SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 001-11784
THE NETPLEX GROUP, INC.
(Exact name of small business issuer as specified in its charter)
NEW YORK 11-2824578
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8260 Greensboro Drive, 5th Floor
McLean, Virginia 22102-3806
(Address of principal executive offices and zip code)
(703) 356-3001
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
As of August 12, 1998, 9,618,825 shares of the registrant's Common Stock were
outstanding.
<PAGE>
THE NETPLEX GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
Facing sheet
Index
Part I. Financial information
Item 1. Financial statements and supplementary data
a) Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 . . . . . . . . . 3
b) Condensed Consolidated Statements of Operations for
the Three Months and Six Months Ended
June 30, 1998 and 1997 . . . . . . . . . . . . . . . 4
c) Condensed Consolidated Statements of Cash Flows for
the Six Months ended June 30, 1998 and 1997 . . . . . 5
d) Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . .11
Part II Other information . . . . . . . . . . . . . . . . . . . .17
Signatures . . . . . . . . . . . . . . . . . . . . . . . 18
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<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 condensed consolidated financial statements
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<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 14,366,138 $ 9,930,589 $ 27,677,446 $ 19,708,901
Cost of revenues 11,956,893 8,966,499 23,133,659 17,810,553
------------ ------------ ------------ ------------
Gross profit 2,409,245 964,090 4,543,787 1,898,348
Selling, general and administrative expenses 2,768,458 1,736,624 5,252,181 3,444,953
------------ ------------ ------------ ------------
Operating loss (359,213) (772,534) (708,394) (1,546,605)
Other income (expense)
Interest income(expense),net (14,403) 31,185 (80,479) 39,405
------------ ------------ ------------ ------------
Loss before income taxes (373,616) (741,349) (788,873) (1,507,200)
Income tax provision(benefit) -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (373,616) $ (741,349) $ (788,873) $ (1,507,200)
============ ============ ============ ============
Basic and diluted (loss) per common share $ (0.05) $ (0.13) $ (0.11) $ (0.26)
============ ============ ============ ============
Weighted average common
shares outstanding, basic and
diluted 9,172,542 6,577,870 8,472,566 6,517,750
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
(Unaudited)
1998 1997
----------- -----------
Operating activities:
Net cash flow used in operating activities $ (701,814) $(2,218,362)
----------- -----------
Investing activities:
Purchases of property and equipment (182,223) (62,298)
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 obligations (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 $ -- $ --
=========== ===========
See accompanying notes to condensed consolidated financial statements
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<PAGE>
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.
All significant intercompany transactions were eliminated in
consolidation.
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<PAGE>
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:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ---------------- -------------
<S> <C> <C> <C>
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)
============ =========
</TABLE>
(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.
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<PAGE>
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.
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.
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<PAGE>
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.
<TABLE>
<CAPTION>
Unaudited
----------------------------------------------------
(amounts in thousands, except per share data)
----------------------------------------------------
Three Months Six Months
June 30, June 30,
------------------------ -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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)
========= ========= ========= ========
</TABLE>
(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.
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<PAGE>
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.
(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.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Based in McLean, Virginia with twelve offices throughout the eastern U.S., The
Netplex Group, Inc., together with its wholly owned subsidiaries ("the Company"
or "Netplex"), is an Information Technology (IT) Services and Solutions company
providing the people, technologies, 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 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 Company'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, the Company 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.
In January 1998, the Company acquired the net assets of The PSS Group, Inc.
("PSS") to expand its staffing organization in the Washington DC metropolitan
area and to broaden its customer base, for $300,000 in cash a $300,000
promissory note to be paid in either cash or 200,000 shares of the Company's
Common Stock and provides for additional payments based on PSS's future
profitability.
In June 1998, the Company acquired all of the stock of Automated Business
Systems ("ABS") for $200,000 in cash and issued 450,000 shares of the Company's
common stock. The agreement provides for additional payments based on ABS's
future profitability. The acquisition of ABS expands the geographic reach of the
Company's IT Solutions business to the Charlotte, NC; Spartanburg, SC and
Atlanta, GA market places and broadens its customer base.
The statement of operations for the three and six months ended June 30, 1998
reflects the results of PSS from January 1, 1998, the effective date of
acquisition. The statement of operations for the three and six months ended June
30, 1998 exclude the results of operations for ABS.
The above acquisitions fit within the Company's three distinct, but
inter-related business operations:
o IT Solutions - Design and implementation of systems solutions
to address all information technology-related business needs. This
business is comprised of several specialized technology consulting
practices and provides customers with firm deliverables, generally on
a "proposed estimate" or "fixed-fee" basis. IT Solutions also
maintains certifications with several leading technology
manufacturers, which authorizes Netplex to resell and implement
"best-in-class" technology products.
o IT Staffing - Providing technical staff augmentation services
to organizations based on technical need and Information Technology
goals. IT Staffing provides customers with IT consulting and resource
services on an as-needed basis, generally for contract terms ranging
from three to 12 months. Consulting rates vary based on the skills and
experience of the consultants requested.
o IT Contractor's Resources - Providing business advice, skills
training, and administrative employer services to IT contract
professionals. IT Contractor's Resources targets independent-minded IT
professionals who are entrepreneurial and accustomed to the
variability and flexibility of contract assignments. This service
provides the stability and "back-office" infrastructure to enable and
encourage IT professionals to build skills-based careers across
multiple customer environments.
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<PAGE>
The following table sets forth the revenue, gross profit, business unit
expenses, and business unit income of each of the business areas for the three
and six months ended June 30, 1998 and 1997.
Consolidated Operating Results by Segment
Amounts in Thousands
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
------- ------- -------- -------
Operating revenues
<S> <C> <C> <C> <C>
IT solutions $ 3,118 $ 953 $ 5,623 $ 2,039
IT Staffing 2,659 729 4,931 1,444
IT Contractor's Resources 8,589 8,249 17,123 16,226
------- ------- -------- -------
Operating revenues $14,366 $ 9,931 $ 27,677 $19,709
------- ------- -------- -------
Gross profit
IT Solutions 1,508 531 2,758 1,027
IT Staffing 607 183 1,200 374
IT Contractor's Resources 294 250 586 498
------- ------- -------- -------
Gross profit 2,409 964 4,544 1,899
------- ------- -------- -------
Gross profit margin
IT Solutions 48.4% 55.7% 49.1% 50.4%
IT Staffing 22.8% 25.1% 24.3% 25.9%
IT Contractor's Resources 3.4% 3.0% 3.4% 3.1%
------- ------- -------- -------
Gross profit margin 16.8% 9.7% 16.4% 9.6%
------- ------- -------- -------
Business Unit Expenses
IT Solutions 966 634 2,189 1,328
IT Staffing 672 333 1,213 619
IT Contractor's Resources 286 203 499 463
------- ------- -------- -------
Business unit expenses 1,924 1,170 3,901 2,410
------- ------- -------- -------
Business Unit Income
IT Solutions 542 (103) 569 (301)
IT Staffing (65) (150) (13) (245)
IT Contractor's Resources 8 47 87 35
------- ------- -------- -------
Business unit income 485 (206) 643 (511)
Corporate Expenses 675 465 1,058 829
------- ------- -------- -------
EBITDA (190) (671) (415) (1,340)
Interest, taxes, depreciation
& amortization 184 70 373 167
------- ------- -------- -------
Net operating loss $ (374) $ (741) $ (788) $(1,507)
======= ======= ======== =======
</TABLE>
Results of Operations
Three months ended June 30, 1998 and 1997
Revenue for the three months ended June 30,1998 increased approximately $4.4
million or 45% to approximately $14.3 million, as compared to $9.9 million for
the same period in 1997. This increase includes a $2.2 million or 227% increase
in IT Solutions revenue, a $1.9 million or 265% increase in IT Staffing revenue,
and $340,000 or 4% 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.
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<PAGE>
Gross Profit for the three months ended June 30,1998 increased approximately
$1.4 million or 150% to approximately $2.4 million as compared to approximately
$964,000 for the same period of 1997. This increase includes an increase of
approximately $977,000 or 184% in IT Solutions gross profit, an approximately
$424,000 or 232% increase in IT Staffing gross profit and a $44,000 or 17%
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 all due to internal revenue growth.
Gross Profit margin increased to approximately 16.8% for the three months ended
June 30, 1998, from approximately 9.7% 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 three months ended June 30, 1998 increased
approximately $754,000 or 64% to approximately $1.9 million from approximately
$1.2 million for the same period of 1997. This increase includes increases in IT
Solutions and IT Staffing business unit expense of approximately $332,000 and
$339,000, respectively. The IT Solutions increase includes increases of
approximately $300,000 for the inclusion of Onion Peel business unit expenses 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 three months ended June 30, 1998 was approximately
$485,000 as compared to an business unit loss of $206,000 for the same period of
1997, and increase of approximately $691,000 which includes increased business
unit profits from IT Solutions and IT Staffing of approximately $645,000, and
$85,000, respectively.
Corporate expense for the three months ended June 30, 1998 increased
approximately $209,000 or 45% to approximately $675,000 from approximately
$465,000 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 three months ended June 30, 1998 was a loss of $190,000 as compared to a
loss of approximately $671,000 for the same period of 1997, an improvement of
approximately $481,000. The components of this improvement are discussed above.
Depreciation, amortization and interest expense for the three months ended June
30, 1998 increased approximately $114,000 to approximately $184,000 from
approximately $70,000 for the same period of 1997. This increase is principally
due to increased borrowings under the Company's line of credit facility in the
three 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 three
months ended June 30, 1998 or 1997.
The net loss decreased approximately $368,000 to approximately $374,000 from
approximately $741,000 in the same period of 1997. The components of this
improvement are discussed above.
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.
13 of 19
<PAGE>
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 the Company'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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company had cash and cash equivalents of $2,084,428. The
Company had $1,894,742 outstanding on its line of credit facilities and had long
term capital lease obligations of $216,450.
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<PAGE>
The Company'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. The Company 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 the
Company 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, the Company 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 the Company to maintain certain financial
covenants. The Company 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.
The Company also had a line of credit facility with a bank that it acquired in
the PSS acquisition (the "PSS line of credit"). The Company retired the PSS line
of credit in April 1998 and repaid the outstanding balance of approximately
$803,000.
In January 1998, the Company completed the purchase of all of the stock of PSS
and on June 18, 1998, the Company completed the purchase of all of the stock of
ABS. See additional discussion of the PSS and ABS acquisitions in Note 2
- -Acquisitions.
Capital expenditures for the six months ended June 30, 1998 were approximately
$183,000.
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
warrants at $1.20.
In March 1998 the Company raised $1,457,000 of financing in a Private Placement
with 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 net of 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. See additional discussion in Note 3- Equity
Financings.
On April 26, 1998, the Company raised $150,000 of financing in a private
placement with accredited investors. The Company 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. The Company 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
15 of 19
<PAGE>
$1.375 per share. The funds will be used to finance operations and additional
acquisitions.
Based on its current operating plan, the Company 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 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 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, the Company 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 Form 10-Q 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 the Company,
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 Form 10-Q
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 the Company or any
other person that the objectives and plans of the Company will be achieved.
Inflation
Inflation has not had and the Company does not expect inflation to have a
significant adverse impact on its operations.
16 of 19
<PAGE>
PART II
Item 1. Legal Proceedings
Nothing to report
Item 2. Changes in Securities
In February 1998 the Company sold 80,000 shares of Common Stock to a
purchaser at a price of $1.25 per share. In addition, the purchaser
received a warrant to purchase an additional 100,000 shares of Common
Stock at an exercise price of $1.80 per share.
In March 1998 the Company closed a private placement of 1,457,000
shares of Common Stock. Such shares were sold at a price of $1.00 per
share.
On April 7, 1998 Netplex completed the sale of 1,500 units of a Private
Placement, totaling $1.5 million ($1.3 million net of 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. See
additional discussion in Note 3- Equity Financings.
On April 26 and 27, 1998, the Company raised $198,125 of financing in a
private placement with accredited investors. The Company 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
prices ranging from $1.375 to $1.50 per share. The funds will be used
to finance operations and additional acquisitions.
All of the above transactions were made pursuant to the exemption
contained in Section 4(2) of the Securities Act of 1933, as amended. In
each case the Company engaged no underwriter. With Respect to the
transaction consummated on April 7, 1998, the Company engaged the
services of a Placement Agent. For further information relating to such
transactions, please see Note 3 to the Condensed Consolidated Financial
Statements.
Item 3. Defaults Upon Senior Securities
Nothing to Report
Item 4. Submission of Matters to a Vote of Security Holders
Nothing to Report
Item 5. Other Information
Nothing to Report
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits:
27 - Financial Data Schedule
(b). Reports on Form 8-K:
The Company filed a form 8-K describing the PSS Group, Inc.
Acquisition under Item 2 - - Acquisition or Disposition of
Assets.
17 of 19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The Netplex Group, Inc.
Date: August 19, 1998 By: /s/ Gene Zaino
----------------- ---------------------------
Gene Zaino, President and CEO
(Principal Executive Officer) and Chairman
of the Board
Date: August 19, 1998 By: /s/ Walton Bell
----------------- ---------------------------
Walton Bell, Chief Financial Officer
(Principal Accounting Officer)
18 of 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULETHIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
10-Q FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,084,428
<SECURITIES> 0
<RECEIVABLES> 8,225,483
<ALLOWANCES> (335,851)
<INVENTORY> 0
<CURRENT-ASSETS> 10,384,063
<PP&E> 2,449,592
<DEPRECIATION> (1,454,895)
<TOTAL-ASSETS> 14,135,140
<CURRENT-LIABILITIES> (10,035,028)
<BONDS> 0
0
(11,029)
<COMMON> (9,618)
<OTHER-SE> (9,661,508)
<TOTAL-LIABILITY-AND-EQUITY> (14,135,140)
<SALES> (27,677,446)
<TOTAL-REVENUES> (27,677,446)
<CGS> 23,133,659
<TOTAL-COSTS> 5,252,181
<OTHER-EXPENSES> (80,479)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (788,873)
<INCOME-TAX> 0
<INCOME-CONTINUING> (788,873)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (788,873)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
