SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 16, 1998
The Netplex Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 1-11784 11-2824578
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
8260 Greensboro Drive, 5th Floor, McLean, Virginia 22101
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (703) 356-1717
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
On October 16, 1998, The Netplex Group, Inc. (the "Company" or
"Netplex") completed the purchase of the information technology consulting
business of Applied Intelligence Group, Inc. of Oklahoma City ("AIG"). In
consideration for the purchase, the Company paid $3,000,000 and issued 643,770
shares of Class B Preferred Stock ("Preferred Stock") (valued at $1,000,000) at
closing. The Company used working capital to finance the acquisition. Such
working capital was provided by (i) an increase in the Company's line of credit
from First Union National Bank from $2.0 million to $6.0 million, which credit
line is based on 80% of the Company's eligible accounts receivable and (ii)
certain equity instruments as described under Item 5. -- Other Events below. The
Class B Preferred Stock is convertible into Common Stock of the Company at any
time on a share for share basis. No dividends are payable on the Preferred
Stock. The holders of the Preferred Stock have agreed not to sell or otherwise
distribute their Preferred Stock on the Common Stock underlying the Preferred
Stock for a period of one year. The agreement also provides that AIG will
receive additional consideration (the "Earn-out") if AIG meets certain operating
targets. Such Earn-out would consist of (i) $1.5 million of cash if AIG achieves
certain net profit targets over the next six quarters and (ii) 643,700 shares of
Preferred Stock if AIG achieves certain net profit targets over the next 9
quarters. The acquisition was accounted for using the purchase method of
accounting.
In connection with the acquisition, the Company will enter
into employment agreements with certain employees of AIG.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS.
In August 1998 the Company raised $592,000 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 $1.325 per share. The funds will be used to finance operations and
additional acquisitions.
In September 1998 Netplex completed a $1.7 million Private
Placement consisting of (i) prepaid Common Stock purchase warrants entitling the
holder to acquire such number of shares of the Company's Common Stock as is
equal to $1,000 divided by an
-2-
<PAGE>
adjustable exercise price (initially $1.3936) and (ii) incentive warrants to
acquire approximately 142,000 shares of Common Stock at an exercise price of
$1.3936 per share. The Prepaid Warrant will be exercisable at a price equal to
125% of the initial exercise price for the first year from issuance and
thereafter will decline in accordance with the terms of the Prepaid Warrant. The
Prepaid Warrant can be redeemed by the Company at the exercise price plus 35%
per annum or the benefit of the bargain, which ever is higher. The Prepaid
Warrants are held by Goldman Sachs Performance Partners, L.P. and Goldman Sachs
Performance Partners (Offshore), L.P. The Zanett Corporation acted as placement
agent and received placement fees and a non-accountable expense allowance equal
to 12.53% of the proceeds of the offering.
In September 30, 1998, Netplex also issued Waterside
Corporation, a Virginia based SBIC ("Waterside") $1.5 million of Class C
Convertible Preferred Stock ("Class C Preferred Stock") which is convertible
commencing five years from the date of issuance. The Class C Convertible
Preferred Stock is redeemable at any time at a per share redemption price equal
to $1.00 plus accrued and unpaid dividends. In connection with the transaction,
Waterside received warrants to purchase 150,000 shares of Common Stock at an
exercise price of $1.375 per share. Waterside will receive an additional 100,000
Warrants for each 18 month period the Class C Preferred Stock is outstanding, up
to a total of 400,000 additional warrants.
EXHIBIT NO. DESCRIPTION
99.1 Audited Financial Statements for Applied
Intelligence Group, Inc. for the year ended December
31, 1997.
99.2 Pro forma financial information.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE NETPLEX GROUP, INC.
Dated: December 29, 1998 By: /s/ Gene Zaino
--------------
Name: Gene Zaino
Title: Chairman of the Board
and President
-4-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Applied Intelligence Group, Inc. Retail and Store Systems Consulting Business
In our opinion, the accompanying balance sheets and the related statements of
operations and changes in parent company investment and of cash flows present
fairly, in all material respects, the financial position of AIG Retail and Store
Systems Consulting Business ("Business") at December 31, 1997 and 1996, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Business's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
December 29, 1998
<PAGE>
AIG RETAIL AND STORE SYSTEMS CONSULTING BUSINESS
BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
-------------- --------------
<S> <C> <C>
Current assets:
Accounts receivable $ 1,140,021 $ 1,144,836
Other receivable 20,700 38,317
Inventory 8,707 28,159
Prepaid expenses 15,884 27,110
-------------- --------------
Total current assets 1,185,312 1,238,422
Furniture and equipment, net 325,949 416,608
Software development costs, net 396,099 446,814
Other assets 6,000 63,808
-------------- --------------
Total assets $ 1,913,360 $ 2,165,652
============== ==============
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities $ 1,127,338 $ 966,127
Deferred revenue 209,886 303,388
-------------- --------------
Total current liabilities 1,337,224 1,269,515
Parent company investment 576,136 896,137
-------------- --------------
Total liabilities and parent company investment $ 1,913,360 $ 2,165,652
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
AIG RETAIL AND STORE SYSTEMS CONSULTING BUSINESS
STATEMENTS OF OPERATIONS AND CHANGES IN PARENT COMPANY
INVESTMENT
For the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
Revenues $ 7,544,678 $ 8,601,465
Expenses:
Direct cost of sales 2,211,956 2,570,840
Salaries and benefits 2,862,691 2,775,875
Allocated Costs
Salaries and benefits 837,890 1,034,710
Selling, general and administrative 1,152,421 982,065
Depreciation and amortization 270,437 247,755
--------------- ----------------
Total expenses 7,335,395 7,611,245
--------------- ----------------
Income before income taxes 209,283 990,220
Provision for income taxes 79,528 376,284
--------------- ----------------
Net income 129,755 613,936
Parent company investment, beginning of year 896,137 1,992,494
Net decrease in parent company investment (449,756) (1,710,293)
--------------- ----------------
Parent company investment, end of year $ 576,136 $ 896,137
=============== ================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
AIG RETAIL AND STORE SYSTEMS CONSULTING BUSINESS
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 129,755 $ 613,936
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 270,437 247,755
Decrease in accounts receivable 4,815 1,226,668
Decrease in other receivable 17,617 25,954
Decrease (increase) in inventory 19,452 (5,767)
Decrease in prepaid expenses 11,226 56,124
(Increase) in other assets 57,808 (20,911)
Increase (decrease) in accounts payable and accrued liabilities 161,211 (284,382)
(Decrease) increase in deferred revenue (93,502) 178,925
-----------
Net cash provided by operating activities 578,819 2,038,302
-----------
Cash flows from investing activities:
Capital expenditures (45,090) (120,339)
Capitalized expenditures for software development (83,973) (207,670)
-----------
Net cash used in investing activities (129,063) (328,009)
-----------
Cash flows from financing activities:
Net change in parent company investment (449,756) (1,710,293)
-----------
Net cash used in financing activities (449,756) (1,710,293)
-----------
Net change in cash -- --
Cash and cash equivalents at beginning of period -- --
-----------
Cash and cash equivalents at end of period $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
AIG RETAIL AND STORE SYSTEMS CONSULTING BUSINESS
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL DESCRIPTION OF ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS
In September 1998, the Netplex Group, Inc. ("Netplex") acquired certain
assets and operations of Applied Intelligence Group, Inc. ("AIG"),
referred to as "AIG Retail and Store Systems Consulting Business" or
the "Business".
The accompanying financial statements, which have been carved out of
the historical cost basis consolidated financial statements of AIG,
include the assets, liabilities, revenues and expenses specifically
related to the Business on a historical cost basis. The Parent Company
Investment presented in the financial statements represents the
seller's historical equity in the Business, including accumulated net
income.
The Business 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.
The Business's clients and customers range from small, rapidly growing
companies to large corporations and are geographically dispersed
throughout the United States.
Certain expenses were incurred by the consolidated entity on behalf of
the Business. Accordingly, expenses such as payroll and general and
administrative costs have been allocated to the Business in order to
give the reader management's best estimate of the financial statements
of the Business. Consolidated AIG revenues and direct cost of sales
were reviewed by management of AIG and those specifically identified
with the consulting business were included in the accompanying
financial statements. Accounts payable ($480,000 and $438,000 were
allocated in 1997 and 1996), salaries and benefits and selling, general
and administrative expenses were specifically associated with the
consulting business based upon function or were allocated based upon
the ratio of consulting employees to total employees of AIG. Management
believes the allocations are reasonable. However, these allocated costs
may not be representative of the actual costs to be incurred by the
Business in future periods.
Total interest costs for AIG for the year ended December 31, 1997 and
1996 were $116,183 and $291,089, respectively, of which $13,463 was
capitalized in 1996 related to the assets acquired. No interest was
capitalized in 1997. No interest costs were allocated to the Business
in the statement of operations and change in parent company investment.
The Business had no borrowings and historically AIG has not charged
interest to the Business.
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.
RISKS FROM CONCENTRATIONS The Business'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
Business's total revenues, respectively. In 1997 and 1996,
approximately 57 percent of the Business's total revenues were
attributable to five clients. It is anticipated that the Business'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
<PAGE>
demand for products or related services from, any of the Business's
major clients could have a material adverse effect on the Business's
operations.
FURNITURE AND EQUIPMENT Furniture and equipment 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 Business
depreciates furniture and equipment using the straight-line method over
their estimated useful lives ranging from 5 to 10 years.
REVENUE RECOGNITION The Business 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.
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 Business's
proprietary software products.
COSTS OF PRODUCT DEVELOPMENT The Business incurred costs and expenses
of approximately $210,000 and $388,000 for product development in 1997
and 1996, respectively. A substantial portion of these costs relates to
development of a network subscription service that the Business made
available to subscribers in January of 1997. Certain of these costs are
capitalized as software development costs (see Note 3).
2. FURNITURE AND EQUIPMENT:
Furniture and equipment at December 31, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
<S> <C> <C>
Furniture and fixtures $ 156,983 $ 152,432
Computer equipment 516,707 485,739
Computer software 184,153 174,582
----------------- ------------------
857,843 812,753
Less accumulated depreciation and amortization (531,894) (396,145)
----------------- ------------------
Furniture and equipment, net $ 325,949 $ 416,608
================= ==================
</TABLE>
Total depreciation expense was $135,749 and $130,317 for the years
ended December 31, 1997 and 1996, respectively.
3. SOFTWARE DEVELOPMENT COSTS:
The Business 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 expense of
capitalized software costs for December 31, 1997 and 1996 was $134,688
and $117,438, respectively. Accumulated amortization at December 31,
1997 and 1996 was $398,679 and $263,991, respectively.
The Business 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. No write-offs were made in 1997 or 1996.
<PAGE>
4. INCOME TAXES:
For purposes of these financial statements, income taxes are calculated
based on the separate results of operations of the Business. The
Business's results of operations have historically been included in the
tax return of AIG. Additionally, the tax provision results only in an
increase or decrease in the investment by AIG.
The difference in federal income taxes at the statutory rate and the
provision for income taxes for the years ended December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Income tax expense at federal statutory rate $ 71,156 $ 336,675
State income taxes 8,372 39,609
--------------- ---------------
Provision for income taxes $ 79,528 $ 376,284
=============== ===============
</TABLE>
5. RETIREMENT PLAN:
AIG has a profit sharing plan ("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. AIG's discretionary matching percentage is equal to each
participant's share of total eligible contributions for a year. The
Business made no contributions in 1997 and 1996.
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.
