SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 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 March 31, 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
(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 April 26, 1998, 9,007,370 shares of the registrant's Common Stock were
outstanding.
<PAGE>
THE NETPLEX GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Facing sheet
Index
Part I. Financial information
Item 1. Financial statements and supplementary data
a) Condensed consolidated balance sheets as of
December 31, 1998 and 1997 . . . . . . . . . . . . . . . 3
b) Condensed consolidated statements of operations for the
three months ended March 31, 1998 and 1997 . . . . . . . 4
c) Condensed consolidated statements of cash flows for the
three months ended March 31, 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 . . . . . . . . . . . . 9
Part II Other information . . . . . . . . . . . . . . . . . . . . . 14
Signature . . . . . . . . . . . . . . . . . . . . . . . . . 17
Page 2 of 19
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------- ---------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,326,291 $ 353,005
Accounts receivable, net 6,293,041 4,133,148
Prepaids and other current assets 419,630 432,842
----------- ---------
Total current assets 8,038,962 4,918,995
Property and equipment, net 1,012,474 952,546
Employee notes receivable 195,014 193,464
Other assets 142,197 82,738
Acquired software, net 1,324,991 418,225
Goodwill, net 339,866 346,529
----------- ---------
Total assets $ 11,053,504 $6,912,497
=========== =========
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Accounts payable $ 1,051,407 $ 567,805
Line of credit 2,404,670 1,316,300
Accrued expenses and other 4,834,246 3,492,521
----------- ---------
Total current liabilities 8,290,322 5,376,626
Other liabilities 292,237 205,169
----------- ---------
Total liabilities 8,582,559 5,581,795
----------- ---------
Stockholders' equity:
Class A cumulative preferred stock;
$.01 par value; 2,000,000 authorized,
outstanding 1,062,500 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) 10,625 10,625
Common stock $.001 par value
20,000,000 authorized, outstanding
9,007,370 share in 1998
7,470,370 shares in 1997 9,007 7,470
Additional paid in capital 7,826,370 6,272,407
Accumulated deficit (5,375,058) (4,959,800)
---------- ----------
Commitments and contingencies
Total stockholders' equity 2,470,945 1,330,702
---------- ----------
Total liabilities and stockholders' equity $11,053,504 $6,912,497
=========== ==========
</TABLE>
Page 3 of 19
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
(Unaudited)
1998 1997
----------- ------------
Revenues $ 3,311,308 $ 9,778,312
Cost of Revenues 1,176,766 8,844,054
----------- -----------
Gross Profit 2,134,542 934,258
Selling general and administrative expenses 2,483,723 1,708,329
----------- -----------
Operating loss (349,181) (774,071)
Interest income (expense), net (66,076) 8,220
----------- -----------
Loss before Income Taxes (415,257) (765,851)
Provision for Income taxes - -
----------- -----------
Net loss $ (415,257) $ (765,851)
=========== ===========
Loss per common share:
Basic and diluted loss per common share $ (0.05) $ (0.12)
=========== ===========
Weighted average common shares outstanding, 7,773,292 6,457,631
basic and diluted
=========== ===========
Page 4 of 19
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
(Unaudited)
1998 1997
----------- -----------
Operating activities:
Net cash flow from operating activities $ (580,364) $ (146,600)
----------- ----------
Investing activities:
Purchases of property and equipment (109,127) (54,632)
Cash paid in acquisition (300,000) -
Proceeds from the exercise of stock options - 69,934
----------- ----------
Net cash flow from investing activities (409,127) 15,302
----------- ----------
Financing activities:
Net proceeds from stock offering 1,555,500 -
Cash acquired in merger 148,385 -
Borrowings under line of credit 282,548 -
Principal payments on capital lease obligations (23,656) (15,086)
----------- ----------
Net cash flow from financing activities 1,962,777 (15,086)
----------- ----------
Increase (decrease) in cash and cash equivalents 973,286 (146,384)
Cash and equivalents at beginning of period 353,005 3,691,099
----------- ----------
Cash and equivalents at end of period $1,326,291 $3,544,715
=========== ==========
Supplemental information:
Cash paid (received) during the period for:
Interest $ 45,585 $ 4,612
=========== =========
Income taxes $ - $ -
=========== =========
Page 5 of 19
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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-K 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 March 31, 1998 and
December 31, 1997 and the results of its operations and its cash flows
for the three months ended March 31, 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 seven offices throughout the U.S., The
Netplex Group, Inc., together with its wholly owned subsidiaries ("the
Company" or "Netplex"), 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 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 subsidiaries 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 March 31, 1998. The financial statements exclude the
accounts of Onion Peel and PSS for the three months ended March 31,
1997 because the effective dates of their acquisitions, which were
accounted for using the purchase method of accounting, were subsequent
to March 31, 1997. 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 quarters ended March 31, 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.
Page 6 of 19
<PAGE>
Weighted average common shares outstanding for the three months ended
March 31, 1998 and 1997 were 7,774,151 and 6,457,631, respectively.
(2) Acquisition of 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.
(3) Acquisition of PSS
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 have entered into employment agreements with
certain employees of PSS. The acquisition was recorded effective
January 1, 1998 using the purchase method of accounting.
(4) Class A Cumulative 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.
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.
Page 7 of 19
<PAGE>
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 issued by the
Company subsequent to 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.
(5) Equity Financings
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.
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, to various purchasers. The Zanett
Corporation acted as placement agent for the Private Placement. 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 Zanett Securities Corporation (which acted as
placement agent) 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 would be for the sale to Zanett of an
additional and committed 1,500 units, for $1,000 per unit, contingent
at the discretion of the Zanett Securities Corporation 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.
The Company believes that it will obtain such shareholder approval at
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. The Company has an oral
hearing with NASDAQ on April 30, 1998 to review whether the Company is
in compliance with the $2,000,000 net tangible asset requirement and to
review the terms of this private placement. The failure to meet and
maintain the NASDAQ requirements 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
Page 8 of 19
<PAGE>
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Based in McLean, Virginia with seven offices throughout the U.S., The Netplex
Group, Inc., together with its wholly owned subsidiaries ("the Company" or
"Netplex"), 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 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 note to
be paid in either cash or 200,000 shares of the Company's Common Stock and is
subject to additional payments based on PSS's future profitability.
The statement of operations for the three months ended March 31, 1998 reflects
the results of PSS from January 1, 1998, the date of acquisition.
The above acquisitions have resulted in the Company emerging in 1997 with 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 are 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.
The following table sets forth the revenue and gross profit of each of the
business areas for the three months ended March 31, 1998 and 1997.
Page 9 of 19
<PAGE>
Consolidated Operating Results
<TABLE>
<CAPTION>
For the three months ended March 31,
Operating Revenue
--------------------------------------
(in thousands)
1998 1997
------- -------
<S> <C> <C>
IT Solutions $ 2,504 $1,087
IT Staffing 2,273 714
IT Contractors Resources 8,534 7,997
------- ------
Operating revenues $13,311 $9,778
======= ======
Gross Profit
--------------------------------------
(in thousands)
1998 1997
------- --------
IT Solutions $ 1,251 $ 496
IT Staffing 592 191
IT Contractors Resources 292 247
------- ------
$ 2,135 $ 934
======= ======
Operating Income
--------------------------------------
(in thousands)
1998 1997
------- --------
IT Solutions $ 27 $ (198)
IT Staffing 52 (95)
IT Contractors Resources 79 (12)
------- --------
Operating income 158 (305)
Selling, general & administrative 384 360
------- --------
EBITDA (226) (669)
Interest,taxes, depreciation, & amortization 189 97
------- --------
Net operating loss $ (415) $ (766)
======= =======
</TABLE>
Results of Operations
Three months ended March 31, 1998 and 1997
Revenue for the three months ended March 31,1998 increased approximately $3.5
million or 36% to approximately $13.3 million, as compared to $9.8 million for
the same period in 1997. This increase includes a $1.4 million or 130% increase
in IT Solutions revenue, a $1.6 million or 218% increase in IT Staffing revenue,
and $560,000 or 6.5% 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 three months ended March 31,1998 increased approximately
$1.2 million or 128% to approximately $2.1 million as compared to approximately
$934,000 for the same period of 1997. This increase includes an increase of
approximately $750,000 or 152% in IT Solutions gross profit, an approximately
$400,000 or 210% increase in IT Staffing gross profit and a $45,000 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 increased to approximately 16.0% for the three months ended March
31, 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. The profit
margins generated by IT Solutions and IT Staffing product offerings generate
higher gross profit margins than IT Contractor Resources Revenues.
Page 10 of 19
<PAGE>
Operating expenses for the three months ended March 31, 1998 increased
approximately $800,000 or 60 % to approximately $2.0 million from approximately
$1.2 million for the same period of 1997. This increase includes increases in IT
Solutions and IT Staffing operating expense of approximately $530,000 and
$250,000, respectively. The IT Solutions increase includes increases of $300,000
for the inclusion of Onion Peel operating expenses and approximately $130,000 of
expansion in the IT Solutions technical staff as well as an expanded sales
force, and practice management. IT Staffing selling, general and administrative
expense increase is primarily due to the acquisition of PSS in January 1998.
Contractor's Resources operating expenses declined by approximately $50,000
during the three months ended March 31, 1998 as compared to the same period of
1997.
Operating income for the three months ended March 31, 1998 was approximately
$160,000 as compared to an operating loss of $305,000 for the same period of
1997, and increase of approximately $465,000 which includes increased operating
profits from IT Solutions, IT Staffing and IT Contractor Resources of
approximately $225,000, $150,000, and $90,000, respectively.
Selling, general, and administrative expense for the three months ended March
31, 1998 increased approximately $25,000 or 7% to approximately $380,000 from
approximately $360,000 when compared to the same period of 1997.
Earnings before interest, income taxes, depreciation and amortization ("EBITDA")
for the three months ended March 31, 1998 was a loss of $225,000 as compared to
a loss of approximately $670,000 for the same period of 1997, an improvement of
approximately $445,000. The components of this improvement are discussed above.
Depreciation and interest expense for the three months ended March 31, 1998
increased approximately $92,000 to approximately $190,000 from approximately
$97,000 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 March 31, 1998 as compared to the same period of 1997.
No provision or benefit for income taxes was required for either the three
months ended March 31, 1998 or 1997.
The net loss decreased approximately $350,000 to approximately $415,000 from
approximately $765,000 in the same period of 1997. The components of this
improvement are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company had cash and cash equivalents of $1,326,291. The
Company had $2,404,670 outstanding on its line of credit facilities and had long
term capital lease obligations of $240,130.
The Company's liquidity and capital resources were increased by the following:
For the three months ended March 31, 1998 the Company's cash increased by
$975,000. This increase is comprised of cash used in operating activities of
approximately $604,000,cash used in investing activities of approximately
$409,000 and cash provided by financing activities of approximately $2.0
million. The primary uses of cash were the Company's increased accounts
receivable of approximately $1.4 million, the Company's net loss of $415,000,
and $300,000 paid in the acquisition of PSS. These uses of cash were offset by
cash provided from the net proceeds from the Company's private placements of
equity of $1,555,000, increased accounts payable and accrued expenses of $1.0
million, and borrowings under the Company's line of credit of $280,000.
The Company is actively pursuing the acquisition of additional technical
consulting firms to broaden its customer base, expand its technical capacity and
enhance its fulfillment capability.
As of March 31, 1998, the Company maintains two credit facilities with a bank, a
line of credit of $2,000,000 (the $2 million line of credit) 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
Page 11 of 19
<PAGE>
to maintain certain financial covenants. The Company had borrowings of
$1,602,300 on this line of credit as of March 31, 1998.
The Company also has a line of credit facility with a bank that it acquired in
the PSS acquisition (the "PSS line of credit"). The PSS line of credit allows
the Company to borrow the lesser of $1,000,000 or 80% of eligible accounts
receivable with an interest rate of 1.00% over the bank's prime rate. The
Company had borrowings of $802,370 on the PSS line of credit as of March 31,
1998. The Company retired the PSS line of credit in April 1998.
The Company will discuss with the bank the extension of its line of credit
facility prior to its expiration in July 1998, as well as entering into
discussions with other financial institutions to expand its credit facilities.
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 made at the Company's option in cash or its Common
Stock, or any combination thereof. If the Company 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.
Capital expenditures for the three months ended March 31, 1998 were
approximately $109,000.
Between January 1, 1998 and April 14, 1998, the Company has raised additional
equity totaling $3,057,000.
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, to various purchasers. The Zanett Corporation
acted as placement agent for the Private Placement. 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 Zanett Securities Corporation (which acted as placement
agent) 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 would be for the
sale to Zanett of an additional and committed 1,500 units, for $1,000 per unit,
contingent at the discretion of the Zanett Securities Corporation 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. The Company believes that it will obtain such
shareholder approval at the
Page 12 of 19
<PAGE>
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. The Company has an oral hearing with NASDAQ on April 30, 1998 to
review whether the Company is in compliance with the $2,000,000 net tangible
asset requirement and to review the terms of this private placement. The failure
to meet and maintain the NASDAQ requirements 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.
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 quarterly
revenue and operating income levels of approximately $15 million and $600
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, 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.
PART II
Item 1. Legal Proceedings
Nothing to report
Page 13 of 19
<PAGE>
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.
Both 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 or placement agent. For
further information relating to such transactions, please see Note 5 to
the Condensed Consolidated Fianancial 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
On April 7, 1998, the Company completed the sale of 1,500 units to certain
investors in a private placement transaction totaling $1.5 million. The units
consist of prepaid warrants to purchase Common Stock at an adjustable exercise
price and an incentive warrant to acquire an aggregate of 78,000 shares of
Common Stock at $1.47 per share, the exercise price. The Company also granted
the placement agent a warrant to purchase 39,000 shares of Common Stock at $1.47
per share. Net proceeds from this transaction were $1,312,000.
On April 27, 1998 the Company completed a private placement of 135,000 shares of
its Common Stock to certain accredited investors for $198,125.
The accompanying proforma condensed consolidated balance sheet as of March 31,
1998 assumes that the April 7 and April 27 private placements were completed on
March 31, 1998.
Page 14 of 19
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
March 31, Proforma March 31,
1998 Adjustments 1998
-------------- ------------------ ---------------
(unaudited) (proforma)
ASSETS
Current Assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 1,326,291 1,312,050 (1)
198,125 (2) 2,836,466
Accounts receivable, net 6,293,041 6,293,041
Prepaids and other current assets 419,630 419,630
------------- ------------ ---------
Total current assets 8,038,962 1,510,175 9,549,137
Property and equipment, net 1,012,474 1,012,474
Employee notes receivable 195,014 195,014
Other assets 142,197 142,197
Acquired software, net 1,324,991 1,324,991
Goodwill, net 339,866 339,866
------------- ------------ ---------
Total assets $ 11,053,504 1,510,175 $12,563,679
============= ============ ==========
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Accounts payable $ 1,051,407 $ 1,051,407
Line of credit 2,404,670 2,404,670
Accrued expenses and other 4,834,246 4,834,246
------------- ------------ ---------
Total current liabilities 8,290,322 8,290,322
Other liabilities 292,237 292,237
------------- ------------ ---------
Total liabilities 8,582,559 - 8,582,559
------------- ------------ ---------
Stockholders' equity:
Class A cumulative preferred stock;
$.01 par value; 2,000,000 authorized,
outstanding 1,062,500 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) 10,625 10,625
Common stock $.001 par value
20,000,000 authorized, outstanding
9,007,370 share in 1998
7,470,370 shares in 1997 9,007 135 (2) 9,142
Additional paid in capital 7,826,370 1,312,050 (1)
197,990 (2) 9,336,410
Accumulated deficit (5,375,058) (5,375,058)
------------- ------------ ----------
Commitments and contingencies
Total stockholders' equity 2,470,945 1,510,175 3,981,120
------------- ------------ -----------
Total liabilities and stockholders' equity $ 11,053,504 1,510,175 $12,563,679
============= ============ ===========
</TABLE>
Proforma Adjustments:
(1) Private placement completed April 7, 1998
(2) Private placement completed April 27, 1998
Page 15 of 19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits:
11 - Statement re: Computation of Per Share Earnings
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. The Company filed a form 8-K describing a private
placement to certain accredited investors and employees under
Item 5 - - Other Events.
Page 16 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: April 28, 1997 By: /s/ Gene Zaino
----------------- ---------------------------
Gene Zaino, President and CEO
(Principal Executive Officer) and Chairman
of the Board
Date: April 28, 1997 By: /s/ Matthew G. Jones
----------------- ---------------------------
Matthew G. Jones, Chief Financial Officer
(Principal Accounting Officer)
Page 17 of 19
EXHIBIT 11
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------------
1998 1997
-----------------------------------
Basic Loss Per Share:
<S> <C> <C>
Weighted average number of common shares outstanding 7,773,292 6,457,631
Common stock equivalents from outstanding stock options
----------- ----------
Average shares outstanding 7,773,292 6,457,631
=========== ===========
Net loss (415,257) $ (765,851)
Preferred dividends
----------- ----------
Loss attributable to Common (415,257) $ (765,851)
=========== ==========
Basic Loss Per Share (0.05) $ (0.12)
=========== ==========
Diluted Loss Per Share:
Weighted average number of common shares outstanding 7,773,292 6,457,631
Preferred stock convertible into common shares - (1) -
Common stock equivalents from outstanding stock options - (1) -
--------- ----------
Average shares outstanding 7,773,292 6,457,631
========= ==========
Net loss (415,257) $ (765,851)
Preferred dividends - -
----------- ----------
Loss attributable to Common (415,257) $ (765,851)
=========== ==========
Diluted Loss Per Share (0.05) $ (0.12)
=========== ==========
</TABLE>
(1) As the Company is in a net loss position the effect of all options and
warrants, including Common Stock equivalents is anti-dilutive and thus
not presented in the computations of loss per common share.
Page 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-QSB FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,326,291
<SECURITIES> 0
<RECEIVABLES> 6,628,892
<ALLOWANCES> (335,851)
<INVENTORY> 0
<CURRENT-ASSETS> 8,038,862
<PP&E> 2,345,106
<DEPRECIATION> (1,332,632)
<TOTAL-ASSETS> 11,053,504
<CURRENT-LIABILITIES> (8,290,322)
<BONDS> 0
0
(10,625)
<COMMON> (9,007)
<OTHER-SE> (7,826,370)
<TOTAL-LIABILITY-AND-EQUITY> (11,053,504)
<SALES> (13,311,308)
<TOTAL-REVENUES> (13,311,308)
<CGS> 11,176,766
<TOTAL-COSTS> 2,483,723
<OTHER-EXPENSES> (66,076)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (415,257)
<INCOME-TAX> 0
<INCOME-CONTINUING> (415,257)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (415,257)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
