headquarters in McLean, Virginia,
Netplex Group provides its IT Staffing branch
locations, IT Solutions practices areas, and Contractor Resources
business with centralized support services, including marketing,
finance and accounting, information systems, legal
support, human resources, and purchasing.
All of Netplex Group's branch locations are
linked by, and can communicate over a Wide Area
Network managed by a centralized Management
Information Systems department at the McLean
headquarters. Branch locations rely on this network
for access to Netplex Group's technical talent
database and corporate Intranet.
Netplex Group also uses numerous techniques to
govern and guide sales, recruiting, financial, and
operating activities. Netplex Group believes the
investment made in these processes will enhance
its ability to grow and attract and retain superior
technical and managerial talent.
Customers
Netplex Group strives to provide technical
talent and services to help businesses deliver
reliable, timely, and secure information across
networked systems. To accomplish this, Netplex
Group places great emphasis in developing
long-term client relationships. Positioning itself as a
specialist in strategically selected "best-of-
class" technology and talent, Netplex Group
strives to reinforce its clients' image of the
Company as being uniquely qualified to
provide the knowledge, experience and capacity to deliver IT
services and solutions. This is increasingly
important as clients seek to reduce the number
of vendors with which they do business.
For this reason, the Company has begun to focus
significant efforts on qualifying for - and remaining
on - multiple clients' vendor lists. Netplex
Group is currently approved on several vendor
lists of Fortune 500 companies. Netplex Group
maintains a broad and well-balanced client base.
No single customer accounted for more than 10% of
Netplex Group's revenue over the past year.
Competition
The IT services industry is fragmented
and highly competitive at both the local and national
levels. Many participants in the information technology
consulting market have significantly greater
financial, technical, and marketing resources -
and generate greater revenue - than Netplex Group.
Many of these competitors have a nationwide
presence equivalent to, or greater than, that of
Netplex Group.
The information technology services
market includes participants in a variety of market segments,
including systems consulting and integration firms,
professional services companies, application software firms,
temporary employment agencies, professional services groups
of computer equipment and software companies,
accounting firms, and general consulting firms.
Some of the firms with which Netplex Group
competes in various geographic and service markets
are Andersen Consulting, Cap Gemini America,
Computer Task Group, Inc., Alternative Resources, Inc, and The Registry.
The Company believes the principal competitive
factors in the IT services industry include responsiveness to fulfill
client needs, speed of systems integration, quality
of service, technical expertise, project management
capabilities, and price.
In staffing for client projects, Netplex
Group competes for IT consultants with many of
those same companies as well as other local and
regional technology or staffing service
providers. Several competitive factors affect
a company's success in recruiting and retaining such
professionals including compensation, availability
of benefits, a continuous flow of quality
assignments, and access to advanced training
and technical support. Netplex Group believes it is well
positioned in all of these areas to attract the
highest quality IT talent. IT Staffing and CR offer
Netplex Group a competitive advantage to access a
valuable pool of high talent independent IT consultants.
Intellectual Property
Netplex Group does not hold any patents or
registered trademarks other than those of Onion
Peel. However, Netplex Group considers the Netplex Group name
and its Database of independent consultants to be highly
proprietary. Employees. As of August 31, 1998, Netplex Group had
approximately 510 fulltime employees (including
permanent and contract employees).
The Company is responsible for, and pays the
employer's share of, Social Security taxes (FICA), federal
and state unemployment taxes, worker's compensation
insurance, and other costs relating to all of its employees.
Netplex Group offers a suite of benefits to
its contract employees that is a different selection
than offered permanent employees. Netplex Group
believes that its relations with its employees are good.
Acquisition or Disposition of Assets
Private Placement
On September 19, 1996, Netplex Group raised
approximately $3,000,000 through a
Private Placement offering of units of
equity securities (the "1996 Private Placement").
Each unit of equity securities consists of one share of
$.01 par value class A Convertible Preferred Stock (the "Preferred
Stock") and one Common Stock warrant to
purchase one share of the Company's $0.001 par
value Common Stock ("Common Stock") at an exercise
price of $2.50.
Each share of Preferred Stock is convertible into one
share of Common Stock at any time, at the
discretion of the holder. The Preferred Stock
earns cumulative dividends at 10%
per annum, payable in either cash or additional shares of
Preferred Stock at Netplex Group's option.
Subject to the conversion rights,
Netplex Group may redeem the Preferred
Stock at its stated value (which is $2 per
share) plus all accrued and unpaid dividends
upon: (1) registration of the shares underlying
the Preferred Stock, and (2) 30 days written
notice given at any time upon the Common Stock attaining
certain per share trading prices and maintaining
such prices for a specified period. The
Preferred Stock has a per share liquidation
preference of the greater of: (i) $4 per share
plus any accrued and unpaid dividends, or (ii) the
amount that would have been received if such shares
were converted to Common Stock on the business day
immediately prior to liquidation.
Each warrant issued in connection with
the Private Placement became exercisable on March 19, 1997, and
expires on September 19, 2001. Netplex Group has the right to call
the warrants at a redemption price of $.01 per
share upon: (1) registration of the shares underlying the
warrant (2) 30 days written notice given at any
time upon the Common Stock attaining trading
prices of $5 per share and sustaining such prices
for twenty (20) trading days.
Onion Peel
The Company acquired Onion Peel Solutions L.L.C. ("Onion
Peel"), a Raleigh, NC based provider of network management solutions
as of July 1, 1997. For consideration, the
Company issued 80,000 shares of its Common
Stock to the owners of Onion Peel. Additional shares may be
issued contingent upon the closing price of Netplex
Group's Common Stock on December 31, 1998. The
cost of the acquisition was determined to be
$400,000. The acquisition was accounted for using
the purchase method of accounting.
PSS
On January 30, 1998, Netplex Group completed
the purchase of all of the stock of The PSS
Group, Inc. ("PSS"), the technical professional staff augmentation
operations and business of Preferred Systems Solutions, Inc.
("Preferred") and formerly a wholly owned
subsidiary of Preferred. In consideration for the purchase,
Netplex Group paid $300,000 at closing and on or before January 15,
1999 will pay $300,000 in cash or 200,000
shares of its Common Stock or any
combination thereof, at Preferred's option. Netplex
Group used working capital to finance the
acquisition. The agreement also provides that
Preferred will receive additional consideration
(the "Earn-out") if PSS meets certain operating targets.
Such Earn-out may be paid at Netplex Group's option
in cash or its Common Stock, or any combination
thereof. In connection with the acquisition,
Netplex Group and PSS have entered into employment
agreements with certain employees of PSS. The
acquisition was accounted for using the purchase method
of accounting.
In order to focus on Netplex Group's core
business and reduce corporate losses, Netplex Group
completed the sale of its WorldLink technology product business
("WorldLink")to XcelleNet, Inc. in December 1996 for
a sale price of $3 million in cash.
As a result of this sale, the Company has
redirected most of the technical talent from the
WorldLink team to its IT Solutions practice groups.
Automated Business Systems
On June 18, 1998, the Company completed the
purchase of all of the stock of Automated
Business Solutions and Kellar Technology Group, Inc.
(collectively referred to as "ABS"). In consideration
for the purchase, the Company paid $200,000 and issued
450,000 shares of its Common Stock. The agreement
also provides that the former shareholders of ABS will
receive additional consideration (the "Earn-out") if ABS
meet certain operating targets. In connection
with the acquisition, the Company has entered
into employment agreements with certain employees
of ABS. The acquisition was recorded effective
June 30, 1998 using the purchase method of
accounting. The results of operations for the period
from June 18, 1998 to June 30, 1998 are
not material and the future results of operations of
ABS will be included beginning effective July 1,
1998.
Properties
Netplex Group leases approximately 10,000
square feet of space in McLean, Virginia for its
corporate offices and the operations of some of
the IT Solutions practice at a monthly rental rate
of $15,754. Netplex Group also leases office space
in New York City, Central and Western New
Jersey, Raleigh, N.C. and the Greater Chicago area
to serve as operating offices of its businesses. These
leases expire on different dates from May 2000 to June 2001.
Prior to the Netplex Group/CompLink
Merger of June 1996, the Company's primary operating facility
and corporate headquarters was located in Great Neck,
NY. As a result of the Merger the Company's corporate offices
moved from these facilities to its McLean, VA headquarters.
Netplex Group settled the remaining obligation under the Great
Neck office lease in March 1997 for approximately $320,000.
The Company believes that the space in its existing
corporate and branch facilities should be adequate for the
foreseeable future to support the growth of its
existing operations in the geographic areas in which it
currently operates. The Company expects to expand its
operations into new geographic regions in the
future and will need to lease additional branch
offices to support operations in those regions.
Legal Proceedings
From time to time, disagreements with
individual employees and disagreements as to the
interpretation, effect or nature of the individual
agreements arise in the ordinary course of
business and may result in legal proceedings
being commenced against Netplex Group.
On December 31, 1996, ACS Ltd., a software
distributor based in the United Kingdom, filed
a complaint against Technology Development
Systems ("TDS") a wholly owned subsidiary of
Netplex Group, in the Circuit Court of Cook
County, Illinois. ACS alleges that TDS breached its
obligations under the Distributor Agreement between
the Plaintiff and TDS for the WorldLink product
when Netplex Group directed TDS to sell the
WorldLink product technology to a third party. ACS
is demanding a sum exceeding one million dollars for
the breach of contract. The case is currently in discovery.
In the opinion of Management and Netplex Group's legal counsel,
the lawsuit has little merit, and the outcome of the pending
lawsuit will not have a material adverse
effect on the Company's financial condition, liquidity or the
results of operations. Netplex Group intends to vigorously
defend against the lawsuit. The TDS subsidiary
which was part of CompLink is currently inactive
with no assets. This action has been settled on
terms favorable to Netplex.
On September 4, 1997, Data Systems Analysts,
Inc. ("DSA"), a software design and consulting
company, filed a complaint against TDS and Netplex
Group in the United States District Court - District
of New Jersey, alleging copyright infringement and
breach of Netplex Group's agreement to pay certain
royalties. The Complaint claims damages in excess
of $3,000,000 plus punitive damages. The case is
currently in discovery. In the
opinion of Management, the lawsuit has little
merit, and the outcome of the pending lawsuit will
not have a material adverse effect on the
Company's financial condition, liquidity or
the results of operations. Netplex Group intends
to vigorously defend against the lawsuit.
Netplex Group is not currently involved in any
litigation or proceedings which if decided against
the Company would have a material adverse affect,
either individually or in the aggregate. To Netplex
Group's knowledge, no other legal proceedings,
that if decided against the Company would have a
material adverse affect, are currently contemplated
by any individuals, entities or governmental
authorities.
The principal risks that Netplex Group insures
against are workers' compensation, personal
injury, property damage, general liability, and
fidelity losses. Netplex Group maintains insurance
in such amounts and with such coverages and
deductibles as management believes are reasonable and
prudent.
MARKET FOR COMMON STOCK OF NETPLEX GROUP;
RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is
traded on the NASDAQ SmallCap market ("NASDAQ") and
on the Boston Stock Exchange.
NASDAQ recently enacted new requirements
for continued listing on NASDAQ. NASDAQ has
advised Netplex Group that it believes that
Netplex Group fails to meet the requirement that
NASDAQ companies have net tangible assets of
at least $2,000,000. The Company believes that with
the proceeds from two recently completed
Private Placements it is in compliance with
NASDAQ's net tangible assets requirement. However there
can be no assurance that Netplex Group will continue to meet the
applicable requirements for continued listing. In
addition, Netplex Group has an oral hearing with
NASDAQ scheduled for April 30, 1998 to review
whether Netplex Group is in compliance with the new requirements
and to review the terms of one of the Private Placements.
The failure to meet the maintenance criteria in the
future may result in the Common Stock no longer being
eligible for quotation on NASDAQ and trading, if any,
of the Common Stock would thereafter be conducted
in the non-NASDAQ over-the-counter market. As a result of such
delisting of the Common Stock from NASDAQ, it
may be more difficult for investors to dispose of,
or to obtain accurate quotations as to the market value of,
the Common Stock.
The regulations of the Securities and
Exchange Commission ("Commission") promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange
Act"), require additional disclosure relating to the market for
penny stocks. Commission regulations generally
define a penny stock to be an equity security that
has a market price of less than $5.00 per
share, subject to certain exceptions. A disclosure
schedule explaining the penny stock market and
the risks associated therewith is required to
be delivered to a purchaser and various sales
practice requirements are imposed on broker-dealers
who sell penny stocks to persons other than
established customers and accredited investors
(generally institutions). In addition, the broker-
dealer must provide the customer with current bid and offer
quotations for the penny stock, the compensation
of the broker-dealer and its salesperson in the
transaction and monthly account statements
showing the market value of each penny stock
held in the customer's account. If the
Company's securities become subject to the
regulations applicable to penny stocks (i.e., by
NASDAQ delisting), the market liquidity for
Netplex Group's securities could be severely
affected. In such an event, the regulations on
penny stocks could limit the ability of
broker-dealers to sell the Company's securities
and thus the ability of purchasers of Netplex
Group's securities to sell their securities in the
secondary market. In the absence of an active
trading market, holders of the Common Stock may
experience substantial difficulty in selling their securities.
Price Range of Netplex Group Common Stock
The quotations set forth in the
table reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not necessarily represent actual
transactions:
<TABLE>
<CAPTION>
Fiscal 1996 High Low
<S> <C> <C>
1st Quarter.............................. $3.50 $2.38
2nd Quarter (OTC Electronic Bulletin
Board commencing June 20) 3.38 2.77
3rd Quarter.............................. 3.38 2.31
4th Quarter.............................. 4.00 3.25
Fiscal 1997
1st Quarter.............................. $3.25 $2.75
2nd Quarter (NASDAQ SmallCap
Commencing April 20)........... 3.25 1.88
3rd Quarter.............................. 3.13 1.50
4th Quarter.............................. 2.94 0.75
Fiscal 1998
1st Quarter.............................. $1.75 .69
2nd Quarter.............................. 1.91 1.25
</TABLE>
Netplex Group has not paid any cash
dividends on its Common Stock and does not intend to pay cash
dividends on its Common Stock for the foreseeable
future. Netplex Group intends to retain future earnings,if any, to
finance future development.
As of June 28, 1998, there were
approximately 159 holders of record of Netplex Group's Common
Stock. Netplex Group believes that at such date there were in
excess of 500 beneficial owners of Netplex Group's Common Stock.
NETPLEX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
The Netplex Group is an Information
Technology (IT) company that provides the expertise
and information systems to link employees,
customers, prospects, suppliers and
manufacturers to help "network-enable" organizations.
Netplex Group re-sells technology products when
necessary to deliver to customers fully integrated system
solutions.
Netplex Group is headquartered in McLean,
Virginia and has branch offices in the Reston,
Virginia, New York City, Central New Jersey,
Raleigh, North Carolina and Chicago Metropolitan markets.
In June 1996, Netplex Group (formerly known
as CompLink, Ltd.) acquired and merged (the
"Merger") with America's Work Exchange, its wholly owned
subsidiary Software Resources of New Jersey, now known as
Contractors Resources ("CR"), and The Netplex Group, Inc.
(collectively referred to as "Netplex
Group") in a reverse merger transaction by issuing
approximately 3,245,000 shares of Common
Stock, or 50.4% of Netplex Group's
then outstanding Common Stock after giving effect to
the Merger. The Merger agreement provided for
the Company to issue options to purchase
1,691,000 shares of Netplex Group's Common Stock in exchange for
options to purchase 1,691,000 shares of
Netplex Group's Common Stock. As a result, Netplex
Group was considered the acquirer for accounting purposes.
The assets and liabilities of CompLink and its
wholly owned subsidiary, Technology Development Systems
("TDS"), were recorded by Netplex Group at merger
date at book value which approximated fair
value. At merger, CompLink's operations
consisted primarily of the distribution of
WorldLink remote and mobile workforce automation software
developed by TDS. Netplex Group discontinued the
operations of its software development and distribution
segment upon the completion of the sale of its
interest in the WorldLink product technology for $3.0 million in
December 1996.
Netplex Group's operations have been concentrated on
providing IT services and solutions to U.S.-based
commercial organizations since the beginning of 1997.
In July 1997, Netplex Group acquired the net
assets of Onion Peel Solutions, L.L.C ("Onion
Peel") to broaden its customer base and expand
the fulfillment capacity of its Enterprise
Systems Management service offerings in exchange for
80,000 shares of its Common Stock, subject to
adjustment.
The statement of operations for the year ended December
31, 1997 reflects the results of Onion Peel from July 1, 1997,
the date of acquisition. The statement of
operations, for the year ended December 31, 1996,
reflects the results of Complink commencing on June
1, 1996. The operations of TDS are included in the
statement of operations for the year ended December
31, 1996, as discontinued operations beginning on
June 1, 1996.
On January 30, 1998, Netplex Group completed
the purchase of all of the stock of The PSS Group,
Inc. ("PSS") the technical professional staff augmentation
operations and business of Preferred Systems Solutions, Inc.
("Preferred") and formerly a wholly-owned subsidiary of
Preferred. In consideration for the purchase, Netplex Group paid
$300,000 at closing and on or before January 15, 1999 will pay
$300,000 in cash or 200,000 sharesof its Common Stock or any
combination thereof, at Preferred's option. Netplex
Group used working capital to finance the acquisition. The
agreement also provides that Preferred will receive
additional consideration (the "Earn-out") if PSS meets certain
operating targets. Such Earn-out may be made at
Netplex Group's option in cash or its Common
Stock, or any combination thereof. If Netplex Group
elects to pay the Earn-out in Common Stock, the
value of the Common Stock will be based on the
average closing price of the Company's
Common Stock for the last quarter of the year in
which the payment was made. The purchase price
of the PSS acquisition was determined to be $600,000
(subject to adjustment for contingent consideration) and was
preliminarily allocated to the fair value of the assets
and liabilities acquired. Netplex Group is amortizing the
fulfillment database (resume database) over 7 years
using the straight-line method.
On June 18 1998, Netplex Group completed the
purchase of all of the stock of Automated Business
Solutions and Kellar Technology Group, Inc.
(Collectively "ABS"). In consideration for the
purchase, Netplex Group paid $200,000 and
issued 450,000 shares of its Common Stock. The
agreement also provides that the former
shareholders of ABS will receive additional
consideration (the "Earn-out") if ABS meets
certain operating targets. In connection with the
acquisition, Netplex Group has entered into
employment agreements with certain employees of
ABS. The acquisition was recorded effective June
30, 1998 using the purchase method of accounting.
The results of operations for the period from June
18, 1998 to June 30, 1998 are not material and the
future results of operations of ABS
will be included beginning effective July 1,
1998. The purchase price of the ABS acquisition was
determined to be $791,000 (subject to adjustment
for contingent consideration) and was preliminarily
allocated to the fair value of the
assets and liabilities acquired. Netplex Group is
amortizing the goodwill resulting from the
acquisition over a estimated useful life of 15
years using the straight-line method.
The above acquisitions and disposition have
resulted in Netplex Group emerging in 1997 with
three distinct areas of business operations:
Design and implementation of solutions for IT
systems related business needs, IT Solutions; Staff
augmentation and flexible task outsourcing, IT Staffing,
and: Business services for the independent IT Consultant,
IT Contractor Resources.
The following table sets forth the revenue
and gross profit of each of the business areas for
1997:
<TABLE>
<CAPTION>
IT IT IT
Contractor Solutions Staffing Total
Resources
---------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $32,048,350 100% $5,221,555 100% $3,198,229 100% $40,468,134 100%
% 79.2% 12.9% 7.9% 100%
Cost of
Sales 30,952,246 96.6% 2,335,658 44.7% 2,127,740 66.5% 35,415,644 87.5%
% 87.4% 6.6% 6.0% 100%
Gross
Profit 1,096,104 3.4% 2,888,897 55.3% 1,070,489 33.5% 5,052,490 12.5%
% 21.7% 57.1% 21.2% 100%
</TABLE>
The following table sets forth the revenue, gross
profit, business unit expenses, and business unit
income of each of the business areas for the six
months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Consolidated Operating Results by Segment
Amounts in Thousands
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Operating revenues
IT solutions $5,623 $2,039
IT Staffing 4,931 1,444
IT Contractor's Resources 17,123 16,226
------- -------
Operating revenues $27,677 $19,709
Gross profit
IT Solutions 2,758 1,027
IT Staffing 1,200 374
IT Contractor's Resources 586 498
------ ------
Gross profit 4,544 1,899
Gross profit margin
IT Solutions 49.1% 50.4%
IT Staffing 24.3% 25.9%
IT Contractor's Resources 3.4% 3.1%
------ -----
Gross profit margin 16.4% 9.6%
Business Unit Expenses
IT Solutions 2,189 1,328
IT Staffing 1,213 619
IT Contractor's Resources 499 463
----- ------
Business unit expenses 3,901 2,410
Business Unit Income
IT Solutions 569 (301)
IT Staffing (13) (245)
IT Contractor's Resources 87 35
----- ------
Business unit income 643 (511)
Corporate Expenses 1,058 829
EBITDA (415) (1,340)
Interest, taxes, depreciation
& amortization 373 167
-------- -------
Net operating loss $ (788) $(1,507)
======== ========
</TABLE>
Results of Operations
Six months ended June 30, 1998 and 1997
Revenue for the six months ended June 30,1998
increased approximately $8.0 million or 40% to
approximately $27.7 million, as compared to $19.7
million for the same period in 1997. This increase
includes a $3.6 million or 176% increase in
IT Solutions revenue, a $3.5 million or 242%
increase in IT Staffing revenue, and a $900,000 or
6% increase in IT Contractor Resources revenue.
The increase in revenues is due to a
combination of growth, better integration across
the three business units and the acquisition of
Onion Peel and the PSS Group.
Gross Profit for the six months ended
June 30,1998 increased approximately $2.6 million
or 139% to approximately $4.5 million as compared
to approximately $1.9 million for the same period
of 1997. This increase includes an increase of
approximately $1.7 million or 170% in IT
Solutions gross profit, an approximately $826,000 or
221% increase in IT Staffing gross profit and
a $88,000 or 18% increase in IT Contractor
Resources gross profit. The increased IT
Solutions gross profit is primarily due to an
increase in revenues from the IT Solutions
practice areas including Onion Peel. The increase
in IT Staffing is attributable to growth and to the
acquisition of The PSS Group, Inc in January 1998.
The IT Contractor Resources increase is due to
revenue growth.
Gross Profit margin increased to approximately 16.4% for
the six months ended June 30, 1998, from
approximately 9.6 % for the same period of 1997,
this increase is due to higher revenue growth
rates in the IT Solutions and IT Staffing
businesses than experienced in the IT
Contractor Resources business. IT Solutions and IT
Staffing offerings generate higher gross profit
margins than IT Contractor Resources services.
Business unit expenses for the six months ended June
30, 1998 increased approximately $1.5 million or 62%
to approximately $3.9 million from approximately $2.4 million
for the same period of 1997. This increase includes
increases in IT Solutions and IT Staffing business unit
expense of approximately $861,000 and $594,000, respectively.
The IT Solutions increase includes increases of approximately
$600,000 for the inclusion of Onion Peel operations (acquired
in July 1997) as well as an expanded sales force,
and practice management. IT Staffing business unit
expense increase is primarily due to the
acquisition of PSS in January 1998, including the
expansion of the Reston, VA facility and the
opening of the Tampa office in April 1998.
Business unit income for the six months ended June 30,
1998 was approximately $643,000 as compared to
an operating business unit loss of $511,000 for the
same period of 1997, an increase of approximately $1.2 million.
This increase includes increased business unit profits from IT
Solutions, IT Staffing and IT Contractor Resources of
approximately $870,000, $232,000, and $52,000, respectively.
Corporate expense for the six months ended
June 30, 1998 increased approximately $230,000 or
28% to approximately $1.1 million from
approximately $829,000 when compared to the same
period of 1997. This increase reflects an
additional investment in corporate development
capability to support the growth of operations.
Earnings before interest, income taxes,
depreciation and amortization ("EBITDA") for the six
months ended June 30, 1998 was a loss of
$415,000 as compared to a loss of approximately $1.3
million for the same period of 1997, an
improvement of approximately $925,000. The
components of this improvement
are discussed above.
Depreciation, amortization and interest expense for the
six months ended June 30, 1998 increased
approximately $206,000 to approximately $373,000 from
approximately $167,000 for the same period of 1997. This
increase is principally due to increased borrowings under
Netplex Group's line of credit facility in the six
months ended June 30, 1998 as compared to the same
period of 1997.
No provision or benefit for income taxes was required for
either the six months ended June 30, 1998 or 1997.
The net loss decreased approximately $718,000 to
approximately $788,000 from approximately $1.5
million in the same period of 1997. The
components of this improvement are discussed above.
Fiscal 1997 Compared to Fiscal 1996
Revenue for the year ended December 31,
1997 increased approximately $6.9 million or
21% to approximately $40.5 million, as compared
to $33.5 million for the same period in 1996.
This increase includes a $5.6 million or 21% increase in IT
Contractor Resources revenue, a $1.6 million or 100%
increase in IT Staffing revenue offset by a
$300,000 or 5% net decrease in the IT Solutions
revenue. The IT Solutions decrease includes a $1.3
million decrease in IT Solutions
revenues driven principally from declines in
computer product resales and was partially offset
by a $1.0 million revenue increase generated by Onion
Peel which was acquired in July 1997.
Gross Profit for the year ended December 31,
1997 increased approximately $2.4 million or 92% to
approximately $5.1 million as compared to
approximately $2.6 million for the same period of
1996. This increase includes a $325,000
increase in IT Contractors Resources gross
profit, an approximately $500,000 increase in IT
staffing gross profit and a $1.5 million
increase in IT Solutions gross profit. The
increase in IT Contractors Resources and IT Staffing
gross profit are principally due to the increases
in revenues. The increase in IT Solutions
gross profit is primarily due to a shift in the
IT Solutions product mix to a higher proportion of
pure service revenues than in 1996 and the
inclusion of the Onion Peel business which was
added to IT Solutions through a July 1, 1997
acquisition.
Gross Profit increased to approximately 12.5
% in 1997 from approximately 8.0% in 1996,
primarily due to the increased IT Solutions and
IT Staffing services revenues which generate higher
gross profit margins.
Selling, general and administrative
expenses for the year ended December 31, 1997
increased approximately $2.7 million or 51.9% to
$7.9 million from $5.2 million for the same
period of 1996. The primary reason for the
increase in selling, general and administrative
expenses is the expansion of the sales and recruiting
forces, and the hiring and training of technical staff
to pursue and prepare for prospective
client engagements, all of which began in the
third quarter of 1996 and continued throughout 1997.
Other income (expense) for the year ended
December 31, 1997 decreased by $65,000 or 171% to
approximately $26,000 of other expense in 1997
from approximately $38,000 of other income in
1996. The primary reason for the decrease is the reduction
in cash balances from the Company's losses in
1997 coupled with increased borrowings on its line of credit
facility during 1997.
The loss from continuing operations
before taxes increased by approximately $352,000
or 14% to $2.9 million from $2.5 million. The components
of this increased loss are discussed above.
As a result of the net loss no provision or benefit
for income taxes was required in 1997. In 1996
the Company recorded a $34,000 benefit for income
taxes generated from a change in the Company's
deferred tax asset valuation allowance.
Income from discontinued operations of approximately
$488,000 in 1996, resulted from Netplex Group's
discontinuance of its software development and
distribution business. This income includes a gain
from the disposal of the business of
approximately $1.8 million which resulted
primarily from the sale of the WorldLink product technology to
XcelleNet, Inc. offset by losses of
approximately $1.3 million from the operations of
this business from the date of its acquisition in
the merger with CompLink (June 1, 1996 for accounting
purposes) through the disposal date.
Liquidity and Capital Resources
At June 30, 1998 Netplex Group had cash and cash
equivalents of $2,084,428. Netplex Group had $1,894,742
outstanding on its line of credit facilities and had
long term capital lease obligations of $216,450.
At December 31, 1997 Netplex Group had cash and
cash equivalents of $353,005. Netplex Group had
$1,316,300 outstanding on its line of credit
facility and had long term capital lease obligations
of $109,096.
Netplex Group's liquidity and capital resources were
increased by the following:
For the six months ended June 30, 1998
the Company's cash increased by $1,731,000. This
increase is comprised of cash used in operating
activities of approximately $702,000 cash used in
investing activities of approximately $329,000 and
cash provided by financing activities of
approximately $2.8 million.
The Company is actively pursuing the
acquisition of additional qualified companies to
broaden its customer base, expand its
technical capacity and enhance its fulfillment
capability. Netplex Group has identified several potential
acquisition candidates, has signed a letter of
intent with one such candidate, and is currently
engaged in due diligence activities of this
company. The letter of intent is subject to the
satisfactory completion of due diligence by
Netplex Group and the negotiation of the terms of
this acquisition in a definitive agreement. There
can be no assurances that the Company will
complete the definitive agreement for the
acquisition of this company.
As of June 30, 1998, Netplex Group
maintains a line of credit with a bank which
allows the Company to borrow the lesser of
$2,000,000 or 80% of eligible accounts receivable.
Advances against this line of credit bear interest at 0.75% over
the bank's prime rate and require Netplex Group
to maintain certain financial covenants. Netplex
Group had borrowings of $1,895,000 on this line
of credit as of June 30, 1998. The expiration of
this line of credit was extended from July 2, 1998
to October 31, 1998.
The Company will discuss with the bank the extension
of its line of credit facility prior to its expiration in
October 1998, as well as entering into discussions
with other financial institutions to expand its
credit facility.
Netplex Group also had a line of credit
facility with a bank that it acquired in the PSS
acquisition (the "PSS line of credit"). Netplex
Group retired the PSS line of credit in April 1998
and repaid the outstanding balance of
approximately $803,000.
In January 1998, Netplex Group completed the
purchase of all of the stock of PSS and on June
18, 1998, Netplex Group completed the purchase
of all of the stock of ABS. See additional
discussion of the PSS and ABS acquisitions in
Note 2 -Acquisitions to the unaudited
consolidated financial statements of Netplex
Group appearing elsewhere in this Information Statement.
Capital expenditures for the six months ended June 30,
1998 were approximately $183,000.
Between January 1, 1998 and June 30, 1998,
Netplex Group has raised additional equity totaling
$3,069,000, as follows:
In February 1998 Netplex Group raised
$100,000 through the sale of 80,000 shares of non-
registered Common Stock plus a warrant to purchase
an additional 100,000 warrants at $1.20.
In March 1998 Netplex Group raised $1,457,000
of financing in a Private Placement with accredited
investors and employees of Netplex Group. Netplex Group
issued shares of non-registered Common Stock to purchasers
who have agreed not to sell or otherwise distribute
their shares for a period of one year. These
restricted shares carry registration rights and were
offered at $1.00 per share. The funds will be used
to finance operations and additional acquisitions.
On April 7, 1998 Netplex Group completed
the sale of 1,500 units of a Private Placement,
totaling $1.5 million, to various purchasers The
Zanett Corporation ("Zanett") acted as
placement agent for the Private Placement.
The sale represents the first half of a transaction that
will include the sale of an additional 1,500
units for $1.5 million at a future date. Zanett
Lombardier purchased 1,500 units at $1,000 per unit,
with each unit consisting of a prepaid Common Stock
purchase warrant entitling the holder to acquire
such number of shares of the Company's Common
Stock as is equal to $1,000 divided by an adjustable
exercise price and an additional incentive warrant
to acquire 52 shares of Common Stock (or an aggregate of
78,000 shares of Common Stock). The Company also granted Zanett
a warrant to purchase 39,000 shares of Common
Stock. Zanett also received placement fees and a
non-accountable expense allowance equal to
12.53% of the proceeds of the offering. The second half of the
transaction is for the sale to Zanett of an
additional and committed 1,500 units, for $1,000 per
unit, contingent on Netplex Group recording three
consecutive quarters of increased profits and revenues,
excluding any extraordinary items. With respect to
the second half of the transaction, the exercise
price of the purchase warrants and the incentive
warrants will be based on the bid price of the
Common Stock at the time of such
closing. The funds from the Private Placement
will be used to fund operations and acquisitions. Under
NASDAQ regulations, certain aspects of the
transaction must receive shareholder
approval. NASDAQ has also advised Netplex
Group that it will review the terms of the Private Placement.
Such shareholder approval is expected in Netplex
Group's annual meeting. Netplex Group
believes that the proceeds should ensure
that Netplex Group will exceed NASDAQ's published
net tangible assets requirement of $2 million.
On April 26, 1998, the Company raised $150,000 of
financing in a private placement with accredited
investors. Netplex Group issued non registered shares of
Common Stock to purchasers who have agreed not to
sell or otherwise distribute their shares for a
period of one year. These restricted
shares carry registration rights and were offered
at $1.50 per share. The funds will be used to
finance operations and additional acquisitions.
On April 27, 1998, the Company raised
$48,125 of financing in a private placement with accredited
investors. Netplex Group issued non registered shares of
Common Stock to purchasers who have agreed not to
sell or otherwise distribute their shares for a
period of one year. These restricted
shares carry registration rights and were offered at
$1.375 per share. The funds will be
used to finance operations and additional acquisitions.
Based on its current operating plan,
Netplex Group believes that the net
proceeds from the Private Placements
together with cash anticipated to be provided
by operating activities and amounts expected to be
available under a renegotiated line of credit (of
which there can be no assurance) will be sufficient to
meet its anticipated cash needs for working capital
and capital expenditures for at least the next 12 months.
Thereafter, if cash generated from operations is insufficient to
satisfy Netplex Group's liquidity requirements,
Netplex Group may seek to sell additional equity or
convertible debt securities or obtain
additional credit facilities. However, no assurance can be given
that any such additional sources of financing will
be available on acceptable terms or at all. The
sale of additional equity or convertible debt
securities could result in additional dilution to
Netplex Group's stockholders. A portion of Netplex
Group's cash may be used for acquisitions or
to acquire or invest in complimentary businesses or
products or to obtain the right to use complementary technologies.
Netplex Group is expecting to incur operating
losses until it achieves quarterly revenue and
operating income levels of approximately
$15,000,000 and $700,000, respectively. While it
cannot be certain as to when such levels of
revenue and profitability can be attained, Netplex
Group anticipates that such levels will be
achieved during the next twelve months. The
Company will continue to make significant
investments in its technical workforce,
marketing, training and infrastructure to increase
productivity, build its core
competency practice unit skill base and product
offerings and foster growth of its operations.
Forward-Looking Statements
This Information Statement contains certain
forward-looking statements within the meaning of
Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as
amended, which are intended to be
covered by the safe harbors created thereby. Investors
are cautioned that all forward-looking
statements involve risks and uncertainty, (including without
limitation, future financings and expenses,
revenues and income of Netplex Group, as well as
general market conditions) though the
Company believes that the assumptions underlying
the forward-looking statements contained herein
are reasonable, any of the
assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking
statements included in this Information Statement
will prove to be accurate. In light of the
significant uncertainties inherent in the
forward-looking statements included
herein, the inclusion of such
information should not be regarded as a
representation by Netplex Group or any other person that the
objectives and plans of Netplex Group will be
achieved.
Recent Accounting Pronouncements
In February 1997, FASB issued SFAS No. 129,
"Disclosure of Information about Capital
Structure" which is effective for the year ending
December 31, 1998. This statement continues the previous
requirements to disclose certain
information about an entity's capital structure
found in Accounting Principles Board (APB) Opinion No.
10, "Omnibus Opinion -1966" and No. 15, "Earnings per
Share" and FASB Statement No. 47,
"Disclosure of Long-Term Obligations."
Netplex Group has been subject to the
requirements of those standards and as a result
does not expect the adoption of SFAS No. 129 to
have a material impact on Netplex Group's financial
statements.
In June 1997, FASB issued SFAS No. 130
"Reporting Comprehensive Income", which is
effective for the year ending
December 31, 1998. This statement establishes
standards for the reporting and display of
comprehensive income and its components in the
financial statements. Earlier application of this
standard is permitted; however, upon adoption
Netplex Group will be required to reclassify
previously reported annual and interim
financial statements. The Company
believes that the disclosure of comprehensive
income in accordance with the provisions of SFAS No. 130 will
not impact the manner of presentation of its
financial statements as currently and previously
reported.
In June 1997, FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise
and Related Information", which is effective for the
year ending December 31, 1998. This statement
requires companies to present certain information
about operating segments and related
information, including geographic and major
customer data, in its annual financial
statements and in condensed financial
statements for interim periods. Netplex Group
believes that the adoption of SFAS No. 131
will impact the manner of
presentation of its financial statements.
In October, 1997, the AICPA Accounting Standards
Executive Committee issued Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), which
supercedes Statement of Position 91-1 "Software
Revenue Recognition. SOP 97-2 focuses on when
and in what amounts revenue should be recognized
for licensing, selling, leasing, or otherwise
marketing computer software, and is effective for
transactions entered into in fiscal years beginning
after December 15, 1997. Netplex Group does not
believe that the adoption of this new
pronouncement will have a material impact on
its financial position and results of operations.
Inflation
Netplex Group does not expect inflation
to have a significant adverse impact on its
operations.
Year 2000 Compliance
Netplex Group has assessed and continues to
assess the impact of the Year 2000 issue on its
operations, including the development of cost
estimates for, and the extent of programming changes
required to address, this issue. Although final
cost estimates have yet to be determined, Netplex
Group expects that these Year 2000 costs will not
be material to Netplex Group's expenses during 1998
and 1999.
DESCRIPTION OF NETPLEX SECURITIES
Pursuant to its Certificate of Incorporation,
Netplex Group is authorized to issue up to
20,000,000 shares of common stock, $.001 par value
("Netplex Group Common Stock"), and 2,000,000
shares of Class A 10% Cumulative Convertible Preferred Stock,
$.01 par value (the "Class A Preferred Stock"), and
2,000,000 shares of Class B Preferred Stock, $.01
par value (the "Class B Preferred Stock"). As of
June 30, 1998, the outstanding capital stock of
Netplex consisted of 9,618,825 shares of Netplex
Group Common Stock and 1,102,983 shares of Class
A Preferred Stock. The Class B Preferred Stock
will be issued to the Company in connection with the
Consulting Division Sale. See "Consulting
Division Sale-Terms of the Acquisition Agreement and Earnout
Agreement."
The following description of certain matters
relating to the capital stock of Netplex Group is a
summary and is qualified in its entirety by
the provisions of the Certificate of
Incorporation of Netplex. See "Available
Information."
Netplex Group Common Stock
The holders of outstanding shares of Netplex
Group Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from
time to time by the Board of Directors out of
assets legally available therefor, subject to the
payment of preferential dividends with respect to
any preferred stock that may be outstanding. In
the event of liquidation, dissolution and winding-up
of Netplex Group, the holders of outstanding Netplex
Group Common Stock will be entitled to share
ratably in all assets available for distribution
to the NetPlex Group Common Stock shareholders
after payment of all liabilities and subject to the
prior distribution rights of the holders of any
preferred stock that may be outstanding at that
time. Holders of outstanding Netplex Group Common
Stock are entitled to one vote per share on
matters submitted to a vote by the Netplex Group
Common Stock shareholders. The Netplex Group Common
Stock has no preemptive rights and no subscription,
redemption or conversion privileges and does not
have cumulative voting rights, which means that
holders of a majority of shares voting for the elec
tion of directors can elect all members of the Board
of Directors subject to election. In general, a
majority vote of shares represented at a
meeting of Netplex Group Common Stock
shareholders at which a quorum (a majority of the
outstanding shares of Common Stock) is present is
sufficient for all actions that require the vote or
concurrence of shareholders, subject to and
possibly in connection with the voting rights of the
holders of any preferred stock that from time to
time may be outstanding and entitled to vote with the
holders of the Netplex Group Common Stock.
Class A Preferred Stock
The Class A Preferred Stock possess all such
rights and privileges that are afforded to preferred
stock by the New York Business Corporation Law in
the absence of any express grant or limitation of
rights or privileges provided in the Certificate of
Incorporation of Netplex Group. The
designations and the preferences, conversions and other rights,
voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions
of the shares of the Class A Preferred Stock as set
forth in the Certificate of Incorporation are
summarized below.
Dividends. Dividends may be declared and paid
or set apart for payment upon the Class A Preferred
Stock out of any assets or funds of Netplex Group
legally available for the payment of dividends.
Holders of Class A Preferred Stock, as a class, are
entitled to receive, when and as declared by
the Board of Directors of Netplex, out of any
funds legally available therefor, cumulative
preferred cash dividends on a pro rata basis of $.20
annually or at the option of Netplex Group issuance
of Netplex Group Common Stock in payment of the
cash dividend. Dividends may not be declared and
paid or set apart for payment upon the Common
Stock or any other preferred stock unless all
dividends, including cumulative dividends, then
payable on the Class A Preferred Stock shall have
been paid.
Voting Rights. Holders of the Class A
Preferred Stock do not have any voting rights other
than as provided by law.
Liquidation Rights. In the event of any
liquidation, dissolution or winding-up of the
affairs of Netplex Group, and before any
distribution or payments are made to the holders of
the Common Stock and any other class of stock,
holders of the Class A Preferred Stock will be
entitled to receive a liquidating distribution of
$4.00 per share plus accumulated and unpaid
dividends before any distribution of assets will
be made to holders of Common Stock or any other
class of stock or the amount the holders of the
Class A Preferred Stock would receive if the Class
A Preferred Stock were converted to Netplex Group
Common Stock.
Conversion Privileges. Each share of Class
A Preferred Stock is convertible, at such holder's
option, into one share of Netplex Group Common
Stock at any time, subject to customary adjustments
to prevent dilution upon the occurrence of certain
future events. Netplex Group is obligated at all times to
reserve and keep available, free from preemptive
rights, unissued or treasury shares of Netplex
Group Common Stock sufficient to effect the
conversion of all the issued and outstanding shares
of Class A Preferred Stock.
Redemption. Netplex Group may, at its option
and subject to certain conditions, redeem the Class
A Preferred Stock on at least 30 days' notice, in
whole and not in part, at any time at $2.00 per
share plus accumulated and unpaid dividends to the
date fixed for redemption, subject to the holder's
right to convert to Net Plex Common Stock.
Class B Preferred Stock
The Class B Preferred Stock possess all such
rights and privileges that are afforded to preferred
stock by the New York Business Corporation Law in
the absence of any express grant or limitation of
rights or privileges provided in the Certificate of
Incorporation of Netplex Group. The designations and the
preferences, conversions and other rights, voting powers,
restrictions, limitations as to dividends,
qualifications and terms and conditions of the
shares of the Class B Preferred Stock as set forth
in the Certificate of Incorporation are summarized
below.
Voting Rights. Holders of the Class B
Preferred Stock do not have any voting rights other
than as provided by law.
Liquidation Rights. In the event of any
liquidation, dissolution or winding-up of the
affairs of Netplex Group, and before any
distribution or payments are made to the holders of
the Common Stock and any other class of stock
other than the Class A Preferred Stock, holders of
the Class B Preferred Stock will be entitled to
receive a liquidating distribution of $3.50 per
share plus accumulated and unpaid dividends
before any distribution of assets will be made to
holders of Common Stock or any other class of stock
or the amount the holders of the Class B Preferred
Stock would receive if the Class B Preferred Stock
were converted to Netplex Group Common Stock.
Conversion Privileges. Each share of Class
B Preferred Stock is convertible, at such holder's
option, into one share of Netplex Group Common
Stock at any time, subject to customary adjustments
to prevent dilution upon the occurrence of certain
future events. Netplex Group is obligated at
all times to reserve and keep available, free from
preemptive rights, unissued or treasury shares of
Netplex Group Common Stock sufficient to effect the
conversion of all the issued and outstanding shares
of Class B Preferred Stock.
Redemption. Netplex Group may, at its option
and subject to certain conditions, redeem the Class
B Preferred Stock on at least 30 days' notice, in
whole and not in part, at any time at $2.00 per
share plus accumulated and unpaid dividends to the
date fixed for redemption, subject to the holder's
right to convert to Net Plex Common Stock.
COMPARATIVE PER SHARE DATA
Set forth below are unaudited earnings per
share from operations and net tangible book value
per share of the Common Stock on a historical
and pro forma basis and the per share dilution on
a pro forma basis. The historical earnings per share
information is based upon the weighted average shares
outstanding for the six months ended June 30, 1998.
Pro forma earnings per share are derived from
the unaudited pro forma consolidated financial
statements appearing elsewhere in this
Information Statement. The net tangible book value
per share for the pro forma presentation is
based upon the number of shares of Common Stock of
the Company and Netplex Group Common Stock,
including common share equivalents, outstanding for
the six months ended June 30, 1998, adjusted to
include the shares of Netplex Group Common Stock
underlying the Netplex Preferred Stock issued in
connection with the Consulting Division Sale. "Net
tangible book value" per share represents the amount
of the Company's tangible net worth (total tangible
assets, less total liabilities) divided by the total
number of shares of Common Stock outstanding. The
information set forth below should be read in
conjunction with the unaudited financial
statements of the Company and Netplex Group and
the notes related thereto appearing elsewhere in
this Information Statement.
<TABLE>
<CAPTION>
As of or for
the Six Months
Ended June 30,1998
<S> <C>
Applied Intelligence Group, Inc.
Historical:
Earnings per share $ 0.01
Dividend per share -
Net tangible book value per share $ .40
Pro Forma:
Loss per share $ (0.44)
Dividend per share -
Net tangible book value per share $ 1.16
Anti-Dilution per share .76
The Netplex Group, Inc.
Historical:
Loss per share $ (0.11)
Dividend per share -
Net tangible book value per share $ 0.21
Pro Forma:
Earnings per share $ .
Dividend per share -
Net tangible book value per share $ .14
Dilution per share $ (.07)
</TABLE>
AVAILABLE INFORMATION
Each of the Company and Netplex is
subject to the informational reporting
requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements
and other information with the Securities and
Exchange Commission (the "Commission"). The
Company's Commission file number is 000-21729 and
Netplex's Commission file number is 001-11784.
Such reports, proxy statements and other
information can be inspected and copied at, and
copies of such material can be obtained at prescribed
rates from, the Public Reference Section maintained
by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549-1004, and at the following the Chicago
Regional Office, Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and New York Regional Office, 75 Park
Place, 13th Floor, New York, New York 10007.
Each of the Company's Common Stock and Netplex
Common Stock is quoted on the Nasdaq SmallCap
Market. The reports, proxy statements and other information
filed by the Company or Netplex with the
Commission may also be inspected at the offices of
The Nasdaq Stock Market, Inc. ("Nasdaq"), 1735 K
Street, N.W., Washington, D.C. 20006-1506. In
addition, the reports, proxy statements and other
filings, including annual and quarterly reports,
made with the Commission through its
Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available
through the Commission's site on the World Wide Web
on the Internet, located at http://www.sec.gov and
through Nasdaq's site located at
http://www.nasdaq.com. This Information Statement
has been filed with the Commission through EDGAR,
as well as the Annual Report on Form 10-KSB for the
year ended December 31, 1997, as filed with the
Commission on April 15, 1998, the Quarterly
Report on Form 10-QSB for the quarter
ended June 30, 1998, as filed with the Commission on
August 19, 1998, and the Form 8-K dated June 22,
1998, as filed with the Commission on July 2, 1998,
of Netplex. The Company will provide without charge
to each person who receives this Information
Statement, upon written or oral request, a copy of
any agreement specifically referenced in this
Information Statement, unless such agreement is
attached and provided as a portion of this
Information Statement. Such requests should be
directed to Applied Intelligence Group, Inc. , Attention Robert
N. Baker, Vice President, at 13800 Benson Road,
Edmond, Oklahoma 73013-6417, telephone: (405) 936-2300. The Company's
Internet home page can be located on the World Wide Web at
http://www.aig.vialink.com and Netplex's Internet
home page can be located on the World Wide Web at
http://www.netplexgroup.com.
Index to Audited, Interim and Unaudited Pro Forma Financial
Statements
[S] [C]
Applied Intelligence Group, Inc.
Unaudited Pro Forma Consolidated Balance Sheet as of
June 30, 1998 F-2
Unaudited Pro Forma Consolidated Statement of Operations for
the Six Months Ended June 30, 1998 F-3
Unaudited Pro Forma Consolidated Statement of Operations for
the Year Ended December 31, 1998 F-4
Notes to Unaudited Pro Forma Consolidated Financial
Statements F-5
Consolidated Balance Sheets (Unaudited) as of June 30, 1998
and December 31, 1997 F-6
Consolidated Statements of Operations (Unaudited) for the
Six Months Ended June 30, 1998 and 1997 F-7
Consolidated Statements of Stockholders' Equity (Unaudited)
for the Six Months Ended June 30, 1998 F-8
Consolidated Statements of Cash Flows(Unaudited) for the Six
Months Ended June 30, 1998 and 1997 F-9
Notes to Consolidated Financial Statements (Unaudited) F-10
Independent Auditors' Report F-11
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-12
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 F-13
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 F-14
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 F-15
Notes to Consolidated Financial Statements F-16
The NetPlex Group, Inc.
Unaudited Pro Forma Condendsed Consolidated Balance Sheet
as of June 30, 1998 F-25
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Six Months Ended June 30, 1998 F-26
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended December 31, 1997 F-27
Notes to Unaudited Pro Forma Consolidated Financial Statements F-28
Condensed Consolidated Balance Sheets (Unaudited) as of
June 30, 1998 and December 31, 1997 F-29
Condensed Consolidated Statements of Operations (Unaudited)
for the Six Months Ended June 30, 1998 and 1997 F-30
Condensed Consolidated Statements of Cash Flows(Unaudited)
for the Six Months Ended June 30, 1998 F-31
Notes to Condensed Consolidated Financial Statements (Unaudited) F-32
Independent Auditors' Report F-38
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-39
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 F-40
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997 and 1996 F-41
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 199 6 F-42
Notes to Consolidated Financial Statements F-43
Unaudited Pro Forma Condendsed Consolidated Balance Sheet
as of March 31, 1998 F-61
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Three Months Ended March 31, 1998 F-62
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended December 31, 1997 F-63
Notes to Unaudited Pro Forma Consolidated Financial Statements F-64
Automated Business Sytems of North Carolina, Inc. and Combine Company
Combined Balance Sheets (unaudited) as of March 31, 1998
and December 31, 1997 F-65
Combined Statements of Operations and Retained Earnings (unaudited)
for the three months ended March 31, 1998 and the year
ended December 31, 1997 F-66
Combined Statements of Cash Flows (unaudited) for the three
months ended March 31, 1998 and the year ended December
31, 1997 F-67
Notes to the Combined Financial Statements (undaudited) F-68
</PAGE> F-1
APPLIED INTELLIGENCE GROUP, INC.
Unaudited Pro Forma Consolidated Financial Statements
The accompanying unaudited pro forma consolidated financial statements are
provided to illustrate the effect of the sale of the Consulting Division
of Applied Intelligence Group ("the Company"), Inc. to the Netplex
Group, Inc. on the historical financial statements of the Company,
as if this sale had occurred, for balance sheet purposes, on June 30, 1998
and, for statement of operations purposes on January 1, 1998 and
January 1, 1997. The pro forma consolidated statements of operations
are not necessarily indicative of operating results which would have
been achieved had the acquisition been consummated as of the beginning
of the period presented and should not be construed as representative
of future operations. For purposes of these pro forma consolidated statements,
the sale has been accounted for under the purchase method of accounting,
based on a preliminary estimate of the historical costs of the assets sold.
The pro forma adjustments described in the accompanying notes are based on
available information and certain assumptions that the Company believes
are reasonable. These pro forma financial statements should be read
in conjunction with the Company's Report on Form 10-KSB for the year
ended December 31, 1997 and Report on Form 10-QSB for the six months
ended June 30, 1998.
APPLIED INTELLIGENCE GROUP, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
-------------------- Pro Forma
June 30, 1998 Debits Credits June 30, 1998
------------- --------- ---------- -------------
ASSETS
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 176,338 $3,000,000 a $ 554,830 c $1,273,312
400,000 d
753,196 e
195,000 f
Accounts receivable-trade,net 1,723,342 202,067 b 1,521,275
Other receivables 47,413 47,413
Inventory 7,427 7,427 a -
Current portion of deferred
tax asset 44,502 44,502 a -
Prepaid expenses 122,829 4,100 g 118,729
---------- ---------- ---------- ----------
Total current assets 2,121,851 3,000,000 2,161,122 2,960,729
Furniture, equipment and
leasehold improvements, net 1,235,608 450,000 a 900,000 a 785,608
Software development costs, net 1,837,375 328,181 a 664,182 a 1,501,374
Deferred tax asset, net 996,488 996,488 a -
Other assets 64,599 1,000,000 a 16,826 g 1,047,773
Other assets ---------- ---------- ---------- ----------
Total assets $6,255,921 $4,778,181 $4,738,618 $6,295,484
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and
accrued liabilities $1,731,974 $ 72,000 c $1,259,974
400,000 d
Deferred revenue 254,567 202,067 b 52,500
Current portion of capital
lease obligation 98,194 98,194
----------- --------- ----------- ----------
Total current liabilities 2,084,735 674,067 1,410,668
---------- ---------- ---------- ----------
Capital lease obligations 6,419 6,419
Notes payable to shareholders 482,830 482,830 c -
Long-term debt 753,196 753,196 e -
Deferred tax liability - 189,203 a 189,203
Stockholders' Equity
Common stock 2,741 2,741
Paid-in capital 4,525,996 4,525,996
Retained earnings (deficit) (1,599,996) 195,000 f 2,165,582 a 160,457
20,926 g
189,203 a
----------- ---------- ---------- ----------
Total stockholders'equity 2,928,741 405,129 2,165,582 4,689,194
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity $6,255,921 $2,315,222 $2,354,785 $6,295,484
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
pro forma consolidated financial statements.
</PAGE> F-2
APPLIED INTELLIGENCE GROUP, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------- Pro Forma
June 30, 1998 Debits Credits June 30, 1998
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES
Products, Hardware,
Point of Sale Equipment $1,073,238 $1,073,238 h $ - $ -
Solutions, Software Licenses 288,269 288,269 h - -
Consulting Fees & System
Integration Services 3,812,076 3,716,799 h - 95,277
Customer Support Fees 318,009 318,009 h - -
Recurring Revenue 654,111 - - 654,111
Commissions on Hardware
sales direct by Vendor - - -
---------- ---------- ---------- ---------
Total Revenue 6,145,703 5,396,315 - 749,388
DIRECT COST OF REVENUE OF
PRODUCTS AND SOLUTIONS 981,114 - 981,114 i -
---------- ---------- ---------- ---------
5,164,589 5,396,315 981,114 749,388
---------- ---------- ---------- ---------
EXPENSES
Salaries and benefits 3,393,260 87,500 j 1,969 868 k 1,510,892
Selling, general and
administrative 1,146,251 - 441,731 l 704,520
Interest expense, net 100,654 - 100,654 o -
Depreciation and amortization 502,187 - 162,647 m 339,540
---------- ---------- ---------- ----------
Total Expenses 5,142,352 87,500 2,674,900 2,554,952
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES 22,237 5,483,815 3,656,014 (1,805,564)
PROVISION (BENEFIT) FOR
INCOME TAXES 8,450 - 8,450 n -
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 13,787 $5,483,815 $3,644,464 $(1,805,564)
========== ========== ========== ===========
Weighted average shares
outstanding - Basic 2,731,083 2,731,083
========== ==========
Net income (loss) per
common share - Basic $ 0.01 $ (0.66)
========== ==========
Weighted average common
shares outstanding
- Dilutive 2,789,518 2,731,083
========== ==========
Net income (loss) per
common share - Dilutive $ 0.01 $ (0.66)
=========== ==========
</TABLE>
The accompanying notes are an integral part of these
pro forma consolidated financial statements.
</PAGE>F-3
APPLIED INTELLIGENCE GROUP, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------- Pro Forma
December 31, December 31,
1997 Debits Credits 1997
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Products, Hardware,
Point of Sale Equipment $2,664,096 $2,664,096 h $ - $ -
Solutions, Software Licenses 131,800 131,800 h - -
Consulting Fees & System
Integration Services 4,576,233 4,100,597 h - 475,636
Customer Support Fees 472,326 472,326 h - -
Recurring Revenue 1,002,527 - - 1,002,527
Commissions on Hardware
sales direct by Vendor 175,860 175,860 h -
---------- ---------- ---------- ---------
Total Revenue 9,022,842 7,544,679 - 1,478,163
DIRECT COST OF REVENUE OF
PRODUCTS AND SOLUTIONS 2,211,956 - 2,211,956 i -
---------- ---------- ---------- ---------
6,810,886 7,544,679 2,211,956 1,478,163
---------- ---------- ---------- ---------
EXPENSES
Salaries and benefits 6,174,503 175,000 j 3,641,548 k 2,707,955
Selling, general and
administrative 2,708,351 - 1,152,421 l 1,555,930
Interest expense, net 73,581 - - 73,581
Depreciation and amortization 827,396 - 340,759 m 486,637
---------- ---------- ---------- ----------
Total Expenses 9,783,831 175,000 5,134,728 4,824,103
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES (2,972,945) 7,719,679 7,346,684 (3,345,940)
PROVISION (BENEFIT) FOR
INCOME TAXES (1,112,127) 1,112,127 74,070 n -
---------- ---------- ---------- ----------
NET INCOME (LOSS) $(1,860,818) $8,831,806 $7,420,754 $(3,345,940)
========== ========== ========== ===========
Weighted average shares
outstanding - Basic 2,727,438 2,727,438
========== ==========
Net loss per
common share - Basic $ (0.68) $ (1.23)
========== ==========
Weighted average common
shares outstanding
- Dilutive 2,727,439 2,727,438
========== ==========
Net loss per
common share - Dilutive $ (0.68) $ (1.23)
=========== ==========
</TABLE>
The accompanying notes are an integral part of these
pro forma consolidated financial statements.
</PAGE> F-4
APPLIED INTELLIGENCE GROUP, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1998 and December 31, 1997
(a) This adjustment records the sale of the assets associated with the
Consulting Division of the Company to Netplex for $3,000,000
in cash and 643,000 shares of Netplex Class B Preferred Stock
(valued at $1,000,000.
(b) This adjustment eliminates deferred revenue that will transfer
to Netplex upon closing.
(c) This adjustment records the payment of shareholder notes including
the related accrued interest. A portion of the proceeds of the sale
of the Consulting Division will be used for payment of these notes.
(d) This adjustment records the payment of past due accounts payable
that will be paid from the proceeds of the sale of the Consulting
Division.
(e) This adjustment records the payment of the Company's credit facility
with a commercial lender that will be paid with the proceeds of
the sale of the Consulting Division.
(f) This adjustment records finder's fees, legal, accounting and
other expenses of the transaction that will be paid from the
proceeds of the sale of the Consulting Division.
(g) This adjustment eliminates trademark, goodwill and prepaid as
a result of the sale Consulting Division of the Company.
(h) This adjustment eliminates the revenue directly related to the
Consulting Division of the Company acquired by Netplex.
(i) This adjustment eliminates the direct cost of revenue associated
with the product and solutions revenue of the Consulting Division.
(j) This adjustment accrues the estimated salary for the new CEO of
the Company.
(k) The adjustment eliminates the direct and indirect payroll,
taxes and benefits and contract labor associated with the
Consulting Division.
(l) This adjustment eliminates the direct and indirect selling, general
and administrative expenses associated with the Consulting Division
of the Company.
(m) This adjustment eliminates the depreciation and amortization of the
fixed assets and capitalized software development costs that were
acquired by Netplex in the purchase of the Consulting Division of
the Company.
(n) This adjustment records a valuation allowance against the tax
benefit of the net operating loss carryforward generated during
the period as it is more likely than not that some or all of the
net deferred tax asset will not be realized.
(o) This adjustment eliminates interest expense because the proceeds of
the sale will pay the Company's credit facility and shareholder notes.
</PAGE> F-5
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS June 30, December
1998 31, 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 176,338 $ 80,769
Accounts receivable-trade, net of allowance
for doubtful accounts of $3,713 at June 30,
1998 and $1,724 December 31, 1997 1,723,342 1,337,322
Other receivables 47,413 44,893
Inventory 7,427 8,707
Current portion of deferred tax asset 44,502 44,502
Prepaid expenses 122,829 51,634
---------- ----------
Total current assets 2,121,851 1,567,827
Furniture, equipment & leasehold improvements, net 1,235,608 1,462,575
Software development costs, net 1,837,375 1,735,420
Deferred tax asset 996,488 1,004,938
Other assets 64,599 33,393
---------- ----------
Total assets $6,255,921 $5,804,153
========== ==========
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Book overdraft $ - $ 23,619
Accounts payable and accrued liabilities 1,731,974 1,507,018
Deferred revenue 254,567 236,134
Current portion of capital lease obligation 98,194 132,422
---------- ----------
Total current liabilities 2,084,735 1,899,193
Capital lease obligations, net of current portion 6,419 44,194
Notes payable to shareholders 482,830 482,830
Long-term debt 753,196 490,000
---------- ----------
Total liabilities 3,327,180 2,916,217
Stockholders' equity:
Common stock, $.001 par value;
30,000,000 shares authorized; 2,740,990 and
2,729,509 shares issued and outstanding at
June 30, 1998 and December 31, 1997 2,741 2,730
Additional paid-in capital 4,525,995 4,498,988
Accumulated deficit (1,599,995) (1,613,782)
---------- ----------
Total stockholders' equity 2,928,741 2,887,936
---------- ----------
Total liabilities and stockholders' equity $6,255,921 $5,804,153
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
</PAGE> F-6
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revenues $6,145,703 $3,925,936
Expenses:
Direct cost of sales 981,114 691,045
Salaries and benefits 3,393,260 2,915,294
Selling, general and
administrative 1,146,251 1,253,881
Interest expense, net 100,654 30,102
Depreciation and amortization 502,187 395,732
---------- ----------
Total expenses 6,123,466 5,286,054
---------- ----------
Income (loss) before income taxes 22,237 (1,360,118)
Provision (benefit) for income taxes 8,450 (451,845)
---------- ----------
Net income (loss) $ 13,787 $(908,273)
========== ==========
Weighted average shares
outstanding-Basic 2,731,083 2,726,947
========== ==========
Net income (loss) per common share-Basic $ 0.01 $ (0.33)
========== ==========
Weighted average shares
outstanding-Dilutive 2,789,518 2,726,947
========== ==========
Net income (loss) per common share-Dilutive $ 0.01 $ (0.33)
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
</PAGE>F-7
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
--------- ------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 2,729,509 $ 2,730 $4,498,988 $(1,613,782)
Exercise of stock options 4,380 4 6,064 -
Stock issued under Employee
Stock Purchase Plan 2,068 2 5,220 -
Stock issued under Employee
Stock Bonus Plan 5,033 5 15,723 -
Net income - - - 13,787
--------- ------- ---------- -----------
Balance, June 30, 1998 2,740,990 $2,741 $4,525,995 $(1,599,995)
========= ======= ========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
</PAGE>F-8
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 13,787 $ (908,273)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 502,187 395,732
Deferred income tax provision (benefit) 8,450 (451,845)
Decrease (increase) in accounts receivable (386,020) 592,918
Decrease (increase) in other receivables (2,520) 58,445
Decrease in inventory 1,280 16,821
Increase in prepaid expenses (71,195) (79,366)
Increase in other assets (31,206) (47,321)
Increase in accounts payable and
accrued liabilities 224,956 66,639
Increase in deferred revenue 18,433 35,728
---------- -----------
Net cash provided by (used in)operating activities 278,152 (320,522)
Cash flows from investing activities:
Capital expenditures (30,679) (326,322)
Capitalized expenditures for software
development (346,496) (271,190)
---------- -----------
Net cash used in investing activities (377,175) (597,512)
Cash flows from financing activities:
Decrease in book overdraft (23,619) (255,617)
Proceeds from long-term debt 2,740,116 392,000
Proceeds from exercise of stock options,
stock bonus and stock purchase plans 27,018 1,581
Payments of capital lease obligations (72,003) (65,457)
Payments of shareholder loans - (20,000)
Payments on long-term debt (2,476,920) (125,000)
---------- -----------
Net cash provided by (used in)
financing activities 194,592 (72,493)
---------- -----------
Net increase (decrease) in cash 95,569 (990,527)
Cash and cash equivalents at beginning of
period 80,769 1,821,014
---------- -----------
Cash and cash equivalents at end of period $ 176,338 $ 830,487
========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
</PAGE>F-9
APPLIED INTELLIGENCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
NOTE 1. DESCRIPTION OF BUSINESS
Applied Intelligence Group, Inc. (the "Company") provides
business solutions through technology to the retail industry.
The Company's viaLink services combine Electronic Commerce and
leading edge Internet-based applications to provide consumer
product manufacturers, distributors, and retailers the capability
of doing business electronically with all of their trading
partners. The subscription-based viaLink service allows supply
chain participants to electronically send and receive product
cost and promotional information in a format that is compatible
with any party's system, regardless of their technological
sophistication and at a fraction of the cost of traditional EDI.
The Company also provides a diversified range of management
consulting and systems integration services to the retail supply
chain. Through the Company's wholly-owned subsidiary, ijob,
Inc., the Company provides a human resource recruiting
application accessible through either the Internet or by
telephone. The Company's clients and customers range from small,
rapidly growing companies to large corporations and are
geographically dispersed throughout the United States.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared by the Company in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring items) considered necessary for a
fair presentation have been included. These interim unaudited
consolidated financial statements should be read in conjunction
with the audited financial statements and related notes included
in the Company's Annual Report on Form 10-KSB as filed on March
31, 1998.
Operating results for the six month period ended June 30, 1998
are not necessarily indicative of the results that may be
expected for the full year ended December 31, 1998.
NOTE 3. RECONCILIATION FOR BASIC AND DILUTIVE EARNINGS PER SHARE ("EPS")
<TABLE>
<CAPTION>
For the Six Months Ended 6/30/98
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common
shareholders $13,787 2,731,083 $0.01
=====
Effect of Dilutive Securities - 58,435
------- ---------
Dilutive EPS
Income available to common
shareholders plus assumed
conversions $13,787 2,789,518 $0.01
======= ========= =====
</TABLE>
Options to purchase 462,500 shares of common stock at an average
exercise price of $4.75 per share were outstanding during the
first six months of 1998 but were not included in the computation
of diluted EPS because the options' exercise prices were greater
than the average market price of the common shares. The options,
which expire on November 30, 2001 and March 1, 2007 were still
outstanding at the end of the quarter ended June 30, 1998. In
addition, options to purchase 666,197 and 578,697 shares of
common stock at a weighted average price of $4.07 and $4.21 were
outstanding during the three month period ended June 30, 1998 and
during the three month and six month periods ended June 30, 1997,
respectively, but were not included in the computation of diluted
EPS because the effect of these outstanding options would be
antidilutive. These options expire June 12, 1999 through March
1, 2007.
</PAGE>F-10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Applied Intelligence Group, Inc.
We have audited the accompanying consolidated balance sheets
of Applied Intelligence Group, Inc. as of December 31, 1997
and 1996 and the related statements of operations,
stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Applied Intelligence Group, Inc. as of December
31, 1997 and 1996 and the results of its operations and its
cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
L.L.P.
Oklahoma City, Oklahoma
March 23, 1998
</PAGE>F-11
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION
ASSETS 1997 1996
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 80,769 $1,821,014
Accounts receivable - trade, net of
allowance for doubtful accounts of
$1,724 in 1997 and $5,631 in 1996 1,337,322 2,009,837
Other receivables 44,893 314,874
Inventory 8,707 28,159
Current portion of deferred tax asset 44,502 -
Prepaid expenses 51,634 76,264
---------- ----------
Total current assets 1,567,827 4,250,148
Furniture, equipment and leasehold
improvements, net 1,462,575 1,632,147
Software development costs, net 1,735,420 1,308,099
Deferred tax asset, net 1,004,938 -
Other assets 33,393 117,141
---------- ----------
Total assets $5,804,153 $7,307,535
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Book overdraft $ 23,619 $ 284,760
Accounts payable and accrued
liabilities 1,507,018 1,078,506
Deferred revenue 236,134 332,449
Current portion of notes payable
to shareholders - 107,375
Current portion of capital lease
obligations 132,422 135,151
---------- ----------
Total current liabilities 1,899,193 1,938,241
Capital lease obligations, net
of current portion 44,194 176,618
Long-term debt 490,000 -
Notes payable to shareholders, net
of current portion 482,830 389,000
Deferred income taxes - 62,687
---------- ---------
Total liabilities 2,916,217 2,566,546
Commitments and contingencies (Notes 7 and 10)
Stockholders' equity:
Common stock, $.001 par value;
30,000,000 shares authorized;
2,729,509 and 2,726,500 shares
issued and outstanding at
December 31, 1997 and 1996, respectively 2,730 2,727
Additional paid-in capital 4,498,988 4,491,226
Retained earnings (deficit) (1,613,782) 247,036
---------- ---------
Total stockholders' equity 2,887,936 4,740,989
---------- ---------
Total liabilities and
stockholders' equity $5,804,153 $7,307,535
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
</PAGE> F-12
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 9,022,842 $ 9,507,370 $11,590,224
Expenses:
Direct cost of sales 2,211,956 2,570,840 3,616,687
Salaries and benefits 6,174,503 5,167,571 5,673,034
Selling, general and
administrative 2,708,351 2,007,999 1,588,655
Interest expense, net 73,581 219,089 149,042
Depreciation and
amortization 827,396 591,205 511,494
----------- ----------- -----------
Total expenses 11,995,787 10,556,704 11,538,912
----------- ----------- -----------
Income (loss) before
income taxes (2,972,945) (1,049,334) 51,312
Provision (benefit) for
income taxes (1,112,127) (366,925) 42,754
---------- ---------- ----------
Net income (loss) $(1,860,818) $ (682,409) $ 8,558
=========== =========== ==========
Basic and diluted earnings:
Net income (loss) per
common share $ (.68) $ (.37) $ .005
=========== =========== ==========
Weighted average common
shares outstanding 2,727,438 1,838,522 1,755,628
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
</PAGE> F-13
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings
--------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Balance,
December 31, 1994 1,500,000 $1,500 $ 66,484 $ 920,887
Net income - - - 8,558
--------- ------ ---------- ---------
Balance,
December 31, 1995 1,500,000 1,500 66,484 929,445
Vantage Capital
Resources, Inc
Merger., 610,000 610 394,317 -
Stock redemptions (383,500) (383) (40,742) -
Initial public
offering 1,000,000 1,000 4,071,167 -
Net loss - - - (682,409)
---------- ------ ---------- --------
Balance,
December 31, 1996 2,726,500 2,727 4,491,226 247,036
Exercise of stock
options 444 - 279 -
Stock issued under
Employee Stock
Purchase Plan 2,565 3 7,483 -
Net loss - - - (1,860,818)
--------- ------ ---------- ----------
Balance (Deficit),
December 31, 1997 2,729,509 $2,730 $4,498,988 $(1,613,782)
========= ====== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
</PAGE> F-14
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1997
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,860,818) $( 682,409) $ 8,558
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 827,396 591,205 511,494
Deferred income tax provision
(benefit) (1,112,127) (241,730) 158,237
Loss on disposal of fixed assets - 5,720 35
Decrease (increase) in accounts
receivable 672,515 363,680 (602,282)
Decrease (increase) in other
receivables 269,981 (95,995) (143,580)
Decrease (increase) in inventory 19,452 (5,767) 1,484
Decrease (increase) in prepaid
expenses 24,630 19,974 (75,473)
Decrease (increase) in other assets 83,748 (68,698) 119,747
Increase (decrease) in accounts
payable and accrued liabilities 428,512 (184,601) 308,505
Increase (decrease) in deferred
revenue (96,315) 207,986 67,143
---------- ----------- -----------
Net cash provided by (used in)
operating activities (743,026) (90,635) 353,868
---------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (332,987) (625,893) (376,541)
Capitalized expenditures for
software development (752,158) (655,248) (650,158)
---------- ----------- -----------
Net cash used in investing activities (1,085,145) (1,281,141) (1,026,699)
---------- ----------- -----------
Cash flows from financing activities:
Increase (decrease) in book
overdraft (261,141) 115,294 169,466
Payments of wholesale financing plan - - (1,020,126)
Proceeds from long-term debt 1,270,000 5,609,000 2,435,000
Proceeds from shareholder notes 6,455 39,375 76,000
Proceeds from exercise of stock
options 279 - -
Proceeds from employee stock
purchase plan 7,486 - -
Proceeds from sale of stock - 4,425,969 -
Payments of capital lease
obligations (135,153) (111,347) (24,610)
Payment of shareholder note (20,000) - -
Payments on long-term debt (780,000) (6,904,000) (1,140,000)
---------- ----------- -----------
Net cash provided by financing
activities 87,926 3,174,291 495,730
---------- ----------- -----------
Net increase (decrease) in cash (1,740,245) 1,802,515 (177,101)
Cash and cash equivalents at
beginning of period 1,821,014 18,499 195,600
---------- ----------- -----------
Cash and cash equivalents at
end of period $ 80,769 $ 1,821,014 $ 18,499
========== =========== ===========
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 123,778 $ 251,967 $ 138,575
========== =========== ===========
Cash paid for income taxes,
net of cash received for
income taxes $ 114,852 $ (10,000) $ 127,871
========== =========== ==========
Supplemental disclosures of noncash
investing and financing activities:
Capital lease obligation incurred $ - $ 205,938 $ 241,788
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
</PAGE> F-15
APPLIED INTELLIGENCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General Description of Business. Applied Intelligence
Group, Inc. ("the Company") provides a diversified range of
management consulting and computer system integration
services, along with providing network services and network
based computer applications. All services are focused
primarily on the retail and wholesale distribution
industries. Through the Company's wholly-owned subsidiary, ijob, Inc.,
the Company also provides a comprehensive automated human
resource recruiting, testing, and screening process
utilizing the technologies of the Internet and interactive
voice response.
The Company's clients and customers range from small,
rapidly growing companies to large corporations and are
geographically dispersed throughout the United States.
Principles of Consolidation. The consolidated financial
statements include the accounts of the Company and its
wholly-owned subsidiary, ijob, Inc., which was formed June
30, 1997. All material intercompany balances and
transactions have been eliminated.
Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles
requires the use of management's estimates and assumptions
in determining the carrying values of certain assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts for certain revenues and expenses during
the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents. For purposes of the statement
of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less at the
time of purchase to be cash equivalents.
Risks from Concentrations. Financial instruments which
potentially subject the Company to concentrations of credit
risk consist principally of temporary cash investments and
accounts receivable. The Company places its temporary cash
investments with high credit quality financial institutions.
Concentrations of credit risk with respect to accounts
receivable are limited due to the size of customers and
their dispersion across different regions. The Company does
not believe a material risk of loss exists with respect to
its financial position due to concentrations of credit risk.
The Company's revenues are in part dependent on large
license fees and systems integration contracts from a limited
number of customers. In 1997 and 1996, three customers
individually accounted for 20, 13, and 10 percent and 17,
14, and 10 percent of the Company's total revenues,
respectively. In 1997 and 1996, approximately 57 percent of
the Company's total revenues were attributable to five
clients. It is anticipated that the Company's revenue
derived from current and future large clients will continue
to represent a significant portion of its total revenues.
The loss of, or reduced demand for products or related
services from, any of the Company's major clients could have
a material adverse effect on the Company's business and
results of operations.
Furniture, equipment and leasehold improvements.
Furniture, equipment and leasehold improvements are stated
at cost. Expenditures for repairs and maintenance are
charged to expense as incurred. Upon disposition, the cost
and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is reflected in
operations for the period. The Company depreciates
furniture and equipment using the straight-line method over
their estimated useful lives ranging from 5 to 10 years.
Leasehold improvements are amortized over the lease term
using the straight-line method.
</PAGE> F-16
Revenue Recognition. The Company recognizes revenues as
the services are provided. Revenues collected in advance
are deferred and recognized as earned. Revenues for fixed-
price contracts are recognized using the percentage of
completion method. Accounts receivable include unbilled
amounts of $193,355 and $534,756 at December 31, 1997 and
1996, respectively.
Direct Cost of Sales. Direct Cost of sales represents the
cost of hardware and certain point-of-sale software acquired
for resale, including royalty payments required for sale of
the Company's proprietary software products.
Earnings per Share. The Company presents basic and diluted
earnings per share ("EPS") as required under Statement of
Accounting Standard No. 128, "Earnings Per Share," ("SFAS
128"), which was adopted in fiscal year 1997. Securities
that could potentially dilute basic EPS in the future that
were not included in the computation of diluted EPS because
to do so would have been antidilutive include common stock
options and warrants outstanding at December 31, 1997 and
1996 of 583,078 and 435,208, respectively.
Income Taxes. The Company accounts for income taxes under
the liability method. Accordingly, deferred taxes are
determined based on the difference between the financial
statement and tax bases of assets and liabilities using the
enacted tax rate in effect in the years in which the
differences are expected to reverse. Deferred tax expense
represents the change in the net deferred tax liability
balance.
Costs of Product Development. The Company incurred costs
and expenses of approximately $1,875,000, $1,204,000, and
$1,060,000 for product development in 1997, 1996, and 1995,
respectively. A substantial portion of these costs relates
to development of a network subscription service that the
Company made available to subscribers in January of 1997.
Certain of these costs are capitalized as Software
Development Costs (See Note 4).
Recently Issued Accounting Pronouncements. In June 1997,
the Financial Accounting Standards Board issued a Statement
of Financial Standards No. 130, "Reporting Comprehensive
Income", the objective of which is to report and disclose a
measure of all changes in equity of a company that result
from transactions and other economic events of the period
other than transactions with owners. The impact of adopting
SFAS 130, which is effective for the Company in 1998, is not
considered to be material.
In June 1997, the Financial Accounting Standards Board
issued a Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related
Information", which establishes standards for reporting
information about operating segments in annual and interim
financial statements issued to the shareholders. This
Statement also establishes standards for related disclosures
about products and services, geographic areas, and major
customers. The Company plans to adopt this Statement in
1998.
Reclassifications. Certain reclassifications of prior year
balances have been made to conform to the current year
presentation.
</PAGE> F-17
2. WHOLESALE FINANCING PLAN:
During 1995, the Company had a wholesale financing agreement
and Flexible Payment Plan with IBM Credit Corporation
("IBMCC"). The credit agreement generally called for a
credit line of $1,500,000, with the borrowing base or
advance rate calculated at 75% of accounts receivable and
100% of IBM inventory items. The credit agreement was
collateralized by the accounts receivable, inventories and
fixed assets of the Company.
The balance due under this plan of $1,209,186 was
extinguished on July 25, 1995 and the financing agreement
was canceled.
3. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture, equipment and leasehold improvements at December
31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Furniture and fixtures $ 482,818 $ 461,203
Computer equipment 2,029,864 1,788,312
Computer software 657,498 595,730
Leasehold improvements 55,779 47,727
----------- ----------
3,225,959 2,892,972
Less: accumulated depreciation
and amortization (1,763,384) (1,260,825)
----------- ----------
Furniture, equipment and leasehold
improvements, net $ 1,462,575 $ 1,632,147
=========== ===========
</TABLE>
Included in furniture and fixtures in 1997 and 1996 was
$125,886 of assets under a capital lease. Included in
computer equipment in 1997 and 1996 was $321,840 of assets
under capital leases. The accumulated depreciation for all
assets under capital leases at December 31, 1997 and 1996
was $195,177 and $105,636, respectively.
4. SOFTWARE DEVELOPMENT COSTS:
The Company capitalizes certain costs, including interest,
that are directly related to the development of software.
In accordance with Statement of Financial Accounting
Standards No. 86, capitalization of costs begins when
technological feasibility has been established and ends when
the product is available for customers. Capitalized software
development costs are amortized using the straight-line
method over the estimated useful life of five years.
Amortization of capitalized software costs for December 31,
1997, 1996, and 1995 was $324,837, $176,756 and $193,246,
respectively. Accumulated amortization at December 31, 1997
and 1996 was $841,826 and $516,989, respectively.
The Company continually assesses whether the unamortized
capitalized cost of software development is impaired. This
assessment is based on the future cashflows expected to be
generated by the related product. If an impairment is
determined, the amount of such impairment is calculated
based on the estimated net realizable value of the related
asset. During 1996, the Company wrote-off $294,000 of fully
amortized capitalized software development costs. No write
offs were made in 1997.
Total interest costs for the year ended December 31, 1997,
1996, and 1995 were $116,183, $291,089 and $171,106,
respectively, of which $54,423 and $22,064, were capitalized
in 1996 and 1995, respectively. No interest was capitalized
in 1997.
</PAGE> F-18
5. LONG-TERM DEBT:
On July 19, 1995, the Company entered into a revolving
credit agreement (the "Agreement") with a bank whereby the
Company could borrow, under two separate notes, up to the
lesser of $3,000,000 or the borrowing base as defined in the
agreement. Pursuant to the terms of the revolving credit
agreement, upon successful completion of the Company's
initial public offering, the working capital note of
$800,000 was paid in full on November 27, 1996, and in
October, 1997, and December 1997, the terms of the remaining
note were renegotiated to a credit line of $500,000.
Interest on the note was prime plus 0.5% at December 31,
1997, which was 9%.
During the first quarter of 1998, the Company completed a
new credit facility with a commercial lender that replaced
the revolving credit agreement with the bank. Under the new
credit facility the Company may borrow up to $1,000,000;
however, amounts borrowed are limited to 75% of the
Company's accounts receivables as defined by the new
facility. The facility is collateralized by accounts
receivable and all tangible assets of the Company and is
guaranteed by three principal officers of the Company. The
promissory note under this agreement is due July 15, 1999.
As of December 31, 1997, the Company had borrowed $490,000
under the former facility with the bank, and as of March 23,
1998 had borrowed $569,030 under the new facility with the
commercial lender, which was partially used to pay off the
bank facility. The amounts borrowed at December 31, 1997
are classified as long-term in conjunction with the terms of
the new facility. The interest rate on the new facility is
prime plus 3%. In addition, during the first quarter of
1998 the Company obtained a credit facility including a
large sale financing option with IBM Credit Corp., whereby
the Company may finance directly with IBM Credit Corp. large
sales of hardware or software. As of March 23, 1998 no
borrowings had been made under this facility.
6. NOTES PAYABLE TO SHAREHOLDERS:
Notes payable to shareholders, who are also executive
officers of the Company, at December 31, 1997 and 1996,
consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
8.50% notes payable to shareholders, due
at maturity on March 8, 1999 $ 60,000 $ 60,000
11.50% note payable to shareholder, due
at maturity on April 5, 1999 55,000 -
11.50% note payable to shareholder, due
at maturity on April 21, 1999 77,000 -
8.50% notes payable to shareholders, due
at maturity on January 3, 2000 20,000 40,000
10.00% note payable to shareholder, due
at maturity on July 28, 200 30,800 28,000
10.00% note payable to shareholder, due
at maturity on November 15, 2000 39,375 39,375
10.00% note payable to shareholder, due
at maturity on January 5, 1998 - 55,000
8.50% note payable to shareholder, due
at maturity on April 1, 2001 46,655 43,000
10.00% notes payable to shareholders,due
at maturity on December 21, 2001 154,000 231,000
-------- --------
482,830 496,375
Less current portion - 107,375
-------- --------
$482,830 $389,000
========= ========
</TABLE>
Interest expense for 1997 and 1996 related to the notes
payable to shareholders was $46,473 and $44,375,
respectively.
Combined aggregate maturities of long-term debt and notes
payable to shareholders are as follows at December 31, 1997:
<TABLE>
<S> <C>
1998 $ -
1999 682,000
2000 90,175
2001 200,655
--------
$972,830
========
</TABLE>
</PAGE> F-19
7. STOCKHOLDERS' EQUITY:
On April 30, 1996, the Company amended its Certificate of
Incorporation to eliminate its previously authorized and
designated classes of Voting Common Stock and Non-Voting
Common Stock, to authorize a single class of Common Stock
with 30,000,000 shares authorized, par value $.001 per
share, and to authorize 10,000,000 shares of Preferred
Stock, $.001 par value per share. Furthermore, the Company
made a stock dividend distribution to its existing
shareholders to cause the number of shares of the Company's
Common Stock outstanding to increase from 541,000 to
1,500,000. All stockholders' equity amounts have been
restated to reflect this stock dividend.
On June 12, 1996, the Company merged with Vantage Capital
Resources, Inc. ("VCRI"). The merger was accounted for as
an acquisition of VCRI by the Company in a manner similar to
the pooling of interests method of accounting. To
consummate the merger, the Company exchanged 610,000 shares
of its Common Stock for all of the outstanding common shares
of VCRI. VCRI has no operations and, at the time of the
merger, had total assets of $541,151 and total liabilities
of $103,291.
On October 14, 1996, the Company redeemed 1,000 shares of
common stock issued to a former executive officer in
consummation of the merger of VCRI with the Company, for
$1.75 per share for an aggregate amount of $1,750. On
October 15, 1996, the Company redeemed 22,500 shares of
common stock that was also issued to an executive office and
director in consummation of the merger of VCRI with the
Company, for $1.75 per share for an aggregate amount of
$39,375. In redemption of the shares, the Company issued a
promissory note in the principal amount of $39,375, bearing
interest at the rate of 10 percent per annum (payable at
maturity), with a maturity date of November 15, 1997. This
note has been extended to November 15, 2000
Pursuant to an Exchange Agreement dated October 15, 1996,
two former executive officers and directors exchanged
360,000 shares of common stock, which were issued in
consummation of the merger of VCRI with the Company for
stock options, exercisable on November 20, 1998, to purchase
360,000 shares of common stock for $5.00 per share on or
before November 30, 2001. The Company has agreed that if it
files a registration statement or an amendment to a
registration statement under the Securities Act of 1933 with
the United State Securities and Exchange Commission, the
holders of the stock options have the right through December
31, 2001, to include in such registration statement the
stock options and or the common stock or other securities
issuable upon exercise of the stock options at no expense to
the holders of the stock options. In addition, the
executive officers and directors resigned as executive
officers and directors of the Company, and their employment
agreements were terminated effective June 12, 1996, without
any payment of or continuing right to receive compensation
under such employment agreement.
The Company's initial public offering was consummated on
November 20, 1996, pursuant to which the Company sold a
total of 1,000,000 common shares at an offering price to the
public of $5 per share, and 920,000 redeemable common stock
purchase warrants, including the underwriter's over-
allotment option, at $.125 per share. Each warrant entitles
the holder to purchase one share of common stock at $5.00
per share (subject to adjustment) during the three-year
period commencing November 20, 1996. The warrants are
redeemable by the Company, for $.125 per warrant, on not
less than 30 nor more than 60 days' written notice if the
average closing price per share of common stock is at least
$7.00 per share during a period of 30 consecutive trading
days ending not earlier than 20 days before the date the
warrants are called for redemption and provided that there
is then a current effective registration statement under the
Securities Act of 1933, as amended, with respect to the
issuance and sale of the common stock upon exercise of the
warrants. The net proceeds from the initial public offering
to the Company were approximately $4,071,000, after
deducting expenses of $428,162 and underwriting discounts.
The Company established the Applied Intelligence Group, Inc.
Employee Stock Purchase Plan (the "Employee Stock Purchase
Plan" or "Plan") in April 1997, which was approved by the
shareholders at the Annual Meeting of Shareholders on June
3, 1997. The Employee Stock Purchase Plan provides the
opportunity for employees to purchase the Company's Stock
through payroll deductions, to encourage participation in
the ownership and economic progress of the Company. Plan
participants may contribute up to $20 per pay period into
their account to purchase whole shares of the Common Stock
of the Company at pre-determined calendar quarter grant
dates or exercise dates. The price will be 85 percent of the
per share fair market value on the granting date or the
exercise date, whichever is the lesser, of the purchase
period. The number of shares of Common Stock authorized and
reserved for issuance under the Plan is 100,000 shares. As
of December 31, 1997, 2,565 shares of Common Stock have been
purchased by Employees of the Company, and are included in
the total outstanding shares as of December 31, 1997.
</PAGE> F-20
8. STOCK OPTION PLAN:
In 1995, the Company created the 1995 Stock Option Plan (the
"Plan"). The Plan provides for incentive stock options and
non-incentive stock options to key management, directors,
key professional employees or key professional non-employee
service providers of the Company. In April 1996, the Company
amended the Plan to authorize and reserve up to 300,000
shares of Common Stock for issuance of options under the
Plan.
The Plan permits the issuance of qualified and nonqualified
stock options. The Company issued 360,000 options not
pursuant to the Plan (see Note 7), which become exercisable
after 2 years and expire after 5 years from the original
grant date. The exercise price for all options granted to
date was based on the fair market value on the date of the
grant.
Activity pertaining to the options is as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at January 1, 1995 - $ -
Granted 45,513 0.63
Exercised - -
Canceled - -
------
Outstanding at December 31, 1995 45,513 0.63
Granted 396,238 4.69
Exercised - -
Canceled (6,543) 0.80
-------
Outstanding at December 31, 1996 435,208 4.32
Granted 167,500 3.76
Exercised (444) 0.63
Canceled (19,186) 3.31
-------
Outstanding at December 31, 1997 583,078 $4.19
=======
</TABLE>
<TABLE>
<CAPTION>
Outstanding Options
------------------------------------------------
Weighted Average Weighted
Number of Remaining Average
Exercise Price Shares Contractual Life Exercise Price
-------------- --------- ----------------- ---------------
<S> <C> <C> <C>
$0.63 - $1.80 70,578 8 years $1.02
$3.50 - $5.00 512,500 7 years $4.63
</TABLE>
The Company applies APB Opinion 25 in accounting for its
stock options issued pursuant to the Plan. Accordingly,
based on the nature of the Company's grants of options, no
compensation cost has been recognized in 1997, 1996 and 1995. Had
compensation been determined on the basis of fair value
pursuant to FASB Statement No. 123, net income (loss) and
net income (loss) per share would not have been materially
impacted.
</PAGE> F-21
On February 9, 1998, the Board of Directors of the Company
adopted the 1998 Non-Qualified Stock Option Plan (the "Non-
Qualified Stock Plan" or "Plan"), to attract, retain and
motivate directors, executive officers, key employees and
independent contractors of the Company and its subsidiaries
by way of granting non-qualified stock options with stock
appreciation rights attached. The Non-Qualified Stock Plan
authorizes and reserves up to 300,000 shares of Common Stock
for issuance and options under the Plan. The option price
shall not be less than 85 percent of the fair market value
of the Common Stock on the date of grant. All options
pursuant to the Plan expire after ten years from the date of
grant. The Board of Directors has the discretion to fix the
period and the time at which any options granted under the
Plan may be exercised.
As of March 23, 1998, the Company has issued 87,500 stock
options to two outside Directors and one independent
contractor, with exercise dates from December 31, 1998
through December 31, 2000, at an exercise price of $3.125
per share, as long as the individuals continue to serve the
Company.
On February 10, 1998, the Board of Directors of the Company
adopted the 1998 Stock Grant Plan (the "Stock Grant Plan" or
"Plan") to attract, retain and motivate consultants,
independent contractors and key employees of the Company and
its subsidiaries by way of granting shares of stock in the
Company.
The Stock Grant Plan authorizes and reserves up to 150,000
shares of Common Stock of the Company for issuance under the
Plan. Shares of Common Stock received pursuant to the Stock
Grant Plan restrict the sale, transfer or other disposal of
said shares for a period of one year. As of March 23, 1998,
no shares of Common Stock had been issued under the Stock
Grant Plan.
</PAGE> F-22
9. INCOME TAXES:
The components of the provision (benefit) for income taxes
for the years ended December 31, 1997, 1996 and 1995 are as
follows:
<TABLE>
1997 1996 1995
------------ --------- ---------
<S> <C> <C> <C>
Current $ - $(125,195) $(115,483)
Deferred (1,112,127) (241,730) 158,237
----------- --------- ---------
Provision (benefit) for
income taxes $(1,112,127) $(366,925) $ 42,754
=========== ========= ==========
</TABLE>
The difference in federal income taxes at the statutory rate
and the provision for income taxes for the years ended
December 31, 1997, 1996, and 1995 are as follows:
<TABLE>
1997 1996 1995
----------- --------- -------
<S> <C> <C> <C>
Income tax expense (benefit)
at federal statutory rate $(1,010,801) $(356,773) $17,446
State income taxes (118,918) (41,973) 2,052
Nondeductible expenses 9,320 6,071 15,960
Revision of prior year estimate - 14,273 -
Other 8,272 11,477 7,296
----------- --------- -------
Provision (benefit) for
income taxes $(1,112,127) $(366,925) $42,754
=========== ========= =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the
following:
<TABLE>
December 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 655 $ 2,140
Compensated absences 43,847 40,977
Tax carryforwards 24,969 22,929
Net operating loss carryforward 1,730,999 452,613
---------- ---------
1,800,470 518,659
Deferred tax liabilities:
Intangible assets (659,460) (497,078)
Depreciation and amortization
(91,570) (84,268)
---------- ---------
Net deferred tax asset (liability) $1,049,440 $ (62,687)
========== =========
</TABLE>
Management believes realization of the cumulative net
deferred tax asset at December 31, 1997 is more likely than
not based upon expected future taxable income and therefore
a valuation allowance has not been provided.
At December 31, 1997, the Company had net operating loss
("NOL") carryforwards for Federal and State purposes of
approximately $4,500,000 and $4,900,000, respectively, and
other carryforwards of approximately $66,000. The Federal
and State NOL carryforwards expire as follows: $1,100,000
and $1,500,000, respectively, in 2011 and $3,400,000 for
both in 2012.
</PAGE> F-23
10. LEASES:
The Company leases its office and storage space under
operating leases. The terms range from month-to-month up to
ten years and include options to renew. The Company also
leases office equipment under various noncancelable lease
agreements. Total rental expense in 1997, 1996 and 1995 for
all leases was $455,369, $333,225 and $210,962,
respectively.
Future minimum lease payments under noncancelable leases at
December 31, 1997 follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ----------
<S> <C> <C>
1998 $146,130 $ 456,656
1999 46,020 441,386
2000 - 402,158
2001 - 332,211
2002 - 330,000
Thereafter - 1,026,000
-------- ---------
Future minimum lease payments 192,150 $2,988,411
==========
Less amount representing interest 15,534
--------
Present value of minimum lease payments $176,616
========
11. RETIREMENT PLAN:
The Company has a profit sharing plan ("the Plan") for
certain eligible employees who have attained the age of 18
and completed one year of service. Under the Plan, employer
contributions are made at management's discretion.
Participants may contribute up to 6% of earnings as eligible
contributions and up to 15% of earnings in total for any
Plan year. The Company's discretionary matching percentage
is equal to each participant's share of total eligible
contributions for a year. The Company made no contributions
in 1997, 1996, and 1995.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying values of financial instruments included in
long-term debt approximate their fair values due to the
nature and terms of the instruments involved.
13. MANAGEMENT'S PLANS FOR IMPROVED OPERATIONS
The Company operated in 1997 without the services of its Vice President
of Sales and Marketing who left the Company in late 1996. In January,
1998, Mr. Larry R. Davenport joined the Company as Vice President
of Sales and Marketing. With his extensive experience, the Company
expects to improve its sales effort in 1998. In addition, the Company
has entered into negotiaions with a large retail software company,
whereby the Company will serves as the preferred supplier of hardware
to their customers and may obtain consulting engagements to install
their software. Substantial hardware sales and consulting revenues
are expected from such arrangement in 1998. In addition, in
the first quarter of 1998 the Company obtained a $1,000,0000 credit
facility to replace its existing bank facility. Further, in
support of the potential hardware sales discussed above, the
Company obtained a large sale financing facility of $1,000,000
with IBM Credit Corp., whereby the Company may finance directly with
IBM Credit Corp. large sales of hardware and software. There can be
no assurance that increased revenues and a return to profitability
will results from the above events.
</PAGE> F-24
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of June 30, 1998
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
As Reported
Netplex Proforma
June 30, 1998 Adjustments June 30, 1998
------------- ------------- -------------
ASSETS
<S> <C> <C> <C>
Current assets;
Cash and cash equivalents $2,084,428 $(3,000,000) A $3,084,428
4,000,000 B
Accounts receivable, net 7,889,632 202,067 A 8,091,699
Prepaid expenses 410,003 11,527 A 421,530
---------- ----------- ----------
Total current assets 10,384,063 1,213,594 11,597,657
Property & equipment, net 994,697 450,000 A 1,444,697
Employee notes receivable 213,792 - 213,792
Acquired software
development costs - 336,001 A 336,001
Fulfilment database, net 863,571 - 863,571
Acquired software, net 379,269 - 379,269
Goodwill, net 1,058,428 3,185,646 A 4,244,074
Other assets 241,322 16,826 A 258,148
----------- ----------- -----------
Total assets $14,135,142 $ 5,202,067 $19,337,209
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,975,517 $ - $1,975,517
Line of credit 1,894,742 2,000,000 B 3,894,742
Accrued expenses and other 6,064,771 202,067 A 6,266,838
----------- ---------- ----------
Total current liabilities 9,935,030 2,202,067 12,137,097
---------- ---------- ----------
Other liabilities 266,630 - 266,630
---------- ---------- ----------
Total liabilities 10,201,660 2,202,067 12,403,727
Stockholders' Equity
Class A preferred stock 11,029 - 11,029
Class B preferred stock - 1,000,000 A 1,000,000
Common stock 9,618 381 B 9,999
Additional paid in capital 9,661,512 1,999,619 B 11,661,131
Accumulated deficit (5,748,677) - (5,748,677)
----------- ---------- ----------
Total stockholders'equity 3,933,482 3,000,000 6,933,482
---------- ---------- ----------
Total liabilities and
stockholders' equity $14,135,142 $5,202,067 $19,337,209
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
</PAGE>F-25
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENESED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION> Pro Forma
Netplex and
ABS AIG Pro Forma
June 30, 1998 Acquisition June 30, 1998
------------ ------------- -------------
<S> <C> <C> <C>
Revenues $30,141,642 $5,396,318 C $35,537,960
Cost of revenues 24,853,533 2,256,146 C 27,109,679
----------- ----------- -----------
Gross profit 5,288,109 3,140,172 8,428,281
----------- ----------- -----------
Selling, general and
administrative expenses 5,952,847 1,199,041 C 7,258,076
106,188 D
---------- ----------- ----------
Operating income (loss) (664,738) 1,834,943 C 1,170,205
Interest expenses, net 80,479 95,000 D 175,479
---------- ----------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (745,217) 1,739,943 994,726
PROVISION FOR INCOME TAXES - - -
---------- ----------- ----------
NET INCOME (LOSS) $ (745,217) $1,739,943 $ 994,726
========== =========== ===========
Weighted average shares
outstanding, Basic & Diluted 8,223,292 8,604,244
========== ==========
Basic and diluted loss per
common share $ (0.10) $ 0.10
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
</PAGE>F-26
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENESED CONSOLIDATED STATEMENT OF OPERATIONS
For Year Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION> Pro Forma
Netplex and
ABS AIG Pro Forma
December 31, 1997 Acquisition December 31, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Revenues $44,613,931 $7,544,678 C $52,158,609
Cost of revenues 38,463,654 5,074,646 C 43,538,300
----------- ----------- -----------
Gross profit 6,150,277 2,470,032 8,620,309
----------- ----------- -----------
Selling, general and
administrative expenses 9,077,948 2,331,070 C 11,621,395
212,376 D
---------- ----------- ----------
Operating income (loss) (2,927,671) (73,414) (3,001,086)
Interest expenses, net 26,337 190,000 D 216,337
---------- ----------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (2,954,008) (263,414) (3,217,423)
PROVISION FOR INCOME TAXES - - -
---------- ----------- ----------
NET INCOME (LOSS) $(2,954,008) $ (263,414) $(3,217,423)
=========== =========== ===========
Weighted average shares
outstanding, Basic & Diluted 7,270,863 7,651,815
========== ==========
Basic and diluted loss per
common share $ (0.44) $ (0.46)
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
</PAGE>F-27
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1998 and December 31, 1997
A Debit Credit
---------- -----------
Accounts receivable 202,067
Property and equipment 450,000
Prepaid and other current assets 11,527
Software development costs 336,001
Other assets 16,826
Goodwill 3,185,646
Accrued expenses-deferred revenue 202,067
Cash 3,000,000
Class B preferred stock 1,000,000
---------- ----------
4,202,067 4,202,067
========== ==========
Record purchase of AIG at preliminary estimate of fair values of
assets and liabilities acquired.
B Debit Credit
--------- ----------
Cash 4,000,000
Line of credit-with Bank 2,000,000
Common stock 381
Additional paid in capital 1,999,619
---------- ----------
4,000,000 4,000,000
========== ==========
Record expected financing of acquisition of Applied Intelligence Group.
C Year Six Months
--------------------- --------------------
Cost of Revenues 5,074,646 2,256,146
Selling, G & A expense 1,990,311 1,036,394
Selling, G&A expense,
Depre & Amort 340,759 162,647
Interest - 1,941,131
Revenue (7,544,678) - 5,396,318
Net assets (balance
sheet entry not
recorded) 138,962
----------- --------- --------- ---------
7,544,678 (7,544,678) 5,396,318 (5,396,318)
========== ========= ========= =========
Record Applied Intelligence Group estimated profit and loss for the
year ended 12/31/97 and the six months ended 6/30/98.
D Year Six Months
--------------------- --------------------
Interest expense (at 9.5%) 190,000 95,000
Goodwill amortization 106,188
expense 212,376
Accrued expenses (190,000) (95,000)
Accumulated amortization-Goodwill (212,376) (106,188)
Record interest expense on financing and amortization of estimated
goodwill over fifteen years on a straight-line basis.
</PAGE>F-28
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,084,428 $ 353,005
Accounts receivable, net 7,889,632 4,133,148
Prepaids and other current assets 410,003 432,842
------------ -----------
Total current assets 10,384,063 4,918,995
Property and equipment, net 994,697 952,546
Employee notes receivable 213,792 193,464
Other assets 241,322 82,738
Fulfillment database, net 863,571 -
Acquired software, net 379,267 418,225
Goodwill, net 1,058,428 346,529
------------ -----------
Total assets $ 14,135,140 $ 6,912,497
============ ===========
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Accounts payable $ 1,975,515 $ 567,805
Line of credit 1,894,742 1,316,300
Accrued expenses and other 6,164,771 3,588,594
------------ -----------
Total current liabilities 10,035,028 5,472,699
Other liabilities 166,630 109,096
------------ -----------
Total liabilities 10,201,658 5,581,795
Stockholders' equity:
Class A cumulative preferred stock;
$.01 par value; 2,000,000 authorized,
outstanding 1,102,983 shares in 1998
and 1,062,500 shares in 1997
(liquidation preference of the greater of
[i]two times the stated value of $2
per share plus all accrued and unpaid
dividends, or [ii] the amount that would have
been received if such shares were
converted to Common Stock on the business day
immediately prior to the liquidation) 11,029 10,625
Common stock $.001 par value
20,000,000 authorized, outstanding
9,618,825 share in 1998
7,470,370 shares in 1997 9,618 7,470
Additional paid in capital 9,661,508 6,272,407
Accumulated deficit (5,748,673) (4,959,800)
Commitments and contingencies
----------- -----------
Total stockholders' equity 3,933,482 1,330,702
Total liabilities and stockholders'
equity $ 14,135,140 $ 6,912,497
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE> F-29
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues $27,677,446 $19,708,901
Cost of revenues 23,133,659 17,810,553
----------- ----------
Gross profit 4,543,787 1,898,348
Selling, general and administrative
expenses 5,252,181 3,444,953
---------- ----------
Operating loss (708,394) (1,546,605)
---------- ----------
Other income (expense)
Interest income (expenss), net (80,479) 39,405
--------- ---------
Loss before income taxes (788,873) (1,507,200)
Income tax provision (benefit) - -
---------- -----------
Net loss $ (788,873) $(1,507,200)
========== ===========
Basic and dilutive (loss) per
common share $ (0.11) $ (0.26)
========== ===========
Weighted average common shares
outstanding, basic and diluted 8,472,566 6,517,750
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE> F-30
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- ------------
<S> <C> <C>
Operating activities:
Net cash flow used in operating activities $ (701,814) $ (2,218,362)
---------- ------------
Investing activities:
Purchases of property and equipment (182,223) (54,632)
Cash paid in acquisition, net of cash acquired (146,670) -
Proceeds from the exercise of stock options - 69,934
---------- ------------
Net cash flow from investing activities (328,893) 15,302
Financing activities:
Net proceeds from stock offerings 3,069,125 -
Borrowings under line of credit (271,199) -
Principal payments on capital lease olibations (35,796) (15,086)
Dividends paid on Class A preferred stock - (180,695)
----------- ----------
Net cash flow from financing activities 2,762,130 (195,781)
----------- ----------
Increase (decrease) in cash and cash equivalents 1,731,423 (2,398,841)
Cash and equivalents at beginning of period 353,005 3,691,099
----------- -----------
Cash and equivalents at end of period $ 2,084,428 $ 1,292,258
============ ===========
Supplemental information:
Cash paid (received) during the period for:
Interest $ 86,182 $ 4,612
============ ===========
Income taxes $ - $ -
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE> F-31
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Unaudited)
(1) General
-------
The accompanying unaudited condensed consolidated
financial statements of The Netplex Group, Inc. and
Subsidiaries ("Netplex" or the "Company") have been prepared
in accordance with generally accepted accounting principles
for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
certain information and note disclosures normally included in
the financial statements presented in accordance with
generally accepted accounting principles have been condensed
or omitted. The Company believes the disclosures made are
adequate to make the information presented consistent with
past practices. However, these condensed consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included
in the Company's annual report on Form 10-KSB for the fiscal
year ended December 31, 1997.
In the opinion of the Company, the accompanying condensed
consolidated financial statements reflect all adjustments and
reclassifications (which include only normal recurring
adjustments) necessary to present fairly the financial
position of the Company as of June 30, 1998 and December 31,
1997, the results of its operations for the three months and
six months ended June 30, 1998 and its cash flows for the six
months ended June 30, 1998 and 1997. Interim results are not
necessarily indicative of the results that may be expected for
the fiscal year ended December 31, 1998.
Business
--------
Based in McLean, Virginia with twelve offices throughout the U.S.,
The Netplex Group, Inc. together with its wholly owned
subsidiaries, is an Information Technology (IT) Services and
Solutions company providing the people, technologies, and
processes that build, manage, and protect business information
systems. Through the strategic teaming of business consulting
practice areas, operating units, and wholly owned
subsidiaries, Netplex believes that it is positioned to
deliver: IT Solutions - Design and implementation of systems
solutions to address IT related business needs; IT Staffing -
Staff augmentation and flexible task outsourcing; and IT
Contractor Resources - Business services for the independent
IT Consultant.
Basis of Presentation
---------------------
The accompanying financial statements include the accounts of
Netplex Systems, Inc. (formerly The Netplex Group, Inc.)
America's Work Exchange, Inc., its wholly owned subsidiary
Software Resources of New Jersey, Inc, now known as
Contractors Resources ("CR"), Onion Peel Solutions, L.L.C.
("Onion Peel"), and PSS Group, Inc. ("PSS") for the three
months ended June 30, 1998. The financial statements exclude
the accounts of Onion Peel and PSS for the three and six
months ended June 30, 1997 because the effective dates of
their acquisitions, which were accounted for using the
purchase method of accounting, were subsequent to June 30,
1997. Only the balance sheet of Automated Business Systems
("ABS") acquired in June 1998 is included in the financial
statements. The Company's statement of operations for the
three and six months ended June 30, 1998 does not include the
results of operations of ABS from June 18, 1998 (acquisition
date) to June 30, 1998, as such amounts are not material.
</PAGE> F-32
All significant intercompany transactions were eliminated in
consolidation.
Earnings (loss) per share
-------------------------
Basic net loss per share is calculated using the weighted
average number of common shares outstanding during the
periods. Diluted net loss per common share is calculated
using the weighted average number of common shares and
dilutive potential common shares outstanding during the
periods. For the three month and six month periods ended June
30, 1998 and 1997, the assumed exercise of the Company's
outstanding stock options and warrants and Convertible
Preferred Stock has not been included in the calculation as
the effect would be anti-dilutive.
A reconciliation of the numerators and denominators of the
basic and diluted EPS for the three months and the six months
ended June 30, 1998 and 1997, is provided below:
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ----------- ---------
Three months ended June 30, 1998
Net Loss $ (373,616)
Preferred stock dividend 55,149
-----------
Basic and diluted EPS
Loss to common shareholders $ (428,765) 9,172,542 $ (0.05)
========== =======
Three months ended June 30, 1997
Net Loss $ (741,349)
Preferred stock dividend 82,500
----------
Basic and diluted EPS
Loss to common shareholders $ (823,849) 6,577,870 $ (0.13)
========== =======
Six months ended June 30, 1998
Net Loss $ (788,873)
Preferred stock dividend 111,612
----------
Basic and diluted EPS
Loss to common shareholders $ (900,485) 8,472,566 $ (0.11)
========== =======
Six months ended June 30, 1997
Net Loss $(1,507,200)
Preferred stock dividend 165,500
-----------
Basic and diluted EPS
Loss to common shareholders $(1,672,700) 6,517,750 $ (0.26)
=========== =======
</PAGE> F-33
(2) Acquisitions
------------
Onion Peel Solutions L.L.C.
---------------------------
The Company acquired Onion Peel Solutions L.L.C., a Raleigh,
NC based provider of network management solutions as of July
1, 1997, by issuing 80,000 shares of its Common Stock to the
members of Onion Peel, subject to the issuance of additional
shares based on the closing price of the Company's Common
Stock on December 31, 1998. The acquisition was accounted for
using the purchase method of accounting, whereby the $400,000
purchase price was allocated to the fair value of the assets
acquired and the liabilities assumed.
PSS Group, Inc.
---------------
On January 30, 1998, the Company completed the purchase of all
of the stock of The PSS Group, Inc. ("PSS"), the technical
professional staff augmentation operations and business of
Preferred Systems Solutions, Inc. ("Preferred") and formerly a
wholly owned subsidiary of Preferred. In consideration for
the purchase, the Company paid $300,000 at closing and on or
before January 15, 1999 will pay $300,000 in cash or 200,000
shares of its Common Stock or any combination thereof, at
Preferred's option. The agreement also provides that Preferred
will receive additional consideration (the "Earn-out") if PSS
meets certain operating targets. Such Earn-out may be paid at
the Company's option in cash or its Common Stock based on
future stock prices, or any combination thereof. In connection
with the acquisition, the Company and PSS have entered into
employment agreements with certain employees of PSS. The
acquisition was recorded effective January 1, 1998 using the
purchase method of accounting.
The purchase price of the PSS acquisition was determined to be
$600,000 (subject to adjustment for contingent consideration)
and was preliminarily allocated to the fair value of the
assets and liabilities acquired, as follows:
Cash $ 148,000
Accounts receivable 800,000
Fulfillment database 930,000
Other assets 122,000
Less liabilities assumed (1,400,000)
------------
Net assets acquired $ 600,000
============
The Company is amortizing the fulfillment database (resume
database) over 7 years using the straight-line method.
</PAGE> F-34
Automated Business Systems
---------------
On June 18 1998, the Company completed the purchase of all of
the stock of Automated Business Solutions and Kellar
Technology Group, Inc. (Collectively "ABS"). In consideration
for the purchase, the Company paid $200,000 and issued 450,000
shares of its Common Stock. The agreement also provides that
the former shareholders of ABS will receive additional
consideration (the "Earn-out") if ABS meets certain operating
targets. In connection with the acquisition, the Company has
entered into employment agreements with certain employees of
ABS. The acquisition was recorded effective June 30, 1998
using the purchase method of accounting. The results of
operations for the period from June 18, 1998 to June 30, 1998
are not material and the future results of operations of ABS
will be included beginning effective July 1, 1998.
The purchase price of the ABS acquisition was determined to be
$791,000 (subject to adjustment for contingent consideration)
and was preliminarily allocated to the fair value of the
assets and liabilities acquired, as follows:
Cash $ 205,000
Accounts receivable 756,000
Property and equipment 51,000
Other assets 33,000
Goodwill 673,000
Less liabilities assumed (927,000)
------------
Net assets acquired $ 791,000
============
The Company is amortizing the goodwill resulting from the
acquisition over a estimated useful life of 15 years using the
straight-line method.
The following unaudited supplemental financial information
presents the consolidated results of the Company from
continuing operations, on a proforma basis, and the resulting
increase in common shares outstanding, as though the
acquisitions of Onion Peel, PSS and ABS were consummated on
January 1, 1997.
Unaudited
--------------------------------------------
(amounts in thousands, except per share data)
--------------------------------------------
Three Months Six Months
------------------ ----------------
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
Revenue $16,070 $11,559 $30,142 $22,826
======= ======= ======= =======
Net loss (345) (920) (728) (1,769)
======= ======= ======= =======
Weighted Average Shares
Outstanding 9,623 7,108 8,923 7,048
======== ====== ====== ======
Loss per share $(0.04) $(0.14) $(0.09) $(0.27)
======== ======= ====== ======
</PAGE> F-35
(3) Equity Financings
-----------------
Between January 1, 1998 and June 30, 1998, the Company has
raised additional equity totaling $3,069,000 as follows:
In February 1998 the Company raised $100,000 through the sale
of 80,000 shares of non-registered Common Stock plus a warrant
to purchase an additional 100,000 shares of common stock at
$1.20.
In March 1998 the Company raised $1,457,000 of financing in a
Private Placement raised primarily from accredited investors
and employees of the Company. The Company issued shares of non-
registered Common Stock to purchasers who have agreed not to
sell or otherwise distribute their shares for a period of one
year. These restricted shares carry registration rights and
were offered at $1.00 per share. The funds will be used to
finance operations and additional acquisitions.
On April 7, 1998 Netplex completed the sale of 1,500 units of
a Private Placement, totaling $1.5 million ($1.3 million after
fees and expenses). The sale represents the first half of a
transaction that could include the sale of an additional 1,500
units for $1.5 million at a future date, subject to the
satisfaction of certain conditions. Each unit sold in the
private placement consisted of a prepaid Common Stock purchase
warrant entitling the holder to acquire such number of shares
of the Company's Common Stock as is equal to $1,000 divided by
an adjustable exercise price and an additional incentive
warrant to acquire 52 shares of Common Stock (or an aggregate
of 78,000 shares of Common Stock). The Company also granted
the placement agent a warrant to purchase 39,000 shares of
Common Stock plus a placement fee and a non-accountable
expense allowance equal to 12.53% of the proceeds of the
offering. The second half of the transaction would be for the
sale of an additional and committed 1,500 units, for $1,000
per unit.
In April 1998 the Company raised $198,000 of financing in two
Private Placements raised from accredited investors. The
Company issued shares of non-registered Common Stock to
purchasers who have agreed not to sell or otherwise distribute
their shares for a period of one year. These restricted
shares carry registration rights and were offered at $1.375 to
$1.50 per share. The funds will be used to finance operations
and additional acquisitions.
The above equity financings enabled the Company to exceed
NASDAQ's published net tangible asset requirement of $2
million and continue its listing on the NASDAQ SmallCap Stock
market.
</PAGE> F-36
(4) New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS' SFAS No.
131 Segment Information. This standard is effective for
reporting periods beginning January 1, 1998. SFAS No. 131
amends the requirements for public enterprises to report
financial and descriptive information about its reportable
operating segments. Operating segments, as defined in SFAS
No. 131, are components of an enterprise for which separate
financial information is available and is evaluated regularly
by the Company in deciding how to allocate resources and in
assessing performance. The financial information is required
to be reported on the basis that it is used internally for
evaluating the segment performance. The Company believes it
operates in three segments as defined: IT Solutions, IT
Staffing, and IT Contractors Resources. The Company believes
that the implementation of this pronouncement will affect
financial statement presentation.
</PAGE> F-37
Independent Auditors' Report
Board of Directors and Stockholders
The Netplex Group, Inc. :
We have audited the accompanying consolidated balance sheets
of The Netplex Group, Inc. and subsidiaries (the "Company")
as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity
and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of The Netplex Group, Inc. and
subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for the
years then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat
Marwick LLP
McLean, Virginia
April 10, 1998
</PAGE>F-38
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 353,005 $3,691,099
Accounts receivable, net of allowance
for doubtful accounts of $133,000
and $177,000, respectively 4,133,148 4,304,662
Notes receivable 200,000 -
Prepaids and current assets 232,842 350,074
---------- ----------
Total current assets 4,918,995 8,345,835
Property and equipment, net 952,546 1,090,617
Other assets 82,738 78,988
Employee notes receivable 193,464 -
Acquired software, net 418,225 -
Goodwill, net 346,529 373,180
---------- ----------
Total assets $6,912,497 $9,888,620
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 567,805 $ 936,865
Line of credit 1,316,300 -
Accrued expenses 3,383,024 5,166,184
Deferred revenue 109,497 329,267
Obligation under capital lease, current portion 96,073 106,347
---------- ----------
Total current liabilities 5,472,699 $6,538,663
Obligation under capital lease, net of
current portion 109,096 110,669
---------- ----------
Total liabilities 5,581,795 6,649,322
---------- ---------
Stockholder's equity:
Class A Cumulative Convertible
Preferred Stock; $.01 par value;
liquidation preference of the greater of (i)
two times the stated value of $2 per share
plus all accrued and unpaid
dividends, or (ii) the amount that
would have been received if such
shares were converted to Common
Stock on the business day
immediately prior to the
liquidation; 2,000,000 shares
authorized, 1,062,500 and 1,750,000
shares outstanding in 1997 and 1996,
respectively 10,625 17,500
Common stock, $.001 par value; 20,000,000
authorized, 7,470,370 and 6,442,903 shares
outstanding in 1997 and 1996, respectively 7,470 6,443
Additional paid in capital 6,272,407 5,301,542
Accumulated deficit (4,959,800) (2,086,197)
----------- ----------
Commitments and contingencies
Total stockholders' equity 1,330,702 3,239,288
----------- ----------
Total liabilities and stockholders'equity $ 6,912,497 $9,888,620
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>F-39
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenue $ 40,468,134 $ 33,524,679
Cost of revenue 35,415,644 30,878,166
------------ -----------
Gross profit 5,052,490 2,646,513
Selling, general and administrative expense 7,899,756 5,205,906
------------ -----------
Operating loss (2,847,266) (2,559,393)
Other income/(expenses)
Interest income/(expensee), net (26,337) 33,119
Other income - 4,808
----------- ----------
(26,337) 37,927
Loss from continuing operations
before income taxes (2,873,603) (2,521,466)
Income tax (benefit) provision - (34,000)
----------- ----------
Loss from continuing operations (2,873,603) (2,487,466)
Discontinued operations
Loss from operations of discountined
business - (1,332,050)
Net gain from disposal - 1,820,129
----------- ----------
Income from discontinued operations - 488,079
Net loss $(2,873,603) $(1,999,387)
=========== ===========
Basic and diluted earnings (loss) per common share
Continuing operations $ (0.46) $ (0.51)
Discontinued operations - 0.09
----------- -----------
Total $ (0.46) $ (0.42)
=========== ===========
Weighted average common shares
outstanding, basic and diluted 6,820,863 5,026,306
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>F-40
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Class A
Cumulative
Convertible
Preferred
Stock Common Stock Additional
-------------- ---------------- paid in Accumulated
Shares $ Shares $ capital deficit Total
--------- ------ --------- ------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 - - 3,197,608 31,976 579,124 (86,810) 524,290
Net loss - - - - - (1,999,387) (1,999,387)
Reduction in par value
resulting from the
merger of the Company
with Netplex from $0.01
per share to $0.001 per
share - - - (28,778) 28,778 - -
Issuance of common shares in
the merger of the Company
with Netplex - - 3,245,295 3,245 1,767,488 - 1,770,733
Private placement of Class A
Cumulative, Convertible - 3,041,846
Stock 1,750,000 17,500 - - 3,024,346 (98,194)
Preferred stock dividends - - - - (98,194) -
--------- ------ --------- ------ --------- ---------- ----------
Balance at December 31, 1996 1,750,000 17,500 6,442,903 6,443 5,301,542 (2,086,197) 3,239,288
Net loss - - - - - (2,873,603) (2,873,603)
Conversions of preferred
stock to common stock (687,500) (6,875) 687,500 687 6,188 - -
Exercise of common stock
warrants - - 225,000 225 537,275 - 537,500
Preferred stock dividends - - - - (82,500) - (82,500)
Issuance of common stock
options - - - - 40,000 - 40,000
Issuance of common stock
in connections
with Onion Peel Solutions,
LLC acquisition - - 80,000 80 399,920 - 400,000
Exercise of common stock - - 34,967 35 69,982 - 70,017
option
--------- ------ --------- ------ --------- ---------- ----------
Balance at December 31, 1997 1,062,500 $10,625 7,470,370 7,470 6,272,407 (4,959,800) 1,330,702
========= ====== ========= ====== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>F-41
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(2,873,603) $(1,999,387)
Adjustments to reconcile net
loss to net cash used in
operating activities
Depreciation and amortization 464,213 587,902
Expense on options granted 40,000 -
Gain on sale of Worldlink
product technology - (1,820,129)
Deferred income taxes - (34,000)
Change in assets and liabilities,
net of effects of acquisition:
Accounts receivable 301,321 (789,955)
Prepaid expenses and other
current assets 117,712 (117,496)
Other assets - (9,404)
Accounts payable and accrued
expenses (2,159,896) 1,190,669
Deferred revenue (219,770) (131,643)
---------- ----------
Net cash used in operating
activities (4,330,023) (3,123,443)
---------- ----------
Investing activities
Capital expenditures (105,438) (631,983)
Net proceeds from the sale of - 2,492,795
WorldLink product technology 2,149 1,245,062
Cash acquired in business acquistion ---------- ----------
Net cash provided by/(used in) (103,289) 3,105,874
investing activities
Financing activities
Proceeds from the exercise of stock
options and warrants 607,517 -
Note receivable (200,000) -
Employee notes receivable (193,464) -
Payment of dividends on Class A
preferred stock (180,694) -
Principal payments on capital
lease obligations (99,945) (14,019)
Line of credit advances 1,316,300 650,000
Line of credit repayments (95,000) (650,000)
Repayments of other notes payable (59,496) (159,870)
Proceeds from private placement - 3,041,846
---------- ----------
Net cash provided by financing
activities 1,095,218 2,867,957
---------- ----------
Increase (decrease) in cash and (3,338,094) 2,850,388
cash equivalents
Cash and Cash equivalents at beginning
of period 3,691,099 840,711
---------- ----------
Cash and cash equivalents at end of
period 353,005 3,691,099
=========== ==========
Supplemental information
Cash paid during the period for:
Interest 61,366 24,247
============ ==========
Income taxes - 12,985
============ ==========
Capital lease obligation 88,098 241,561
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>F-42
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) The Business and Basis of Presentation
The Business
------------
The Netplex Group, Inc. ("the Company") was incorporated in
1986 to provide IT services and solutions. Netplex is an
Information Technology (IT) company that provides the
expertise and information systems to link employees,
customers, prospects, suppliers and manufacturers to help
"network-enable" organizations. The Company re-sells
technology products when necessary to deliver to customers
fully integrated system solutions. The Company also provides
certain business services to independent consultants who
become the Company's employees.
Basis of presentation
---------------------
Merger with Netplex
-------------------
On June 7, 1996, the Company (formerly known as "CompLink,
Ltd." or "CompLink") acquired and merged with America's Work
Exchange and The Netplex Group, Inc. (collectively referred to
as "Netplex") in a reverse merger transaction by issuing
approximately 3,245,000 shares of Common Stock, or 50.4 % of
the Company's outstanding stock after giving effect for the
merger. The merger agreement also provided for the Company to
assume 1,691,000 outstanding Common Stock options of Netplex.
The merger has been accounted for under the purchase method of
accounting as a reverse merger, since the shareholders of
Netplex, which have common control, received the larger of the
voting rights of the combined entity. As a result, Netplex is
considered the acquirer for accounting purposes.
The merger resulted in a re-capitalization of the acquirers,
so that the resulting capitalization of the Company after the
merger is that of CompLink's giving effect to the issuance of
new shares and elimination of CompLink's accumulated deficit.
In addition, the par value of the Company's Common Stock was
decreased from $0.01 per share to $0.001 per share in
connection with the merger. The assets and liabilities of
CompLink were recorded by the Company at book value which
approximates fair value.
The statement of operations for the year ended December 31,
1996 reflect those of Netplex for the year and those of
CompLink and its wholly-owned subsidiary, Technology
Development Systems ("TDS"), commencing on June 1, 1996. The
merger has been accounted for assuming that it occurred on May
31, 1996. The operating results of CompLink and TDS from June
1, 1996 up to June 7, 1996 (the merger date) have been
included in the Company's 1996 consolidated statement of
operations, as such amounts are not material.
Coincident with the merger the Company's name was changed from
CompLink, Ltd. to The Netplex Group, Inc. and the entity known
as The Netplex Group, Inc. prior to the merger changed its
name to Netplex Systems, Inc. The Company's fiscal year end
was changed from July 31 to December 31. Upon completion of
the merger, the Company consisted of Netplex Systems, Inc.;
America's Work Exchange ("AWE") and its wholly- owned
subsidiary, Software Resources of New Jersey , now known as
Contractors Resources ("CR"), and The Netplex Group, Inc.
(formerly known as CompLink Ltd.) and its wholly-owned
subsidiary, TDS.
</PAGE> F-43
Acquisition of Onion Peel Solutions L.L.C.
------------------------------------------
On July 1, 1997, the Company acquired all of the outstanding
membership interests of Onion Peel Solutions L.L.C. ("Onion
Peel"), a Raleigh, NC based provider of network management
solutions, in exchange for 80,000 shares of its Common Stock,
subject to the issuance of additional shares based on the
closing price of the Company's Common Stock on December 31,
1998. The acquisition was accounted for using the purchase
method of accounting, whereby the $400,000 purchase price was
allocated to the fair value of the assets acquired and the
liabilities assumed.
The operating results of Onion Peel have been included in the
Company's consolidated results from July 1, 1997. The
acquired intangible asset recorded on the consolidated balance
sheet represents the fair value of Onion Peel's software
license rights. This intangible asset is being amortized on a
straight - line basis over four years. Amortization of the
software license rights was $46,470 in 1997.
The following unaudited supplemental financial information
presents the consolidated results of the Company from
continuing operations, on a pro forma basis, as though the
merger with CompLink and the acquisition of Onion Peel were
consummated on January 1, 1996 and reflect the historical
results of operations of the purchased business adjusted for
goodwill amortization and increased common shares outstanding
from the merger. The pro forma results do not include the
operations of the discontinued business.
Unaudited
Year Ended December 31
1997 1996
---------- -----------
(in thousands except per share data)
Revenues $ 40,804 $ 34,666
=========== ===========
Net loss from continuing
operations $ (3,173) $ (2,865)
========== ==========
Net loss per share from
continuing operations $ (0.46) $ (0.44)
========== ==========
Weighted average common
shares outstanding 6,861 6,523
========== =========
The pro forma results of operations are not necessarily
indicative of the actual results of operations that would have
occurred had the purchase been made at the beginning of the
period, or the results which may occur in the future.
</PAGE> F-44
(2) Summary of Significant Accounting Policies
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of The Netplex Group, Inc. and its wholly owned
subsidiaries, Netplex Systems, Inc., America's Work Exchange,
Software Resources of New Jersey, now known as Contractors
Resources ("CR"), Technology Development Systems, and Onion
Peel Solutions, L.L.C. All significant intercompany
transactions have been eliminated during consolidation.
Revenue Recognition
-------------------
The majority of the Company's revenue is from consulting
services contracts. This revenue is recognized when the
services are performed and the costs are incurred. The
Company generally recognizes hardware and software product
revenue when the products are delivered to the customer site.
Fixed price contract revenue is recognized on the percentage
of completion basis based on costs incurred to estimated costs
to complete. Revenue for maintenance contracts is recognized
ratably over the service period of the underlying contract.
Deferred revenue represents the unearned portion of
maintenance contracts and amounts billed in advance of
customer acceptance, in accordance with the terms of the
contract. The Company records loss provisions if required for
its contracts at the time that such losses are identified.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with
maturity, at date of purchase, of three months or less to be
cash equivalents. Cash equivalents are comprised of money
market accounts.
Property and Equipment
----------------------
Property and equipment is recorded at cost. Depreciation and
amortization are provided for using the straight-line method
over the estimated useful lives of the assets which range from
3 to 7 years.
Property and equipment under capital leases are stated at the
present value of the minimum lease payments and are amortized
using the shorter of the lease term or the estimated useful
life.
Upon sale or retirement of property and equipment, the costs
and related accumulated depreciation are eliminated from the
accounts and any gain or loss on such disposition is reflected
in the statement of operations. Expenditures for repairs and
maintenance are charged to operations as incurred.
Depreciation and amortization expense related to property and
equipment was $391,091 and $318,865 for the years ended
December 31, 1997 and 1996.
Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
------------------------------------------------------------
The Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of ", on January 1, 1996.
This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount
or fair value less cost to sell. Adoption of this Statement
did not have a material impact on the Company's financial
position, results of operations, or liquidity.
</PAGE> F-45
Excess Costs Over Net Assets Acquired
-------------------------------------
Excess costs over net assets acquired (goodwill) resulting
from AWE's acquisition of CR is being amortized on a straight-
line basis over a recovery period of 15 years. The Company
assesses the potential impairment and recovery of goodwill on
an annual basis and more frequently if factors dictate.
Management forecasts are used to evaluate the recovery of
goodwill through determining whether amortization of the
goodwill can be recovered through the undiscounted operating
cash flow (cash flow excluding goodwill amortization, non-
recurring charges and interest expense). If an impairment of
goodwill appears to have occurred, impairment is measured
based on projected discounted operating cash flow (excluding
goodwill amortization, non recurring charges and interest
expense) using a discount rate reflecting the Company's cost
of funds. The assessment of the recoverability of goodwill
will be impacted if estimated future operating cash flows are
not achieved. The Company may assess the net carrying amount
of goodwill using internal and or independent valuations.
Accumulated amortization of goodwill related to the purchase
of CR at December 31, 1997 was $53,308 and at December 31,
1996 was $26,656.
Income Taxes
------------
Income taxes are accounted for under the asset and liability
method under Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" ("SFAS 109"). Under this
method, deferred tax assets and liabilities are recognized for
the future tax consequences of differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured by applying enacted statutory tax
rates, that are applicable to the future years in which the
deferred tax assets or liabilities are expected to be settled
or realized. Any change in tax rates on deferred tax assets
and liabilities is recognized in net income in the period in
which the rate change is enacted.
Earnings (loss) per share
-------------------------
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS 128"), which requires
companies to present basic earnings per share and diluted
earnings per share (EPS), instead of the primary and fully
diluted EPS that had previously been required. The Company
adopted SFAS 128 in the fourth quarter of 1997. The impact to
prior years' amounts was immaterial. Basic net loss per
common share is calculated using the weighted average number
of common shares outstanding during the periods. Diluted net
loss per common share is calculated using the weighted average
number of common shares and dilutive potential common shares
outstanding during the periods. For the years ended December
31, 1997 and 1996, the assumed exercise of the company's
outstanding stock options and warrants and Convertible
Preferred Stock has not been included in the calculation as
the effect would be anti-dilutive.
</PAGE> F-46
A reconciliation of the numerators and denominators of the
basic and diluted EPS for the years ended December 31, 1997
and 1996, is provided below:
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------ --------
1997
Net Loss $ (2,873,603) - $ -
Preferred stock dividend 275,628 - -
Basic and diluted EPS
Income available to --------- --------- -----
common shareholders $ (3,149,228) 6,820,863 $ (0.46)
============ ========= ======
1996
Net Loss $ (1,999,387) - $ -
Preferred stock dividend 98,194 - -
------------ --------- ------
Basic and diluted EPS
Income available to
common shareholders $ (2,097,581) 5,026,306 $ (0.42)
============ ========= ======
</PAGE> F-47
Stock Options
-------------
Prior to January 1, 1996, the Company accounted for its 1992
Incentive Stock Option plan ("ISO Plan") and the 1995
Directors' Stock Option plan (the "Director' Plan") in
accordance with the provisions of Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. Pursuant to APB 25
compensation expense is recorded on the date of grant only to
the extent the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which
permits entities to recognize, as expense over the vesting
period, the fair value of all stock-based awards on the grant
date. Alternatively, SFAS No.123 also allows entities to
continue to apply the provisions of APB 25 and provide pro
forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and in future
years as if the fair-value-based method defined in SFAS 123
had been applied. The Company has elected to continue to
apply the provisions of APB Opinion 25 and provide the pro
forma disclosure provisions of SFAS 123 for the ISO and
Directors' Plans.
The Company's 1995 Consultant's plan (the " Consultant's
Plan") allows for the granting of options to both
organizations and individuals who are not employees of the
Company. The Company accounts for the options granted to non-
employees based on the provisions of SFAS 123.
Use of Estimates
----------------
The preparation of consolidated financial statements in
accordance with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date
of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
(3) Liquidity
Based on its current operating plan, the Company believes that
the net proceeds from the Private Placement together with cash
anticipated to be provided by operating activities and amounts
expected to be available under a renegotiated line of credit
will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures for at least the next
12 months. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's liquidity requirements,
the Company may seek to sell additional equity or convertible
debt securities or obtain additional credit facilities.
However, no assurance can be given that any such additional
sources of financing will be available on acceptable terms or
at all. The sale of additional equity or convertible debt
securities could result in additional dilution to the
Company's stockholders. A portion of the Company's cash may
be used for acquisitions or to acquire or invest in
complimentary businesses or products or to obtain the right to
use complementary technologies. The Company has no current
plans, agreements or commitments, and is not currently engaged
in any negotiations with respect to any such transaction.
The Company is expecting to incur operating losses until it
achieves full productivity of the majority of its sales force.
While it cannot be certain as to when such levels of
productivity can be attained, the Company anticipates that its
sales force will operate at levels below full productivity
through at least the first quarter of 1998. The Company will
continue to make significant investments in its technical
workforce, marketing, training and infrastructure to increase
productivity, build its core competency practice unit skill
base and product offerings and foster growth of its
operations. Despite the expectation of continued operating
losses, management believes that its current cash balance and
credit facility will be sufficient to meet operating
requirements for at least the next twelve months.
</PAGE> F-48
(4) Discontinuance of Business
In December 1996, the Company made the decision to discontinue
its software development and distribution business, through
the sale of TDS's interest in its WorldLink product technology
("WorldLink"). WorldLink represented the primary asset
offering of the Company's software development and
distribution business. The operations of the software
development and distribution business have been treated as
discontinued operations in accordance with the provisions of
Accounting Principles Board Opinion No. 30 (APB 30). Pursuant
to APB 30, the revenue, costs and expenses have been excluded
from their respective captions in the Company's consolidated
statements of operations and the net results have been
reported separately as income from discontinued operations.
On December 31, 1996, the Company completed the sale of its
interest in WorldLink to Xcellenet, Inc. for an aggregate sale
price of $2.5 million, net of expenses paid of approximately
$500,000 related to the sale. During 1996,the remaining net
assets of TDS were written down to their net realizable values
and consisted primarily of accounts receivable and furniture
and equipment, which the Company is using in its continuing
operations.
(5) Property and Equipment
Property and equipment consists of the following:
December 31,
-------------------
1997 1996
Computer software $ 493,935 $ 464,318
Computer and office equipment 628,537 460,422
Furniture and fixtures 188,563 212,561
Equipment under capital leases 335,197 247,100
Leasehold Improvements 38,520 46,934
-------- ---------
1,684,752 1,431,335
Accumulated depreciation
and amortization (732,206) (340,718)
---------- ----------
Property and equipment, net $ 952,546 $1,090,617
========== ==========
Computer software at December 31, 1997, includes $407,338 of
software that was developed for internal usage. Such software
was placed in service in January 1997 and is being amortized
over a 4-year useful life. Amortization expense related to
this software was $67,890 for 1997. Accumulated depreciation
and amortization includes $119,925 related to assets under
capital leases at December 31, 1997 and $29,125 at December
31, 1996.
</PAGE> F-49
(6) Accrued Expenses
----------------
Accrued expenses consists of the following:
December 31,
----------------------
1997 1996
---------- -----------
Payroll and employee benefits $2,954,522 $ 3,592,795
Other 428,502 402,067
Cost of discontinued business - 704,890
Merger costs - 466,432
---------- ----------
$3,383,024 $ 5,166,184
========== ===========
(7) Notes Payable to Bank
On July 2, 1997, the Company entered into a bank line of
credit facility agreement that expires on June 30, 1998. This
line of credit facility provides for advances of 80% of
eligible accounts receivable (as defined in the agreement) up
to $2,000,000. Amounts borrowed bear interest at the bank's
reference rate of prime (8.5%) plus _% . The Company had
outstanding advances of $1,316,300 on the line of credit at
December 31, 1997.
At December 31, 1997, the Company was not in compliance with
certain financial covenants contained in its line of credit
facility which requires the Company to maintain minimum
tangible net worth of a least $1.3 million and a current ratio
of at least 1.10 to 1.00. The bank has waived the Company's
non compliance of these covenants.
(8) Income Taxes
The reconciliation between the actual income tax expense and
income tax computed by applying the statutory Federal income
tax rate to earnings before provision for income taxes for the
year ended December 31, 1997 and 1996 is as follows:
1997 1996
---------- ----------
(in thousands)
Computed expected tax benefit on $ (977) $ (857)
income from continuing
operations
Non-deductible expenses and other (484) (50)
Change in valuation allowance for 493 873
deferred tax assets allocated
to income tax expense ---------- --------
$ - $ (34)
========== ========
</PAGE> F-50
The tax effects of temporary differences that give rise to
significant portions of deferred taxes assets and deferred tax
liabilities at December 31, 1997 and 1996 are presented below:
As of December 31,
1997 1996
--------- --------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $4,010 $3,000
Research and development credit carryforwards 187 187
Execess tax basis over book of net assets acquired 150 200
Inventory obselescence reserve 56 59
Allowance for doubtful accounts receivable 48 74
Accrued liabilities, not presently deductible 8 496
Other 30 12
------ ------
Total gross deferred tax assets 4,489 4,028
Less valuation allowance ( 4,489) (3,996)
------- ------
Net deferred tax asset - 32
------- ------
Deferred tax liabilities
Obligaion under capital lease - (13)
Other - (19)
------- ------
Total deferred tax liabilities - (32)
------- ------
Net deferred tax asset (liablities) $ - $ -
======= ======
The net change in the valuation allowance was an increase of
approximately $493,000 in 1997 and an increase of $3,911,000
in 1996. The Company has provided a valuation allowance for
the majority of its deferred tax assets at December 31, 1997
and 1996 since the Company could not conclude that it was more
likely than not that it would realize these assets due
principally to the Company's history of losses.
As of December 31, 1997 the Company had net operating loss
carry forwards (NOL's) for Federal income tax purposes of
approximately $13,500,000. Additionally, the Company had
$187,000 of research and development tax credits available to
offset future taxable income. The NOL's and credit
carryforwards expire primarily in 2007 through 2012.The future
annual usage of approximately $9,600,000 of these NOL's and
credits for income tax purposes is subject to annual
limitations and other conditions and may not be fully utilized
for tax purposes due to the change in ownership resulting from
the Company's merger in 1996.
</PAGE> F-51
(9) Commitments
Employment agreements
---------------------
On June 7, 1996, in connection with the closing of the merger,
the Board of Directors approved three-year employment
agreements with the Chairman and Chief Executive Officer and
two executives of Netplex and AWE that provide for aggregate
base salaries ranging from $110,000 to $130,000 with annual
bonuses up to 60% of base salary based of the Company's
financial and operating performance, subject to Board
approval. These agreements expire on June 6, 1999.
Obligations Under Leases
------------------------
The Company leases computer equipment, furniture, vehicles and
office facilities under long-term lease agreements. The
following is a schedule of future minimum lease payments for
capital and non-cancelable operating leases (with initial
terms in excess of one year) as of December 31, 1997:
Capital Operating
Leases Leases
--------- -----------
Year ending December 31:
1998 $ 120,082 $ 551,895
1999 100,544 560,419
2000 12,195 480,241
2001 - 203,087
2002 - 97,268
Thereafer - 48,634
------- ----------
Total minimun lease payments 232,821 $1,941,544
==========
Less: amount representing 27,652
Present value of future
minimum lease payment $ 205,169
=========
Total rent expense was approximately $647,000 and $577,000 for
the years ended December 31, 1997 and 1996.
</PAGE> F-52
(10) Class A Cumulative Convertible Preferred Stock
0n September 19, 1996, the Company raised approximately
$3,000,000 through the completion of a Private Placement
offering of units of equity securities. Each unit of equity
securities consists of one share of $.01 par value Class A
Cumulative Convertible Preferred Stock (the "Preferred Stock")
and one Common Stock warrant to purchase one share of the
Company's $0.001 par value Common Stock at an exercise price
of $2.50.
Each share of Preferred Stock is convertible into one share of
Common Stock at any time, at the discretion of the holder.
The Preferred Stock earns cumulative dividends at 10% per
annum, payable in either cash or additional shares of
Preferred Stock at the Company's option. Subject to the
conversion rights, the Company may redeem the Preferred Stock
at its stated value plus all accrued and unpaid dividends
upon: (1) registration of the shares underlying the Preferred
Stock, and (2) 30 days written notice given at any time upon
attaining certain per share trading prices and sustaining such
prices for a specified period. The Preferred Stock has a per
share liquidation preference of the greater of: (i) two times
the stated value of the Preferred Stock (stated value is $2
per share) plus any accrued and unpaid dividends, or (ii) the
amount that would have been received if such shares were
converted to Common Stock on the business day immediately
prior to liquidation. During the year ended December 31,
1997, 687,500 preferred shares were converted to Common Stock.
No conversions occurred in 1996.
Each warrant issued in connection with the Private Placement
became exercisable on March 19, 1997 and expires on September
19, 2001. The Company has the right to call the warrants at a
redemption price of $.01 per share upon: (1) registration of
the shares underlying the warrant, and (2) 30 days written
notice given at any time upon the Common Stock attaining
certain per share trading prices and maintaining such prices
for a specified period. During 1997, warrants to acquire
175,000 shares of Common Stock were exercised.
On March 27, 1997, the Company declared a dividend in the
amount of $0.05 per share ($82,500) payable in cash to the
holders of record of the Company's Class A Preferred Stock on
March 28, 1997.
On November 14, 1997, the Company declared a dividend payable
to the holders of record of its Class A Preferred Stock on
account of dividends in arrears which were payable on June 30,
1997 and September 30, 1997, in the amount of 0.0582 shares of
Class A Preferred Stock per share of Class A Preferred Stock.
The related shares were not issued by the Company as of
December 31, 1997.
On December 31, 1996, the Company declared a dividend payable
of approximately $0.056 per share to all holders of record of
the Class A Preferred Stock on January 15, 1997. Accordingly,
the Company accrued a dividend payable of $98,194 at December
31, 1996, which was paid during 1997.
</PAGE> F-53
(11) Common Stock and Warrants
Pursuant to an agreement dated March 25, 1992, the Company
sold 100,000 units each consisting of one share of Common
Stock and one warrant with an aggregate purchase price of
$250,000 and issued an additional 120,000 warrants. As of
April 10, 1998, all warrants have expired except for 170,000
exercisable at $3.00 per share.
In connection with the Company's initial public offering
(IPO), the Company sold to the underwriters for $100 the right
to purchase up to an aggregate of 100,000 Units (Unit Purchase
Option). The Unit Purchase Options is exercisable initially
at $6.00 per Unit through March 1998. The Units are identical
to those offered in the IPO, except the warrants may not be
redeemed by the Company. The Unit Purchase Option contains
anti-dilution provisions providing for adjustments to the
exercise price upon the occurrence of certain events. In
connection with the merger, the Unit exercise price was
reduced from $6.00 to $2.40 per share from the effects of this
anti-dilution provision. The exercise price of the underlying
warrants remained at $5.25 per share. These warrants expired
in March, 1998.
In connection with the merger of the Company with Netplex,
effective April 11, 1996, the Company provided its
underwriters with warrants to purchase up to 125,000 shares of
the Company's Common Stock. Each warrant entitles the holder
to purchase, through April 10, 2001, one share of Common Stock
at an exercise price of $3.50 per share. These warrants
became exercisable on October 11, 1996. The fair value of the
warrants issued of approximately $170,000 had no effect on the
Company's equity as a result of the merger.
In connection with the merger of the Company with Netplex,
effective June 7, 1996, the shareholders of Netplex were
granted warrants to purchase up to 150,000 shares of the
Company's Common Stock. Each warrant entitles the holder to
purchase, through June 6, 2001, one share of Common Stock at
an exercise price of $2.50 per share. These warrants became
exercisable on October 7, 1996. The fair value of the
warrants issued of approximately $270,000 had no effect on the
Company's equity as a result of the merger.
In connection with the Class A convertible Preferred Stock
Private Placement, the Company provided the underwriters for
the Private Placement with the option to purchase up to 87,500
units, each consisting of one share of $.01 par value Class A
Convertible Preferred Stock and one Common Stock purchase
warrant. These units are exercisable at $2.00 per share and
are identical in all respects to the units sold in the Private
Placement transaction. During 1997, units to acquire 50,000
shares of the Company's Common Stock were exercised. The
37,500 units are all exercisable at December 31, 1997.
</PAGE> F-54
(12) Stock Options
As of December 31, 1997, the Company maintains three stock
option plans; the 1992 Incentive Stock Option Plan (ISO Plan),
the 1995 Directors' Stock Option Plan (Directors' Plan) and
the 1995 Consultant's Stock Option Plan (Consultant's Plan).
The ISO Plan includes both incentive and non-qualified stock
options. The Board of Directors may grant stock options to
employees to purchase up to 3,000,000 shares of the Company's
authorized but unissued Common Stock. Stock options are
granted with an exercise price equal to the market price on
the date of grant. All stock options expire 10 years from
grant date (5 years in the case that the optionee is a holder
of more than 10% of the voting stock of the Company).
Generally the options vest and become fully exercisable after
3 years from the date of grant but never less than 6 months.
At December 31, 1997, there were 475,033 shares available for
grant under this plan.
The Directors' Plan authorizes the Board of Directors to grant
to each director options to purchase up to 15,000 shares of
the Company's authorized but unissued Common Stock, upon
election to the Board, and award aggregate options to purchase
up to 100,000 shares of the Company's authorized but unissued
Common Stock. The terms of option grants for the Directors'
Plan are identical to those of the ISO plan, except that the
vesting period for the Directors' Plan is at the Board's
discretion. Option grants under this Plan from inception to
date have contained three-year vesting periods. At December
31,1997, there were 40,000 shares available for grant under
this Plan.
The Consultant's Plan authorizes the Board of Directors to
grant organizations or individuals who are not eligible for
the ISO or Directors' Plans stock options to purchase up to
800,000 shares of the Company's authorized but unissued Common
Stock. The exercise price, terms of the option grant and
vesting period for the Consultant's Plan stock options are at
the Board's discretion. At December 31,1997, there were
768,000 shares available for grant under this Plan.
Stock option activity for the Plans during the periods
indicated is as follows:
ISO Plan Directors' Plan Consultant's Plan
----------------- ----------------- -----------------
Wt. Avg. Wt. Avg. Wt. Avg.
Shares Ex.Price Shares Ex.Price Shares Ex.Price
--------- ------- -------- -------- ------- --------
December 31,1995 724,500 $ 3.07 30,000 $ 3.56 - $ -
Assumed in merger 1,691,000 2.95 - - - -
Granted 233,000 2.75 30,000 2.50 - -
Excercised - - - - - -
Forfeited/canceled (236,000) 5.50 - - - -
Expired - - - - - -
--------- ------ ------ ------ ----- ----
December 31, 1996 2,412,500 $ 2.86 60,000 $ 3.03 - $ -
Granted 2,363,500 1.29 15,000 2.97 32,000 2.50
Excercised (34,967) 2.00 - - - -
Forfeited/Canceled(2,201,033) 2.78 (15,000) 2.50 - -
Expired (50,000) 4.40 - - - -
--------- ------- ------ ------- ------ ------
December 31, 1997 2,490,000 $ 1.45 60,000 $ 3.15 32,000 $ 2.50
========= ======= ====== ======= ====== ======
</PAGE> F-55
ISO Plan options
----------------
At December 31,1997, the range of exercise prices for the
options granted under the ISO plan was $0.97-$4.00 and the
weighted average remaining contractual life of those options
was 8.8 years. At December 31, 1997 and 1996, the number of
options exercisable under the ISO Plan totaled 545,834 and
867,167, respectively. The weighted average exercise price of
those options was $2.73 and $3.00, respectively.
Directors' Plan options
-----------------------
At December 31, 1997, the range of exercise prices for options
granted under the Directors' Plan was $2.50- $3.56 and the
weighted-average remaining contractual life of those options
was 8.4 years. At December 31, 1997, and 1996 the number of
options exercisable under the Directors' Plan totaled 25,000
and 15,000, respectively. The weighted-average exercise price
of those options was $3.35.and $3.56, respectively.
Consultants' Plan options
-------------------------
At December 31, 1997, the exercise price for all options
granted under the Consultants' Plan was $2.50 and the weighted-
average remaining contractual life of those options was 4
years. At December 31, 1997 the number of options exercisable
under the Consultants' Plan totaled 32,000. No options were
granted prior to 1997. The weighted-average exercise price of
those options was $2.50.
The Company applies APB Opinion No. 25 in accounting for its
ISO and Directors' Plans and, accordingly, no compensation
cost has been recognized for its stock options in the
financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
1997 1996
------- --------
(Thousands except per share amounts)
Net loss - As reported $(2,874) $(1,999)
======= =======
Net loss - Pro forma $(4,836) $(3,462)
======= =======
Net loss per share - As reported $ (0.46) $ (0.42)
======= =======
Net loss per share - Pro forma $ (0.71) $ (0.71)
======= =======
Weighted average shares outstanding 6,821 5,026
======= =======
Pro forma net loss reflects only the option grants in 1997,
1996, and 1995. Therefore, the full impact of calculating
compensation costs for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts presented above
because compensation cost is reflected over the option's
vesting periods and compensation cost for options granted
prior to January 1, 1995 is not considered.
The per share weighted average fair value of the ISO options
granted in 1997 and 1996 was $1.20 and $1.83 on the grant date
using the Black - Scholes option pricing model with the
following weighted average assumptions for 1997: expected
dividend yield 0.0%, risk free interest rate of 6.24%,
expected volatility of 103%, and an expected life of 10 years;
and 1996: expected dividend yield 0.0%, risk free interest
rate of 6.70%, expected volatility of 44%, and an expected
life of 10 years.
The per share weighted average fair value of the Directors'
Plan options granted in 1997 and 1996 was $2.76 and $1.67 on
the grant date using the Black - Scholes option pricing model
with the following weighted average assumptions for 1997:
expected dividend yield 0.0%, risk free interest rate of
6.97%, expected volatility of 103%, and an expected life of 10
years; and 1996: expected dividend yield 0.0%, risk free
interest rate of 6.81%, expected volatility of 44%, and an
expected life of 10 years.
</PAGE> F-56
(13) Related Party Transactions
The Company paid $28,800 in 1997 and $17,900 in 1996 for
accounting, tax and consulting services to a CPA firm in which
a partner of the firm has been a director of the Company since
July 1996.
In January, 1997, the Company issued a $150,000 loan to the
chief executive officer for relocation expenses. The loan
bears interest at 8% per annum and is due upon demand. The
Company does not intend to demand payment of the loan during
1998, and thus the amount is classified as long-term in the
accompanying consolidated balance sheet as of December 31,
1997. At December 31, 1997, the outstanding amount due under
the loan was approximately $161,000, including approximately
$11,000 in accrued interest.
In June 1997, the Company issued options under the
Consultants' Plan to purchase up to 32,000 shares of the
Company's Common Stock at an exercise price of $2.50 per
share. These options were granted to one of the Company's
legal counsel in exchange for legal services rendered in the
amount of $40,000. The fair value of the options issued of
$40,000 has been classified as additional paid in capital in
the accompanying consolidated financial statements for the
year ended December 31, 1997. The options are for a term of 4
years and are immediately exercisable.
A director of the Company, is a Vice President of the
underwriter (the "Underwriter") of the Private Placement
completed by the Company on September 19, 1996 (see note 9).
The Company paid the Underwriter $432,500 for fees associated
with the completion of this transaction.
The Company contracted with an entity owned by a shareholder
of the Company, for the development of certain software used
in the Company's technical staffing operations. The Company
paid the shareholder $150,000 in 1996.
</PAGE> F-57
(14) Litigation
From time to time, disagreements with individual employees and
disagreements as to the interpretation, effect or nature of
the individual agreements arise in the ordinary course of
business and may result in legal proceedings being commenced
against the Company.
On December 31, 1996, ACS Ltd., a software distributor based
in the United Kingdom, filed a complaint against Technology
Development Systems ("TDS") a wholly owned subsidiary of the
Company, in the Circuit Court of Cook County, Illinois. ACS
alleges that TDS breached its obligations under the
Distributor Agreement between the Plaintiff and TDS for the
WorldLink product when the Company directed TDS to sell the
WorldLink product technology to a third party. ACS is
demanding a sum exceeding one million dollars for the breach
of contract. The case is currently in discovery. In the
opinion of Management and the Company's legal counsel, the
lawsuit has little merit, and the outcome of the pending
lawsuit will not have a material adverse effect on the
Company's financial condition, liquidity or the results of
operations. The Company intends to vigorously defend against
the lawsuit. The TDS subsidiary which was part of CompLink is
currently inactive with no assets.
On September 4, 1997, Data Systems Analysts, Inc. ("DSA"), a
software design and consulting company, filed a complaint
against TDS and the Company, alleging copyright infringement
and breach of the Company's agreement. The Complaint claims
damages in excess of $300,000 plus punitive damages. The case
is currently in discovery. In the opinion of Management, the
lawsuit has little merit, and the outcome of the pending
lawsuit will not have a material adverse effect on the
Company's financial condition, liquidity or the results of
operations. The Company intends to vigorously defend against
the lawsuit.
The Company is not currently involved in any litigation or
proceedings which if decided against the Company would have a
material adverse affect, either individually or in the
aggregate. To the Company's knowledge, no other legal
proceedings, that if decided against the Company would have a
material adverse affect, are currently contemplated by any
individuals, entities or governmental authorities.
(15) Employee Benefit Plans
During 1996, the Company sponsored a 401(k) retirement plan
("the Plan") under which substantially all full-time employees
were eligible to participate. The Company made no matching
contributions to the Plan during 1996. In addition, the
Company's CR subsidiary provided a separate 401(k) plan for
its employees during 1996. The Company's contribution to the
subsidiary's 401(k) plan during 1996 was $628,333.
On January 1, 1997, the Company and subsidiary 401(k) plans
were merged. Under the merged Plan, all full time employees
with over 1000 hours of service to the Company or its
subsidiaries are eligible to participate. The Company matches
one-half of the employees' voluntary contributions up to a
maximum Company contribution of 5% of participants' salaries.
The Company's contribution to the Plan during 1997 was
$647,418.
The Company's CR subsidiary provides a profit sharing plan for
its employees whereas up to 10% of the employees salary can be
contributed to the plan. The Company made no matching
contributions to this plan during 1997 and 1996.
The Company does not provide any post retirement or any post
employment benefits.
</PAGE> F-58
(16) Recent Accounting Pronouncements
In February 1997, FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure" which is effective for
the year ending December 31, 1998. This statement continues
the previous requirements to disclose certain information
about an entity's capital structure found in Accounting
Principles Board (APB) Opinion No. 10, "Omnibus Opinion -1966"
and No. 15, "Earnings per Share" and FASB Statement No. 47,
"Disclosure of Long-Term Obligations." The Company has been
subject to the requirements of those standards and as a result
does not expect the adoption of SFAS No. 129 to have a
material impact on the Company's financial statements.
In June 1997, FASB issued SFAS No. 130 "Reporting
Comprehensive Income", which is effective for the year ending
December 31, 1998. This statement establishes standards for
the reporting and display of comprehensive income and its
components in the financial statements. Earlier application
of this standard is permitted; however, upon adoption the
Company will be required to reclassify previously reported
annual and interim financial statements. The Company believes
that the disclosure of comprehensive income in accordance with
the provisions of SFAS No. 130 will not impact the manner of
presentation of its financial statements as currently and
previously reported.
In June 1997, FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which is
effective for the year ending December 31, 1998. This
statement requires companies to present certain information
about operating segments and related information, including
geographic and major customer data, in its annual financial
statements and in condensed financial statements for interim
periods. The Company believes that the adoption of SFAS No.
131 will impact the manner of presentation of its financial
statements.
In October, 1997, the AICPA Accounting Standards Executive
Committee issued Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), which supercedes Statement of
Position 91-1 "Software Revenue Recognition. SOP 97-2 focuses
on when and in what amounts revenue should be recognized for
licensing, selling, leasing, or otherwise marketing computer
software, and is effective for transactions entered into in
fiscal years beginning after December 15, 1997. The Company
does not believe that the adoption of this new pronouncement
will have a material impact on its financial position and
results of operations.
</PAGE> F-59
(17) Subsequent Events
On January 30, 1998, the Company completed the purchase of all
of the stock of The PSS Group, Inc. ("PSS"), the technical
professional staff augmentation operations and business of
Preferred Systems Solutions, Inc. ("Preferred") and formerly a
wholly owned subsidiary of Preferred. In consideration for
the purchase, the Company paid $300,000 at closing and on or
before January 15, 1999 will pay $300,000 in cash or 200,000
shares of its Common Stock or any combination thereof, at
Preferred's option. The Company used working capital to
finance the acquisition. The agreement also provides that
Preferred will receive additional consideration (the "Earn-
out") if PSS meets certain operating targets. Such Earn-out
may be paid at the Company's option in cash or its Common
Stock, or any combination thereof. In connection with the
acquisition, the Company and PSS has entered into employment
agreements with certain employees of PSS. The acquisition was
recorded effective January 1, 1998 using the purchase method
of accounting. A $200,000 advance to the purchase price was
made to PSS as of December 31, 1997 and is included in notes
receivable in the accompany consolidated balance sheet.
Between January 1, 1998 and April 14, 1998, the Company has
raised additional equity totaling $3,057,000 as follows:
In February 1998 the Company raised $100,000 through the sale
of 80,000 shares of nonregistered Common Stock plus a warrant
to purchase an additional 100,000 warrants at $1.20.
On March 17, 1998 the Company raised $1,457,000 of financing
in a Private Placement raised primarily from employees,
directors, associates, existing stockholders and friends of
the Company. The Company issued shares of non-registered
Common Stock to purchasers who have agreed to a one-year lock-
up provision. These restricted shares carry registration
rights and were offered at $1.00 per share. The funds will be
used to finance operations and additional acquisitions.
On April 7, 1998 Netplex completed the sale of 1,500 units of
a Private Placement, totaling $1.5 million, to various
purchasers The Zanett Corporation acted as placement agent
for the Private Placement. The sale represents the first half
of a transaction that will include the sale of an additional
1,500 units for $1.5 million at a future date. Zanett
Lombardier purchased 1,500 units at $1,000 per unit, with each
unit consisting of a prepaid Common Stock purchase warrant
entitling the holder to acquire such number of shares of the
Company's Common Stock as is equal to $1,000 divided by an
adjustable exercise price and an additional incentive warrant
to acquire 52 shares of Common Stock (or an aggregate of
78,000 shares of Common Stock). The Company also granted
Zanett a warrant to purchase 39,000 shares of Common Stock.
Zanett also received placement fees and a non-accountable
expense allowance equal to 12.53% of the proceeeds of the
offering. The second half of the transaction is for the sale
to Zanett of an additional and committed 1,500 units, for
$1,000 per unit, contingent on Netplex recording three
consecutive quarters of increased profits and revenues,
excluding any extraordinary items. With respect to the second
half of the transaction, the exercise price of the purchase
warrants and the incentive warrants will be based on the bid
price of the Common Stock at the time of such closing. The
funds from the Private Placement will be used to fund
operations and acquisitions. Under NASDAQ regulations,
certain aspects of the transaction must receive shareholder
approval. Such shareholder approval is expected in the
Company's annual meeting. The Company believes that the
proceeds should ensure that the Company will exceed NASDAQ's
published net tangible assets requirement of $2 million.
</PAGE> F-60
THE NETPLEX GROUP, INC.
Unaudited Pro Forma Consolidated Financial Statements
The accompanying unaudited pro forma consolidated financial statements are
provided to illustrate the effect of the acquisition of Automated Business
Systems of North Carolina, Inc. and Kellar Technology Group, Inc.
(collectively "ABS") on the historical financial statements of the Netplex
Group, Inc. ("the Company"), as if this acquisition had occurred, for
balance sheet purposes, on March 31, 1998 and, for statement of operations
purposes on January 1, 1998 and January 1, 1997. The pro forma consolidated
statements of operations are not necessarily indicataive of operation results
which would have been achieved had the acquisition been consummated as of the
beginning of the period presented and should not be construed as representative
of future operations. For purposes of these pro forma consolidated statements,
the acquisition has been accounted for under the purchase method of accounting,
based on a preliminary estimated of the fair values of the assets and
liabilities acquired. The pro forma adjustments described in the
accompanying notes are based on available information and certain assumptions
that the Company believes are reasonable. These proforma financial
statements should be read in conjunction with the Company's Report on
Form 10-KSB for the year ended December 13, 1997 and Report on Form
10-Q for the three months ended March 31, 1998.
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
As March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Netplex ABS Adjutments(a)Pro Forma
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $1,326,291 $ 121,169 $(200,000) $1,247,460
Accounts receivable, net 6,293,041 360,310 6,653,351
Prepaids and other 419,630 14,685 434,315
----------- ----------- --------- ----------
Total current assets 8,038,962 496,164 (200,000) 8,335,126
Property and equipment, net 1,012,474 1,006 50,000 1,063,480
Employee notes receivable 195,014 - 195,014
Fulfillment database, net 930,000 - 930,000
Acquired software, net 394,991 - 394,991
Goodwill, net 339,866 - 660,643 1,000,589
Other assets 142,197 22,142 164,339
---------- ----------- --------- ----------
Total assets $ 11,053,504 $ 519,312 $ 510,643 $12,083,459
============ =========== ====================
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Accounts payable $ 1,051,407 $ 259,122 $ 1,310,529
Line of credit 2,404,670 - 2,404,670
Accrued expenses and other 4,834,246 130,708 50,000 5,014,954
------------ ----------- --------- -----------
Total current liabilities 8,290,323 389,830 50,000 8,730,153
Other liabilities 292,237 - - 292,237
------------ ----------- -------- -----------
Total liabilities 8,582,560 389,830 50,000 9,022,390
Stockholders' equity:
Class A preferred stock 10,625 - 10,625
Common stock 9,007 444 450 9,457
(444)
Additional paid in capital 7,826,370 42,741 589,675 8,416,045
(42,741)
Accumulated deficit (5,375,673) 89,297 (86,297) (5,375,058)
Commitments and contingencies
----------- ----------- -------- ----------
Total stockholders' equity 2,470,944 129,482 460,643 3,061,069
----------- ---------- -------- -----------
Total liabilities and
stockholders' equity $ 11,053,504 $ 519,312 $510,643 $12,083,459
============ =========== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>F-61
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Netplex ABS Total Adjustments Pro Forma
----------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $13,311,308 $760,374 $14,071,682 $14,071,682
Cost of revenues 11,176,766 421,597 11,598,363 11,598,363
----------- ------- ----------- ---------- -----------
Gross profit 2,134,542 338,777 2,473,319 2,473,319
Selling, general
and administrative
expenses 2,483,723 341,052 2,824,775 15,178 c 2,839,953
---------- ------- --------- --------- ----------
Operating loss (349,181) (2,275) (351,456) (15,178) (366,634)
Interest expense,
net 66,076 - 66,076 66,076
--------- --------- --------- -------- ----------
Loss before income
taxes (415,257) (2,275) (417,532) (15,178) (432,710)
Provision for income
tax - 2,542 2,542 (2,542) b -
---------- --------- --------- --------- ----------
Net loss $ (415,257) $ (4,817) $(420,074) $(12,636) $ (432,710)
========== ========= ========= ========= ==========
Basic and diluted
loss per
common share $ (0.07)
===========
Weighted average
common shares
outstanding,
basic and
diluted 8,223,292
==========
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE> F-62
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Netplex ABS Total Adjustments Pro Forma
----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $40,468,134 $4,145,797 $44,613,931 $44,613,931
Cost of revenues 35,415,644 3,048,010 38,463,654 38,463,654
----------- -------- ----------- -------- -----------
Gross profit 5,052,490 1,097,787 6,150,277 6,150,277
Selling, general
and administrative
expenses 7,899,756 1,116,348 9,016,104 60,710 c 9,076,814
---------- --------- ---------- ------- ----------
Operating loss (2,847,266) (18,561) (2,865,827) 60,710 (2,926,537)
Interest expense, net 26,337 - 26,337 26,337
--------- --------- ----------- ------- ----------
Loss before income
taxes (2,873,603) (18,561) (2,892,164) (60,710) (2,952,874)
Provision for income tax - 8,243 8,243 (8,243) b -
---------- --------- ---------- -------- ----------
Net loss $(2,873,603) $ (26,804) $(2,900,407) $(52,467) $(2,952,874)
========== ========= ========== ======== ===========
Basic and dilutive
(loss) per
common share $ (0.45)
===========
Weighted average
common shares
outstanding,
basic and
diluted 7,270,863
==========
</TABLE>
See accompanying notes to consolidated financial statements.
</PAGE>F-63
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Notes to the unaudited pro forma consolidated financial statements
(a) This Adjustment records the acquisition of ABS by Netplex,
under the purchase method of accounting, through the issuance of
$200,000 in cash and 450,000 shares of Netplex common stock
(valued at $590,125 or $1.3125 per share). In connection with the
preliminary allocation of the purchase price the historical cost
basis of the assets and liabilities of ABS were deemed to be at
fair value, except for property and equipment which was brought
up to its estimated fair value through an adjustment of
approximately $50,000 and the accrual of estimated direct costs
related to the acquisition of $50,000. The net assets of ABS
acquired (at fair value) was $129,482. Cost in excess of net
assets acquired (goodwill) resulting from this transaction is
$660,632 and is expected to be amortized on a straight-line basis
over an estimated life of 15 years.
(b) This adjustment reverses the tax provision of ABS for the
three months ended March 31, 1998 of $2,543 and for the year
ended December 31, 1997 of $8,243. Netplex experienced net
operating losses during the three month and years ended March 31,
1998 and December 31, 1997, respectively and accordingly, no
consolidated provision for income taxes is be required for the
periods presented on the combined entity.
(c) This adjustment records depreciation and amortization for
the three months ended March 31, 1998 and the year ended December
31, 1997 of $15,170 and $60,710,respectively. Depreciation
expense on the increase in ABS property and equipment ($50,000
depreciated on a straight-line basis for over a 3 year estimated
life) for the three months ended March 31, 1998 of $4,167 and
$16,667 for the year ended December 31, 1997. Goodwill
amortization recorded on Goodwill of $660,643 on a straight-line
basis over a 15 year estimated life of $11,011 for the three
months ended March 31, 1998 and $44,043 for the year ended
December 31, 1997.
</PAGE>F-64
Automated Business Systems of North Carolina, Inc. and
Combined Company
Combined Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
ASSETS:
<S> <C> <C>
Current Assets:
Cash and cash equivalents $121,169 $173,860
Accounts receivable 360,310 163,005
Prepaid expenses
and other current assets 14,685 7,592
-------- --------
Total current assets 496,164 344,457
Property & equipment, net 1,006 695
Other assets 22,142 22,162
-------- --------
Total Assets $519,312 $367,314
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts Payable $259,122 $167,960
Accrued Expenses 130,708 53,532
Note payable to bank - 11,523
-------- --------
Total current liabilities 389,830 233,015
Shareholders' Equity
ABSI common stock, $1 par value;
100,000 shares authorized;
444 issued and outstanding
in 1998 and 1997 444 444
KTG common stock: no par value:
class A 100,000 shares authorized
3,000 issued and outstanding
in 1998 and 1997 - -
Class B, 1,000,000 shares
authorized, none outstanding
in 1998 and 1997 - -
Paid in capital 42,741 42,741
Retained Earnings 86,297 91,114
-------- --------
Total shareholders' equity 129,482 134,299
Total liabilities
and sharholders' equity $519,312 $367,314
========= ========
</TABLE>
The accompanying notes are an integral part of these financial
statements
</PAGE>F-65
Automated Business Systems of North Carolina, Inc. and
Combined Company
Combined Statements of Operations and Retained Earnings
<TABLE>
<CAPTION>
Three
Months
Ended Year Ended
March 31, December
1998 31, 1997
(unaudited)
-------------- ------------
<S> <C> <C>
Revenue $760,374 $4,145,797
Cost of Revenue 421,597 3,048,010
-------- ----------
Gross Profit 338,777 1,097,787
Selling, General and
Administrative Expense 341,052 1,116,348
-------- ---------
Loss before taxes (2,275) (18,561)
Provision for income tax 2,542 8,243
-------- ---------
Net loss (4,817) (26,804)
Retained Earnings at the
beginning of the period 91,114 117,918
---------- ----------
Retained Earnings at the
end of the period 86,297 91,114
========== ==========
The accompanying notes are an integral part of these financial
statements
</TABLE>
</PAGE>F-66
Automated Business Systems of North Carolina, Inc. and
Combined Company
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Three months
Ended Year Ended
March 31, December 31,
1998 1997
----------- ----------
<S> <C> <C>
Operating Activities:
Net loss $ (4,817) $(26,804)
Adjustments to reconcile
net loss to net cash
(used in) provided by
operating activities:
Depreciation and amortization 27 18,964
Loss on sale of property and
equipment - 6,867
Changes in assets and liabilities:
Accounts receivable (197,305) 7,143
Prepaids and other assets (7,074) (15,129)
Accounts payable 91,162 37,660
Accrued expense 77,177 27,244
----------- ---------
Net cash (used in) provided by
operating activities (40,830) 55,945
----------- --------
Investing activities:
Acquisition of property and equipment (338) (29,834)
Proceed from sale of property and
equipment - 31,000
----------- --------
Net cash (used in) provided by
investing activities (338) 1,166
----------- --------
Financing activities:
Repayment of notes payable to bank (11,523) (18,315)
Borrowing under note payable to bank - 17,000
---------- --------
Net cash used in financing activities (11,523) (1,315)
---------- --------
(Decrease)increase in cash and cash
equivalents (52,691) 55,796
Cash and cash equivalents at the
beginning of the period 173,860 118,064
--------- ---------
Cash and cash equivalents at $121,169 $173,860
the end of the period ========= ========
Supplemental disclosures:
Cash paid during the period:
Interest $ 1,293 $ 2,685
========= ========
Income taxes $ - $ 7,577
========= ========
</TABLE>
The accompanying notes are an integral part of these
financial statements
</PAGE> F-67
Automated Business Systems of North Carolina, Inc. and
Combined Company
Notes to Combined Financial Statements
(1) Business and Basis of Presentation
Automated Business Systems of North Carolina, Inc.,
doing business as Automated Business Systems , Inc.
(ABSI) was incorporated in North Carolina in 1975.
Kellar Technology Group (KTG) was incorporated in
Georgia in June 1997. The companies provide complete
systems solutions through the distribution of hardware
and software from Hewlett-Packard ("HP") UNIX and
Microsoft NT based technologies to medium-sized and
Fortune 500 organizations, in the Charlotte, NC;
Spartanburg, SC; and Atlanta, GA markets. The
shareholders of ABSI own a majority interest in KTG,
and as a result, the financial statements of the
entities, collectively "ABS" or the "Company" have been
reported on a combined basis.
The accompanying financial statements contain the
combined balance sheets of ABSI and KTG as of March 31,
1998 and December 31, 1997; the combined statements of
operations and retained earnings, and cash flows for
the three months ended March 31, 1998 and the year
ended December 31, 1997 (KTG included on a combined
basis from June 19, 1997, date of inception). The
balance sheet as of March 31, 1998 and the result of
operations and cash flows for the three months ended
March 31, 1998 are unaudited. In the opinion of
management, all adjustments, consisting of normal
recurring adjustments necessary for fair presentation
of interim period results have been included. Interim
results are not necessarily indicative of the results
that may be expected for the fiscal year ended December
31, 1998.
</PAGE> F-68
(2) Summary of Significant Accounting Policies:
Principles of Combination:
The accompanying combined financial statements include
the accounts of Automated Business Systems, Inc and
Kellar Technology Group, Inc. for the periods outlined
above. All significant intercompany transactions have
been eliminated in combination.
Revenue Recognition:
The Company generally recognizes hardware and software
product revenue when such products are delivered to the
customer site. Revenue from consulting service
contracts is recognized when the services are performed
and related costs are incurred.
Cash and Cash Equivalents:
The Company considers all highly liquid investments
with maturity, at date of purchase, of three months or
less to be cash equivalents. Cash equivalents are
comprised of money market accounts.
Property and Equipment:
Property and equipment is recorded at cost. Additions
to property and equipment have historically not been
material. Automobiles are being depreciated over five
years. All other property and equipment is being
depreciated in the year of acquisition.
Income Taxes:
Income taxes are accounted for under the asset and
liability method under Statement of Financial
Accounting Standards No. 109 "Accounting for Income
Taxes" (SFAS 109). Under this method, the deferred tax
assets and liabilities are recognized for the future
tax consequences of differences between the financial
statement carrying value of existing assets and
liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred
tax assets are measured by applying the enacted
statutory tax rates, that are applicable to the future
years in which deferred tax assets or liabilities are
expected to be settled or realized. Any change in tax
rates on deferred tax assets and liabilities is
recognized in net income in the period in which the
rate change is enacted.
</PAGE> F-69
Use of Estimates:
The preparation of combined financial statements in
accordance with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets
and liabilities at the date of the combined financial
statements and the reported amounts of revenue and
expenses during the reporting period. Actual results
could differ from those estimates.
(3) Property and Equipment:
Property and equipment consists of the following:
March 31 December 31,
1998 1997
---------- -----------
(unaudited)
Office furniture &
equipment $34,900 $34,562
Demo equipment 59,727 59,727
Autos 7,344 7,344
------- -------
101,970 101,632
Accumulated
depreciation (100,964) (100,937)
-------- --------
$ 1,006 $ 695
======== ========
(4) Accrued Expenses:
March December
31, 31,
1998 1997
--------- -------
(unaudited)
Accrued payroll and
payroll taxes $73,826 48,866
Accrued other
expenses 56,882 4,665
------- ------
$130,708 $53,532
======== =======
(5) Note Payable to Bank:
As of December 31, 1997, the Company had a note payable
to a bank in the amount of $11,523 related to the
financing of an automobile. Monthly payments under this
note were $624. The Company repaid this loan in early
1998.
</PAGE> F-70
(6) Commitments:
The Company leases approximately 1,600 square feet of
office space under a non-cancelable operating lease to
house the Company's headquarters in Charlotte, NC.
Monthly payments under this lease are $1,995. The
Company also has a refundable deposit of $1,995 related
to these leased premises. This lease expires on
September 30, 1998. The Company's remaining obligation
under this lease at March 31, 1998 and at December
31, 1997 was $11,970 (unaudited) and $17,955,
respectively.
(7) Income taxes:
The Company files separate returns for ABSI and KTG.
Income tax expense for the year ended December 31, 1997
and the three months ended March 31, 1998 (unaudited)
consists of current tax expense.
The reconciliation between the actual income tax
expense and the income tax computed by applying the
statutory Federal income tax rate to earnings before
provision for income taxes for the three months ended
March 31, 1998 (unaudited) and the year ended December
31, 1997 is as follows:
March December
31, 31,
1998 1997
--------- --------
(unaudited)
Computed expected tax
provision (benefit) $ (773) $(6,311)
State taxes, net of
Federal benefit 304 986
Non deductible
expenses and other 3,011 13,567
------- -------
$ 2,542 $ 8,243
======== =======
There were no significant deferred tax assets or
liabilities at March 31, 1998 (unaudited) or December
31, 1997.
(8) 401(k) Retirement Plan:
The Company maintains a 401(k) retirement plan ("the
Plan") for employees who meet the eligibility
requirements outlined in the Plan. Participants in the
Plan make voluntary tax deferred contributions to the
Plan. The Company does not make contributions to match
the participants contributions, but, has the ability to
make discretionary contributions to the Plan. During
the three months ended March 31, 1998 (unaudited) and
the year ended December 31, 1997, the Company made no
discretionary contributions to the Plan.
(9) Subsequent Event
On June 22, 1998, The Netplex Group, Inc. ("Netplex")
acquired all of the stock of both ABSI and KTG in
exchange for: $200,000 in cash, 450,000 shares of
Netplex common stock, and additional consideration
("earn-out") to the former ABS shareholders if the
Company meets certain operating targets over the period
beginning on June 30, 1998 through December 31, 2000.
Payments due under the earn-out, if any, are to be made
on April 30, 1999, 2000 and 2001 in the form of 50%
Netplex common stock and 50% cash.
</PAGE>F-71
APPENDIX A
ASSET ACQUISITION AGREEMENT
THIS ASSET ACQUISITION AGREEMENT is entered into as of
August 31, 1998 ("Agreement") by and among APPLIED
INTELLIGENCE GROUP, INC., 13800 Benson Road, Edmond,
Oklahoma 73013-6417 ("Seller"), and THE NETPLEX GROUP, INC.,
a New York corporation, 8260 Greensboro Drive, Fifth Floor,
McLean, Virginia 22102 ("Netplex").
RECITALS
WHEREAS, Seller desires to sell to Netplex all of the
Assets (as hereinafter defined) relating to the delivery of
its technical consulting services and solutions business to
the retail industry;
WHEREAS, Netplex desires to acquire said Assets, and in
connection therewith, Seller will receive from Netplex (i)
$3,000,000 in cash (the "Cash Consideration"); (ii) One
Million Dollars ($1,000,000) in value of Netplex Preferred
Stock (as defined below), and (iii) certain earn-out
compensation payments (the "Earn-Out Payments") as described
in the Earn-Out Agreement as provided for herein.
AGREEMENT
NOW, THEREFORE, in consideration of the promises and
the agreements herein contained, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
1.1. "Accounts Receivable" shall mean the accounts
receivable of Seller arising from the operation of the
Business.
1.2 "Agreement Documents" shall mean this
Agreement and the various Schedules, Exhibits, attachments,
and other documents, of which the exchange or execution
between Netplex and Seller is contemplated by this Agreement
to occur at or before the Closing, except as to such
documents subsumed in the definitions hereinafter provided.
1.3. "Assets" shall mean all the assets of Seller
used in the operation of the Business as a going concern,
except for the ChainLink software product, Accounts
Receivable earned prior to Closing, and cash of the
Business,.
1.4. The "Business" shall mean the technical
consulting services and solutions business of Seller which
provides such services and solutions to the retail and
distribution industries, but not including the Seller's
viaLink and iJob businesses.
1.5. "Business Records" shall mean all business
records of Seller relating to the Business, including, but
not limited to, all books of account, customer contracts,
customer lists, supplier and vendor lists, employee
personnel files, file materials, logs, consultants' reports,
budgets, financial reports and sales, operating and business
plans, and customer files relating to or used or held for
use in the operation of the Business.
1.6. "Contracts" shall mean oral and written agreements
and contracts of Seller relating to the Business to the
extent identified on Schedule 4.14 attached to this
Agreement, including, without limitation, notes receivable,
license agreements, assignment agreements, purchase orders,
sales orders, warranties, rights to discounts, joint venture
agreements, partnership agreements, maintenance agreements,
sales representative agreements, service agreements,
distribution agreements, leases of real property and
automobiles and agreements for leased equipment.
1.7. "Fixed Assets and Tangible Personal Property"
shall mean all fixed assets and tangible personal property
of Seller used in the Business , including, without
limitation, all machinery, including essential replacement
parts, equipment, supplies, tools, tooling, furniture,
fixtures, hardware and spare parts.
1.8. "Intangible Property" shall mean all intangible
property and assets of Seller used in the Business (whether
owned, used, registered in the name of, or licensed by
Seller or in which Seller otherwise has an interest) .
Without limiting the generality of the foregoing, any
intangible property not used in the Business, such as the
iJobT and viaLinkr software products and all associated
intellectual property, are specifically excluded from this
definition.
1.9. "Inventory" shall mean all inventory of raw
materials, finished goods, supplies, project deliverables
and repair materials of Seller relating to the Business.
1.10. "AIG Marks" shall mean such tradenames,
trademarks, logos or graphic designs representing or
relating to the Business, except such items relating to
Chainlink, and any part of Seller's business or other
operations which are not part of the Assets.
1.11. "Permits" shall mean all licenses, permits,
franchises, approvals, authorizations, consents or orders
of, or filings with, any governmental authority whether
federal, state or local, or any other person relating to the
Business.
1.12. "Affiliate" shall mean any Person who is
controlled by, or is under common control with, a Party
hereto. The term "control" (including, with correlative
meaning, the terms "controlled by" and "under common control
with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of
such Person, whether through the ownership of voting
securities, by contract or otherwise.
1.13. "Closing" shall mean the actual transaction at
which the Seller receives the consideration and other
documents required to be given by Netplex hereunder, and at
which Netplex receives the documents required to be given by
Seller hereunder. Closing shall take place in Oklahoma City,
Oklahoma.
1.14. "Closing Date" shall mean September 30, 1998
or such other date as may be mutually agreed to by the parties.
1.15. "Code" shall mean the Internal Revenue Code
of 1986, as amended.
1.16. "Knowledge" as to any party hereto shall mean
the knowledge of such party or any officer or director of
such party after due investigation.
1.17. "Laws" shall mean the statutes, laws, rules,
regulations, ordinances, codes, directives, writs,
injunctions, decrees, judgments, and orders of any
governmental (whether foreign, federal, state, local, or
otherwise) legislative, regulatory or administrative agency,
court or other governmental body, promulgated generally and
not specifically directed to both of the parties to this
Agreement.
1.18. "Liabilities" shall mean liabilities,
obligations or commitments of any nature, absolute, accrued,
contingent or otherwise, known or unknown, whether matured
or unmatured.
1.19. "Liens" shall mean mortgages, deeds of trust,
collateral assignments, security interests, conditional or
other sales agreements, claims, options, restrictions,
liens, pledges, hypothecations, easements, rights of way,
encumbrances and adverse interests or other defects of title
of any kind, provided that "Liens" shall not mean liens for
taxes not yet due and payable.
1.20. "Material Adverse Effect" shall mean, with
respect to any Person, any condition, occurrence or effect,
which is materially adverse to the value of the business,
properties, assets, liabilities, capitalization,
stockholders' equity, financial condition, operations,
licenses or other franchises or results of operations of
such Person, considered as a whole.
1.21. "Netplex Common Stock" shall mean the shares
of Netplex common stock, par value $.001 per share.
1.22. "Netplex Preferred Stock" shall mean the
shares of Netplex preferred stock, Class B, par value $.01
per share. The Certificate of Designation which sets forth
the rights and preferences of the Netplex Preferred Stock is
attached hereto as Exhibit A.
1.23. "Person" shall mean any person or entity,
whether an individual, trustee, corporation, general
partnership, limited partnership, limited liability company,
trust, unincorporated organization, business association,
firm, joint venture, governmental agency or authority.
1.24. "Taxes" shall mean any federal, state, local,
foreign or other tax, levy, fee, assessment or other
government charge, including any penalties, additions and
interest with respect thereto.
1.25. "Work in Progress" shall mean, as to the
Contracts being transferred to Netplex under this Agreement
as of the Closing Date, any continuing or uncompleted
obligation to provide goods and/or services to Seller's
customer(s), which obligations will be transferred to
Netplex and assumed thereby hereunder, to the extent the
same are identified on Schedule 4.14.
ARTICLE 2
ASSET SALE AND PURCHASE
Netplex and Seller hereby agree that, subject to the terms
and conditions hereinafter set forth, (i) Seller shall sell,
assign, transfer and otherwise convey the Business and the
Assets, free and clear of all Liens, Contracts and
Liabilities, except as have been, or will be, identified on
schedules to this Agreement; (ii) Netplex agrees to
purchase, assume, and otherwise receive the Assets; (iii)
and Netplex agrees to pay to Seller the
consideration set forth herein for the Assets conveyed to
Netplex.
ARTICLE 3
CLOSING
3.1. Consideration to Seller:
3.1.1. At Closing, Netplex shall deliver
and pay to Seller (i) the Cash Consideration of Three
Million Dollars ($3,000,000) in certified funds or bank
wire transfer to an account designated by Seller; (ii)
a stock certificate representing the number of shares
of Netplex Preferred Stock as calculated below; (iii)
the Certificate of Designation of the Preferred Shares.
3.1.2. The number of shares of Netplex
Preferred Stock which Seller shall receive from Netplex
at Closing shall be calculated by dividing one million
(1,000,000) by the average reported closing price of
the Netplex Common Stock on the NASDAQ SmallCap Market
for the twenty (20) days immediately prior to September
1, 1998.
3.1.3. At Closing, Seller and Netplex
shall deliver to each other the executed Earn-Out
Agreement in the form substantially as set forth in
Exhibit B hereto, and such other Agreements Documents
as are provided for by this Agreement, all of which are
incorporated by reference as if fully set forth herein.
3.1.4. At Closing, Netplex shall deliver
to Seller such other documents as are reasonably
necessary to effect the transactions contemplated by
this Agreement.
3.2. Consideration to Netplex. At Closing,
Seller shall, subject to the terms, covenants, and
conditions of this Agreement, convey, transfer and deliver
to Netplex by an executed bill of sale, assignments,
assignments of contracts, and such other documents as are
reasonably required to perfect the transfer of the Business
and the Assets to Netplex free and clear of all Liens,
Contracts and Liabilities, except to the extent identified
on Schedule 3.2 hereto, which Schedule identifies the Liens,
Contracts and Liabilities Netplex agrees to assume
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Netplex as
follows, which representations and warranties have been
relied upon by Netplex in entering into this Agreement:
4.1. Organization. Seller is a corporation duly
organized, validly existing and in good standing under the
laws of the State of Oklahoma, and is qualified or
registered to do business in each jurisdiction where it is
required to do so. Seller has full corporate power and
authority to carry on its business as now conducted and to
enter into and to perform this Agreement. The address of
Seller's principal office, all of Seller additional places
of business, and the locations of all tangible personal
property included in the Assets are listed on Schedule 4.1.
Except as set forth on Schedule 4.1, during the past five
(5) years, Seller has not been known by or used any
corporate, partnership, fictitious or other name in the
conduct of the Business or in connection with the use or
operation of the Assets.
4.2. Corporate Authorization. The execution and
delivery of this Agreement and the consummation of the
transactions contemplated hereby have been, or will be prior
to the Closing, duly authorized by Seller's board of
directors and shareholders.
4.3. Binding Agreement. This Agreement has been duly
executed by Seller and delivered to Netplex and constitutes
the valid and binding agreement of Seller, enforceable
against Seller in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency or
other laws affecting creditors' rights generally and the
exercise of judicial discretion in accordance with general
equitable principles.
4.4. Subsidiaries and Affiliates. Except as set forth
on Schedule 4.4, Seller does not own any capital stock or
other equity securities of any other corporation and does
not have any other type of ownership interest in any other
corporation, partnership, joint venture or other business
organization or entity which relates to or is integral to
the operation of the Business.
4.5. No Breach. Except as set forth in Schedule 4.5 or
otherwise in the Agreement Documents, the execution,
delivery and performance of this Agreement by Seller will
not violate or conflict with Seller's Articles of
Incorporation or Bylaws or any Law to which Seller, or the
Assets are subject, or by which Seller or the Assets may be
bound, or (with or without giving notice or the lapse of
time or both) breach or conflict with any contract,
agreement, or other commitment to which Seller is a party or
by which Seller may be bound, or result in the imposition of
any Lien on the Assets other than such Liens as have been
identified on a Schedule to this Agreement.
4.6. Consents and Approvals. Except as set forth on
Schedule 4.6 hereto, no filing or registration with, no
permit, authorization, consent or approval of, and no notice
to, any federal, state or local government or any court,
administrative or regulatory agency or commission or other
governmental authority or agency, domestic or foreign, or
other public body or authority or any other person is
necessary or required in connection with the execution and
delivery of this Agreement by Seller or for the consummation
by Seller of the transactions contemplated by this
Agreement.
4.7. Permits. Schedule 4.7 contains a true and
complete list of all Permits. Seller has all Permits
required to conduct the Business as now being conducted.
All Permits are valid and in full force and effect. Except as set forth
on Schedule 4.7(a) or elsewhere in the Agreement Documents,
no notice to, declaration, filing or registration with,
approval or permit from, any domestic or foreign
governmental or regulatory body or authority, or any other
Person or entity, is required to be made or obtained by
Seller in connection with the execution, delivery or
performance of this Agreement and the consummation of the
transactions contemplated hereby. Notwithstanding anything
to the contrary in the foregoing, Seller makes no
representation as to whether any of said Permits may be
assumed, acquired, continued, or renewed by Netplex at or
after the Closing. It is specifically agreed and understood
between the Parties hereto that such Permits, to the extent
such Permits cannot be transferred, are not included in the
Assets.
4.8. Compliance with Laws. Except as set forth in
Schedule 4.8, Seller has, to the best Knowledge of Seller,
complied in all material respects with all of the Laws
applicable to the Business and the Assets, including,
without limitation, all applicable Laws relating to health
and sanitation, environmental protection and occupational
safety the violation of which would have a Material Adverse
Effect on its Business or the Assets.
4.9. Title to and Sufficiency of the Assets.
Seller has good and marketable title to all of the Assets
free and clear of all Liens, except for Liens described on
Schedule 4.9. The Assets constitute all of the assets,
rights and properties that are used in the operation of the
Business as it is now conducted.
4.10. Fixed Assets and Tangible Personal
Property. Schedule 4.10 contains a true and complete list of
the Fixed Assets and Tangible Personal Property which are
being sold pursuant to this Agreement. Except as set forth
on Schedule 4.10, the Fixed Assets and Tangible Personal
Property, are in good operating condition and repair
(reasonable wear and tear excepted), are performing
satisfactorily and are suitable for their intended uses.
4.11. Inventory. Schedule 4.11 contains a true
and complete list of all Inventory as of August 31, 1998
which is being sold pursuant to this Agreement. Except as
otherwise set forth on Schedule 4.11 and subject to Liens
identified in any of the Agreement Documents, all Inventory
reflected on the Seller Balance Sheet (as defined below), or
acquired since the date of the Seller Balance Sheet, was
acquired and has been maintained in the ordinary course of
business; is of good and merchantable quality; consists
substantially of a quality, quantity and condition useable,
leasable or saleable in the ordinary course of business; is
valued at reasonable amounts based on the ordinary course of
business and consistent with past practice; and is not
subject to any write-down or write-off. Seller is not under
any liability or obligation with respect to the return of
Inventory in the possession of wholesalers, retailers or
other customers.
4.12. Intangible Property and AIG Marks.
Schedule 4.12 contains a true and complete list of the
Intangible Property and AIG Marks to be conveyed to Netplex
pursuant to this Agreement. Seller has delivered to Netplex
copies of all documents (if any) establishing Seller's
rights to use the Intangible Property and AIG Marks, and any
restrictions thereof. To the best of Seller's Knowledge and
except as otherwise identified in this Agreement or the
Agreement Documents, Seller has, and after Closing, Netplex
will have, the right to use all Intangible Property and AIG
Marks, free and clear of any royalty or other payment
obligations. Except as set forth on Schedule 4.12 or in the
documents heretofore described in this section, to the best
of Seller's Knowledge, Seller's use of the Intangible
Property does not conflict with, violate or infringe any
intellectual property or other rights of any other Person,
no one has claimed any such violation or infringement, and
to Seller's best Knowledge, no Person is currently violating
or infringing any of Seller's intellectual property or other
rights with respect to the Intangible Property in any way
that would have a Material Adverse Effect on the Business.
4.13. Protection of Intellectual Property. To
the best of Seller's Knowledge, all employees and
consultants of Seller who have worked on or contributed to
the development of Seller's technology, trademarks, trade
names, copyrights and other intellectual property rights
have effectively conveyed to Seller all rights such
employees or consultants may have had in such intellectual
property.
4.14. Contracts. Schedule 4.14 contains a
true and complete list (and, in the case of oral agreements,
contracts or leases, a summary of the material terms) of all
Contracts and Works in Progress dated on or after January 1,
1996 or which represent Contracts of Seller and/or Works in
Progress to be transferred to Netplex pursuant to this
Agreement. To Seller's best Knowledge, the Contracts are
valid, binding and enforceable by Seller in accordance with
their respective terms and are in full force and effect. To
Seller's best Knowledge, Seller has delivered to Netplex
true and complete copies of the Contracts and all amendments
thereto, other than those oral agreements summarized on
Schedule 4.14. The Contracts are subject to any Liens
and/or Liabilities set forth on Schedule 4.14. Seller has
complied in all material respects with all of the Contracts
and neither it nor any other party thereto is in default, or
has been notified of a threat of a default or any dispute,
under any of the Seller Contracts. The execution, delivery
and performance of this Agreement by Seller will not
constitute a default or breach under any of the Contracts,
except as set forth in Schedule 4.14.
4.15. Litigation. Except as described on
Schedule 4.15, there is no litigation, proceeding (arbitral
or otherwise), claim or investigation of any nature pending
or, to Seller's best Knowledge, threatened against Seller,
the Business or the Assets. There are no writs,
injunctions, decrees, arbitration decisions, unsatisfied
judgments or similar orders outstanding against Seller with
respect to the Business or the Assets.
4.16. Seller Financial Statements.
(a) Schedule 4.16(a) sets forth true, correct and
complete copies of (i) the audited balance sheet of
Seller as of December 31, 1997 (the "Seller Balance
Sheet"); (ii) the statement of income of Seller for
the one year period ended December 31, 1997 (collectively
with the balance sheet described in Subsection (i) hereof,
the "Seller Annual Financials");
(iii) the unaudited balance sheet of Seller as of
June 30, 1998 and the statement of income of Seller
for the period January 1 through June 30, 1998 (the
"Seller Quarterly Financials"); and (iv) the
unaudited balance sheet of Seller as of August 31,
1998 and the statement of income for the interim
period from July 1, 1998 through August 31, 1998 (the
"Seller Monthly Financials" and, together with the
Seller Annual Financials and the Seller Quarterly
Financials, the "Seller Financial Statements"). The
Seller Financial Statements have been prepared in
accordance with generally accepted accounting
principles consistently applied, and present fairly
and accurately the financial condition of Seller at
the respective dates thereof.
(b) Schedule 4.16(b) sets forth true, correct and complete
copies of (i) the unaudited balance sheet of the
Business as of December 31, 1997 (the "Business
Balance Sheet"); (ii) the unaudited statement of
income of the Business for the one year period ended
December 31, 1997 (collectively with the balance
sheet described in Subsection (i) hereof, the
"Business Annual Financials"); (iii) the unaudited
balance sheet of the Business as of June 30, 1998 and
the statement of income of the Business for the
period January 1 through June 30, 1998 (the "Business
Quarterly Financials"); and (iv) the unaudited
balance sheet of the Business as of August 31, 1998
and the statement of income for the interim period
from July 1, 1998 through August 31, 1998 (the
"Business Monthly Financials" and, together with the
Business Annual Financials and the Business Quarterly
Financials, the "Business Financial Statements"). It
is specifically agreed
and understood by the Parties hereto that the
Business Balance Sheet was prepared for the purposes
of this Agreement with Seller's best efforts to
fairly and accurately present the financial condition
and the results of the operations of the Business at
the respective dates thereof, and such Business
Balance Sheet was not necessarily calculated or kept
by Seller in the ordinary course of its business.
4.17. Absence of Material Adverse Changes. Since
December 31, 1997, there have been no changes or conditions
constituting a Material Adverse Effect on the Assets
or Business which have not been disclosed in writing
to Netplex.
4.18. Liabilities. Except as disclosed
on Schedule 4.18 attached hereto or disclosed
elsewhere in the Agreement Documents, Seller has no
material Liabilities of any nature relating to the
Business, including without limitation, Tax
liabilities due or to become due, except iabilities
that are reflected and reserved against on the Seller
Financial Statements or otherwise disclosed pursuant
to this Agreement.
4.19. Tax Matters. Neither Seller, nor
any entity to whose liabilities Seller has succeeded,
has filed or been included in a consolidated,
unitary, or combined tax return with another Person.
Except as disclosed on Schedule 4.19 hereto: (a)
Seller has filed all tax returns and reports ("Seller
Tax Returns") required to have been filed by or for
it (except for those tax returns and reports for
which it has obtained an extension, which it will
file in a timely manner); (b) Seller has paid or made
adequate provision for all Taxes payable by Seller,
and there is no Tax due and payable, the non-payment
of which would adversely affect any of the Assets or
the use thereof, or could cause Netplex to incur any
liability; (c) no unpaid Tax deficiency has been
asserted against or with respect to Seller by any
taxing authority; (d) Seller is in compliance with,
and its Business Records contain all information and
documents necessary to comply with, all applicable
information reporting and Tax withholding
requirements; (e) Seller has not granted, nor is it
subject to, any waiver of the period of limitations
for the assessment of Tax for any currently open
taxable period; and (f) Seller has not entered into,
and holds no asset subject to, a "safe harbor lease"
subject to former Section 168(f)(8) of the Internal
Revenue Code of 1954, as amended before the Tax
Reform Act of 1986, and the regulations thereunder;
(g) all material information set forth in the Seller
Tax Returns is accurate and complete; (h) the Seller
Balance Sheet fully and properly reflects, as of the
date thereof, the Liabilities of Seller for all
accrued taxes, additions to tax, penalties, and
interest; (i) for periods ending after the date of
the most recent Seller Financial Statements, the
books and records of Seller fully and properly
reflect its liability for all accrued taxes,
additions to tax, penalties and interest; (j) Seller
has not made or entered into, and holds no asset
subject to, a consent filed pursuant to Section
341(f) of the Code and the regulations thereunder;
and (k) Seller is not required to include in income
any amount for an adjustment pursuant to Section 481
of the Code or the regulations thereunder. Schedule
4.19 describes all material tax elections, consents,
and agreements affecting Seller, and lists all types
of taxes paid and tax returns filed by Seller.
Seller is not a "foreign person" for purposes of
Section 1445 of the Code.
4.20. Insolvency Proceedings.
Neither Seller nor any of the Seller's Assets being
transferred under this Agreement is the subject of
any pending or, to Seller's best Knowledge,
threatened, insolvency proceedings of any character.
Seller has not made an assignment for the benefit of
creditors or taken any action with a view to or that
would constitute a valid basis for the institution of
any such insolvency proceedings. Seller is not
insolvent and will not become insolvent as a result
of entering into this Agreement.
4.21. Employee Benefit Plans.
(a) Schedule 4.21 hereto includes a complete and correct
schedule of (i) all employee pension benefit plans
(as defined in Section 3(2) of ERISA) and employee
welfare benefit plans (as defined in Section 3(1) of
ERISA) of Seller and any other Person or entity that
together with Seller, is treated as a single employer
under Code Section 414(b), (c), (m) or (o) (each such
Person or entity being referred to herein as an
"ERISA Affiliate"), (ii) all plans, programs,
agreements and arrangements that provide benefits to
employees of Seller or any ERISA Affiliate as a
result of the transactions contemplated by this
Agreement or that provide for the payment of
separation, severance, termination or similar
benefits to such employees, (iii) all trust
agreements established for the purposes of funding
any compensation or benefit plan, program, agreement
or arrangement, in each case currently maintained for
the benefit of, or relating to, any current or former
employee, officer, director or independent contractor
of Seller or any ERISA Affiliate, and (iv) all other
plans, programs, contracts or arrangements pertaining
to or including any current or former employee,
officer, director or independent contractor of Seller
or any ERISA Affiliate (these plans, programs,
agreements and arrangements together with all other
employee benefit plans, programs, agreements and
arrangements of Seller or any ERISA Affiliate
(including, but not limited to, all "employee benefit
plans" within the meaning of Section 3(3) of ERISA)
for the benefit of, or relating to, any current or
former employee, officer, director or independent
contractor of Seller or any ERISA Affiliate, being
collectively referred to herein as the "Seller
Plans"). Neither Seller nor any ERISA Affiliate
maintains or participates in, nor has Seller or any
ERISA Affiliate ever maintained or participated in,
any defined benefit plans or any "multiemployer
plans" as defined in Section 3(37) of ERISA. Except
as set forth in Schedule 4.21 hereto, neither Seller
nor any ERISA Affiliate has ever maintained or
participated in any other employee benefit plans or
other like plans, programs or arrangements under
which Seller or any ERISA Affiliate has any
obligation to any of their current or former
employees, officers, directors, or independent
contractors, nor has Seller or any ERISA Affiliate
made any commitments or agreements to establish or
extend any such plans, programs or arrangements for
their benefit.
(b) Seller has previously provided to Netplex true, correct and
complete copies of (i) each Seller Plan (or, in the
case of any unwritten Seller Plan, a description
thereof), (ii) actuarial reports and financial
statements prepared in connection therewith for the 3
previous years, (iii) each trust agreement and/or
insurance contract with respect to each Seller Plan,
(iv) annual reports on Form 5500 filed with the
Internal Revenue Service with respect to each Seller
Plan (if required) for the 3 previous years, (v) the
most recent summary plan description for each Plan
for which such summary plan description is required;
and (vi) all IRS determination letters obtained for
any Seller Plan.
(c) To the Knowledge of Seller, each Seller Plan is now and has
been operated, administered and maintained in all
material respects in compliance with its terms and
the requirements of all applicable law, including,
without limitation, ERISA and the
Code. All contributions required to be made to any
Seller Plan have been made on or before their due
dates and no Seller Plan has incurred a funding
deficiency under Section 412 of the Code. No legal
action, suit or claim is pending or, to the Knowledge
of Seller, threatened with respect to any Seller Plan
(other than claims for benefits in the ordinary
course).
(d) Each Seller Plan that is intended to be qualified under
Section 401(a) of the Code or Section 401(k) of the
Code has received a favorable determination letter
from the Internal Revenue Service that the form of
such Seller Plan is so qualified and each trust
established in connection with any Seller Plan which
is intended to be exempt from federal income taxation
under Section 501(a) of the Code has received a
determination letter from the Internal Revenue
Service that it is so exempt from federal income
taxation. No such determination letter has been
revoked nor has revocation of any such determination
letter been threatened, nor has any such Seller Plan
been amended since the date of its most recent
determination letter or application therefor in any
respect that would adversely affect its qualified
status or materially increase its costs (provided
that for purposes of this sentence the term
"materially" shall mean, with regard to each
occurrence, an amount in excess of $10,000.00 or
$100,000.00 in the aggregate).
(e) To the Knowledge of Seller, there has been no
prohibited transaction (within the meaning of Section
406 of ERISA or Section 4975 of the Code) or other
breach of fiduciary responsibility with respect to
any Seller Plan that could give rise to any tax or
penalty under Section 4975 of the Code, Title I of
ERISA or other applicable law.
(f) With respect to each Seller Plan which is a group health
plan (as defined in Code Section 4980B and ERISA
Section 607), Seller and each ERISA Affiliate have
taken all necessary actions to satisfy the notice and
benefit requirements under Code Section 4980B and
Part 6 of Title I of ERISA with respect to employees,
former employees and independent contractors of
Seller and any ERISA Affiliate (and their spouses and
dependent children) who have had a "qualifying event"
as defined in Code Section 4980B and ERISA Section
603 with respect to any such Seller Plan on or before
the Closing, or as a result of the instant
transaction. Except as set forth in Schedule 4.21
hereto, there are currently no employees, former
employees or independent contractors of Seller or any
ERISA Affiliate (or their spouses and dependent
children) (i) who have elected continuation coverage
under Code Section 4980B or Part 6 of Title I or
ERISA, or (ii) who are eligible to elect such
continuation coverage with respect to any of Seller'
or any ERISA Affiliate's group health plans for a
"qualifying event" (as defined above) that occurred
prior to the date of this Agreement.
(g) Except as set forth in Schedule 4.21, there is no material
debt, liability, claim or obligation resulting (or
which may result) from any claim incurred or
asserted under any Seller Plan, or which, to the
Knowledge of Seller, may be incurred or asserted
before, on or after the Closing under any Seller
Plan, by any employees, former employees or
independent contractors of Seller or any ERISA
Affiliate (or their covered dependents), whether as
retirees, disabled persons or otherwise, which is
not fully and totally funded for by a separate trust
or insurance policy or fully and totally reserved
for on the Financial Statements as of the Closing
(in which case, the amount of such debt, liability,
claim or obligation and the actuarial methods and
assumptions are stated in Schedule 4.18).
(h) Notwithstanding anything to the contrary in
this Agreement, Netplex is not acquiring any interest
in any Employee Benefit Plan or insurance policies of Seller.
4.22. Employees. Seller has provided
Netplex with a complete and accurate list of all
employees of Seller employed in the Business, showing
for each: name, current job title or description,
current salary level (including any bonus or deferred
compensation arrangements) and any bonus, commission
or other remuneration paid or payable since December
31, 1997 (other than any bonuses paid to salespersons
in the ordinary course of the Business), and
describing any existing contractual arrangement with
such employee. Except as set forth in Schedule 4.22
hereto, Seller has not maintained, does not maintain
and has not announced to the employees listed on
Schedule 4.22 any plan to maintain any written or
other policy with respect to severance or termination
pay. Except as set forth in Schedule 4.22 and other
than usual and customary wage and salary or
employment practices, since December 31, 1997, Seller
has made no commitments or agreements to increase the
wages or to modify the conditions or terms of
employment of any of the employees listed on said
Schedule. There are no collective bargaining
agreements applicable to the Business and there have
been no union organizing efforts conducted with
respect to such employees or any work stoppages
experienced by Seller during the last three years.
4.23. Insurance. Schedule 4.23 lists
all insurance policies (by policy number, insurer,
location or property insured, annual premium, premium
payment dates, expiration date and type of coverage)
held by Seller relating to the business, properties
and employees of the Business, copies of which have
been provided to Netplex. All such insurance
policies are in full force and effect and in such
amounts and provide coverages that are reasonable and
customary in light of the business, operations and
properties of Business.
4.24. Environmental Matters.
(a) As used in this Agreement "Hazardous Material" shall mean:
(i) any "hazardous substance" as now defined pursuant
to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C.
9601(14); (ii) any "pollutant or contaminant" as
defined in 42 U.S.C. 9601(33); (iii) any material
now defined as "hazardous waste" pursuant to 40
C.F.R. Part 261; (iv) any petroleum, including crude
oil and any fraction thereof; natural or synthetic
crude oil and any fraction thereof; (v) natural or
synthetic gas usable for fuel; (vi) any "hazardous
chemical" as defined pursuant to 29 C.F.R. Part 1910;
(vii) any asbestos, polychlorinated biphenyl, or
isomer of dioxin, or any material or thing containing
or composed of such substance or substances; (viii)
any infectious organism or biological or medical
waste; or (ix) any other substance, regardless of
physical form, that is subject to any Environmental
Laws.
(b) As used in this Agreement, "Environmental Laws" shall mean
any statutes, regulations, requirements, orders,
ordinances, rules of liability or standards of
conduct of any foreign, federal, state, local
government, or common law relating to the protection
of human health, plant life, animal life, natural
resources, the environment or property from the
presence in the environment of any solid, liquid,
gas, odor or any form of energy, from whatever
source, including, without limitation, any emissions,
discharges, releases, or threatened releases of
Hazardous Material into the environment (including,
without limitation, ambient air, surface water,
groundwater, land surface or subsurface or building
structures), or otherwise relating to
the manufacture, processing, distribution, use,
treatment, storage, generation, disposal, transport
or handling of pollutants, contaminants, chemicals,
or industrial, toxic or hazardous substances or
wastes.
(c) To the knowledge of Seller, except as set forth on Schedule
4.24, (i) there are no environmental conditions
related to the Seller Real Property Leases (as
defined herein) or Seller' business and other assets
of Seller that could have a Material Adverse Effect
on Seller, including any such conditions relating to
the use, treatment, storage, release or disposal of
any Hazardous Material; (ii) Seller has not
manufactured, processed, distributed, used, treated,
stored, disposed of, transported or handled any
Hazardous Material in a manner that could have a
Material Adverse Effect on Seller; (iii) there is no
ambient air, surface water, groundwater or land
contamination or contamination within building
structures, within, under, originating from or
relating to any real property which is the subject of
the Seller Real Property Leases, or any other
location related to the Seller Real Property Leases
such that the contamination affects such other
locations and none of such properties has been used
for the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling
of any Hazardous Material in a manner that could have
a Material Adverse Effect on Seller; and (iv) Seller
has no obligation or liability, known or unknown,
matured or not matured, absolute or contingent,
assessed or unassessed, imposed or based upon the
failure to comply with any provision under any
federal, state or local law, rule, or regulation or
common law, or under any code, order, decree,
judgment or injunction applicable to Seller, and
Seller has not received any notice, or request for
information issued, promulgated, approved or entered
thereunder, or under the common law, or any tort,
nuisance or absolute liability theory, relating to
public health or safety, worker health or safety, or
pollution, damage to or protection of the
environment, including, without limitation, the
Environmental Laws, where such obligation or
liability could have a Material Adverse Effect on
Seller.
(d) Seller possesses and is in compliance in all material
respects with all permits, licenses, certificates,
franchises and other authorizations relating to the
Environmental Laws necessary to conduct Seller's
business or required by environmental regulations.
4.25. Seller Real Property Leases. Schedule 4.25
lists the real property leases to which Seller is a party.
Seller has a valid leasehold interest in all real
property it uses or occupies pursuant to real
property leases included within the Contracts (the
"Seller Real Property Leases"). Seller's leasehold
interest in all Seller Real Property Leases is free
and clear of all Liens, except for (i) easements and
other rights or restrictions of record that do not
materially impair the use or value of the Seller Real
Property Leases as they are now used by Seller, and
(ii) except for Liens set forth on Schedule 4.9. To
the best of Seller's Knowledge, the buildings,
improvements and fixtures that are included in the
Seller Real Property Leases are in good operating
condition and repair (reasonable wear and tear
excepted), free of structural defects and are
suitable for their intended uses. To the best of
Seller's Knowledge, the real property which is the
subject of the Seller Real Property Leases, the
improvements located thereon, and the furniture,
fixtures and equipment relating thereto (including
plumbing, heating, air conditioning and electrical
systems), conform to any and all applicable health,
fire, safety, zoning, environmental, land use and
building laws, ordinances and regulations. Seller is
current with respect to all rental payments under the
Seller Real Property Leases and is not in default under any of
the Seller Real Property Leases. In addition, with
respect to all Liens listed on Schedule 4.9, to
Seller's Knowledge, there are no facts or
circumstances which would give rise to a claim under
the Seller Real Property Leases in connection with
any such Lien. Seller owns no real property and has
no other interests therein, other than its leasehold
interests in the Seller Real Property Leases.
4.26. Brokers. Other than Ampton
Investments, Inc., Seller has not dealt with, or made
any arrangements or agreements with any third party
in connection with the transactions contemplated by
this Agreement so as to give rise to any claims for
brokerage commissions, finders fees or similar
compensation.
4.27. No Other Agreements to Merge or
Sell. Seller has no legal obligation, absolute or
contingent, to any other Person to sell the Assets or
the Business (in whole or in part), or effect any
merger, consolidation or other reorganization of
Seller, or to enter into any agreement with respect
thereto.
4.28. Financing Statements. Except as
set forth on Schedule 4.28, all of the Assets are and
have been located in the State of Oklahoma since the
Assets were acquired by Seller. To Seller's best
Knowledge, all Uniform Commercial Code financing
statements, if any, filed by any person with respect
to the Assets are listed on Schedule 4.28.
4.29. Transactions with Certain
Persons; Interest in Customers, Suppliers or
Competitors. To Seller's best Knowledge, except as
set forth on Schedule 4.29, no officer, director or
employee of Seller nor any member of any such
person's immediate family ("Interested Person") is,
or has within the past five (5) years been, a party
to any transaction with Seller relating to the
Business, other than for services as officers,
directors or employees of Seller, or transactions in
the ordinary course of business, which transaction
provides or provided for: (a) furnishing of services
by such Interested Person, (b) rental of real or
personal property from such Interested Person, or (c)
payments to such Interested Person or a corporation,
partnership, trust or other entity in which any such
Interested Person has a controlling interest as a
shareholder, officer, director, trustee or partner.
No Interested Person has any direct or indirect
controlling interest in any competitor, supplier or
customer of the Business or in any Person from whom
or to whom Seller leases any Real Property or
personal property, or in any other Person with whom
Seller is doing business.
4.30. Accounts Receivable. Schedule
4.30 contains a true and complete aging report of all
of the Accounts Receivable relating to the Business
as of August 31, 1998. All Accounts Receivable
relating to the Business, except as set forth on
Schedule 4.30, represent bona fide claims of Seller
against debtors for sales, services performed or
other charges arising on or before August 31, 1998,
and all the goods delivered and services performed
which gave rise to said accounts were delivered or
performed in accordance with the applicable orders,
contracts or customer requirements. The Accounts
Receivable are subject to no defenses, counterclaims
or rights of setoff and are fully collectible in the
ordinary course of Seller's business without cost in
collection efforts therefor, except as set forth on
Schedule 4.30 and except to the extent of the
appropriate reserves for bad debts on the Accounts
Receivable as set forth in the Seller Financial
Statements.
4.31. Material Misstatements Or
Omissions. No representations or warranties by
Seller in this Agreement, nor in any of the Agreement
Documents, contain or will contain any untrue
statement of a material fact, or omit or will omit to
state any material fact necessary to make the
statements or facts contained therein not misleading.
4.32. Acquisition for Own Account. The
Netplex Preferred Stock to be acquired by Seller
hereunder will be acquired for investment for
Seller's own account, not as a nominee or agent, and
not with a view to the public resale or distribution
thereof within the meaning of the Securities Act of
1933, as amended (the "1933 Act"), and Seller has no
present intention of selling, granting any
participation in, or otherwise distributing the same.
4.33. Restricted Securities. Seller
understands that the shares of Netplex Preferred
Stock are characterized as "restricted securities"
under the 1933 Act inasmuch as they are being
acquired from Netplex in a transaction not involving
a public offering and that under the 1933 Act and
applicable regulations thereunder such securities may
be resold without registration under the 1933 Act
only in certain limited circumstances. In this
connection, Seller represents that it is familiar
with Rule 144 of the Securities and Exchange
Commission ("SEC"), as presently in effect, and
understands such resale limitations imposed thereby
and by the 1933 Act.
4.34. Legends. Seller understands that the
instruments and certificates evidencing the shares of
Netplex Preferred Stock will bear the legend
substantially as set forth below:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
ANY STATE. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY
NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED
UNDER THE ACT AND THE APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY
BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE
ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF
COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR
RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
The legend set forth above shall be removed by
Netplex from any certificate or instrument evidencing
the Shares upon delivery to Netplex of an opinion by
counsel, reasonably satisfactory to Netplex, that a
registration statement under the 1933 Act is at that
time in effect with respect to the legended security
or that such security can be freely transferred in a
public sale without such a registration statement
being in effect and that such transfer will not
jeopardize the exemption or exemptions from
registration pursuant to which Netplex issued the
Shares.
4.35. No Owned Software or Patents.
Except as set forth on Schedule 4.35, or transferred
as part of the Assets, Seller owns no software or
patents which are used or required for use in the
operation of the Business as it is presently being
conducted.
4.36. No Customer Complaints. To
Seller's Knowledge and except as set forth on
Schedule 4.36, there are no currently
pending complaints from customers of the Business
which are substantially likely to have a Material
Adverse Effect on the Business, and no customer of
the Business with any pending complaint or claim has
threatened to file suit against or refused to pay
Seller for products or services sold to a customer in
the ordinary course of the Business.
4.37. Business Records. Seller has
delivered, or will deliver, to Netplex copies of all
of the Business Records and copies of all customer
lists and accounts of Seller. The customer list as
set forth in Schedule 4.37 is a complete list of all
current customers of Seller relating to the Business
as of August 31, 1998.
4.38. Year 2000 Compliance. Seller's
"RSA," "Chainlink" and "IDP" software products
("Compliant Products"), subject to the disclaimer
below, will not produce errors processing date data
in connection with the year change from December 31,
1999 to January 1, 2000 when used with accurate date
data in accordance with the documentation for the
Compliant Products, provided all other products
(including, without limitation, other software,
firmware, hardware, and operating systems) used with
it properly exchange date data with the Seller's
Compliant Products. Said Compliant Products will
recognize the year 2000 as a leap year. DISCLAIMER:
The foregoing statement refers to the Seller's
identified Compliant Products as delivered by Seller,
and does not apply to user initiated modifications,
user customizable features or third party add-on
features or products, including items such as macros
and custom programming and formatting features, and
further does not constitute a warranty or extend the
terms of any existing warranty. The warranties for
the Compliant Products, if any, are set forth in the
license agreement(s) that were signed by Seller's
customer in conjunction with the licensing of the
Compliant Product. Except as to the Compliant
Products, no representation or warranty is made by
Seller concerning the compatibility or functionality
of any other program or software product included in
any way in the Assets, including, without limitation,
any items of software, operating systems, or hardware
with which the Compliant Products may interact, nor
does Seller make or extend any warranty or
representation concerning "year2000 compliance" of
any kind with regard to any product or item created
or provided by any third party, whether owned or
licensed, that is to be transferred to Netplex as an
Asset pursuant to this Agreement, or any other item
of software created or provided by Seller.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF NETPLEX
Netplex hereby represents and warrants to Seller
as follows, which representations and warranties have
been relied upon by Seller in entering into this
Agreement:
5.1. Organization. Netplex is a
corporation duly organized, validly existing and in
good standing under the laws of the State of New
York, and is qualified or registered to do business
in each jurisdiction where it is required to do so.
Netplex has full corporate power and authority to
carry on its business as now conducted and to enter
into and to perform this Agreement.
5.2. Corporate Authorization. The
execution and delivery of this Agreement, the
issuance of the Netplex Preferred Stock as provided
herein and the consummation of all the transactions
contemplated hereby have been duly authorized by all
requisite corporate action with respect to Netplex,
including, without limitation, approval by Netplex's
board of directors.
5.3. Binding Agreement. This Agreement has
been duly executed by Netplex and delivered to Seller
and constitutes the valid and binding agreement of
Netplex, enforceable against Netplex in accordance
with its respective terms, except as enforceability
may be limited by bankruptcy, insolvency or other
laws affecting creditors' rights generally and the
exercise of judicial discretion in accordance with
general equitable principles.
5.4. No Breach. The execution, delivery
and performance of this Agreement by Netplex and the
issuance of any Netplex stock pursuant to this
Agreement and the Agreement Documents will not
violate Netplex's Certificate of Incorporation, as
amended, or Bylaws or any Law to which Netplex is
subject or by which Netplex may be bound, or (with or
without giving notice or the lapse of time or both)
breach or conflict with any contract, agreement, or
other commitment to which either of Netplex is a
party or by which Netplex is or may be bound, or
result in the creation or imposition of any Lien
against or upon the Shares or any of the assets or
properties owned or leased by either of Netplex or
the Business.
5.5. Litigation; Compliance with Law.
Other than as disclosed in its public filings, there
is no litigation, proceeding (arbitral or otherwise),
claim or investigation of any nature, pending or, to
Netplex's best Knowledge, threatened, against
Netplex that reasonably could be expected to
adversely affect Netplex's ability to perform in
accordance with the terms of this Agreement. Neither
Netplex nor any officer, director, partner or
employee of Netplex has been permanently or
temporarily enjoined or barred by any legal judgment
from engaging in or continuing any conduct or
practice in connection with the activities of Netplex
as currently conducted; and there is not in existence
any legal judgment requiring Netplex to take any
action of any kind with respect to the assets or
properties owned or leased by it, or its activities,
or to which Netplex or its activities, properties or
assets are otherwise subject or by which they are
otherwise bound or affected. The conduct by Netplex
of its activities as currently conducted does not
violate or infringe any Laws currently in effect, or,
to the Knowledge of Netplex, proposed to become
effective; and Netplex has not received any notice of
any violation by Netplex of any Laws applicable to
Netplex or their respective activities as currently
conducted; and Netplex does not know of any basis
for the allegation of any such violation.
5.6. Brokers. Other than Zanett Securities
Corporation, Buyer has not dealt with, or made any
arrangements or agreements with any third party in
connection with the transactions contemplated by this
Agreement so as to give rise to any claims for
brokerage commissions, finders fees or similar
compensation..
5.7. Capitalization. Netplex has
authorized and outstanding the capital stock set
forth on Schedule 5.7. Except as set forth on
Schedule 5.7, there are not outstanding any options,
warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition
from Netplex of any shares of its capital stock or
any securities convertible into or ultimately
exchangeable or exercisable for any shares of
Netplex's capital stock.
5.8. Certificate of Incorporation;
Certificate of Designation. Schedule 5.8 includes true,
complete and current copies of Netplex's Certificates of
Incorporation, as amended, and Netplex's Certificate of Designation,
respectively, to be filed with the Secretary of State
of the State of New York.
5.9. Consents and Approvals. Except as set
forth on Schedule 5.9 hereto, no filing or
registration with, no permit,
authorization, counsel or approval of, and no notice
to, any federal, state or local government or any
court, administrative or regulatory agency or
commission or other governmental authority or agency,
domestic or foreign, or other public body or
authority or any other Person is necessary or
required in connection with the execution and
delivery of this Agreement by Netplex or for the
consummation by Netplex of the transactions
contemplated by this Agreement.
5.10. Valid Issuance of Preferred
Shares. The Preferred Shares, when issued and
delivered in accordance with the terms of this
Agreement for the consideration provided for herein,
will be duly and validly issued, fully paid and
nonassessable and shall not be subject to, or bound
or affected by, any proxies, voting agreements, or
other restrictions on the incidents of ownership or
Liens of any nature.
5.11. Permits of Netplex. Netplex
represents and warrants that, at its expense, it has
or shall obtain at or prior to Closing all Permits
required to conduct the Business as now being
conducted. In the event Netplex is required to
obtain any Permit other than by receipt of the same
from Seller, Netplex shall bear the cost of obtaining
it. Until the expiration of nine quarters after the
Closing, all Permits shall be maintained by Netplex
as valid and in full force and effect until December
31, 2000. Except as set forth on Schedule 5.11, no
notice to, declaration, filing or registration with,
approval or permit from, any domestic or foreign
governmental or regulatory body or authority, or any
other Person or entity, is required to be made or
obtained by Netplex in connection with the execution,
delivery or performance of this Agreement and the
consummation of the transactions contemplated hereby.
5.12. Compliance with Laws. Netplex
has and shall continue until December 31, 2000 to
comply in all material respects with all of the Laws
applicable to the Business and the Assets, including,
without limitation, all applicable Laws relating to
health and sanitation, employment and employment
benefits, equal opportunity, discrimination,
environmental protection and occupational safety, the
violation of which would have a Material Adverse
Effect on the Business or the Assets.
5.13 Absence of Material Adverse Changes.
Since December 31, 1997, there have been no changes
or conditions constituting a Material Adverse Effect
on Netplex which has not been disclosed in writing to
Seller.
ARTICLE 6
COVENANTS OF SELLER
Between the date of this Agreement and the
Closing, Seller hereby covenants:
6.1. Maintenance of the Business. Seller
shall conduct the Business and use the Assets only in
the ordinary course of business, consistent with past
practices, which shall include compliance in all
respects with all Laws, regulations and administrative
orders of any federal, state or local governmental
authority that are applicable to Seller with respect
to the Assets or Business, with the intent of
preserving the ongoing operations of the Assets and
Business and which shall also include, without
limitation, not selling, transferring or disposing of
any assets or properties currently owned by Seller,
as applicable, nor making any distributions of cash
or other property to shareholders or incurring any
indebtedness for borrowed money without Netplex's
consent, other than accounts payable consistent with
past practices.
6.2. Adverse Developments. Seller shall
promptly notify Netplex of any materially adverse
developments that occur prior to Closing with respect
to the Assets or the operation of the Business.
Seller shall keep Netplex informed of all material
operational matters and business developments with
respect to the Business and its markets, including
any competitive changes.
6.3. Access. Seller will provide Netplex,
its counsel, accountants, financing sources and other
representatives ("Netplex's Representatives") with
access to the Business Records, to the Assets, and to
the officers, employees, agents and accountants of
each with respect to matters relating to the Business
during normal business hours, upon reasonable notice
and at a mutually agreeable time; provided that such
access does not materially disrupt the operations of
the Business, and Seller will provide Netplex's
Representatives with such information concerning the
Assets and the Business as they reasonably may
request for the purpose of allowing Netplex to
perform a due diligence review of Seller. Seller
shall instruct its representatives to cooperate fully
with the review by Netplex's Representatives of the
Business Records.
6.4. Financial Statements and Other
Reports. Between the date of this Agreement and the
Closing, as soon as the same are available, Seller
will provide Netplex with copies of the Business'
regularly prepared sales reports and any regularly
prepared periodic financial statements or reports.
6.5. No Negotiations. Seller will refrain,
and will cause each other Person acting for or on
behalf of Seller, to refrain, from taking, directly
or indirectly, any action (a) to merge, consolidate,
or combine, or to permit any other Person to merge,
consolidate or combine, with Seller in a manner which
affects the Business; and (b) to seek or encourage
any offer or proposal from any Person to acquire the
Business or any Assets (other than in the ordinary
course of business consistent with past practices).
6.6. Third Party Consents. Seller shall
use its best efforts to obtain any third party
consents required for performance under this
Agreement and the consummation of the transactions
contemplated hereby.
6.7. Satisfaction of Conditions. Seller
shall in good faith use its reasonable best efforts
to satisfy all conditions to its obligations to close
and consummate the transactions contemplated by this
Agreement.
ARTICLE 7
COVENANTS OF NETPLEX
Between the date of this Agreement and the
Closing, Netplex hereby covenants:
7.1. Adverse Developments. Netplex shall
promptly notify Seller of any materially adverse
developments that occur
prior to Closing with respect to the operation of its
business.
7.2. Access. Netplex will provide Seller,
its counsel, accountants, financing sources and other
representatives ("Seller's Representatives") with
access to its business records, and to its officers,
employees, agents and accountants with respect to
matters relating to its business during normal
business hours, upon reasonable notice and at a
mutually agreeable time; provided that such access
does not materially disrupt the operations of
Netplex's business, and Netplex will provide Seller's
Representatives with such information concerning its
business as they reasonably may request for the
purpose of allowing Seller to perform a due diligence
review of Netplex. Netplex shall instruct its
representatives to cooperate fully with the review by
Seller's Representatives.
7.3. Financial Statements and Other
Reports. Between the date of this Agreement and the Closing, as soon
as the same are available, Netplex will provide
Seller with copies of its regularly prepared sales
reports and any regularly prepared periodic financial
statements or reports.
7.4. Third Party Consents. Netplex shall use its best
efforts to obtain any third party consents required
for performance under this Agreement and the
consummation of the transactions contemplated hereby.
7.5. Financial Statements and Other Reports. Between
the date of this Agreement and the Closing, as soon
as the same are available, Netplex will provide
Seller with copies of Netplex's regularly prepared
periodic financial statements or reports.
7.6. Third Party Consents. Netplex shall obtain any
and all third party consents required for performance
under this Agreement and the consummation of the
transactions contemplated hereby.
7.7. Satisfaction of Conditions. Netplex shall in good
faith use its reasonable best efforts to satisfy all
conditions to its obligations to close and consummate
the transactions contemplated by this Agreement.
ARTICLE 8
OTHER COVENANTS
8.1. Governmental Consents. Promptly following the
execution of this Agreement, Seller and Netplex shall
proceed to prepare and file with the appropriate
governmental authorities such requests for approvals
or waivers, reports or notifications as may be
required in connection with this Agreement.
Notwithstanding anything to the contrary in the
foregoing, Seller's obligations under this section
8.1 shall be construed under and limited to any
requests, waivers, reports or notifications as a
required specifically by Oklahoma or federal law.
8.2. Confidentiality. Netplex and Seller shall each
keep confidential and not, directly or indirectly,
reveal, report, publish, disclose or transfer any
information obtained by it with respect to the others
in connection with this Agreement and the
negotiations preceding this Agreement (the
"Confidential Information"). Each will use such
Confidential Information solely in connection with
the transactions contemplated by this Agreement, and
if the transactions contemplated hereby are not
consummated for any reason, each shall return to the
others, without retaining any copies thereof, any schedules,
documents or other written information obtained from
the other in connection with this Agreement and the
transactions contemplated hereby and shall cause all
of its officers, employees, agents, accountants,
attorneys and other representatives to whom it may
have disclosed such Confidential Information to do
the same. Notwithstanding the foregoing limitation,
neither party shall be required to keep confidential
or return any Confidential Information that (a) is
known or available through other lawful sources, not
bound by a confidentiality agreement with the
disclosing party, (b) is or becomes publicly known or
generally known in the industry through no fault of
the receiving party or its agents, (c) is required to
be disclosed pursuant to Law (provided the other
parties are given reasonable prior notice), and (d)
is developed by the receiving party independently of
the disclosure by the disclosing party. This Section
8.2 shall survive the termination of this Agreement.
8.3. No Inconsistent Action. Each of
Netplex and Seller shall not take any action which is
materially inconsistent with its obligations under
this Agreement or that would hinder or delay the
consummation of the transactions contemplated by this
Agreement.
8.4. Non-competition by Seller.
(a) For a period of four (4) years after the Closing Date,
Seller and any of its subsidiaries, Affiliates,
successors or assigns (except as hereinafter stated)
shall not, directly or indirectly, alone, or as a
partner, partial owner, consultant, or agent (of any
other corporation, partnership or other business
organization), engage in the delivery of technology
consulting services and solutions to the retail and
distribution industries other than as is reasonably
necessary for the sale, licensing, installation,
integration, use, implementation and support of
viaLink products and services. Seller and Netplex
agree that the viaLink business is defined as
substantially building, marketing and implementing
proprietary software products, information content
and related services to facilitate electronic
commerce. If Seller sells, assigns, or otherwise
disposes of its viaLink business to a buyer who is
not under the control of Seller, and such Buyer is
already in competition with Netplex or any of its
Affiliates, then this Section 8.4(a) shall not apply.
(b) For a period of four (4) years after the Closing Date,
Seller and any of its subsidiaries, Affiliates,
successors or assigns shall not, directly or
indirectly, alone, or as a partner, partial owner,
consultant, or agent of any other corporation,
partnership or other business organization, knowingly
solicit the employment of, or knowingly hire, any
employee of Netplex, or any Netplex subsidiary, or
intentionally cause any such employee to terminate
the employee's relationship with Netplex or any
Netplex subsidiary, without the prior written
approval of Netplex.
(c) For a period of four (4) years after the Closing Date,
Seller and any of its subsidiaries, Affiliates,
successors or assigns (except as hereinafter stated)
shall not, directly or indirectly, alone, or as a
partner, partial owner, consultant or agent (of any
other corporation, partnership or other business
organization), knowingly solicit any of the accounts
of Netplex relating to the retail and distribution
industries unless such solicitation is undertaken on
behalf of a business venture which does not engage in
the delivery of information technology services and
solutions to the retail and distribution industries
other than as is reasonably necessary for the sale,
licensing,
installation, integration, use, implementation and
support of viaLink products and services. Seller and
Netplex agree that the viaLink business is defined as
substantially building, marketing and implementing
proprietary software products, information content
and related services to facilitate electronic
commerce. If Seller sells, assigns, or otherwise
disposes of its viaLink business to a buyer who is
not under the control of Seller, and such Buyer is
already in competition with Netplex or any of its
Affiliates, then this Section 8.4(c) shall not apply.
(d) The parties agree that any breach of this Section 8.4 of
this Agreement may cause irreparable injury to
Netplex and that money damages may not provide an
adequate remedy. Accordingly, Netplex shall, in
addition to other remedies provided by law, be
entitled to such equitable and injunctive relief as
may be necessary to enforce the provisions of this
Section 8.4 against Seller or any of its subsidiaries
or Affiliates, or any person or entity participating
in such breach or threatened breach.
Nothing contained herein shall be construed as
prohibiting Netplex from pursuing any other and
additional remedies available to it, at law or in
equity, for such breach or threatened breach
including any recovery of damages from Seller or any
other person or entity participating in such breach
or threatened breach.
8.5. Piggyback Registration. Seller understands
that Netplex is under no obligation to register any of the
Netplex Preferred Stock sold hereunder. However,
Netplex, at its sole cost and expense, agrees to
either: (i) include in its next registration
statement, or (ii) register no later than 12 months
after Closing, whichever first occurs, sufficient
Netplex Common Stock to permit the conversion of the
Netplex Preferred Stock and to maintain effectiveness
of such registration statement until such time as the
Netplex Common Stock underlying the Netplex Preferred
Stock may be sold pursuant to Rule 144(k) of the SEC
upon conversion of the Netplex Preferred Stock to
Netplex Common Stock.
8.6 Compensation of Broker - Netplex. If
Netplex has or is alleged to have any liability to
any Person who has or claims to have acted on
Netplex's behalf as a finder, broker, intermediary or
otherwise in connection with this Agreement or the
transactions contemplated hereby, then Netplex shall
be totally responsible for payment of any amounts due
to the Person and shall fully indemnify and hold
Seller harmless from any claim, expense (including
attorney's fees) and Liabilities to such Person
arising out of or related to such Person's claims.
8.7. Compensation of Broker - Seller.
If Seller has or is alleged to have any liability to
any Person who has or claims to have acted on
Seller's behalf as a finder, broker, intermediary or
otherwise in connection with this Agreement or the
transactions contemplated hereby, then Seller shall
be totally responsible for payment of any amounts due
to the Person and shall fully indemnify and hold
Netplex harmless from any claim, expense (including
attorney's fees) and Liabilities to such Person
arising out of or related to such Person's claims.
8.8. Schedules. The parties shall have
completed and/or updated the schedules attached to
this Agreement so that such schedules are complete
and accurate as of the Closing Date.
8.9. Assignment of Assets and Contracts. The parties
shall assist each other in good faith in securing the
consent of any third parties to the transfer and/or
assignment of any Assets and Contracts.
8.10. Earned Compensation. All compensation which
represents payment of any amounts earned by Seller
for any previously completed work for any customer or
any Contract obligations for which payment was earned
at any time prior to Closing shall be Seller's. If
such compensation is received by Netplex or the
Business after the Closing, it shall promptly be
accounted for and paid or delivered to Seller and
shall not be included in any calculation of earnings
or expenses for the business for any period
subsequent to the Closing. Any compensation
collected by Seller which represents payment for Work
in Progress earned after Closing through continuation
or completion of such work by the Business after the
Closing shall be paid to Netplex. Compensation due
to either Party under this section, or any other
compensation due to either Party due to audit
adjustments, credits for prepaid assets, credits for
prepaid expenses, vacation liabilities or other
amounts agreed to by the parties, to the extent such
amounts to be received are known at or before the
Closing, are set forth on Schedule 8.10.
8.11. Receipt of Payments/Property. If one party for
any reason receives any payment or property which
belongs to the other party, the party receiving the
funds or property shall immediately notify the other,
and shall immediately forward such funds or property
to the other party.
8.12. Sales and Transfer Taxes. Seller shall any
sales and transfer taxes relating to the sale and
transfer of the Assets, and shall hold Netplex
harmless therefrom.
8.13. Filings. If required by Law, Seller shall
comply with any Bulk Sales Act or similar
requirements necessary to consummate the transactions
contemplated herein.
8.14. Material Misstatements Or Omissions. No
representations or warranties by Netplex in this
Agreement, nor any document, exhibit, statement,
certificate or Schedule heretofore or hereinafter
furnished to Seller pursuant hereto, or in connection
with the transactions contemplated hereby, including,
without limitation, the Agreement Documents, contain
or will contain any untrue statement of a material
fact, or omit or will omit to state any material fact
necessary to make the statements or facts contained
therein not misleading.
8.15. Compliance With Constituent Agreements.
Netplex shall comply with all terms and provisions
and shall meet all of Netplex's obligations contained
in the Earn-Out Agreement, the Certification of
Designation, and each and all of the Agreement
Documents, the breach or default of any of which
shall constitute a material breach of this Agreement.
8.16. Adverse Developments. Netplex shall promptly
notify Seller of any materially adverse developments
that occur subsequent to Closing with respect to the
Assets or the operation of the Business until all
compensation due to Seller under the Agreement
Documents has been paid. Seller shall keep Netplex
informed of all material operational matters and
business developments with respect to the Business
and its markets, including any competitive changes
during such time.
8.17. Access. Netplex will provide Seller, its
counsel, accountants, financing sources and other
representatives ("Seller's Representatives") with
access to the Business Records and Assets during
normal business hours, upon reasonable notice and at
a mutually agreeable time; provided that such access
does not materially disrupt the operations of the
Business, and Netplex will provide Seller's
Representatives with such information concerning the
Business Records, Assets and Business
as they reasonably may request for the purposes of
(i) allowing Seller to reasonably audit the Business
while any compensation due under the Agreement
Documents remains due; and (ii) to defend, counter,
or respond to any claim, complaint, or litigation
matter which may arise involving Seller and any
Person.
8.18. In addition to Netplex's other
confidentiality obligations as set forth in this
Agreement or any of the Agreement Documents, Netplex
adopts, assumes, and shall remain bound by any and
all agreements of Seller or provisions contained in
the Contracts or elsewhere disclosed in the Agreement
Documents that provide for any continuing obligation
of Seller to maintain or protect the confidentiality
of any information of any customer, client, or other
Person with whom Seller has had any commercial
dealings. This Section 8.16 shall survive
termination of this Agreement.
8.19. Netplex shall not impair the
rights or the value of the Netplex Preferred Stock to
be issued to Seller by the Agreement or the Agreement
Documents.
ARTICLE 9
CONDITIONS PRECEDENT TO CLOSING
9.1. Conditions Precedent to Each Party's
Obligation to Effect the Closing. The respective
obligations of each party to consummate the Agreement
are subject to the satisfaction at or prior to the
Closing of the following conditions precedent:
(a) This Agreement, the Agreement Documents, and the
transactions contemplated hereby shall have been
authorized and approved by the each Party's Board of
Directors and shareholders in accordance with all
applicable Laws and regulations.
(b) No order, decree or injunction shall have been enacted,
entered, promulgated or enforced by any court of
competent jurisdiction or any governmental authority
which prohibits the Closing; provided, however, that
the parties hereto shall use their best efforts to
have any such order, decree or injunction vacated or
reversed.
(c) No action, claim, suit or proceeding seeking to enjoin,
restrain, or prohibit the consummation of this
Agreement shall be pending before any court or any
other governmental authority; provided, however, that
this condition may not be invoked by a party if any
such action, suit, or proceeding was solicited or
encouraged by, or instituted as a result of any act
or omission of such party.
(d) Netplex and each of Robert Barcum, Larry Davenport, and
David North shall have executed employment agreements
in substantially the form attached as Exhibit C
hereto (the "Employment Agreements").
(e) The parties shall have obtained all required regulatory
approvals in connection with this Agreement and the
transactions contemplated herein.
(f) The parties shall have obtained consent from Seller's lessor
and Netplex shall have entered into a sublease with
Seller, on terms mutually satisfactory to both
Parties, for a portion of the real property currently
used in the Business.
(g) Subject to the terms of this Agreement, All Contracts and
Works in Progess shall have been assigned to Netplex or the same
shall have been modified, amended or novated so that
Netplex has been substituted for Seller.
(h) All Agreement Documents shall have been completed and/or
executed by the Parties.
(i) The parties shall have entered into a Remarketing Agreement
for Seller's ChainLink software product, on terms
mutually satisfactory to both Parties.
(j) The parties shall have entered into an agreement for
office support and other administrative services to
be provided by Seller to Netplex, on terms mutually
satisfactory to both Parties.
(k) The parties shall have entered into a computer equipment
lease agreement, on terms mutually satisfactory to both Parties.
(l) The closing or closings of a financing transaction with
First Union Bank pursuant to which First Union Bank
loans to Netplex up to 80% of Netplex's accounts
receivable and the sale of equity securities to
Zanett Securities for $1,500,000 and the receipt of
said proceeds of the sale transaction, or any similar
financing arrangement.
(m) The Parties mutually agree as to which Liens, Liabilities
and Contracts regarding the Assets, if any, will be
assumed by Netplex.
(n) The parties acknowledge that at the time of signing this
Agreement, the Schedules and Exhibits have not been
completed and annexed to the Agreement. In the event
that any qualification of a representation which is
reflected on a Schedule is unacceptable to either
party, that Party shall have the right to terminate
this Agreement.
9.2. Conditions Precedent to Obligations of Netplex.
The obligations of Netplex to consummate the Agreement are
subject to the satisfaction or waiver at or prior to the
Closing of the following conditions precedent;
(a) The representations and warranties of Seller contained in
Article 4 that are qualified as to materiality shall
be true and correct and the representations and
warranties of Seller contained in Article 4 that are
not qualified as to materiality shall be true and
correct in all material respects in each case when
made, and at and as of the Closing, with the same
force and effect as if those representations and
warranties had been made at and as of such time (with
such exceptions if any, necessary to give effect to
events or transactions expressly permitted herein).
(b) Seller shall, in all material respects, have
performed all obligations and complied with all
covenants contemplated herein that are required by
this Agreement to be performed or complied with by
Seller on or before the Closing.
(c) Netplex shall have received a certificate of the President
or Vice President of Seller, in form satisfactory to
counsel for Netplex, certifying fulfillment of the
matters referred to in paragraphs (a) and (b),
respectively, and (d), (e), (f), (g) and (i) of this
Section 9.2.
(d) Seller shall have obtained all necessary consents of
third parties to the transactions contemplated by this Agreement,
including without limitation, any governmental
consents or approvals and any consents required to
prevent a default under any Contract as a result of
the transactions contemplated in this Agreement.
(e) Netplex shall have completed and been satisfied with the
results of its due diligence review of Seller as
being consistent with the representations and
warranties contained herein.
(f) All necessary agreements and approvals by the holders of the
shares of Seller Capital Stock shall have been
obtained in order to consummate this Agreement.
(g) Seller shall not have suffered any material adverse change
with respect to its financial condition or its
properties since December 31, 1997 (regardless of
whether such material adverse change shall have been
reflected on the updated Disclosure Schedules to be
delivered to Netplex by Seller at the Closing); and
(h) Netplex shall have received good standing
certificates with respect to Seller in Oklahoma, and
in each other jurisdiction where Seller is qualified
as a foreign corporation.
(i) Seller shall have changed its corporate name in Oklahoma and
in each other jurisdiction where Seller is qualified
as a foreign corporation.
(j) Seller shall have delivered to Netplex copies of all
Business Records and all current customer lists and
accounts of the Business.
(k) Netplex shall have (i) extended offers of employment
to each Person listed on Schedule 4.22 at the
compensation rates set forth in said Schedule and
with an effective date of hire equal to the Closing
Date; (ii) offered to such Person the usual and
customary benefits provided by Netplex to its
employees; (iii) for purposes of determining vacation
and sick leave benefits, credited such employee's
prior service as an employee of Seller toward such
employee's entitlement to any such benefits as an
employee of Netplex; (iv) provided vested vacation
and/or sick leave benefits equal to any such benefit
accrued and unused while such employee was employed
with Seller prior to the Effective Date hereof; and
(v) complied with all applicable Laws regarding the
hiring of said Employees, including, without
limitation, any Laws relating to employee benefits.
(l) All of Seller's employees involved in the operation of the
Business shall have been offered employment as in (j)
above and shall have accepted such offer of
employment with Netplex.
(m) Netplex shall have received an opinion of Seller's
outside counsel, in form satisfactory to counsel for
Netplex, to the effect all necessary approvals
of shareholders and/or the Board of Directors of
Seller have been obtained for the transaction.
9.3. Conditions Precedent to the Obligations of Seller.
The obligation of Seller to consummate the Agreement is subject to the
satisfaction or waiver at or prior to the Closing of the following
conditions precedent:
(a) The representations and warranties of Netplex contained in
Article 5 shall have been true and correct in all material
respects when made, and as of the Closing with the same force and
effect as if those representations and warranties had been made at
and as of such time (with such exceptions, if any, necessary to
give effect to events or transactions expressly permitted herein).
(b) Netplex shall, in all material respects, have performed all
obligations and complied with all covenants contemplated herein
that are required by this Agreement to be performed or complied
with by Netplex on or before the Closing;
(c) Seller shall have received certificates of the President or
Vice President of Netplex, in form satisfactory to counsel for
Seller, certifying fulfillment of the matters referred to in
paragraphs (a) and (b), respectively, and (d), (e), and (f) of
this Section 9.3.
(d) Netplex shall have obtained all necessary consents of third
parties to the transactions contemplated by this Agreement,
including without limitation, any governmental consents or
approvals and any consents required to prevent a default or breach
under any contract as a result of the transactions contemplated in
this Agreement.
(e) All necessary agreements and approvals by the holders of the
shares of Netplex stock shall have been obtained in order to
consummate this Agreement.
(f) Netplex shall not have suffered any material adverse change
with respect to its financial condition or its properties since
December 31, 1997; and
(g) Seller shall have received good standing certificates with respect
to Netplex in New York, and in each other jurisdiction where
Netplex is qualified as a foreign corporation.
(h) Seller shall have received an opinion of Netplex's outside
counsel, in form satisfactory to counsel for Seller, to the effect
that the Certificate of Designation of the Preferred Stock of
Netplex fully complies with all applicable Laws and that all
necessary approvals of shareholders and/or the Board of Directors
of Netplex have been obtained both for the Certificate of
Designation and for the transactions contemplated hereby.
(i) Seller shall have received a fairness opinion concerning the
contemplated transactions from Seidman & Co., Inc.
(j) To the extent Netplex expressly agrees to do so in
accordance with the terms and conditions as set forth in the
Agreement or a Schedule to this Agreement, Netplex expressly shall
have assumed, adopted and accepted as its own obligations all
Liabilities to Seller's customers contained in all Contracts,
Works in Progress, and in any of the Agreement Documents, whether
express or implied by law, relating to the Contracts or the
Assets, to the extent identified on a Schedule to this Agreement.
(k) The Certificate of Designation, its approval, and all
necessary filings related thereto shall be satisfactory to Seller;
or Netplex, in a form satisfactory to Seller, has agreed to issue
to Seller an equivalent number of shares of Netplex Common Stock
upon similar terms and conditions a those relating to the Netplex
Preferred Stock.
ARTICLE 10
TERMINATION; AMENDMENT; WAIVER
10.1. Termination. This Agreement may be terminated
without liability of any Party, each to the other, and the Closing
contemplated hereby may be abandoned at any time notwithstanding
approval thereof by the shareholders of Seller, but prior to the
Closing:
(a) by mutual written consent of Seller and Netplex;
(b) by Netplex, or Seller, if the Closing shall not have
occurred on or before September 30, 1998 (provided that the right
to terminate this Agreement under this Section 9.1 shall not be
available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of or has resulted in the
failure of the Closing to occur on or before such date); or
(c) by either Party, if prior to the Closing, the Board of
Directors of either Party shall have withdrawn, or modified in a
manner adverse to the other Party, its approval or recommendation
of the Agreement, or shall have recommended another offer or
shall have resolved to do any of the foregoing;
(d) by Netplex or Seller, if any court of competent jurisdiction
in the United States or other United States governmental body
shall have issued an order, decree or ruling or taken any other
action restraining, enjoining or otherwise prohibiting the
Agreement and such order, decree, ruling or other action shall
have become final and nonappealable;
(e) by Netplex or Seller if there shall be pending any suit,
action or proceeding, which has a reasonable possibility of
success, or there shall be pending by any other Person any suit,
action or proceeding, which has a substantial likelihood of
success, (i) seeking to restrain or prohibit the consummation of
the Agreement or the performance of any of the other transactions
contemplated by this Agreement, or (ii) which otherwise is
reasonably likely to have a Material Adverse Effect on the
business, properties, assets, condition (financial or otherwise),
results of operations or prospects of Seller.
(f) by Netplex or Seller, if there shall be pending any suit,
action or proceeding which has a reasonable possibility of
success, or there shall be pending by any other Person any suit,
action or proceeding, which has a substantial likelihood of
success, (i) seeking to prohibit or limit the ownership or
operation by Seller, Netplex of a material portion of the Business
or Assets, (ii) seeking to impose material limitations on the
ability of Netplex to exercise full rights of ownership of the
Assets, or (iii) seeking to prohibit Netplex from effectively
controlling in any material respect the Business.
10.2. Effect of Termination. If this Agreement is
so terminated and the Agreement is not consummated, this Agreement
shall forthwith become void and have no effect,
without any liability on the part of any party or its directors,
officers or shareholders, other than the provisions of this
Section 10.2 and the provisions of this Agreement which are
indicated herein as surviving such termination. Nothing
contained in this Section 10.2 shall relieve any party from
liability for any breach of this Agreement.
10.3. Amendment. This Agreement may not be amended
except by an instrument in writing signed by both Parties.
10.4. Extension; Waiver. At any time prior to the
Closing, the parties may (a) extend the time for the performance
of any of the obligations or other acts of the other parties
hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document, certificate or
writing delivered pursuant hereto or (c) waive compliance with any
of the agreements or conditions contained herein. Any agreement
on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on
behalf of such party.
ARTICLE 11
INDEMNIFICATION
11.1. From and after the Closing, Seller shall
indemnify, defend, protect and hold harmless Netplex, from and
against all losses, liabilities, obligations, damages, deprivation
of benefits, costs and expenses (including reasonable attorneys'
fees) (collectively hereinafter "Losses"), which result from or
arise in connection with: (a) any breach of any warranty made by
Seller in the Agreement or any representation in any of the
Agreement Documents, not being true when made or when required by
this Agreement to be true in all material respects, or in any
certificate or other instrument delivered by or on behalf of
Seller pursuant thereto not being true when made or when required
by this Agreement to be true in all material respects; or (b) any
breach of any covenant set forth in this Agreement or any
Agreement Documents to be performed (prior to or after the
Closing) by Seller; or (c) the Liabilities of Seller which are not
assumed or acquired by Netplex pursuant to this Agreement or the
Agreement Documents.
The parties anticipate that a claim for indemnification
may be made under any or all of subsections (a) through (c) above;
in any such case, each such clause and sub-clause shall be
independently effective to provide Netplex with a right to
indemnification.
11.2. From and after the Closing, Netplex, shall
indemnify, defend, protect and hold harmless Seller, from and
against all Losses as defined in Section 11.1, which result from,
or arise in connection with: (a) any breach of any warranty made
by Netplex in the Agreement or any representation in any of the
Agreement Documents, not being true when made or when required by
this Agreement to be true in all material respects, or in any
certificate or other instrument delivered by or on behalf of
Netplex pursuant thereto not being true when made or when required
by this Agreement to be true in all material respects; (b) any
breach of any covenant set forth in this Agreement or the
Agreement Documents to be performed (prior to or after the
Closing) by Netplex; or (c) any of the Liabilities assumed by
Netplex pursuant to this Agreement or the Agreement Documents .
The parties anticipate that a claim for indemnification may
be made under any or all of subsections (a) through (c) above; in
any such case, each such clause and sub-clause shall be
independently effective to provide Seller with a right to
indemnification.
11.3. Whenever any claim shall arise for
indemnification hereunder, the party entitled to such
indemnification (the "Indemnitee") shall notify the party from
whom indemnification is sought (the "Indemnitor") of such claim in
writing promptly and in no case later than ninety (90) days after
such Indemnitee has received actual written notice of the facts
constituting the basis for such claim; each Indemnitee shall also
so notify the Indemnitor promptly and in no case later than
fifteen (15) days after the commencement of any legal proceedings
with respect to any such claim. The failure to notify the
Indemnitor will not relieve the Indemnitor from any
liability which it may have to any Indemnitee to the extent the
Indemnitor is not prejudiced as a proximate result of such
failure. Such notice shall specify, in reasonable detail, the
facts known to such Indemnitee giving rise to the indemnification
sought . Such notice shall also include photocopies of all
relevant communications received from third party claimants and
their attorneys.
11.4. If the facts giving rise to any
indemnification provided for in this Agreement shall involve any
actual or threatened claim or demand by any person other than a
party to the Agreement or its successors or permitted assigns (a
"Third Party") against any Indemnitee, the Indemnitor shall be
entitled, upon its election, by written notice given to the
Indemnitee as soon as reasonably practicable and in any case
within thirty (30) days after the date on which notice of the
claim or demand is given to the Indemnitor (without prejudice to
the right of such Indemnitee to participate at its expense through
counsel of its own choosing), to assume the defense of such claim
and any litigation resulting therefrom at its expense and through
counsel of its own choosing; provided, however, that if by reason
of the claim of such Third Party a Lien, attachment, garnishment
or execution is placed upon any of the property or assets of such
Indemnitee, the Indemnitor, if it desires to exercise its right to
defend such claim or litigation, shall furnish an indemnity bond
or other form of security reasonably satisfactory to the
Indemnitee to obtain the prompt release of such Lien, attachment,
garnishment or execution. If the Indemnitor assumes the defense
of any such claim or litigation, it shall take all steps
reasonably necessary in the defense or settlement of such claim or
litigation. In any such suit, action or proceeding, the
Indemnitee shall have the right to control its own defense through
its own counsel, but the fees and expenses of such counsel shall
be at its own expense unless (i) the parties shall have mutually
agreed to the retention of such counsel or (ii) the named parties
to such suit, action or proceeding (including any impleaded
parties) shall include an Indemnitee and an Indemnitor and the
representation of both parties by the same counsel would present a
conflict of interest as reasonably determined by counsel to the
Indemnitee, in which event the Indemnitor shall pay such counsel's
fees and expenses. If the Indemnitor has timely assumed defense,
the Indemnitor shall not be liable for any settlement effected
without its consent, which consent shall not be unreasonably
withheld or delayed. The Indemnitor may settle any claim without
the consent of any Indemnitee, but only if the sole relief awarded
is money damages that are paid in full by the Indemnitor and
either (i) the consent to the entry of any judgment or settlement
includes as an unconditional term thereof the giving to the
Indemnitee of a release from all liability in respect to such
claim or litigation or (ii) the litigation against the Indemnitee
is dismissed with prejudice; otherwise, the Indemnitor may not
settle any claim against an Indemnitee without the consent of the
Indemnitee, which consent shall not unreasonably withheld or
delayed. The parties shall cooperate in the defense of any such
claim or litigation. If the Indemnitor does not timely assume the
defense of any such claim or litigation, the Indemnitee may defend
against such claim or litigation in such manner as it may deem
appropriate and may settle such claim or litigation, after giving
written notice thereof to the Indemnitor, on such terms as such
Indemnitee may deem appropriate; and the Indemnitor will promptly
reimburse such Indemnitee for the Losses incurred as a result of
such settlement. If no settlement of such claim or litigation is
made, the Indemnitor shall promptly reimburse such Indemnitee for
the amount of any judgment rendered with respect to such claim or
such litigation and for all expenses, legal and other, incurred
by such Indemnitee in connection with any such judgment for which
the Indemnitee has been so reimbursed pursuant hereto; provided,
however, that if such judgment is appealable and such Indemnitee
notifies the Indemnitor of its intention not to appeal, the
Indemnitor may prosecute such appeal, at its sole cost and expense
and subject to the obligations set forth herein.
11.5. Each amount determined to be payable by an
Indemnitor to an Indemnitee under the terms hereof ("Indemnity")
shall be paid in cash to the Indemnitee within thirty (30) days
after the date on which the Indemnitor is notified in writing of
the amount of such Indemnity, as finally determined in accordance
with the terms hereof. Each such notice shall contain an
itemization of the damages, expenses, costs and liabilities
comprising the Indemnity, certified to be true and correct by the
Indemnitee or its legal representative.
11.6. Indemnification Threshold. Neither party
shall have any indemnification payment obligations under this
Agreement unless and until all such obligations exceed One
Thousand Dollars ($1,000) in aggregate, and then only to the
extent that such obligations exceed One Thousand Dollars ($1,000)
in the aggregate.
ARTICLE 12
MISCELLANEOUS
12.1. Further Assurances. From time to time at or
after the Closing, at the request of the other, Seller and
Netplex, as necessary, will execute and deliver such other
instruments and take such other action as is reasonably necessary
to consummate, complete and carry out the purposes of the
transactions contemplated hereby.
12.2. Benefit and Assignability. This Agreement
shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted
assigns, and no other person or entity shall have any right
(whether third party beneficiary or otherwise) hereunder. This
Agreement may not be assigned by any party without the prior
written consent of the other party.
12.3. Notices. All notices demands and other
communications pertaining to this Agreement ("Notices") shall be
in writing addressed as follows:
If to Seller:
Robert N. Baker, Vice President
viaLink
13800 Benson Road
Edmond, OK 73013-6417
with a copy to:
Richard M. Klinge, Esq.
Richard M. Klinge & Associates, P.C.
228 Robert S. Kerr, Suite 940
Oklahoma City, OK 73102
If to Netplex:
The Netplex Group, Inc.
Attention: Gene F. Zaino, President
8260 Greensboro Drive, 5th Floor
McLean, Virginia 22102
with a copy to:
Attn: Edward J. Walsh, Jr., Esq.
Vedder Price Kaufman & Day
22nd Floor
805 Third Avenue
New York, NY 10022
Notices shall be deemed given five (5) business days after being
mailed by certified or registered United States mail, postage
prepaid, return receipt requested, or on the first business day
after being sent, prepaid, by nationally recognized overnight
courier that issues a receipt or other confirmation of delivery to
the appropriate recipient of such Notice. Any party may change
the address to which Notices under this Agreement are to be sent
to it by giving written notice of a change of address in the
manner provided in this Agreement for giving Notice.
12.4. Waiver. Unless otherwise specifically agreed
in writing to the contrary: (a) the failure of any party at any
time to require performance by the other of any provision of this
Agreement shall not affect such party's right thereafter to
enforce the same; (b) no waiver by any party of any default by any
other shall be valid unless in writing and acknowledged by an
authorized representative of the nondefaulting party, and no such
waiver shall be taken or held to be a waiver by such party of any
other preceding or subsequent default; and (c) no extension of
time granted by any party for the performance of any obligation or
act by any other party shall be deemed to be an extension of time
for the performance of any other obligation or act hereunder.
12.5. Entire Agreement. This Agreement and the
Agreement Documents as defined herein constitutes the entire
agreement between the parties with respect to the subject matter
hereof and referenced herein, and supersedes and terminates any
prior agreements or representations between the parties (written
or oral) with respect to the subject matter hereof. This
Agreement may not be altered or amended except by an instrument in
writing signed by the party against whom enforcement of any such
change is sought.
12.6. Counterparts; Facsimile. This Agreement may
be signed in any number of counterparts with the same effect as if
the signature on each such counterpart were on the same
instrument. This Agreement and any counterparts may be executed
by facsimile with the same effect as if the signature were an
original.
12.7. Construction. The headings of the Articles
and Sections of this Agreement are for convenience only and in no
way modify, interpret or construe the meaning of specific
provisions of the Agreement.
12.8. Agreement Documents. The Agreement Documents
are a material part of this Agreement.
12.9. Severability. In case any one or more of the
provisions contained in this Agreement should be held invalid,
illegal or unenforceable in any respect, the validity, legality,
and enforceability of the remaining provisions will not in any way
be affected or impaired. Any illegal or unenforceable term
shall be deemed to be void and of no force and effect only to the
minimum extent necessary to bring such term within the provisions
of applicable Laws and such term, as so modified, and the balance
of this Agreement shall then be fully enforceable.
12.10. Choice of Law. The obligations,
representations, covenants and warranties entered into by the
Parties under this Agreement shall be construed and governed by
the Laws of the State of Oklahoma, without regard for the choice
of law rules of that State.
12.11. Survival and Limitation of Actions. The
representations, warranties and covenants of Seller and Netplex
contained in the Agreement Documents shall survive the consumation
of the transactions contemplated hereby. Any claims or causes of
action for breach or default, or for indemnification, under this
Agreement or any of the Agreement Documents, must be commenced by
either party hereto no later two years after such Party discovers
or reasonably should have discovered the existence of any such
claim or cause of action. For any action between the parties not
otherwise subsumed in the foregoing, such action may be commenced
no later than within the time permitted by the statute of
limitations provided by applicable Law.
12.12. Public Statements. Prior to the Closing,
neither Seller nor Netplex shall, without the prior written
approval of the other party, make any press release or other
public announcement concerning the transactions contemplated by
this Agreement, except that (a) Seller and Netplex shall issue a
mutually agreeable press release promptly after the signing of
this Agreement; and (b) Seller and Netplex shall be permitted to
make public announcements to the extent required by Law, in which
case the other party shall be so advised as far in advance as
possible.
12.13. Attorneys' Fees. If either party initiates
any litigation against the other party involving this Agreement,
the prevailing party in such action shall be entitled to receive
reimbursement from the other party for all reasonable attorneys'
fees and other costs and expenses incurred by the prevailing party
in respect of that litigation, including any appeal, and such
reimbursement may be included in the judgment or final order
issued in that proceeding.
12.14. Expenses. Seller shall be responsible for
the legal, accounting and other expenses incurred by Seller in
connection with this Agreement and the transactions contemplated
hereby. Netplex shall be responsible for the legal, accounting
and other expenses incurred by Netplex in connection with this
Agreement and the transactions contemplated hereby.
12.15. Counsel. Each party has been represented by
its own counsel in connection with the negotiation and preparation
of this Agreement and, consequently, each party hereby waives the
application of any rule of law that would otherwise be applicable
in connection with the interpretation of this Agreement,
including, but not limited to, any rule of law to the effect that
any provision of this Agreement shall be interpreted or construed
against the party whose counsel drafted that provision.
12.16. De Minimus violations. Any act,
omission, or misrepresentation which does not materially result in
any measurable damage or liability to either party shall not be
deemed or considered a breach or default of this Agreement by
either party.
12.17 Remedies Nonexclusive. The rights and
remedies provided to the Parties in this Agreement are in addition
to and not in lieu of any other right or remedy which may exist at
law or in equity according to applicable Laws.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
THE NETPLEX GROUP, INC.
By: /s/Gene Zaino
Name: Gene Zaino
Title: President & CEO
APPLIED INTELLIGENCE GROUP, INC.
By: /s/Robert L. Barcum
Name: Robert L. Barcum
Title: President
APPENDIX A-2
FIRST AMENDMENT TO
ASSET ACQUISITION AGREEMENT
This First Amendment (hereinafter "Amendment")
to the Asset Acquisition Agreement (hereinafter
"Agreement") between Applied Intelligence Group,
Inc. ("Seller") and The Netplex Group, Inc.
("Netplex") is entered into as of this 9th day of
September, 1998 by and between Seller and
Netplex.
WHEREAS, on August 31, 1998 Seller and
Netplex entered into said Agreement, and
WHEREAS, the parties mutually desire to amend certain
terms and provisions of said Agreement.
WHEREUPON, in consideration of the above
premises and in consideration of other good and
valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Additional Defined Terms. The following
terms are added to Article 1 of the
Agreement:
1.26. "Preliminary Closing Date" shall mean such date as
the consideration for this Agreement is
transferred to the Escrow Agent pursuant to the
terms of Article 3 of the Agreement as amended
hereby, which date shall not be later than
September 30, 1998.
1.27. "Preliminary Closing" shall mean the transaction
at which the consideration provided for by the
Agreement will be delivered to the Escrow Agent
subject to the terms of the Escrow Agreement.
1.28. "Effective Date" shall be September 1, 1998.
1.29. "Escrow Agent" shall mean such Person to whom the
Parties agree shall be delivered the
consideration set forth in Article 3 of the
Agreement and this Amendment, pursuant to the
terms of the Escrow Agreement.
1.30. "Escrow Agreement" shall mean an agreement to be
executed to the mutual satisfaction of the
Parties at or prior to the Preliminary Closing
Date.
2. Amendment of Defined Terms:
2.1. The definition of "Closing" in Section 1.13 of the
Agreement is amended as follows: "Closing" shall
mean the actual transaction at which the Seller
receives from the Escrow Agent the consideration
and other documents required to be given by
Netplex hereunder, and at which Netplex receives
from the Escrow Agent the documents required to
be given by Seller hereunder. Closing shall
take place in Oklahoma City, Oklahoma.
2.2. The definition of "Closing Date" in Section 1.14 of the
Agreement is amended as follows: "Closing Date"
shall mean such date after the 21st day
following the giving of notice to Seller's
shareholders of the transaction contemplated by
the Agreement when Netplex and Seller submit the
documentation required by the Escrow Agreement
to the Escrow
Agent to enable each of them to receive the
consideration held by the Escrow Agent.
2.3. "Agreement Documents" shall mean this Agreement
and the various Schedules, Exhibits,
attachments, and other documents, of which the
exchange or execution between Netplex and
Seller is contemplated by this Agreement to
occur at or before the Closing escrow and any
amendments or modifications thereto executed by
Seller and Netplex.
3. Amendment of Delivery of Consideration.
3.1. Section 3.1 of the Agreement, including is subsections,
is deleted and replaced as follows:
Consideration to Seller:
3.1.1. At Preliminary Closing, Netplex shall deliver and
pay to the Escrow Agent (i) the Cash
Consideration of Three Million Dollars
($3,000,000) in certified funds or bank wire
transfer to an account designated by the
EscrowAgreement, less the amounts loaned to
Seller under Section 5.1.3 below; (ii) a stock
certificate representing the number of shares of
Netplex Preferred Stock as calculated below;
(iii) the Certificate of Designation of the
Preferred Shares.
3.1.2. The number of shares of Netplex Preferred Stock
which Netplex shall deliver to the Escrow Agent
at the Preliminary Closing Date and which will
be delivered to Seller by the Escrow Agent at
Closing, shall be calculated by dividing one
million (1,000,000) by the average reported
closing price of the Netplex Common Stock on
the NASDAQ Small Cap Market for the twenty (20)
days immediately prior to September 1, 1998.
3.1.3. At Preliminary Closing, Seller and Netplex shall
deliver to the Escrow Agent the executed Earn-
Out Agreement in the form substantially as set
forth in Exhibit B hereto, and such other
Agreements Documents as are provided for by
this Agreement, all of which are incorporated
by reference as if fully set forth herein.
3.1.4. At Preliminary Closing, Netplex shall deliver to
the Escrow Agent such other documents as are
reasonably necessary to effect the transactions
contemplated by this Agreement.
3.2. Section 3.2 of the Agreement is deleted and replaced as
follows: Consideration to Netplex. At Preliminary
Closing, Seller shall, subject to the terms,
covenants, and
conditions of this Agreement, convey, transfer and
deliver to the Escrow Agent by an executed bill of
sale, assignments, assignments of contracts, and such
other documents as are reasonably required to perfect
the transfer of the Business and the Assets to Netplex
free and clear of all Liens, Contracts and
Liabilities, except to the extent identified on
Schedule 3.2 hereto, which Schedule identifies the
Liens, Contracts and Liabilities Netplex agrees to
assume.
4. Effective Date
4.1. Subject to the terms of this Amendment, the parties
agree and understand that Netplex shall assume the
risks and benefits of the Business as of the Effective
Date as if the parties had consummated the transaction
contemplated hereby on such date; subject however to
the Closing of the transaction contemplated by the
Agreement as amended hereby.
4.2. The parties agree and understand that the Preliminary
Closing Date shall be such date when the parties deliver
the documents and money specified in the Agreement as
amended hereby to the Escrow Agent.
4.3. The parties agree and understand that the Closing Date
shall be the day when the Escrow Agent delivers to the
respective parties the money and documents delivered to
the Escrow Agent at the Preliminary Closing Date.
5. Transition between Effective Date and Closing
5.1. As of the Effective Date, Seller shall lease the
employees identified on Schedule 4.22 to the Agreement
to Netplex as of September 1, 1998 to allow Netplex to
assume responsibility for the operation of the
Business between the Effective Date and the
Preliminary Closing Date of the Agreement as amended.
As of the Effective Date, Netplex shall assume total
responsibility for completing all Work in Progress and
shall assume responsibility for the operation of the
Business and all expenses associated therewith.
5.1.1. Seller shall continue to keep said employees on
its payroll and benefit plans through the
Preliminary Closing Date or September 30,
whichever occurs later. Netplex shall pay Seller for
all costs and expenses directly and
indirectly incurred by Seller for such payroll and benefits as
set forth in this Amendment. As of October 1, 1998, all
employees identified on Schedule 4.22 shall become direct
employees of Netplex and shall be placed on Netplex's benefit
plans, and Seller shall have no further obligation regarding the
same.
5.1.2. Although Netplex shall be responsible for all
expenses associated with the Business after the
Effective Date, it is anticipated that Seller
either has paid or will incur expenses for the
Business which are the obligation of Netplex to
pay. Such expenses include, without limitation,
payroll, benefits, rent, services and amounts
paid to third parties for or in relation to the
Business such as pagers, cellular phones travel,
etc. Netplex shall allow Seller to collect and
use, as Seller desires, the receivables invoiced
for revenue earned and expenses incurred during
September 1998 for the Business ("Invoiced
September Earnings"). To the extent that any
actual invoice(s) includes revenue earned or
expenses incurred during a month prior to
September, 1998, such revenue and/or expenses
shall not be included within said Invoiced
September Earnings. Netplex shall not make any
effort to collect or use the Invoiced September
Earnings. Netplex shall provide to Seller
and/or Trinity Capital, Inc. such documentation
as is necessary to allow Seller to continue to
finance said receivables for September, 1998 in
Seller's name. As of October 1, 1998, all
expenses associated with the Business shall
become direct obligations of Netplex, and Seller
shall have no further obligation regarding the
same.
5.1.3. Additionally, on September 15, 1998, Netplex
shall loan Seller $125,000. On September 30,
1998, Netplex shall loan Seller up to an
additional $375,000. The total of such sums
loaned ("Loaned Amount"), to the extent not
withheld by Netplex from the consideration paid
to Seller at Preliminary Closing pursuant to
section 3.1.1 of the Agreement as amended
hereby, shall be repaid by Seller to
Netplex at Closing, without interest, from the sums otherwise
due at Closing. If the transaction fails to close, the
Loaned Amount shall be due and payable to Netplex within 10
days after the termination of the Agreement
or abandonment of the Closing.
5.1.4. On or before Closing, Seller shall submit to
Netplex an accounting for the actual disbursements for
expenses incurred by Seller for or on behalf of the Business
from the Effective Date through September ("Actual September
Expenses"). If the Actual September Expenses exceed the
Invoiced September Earnings less any credits thereon or
reductions thereto ("Net Receivables"), then Netplex shall
forthwith pay Seller at Closing, without interest, the
difference between such Actual September Expenses and the Net
Receivables. If the Net Receivables exceed the Actual
September Expenses, then Seller shall forthwith pay Netplex
at Closing, without interest, the difference between such Net
Receivables and the Actual September Expenses.
5.1.5. Seller shall provide such documentation as Netplex
reasonably requests to support the Actual Total Expenses
incurred by Seller for the Business for which Seller seeks
payment pursuant to Section 5.1.4 of this Amendment. In
addition, prior to paying any such expenses, Seller shall
notify Netplex of any individual payment in excess of $1,000
each.
5.1.6. If any of the sums due pursuant to Section 5.1.4
of this Amendment are not paid when due, the party owed such
sum shall be entitled to interest at the rate of 10 percent
per year on any unpaid principal amount from and after the
date such amount was due.
5.1.7. Netplex shall indemnify, defend and hold Seller
harmless from any Liabilities arising from the nonpayment of
any such expenses.
5.1.8. It is agreed and understood that, although Robert
Barcum and David North will be leased to Netplex pursuant to
this Amendment, they will also retain their positions as
officers of Seller through the Preliminary Closing Date and
will continue to report to Seller's Board of Directors and to
represent the interests of Seller on issues relating to or
arising out of the Agreement as amended hereby between the
Effective Date and the Preliminary Closing Date. Moreover,
Netplex agrees that Robert Barcum may retain his position as
Chairman of Seller's Board of Directors and may continue to
represent the interests of Seller on the issues relating to
or arising out of the Agreement as amended hereby between the
Effective Date and the Closing thereof. It is also agreed
that, although Kay Titchenal will be leased to Netplex
pursuant to this Amendment, through the Preliminary Closing
Date she will also maintain her responsibilities as Human
Resources Director of Seller and will continue to represent
the interests of Seller on issues relating to or arising out
of this Agreement as amended hereby between the Effective
Date and the Preliminary Closing Date.
5.2. Subject to the terms of Schedule 3.2 to the Agreement,
Netplex shall indemnify, defend and hold Seller harmless
from any Liabilities related to or arising from Netplex's
operation of the Business from and after the Effective Date.
5.3. Notwithstanding the terms of section 8.10 of the
Agreement, Netplex shall be entitled to receive any income
earned by the Business based on work performed after the
Effective Date. Seller shall account to Netplex for the same
at the Preliminary Closing Date and, to the extent the same
is received after Closing, Seller, upon receipt thereof,
shall pay to Netplex such sums received for income earned
after the Effective Date.
5.4. Netplex shall make available to Seller all Business
Records of the Business covering the period of time between
the Effective Date and the Closing.
5.5. As of the Effective Date and through the Closing, but
subject to the terms of the Agreement and this Amendment,
Netplex shall assume total responsibility for and control
over the employees leased to Netplex pursuant to this
Amendment or otherwise employed by Netplex and shall comply
with all federal, state and local laws, rules and regulations
relating to said employees. Netplex shall indemnify, defend
and hold Seller harmless from any Liabilities arising out of
Netplex's use and/or control of such employees.
5.6. Between the Effective Date and the Closing, in addition
to its other obligations under Section 8.2 of the Agreement,
Netplex shall continue to maintain the confidentiality of all
Business Records of the Business regardless of when the same
were generated.
5.7. Seller shall cooperate with Netplex in providing
Netplex with such Business Records as it reasonably needs to
operate the Business between the Effective Date and Closing.
5.8. After the Effective Date, Netplex shall have the right
to use the AIG Marks only in relation to the operation of the
Business between the Effective Date and Closing as are
approved in writing by Seller.
5.9. Between the Effective Date and the Preliminary Closing
Date, Seller shall allow Netplex to use the Assets of the
Business and will provide Netplex space at its principal
business location to fulfill its obligations hereunder.
5.10. Subsequent to Closing, the parties shall make such
periodic accountings to one another as are reasonably
necessary to account for payments due to a party as a result
of the payment obligations of a party set forth in the
Agreement and/or this Amendment.
5.11. In the event that the Preliminary Closing fails to
be completed by September 30, 1998, or if the Closing is
abandoned, for whatever reason, the Agreement as amended
hereby, may be terminated by either party. In such event,
the lease of the employees shall be terminated and Seller
shall assume responsibility for all risks and benefits of the
Business. In the event of such termination, (i) Seller
shall indemnify, defend and hold Netplex harmless from any
Liabilities associated therewith after such termination;
(ii) Netplex shall deliver to Seller all Business Records,
Assets and AIG marks in its possession and Netplex shall
forthwith terminate the use thereof; (iii) the Confidentiality
Obligations of section 8.2 of the Agreement shall remain in
full force and effect; (iv) Netplex shall indemnify, defend
and hold Seller harmless from any Liabilities associated with
the Business between the Effective Date and such termination;
(v) Seller shall be entitled to receive any and all income earned
from the Business from and after the Effective Date and Seller shall
be responsible for any expenses incurred by the Business
from and after the Effective Date.
6. Modification of certain terms:
6.1. The term "Closing" as used in sections 4.21 (f) and
(g), 5.11, 6.2, 6.4, 7.1, 7.3, 8.5, 8.8, 8.10, 9.1, 9.1(b),
9.2, 9.2(b), 9.2(g), 9.2(k), 9.3, 9.3(a), 9.3(b), and 10.1(c)
of the Agreement is amended to "Preliminary Closing" as
defined in this Amendment. The term "Closing" as used in the
introductory clauses of Article 6 and Article 7 is amended to
"Preliminary Closing" as defined in this Amendment. The
heading of Article 9 of the Agreement is amended as follows:
Conditions Precedent to Preliminary Closing.
6.2. The term "Closing Date" as used in sections 1.25, 8.16,
11.1 and 11.2 of the Agreement is amended to "Effective
Date" as defined in this Amendment.
6.3. The term "Closing Date" as used in section 9.2(k) of
the Agreement is amended to "Preliminary Closing Date" as
defined in this Agreement.
6.4. Section 8.2 of the Agreement is amended as follows: The
last sentence of 8.2 is deleted and replaced by the
following: "This Section 8.2 shall survive the Closing or the
termination of this Agreement, as the case may be.
6.5. Section 10.1 is deleted and replaced as follows: "This
Agreement may be terminated without liability of any Party,
each to the other, at any time prior to the Preliminary
Closing and the Closing contemplated hereby may be
abandoned:". The provisions of sections 10.1(a)-10.1(f),
inclusive are not amended by the change to section 10.1
except as otherwise set forth in this Amendment.
6.6. Notwithstanding anything to the contrary in the
Agreement or in this Amendment, Section 10.1(b) is deleted
and replaced as follows: "(b) by Netplex, or Seller, if the
Preliminary Closing shall not have occurred on or before
September 30, 1998 (provided that the right to terminate this
Agreement under this Section 10.1 shall not be available to
any party whose failure to fulfill any obligation under this
Agreement has been the cause of or has resulted in the
failure of the Closing to occur on or before such date); or"
6.7. The Introductory clauses of sections 8.4(a)(b) and (c)
shall be amended to read as follows: "For a period of fours
years after the Effective Date, if the Closing occurs,".
6.8. In section 10.1(f) the term "Seller, Netplex" shall be
amended to read "Seller or Netplex".
6.9. The following paragraph is added to Article 9 of the
Agreement as Section 9.3(l): "Netplex shall amend its
Certificate of Incorporation as set forth in the Certificate
of Designation."
6.10. The following paragraph is added as section 6.8 of
the Agreement: "No Person other than Seller and/or its
transferees or designees shall be eligible to hold the
Netplex Preferred Stock.
7. Covenants of Seller.
7.1. Seller hereby covenants:
7.1.1. That, unless the Agreement is terminated, from and
after the execution of the Agreement and through Closing, it
will refrain from, and will cause each other Person acting for
or on behalf of Seller, to refrain, from taking, directly or
indirectly, any action (a) to merge, consolidate, or combine,
or to permit any other Person to merge, consolidate or
combine, with Seller in a manner which affects the Business or
the Assets; and (b) to seek or encourage any offer or proposal
from any Person to acquire the Business or any Assets.
7.1.2. Seller shall comply with the terms of the Escrow
Agreement.
8. Covenants of Netplex.
8.1. Netplex hereby covenants:
8.1.1. That between the Effective Date and Closing, it
shall conduct the Business and use the Assets only in the
ordinary course of business, consistent with the past
practices of Seller, which shall include, without limitation,
compliance in all respects with all Laws, regulations and
administrative orders of any federal, state or local
governmental authority that are applicable to Netplex or
Seller with respect to the Assets or Business, with the intent
of preserving the ongoing operations of the Assets and
Business and which shall also include, without limitation, not
selling, transferring or disposing of any of the Assets nor
making any distributions of cash or other property relating to
the Assets to Netplex shareholders or incurring any
indebtedness other than accounts payable consistent with past
practices.
8.1.2. That between the Effective Date and Closing, it
shall promptly notify Seller of any materially adverse
developments that occur prior to Closing with respect
to the Assets or the operation of the Business. Netplex
shall keep Seller informed of all
material operational matters and business developments
with respect to the Business and its markets, including
any competitive changes.
8.1.3. That between the Effective Date and Closing, it
will refrain from, and will cause each other Person acting
for or on behalf of Netplex, to refrain, from taking,
directly or indirectly, any action (a) to merge, consolidate,
or combine, or to permit any other Person to merge,
consolidate or combine, with Netplex in a manner which
affects the Business or the Assets; and (b) to seek or
encourage any offer or proposal from any Person to acquire
the Business or any Assets.
8.1.4. Netplex shall comply with the Escrow Agreement.
9. Other Additional Covenants:
9.1. Non-solicitation by Netplex. For a period of four (4)
years after the Effective Date, if the Closing occurs,
Netplex and any of its subsidiaries, Affiliates, successors
or assigns shall not, directly or indirectly, alone, or as a
partner, partial owner, consultant, or agent of any other
corporation, partnership or other business organization,
knowingly solicit the employment of, or knowingly hire, any
employee of Seller, or any Seller subsidiary, or
intentionally cause any such employee to terminate the
employee's relationship with Seller or any Seller Affiliate,
without the prior written approval of Seller.
10. Conditions Precedent to Closing.
10.1. The respective obligations of each party to
consummate the Agreement are subject to the satisfaction at
Closing Date of the following conditions precedent:
10.1.1. No order, decree or injunction shall have been
enacted, entered, promulgated or enforced by any court of
competent jurisdiction or any governmental authority which
prohibits the Closing.
10.1.2. No action, claim, suit or proceeding seeking to
enjoin, restrain, or prohibit the consummation of this
Agreement shall be pending before any court or any other
governmental authority.
10.2. The obligations of Netplex to consummate the
Agreement are subject to the satisfaction or waiver at or
prior to the Closing Date of the following condition
precedent:
10.2.1. Netplex shall have received an opinion of Seller's
outside counsel, in form satisfactory to counsel for
Netplex, to the effect all necessary approvals of
shareholders and/or the Board of Directors of Seller have
been obtained for the transaction.
10.3. The obligation of Seller to consummate the
Agreement is subject to the satisfaction or waiver at or
prior to the Closing Date of the following condition
precedent:
10.3.1. Seller shall have received an opinion of Netplex's
outside counsel, in form satisfactory to counsel for Seller,
to the effect that the Certificate of Designation of the
Preferred Stock of Netplex fully complies with all applicable
Laws and that all necessary approvals of shareholders and/or
the Board of Directors of Netplex have been obtained both for
the Certificate of Designation and for the transactions
contemplated by the Agreement.
11. Miscellaneous.
11.1. The Escrow Agreement shall be mutually agreed upon
and executed by Netplex and Seller at or prior to the
Preliminary Closing.
11.2. Any terms defined in the Agreement used herein and
not otherwise defined in this Amendment shall have the
meaning for such term that is provided in the Agreement.
11.3. This Amendment is a material part of the Agreement
and the terms hereof supercede any conflicting terms of the
Agreement. However, nothing in this Amendment abrogates any
provision of the Agreement or the Agreement Documents except
as expressly set forth in this Amendment.
11.4. Captions and numbering. The captions and
numbering of the provisions of this Amendment are for
convenience only, are not to be interpreted as substantive
terms, and are not to be interpreted to signify replacement
of similarly captioned or numbered provisions of the
Agreement, except where such effect is expressly set forth
in this Amendment.
11.5. The term "Buyer" as used in sections 8.4(a) and
8.4(c) is amended to read "buyer".
11.6. The term "Buyer" as used in section 5.6 is amended
to read "Netplex".
11.7. In section 3.2 of the Earnout Agreement, Exhibit B
to the Agreement, the date "March 1, 2000" shall be amended
to read "March 1, 2001".
11.8 It is agreed and understood that Seller shall be entitled to
receive fifty percent (50%) of the Net Profit from the
Business between the Effective Date and September 30, 1998.
The Earnout Agreement and the Employment Agreements shall be
amended to reflect the same.
SIGNATURE PAGE FOLLOWS
THE NETPLEX GROUP, INC.
By: __________________________
Name: Gene Zaino
Title: President and CEO
APPLIED INTELLIGENCE GROUP, INC.
By: ___________________________
Name: Robert Barcum
Title: President and CEO
APPENDIX A-3
EXHIBIT B
EARN-OUT AGREEMENT
This Earn-Out Agreement is made as of this
30th day of September, 1998 by and between The
Netplex Group, Inc., a New York corporation
("Netplex"), and Applied Intelligence Group,
Inc., an Oklahoma corporation ("Seller").
WHEREAS, Seller and Netplex have entered into an
Asset Acquisition Agreement dated as of
August 31, 1998 ("Asset Agreement"); and
WHEREAS, pursuant to the terms of said Asset
Agreement, Seller may be entitled to
receive from Netplex monetary compensation
in addition to that which was paid Seller
at the Closing of said Asset Agreement
("Additional Compensation"), and
WHEREAS, pursuant to the terms of said Asset
Agreement, Seller may be entitled to an
increase in the number of shares of Netplex
Class B Preferred Stock received from
Netplex ("Additional Preferred Shares");
and
WHEREAS, the parties hereto desire to establish
a means and method for determining what
amount of Additional Compensation and/or
Additional Preferred Shares Seller is
entitled to receive as additional
consideration for the sale of assets.
NOW, THEREFORE, the parties hereto in
consideration of the above premises and in
consideration of other good and valuable
consideration, the receipt and sufficiency
is hereby acknowledged, agree as follows:
1. Nature and Purpose of Earn-Out Agreement. This Earn-
Out Agreement is established for the purpose of
determining what Additional Compensation and/or
Additional Preferred Shares Seller is entitled
to receive pursuant to the terms of the Asset
Agreement and the Additional Documents executed
thereunder. The amount of Additional
Compensation and the Additional Preferred Shares
shall be determined and paid as set forth in
this Earn-Out Agreement.
2. Definitions. The following terms as used in this Earn-
Out Agreement shall have the definitions set forth below:
2.1. "AIG" shall mean the division or subsidiary of Netplex
which will be established by Netplex
contemporaneously with the Closing to operate a
technical consulting services and solutions
business substantially similar to that operated
by Seller prior to the Closing of said Asset
Agreement.
2.2. "Net Profit" shall mean, for each applicable quarter,
the earnings of AIG before interest, taxes,
depreciation and amortization (hereinafter
"EBITDA") for that quarter less any losses from
prior quarters determined after Closing on that
same basis which have not previously been
deducted in arriving at a calculation of Net
Profit for purposes of this Earn-Out Agreement.
The parties further agree and understand that
generally accepted accounting principles shall
be used by Netplex during the Earn-out Period
for purposes of determining EBITDA for this Earn-
out Agreement.
2.3. "Performance Forecast" shall mean the projected plan
agreed to by the parties hereto for the
operation of AIG after the Closing, which is
attached hereto and incorporated herein by
reference as Exhibit 1.
2.4. "Earn-Out Period" shall mean that period of time from
and after September 1, 1998 and through and including
December 31, 2000.
2.5. Any terms defined in the Asset Acquisition Agreement
used herein and not otherwise defined in this
Earn-Out Agreement shall have the meaning for
such term that is provided in the Asset
Acquisition Agreement.
3. Determination of Earn-Out Amounts.
3.1. Additional Compensation. On or before the 60th day
following the conclusion of each of the next
seven (7) calendar quarters, beginning with the
quarter ending September 30, 1998, Netplex shall
determine the Net Profit of AIG for the calendar
quarter just ended. For purposes of this
calculation, the parties agree and understand
that the quarter ending September 30, 1998 only
includes the month of September, 1998. The
amount of Additional Compensation to which
Seller is entitled to receive for each of said
calendar quarters shall be a sum equal to fifty
percent (50%) of the Net Profit for that
quarter, provided however that the cumulative
sum of all of such Additional Compensation shall
not exceed One Million Five Hundred Thousand
Dollars ($1,500,000). Netplex shall pay Seller
the Additional Compensation within ten (10) days
after the calculation of Additional Compensation
is made for each of such calendar quarters.
3.2. Additional Preferred Shares. If the aggregate Net
Profit of AIG for the ten (10) quarters
beginning with the quarter ending September 30,
1998 exceeds $5,000,000, then Netplex, within
ten (10) days after the calculation made
pursuant to this paragraph, will issue to Seller
or its designee(s) additional shares of Netplex
Preferred Stock, (as the same is defined in the
Asset Agreement) as is determined by the formula
hereinafter set forth. For purposes of this
calculation, the parties agree and understand
that the quarter ending September 30, 1998 only
includes the month of September, 1998. Such
determination shall be made on or before March
1, 2001. The number of such additional shares
of Netplex Preferred Stock shall be calculated
in accordance with the formula below
(hereinafter "Additional Preferred Share
Calculation"):
[(The sum of the Net Profit
for the ten consecutive quarters defined above,
or $9,000,000, whichever is less) minus
$5,000,000] divided by $4,000,000,
the quotient of which is then multiplied by
[the number of shares of Netplex Preferred
Stock issued to Seller pursuant to Article 3
of the Asset Acquisition Agreement less the
amount of such Netplex Preferred Stock
converted by Seller to Netplex Common Stock
prior to December 31, 2000].
4. Duties of Netplex Regarding Earn-Out Amounts.
4.1. With the payment of the Additional Compensation,
Netplex shall deliver to Seller Netplex's calculation
of the Net Profit and Additional Compensation
payable, and all documents reasonably requested by
Seller to verify the amount of such compensation (the
"Payment Calculation").
4.2. Netplex shall afford Seller's accountants and
representatives reasonable access to the books and
records of Netplex during normal business hours for
the purpose of reviewing the Payment Calculation.
However, and notwithstanding the foregoing, in the
event there is any change in the control of Seller
such that Seller is acquired or becomes controlled by
a direct competitor of Netplex, then said access to
the books and records of Netplex shall be provided to
either an Independent Accounting Firm selected and/or
determined in the manner provided for in Section 4.6,
such Independent Accounting Firm's opinion regarding
the Payment Calculation shall be provided to both
parties. If either party is not satisfied with such
opinion, or if an Independent Accounting Firm cannot
be selected, such party may seek arbitration pursuant
Section 4.6. In any event, Netplex may seek a
protective order from either a court of competent
jurisdiction or the arbitration panel regarding the
confidentiality of any books and records to be
disclosed as required by this Section 4.2.
4.3. Each of the parties shall bear its or their own costs
in preparation and review of the Payment Calculation.
4.4. On or prior to the 30th day after receipt of the
Payment Calculation, Seller may give Netplex a
written notice stating in reasonable detail Seller's
objections (an "Objection Notice") to the Payment
Calculation. If Seller does not give Netplex an
Objection Notice within such 30-day period, then the
Payment Calculation will be conclusive and binding
upon the parties as of the end of such 30-day period.
4.5. If Seller timely gives an Objection Notice, then Seller
and Netplex will make reasonable efforts to resolve
their disputes as reflected in the Objection Notice,
and any amount agreed to in writing by Seller and
Netplex as the Payment Calculation as a result of
such efforts will be conclusive and binding upon the
parties.
4.6. If Seller and Netplex do not resolve all disputes as
reflected in the Objection Notice on or prior to the
15th day after the Objection Notice is given, then
Seller and Netplex will, within ten days after the
15th day period, retain a mutually acceptable,
nationally recognized accounting firm (the
"Independent Accounting firm") to determine the Net
Profit as soon as practicable and, in any event,
within 30 days of such engagement, all in accordance
with the standards and definitions set forth herein.
The Net Profit for such quarter determined by the
Independent Accounting Firm will be conclusive and
binding upon the parties. The fees and expenses of
the Independent Accounting Firm will be paid 50% by
Netplex and 50% by Seller. In the event Seller and
Netplex fail to reach mutual agreement as to the
Independent Accounting Firm within such ten-day
period (except as extended by written agreement
between the parties), Arthur Anderson, or any
successor firm, is deemed to be a mutually acceptable
Independent Accounting Firm, provided such firm is
not otherwise then engaged by Seller or Netplex. In
the event that Arthur Anderson is not eligible to
resolve such dispute as provided above, then the
parties shall submit such dispute to arbitration
before a panel designated by the New York City office
of the American Arbitration Association as provided
in sections 4.6.1 to 4.6.5 below.
4.6.1. In the event such dispute is submitted to
arbitration, it shall be decided by arbitration
in accordance with the then current Rules of the
American Arbitration Association.
4.6.2. Notice of the demand for arbitration shall be
filed in writing with the other party to this
Earn-Out Agreement and with the New York City
office of the American Arbitration Association. The
demand for arbitration shall be made within
the time set forth in this Earn-Out Agreement for
referral of the dispute. Unless otherwise agreed in writing,
all obligations of the parties to this Earn-Out Agreement shall
continue during any such Arbitration according to the terms of
this Earn-Out Agreement.
4.6.3. The foregoing agreement to arbitrate shall be
specifically enforceable under the prevailing
arbitration law.
4.6.4. The award, if any, rendered by the arbitrators
shall be final, and judgment may be entered upon
it in accordance with applicable law in any
court having jurisdiction thereof.
4.6.5. Costs and attorneys fees shall be paid or imposed
as part of the arbitration award.
4.7. If the Independent Accounting Firm or Arbitration
panel, as the case may be, determines that the Net Profit
was calculated incorrectly, then Netplex will pay any
amounts owed to Seller within five (5) business
days of the determination. Provided the
overpayment does not cause the Additional
Compensation to exceed $1,500,000, Seller will
not be required to remit to Netplex any
overpayment made to Seller. If the overpayment
causes the Additional Compensation to exceed
$1,500,000, then the Seller shall remit to
Netplex any overpayment made to Seller.
4.8. During the Earn-Out Period, and to the extent not
already delivered pursuant to Section 4.1,
Netplex shall deliver to Seller Netplex's
calculation of the Net Profit for each quarter
and all documents reasonably requested by Seller
to verify the amount of such Net Profit. In the
event that Seller disputes the Additional
Preferred Share Calculation, Seller shall have
the same rights and remedies, and the parties
shall be subject to the same procedures, as
provided by sections 4.4 through 4.7 of this
Earn-Out Agreement.
5. Covenants of Netplex. During the Earn-Out Period,
Netplex covenants and agrees as follows:
5.1. Netplex shall separately account for the AIG's Net
Profit in accordance with this Earn-Out Agreement.
5.2. Netplex shall comply in all respects with all Laws,
regulations and administrative orders of any
federal, state or local governmental authority
that are applicable to the operation of AIG.
5.3. Netplex shall take all steps which are reasonably
necessary to continue to operate AIG in a manner which allows
Seller the opportunity to earn the maximum potential
Additional Compensation and Additional Preferred Shares
contemplated under this Earn-Out Agreement.
5.4. Netplex shall not, without the written consent of
Seller, have any right to allocate any corporate or other
expenses to AIG for purposes of arriving at the EBITDA
calculation except to the extent that the same are shown on
the Performance Forecast.
5.5. During the first two quarters of the Earn-Out Period,
Netplex shall provide to AIG such cash funds as are necessary
to allow AIG to meet its expense obligations under the plan
for the operation of AIG. Such amount shall not be charged
as an expense or liability, counted as revenue, deducted from
any calculation of Net Profit, or deducted from any amount
owing to Seller under this Earn-Out Agreement.
5.6. Netplex shall not include in or deduct from the
calculation of Net Profit: (i) any corporate overhead or
administrative expense of Netplex or any of its subsidiaries
or Affiliates; (ii) any reserves or contingencies for any
item covered by the Asset Agreement for which either party
has indemnification requirements, obligations or liability to
the other party hereto; (iii) any amount of any kind or
character not substantially similar to those included in the
Performance Forecast; (iv) compensation or fringe benefit
expenses for any employee of Netplex or any of its Affiliates
or subsidiaries who are not directly engaged in the Business;
(v) third party professional services and legal expenses
incurred by Netplex in relation to acquiring AIG or managing
any of AIG's operations, provided however that third party
services and legal expenses caused by the AIG operations
shall be included in the calculation of Net Profit; (vi) any
charges, fees, or interest of any kind or character incurred
by Netplex for any Lien incurred by it against any of the
assets or value of AIG; (vii) any interest on the money
Netplex is required to provide to AIG pursuant to this Earn-
Out Agreement.
5.7. Netplex shall continue to operate AIG in good faith so
as to maximize the Net Profit of AIG during the Earn-Out
Period, and, provided AIG continues to achieve the Minimum
Net Profit, as specified on the Quota Schedule attached
hereto as Exhibit 2 for six of the eight quarters after the
last quarter of 1998 [or for seven of the nine quarters,
starting with the last quarter of 1998, if the Net Profit for
the last quarter of 1998 is less than one hundred thousand
dollars ($100,000)], Netplex shall provide the employees of
AIG, including, without limitation, the employees retained by
the Employment Agreements, such discretion and authority as
necessary to operate AIG as necessary to fulfill the intent
of the Agreement Documents and to maximize Seller's ability
to earn the Additional Compensation and Additional Preferred
Shares.
5.8. Not later than ninety (90) days after the Additional
Preferred Shares is issued purusant to this Earn-Out
Agreement, Netplex shall file an appropriate registration
statement for sufficient Netplex Common Stock to permit the
conversion of the Additional Preferred Shares and shall
maintain effectiveness of such registration statement until
such time as the Netplex Common Stock underlying the Netplex
Preferred Stock may be sold pursuant to Rule 144(k) of the
SEC upon conversion of the Netplex Preferred Stock to Netplex
Common Stock.
6. Termination and Breach.
6.1. In the event that (i) AIG ceases to be accounted for by
Netplex to Seller as a discrete business enterprise; (ii)
Netplex sells substantially all of AIG or a substantial
portion thereof; or (iii) Netplex breaches the Asset
Acquisition Agreement or this Earn-Out Agreement or (iv)
Netplex terminates any of the Employment Agreements executed
pursuant to section 9.1(d) of the Asset Agreement for any
reason other than for Cause, then the remaining balance of
the maximum Additional Compensation and the maximum
Additional Preferred Shares provided for under this Earn-Out
Agreement shall be immediately deemed earned, and shall be
forthwith paid and delivered, as the case may be, to Seller.
Upon satisfaction of such obligation, Netplex shall not have
any further liability to Seller under this Earn-Out
Agreement.
6.2. Netplex acknowledges and agrees that any material
breach of its obligations hereunder shall represent a
Material Adverse Effect upon Seller, that the total amount of
damages Seller will suffer in such event will not be subject
to reasonable calculation, and that Seller shall in such
event be entitled to the remedies that appear in this Earn-
Out Agreement in addition to, and not in lieu of, any other
remedy to which Seller may be entitled as a result of
Netplex's breach, whether at Law or equity, and to include,
without limitation, injunctive relief.
6.3. In the event that Netplex fails to make any payment
when due. Netplex will pay interest on said sum until paid
in full. The annual interest rate thereon shall be equal to
the prime rate at Nationsbank in Oklahoma City, Oklahoma, or
its successor in interest, plus three quarters of one point,
as of the date such payment is due.
7. Miscellaneous.
7.1. Benefit and Assignability. This Earn-Out Agreement
shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted
assigns, and no other person or entity shall have any right
(whether third party beneficiary or otherwise) hereunder.
This Earn-Out Agreement may not be assigned by any party
without the prior written consent of the other party, which
consent shall not unreasonably be withheld.
7.2. Notices. All notices demands and other communications
pertaining to this Earn-Out Agreement ("Notices") shall be in
writing addressed as follows:
If to Seller:
Robert N. Baker, Vice President
viaLink
13800 Benson Road
Edmond, OK 73013-6417
with a copy to:
Richard M. Klinge, Esq.
Richard M. Klinge & Associates, P.C.
228 Robert S. Kerr, Suite 940
Oklahoma City, OK 73102
If to Netplex:
The Netplex Group, Inc.
Attention: Gene F. Zaino, President
8260 Greensboro Drive, 5th Floor
McLean, Virginia 22102
with a copy to:
Attn: Edward J. Walsh, Jr., Esq.
Vedder Price Kaufman & Day
22nd Floor
805 Third Avenue
New York, NY 10022
Notices shall be deemed given five (5) business days after
being mailed by certified or registered United States mail,
postage prepaid, return receipt requested, or on the first
business day after being sent, prepaid, by nationally
recognized overnight courier that issues a receipt or other
confirmation of delivery to the appropriate recipient of such
Notice. Any party may change the address to which Notices
under this Earn-Out Agreement are to be sent to it by giving
written notice of a change of address in the manner provided
in this Earn-Out Agreement for giving Notice.
7.3. Counterparts; Facsimile. This Earn-Out Agreement may
be signed in any number of counterparts with the same effect as if
the signature on each such counterpart were on the same instrument.
This Earn-Out Agreement and any counterparts may be executed by
facsimile with the same effect as if the signature were an original.
7.4. Waiver. Unless otherwise specifically agreed in
writing to the contrary: (a) the failure of any party at any
time to require performance by the other of any provision of
this Earn-Out Agreement shall not affect such party's right
thereafter to enforce the same; (b) no waiver by any party of
any default by any other shall be valid unless in writing and
acknowledged by an authorized representative of the
nondefaulting party, and no such waiver shall be taken or
held to be a waiver by such party of any other preceding or
subsequent default; and (c) no extension of time granted by
any party for the performance of any obligation or act by any
other party shall be deemed to be an extension of time for
the performance of any other obligation or act hereunder.
7.5. Construction. The headings of the Articles and
Sections of this Earn-Out Agreement are for convenience only
and in no way modify, interpret or construe the meaning of
specific provisions of the Agreement.
7.6. Severability. In case any one or more of the
provisions contained in this Earn-Out Agreement should be
held invalid, illegal or unenforceable in any respect, the
validity, legality, and enforceability of the remaining
provisions will not in any way be affected or impaired. Any
illegal or unenforceable term shall be deemed to be void and
of no force and effect only to the minimum extent necessary
to bring such term within the provisions of applicable Laws
and such term, as so modified, and the balance of this Earn
Out Agreement shall then be fully enforceable.
7.7. Choice of Law. The obligations, representations,
covenants and warranties entered into by the Parties under
this Earn-Out Agreement shall be construed and governed by
the Laws of the State of Oklahoma, without regard for the
choice of law rules of that State.
7.8. Survival and Limitation of Actions. In addition to
such terms and provisions which survive the termination of
this Earn-Out Agreement as stated heretofore in this EarnOut
Agreement, the representations and warranties of Netplex
contained herein shall survive the termination of this Earn
Out Agreement. Any claims or causes of action for breach or
default, or for indemnification, under this Earn-Out
Agreement must be commenced by either party hereto no later
two years after such Party discovers or reasonably should
have discovered the existence of any such claim or cause of
action. For any action between the parties not otherwise
subsumed in the foregoing, such action may be commenced no
later than within the time permitted by the statute of
limitations provided by applicable Law.
7.9. Attorneys' Fees. Except to the extent otherwise
specified in this Earn-Out Agreement, if either party
initiates any litigation against the other party involving
this Earn-Out Agreement, the prevailing party in such action
shall be entitled to receive reimbursement from the other
party for all reasonable attorneys' fees and other costs and
expenses incurred by the prevailing party in respect of that
litigation, including any appeal, and such reimbursement may
be included in the judgment or final order issued in that
proceeding.
7.10. Complementary Terms. This Earn-out Agreement is a
material part of the Asset Agreement, and are intended to be
interpreted and applied consistently therewith. In the event
that any material conflict exists between the application of
the provisions of this Earn-Out Agreement and the provisions
of the Asset Acquisition Agreement, the language of this Earn-
Out Agreement shall control and supercede any conflicting
provision of the Asset Acquisition Agreement, without voiding
or invalidating any other provision of either this Earn-Out
Agreement or the Asset Agreement.
SIGNATURE PAGE FOLLOWS
WHEREFORE, the parties hereto have executed this Earn-Out
Agreement as of the date first above written.
THE NETPLEX GROUP, INC. APPLIED INTELLIGENCE GROUP,
INC.
_________________________ __________________________
Gene F. Zaino
President by its _____________
APPENDIX B
THIRD AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
APPLIED INTELLIGENCE GROUP, INC.
Applied Intelligence Group, Inc., an Oklahoma
corporation
(this "Corporation"), does hereby certify:
FIRST. Applied Intelligence Group, Inc., an Oklahoma
corporation, was incorporated on May 31, 1985.
SECOND. The Certificate of Incorporation was
amended and restated pursuant to the Second Amended
and Restated Certificate of Incorporation of this
Corporation on April 30, 1996.
THIRD. This Third Amendment to the Certificate
of Incorporation was duly adopted in accordance with
the provisions of Sections 77 and 80 of the Oklahoma
General Corporation Act (the "Act").
THIRD. Article I of this Corporation's
Certificate of Incorporation is hereby amended to
read in its entirety as follows:
ARTICLE I
Name
The name of the corporation is "APPLIED
INTELLIGENCE GROUP, INC.", and, as amended, the
name of this Corporation has been changed to
"THE viaLink COMPANY."
FOURTH. In all other respect this Corporation's
Certificate of Incorporation remains as set forth in
the Second Amended and Restated Certificate of
Incorporation of this Corporation.
IN WITNESS WHEREOF, this Corporation has
caused this Third Amendment to the Certificate of
Incorporation to be signed by its President and
attested by its Secretary this 4th day of September,
1998.
APPLIED
INTELLIGENCE GROUP, INC.
By:_______________________
Robert L.
Barcum
President
ATTEST:
_______________
Robert N. Baker, Secretary
APPENDIX C
CONSENT TO ACTION IN LIEU
OF A MEETING OF THE SHAREHOLDERS
OF APPLIED INTELLIGENCE GROUP, INC.
The undersigned holders of a majority of the outstanding
shares of common stock, $.001 par value per share (the
"Common Stock'), of Applied Intelligence Group, Inc., an
Oklahoma corporation, (the "Corporation"), do hereby adopt
and consent to the adoption of the following resolutions,
with the same force and effect as if such resolutions were
proposed, seconded and adopted by the holders of a majority
of the outstanding shares of Common Stock at a meeting of
the Corporation's shareholders duly called and held on the
date set forth below:
WHEREAS, upon the recommendation of the Board of
Directors of the Corporation, the below named holders of a
majority of the issued and outstanding shares of Common
Stock deem it advisable to approve the following:
(i) that certain Asset Acquisition Agreement
between the Corporation and The Netplex Group, Inc.
dated August 31, 1998, and as amended on September 8,
1998 (the "Asset Acquisition Agreement");
(ii) amend the Corporation's Certificate of
Incorporation to change the name of the Corporation to
"THE viaLink COMPANY" as required to permit transfer
and assignment of the name "Applied Intelligence Group"
to The Netplex Group, Inc. in accordance with the Asset
Acquisition Agreement;
(iii) amend the Applied Intelligence Group, Inc.
1995 Stock Option Plan (the "1995 Plan") to (A) permit
the grant of non-qualified stock options to all
employees and nonemployee service provides of the
Company and its subsidiaries, (B) permit option holders
to exercise such stock options through the end of
applicable option exercise period without requiring
continued employment with the Company as a condition of
exercise, and (C) increase the number of shares of
common stock, $.001 par value per share of the Company
(the "Common Stock") authorized and reserved for
issuance under the 1995 Plan from 300,000 to 800,000
(the "1995 Plan Amendment"); and
(iv) amend the Applied Intelligence Group, Inc.
1998 Non-Qualified Stock Option Plan (the "1998 Plan")
to (A) permit the grant of options to all employees and
nonemployee service provides of the Company and its
subsidiaries, and (B) increase the number of shares of
Common Stock authorized and reserved for issuance under
the 1998 Plan from 150,000 to 800,000 (the "1998 Plan
Amendment")
NOW, THEREFORE, BE IT RESOLVED, that the Asset
Acquisition Agreement between the Corporation and Netplex,
Inc., dated August 31, 1998, as amended September 8, 1998,
is hereby approved in all respects;
RESOLVED FURTHER, that Article I of the Certificate of
Incorporation of the Corporation be amended to change the
name of the Corporation as follows:
ARTICLE I
Name
The name of the corporation is
"APPLIED INTELLIGENCE GROUP, INC.", and, as
amended, the name of this Corporation has
been changed to "THE viaLink COMPANY."
RESOLVED FURTHER, that the Applied Intelligence
Group, Inc. 1995 Stock Option Plan be amended as
follows:
The Applied Intelligence Group, Inc. 1995 Stock
Option Plan (the "Plan") is hereby amended as
follows:
I.
The first sentence of Section 1.1 of the Plan is hereby
amended to read as follows:
"The purpose of APPLIED INTELLIGENCE GROUP,
INC. 1995 STOCK OPTION PLAN shall be to
attract, retain and motivate management,
directors, employees or professional non-
employee service providers of Applied
Intelligence Group, Inc. (the "Company")
and subsidiaries and certain other
individuals who have benefitted or could
benefit the Company (collectively, the
"Participants") by way of granting (i)
nonqualified stock options ('Stock
Options') and (ii) incentive stock options
('ISO Options')."
II.
The first sentence of Section 1.4 of the Plan is hereby
amended to read as follows:
"Shares of stock ('Stock') covered by Stock
Options and ISO Options shall consist of
Eight Hundred Thousand (800,000) shares of
the voting common stock, par value $.001,
of the Company"
III.
The first paragraph of Section 2.2 of the Plan is hereby
amended to read as follows:
"2.2 Grant and Terms for Stock Options.
Stock Options shall be granted on the
following terms and conditions. No Stock
Option shall be exercisable more than ten
(10) years from the date of grant. Subject
to such limitation, the Committee shall
have the discretion to fix the period
("Option Period") during which Stock
Options may be exercised."
IV.
The first three sentences of Section 3.2 of the Plan are
hereby amended to read as follows:
"ISO Options may be granted only to
management or other employees of the
Company, its parent or any subsidiary of
the Company. No ISO Options shall be
granted to any person who is not eligible
to receive 'incentive stock options' as
provided in Section 422 of the Code. No
ISO Options shall be granted to any
management or other employee if,
immediately before the grant of and ISO
Option, such employee owns more than 10% of
the total combined voting power of all
classes of stock of the Company, its parent
or its subsidiaries (as determined in
accordance with the stock attribution rules
contained in Section 422 and Section 424(d)
of the Code)."
V.
The Plan is hereby amended to delete the word "key" each
place it appears in the Plan.
Except as otherwise provided in this 1998 Amendment
to Applied Intelligence Group, Inc. 1995 Stock Option
Plan ("Amendment"), the Plan is hereby ratified and
confirmed in all respects. This Amendment shall be
effective as of September 1, 1998.
RESOLVED FURTHER, that the Applied Intelligence
Group, Inc. 1998 Non-Qualified Stock Option Plan be
amended as follows:
The Applied Intelligence Group, Inc. 1998 Non-Qualified
Stock Option Plan (the"Plan") is hereby amended as
follows:
I.
The first sentence of Section 1.1 of the Plan is hereby
amended to read as follows:
"The purpose of the Plan shall be to
attract, retain and motivate directors,
executive officers, employees, independent
contractors and consultants of the Company
and its subsidiaries and certain other
individuals who have benefitted or could
benefit the Company ('Eligible Persons') by
way of granting non-qualified stock options
('Stock Options') with stock appreciation
rights attached ('Stock Option SARs')."
II.
The first sentence of Section 1.4 of the Plan is hereby
amended to read as follows:
"Shares of stock ('Stock') covered by Stock
Options and SARs shall consist of 800,000
shares of the Common Stock, $.001 par
value, of the Company, subject to
adjustment pursuant to Section 1.7 of the
Plan, which may be either authorized and
unissued shares or treasury shares, as
determined in the sole discretion of the
Board."
III.
Section 2.1.1 of the Plan is hereby amended to read as follows:
2.1.1 Grant and Terms for Stock Options.
Stock Options and Stock Option SARs shall
be granted by the Board on the following
terms and conditions: No Stock Options and
Stock Option SARs shall be exercisable more
than 10 years after the date of grant.
Subject to such limitation, the Board shall
have the discretion to fix the period (the
'Option Period') during which any Stock
Option or Stock Option SAR may be exercised."
IV.
Section 3.1.1 of the Plan is hereby amended to read as follows:
"3.1.1 Grant and Terms for SARs. The
Board may grant SARs to Participants in
connection with Stock Options granted under
the Plan. SARs shall terminate at such
time as the Board determines and shall be
exercised only upon surrender of the
related Stock Option and only to the
extent that the related Stock Option (or
the portion thereof as to which the SAR is
exercisable) is exercised. The applicable
SAR shall (i) terminate upon the
termination of the underlying Stock Option,
(ii) only be transferable at the same time
and under the same conditions as the
underlying Stock Option is transferable,
(iii) only be exercised when the underlying
Stock Option is exercised, and (iv) may be
exercised only if there is a positive
spread between the Option Price and the
fair market value of the Stock for which
the SAR is exercised."
Except as otherwise provided in this 1998
Amendment to Applied Intelligence Group, Inc. 1998
Non-Qualified Stock Option Plan ("Amendment"), the
Plan is hereby ratified and confirmed in all
respects. This Amendment shall be effective as of
September 1, 1998.
EXECUTED on the date set forth below, but effective as of
the 1st day of September, 1998.
Date: September 4, 1998
______________________
Robert L. Barcum
Date: September 4, 1998
______________________
Robert N. Baker
Date: September 4, 1998
/S/ Robert L. Barcum
________________
Robert L. Barcum, as
proxy for and
on behalf of Russell L.
Reinhardt and
David B. North
APPENDIX D
September 8, 1998
The Board of Directors
Applied Intelligence Group, Inc.
c/o Mr. Robert Barcum, President and Chief Operating Officer
13800 Benson Road
Edmond, Oklahoma 73013
Gentlemen:
You have requested the opinion of Seidman
& Co., Inc. as to the fairness, from a
financial point of view, to the shareholders of
Applied Intelligence Group, Inc. ("AIG"), of the
proposed sale (the "Transaction") of the
Technical Consulting Business of AIG (the
"Consulting Group") to The Netplex Group, Inc.
("Netplex").
It is understood that the Consulting Group
provides a range of management consulting and computer systems
information integration services and technology
focused on the retail and wholesale distribution industries.
The "Proposed asset acquisition by The
Netplex Group, Inc. of the Technical
Consulting Business of Applied Intelligence
Group, Inc." letter agreement, dated July 31,
1998, (the "Agreement"), between Applied
Intelligence Group, Inc. and The Netplex
Group would provide for Netplex to purchase
all of the assets of the Consulting Group.
In consideration for selling the
Consulting Group to Netplex, the Agreement
provides for AIG, minimally, to receive
$4.000,000, including $3,000,000 in cash
plus Netplex convertible preferred stock having
a face value of $1,000,000 and convertible
into Netplex common stock on a one for one
basis. Maximally, AIG would receive
$6,500,000, including $3,000,000 in cash,
plus Netplex convertible preferred stock which
would be convertible into two (2) shares of
Netplex common stock for for each share of
preferred, subject to Consulting Group
performance, plus an earn-out payment up to
$1,500,000, again subject to Consulting
Group performance. Thus, it is understood that
total consideration for the Consulting Group
ranges from approximately $4,000,000 on the low
end to $6,500,000 on the high, excluding stock
appreciation value (the "Total Consideration").
It is understood that the proceeds from the
sale of the Consulting Group are to be
reinvested by AIG into two remaining
businesses of the AIG, "viaLink" and "ijob,"
both Internet related.
In reaching our fairness opinion, we have
examined and considered all available
information and data which we deemed
relevant to determining the fairness of the
subject Transaction from a financial point of
view, including:
1. The "Proposed asset acquisition by
The Netplex Group, Inc. of the
Technical Consulting Business of
Applied Intelligence Group, Inc."
letter agreement, dated July 31, 1998,
between AIG and Netplex;
2. AIG's 10-K, dated December 31, 1997, AIG's 10-Q,
dated June 30,1998;
3. Historic and current operating data for the
Consulting Group and AIG, actual and pro
forma for the Transaction, with focus
on sales, operating costs and other
charges against revenues, operating cash
flow and operating cash flow margins
(that is, operating cash flow as
percent of revenues),
operating income and operating income
margins, pretax income and pre-tax
income margins;
4. Historic and current balance sheets for the
Consulting Group and AIG, actual and pro
forma for the Transaction, focusing on
analysis of assets and capital
structure and on indices of
liquidity, activity and coverage,
including current and longterm debt to
equity ratios;
5. Comparative statistical analysis of the operating
performance and balance sheets
of selected companies comparable to
the Consulting Group which have
publicly traded common stock, and, from
this data, deriving financial and
capitalization ratios typical of
management and systems consulting
companies;
6. Financial and operating forecasts provided by AIG
management for the Consulting Group and
other AIG businesses;
7. Discounted cash flow analyses of five year
projected net free cash flows for the
Consulting Group;
8. Discounted cash flow analyses of five year
projected net free cash flows for viaLink and ijob;
9. Conditions in, and the outlook for the management
and systems consulting industry in
the United States;
10.Conditions in, and the outlook for
the United States economy, interest
rates and financial markets;
11.Other studies, analyses, and
investigations as we deemed
appropriate
The preparation of a fairness opinion is
a complex process and is not necessarily
susceptible to partial analysis or summary
description. Selecting portions of the
analyses or of the summary set forth
herein without considering the analysis as
a whole could create an incomplete view of
the processes underlying Seidman & Co. Inc.'s
fairness opinion. This letter was prepared
solely for the purpose of Seidman & Co., Inc.
providing an outline of the opinion as to
the fairness of the subject disposition,
and does not purport to be an appraisal or
necessarily reflect the prices at which
businesses or securities actually may be
sold. This letter only has application as
it is employed with reference to the full
written analysis and supporting research and
tables.
During the course of our investigation,
we conducted interviews with persons who, in
our judgment, were capable of providing us
with information necessary to complete the
assignment, including members of management.
We have assumed that the information and
accounting supplied by management and others
are accurate, and reflect good faith efforts
to describe the current and prospective status
of both the Consulting Group and other
AIG businesses, including viaLink and
ijob, from an operational and
financial point of view. We have
relied, without independent verification, upon the
accuracy of the information provided by these sources.
The valuation fairness tests include a
matrix of fair market valuations of
the Consulting Group, and the
comparison of these valuations with the Total
Consideration to be paid AIG under the terms of the
Transaction. Two generally accepted methods have been
employed in determining the Consulting Group's fair
market value, the "market comparable method"
and the "discounted cash flow method." The
market comparable method of valuation relates
to a subject company's operating and balance
sheet financial capitalizing multiples based
on ratios derived from a universe of
publicly-traded market comparable companies.
The discounted cash flow method of valuation
derives the present value of a company from a
future stream of free cash flows.
Based, therefore, on our analysis and
consideration of the foregoing,
particularly the market comparable and
discounted cash flow valuations, it is our
considered professional judgment that the
consideration in the proposed sale of the
Applied Intelligence Group, Inc. Technical
Consulting Business is fair to the existing
shareholders of Applied Intelligence Group,
Inc. from a financial point of view.
Yours truly,
/S/ Seidman & Co., Inc.
