SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to__________________
Commission file number 1-11784
THE NETPLEX GROUP, INC.
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(Name of small business issuer in its charter)
New York 11-2824578
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8260 Greensboro Drive, 5th Floor, McLean, VA 22102
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(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (703) 356-3001
Securities registered under Section 12(b) of the Exchange Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.001 par value NASDAQ SmallCap Stock Market
Boston Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act:
None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 / / No / /.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / X /
State issuer's revenue for its most recent fiscal year $40,468,134
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. The aggregate market value shall be computed by
reference to the price at which the stock as sold, or the average bid and asked
prices of such stock, as of March 20, 1998. (See definition of affiliate in Rule
12b-2 of the Exchange Act). $9,428,201
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by nonaffiliates on the basis of reasonable
assumptions, if the assumptions are stated.
As of March 20, 1998, there are 7,550,370 shares outstanding of the
Company' s Common Stock.
Transitional Small Business Disclosure Format (Check one):
Yes ______ No ______
This report consists of __ consecutively numbered pages (inclusive of
all exhibits and including this cover page). The Exhibit Index appears on page
__.
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INDEX OF FORM 10-KSB
PART I ......................................................................2
ITEM 1. BUSINESS..............................................................2
ITEM 2. PROPERTIES............................................................9
ITEM 3. LEGAL PROCEEDINGS.....................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................10
PART II .....................................................................10
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.................................11
ITEM 7. FINANCIAL STATEMENTS.................................................15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................................16
PART III .....................................................................16
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.....................16
ITEM 10. EXECUTIVE COMPENSATION..............................................17
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......20
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................21
PART IV .....................................................................22
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K....................................22
SIGNATURES....................................................................23
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PART I
ITEM 1. BUSINESS.
Corporate Profile
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 following describes these three business areas and provides an at-a-glance
look at the industries served, strategic alliances, geographic positioning, and
engagement confidence that the Company believes makes Netplex a preeminent
supplier of information technology services and solutions.
The Company was incorporated in 1986. From 1986 to June 1996, the Company, under
the name CompLink, Ltd., developed and marketed a communications software
product.
On June 7, 1996, the Company (formerly known as CompLink, Ltd. or "CompLink")
acquired and merged with The Netplex Group, Inc. and America's Work Exchange,
Inc. (combined entities referred to as "Netplex" or "the Company") by issuing
approximately 3,245,000 shares of Common Stock. The agreement also provided for
CompLink to issue 1,691,000 options to purchase its Common Stock in exchange for
the 1,691,000 outstanding options to purchase the Common Stock of Netplex. The
mergers have been accounted for under the purchase method of accounting as a
reverse merger, since the shareholders of the acquirees, who have common
control, received the larger percentage of the voting rights of the combined
entity. The mergers resulted in a recapitalization of the Company, so that the
resulting capitalization after the mergers will be that of CompLink's, giving
effect to the new share issuance and the elimination of CompLink's accumulated
deficit. The acquisition of the assets and liabilities of CompLink has been
accounted for at book value, which approximates fair value.
* IT Solutions
Through a collection of specialized systems integration and IT consulting
practices, each capable of providing focused business solutions by combining
in-depth expertise, proven methods, and leading technologies, Netplex believes
it delivers superior quality and measurable results. The Netplex IT Solutions
practice areas are:
. Network Systems Integration (NSI): providing networked office
automation solutions;
. Enterprise Network Management (ENM): providing network management
solutions;
. Enterprise Systems Management (ESM): providing solutions to manage the
systems that run businesses; and
. Business Protection Services (BPS): providing solutions that keep
businesses in business.
These IT Solutions practice areas span several performance disciplines,
including:
* Strategic Planning * Custom Software Development
* Information Security * Technology Integration
* Hardware Product Fulfillment * Software Product Fulfillment
* Project Management * Systems Training
* Network Management * Systems Management
* Systems Integration * Business Resumption Planning
Each practice area employs a team of subject-matter experts to help businesses
develop, implement, and support their IT objectives. Adherence to comprehensive
management techniques helps ensure that every detail in a project plan is
subject to quality control and measures of technical excellence. This commences
with an evaluation of the current user environment and IT goals and ends with a
review process for determining the impact of value-added improvements.
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Many hardware and software suppliers have engaged Netplex to manage the
implementation of their technologies (see "Strategic Alliances").
The IT Solutions Market
The IT solutions market is experiencing record growth in the commercial and
government sectors. The IT services industry is estimated at over $126 billion
in the U.S. and even larger internationally. It is growing at an estimated 18%
average annual rate. The demand for IT services is growing, driven by the Year
2000 problem, the Internet, short technology cycles, business process
reengineering, increasing global competition, and other factors. While
mainframes continue to be the largest area of demand for work assignments,
client/server and network technology demand is on the rise. The consulting
segment, which includes information systems integration services, feasibility
studies, business protection services, cost-effectiveness analysis, and
technical and management program assistance, continues to be the fastest growing
sector of the IT professional services industry. This segment is forecast to
grow at a rate of 21.1% to reach $18.3 billion in aggregate revenue by 2001.
* IT Staffing
Netplex recognizes the need for technical staff augmentation. IT Staffing
Services provides help to organizations confronted with technical staffing
needs. Clients gain access to the Netplex recruiting team, which maintains a
proprietary Database of a qualified pool of 40,000+ IT professionals with the
talent and flexibility to undertake virtually any technical task. The Company
believes that the ability of its consultants enables it to deliver qualified,
results-oriented technical staffing services.
Seasoned professionals with many years of business experience provide strategic
direction, planning, and input on complex technical issues. Consultants,
engineers, project managers, analysts, developers, technicians, and other IT
professionals provide additional capacity to solve technical staffing needs.
Whether a need for technical services arises during peak periods, systems
planning sessions, project roll-outs, or technology transitions, Netplex IT
Staffing believes it can apply a qualified, customized skill-set to quickly
fulfill a client engagement.
The Company, in business to serve as an extension of the client's IT
organization, believes it is capable of providing staff to manage any IT
operation. The Netplex technical staff accepts direction from the client in
fulfilling all project objectives; thus, allowing the client to maintain full
control over the timeline and project course. Netplex IT Staffing Services
provides the human and technical resources to keep its client's on-schedule,
technology-aware, and quality-fastened. The Company's staffing services are
located primarily in New York, New Jersey, and Washington, D.C., where The PSS
Group, Inc., a wholly-owned subsidiary of Netplex acquired in January, 1998, has
been providing technical personnel for engagements throughout the Washington,
D.C. metropolitan area since 1991.
The IT Staffing Market
The IT Staffing industry continues to grow. Recent Bureau of Labor statistics
indicate Personnel Supply Services added 43,000 jobs (seasonally adjusted) in
February of 1998. Compared to a year earlier, February's job growth was up 5.6%
in Personnel Supply, the highest year-to-year percentage growth since April and
March of 1997, respectively. Staffing growth is expected to remain strong
throughout 1998 with a growth rate of over 25% in information technology and
other professional specialties. INPUT, a market research firm, estimates the
total IT market in the U.S. at $231 billion in 1997. According to INPUT,
compound annual growth in the U.S. Information Technology Commercial
Professional Services Market will continue at a rate of 17.3% through 2001. In
1996, every segment of the IT professional services industry grew faster than
forecast by INPUT evidencing ongoing, rising demand for these services.
Organizations are increasingly turning to external IT services organizations to
develop, support and enhance their internal IT systems. By outsourcing IT
services, companies are able to (i) focus on their core business, (ii) access
specialized technical skills, (iii) implement IT solutions more rapidly, (iv)
benefit from flexible staffing, providing a variable cost solution to a fixed
cost issue, and (v) reduce the cost of recruiting, training, and adjusting the
number of employees as IT requirements change.
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Netplex, through its wholly owned subsidiary Software Resources of New Jersey,
now known as Contractor's Resources ("CR"), believes it can offer a specially
tailored program to both IT consultants and business. This service arrangement
enables the independent contractor to escape the administrative burdens of
incorporation; thereby, focusing on providing the technical skills that
businesses seek.
Consultant Advantage - CR allows an independent contractor consultant to reap
the benefits of incorporation, without incorporating. These IT consultants
become CR employees set up with their own personal profit centers administered
by CR. This enables these professionals to pursue a vast array of assignments
that would otherwise be impractical or cost prohibitive.
The business services that CR provides IT consultants include:
* Contract Review and Administration * Financial Reporting
* Group Medical, Dental, etc. * 401K and Pension Administration
* Payroll Administration * Personal Account Management
Personal Account Management is coordinated through a designated Profit Center
Manager- a highly-trained service professional who helps consultants manage
their business from the review of a consultant's contract to the seamless
administration of benefits and financial planning.
Business Advantage - CR offers businesses a convenient solution for
consolidating the administration and delivery of employee services to their
existing independent contractor base. Because CR alleviates the administrative
burdens that independent contractors face, while offering a premier set of
benefits and "employment services" to help the independent contractor function
more seamlessly, businesses are able to reap the benefits of consolidated
billing, central administration processing, and focused application of a
consultant's technical skills.
CR attracts independently-minded IT consultants who want to take advantage of
today's favorable market for independent contractors and be free of the arduous
and time-consuming tasks associated with managing their own corporation.
Businesses want to keep the administrative burdens that contractors face to a
minimum allowing their consultants to concentrate on their assignments.
The IT Contractor Resources Market
The Department of Labor estimates that by the year 2000 at least 44% of all
workers will be in data services, gathering, processing, retrieving, or
analyzing information. Already an estimated two-thirds of U.S. employees work in
the services sector. This environment calls for different organizations and
different kinds of workers. As recently as the 1960's, almost one-half of all
workers in the industrialized countries were involved in making or helping to
make things. It is predicted that by the year 2000, however, no developed
country will have more than one-sixth or one-eighth of its workforce in the
traditional roles of making and moving goods. It is these trends that are
driving the contractor resources market as more and more people shift from
permanent to flexible and part-time employment, many as independent contractors.
It is estimated that less than half the workforce in the industrialized world
will be holding conventional full-time jobs in organizations by the year 2000.
Those full-timer or insiders will be the new minority. Every year more and more
people will be self-employed. The U.S. contingent workforce of temporaries,
self-employed, part-timers, or consultants grew by 57% during the decade of the
80's.
Industries Served by Netplex
Netplex has supplied services around the world within the public and private
sector, but has tailored its service offerings, primarily, to U.S.-based
commercial organizations. Presently, Netplex delivers information solutions,
technical staff augmentation, and IT contractor services to several well-known
organizations within many industries including Telecom/Communications, Retail,
Insurance, Legal & Professional Services, Pharmaceutical, Associations,
Utilities, Health Care, Distribution, Manufacturing, and Financial Services.
Although the in-roads
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Netplex has made to these markets are expansive, the diverse picture it presents
is only a sample of the range of services and solutions that Netplex believes it
provides on a daily and on-going basis.
Strategic Alliances
Netplex has engaged in strategic partnerships (i.e., compliance with certified
training programs) with leading software and hardware producers to become a
full-service Information Solutions provider. Among the companies for which
Netplex is certified to re-sell and implement technologies are:
Compaq IBM Remedy
Envive Microsoft Tivoli
Hewlett-Packard Novell Unisys
In addition, Netplex has provided services to many other organizations over the
past three years, including:
Amdahl Charles Schwab New York Life
America Online Chase Manhattan SIAC
Arthur Andersen Hewlett-Packard U.S. West
AT&T Hoffman-LaRoche Union Camp
Bell Atlantic Mobile Lucent Technologies Unisys
BellSouth MCI United Nations
CNA Insurance World Bank
Geographic Positioning
Netplex is strategically positioned in the Northeast, Mid-West, and Mid-Atlantic
region of the U.S., and has offices in Chicago, Connecticut, New Jersey, New
York, North Carolina, and Washington, D.C. Netplex has assisted organizations
throughout the United States with their networked information systems goals and
internationally has served clients in such countries as Ireland and Turkey. The
Company intends to open new offices in other geographic markets. To date,
however, the Company has not entered into any leases with respect to such
offices and there can be no assurance that Netplex will in fact open such
offices.
Engagement Confidence
Netplex is aware of the threats posed to business from unreliable information
systems, insecure environments, lack of technical resources, and unnecessary
downtime. Netplex believes that experience enables it to provide the answers to
some common and not-so-common problems dealing with information systems. The
Company believes this knowledge, coupled with its technical resource base,
industry experience, and growth, reinforces the ability of Netplex to fulfill
virtually any technical request.
Growth Strategy
Expand Existing IT Staffing Locations and Open New Branches
The Company believes it can significantly increase revenue in its three existing
IT staffing locations in New York, New Jersey, and Washington, D.C. The Company
will attempt to achieve this growth by expanding the sales and recruiting
organization in each location and increase business to existing customers.
The Company will also open locations in cities that it believes to have high
growth and market potential. The Company intends to accomplish this goal in part
by recruiting a skilled Branch Manager for each new location. These managers
will be responsible for developing local accounts and building the branch by
hiring sales people, technical recruiters, administrators and replicating the
systems and procedures from the existing operations. The expansion of IT
Staffing also provides a greater supply of technical talent to the IT Solutions
practice.
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Expand Existing IT Solutions Practices
The Company believes that it can significantly expand its present IT Solutions
practice by expanding its sales staff, encouraging practice area cross-selling,
and promoting lead generation from the IT staffing and IT contractor
organizations. The natural project oriented migration of personnel across
practice units, enhanced with business opportunity recognition training,
marketing skills development, and market lead generation incentives, will create
an effective low cost marketing force. The Company believes that effective
utilization of this force will give the IT Solutions Practice a competitive and
cost efficient advantage over marketing approaches of traditional IT solution
providers and will enable the Company as a whole to cross sell its varied
services between practice units IT staffing and IT contractor resources.
Expand Contractors Resources Business
The Company believes that the trend of predicted continued growth of the
free-lance worker in the market will naturally fuel the expansion of the IT
Contractors Resource business. The realization by these professional services
providers that their hours spent on clients are more profitable to them than
hours spent performing "back-office" administrative tasks should direct them to
an outsource solution. The Company intends to build upon this trend by education
and recruitment campaigns through first time marketing in publications and
participation in job fairs. The Company will also focus on encouraging large
organizations employing independent consultants to become advocates of the
"contractor employee" approach thus reducing their risk of tax audits and the
potential tax penalties of having "independent contractors" deemed employees by
the Internal Revenue Service. The expansion of the Contractors Resources
business also provides the Company with access to a unique reservoir of high
talent IT consultants.
Strategic Acquisitions
The Company believes that acquisitions are a valuable and important means of
achieving critical mass, enhancing market share, increasing capabilities to
deliver large, complex solutions, and supplementing internal growth. The Company
will seek to acquire companies in the IT Staffing industry to facilitate its
expansion into new territories or to acquire IT solutions businesses that offer
additional strength to existing practice areas. The Company currently expects
that acquisitions will be limited to profitable companies. The Company is not
currently negotiating to acquire any other business and has no commitments,
understandings or arrangements with respect to any such acquisition.
The Company's ability to expand successfully by acquisition depends on many
factors, including the successful identification and acquisition of businesses
and management's ability to integrate and operate the new businesses
effectively. The anticipated benefits from any acquisition may not be achieved
unless the operations of the acquired business are successfully combined with
those of the Company in a timely manner. The Company's senior management team is
experienced in identifying acquisition targets and has already successfully
integrated businesses into the Company's existing infrastructure.
Operations and Support Services
From its headquarters in McLean, Virginia, the Company provides its IT Staffing
branch locations, IT Solutions practices areas, and Contractor Resources
business with centralized support services, including marketing, finance and
accounting, information systems, legal support, human resources, and purchasing.
All of the Company's branch locations are linked by, and can communicate over a
Wide Area Network managed by a centralized Management Information Systems
department at the McLean headquarters. Branch locations rely on this network for
access to the Company's technical talent database and corporate Intranet.
The Company also uses numerous techniques to govern and guide sales, recruiting,
financial, and operating activities. The Company believes the investment made in
these processes will enhance its ability to grow and attract and retain superior
technical and managerial talent.
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Customers
The Company strives to provide technical talent and services to help businesses
deliver reliable, timely, and secure information across networked systems. To
accomplish this, the Company places great emphasis in developing long-term
client relationships. Positioning itself as a specialist in strategically
selected "best-of-class" technology and talent, Netplex strives to reinforce its
clients' image of the Company as being uniquely qualified to provide the
knowledge, experience and capacity to deliver IT services and solutions. This is
increasingly important as clients seek to reduce the number of vendors with
which they do business. For this reason, the Company has begun to focus
significant efforts on qualifying for -- and remaining on -- multiple clients'
vendor lists. The Company is currently approved on several vendor lists of
Fortune 500 companies. The Company maintains a broad and well-balanced client
base. No single customer accounted for more than 10% of the Company's revenue
over the past year.
Competition
The IT services industry is fragmented and highly competitive at both the local
and national levels. Many participants in the information technology consulting
market have significantly greater financial, technical, and marketing resources
- -- and generate greater revenue -- than the Company. Many of these competitors
have a nationwide presence equivalent to, or greater than, that of the Company.
The information technology services market includes participants in a variety of
market segments, including systems consulting and integration firms,
professional services companies, application software firms, temporary
employment agencies, professional services groups of computer equipment and
software companies, accounting firms, and general consulting firms. Some of the
firms with which the Company competes in various geographic and service markets
are Andersen Consulting, Cap Gemini America, Computer Task Group, Inc.,
Alternative Resources, Inc, and The Registry.
The Company believes the principal competitive factors in the IT services
industry include responsiveness to fulfill client needs, speed of systems
integration, quality of service, technical expertise, project management
capabilities, and price.
In staffing for client projects, the Company competes for IT consultants with
many of those same companies as well as other local and regional technology or
staffing service providers. Several competitive factors affect a company's
success in recruiting and retaining such professionals including compensation,
availability of benefits, a continuous flow of quality assignments, and access
to advanced training and technical support. The Company believes it is well
positioned in all of these areas to attract the highest quality IT talent. IT
Staffing and CR offer the Company a competitive advantage to access a valuable
pool of high talent independent IT consultants.
Intellectual Property
The Company does not hold any patents or registered trademarks other than those
of Onion Peel. However, the Company considers the Netplex name and its Database
of independent consultants to be highly proprietary. Employees
As of March 20, 1998, the Company had approximately 417 full-time employees
(including permanent and contract employees).
The Company is responsible for, and pays the employer's share of, Social
Security taxes (FICA), federal and state unemployment taxes, worker's
compensation insurance, and other costs relating to all of its employees. The
Company offers a suite of benefits to its contract employees that is a different
selection than offered permanent employees. The Company believes that its
relations with its employees are good.
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Acquisition or Disposition of Assets
Private Placement
On September 19, 1996, the Company raised approximately $3,000,000 through a
Private Placement offering of units of equity securities (the "1996 Private
Placement"). Each unit of equity securities consists of one share of $.01 par
value class A Convertible Preferred Stock (the "Preferred Stock") and one Common
Stock warrant to purchase one share of the Company's $0.001 par value Common
Stock ("Common Stock") at an exercise price of $2.50.
Each share of Preferred Stock is convertible into one share of Common Stock at
any time, at the discretion of the holder. The Preferred Stock earns cumulative
dividends at 10% per annum, payable in either cash or additional shares of
Preferred Stock at the Company's option. Subject to the conversion rights, the
Company may redeem the Preferred Stock at its stated value (which is $2 per
share) plus all accrued and unpaid dividends upon: (1) registration of the
shares underlying the Preferred Stock, and (2) 30 days written notice given at
any time upon the Common Stock attaining certain per share trading prices and
maintaining such prices for a specified period. The Preferred Stock has a per
share liquidation preference of the greater of: (i) $4 per share plus any
accrued and unpaid dividends, or (ii) the amount that would have been received
if such shares were converted to Common Stock on the business day immediately
prior to liquidation.
Each warrant issued in connection with the Private Placement became exercisable
on March 19, 1997, and expires on September 19, 2001. 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 (2) 30 days written notice
given at any time upon the Common Stock attaining trading prices of $5 per share
and sustaining such prices for twenty (20) trading days.
Onion Peel
The Company acquired Onion Peel Solutions L.L.C. ("Onion Peel"), a Raleigh, NC
based provider of network management solutions as of July 1, 1997. For
consideration, the Company issued 80,000 shares of its Common Stock to the
owners of Onion Peel. Additional shares may be issued contingent upon the
closing price of the Company's Common Stock on December 31, 1998. The cost of
the acquisition was determined to be $400,000. The acquisition was accounted for
using the purchase method of accounting.
PSS
On January 30, 1998, 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 accounted for using the purchase method of
accounting.
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In order to focus on the Company's core business and reduce corporate losses,
the Company completed the sale of its WorldLink technology product business
("WorldLink")to XcelleNet, Inc. in December 1996 for a sale price of $3 million
in cash.
As a result of this sale, the Company has redirected most of the technical
talent from the WorldLink team to its IT Solutions practice groups.
ITEM 2. PROPERTIES.
The Company leases approximately 10,000 square feet of space in McLean, Virginia
for its corporate offices and the operations of some of the IT Solutions
practice at a monthly rental rate of $15,754. The Company also leases office
space in New York City, Central and Western New Jersey, Raleigh, N.C. and the
Greater Chicago area to serve as operating offices of its businesses. These
leases expire on different dates from May 2000 to June 2001.
Prior to the Netplex/CompLink Merger of June 1996, the Company's primary
operating facility and corporate headquarters was located in Great Neck, NY. As
a result of the Merger the Company's corporate offices moved from these
facilities to its McLean, VA headquarters. The Company settled the remaining
obligation under the Great Neck office lease in March 1997 for approximately
$320,000.
The Company believes that the space in its existing corporate and branch
facilities should be adequate for the foreseeable future to support the growth
of its existing operations in the geographic areas in which it currently
operates. The Company expects to expand its operations into new geographic
regions in the future and will need to lease additional branch offices to
support operations in those regions.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, disagreements with individual employees and disagreements as
to the interpretation, effect or nature of the individual agreements arise in
the ordinary course of business and may result in legal proceedings being
commenced against the Company.
On December 31, 1996, ACS Ltd., a software distributor based in the United
Kingdom, filed a complaint against Technology Development Systems ("TDS") a
wholly owned subsidiary of the Company, in the Circuit Court of Cook County,
Illinois. ACS alleges that TDS breached its obligations under the Distributor
Agreement between the Plaintiff and TDS for the WorldLink product when the
Company directed TDS to sell the WorldLink product technology to a third party.
ACS is demanding a sum exceeding one million dollars for the breach of contract.
The case is currently in discovery. In the opinion of Management and the
Company's legal counsel, the lawsuit has little merit, and the outcome of the
pending lawsuit will not have a material adverse effect on the Company's
financial condition, liquidity or the results of operations. The Company intends
to vigorously defend against the lawsuit. The TDS subsidiary which was part of
CompLink is currently inactive with no assets.
On September 4, 1997, Data Systems Analysts, Inc. ("DSA"), a software design and
consulting company, filed a complaint against TDS and the Company in the United
States District Court -- District of New Jersey, alleging copyright infringement
and breach of the Company's agreement to pay certain royalties. The Complaint
claims damages in excess of $300,000 plus punitive damages. The case is
currently in discovery. In the opinion of Management, the lawsuit has little
merit, and the outcome of the pending lawsuit will not have a material adverse
effect on the Company's financial condition, liquidity or the results of
operations. The Company intends to vigorously defend against the lawsuit.
The Company is not currently involved in any litigation or proceedings which if
decided against the Company would have a material adverse affect, either
individually or in the aggregate. To the Company's knowledge, no
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other legal proceedings, that if decided against the Company would have a
material adverse affect, are currently contemplated by any individuals, entities
or governmental authorities.
The principal risks that the Company insures against are workers' compensation,
personal injury, property damage, general liability, and fidelity losses. The
Company maintains insurance in such amounts and with such coverages and
deductibles as management believes are reasonable and prudent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the holders of the Company's Common Stock
during the fourth quarter of the Company's fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company is traded on the NASDAQ SmallCap market
("NASDAQ") and on the Boston Stock Exchange.
NASDAQ recently enacted new requirements for continued listing on NASDAQ. NASDAQ
has advised the Company that it believes that the Company fails to meet the
requirement that NASDAQ companies have net tangible assets of at least
$2,000,000. The Company believes that with the proceeds from two recently
completed Private Placements it is in compliance with NASDAQ's net tangible
assets requirement. However there can be no assurance that the Company will
continue to meet the applicable requirements for continued listing. In addition,
the Company has an oral hearing with NASDAQ scheduled for April 30, 1998 to
review whether the Company is in compliance with the new requirements and to
review the terms of one of the Private Placements.
The failure to meet the maintenance criteria in the future may result in the
Common Stock no longer being eligible for quotation on NASDAQ and trading, if
any, of the Common Stock would thereafter be conducted in the non-NASDAQ
over-the-counter market. As a result of such delisting of the Common Stock from
NASDAQ, it may be more difficult for investors to dispose of, or to obtain
accurate quotations as to the market value of, the Common Stock.
The regulations of the Securities and Exchange Commission ("Commission")
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), require additional disclosure relating to the market for penny stocks.
Commission regulations generally define a penny stock to be an equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. A disclosure schedule explaining the penny stock market and the
risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If the Company's securities become subject to the
regulations applicable to penny stocks (i.e., by NASDAQ delisting), the market
liquidity for the Company's securities could be severely affected. In such an
event, the regulations on penny stocks could limit the ability of broker-dealers
to sell the Company's securities and thus the ability of purchasers of the
Company's securities to sell their securities in the secondary market. In the
absence of an active trading market, holders of the Common Stock may experience
substantial difficulty in selling their securities.
9
<PAGE>
PRICE RANGE OF COMMON STOCK
The quotations set forth in the table reflect inter-dealer prices, without
retail mark-up, markdown or commission, and may not necessarily represent actual
transactions:
Fiscal 1996 High Low
----------- ---- ---
1st Quarter.................................................... $3.50 $2.38
2nd Quarter (OTC Electronic Bulletin Board commencing June 20) 3.38 2.77
3rd Quarter.................................................... 3.38 2.31
4th Quarter.................................................... 4.00 3.25
Fiscal 1997
1st Quarter....................................................$3.25 $2.75
2nd Quarter (NASDAQ SmallCap Commencing April 20)... 3.25 1.88
3rd Quarter.................................................... 3.13 1.50
4th Quarter.................................................... 2.94 0.75
The Company has not paid any cash dividends on its Common Stock and does not
intend to pay cash dividends on its Common Stock for the foreseeable future. The
Company intends to retain future earnings, if any, to finance future
development.
As of March 20, 1998, there were approximately 77 holders of record of the
Company's Common Stock. The Company believes that at such date there were in
excess of 500 beneficial owners of the Company's Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
OVERVIEW
The Netplex Group, Inc. (the "Company") is an Information Technology (IT)
company that provides the expertise and information systems to link employees,
customers, prospects, suppliers and manufacturers to help "network-enable"
organizations. The Company re-sells technology products when necessary to
deliver to customers fully integrated system solutions.
The Company is headquartered in McLean, Virginia and has branch offices in the
Reston, Virginia, New York City, Central New Jersey, Raleigh, North Carolina and
Chicago Metropolitan markets.
In June 1996, the Company (formerly known as CompLink, Ltd.) acquired and merged
(the "Merger") with America's Work Exchange, its wholly owned subsidiary
Software Resources of New Jersey, now known as Contractors Resources ("CR"), and
The Netplex Group, Inc. (collectively referred to as "Netplex") in a reverse
merger transaction by issuing approximately 3,245,000 shares of Common Stock, or
50.4% of the Company's then outstanding Common Stock after giving effect to the
Merger. The Merger agreement provided for the Company to issue options to
purchase 1,691,000 shares of the Company's Common Stock in exchange for options
to purchase 1,691,000 shares of Netplex's Common Stock. As a result, Netplex was
considered the acquirer for accounting purposes.
The assets and liabilities of CompLink and its wholly owned subsidiary,
Technology Development Systems ("TDS"), were recorded by the Company at merger
date at book value which approximated fair value. At merger, CompLink's
operations consisted primarily of the distribution of WorldLink remote and
mobile workforce automation software developed by TDS. The Company discontinued
the operations of its software development and distribution segment upon the
completion of the sale of its interest in the WorldLink product technology for
$3.0 million in December 1996.
The Company's operations have been concentrated on providing IT services and
solutions to U.S.-based commercial organizations since the beginning of 1997.
10
<PAGE>
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.
The statement of operations for the year ended December 31, 1997 reflects the
results of Onion Peel from July 1, 1997, the date of acquisition. The statement
of operations, for the year ended December 31, 1996, reflects the results of
Complink commencing on June 1, 1996. The operations of TDS are included in the
statement of operations for the year ended December 31, 1996, as discontinued
operations beginning on June 1, 1996.
The above acquisitions and disposition have resulted in the Company emerging in
1997 with three distinct areas of business operations: Design and implementation
of solutions for IT systems related business needs, IT Solutions; Staff
augmentation and flexible task outsourcing, IT Staffing, and: Business services
for the independent IT Consultant, IT Contractor Resources.
The following table sets forth the revenue and gross profit of each of the
business areas for 1997:
<TABLE>
<CAPTION>
IT
Contractor
Resources IT Solutions IT Staffing Total
--------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $32,048,350 100% $5,221,555 100% $3,198,229 100% $40,468,134 100%
% 79.2% 12.9% 7.9% 100%
Cost of Sales 30,952,246 96.6% 2,335,658 44.7% 2,127,740 66.5% 35,415,644 87.5%
% 87.4% 6.6% 6.0% 100%
Gross Profit 1,096,104 3.4% 2,885,897 55.3% 1,070,489 33.5% 5,052,490 12.5%
% 21.7% 57.1% 21.2% 100%
</TABLE>
RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Revenue for the year ended December 31, 1997 increased approximately $6.9
million or 21% to approximately $40.5 million, as compared to $33.5 million for
the same period in 1996. This increase includes a $5.6 million or 21% increase
in IT Contractor Resources revenue, a $1.6 million or 100% increase in IT
Staffing revenue offset by a $300,000 or 5% net decrease in the IT Solutions
revenue. The IT Solutions decrease includes a $1.3 million decrease in IT
Solutions revenues driven principally from declines in computer product resales
and was partially offset by a $1.0 million revenue increase generated by Onion
Peel which was acquired in July 1997.
Gross Profit for the year ended December 31, 1997 increased approximately $2.4
million or 92% to approximately $5.1 million as compared to approximately $2.6
million for the same period of 1996. This increase includes a $325,000 increase
in IT Contractors Resources gross profit, an approximately $500,000 increase in
IT staffing gross profit and a $1.5 million increase in IT Solutions gross
profit. The increase in IT Contractors Resources and IT Staffing gross profit
are principally due to the increases in revenues. The increase in IT Solutions
gross profit is primarily due to a shift in the IT Solutions product mix to a
higher proportion of pure service revenues than in 1996 and the inclusion of the
Onion Peel business which was added to IT Solutions through a July 1, 1997
acquisition.
Gross Profit increased to approximately 12.5 % in 1997 from approximately 8.0%
in 1996, primarily due to the increased IT Solutions and IT Staffing services
revenues which generate higher gross profit margins.
Selling, general and administrative expenses for the year ended December 31,
1997 increased approximately $2.7 million or 51.9% to $7.9 million from $5.2
million for the same period of 1996. The primary reason for the increase in
selling, general and administrative expenses is the expansion of the sales and
recruiting forces, and the hiring and
11
<PAGE>
training of technical staff to pursue and prepare for prospective client
engagements, all of which began in the third quarter of 1996 and continued
throughout 1997
Other income (expense) for the year ended December 31, 1997 decreased by $65,000
or 171% to approximately $26,000 of other expense in 1997 from approximately
$38,000 of other income in 1996. The primary reason for the decrease is the
reduction in cash balances from the Company's losses in 1997 coupled with
increased borrowings on its line of credit facility during 1997.
The loss from continuing operations before taxes increased by approximately
$352,000 or 14% to $2.9 million from $2.5 million. The components of this
increased loss are discussed above.
As a result of the net loss no provision or benefit for income taxes was
required in 1997. In 1996 the Company recorded a $34,000 benefit for income
taxes generated from a change in the Company's deferred tax asset valuation
allowance.
Income from discontinued operations of approximately $488,000 in 1996, resulted
from the Company's discontinuance of its software development and distribution
business. This income includes a gain from the disposal of the business of
approximately $1.8 million which resulted primarily from the sale of the
WorldLink product technology to XcelleNet, Inc. offset by losses of
approximately $1.3 million from the operations of this business from the date of
its acquisition in the merger with CompLink (June 1, 1996 for accounting
purposes) through the disposal date.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997 the Company had cash and cash equivalents of $353,005. The
Company had $1,316,300 outstanding on its line of credit facility and had long
term capital lease obligations of $109,096.
The Company's liquidity and capital resources were increased by the following:
On July 1, 1997, the credit line was expanded by the bank to the lesser of
$2,000,000 or 80% of eligible accounts receivable and the interest rate was
reduced to 0.75% over the bank's prime rate. The bank has waived certain
financial covenants contained in this line of credit agreement with which the
Company was not in compliance at December 31,1997. The Company is presently in
discussion with the bank to extend the credit line when it expires on July 1,
1998.
During the year ended December 31, 1997, the Company received $607,500 from the
exercise of outstanding options and warrants.
For the year ended December 31, 1997 the Company's operating activities used
approximately $4.3 million, investing activities used approximately $103,000 and
financing activities provided approximately $1.0 million of the Company's cash.
The primary uses of cash were the Company's net loss of $2.9 million, and
decreased accounts payable and accrued expenses of approximately $2.1 million.
These uses of cash were partially offset by cash provided from the exercise of
warrants and options of $607,500 and borrowings under the Company's line of
credit of $1,316,300. The Company will continue to make significant investments
in its technical staff, marketing, training and infrastructure to increase
productivity, build its technical staff database and foster growth of its
operations.
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.
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
12
<PAGE>
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 year ended December 31, 1997 were approximately
$105,000.
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 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
("Zanett") acted as placement agent for the Private Placement. The sale
represents the first half of a transaction that will include the sale of an
additional 1,500 units for $1.5 million at a future date. Zanett Lombardier
purchased 1,500 units at $1,000 per unit, with each unit consisting of a prepaid
Common Stock purchase warrant entitling the holder to acquire such number of
shares of the Company's Common Stock as is equal to $1,000 divided by an
adjustable exercise price and an additional incentive warrant to acquire 52
shares of Common Stock (or an aggregate of 78,000 shares of Common Stock). The
Company also granted Zanett a warrant to purchase 39,000 shares of Common Stock.
Zanett also received placement fees and a non-accountable expense allowance
equal to 12.53% of the proceeeds of the offering. The second half of the
transaction is for the sale to Zanett of an additional and committed 1,500
units, for $1,000 per unit, contingent on Netplex recording three consecutive
quarters of increased profits and revenues, excluding any extraordinary items.
With respect to the second half of the transaction, the exercise price of the
purchase warrants and the incentive warrants will be based on the bid price of
the Common Stock at the time of such closing. The funds from the Private
Placement will be used to fund operations and acquisitions. Under NASDAQ
regulations, certain aspects of the transaction must receive shareholder
approval. NASDAQ has also advised the Company that it will review the terms of
the Private Placement. Such shareholder approval is expected in the Company's
annual meeting. The Company believes that the proceeds should ensure that the
Company will exceed NASDAQ's published net tangible assets requirement of $2
million.
Based on its current operating plan, the Company believes that the net proceeds
from the Private Placement together with cash anticipated to be provided by
operating activities and amounts expected to be available under a renegotiated
line of credit will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's
liquidity requirements, the Company may seek to sell additional equity or
convertible debt securities or obtain additional credit facilities. However, no
assurance can be given that any such additional sources of financing will be
available on acceptable terms or at all. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. A portion of the Company's cash may be used for acquisitions or to
acquire or invest in complimentary businesses or products or to obtain the right
to use complementary technologies. The Company has no current plans, agreements
or commitments, and is not currently engaged in any negotiations with respect to
any such transaction.
The Company is expecting to incur operating losses until it achieves full
productivity of the majority of its sales force. While it cannot be certain as
to when such levels of productivity can be attained, the Company anticipates
that its sales force will operate at levels below full productivity through at
least the first quarter of 1998. The Company will continue to make significant
investments in its technical workforce, marketing, training and infrastructure
to increase productivity, build its core competency practice unit skill base and
product offerings and foster growth of
13
<PAGE>
its operations. Despite the expectation of continued operating losses,
management believes that its current cash balance and credit facility will be
sufficient to meet operating requirements for at least the next twelve months.
Recent Accounting Pronouncements
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure" which is effective for the year ending December 31, 1998.
This statement continues the previous requirements to disclose certain
information about an entity's capital structure found in Accounting Principles
Board (APB) Opinion No. 10, "Omnibus Opinion -1966" and No. 15, "Earnings per
Share" and FASB Statement No. 47, "Disclosure of Long-Term Obligations." The
Company has been subject to the requirements of those standards and as a result
does not expect the adoption of SFAS No. 129 to have a material impact on the
Company's financial statements.
In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income", which
is effective for the year ending December 31, 1998. This statement establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. Earlier application of this standard is
permitted; however, upon adoption the Company will be required to reclassify
previously reported annual and interim financial statements. The Company
believes that the disclosure of comprehensive income in accordance with the
provisions of SFAS No. 130 will not impact the manner of presentation of its
financial statements as currently and previously reported.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for the year ending
December 31, 1998. This statement requires companies to present certain
information about operating segments and related information, including
geographic and major customer data, in its annual financial statements and in
condensed financial statements for interim periods. The Company believes that
the adoption of SFAS No. 131 will impact the manner of presentation of its
financial statements.
In October, 1997, the AICPA Accounting Standards Executive Committee issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which
supercedes Statement of Position 91-1 "Software Revenue Recognition. SOP 97-2
focuses on when and in what amounts revenue should be recognized for licensing,
selling, leasing, or otherwise marketing computer software, and is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company does not believe that the adoption of this new pronouncement will have a
material impact on its financial position and results of operations.
Inflation
The Company does not expect inflation to have a significant adverse impact on
its operations.
Forward-Looking Statements
This Form 10-KSB 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 and 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 with out
limitation, the growth of the Company, future financings, acquisitions and
expenses and 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-KSB
will prove accurate. In light of the significant uncertainties inherent in
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.
Year 2000 Compliance
The Company has assessed and continues to assess the impact of the Year
2000 issue on its operations, including the development of cost estimates for,
and the extent of programming changes required to address, this issue. Although
final cost estimates have yet to be determined, the Company expects that these
Year 2000 costs will not be material to the Company's expenses during 1998 and
1999.
ITEM 7. FINANCIAL STATEMENTS.
See Consolidated Financial Statements listed in the accompanying index to
Consolidated Financial Statements on Page F-1 herein.
14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth the ages of the Executive Officers and the
members of the Board of Directors and the positions they hold with The Netplex
Group, Inc., a New York Corporation (the "Company"):
Name Age Position
Gene Zaino 40 President, Chief Executive Officer and
Chairman
Robert Skelton 36 Vice President - Human Resources,
General Counsel and Secretary
Matthew Jones 36 Chief Financial Officer and Treasurer
Richard Goldstein (1)(2) 51 Director
Frank Lagattuta (1) 54 Director
Neil Luden 42 Director
Deborah Novick (2) 33 Director
- ------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Gene Zaino has been a Director of the Company since August 1995 and became its
Chief Executive Officer and Chairman upon completion of the merger with Netplex
in June 1996. From November 1995 through the completion of the merger, Mr. Zaino
functioned in the capacity of Chief Executive Officer. Mr. Zaino started his
career at KPMG Peat Marwick L.L.P. in 1980. He was a founding principal of a
subsidiary of Evernet Systems, Inc. which was acquired by Control Data Systems,
Inc. in 1993. In January 1994, Mr. Zaino developed the business plan which lead
to the formation of Netplex. Mr. Zaino is a Graduate of the University of
Pennsylvania, Wharton School and is a Certified Public Accountant.
Robert Skelton joined the Company as its Vice President of Human Resources and
General Counsel in September 1996 and became its Secretary in November 1996.
From November 1990 to June 1996, Mr. Skelton served in similar capacities for
Central Atlantic Toyota Distributors, Inc., and Quality Port Processors, Inc.,
subsidiaries of Toyota Motor Sales, USA. From July 1986 through October 1990,
Mr. Skelton was an attorney with the law firm of Webster, Chamberlain & Bean in
Washington D.C. Mr. Skelton holds a Bachelors of Arts in Political Science and
Modern Language from Union College and a Juris Doctor from George Washington
University. Mr. Skelton is an Attorney and a member of the District of Columbia,
Maryland, and Virginia Bars.
Matthew Jones joined the Company as its Chief Financial Officer in September
1996 and became its Treasurer in November 1996. From August 1992 through August
1996, Mr. Jones served as the Director of Finance for Telos Corporation, a
Virginia based Systems integrator and Computer services provider. From July 1984
to August 1992, Mr. Jones was employed in various capacities with Price
Waterhouse - lastly as an Audit Manager. Mr. Jones holds a Bachelors of Science
in Business Administration - Accounting from California State University,
Northridge and is a Certified Public Accountant.
Richard Goldstein has served as a Director of the Company since July 1996. Mr.
Goldstein has been a Partner of Tocci, Goldstein and Company, L.L.P., a New York
City based C.P. A. firm since 1992. Prior thereto, Mr.
15
<PAGE>
Goldstein was a Tax Partner with KPMG Peat Marwick LLP. Mr. Goldstein holds a
Bachelor of Business Administration in Accounting and Master of Business
Administration in Taxation from the City University of New York and is a
Certified Public Accountant.
Frank Lagattuta became a Director of the Company in September 1997. Mr.
Lagattuta has been serving since 1996 as the President and chief operating
officer of CompuLaw, Ltd. of Los Angeles, California. Prior thereto, he was the
Vice President of Sales and Marketing for Saft America, Inc. form 1993 to 1996.
Prior thereto, Mr. Lagattuta was the Vice President of Sales and Marketing for
BISS Sales, Inc. from 1991 to 1993. Prior thereto, he served as the Executive
Vice President of Sales and Marketing for Evernet Systems, Inc. from 1989 to
1991. Mr. Lagattuta also was employed in several management positions by Xerox
Corporation from 1973 to 1989 and served as the President of Xerox Computer
Services from 1987 to 1989. Mr. Lagattuta holds a Bachelor of Science degree in
Accounting from Canisius College and a Master of Business Administration in
Finance and Accounting from the University of Southern California.
Neil Luden has served in various capacities with the Company since June 1992.
Since June 1996, Mr. Luden has served as a Director. From June 1996 through
April 1997, he also served as Vice President. From December 1992 through the
Company's Merger with Netplex in June 1996, he served as President of the
Company and a Director. Prior thereto, from March 1990 to June 1992 he was
president and the sole stockholder of ALN Enterprises, Inc., a financial and
business consulting firm. From June 1983 to March 1990, Mr. Luden was employed
in various capacities with Prudential-Bache Securities, Inc., lastly as a Vice
President--Systems. Mr. Luden is a graduate of St. Johns University.
Deborah Novick has been a Director of the Company since August, 1995 and has
served in a variety of capacities at GKN Securities Corp., a New York based
investing banking company, since August 1992, including most recently Senior
Vice President -- Investment Banking. Prior thereto, Ms. Novick was a Senior
Analyst with Value Line, Inc. from August 1989 until August 1992. Ms. Novick
holds a Bachelor of Science degree from Cornell University.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth, for the fiscal years indicated, all compensation
awarded to, earned by or paid Gene Zaino, the President and Chief Executive
Officer of the Company, and all compensation paid to Robert Skelton, Vice
President - Human Resources, General Counsel and Secretary of the Company. In
June 1996, the Company merged with the Netplex and America's Work Exchange
("AWE"), compensation paid for periods prior to June 1996 constitutes
compensation paid by Netplex or AWE. The Company had no executive officer, other
than Mr. Zaino and Mr. Skelton, whose salary exceeded $100,000 for year ended
December 31, 1997. The total compensation paid to all executive officers of the
Company in the year ended December 31, 1997 was $330,273.
16
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(1) Compensation
Awards
-------------------------------------------------------------
Securities
Fiscal Other Annual Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($)
- --------------------------- ---- --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gene Zaino, President 1997 $130,000 - 0 - - 0 - 600,000 (3) $ 4,563
1996 $116,423 - 0 - - 0 - - 0 - $27,125 (2)
1995 $ 86,100 - 0 - - 0 - 615,000 (3) $ 5,425 (2)
Robert Skelton, Secretary 1997 $100,000 - 0 - - 0 - 70,000 (3) $ 2,903
1996 $ 32,731 - 0 - - 0 - 50,000 (3) $ 2,000
</TABLE>
- -----------------------
(1) Mr. Zaino is employed under an employment agreement pursuant to which
he is paid a base salary of $130,000 per annum. See "Executive
Compensation -- Employment and Related Agreements."
(2) Mr. Zaino received $5,425 per month from December 1995 through May 1996
pursuant to a consulting agreement with the Company
(3) Options to purchase 600,000 shares issued to Mr. Zaino in 1995 under
the Employee Stock Option Plan were canceled in December 1997. Options
to purchase 600,000 shares were thereafter issued to Mr. Zaino at a
lower exercise price. None of Mr. Zaino's options have been exercised
and none are vested as of December 31, 1997. Options to purchase 70,000
shares granted to Mr. Skelton in 1996 and 1997 under the Employee Stock
Option Plan were canceled in December 1997 and options to purchase
70,000 shares were granted thereafter to Mr. Skelton at a lower
exercise price. None of Mr. Shelton's options have been exercised and
none are vested as of December 31, 1997. Mr. Skelton's employment with
the Company commenced in 1996..
Stock Option Grants
As part of a company-wide non-cash employee incentive granted by the Company's
Compensation Committee, Mr. Zaino agreed to cancel 600,000 options previously
issued to him. The Company granted 600,0000 options to Mr. Zaino in the fiscal
year ended December 31, 1997. As part of the merger, Mr. Zaino exchanged options
that he held in Netplex and AWE for options to purchase an aggregate of 600,000
shares at an exercise price ranging from $2.90 to $2.98 per share. These options
were canceled in 1997. Options on 70,000 shares granted to Mr. Skelton in 1996
and 1997 under the Employee Stock Option Plan were canceled in December 1997 and
options on 70,000 shares were granted to Mr. Skelton at a lower exercise price.
in the fiscal year ended December 31, 1997. The following table sets forth
further information with respect to options granted to Messrs. Zaino and
Skelton:
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Per Share Exercise
Name Granted Fiscsal Year Price Expiration Date
---- ------- ------------ ----- ---------------
<S> <C> <C> <C> <C>
Gene Zaino 600,000 25% $0.97 December 20, 2007
Robert Skelton 70,000 3% $0.97 December 20, 2007
</TABLE>
Fiscal Year End Option Values
Mr. Zaino and Mr. Skelton exercised no options in the fiscal year ended December
31, 1997. The following table sets forth certain information regarding the
options held by Mr. Zaino and Mr. Skelton at December 31, 1997.
17
<PAGE>
Aggregate Option Exercises and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options at Options at
December 31, 1997(1) December 31, 1997($)(1)
--------------------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gene Zaino -0- 600,000 -0- -0-
Robert Skelton -0- 70,000 -0- -0-
</TABLE>
- --------------
(1) At December 31, 1997 the closing price of the Company's Common Stock as
reported by the NASDAQ was $0.875. The exercise price for the option
shares exceeded the fair market value on December 31, 1997.
Employment and Related Agreements
Mr. Zaino is employed under a three-year employment agreement, effective as of
June 7,1996, pursuant to which he is paid a base salary of $130,000 per annum,
subject to increase by the Company's Board. Mr. Zaino may also receive an annual
bonus at the sole discretion of the Company's Board, based upon the financial
and operating performance of the Company. Mr. Skelton is paid a base salary of
$100,000. Mr. Skelton may also receive an annual bonus at the sole discretion of
the Company's President.
The Company obtained key-person life insurance in the amount of $1 million on
the life of Mr. Zaino.
Directors' Compensation
Directors receive no fees or other compensation for attendance at meetings of
the Company's Board.
The Company has created the 1995 Directors' Stock Option Plan (the "Directors'
Plan") pursuant to which any Director of the Company who is not a full or
part-time employee of the Company may be eligible to participate in the
Directors' Plan. To date, options to purchase 60,000 shares at exercise prices
ranging from $2.50 to $3.56 per share have been granted to Directors.
Board of Directors Interlocks and Insider Participation
The Company's Board has a Compensation Committee consisting of Mr. Goldstein and
Mr. Lagattuta and an Audit Committee consisting of Mr. Goldstein and Ms. Novick
and, except as set forth in detail in Certain Relationships and Related
Transactions, there are no Board of Directors interlocks.
18
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information concerning ownership of the Company's
Common Stock, as of April 8, 1998, by each person known by the Company to be the
beneficial owner of more than five percent of the Common Stock, each director,
each nominee for Director, each executive officer and by all directors and
executive officers of the Company as a group.
Name of Beneficial Owner Number of Shares of Common Stock Beneficially
Owned (1)
Number Percent
------ -------
Gene Zaino 1,329,850(2) 17.4%
Stan Fischer 448,420(3) 5.9%
Scott Pogoda 616,072 8.2%
PO Box 10229
Zephyr Cove, NV 89448
Deborah Novick 16,250(4) *
Richard Goldstein 16,000(5) *
Neil Luden 100,000(6) *
Frank Lagattuta 8,000 *
Matthew Jones 0 -
Robert Skelton 0 -
All directors and 1,464,300(7) 18.9%
Executive officers as a
Group(7 persons)
- ----------------
* Less than 1%.
(1)Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to options or
warrants currently exercisable, or exercisable within 60 days, are deemed
outstanding for computing the percentage of the person holding such options or
warrants but are not deemed outstanding for computing the percentage of any
other person. Based on review of Schedules 13G and 13D that have been filed and
delivered to the Company, the Company is not aware of any 5% beneficial holders
of its Common Stock, other than the persons specified in the table above.
(2) Includes 73,420 shares of Common Stock, subject to options or warrants.
(3) Includes 19,809 shares of Common Stock subject to options or warrants. Mr.
Fischer is an employee and member of the senior management team of the Company
but is not an Executive Officer.
(4) Consists of 16,250 shares of Common Stock subject to options or warrants.
(5) Includes 7,500 shares of Common Stock subject to options.
(6) Consists of 100,000 shares of Common Stock subject to options.
(7) Includes 197,170 shares of Common Stock subject to options or warrants.
19
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company contracted with an entity owned by Scott Pogoda, a five-percent
shareholder for the development of the software to be used to maintain the
Company's Centralized National Technical Database. The Company paid Mr. Pogoda
$150,000 and has a remaining obligation of approximately $50,000 at December 31,
1997 related to the development of this software.
Ms. Novick is a Senior Vice President of GKN Securities Corp., Placement Agent
of the 1996 Private Placement. The Company paid GKN Securities Corp. $432,500 in
fees associated with the completion of this transaction.
20
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit
No.
2.1 Agreement and Plan of Reorganization and Merger dated as of
November 20, 1995, by and among The Netplex Group, Inc., America's
Work Exchange, Inc. and the Company.**
3.1 The Company's Amended and Restated Certificate of
Incorporation.***
3.2 The Company's By-laws.**
3.3 Amendment to the Company's Amended and Restated Certificate of
Incorporation.*
4.1 Form of Common Stock Certificate.***
4.5 Form of Warrant issued to investors in connection with 1992 bridge
financing.***
4.6 Form of Unit Purchase Option granted to the Underwriter of the
Company's initial public offering.**
4.7 Form of Purchase Option granted to Placement Agent in connection
with the 1996 Private Placement.*****
4.8 Form of Warrant issued in connection with the 1996 Private
Placement.****
4.9 Certificate of Designation for the Preferred Stock.****
4.10 Form of Prepaid Warrant issued to Purchasers in 1998 Private
Placement.******
4.11 Form of Incentive Warrant issued to Purchasers in 1998 Private
Placement.******
10.5 1992 Incentive and Non-Qualified Stock Option Plan.**
10.6 Amendment to 1992 Incentive and Non-Qualified Stock Option Plan.**
10.9 Form of Indemnification Agreement between the Officers and
Directors of the Company and the Company.**
10.10 1995 Directors' Stock Option Plan.*****
10.11 1995 Consultant's Stock Option Plan.*****
10.12 Employment Agreement between the Company and Gene Zaino.*
10.13 Agreement by and among XcelleNet, Inc., The Netplex Group, Inc.
and Technology Development Systems, Inc. dated November 5,
1996.******
10.14 Agreement dated as of January 23, 1998 between The Netplex Group,
Inc., Preferred Systems Solutions, Inc., The PSS Group, Inc. and
Robert Hisel, Jr.******
11 Computation Re: Per Share Earnings.******
23 Consent of KPMG Peat Marwick LLP.******
27 Financial Data Schedule.******
(b) The Company filed one report Form 8-K/A in the quarter ended December
31, 1996, under Item 2 Acquisition and Disposition of Assets.
- -----------------
* Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996.
** Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission (the "Commission") on
June 7, 1996, as amended.
*** Incorporated by reference to the Company's Registration Statement on
Form SB-2, filed with the Commission on January 29, 1993 (Commission
file No. 33-57546), as amended.
**** Incorporated by reference to the Company's Registration Statement on
Form S-3, filed with the Commission on November 19, 1996, as amended
(Commission File No. 333-16423).
***** Incorporated by reference to the Company's Registration Statement on
Form S-8, filed with the Commission on December 31, 1996, (Commission
File No. 333-19115).
****** Filed Herewith.
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized in the County of Fairfax, Commonwealth of Virginia on the 15th day of
April, 1998.
The Netplex Group, Inc.
By: /s/ Gene Zaino
-----------------
Gene Zaino
Chairman, President and C.E.O.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Gene Zaino Chairman, President and April 14, 1998
- ------------------------- Chief Executive Officer
Gene Zaino [Principal Executive Officer]
/s/ Matthew G. Jones Chief Financial Officer April 14, 1998
- ------------------------- and Treasurer [Principal
Matthew G. Jones Accounting Officer]
/s/ Neil Luden Vice President & Director April 14, 1998
- -------------------------
Neil Luden
/s/ Richard Goldstein Director April 14, 1998
- --------------------------
Richard Goldstein
/s/ Frank C. Lagattuta Director April 14, 1998
- ---------------------------
Frank C. Lagattuta
/s/ Deborah Schondorf-Novick Director April 14, 1998
- -------------------------------
Deborah Schondorf-Novick
22
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report......................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996......... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996........................................ F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997........................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996........................................ F-6
Notes to Consolidated Financial Statements......................... F-7
F-1
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
Independent Auditors' Report
Board of Directors and Stockholders
The Netplex Group, Inc. :
We have audited the accompanying consolidated balance sheets of The Netplex
Group, Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Netplex Group,
Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
McLean, Virginia
April 10, 1998
F-2
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Assets 1997 1996
---------- ----------
Current assets
<S> <C> <C>
Cash and cash equivalents $ 353,005 $3,691,099
Accounts receivable, net of allowance for doubtful accounts of
$133,000 and $177,000, respectively 4,133,148 4,304,662
Notes receivable 200,000 --
Prepaids and other current assets 232,842 350,074
---------- ----------
Total current assets 4,918,995 8,345,835
Property and equipment, net 952,546 1,090,617
Other assets 82,738 78,988
Employee notes receivable 193,464 --
Acquired software, net 418,225 --
Goodwill, net 346,529 373,180
---------- ----------
Total assets $6,912,497 $9,888,620
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 567,805 $ 936,865
Line of credit 1,316,300 --
Accrued expenses 3,383,024 5,166,184
Deferred revenue 109,497 329,267
Obligation under capital lease, current portion 96,073 106,347
---------- ----------
Total current liabilities 5,472,699 6,538,663
Obligation under capital lease, net of current portion 109,096 110,669
---------- ----------
Total liabilities 5,581,795 6,649,332
---------- ----------
Stockholders' equity
Class A Cumulative Convertible Preferred Stock; $.01 par value;
liquidation preference of the greater of (i) two times the stated
value of $2 per share plus all accrued and unpaid dividends, or (ii) the
amount that would have been received if such shares were converted
to Common Stock on the business day immediately prior to the
liquidation; 2,000,000 shares authorized, 1,062,500 and 1,750,000
shares outstanding in 1997 and 1996, respectively 10,625 17,500
Common stock, $.001 par value; 20,000,000 authorized,7,470,370 and
6,442,903 shares outstanding in 1997 and 1996, respectively 7,470 6,443
Additional paid in capital 6,272,407 5,301,542
Accumulated deficit (4,959,800) (2,086,197)
---------- ----------
Commitments and contingencies
Total stockholders' equity 1,330,702 3,239,288
---------- ----------
Total liabilities and stockholders' equity $6,912,497 $9,888,620
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenue $40,468,134 $33,524,679
Cost of revenue 35,415,644 30,878,166
----------- -----------
Gross profit 5,052,490 2,646,513
Selling, general and administrative expense 7,899,756 5,205,906
----------- -------------
Operating loss (2,847,266) (2,559,393)
Other income/(expenses)
Interest income/(expense), net (26,337) 33,119
Other income -- 4,808
------------ -----------
(26,337) 37,927
Loss from continuing operations
before income taxes (2,873,603) (2,521,466)
Income tax (benefit) provision -- (34,000)
---------- ------------
Loss from continuing operations (2,873,603) (2,487,466)
Discontinued operations
Loss from operations of discontinued
Business -- (1,332,050)
Net gain from disposal -- 1,820,129
--------- -------------
Income from discontinued operations -- 488,079
Net loss $(2,873,603) $(1,999,387)
=========== ============
Basic and diluted earnings (loss) per common share
Continuing operations $ (0.46) $ (0.51)
Discontinued operations -- 0.09
----------- -------------
Total $ (0.46) $ (0.42)
=========== ============
Weighted average common shares outstanding, basic and diluted 6,820,863 5,026,306
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Class A Cumulative
Convertible Preferred
Stock Common stock Additional
------------------------- ---------------------- paid in
Shares $ Shares $ capital
--------- ------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 -- $ -- 3,197,608 $ 31,976 $ 579,124
Net loss
Reduction in par value resulting from the
merger of the Company with Netplex
from $0.01 per share to $0.001 per share -- -- -- (28,778) 28,778
Issuance of common shares in the merger of
the Company with Netplex -- -- 3,245,295 3,245 1,767,488
Private placement of Class A Cumulative,
Convertible Preferred Stock 1,750,000 17,500 -- -- 3,024,346
Preferred stock dividends -- -- -- -- (98,194)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 1,750,000 17,500 6,442,903 6,443 5,301,542
Net loss -- -- -- -- --
Conversions of Preferred Stock to Common Stock (687,500) (6,875) 687,500 687 6,188
Exercise of common stock warrants -- -- 225,000 225 537,275
Preferred stock dividends -- -- -- -- (82,500)
Issuance of Common Stock options -- -- -- -- 40,000
Issuance of Common Stock in connection with Onion
Peel Solutions, L.L.C. acquisition
-- -- 80,000 80 399,920
Exercise of Common Stock options -- -- 34,967 35 69,982
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 1,062,500 $ 10,625 7,470,370 $ 7,470 $ 6,272,407
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
deficit Total
------------ -----------
<S> <C> <C>
Balance at December 31, 1995 $ (86,810) $ 524,290
Net loss (1,999,387) (1,999,387)
Reduction in par value resulting from the
merger of the Company with Netplex
from $0.01 per share to $0.001 per share -- --
Issuance of common shares in the merger of
the Company with Netplex -- 1,770,733
Private placement of Class A Cumulative,
Convertible Preferred Stock -- 3,041,846
Preferred stock dividends -- (98,194)
----------- -----------
Balance at December 31, 1996 (2,086,197) 3,239,288
Net loss (2,873,603) (2,873,603)
Conversions of Preferred Stock to Common Stock -- --
Exercise of common stock warrants -- 537,500
Preferred stock dividends -- (82,500)
Issuance of Common Stock options -- 40,000
Issuance of Common Stock in connection with Onion
Peel Solutions, L.L.C. acquisition
-- 400,000
Exercise of Common Stock options -- 70,017
----------- -----------
Balance at December 31, 1997 $(4,959,800) $ 1,330,702
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -------------
Operating activities
<S> <C> <C>
Net loss $(2,873,603) $(1,999,387)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 464,213 587,902
Expense on options granted 40,000
Gain on sale of WorldLink product technology -- (1,820,129)
Deferred income taxes -- (34,000)
Change in assets and liabilities, net of effects of acquisition:
Accounts receivable 301,321 (789,955)
Prepaid expenses and other current assets 117,712 (117,496)
Other assets -- (9,404)
Accounts payable and accrued expenses (2,159,896) 1,190,669
Deferred revenue (219,770) (131,643)
---------- -----------
Net cash used in operating activities (4,330,023) (3,123,443)
---------- -----------
Investing activities
Capital expenditures (105,438) (631,983)
Net proceeds from the sale of WorldLink product technology -- 2,492,795
Cash acquired in business acquisition 2,149 1,245,062
---------- ----------
Net cash provided by/(used in) investing activities (103,289) 3,105,874
---------- ----------
Financing activities
Proceeds from the exercise of stock options and warrants 607,517 --
Note receivable (200,000)
Employee notes receivable (193,464)
Payment of dividends on Class A Preferred Stock (180,694) --
Principal payments on capital lease obligations (99,945) (14,019)
Line of credit advances 1,316,300 650,000
Line of credit repayments (95,000) (650,000)
Repayments of other notes payable (59,496) (159,870)
Proceeds from Private Placement -- 3,041,846
---------- ----------
Net cash provided by financing activities 1,095,218 2,867,957
---------- ----------
Increase (decrease) in cash and cash equivalents (3,338,094) 2,850,388
Cash and cash equivalents at beginning of period 3,691,099 840,711
---------- ----------
Cash and cash equivalents at end of period $ 353,005 $3,691,099
========== ==========
Supplemental information Cash paid during the period for:
Interest 61,366 24,247
========== ==========
Income taxes -- 12,985
========== ==========
Capital lease obligation 88,098 241,561
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) The Business and Basis of Presentation
The Business
The Netplex Group, Inc. ("the Company") was incorporated in 1986 to provide
IT services and solutions. Netplex is an Information Technology (IT)
company that provides the expertise and information systems to link
employees, customers, prospects, suppliers and manufacturers to help
"network-enable" organizations. The Company re-sells technology products
when necessary to deliver to customers fully integrated system solutions.
The Company also provides certain business services to independent
consultants who become the Company's employees.
Basis of presentation
Merger with Netplex On June 7, 1996, the Company (formerly known as
"CompLink, Ltd." or "CompLink") acquired and merged with America's Work
Exchange and The Netplex Group, Inc. (collectively referred to as
"Netplex") in a reverse merger transaction by issuing approximately
3,245,000 shares of Common Stock, or 50.4 % of the Company's outstanding
stock after giving effect for the merger. The merger agreement also
provided for the Company to assume 1,691,000 outstanding Common Stock
options of Netplex.
The merger has been accounted for under the purchase method of accounting
as a reverse merger, since the shareholders of Netplex, which have common
control, received the larger of the voting rights of the combined entity.
As a result, Netplex is considered the acquirer for accounting purposes.
The merger resulted in a re-capitalization of the acquirers, so that the
resulting capitalization of the Company after the merger is that of
CompLink's giving effect to the issuance of new shares and elimination of
CompLink's accumulated deficit. In addition, the par value of the Company's
Common Stock was decreased from $0.01 per share to $0.001 per share in
connection with the merger. The assets and liabilities of CompLink were
recorded by the Company at book value which approximates fair value.
The statement of operations for the year ended December 31, 1996 reflect
those of Netplex for the year and those of CompLink and its wholly-owned
subsidiary, Technology Development Systems ("TDS"), commencing on June 1,
1996. The merger has been accounted for assuming that it occurred on May
31, 1996. The operating results of CompLink and TDS from June 1, 1996 up to
June 7, 1996 (the merger date) have been included in the Company's 1996
consolidated statement of operations, as such amounts are not material.
Coincident with the merger the Company's name was changed from CompLink,
Ltd. to The Netplex Group, Inc. and the entity known as The Netplex Group,
Inc. prior to the merger changed its name to Netplex Systems, Inc. The
Company's fiscal year end was changed from July 31 to December 31. Upon
completion of the merger, the Company consisted of Netplex Systems, Inc.;
America's Work Exchange ("AWE") and its wholly- owned subsidiary, Software
Resources of New Jersey , now known as Contractors Resources ("CR"), and
The Netplex Group, Inc. (formerly known as CompLink Ltd.) and its
wholly-owned subsidiary, TDS.
Acquisition of Onion Peel Solutions L.L.C.
On July 1, 1997, the Company acquired all of the outstanding membership
interests of Onion Peel Solutions L.L.C. ("Onion Peel"), a Raleigh, NC
based provider of network management solutions, in exchange for 80,000
shares of its Common Stock, subject to the issuance of additional shares
based on the closing price of the Company's Common Stock on December 31,
1998. The acquisition was accounted for using the purchase method of
accounting, whereby the $400,000 purchase price was allocated to the fair
value of the assets acquired and the liabilities assumed.
The operating results of Onion Peel have been included in the Company's
consolidated results from July 1, 1997. The acquired intangible asset
recorded on the consolidated balance sheet represents the fair value of
F-7
<PAGE>
Onion Peel's software license rights. This intangible asset is being
amortized on a straight - line basis over four years. Amortization of the
software license rights was $46,470 in 1997.
The following unaudited supplemental financial information presents the
consolidated results of the Company from continuing operations, on a pro
forma basis, as though the merger with CompLink and the acquisition of
Onion Peel were consummated on January 1, 1996 and reflect the historical
results of operations of the purchased business adjusted for goodwill
amortization and increased common shares outstanding from the merger. The
pro forma results do not include the operations of the discontinued
business.
<TABLE>
<CAPTION>
Unaudited
Year Ended December 31
1997 1996
------------ ---------------
(in thousands except per share data)
<S> <C> <C>
Revenues $ 40,804 $ 34,666
============ ===========
Net loss from continuing operations $ (3,173) $ (2,865)
============ ===========
Net loss per share from continuing operations $ (0.46) $ (0.44)
============ ===========
Weighted average common shares outstanding 6,861 6,523
============ ===========
</TABLE>
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchase been
made at the beginning of the period, or the results which may occur in the
future.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
The Netplex Group, Inc. and its wholly owned subsidiaries, Netplex Systems,
Inc., America's Work Exchange, Software Resources of New Jersey, now known
as Contractors Resources ("CR"), Technology Development Systems, and Onion
Peel Solutions, L.L.C. All significant intercompany transactions have been
eliminated during consolidation.
Revenue Recognition
The majority of the Company's revenue is from consulting services
contracts. This revenue is recognized when the services are performed and
the costs are incurred. The Company generally recognizes hardware and
software product revenue when the products are delivered to the customer
site. Fixed price contract revenue is recognized on the percentage of
completion basis based on costs incurred to estimated costs to complete.
Revenue for maintenance contracts is recognized ratably over the service
period of the underlying contract. Deferred revenue represents the unearned
portion of maintenance contracts and amounts billed in advance of customer
acceptance, in accordance with the terms of the contract. The Company
records loss provisions if required for its contracts at the time that such
losses are identified.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity, at date
of purchase, of three months or less to be cash equivalents. Cash
equivalents are comprised of money market accounts.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization
are provided for using the straight-line method over the estimated useful
lives of the assets which range from 3 to 7 years.
Property and equipment under capital leases are stated at the present value
of the minimum lease payments and are amortized using the shorter of the
lease term or the estimated useful life.
Upon sale or retirement of property and equipment, the costs and related
accumulated depreciation are eliminated from the accounts and any gain or
loss on such disposition is reflected in the statement of operations.
Expenditures for repairs and maintenance are charged to operations as
incurred.
F-8
<PAGE>
Depreciation and amortization expense related to property and equipment was
$391,091 and $318,865 for the years ended December 31, 1997 and 1996.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed
the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less cost to sell. Adoption of
this Statement did not have a material impact on the Company's financial
position, results of operations, or liquidity.
Excess Costs Over Net Assets Acquired
Excess costs over net assets acquired (goodwill) resulting from AWE's
acquisition of CR is being amortized on a straight-line basis over a
recovery period of 15 years. The Company assesses the potential impairment
and recovery of goodwill on an annual basis and more frequently if factors
dictate. Management forecasts are used to evaluate the recovery of goodwill
through determining whether amortization of the goodwill can be recovered
through the undiscounted operating cash flow (cash flow excluding goodwill
amortization, non-recurring charges and interest expense). If an impairment
of goodwill appears to have occurred, impairment is measured based on
projected discounted operating cash flow (excluding goodwill amortization,
non recurring charges and interest expense) using a discount rate
reflecting the Company's cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved. The Company may assess the net carrying amount
of goodwill using internal and or independent valuations.
Accumulated amortization of goodwill related to the purchase of CR at
December 31, 1997 was $53,308 and at December 31, 1996 was $26,656.
Income Taxes
Income taxes are accounted for under the asset and liability method under
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("SFAS 109"). Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences of differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured by applying enacted
statutory tax rates, that are applicable to the future years in which the
deferred tax assets or liabilities are expected to be settled or realized.
Any change in tax rates on deferred tax assets and liabilities is
recognized in net income in the period in which the rate change is enacted.
Earnings (loss) per share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"), which requires companies to present basic earnings per share
and diluted earnings per share (EPS), instead of the primary and fully
diluted EPS that had previously been required. The Company adopted SFAS 128
in the fourth quarter of 1997. The impact to prior years' amounts was
immaterial. Basic net loss per common share is calculated using the
weighted average number of common shares outstanding during the periods.
Diluted net loss per common share is calculated using the weighted average
number of common shares and dilutive potential common shares outstanding
during the periods. For the years ended December 31, 1997 and 1996, the
assumed exercise of the company's outstanding stock options and warrants
and Convertible Preferred Stock has not been included in the calculation as
the effect would be anti-dilutive.
F-9
<PAGE>
A reconciliation of the numerators and denominators of the basic and
diluted EPS for the years ended December 31, 1997 and 1996, is provided
below:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
1997
<S> <C> <C> <C>
Net Loss $ (2,873,603) - $ -
Preferred stock dividend 275,625 - -
Basic and diluted EPS
Income available to common shareholders $ (3,149,228) 6,820,863 $ (0.46)
============ ========= =========
1996
Net Loss $ (1,999,387) - $ -
Preferred stock dividend 98,194 - -
Basic and diluted EPS
Income available to common shareholders $ (2,097,581) 5,026,306 $ (0.42)
============ ========= =========
</TABLE>
Stock Options
Prior to January 1, 1996, the Company accounted for its 1992 Incentive
Stock Option plan ("ISO Plan") and the 1995 Directors' Stock Option plan
(the "Director' Plan") in accordance with the provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. Pursuant to APB 25 compensation
expense is recorded on the date of grant only to the extent the current
market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
which permits entities to recognize, as expense over the vesting period,
the fair value of all stock-based awards on the grant date. Alternatively,
SFAS No.123 also allows entities to continue to apply the provisions of APB
25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and in future
years as if the fair-value-based method defined in SFAS 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion 25 and provide the pro forma disclosure provisions of SFAS 123 for
the ISO and Directors' Plans.
The Company's 1995 Consultant's plan (the "Consultant's Plan") allows for
the granting of options to both organizations and individuals who are not
employees of the Company. The Company accounts for the options granted to
non-employees based on the provisions of SFAS 123.
Use of Estimates
The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
(3) Liquidity
Based on its current operating plan, the Company believes that the net
proceeds from the Private Placement together with cash anticipated to be
provided by operating activities and amounts expected to be available under
a renegotiated line of credit will be sufficient to meet its anticipated
cash needs for working capital and capital expenditures for at least the
next 12 months. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company
may seek to sell additional equity or convertible debt securities or obtain
additional credit facilities. However, no assurance can be given that any
such additional sources of financing will be available on acceptable terms
or at all. The sale of additional equity or convertible debt securities
could result in additional dilution to the Company's stockholders. A
portion of the Company's cash may be used for acquisitions or to acquire or
invest in complimentary businesses or products or to obtain the right to
use complementary technologies. The Company has no current plans,
F-10
<PAGE>
agreements or commitments, and is not currently engaged in any negotiations
with respect to any such transaction.
The Company is expecting to incur operating losses until it achieves full
productivity of the majority of its sales force. While it cannot be certain
as to when such levels of productivity can be attained, the Company
anticipates that its sales force will operate at levels below full
productivity through at least the first quarter of 1998. The Company will
continue to make significant investments in its technical workforce,
marketing, training and infrastructure to increase productivity, build its
core competency practice unit skill base and product offerings and foster
growth of its operations. Despite the expectation of continued operating
losses, management believes that its current cash balance and credit
facility will be sufficient to meet operating requirements for at least the
next twelve months.
(4) Discontinuance of Business
In December 1996, the Company made the decision to discontinue its software
development and distribution business, through the sale of TDS's interest
in its WorldLink product technology ("WorldLink"). WorldLink represented
the primary asset offering of the Company's software development and
distribution business. The operations of the software development and
distribution business have been treated as discontinued operations in
accordance with the provisions of Accounting Principles Board Opinion No.
30 (APB 30). Pursuant to APB 30, the revenue, costs and expenses have been
excluded from their respective captions in the Company's consolidated
statements of operations and the net results have been reported separately
as income from discontinued operations.
On December 31, 1996, the Company completed the sale of its interest in
WorldLink to Xcellenet, Inc. for an aggregate sale price of $2.5 million,
net of expenses paid of approximately $500,000 related to the sale. During
1996,the remaining net assets of TDS were written down to their net
realizable values and consisted primarily of accounts receivable and
furniture and equipment, which the Company is using in its continuing
operations.
(5) Property and Equipment
Property and equipment consists of the following:
December 31,
--------------------------------
1997 1996
----------------- --------------
Computer software $ 493,935 $ 464,318
Computer and office equipment 628,537 460,422
Furniture and fixtures 188,563 212,561
Equipment under capital leases 335,197 247,100
Leasehold Improvements 38,520 46,934
----------------- --------------
1,684,752 1,431,335
Accumulated depreciation and amortization (732,206) (340,718)
----------------- --------------
Property and equipment, net $ 952,546 $ 1,090,617
================= ==============
Computer software at December 31, 1997, includes $407,338 of software that
was developed for internal usage. Such software was placed in service in
January 1997 and is being amortized over a 4-year useful life. Amortization
expense related to this software was $67,890 for 1997. Accumulated
depreciation and amortization includes $119,925 related to assets under
capital leases at December 31, 1997 and $29,125 at December 31, 1996.
F-11
<PAGE>
(6) Accrued Expenses
Accrued expenses consists of the following:
December 31,
-------------------------------
1997 1996
---------------- -------------
Payroll and employee benefits $ 2,954,522 $ 3,592,795
Other 428,502 402,067
Cost of discontinued business - 704,890
Merger costs - 466,432
---------------- -------------
$ 3,383,024 $ 5,166,184
================ =============
(7) Notes Payable to Bank
On July 2, 1997, the Company entered into a bank line of credit facility
agreement that expires on June 30, 1998. This line of credit facility
provides for advances of 80% of eligible accounts receivable (as defined in
the agreement) up to $2,000,000. Amounts borrowed bear interest at the
bank's reference rate of prime (8.5%) plus 3/4%. The Company had
outstanding advances of $1,316,300 on the line of credit at December 31,
1997.
At December 31, 1997, the Company was not in compliance with certain
financial covenants contained in its line of credit facility which requires
the Company to maintain minimum tangible net worth of a least $1.3 million
and a current ratio of at least 1.10 to 1.00. The bank has waived the
Company's non compliance of these covenants.
(8) Income Taxes
The reconciliation between the actual income tax expense and income tax
computed by applying the statutory Federal income tax rate to earnings
before provision for income taxes for the year ended December 31, 1997 and
1996 is as follows:
1997 1996
---- ----
(in thousands)
Computed expected tax benefit on income from
continuing operations $(977) $(857)
Non-deductible expenses and other (484) (50)
Change in valuation allowance for deferred tax
assets allocated to income tax expense 493 873
----- -----
$ - $(34)
===== =====
F-12
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of deferred taxes assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1997 1996
(in thousands)
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $4,010 $ 3,000
Research and development credit carryforwards 187 187
Excess tax basis over book of net assets acquired 150 200
Inventory obsolescence reserve 56 59
Allowance for doubtful accounts receivable 48 74
Accrued liabilities, not presently deductible 8 496
Other 30 11
------ --------
Total gross deferred tax assets 4,489 4,028
Less valuation allowance (4,489) (3,996)
------- --------
Net deferred tax asset - 32
------- --------
Deferred tax liabilities:
Obligation under capital leases - (13)
Other - (19)
------- --------
Total deferred tax liabilities - (32)
------- --------
Net deferred tax asset (liability) $ - $ -
======= ========
</TABLE>
The net change in the valuation allowance was an increase of approximately
$493,000 in 1997 and an increase of $3,911,000 in 1996. The Company has
provided a valuation allowance for the majority of its deferred tax assets
at December 31, 1997 and 1996 since the Company could not conclude that it
was more likely than not that it would realize these assets due principally
to the Company's history of losses.
As of December 31, 1997 the Company had net operating loss carry forwards
(NOL's) for Federal income tax purposes of approximately $13,500,000.
Additionally, the Company had $187,000 of research and development tax
credits available to offset future taxable income. The NOL's and credit
carryforwards expire primarily in 2007 through 2012. The future annual
usage of approximately $9,600,000 of these NOL's and credits for income tax
purposes is subject to annual limitations and other conditions and may not
be fully utilized for tax purposes due to the change in ownership resulting
from the Company's merger in 1996.
(9) Commitments
Employment agreements
On June 7, 1996, in connection with the closing of the merger, the Board of
Directors approved three-year employment agreements with the Chairman and
Chief Executive Officer and two executives of Netplex and AWE that provide
for aggregate base salaries ranging from $110,000 to $130,000 with annual
bonuses up to 60% of base salary based of the Company's financial and
operating performance, subject to Board approval. These agreements expire
on June 6, 1999.
F-13
<PAGE>
Obligations Under Leases
The Company leases computer equipment, furniture, vehicles and office
facilities under long-term lease agreements. The following is a schedule of
future minimum lease payments for capital and non-cancelable operating
leases (with initial terms in excess of one year) as of December 31, 1997:
Capital Operating
Year ending December 31: Leases Leases
------ ------
1998 $ 120,082 $ 551,895
1999 100,544 560,419
2000 12,195 480,241
2001 - 203,087
2002 - 97,268
Thereafter - 48,634
--------- -----------
Total minimum lease payments 232,821 $1,941,544
===========
Less: amount representing interest 27,652
---------
Present value of minimum lease payments $ 205,169
=========
Total rent expense was approximately $647,000 and $577,000 for the years
ended December 31, 1997 and 1996.
(10) Class A Cumulative Convertible Preferred Stock
0n September 19, 1996, the Company raised approximately $3,000,000 through
the completion of a Private Placement offering of units of equity
securities. Each unit of equity securities consists of one share of $.01
par value Class A Cumulative Convertible Preferred Stock (the "Preferred
Stock") and one Common Stock warrant to purchase one share of the Company's
$0.001 par value Common Stock at an exercise price of $2.50.
Each share of Preferred Stock is convertible into one share of Common Stock
at any time, at the discretion of the holder. The Preferred Stock earns
cumulative dividends at 10% per annum, payable in either cash or additional
shares of Preferred Stock at the Company's option. Subject to the
conversion rights, the Company may redeem the Preferred Stock at its stated
value plus all accrued and unpaid dividends upon: (1) registration of the
shares underlying the Preferred Stock, and (2) 30 days written notice given
at any time upon attaining certain per share trading prices and sustaining
such prices for a specified period. The Preferred Stock has a per share
liquidation preference of the greater of: (i) two times the stated value of
the Preferred Stock (stated value is $2 per share) plus any accrued and
unpaid dividends, or (ii) the amount that would have been received if such
shares were converted to Common Stock on the business day immediately prior
to liquidation. During the year ended December 31, 1997, 687,500 preferred
shares were converted to Common Stock. No conversions occurred in 1996.
Each warrant issued in connection with the Private Placement became
exercisable on March 19, 1997 and expires on September 19, 2001. The
Company has the right to call the warrants at a redemption price of $.01
per share upon: (1) registration of the shares underlying the warrant, and
(2) 30 days written notice given at any time upon the Common Stock
attaining certain per share trading prices and maintaining such prices for
a specified period. During 1997, warrants to acquire 175,000 shares of
Common Stock were exercised.
On March 27, 1997, the Company declared a dividend in the amount of $0.05
per share ($82,500) payable in cash to the holders of record of the
Company's Class A Preferred Stock on March 28, 1997.
On November 14, 1997, the Company declared a dividend payable to the
holders of record of its Class A Preferred Stock on account of dividends in
arrears which were payable on June 30, 1997 and September 30,
F-14
<PAGE>
1997, in the amount of 0.0582 shares of Class A Preferred Stock per share
of Class A Preferred Stock. The related shares were not issued by the
Company as of December 31, 1997.
On December 31, 1996, the Company declared a dividend payable of
approximately $0.056 per share to all holders of record of the Class A
Preferred Stock on January 15, 1997. Accordingly, the Company accrued a
dividend payable of $98,194 at December 31, 1996, which was paid during
1997.
(11) Common Stock and Warrants
Pursuant to an agreement dated March 25, 1992, the Company sold 100,000
units each consisting of one share of Common Stock and one warrant with an
aggregate purchase price of $250,000 and issued an additional 120,000
warrants. As of April 10, 1998, all warrants have expired except for
170,000 exercisable at $3.00 per share.
In connection with the Company's initial public offering (IPO), the Company
sold to the underwriters for $100 the right to purchase up to an aggregate
of 100,000 Units (Unit Purchase Option). The Unit Purchase Options is
exercisable initially at $6.00 per Unit through March 1998. The Units are
identical to those offered in the IPO, except the warrants may not be
redeemed by the Company. The Unit Purchase Option contains anti-dilution
provisions providing for adjustments to the exercise price upon the
occurrence of certain events. In connection with the merger, the Unit
exercise price was reduced from $6.00 to $2.40 per share from the effects
of this anti-dilution provision. The exercise price of the underlying
warrants remained at $5.25 per share. These warrants expired in March,
1998.
In connection with the merger of the Company with Netplex, effective April
11, 1996, the Company provided its underwriters with warrants to purchase
up to 125,000 shares of the Company's Common Stock. Each warrant entitles
the holder to purchase, through April 10, 2001, one share of Common Stock
at an exercise price of $3.50 per share. These warrants became exercisable
on October 11, 1996. The fair value of the warrants issued of approximately
$170,000 had no effect on the Company's equity as a result of the merger.
In connection with the merger of the Company with Netplex, effective June
7, 1996, the shareholders of Netplex were granted warrants to purchase up
to 150,000 shares of the Company's Common Stock. Each warrant entitles the
holder to purchase, through June 6, 2001, one share of Common Stock at an
exercise price of $2.50 per share. These warrants became exercisable on
October 7, 1996. The fair value of the warrants issued of approximately
$270,000 had no effect on the Company's equity as a result of the merger.
In connection with the Class A Convertible Preferred Stock Private
Placement, the Company provided the underwriters for the Private Placement
with the option to purchase up to 87,500 units, each consisting of one
share of $.01 par value Class A Convertible Preferred Stock and one Common
Stock purchase warrant. These units are exercisable at $2.00 per share and
are identical in all respects to the units sold in the Private Placement
transaction. During 1997, units to acquire 50,000 shares of the Company's
Common Stock were exercised. The 37,500 units are all exercisable at
December 31, 1997.
(12) Stock Options
As of December 31, 1997, the Company maintains three stock option plans;
the 1992 Incentive Stock Option Plan (ISO Plan), the 1995 Directors' Stock
Option Plan (Directors' Plan) and the 1995 Consultant's Stock Option Plan
(Consultant's Plan).
The ISO Plan includes both incentive and non-qualified stock options. The
Board of Directors may grant stock options to employees to purchase up to
3,000,000 shares of the Company's authorized but unissued Common Stock.
Stock options are granted with an exercise price equal to the market price
on the date of grant. All stock options expire 10 years from grant date (5
years in the case that the optionee is a holder of more than 10% of the
voting stock of the Company). Generally the options vest and become fully
exercisable after 3 years from the date of grant but never less than 6
months. At December 31, 1997, there were 475,033 shares available for grant
under this plan.
The Directors' Plan authorizes the Board of Directors to grant to each
director options to purchase up to 15,000 shares of the Company's
authorized but unissued Common Stock, upon election to the Board, and award
aggregate options to purchase up to 100,000 shares of the Company's
authorized but unissued Common Stock. The terms of option grants for the
Directors' Plan are identical to those of the ISO plan, except that the
vesting
F-15
<PAGE>
period for the Directors' Plan is at the Board's discretion. Option grants
under this Plan from inception to date have contained three-year vesting
periods. At December 31,1997, there were 40,000 shares available for grant
under this Plan.
The Consultant's Plan authorizes the Board of Directors to grant
organizations or individuals who are not eligible for the ISO or Directors'
Plans stock options to purchase up to 800,000 shares of the Company's
authorized but unissued Common Stock. The exercise price, terms of the
option grant and vesting period for the Consultant's Plan stock options are
at the Board's discretion. At December 31,1997, there were 768,000 shares
available for grant under this Plan.
Stock option activity for the Plans during the periods indicated is as
follows:
<TABLE>
<CAPTION>
ISO Plan Directors' Plan Consultants' Plan
-------- --------------- -----------------
Wt. Avg. Wt. Avg. Wt. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
--------- --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
December 31,1995 724,500 $3.07 30,000 $3.56 -- $ --
Assumed in Merger 1,691,000 2.95 -- -- -- --
Granted 233,000 2.75 30,000 2.50 -- --
Exercised -- -- -- -- -- --
Forfeited/Canceled (236,000) 5.50 -- -- -- --
Expired -- -- -- -- -- --
---------- ------- ------ ----- ------ -----
December 31, 1996 2,412,500 $2.86 60,000 $3.03 -- $ --
Granted 2,363,500 1.29 15,000 2.97 32,000 2.50
Exercised (34,967) 2.00 -- -- -- --
Forfeited/Canceled (2,201,033) 2.78 (15,000) 2.50 -- --
Expired (50,000) 4.40 -- -- -- --
---------- ------- ------ ----- ------ -----
December 31, 1997 2,490,000 $1.45 60,000 $3.15 32,000 $2.50
========== ======= ====== ===== ====== =====
</TABLE>
ISO Plan options
At December 31,1997, the range of exercise prices for the options granted
under the ISO plan was $0.97-$4.00 and the weighted average remaining
contractual life of those options was 8.8 years. At December 31, 1997 and
1996, the number of options exercisable under the ISO Plan totaled 545,834
and 867,167, respectively. The weighted average exercise price of those
options was $2.73 and $3.00, respectively.
Directors' Plan options
At December 31, 1997, the range of exercise prices for options granted
under the Directors' Plan was $2.50-$3.56 and the weighted-average
remaining contractual life of those options was 8.4 years. At December 31,
1997, and 1996 the number of options exercisable under the Directors' Plan
totaled 25,000 and 15,000, respectively. The weighted-average exercise
price of those options was $3.35.and $3.56, respectively.
Consultants' Plan options
At December 31, 1997, the exercise price for all options granted under the
Consultants' Plan was $2.50 and the weighted-average remaining contractual
life of those options was 4 years. At December 31, 1997 the number of
options exercisable under the Consultants' Plan totaled 32,000. No options
were granted prior to 1997. The weighted-average exercise price of those
options was $2.50.
The Company applies APB Opinion No. 25 in accounting for its ISO and
Directors' Plans and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements. Had the Company
F-16
<PAGE>
determined compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
1997 1996
------------------------------------
(Thousands except per share amounts)
Net loss - As reported $ (2,874) $ (1,999)
============ ===============
Net loss - Pro forma $ (4,836) $ (3,462)
============ ===============
Net loss per share - As reported $ (0.46) $ (0.42)
============ ===============
Net loss per share - Pro forma $ (0.71) $ (0.71)
============ ===============
Weighted average shares outstanding 6,821 5,026
============ ===============
Pro forma net loss reflects only the option grants in 1997, 1996, and 1995.
Therefore, the full impact of calculating compensation costs for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
option's vesting periods and compensation cost for options granted prior to
January 1, 1995 is not considered.
The per share weighted average fair value of the ISO options granted in
1997 and 1996 was $1.20 and $1.83 on the grant date using the Black -
Scholes option pricing model with the following weighted average
assumptions for 1997: expected dividend yield 0.0%, risk free interest rate
of 6.24%, expected volatility of 103%, and an expected life of 10 years;
and 1996: expected dividend yield 0.0%, risk free interest rate of 6.70%,
expected volatility of 44%, and an expected life of 10 years.
The per share weighted average fair value of the Directors' Plan options
granted in 1997 and 1996 was $2.76 and $1.67 on the grant date using the
Black - Scholes option pricing model with the following weighted average
assumptions for 1997: expected dividend yield 0.0%, risk free interest rate
of 6.97%, expected volatility of 103%, and an expected life of 10 years;
and 1996: expected dividend yield 0.0%, risk free interest rate of 6.81%,
expected volatility of 44%, and an expected life of 10 years.
(13) Related Party Transactions
The Company paid $28,800 in 1997 and $17,900 in 1996 for accounting, tax
and consulting services to a CPA firm in which a partner of the firm has
been a director of the Company since July 1996.
In January, 1997, the Company issued a $150,000 loan to the chief executive
officer for relocation expenses. The loan bears interest at 8% per annum
and is due upon demand. The Company does not intend to demand payment of
the loan during 1998, and thus the amount is classified as long-term in the
accompanying consolidated balance sheet as of December 31, 1997. At
December 31, 1997, the outstanding amount due under the loan was
approximately $161,000, including approximately $11,000 in accrued
interest.
In June 1997, the Company issued options under the Consultants' Plan to
purchase up to 32,000 shares of the Company's Common Stock at an exercise
price of $2.50 per share. These options were granted to one of the
Company's legal counsel in exchange for legal services rendered in the
amount of $40,000. The fair value of the options issued of $40,000 has been
classified as additional paid in capital in the accompanying consolidated
financial statements for the year ended December 31, 1997. The options are
for a term of 4 years and are immediately exercisable.
A director of the Company, is a Vice President of the underwriter (the
"Underwriter") of the Private Placement completed by the Company on
September 19, 1996 (see note 9). The Company paid the Underwriter $432,500
for fees associated with the completion of this transaction.
The Company contracted with an entity owned by a shareholder of the
Company, for the development of certain software used in the Company's
technical staffing operations. The Company paid the shareholder $150,000 in
1996.
F-17
<PAGE>
(14) Litigation
From time to time, disagreements with individual employees and
disagreements as to the interpretation, effect or nature of the individual
agreements arise in the ordinary course of business and may result in legal
proceedings being commenced against the Company.
On December 31, 1996, ACS Ltd., a software distributor based in the United
Kingdom, filed a complaint against Technology Development Systems ("TDS") a
wholly owned subsidiary of the Company, in the Circuit Court of Cook
County, Illinois. ACS alleges that TDS breached its obligations under the
Distributor Agreement between the Plaintiff and TDS for the WorldLink
product when the Company directed TDS to sell the WorldLink product
technology to a third party. ACS is demanding a sum exceeding one million
dollars for the breach of contract. The case is currently in discovery. In
the opinion of Management and the Company's legal counsel, the lawsuit has
little merit, and the outcome of the pending lawsuit will not have a
material adverse effect on the Company's financial condition, liquidity or
the results of operations. The Company intends to vigorously defend against
the lawsuit. The TDS subsidiary which was part of CompLink is currently
inactive with no assets.
On September 4, 1997, Data Systems Analysts, Inc. ("DSA"), a software
design and consulting company, filed a complaint against TDS and the
Company, alleging copyright infringement and breach of the Company's
agreement. The Complaint claims damages in excess of $300,000 plus punitive
damages. The case is currently in discovery. In the opinion of Management,
the lawsuit has little merit, and the outcome of the pending lawsuit will
not have a material adverse effect on the Company's financial condition,
liquidity or the results of operations. The Company intends to vigorously
defend against the lawsuit.
The Company is not currently involved in any litigation or proceedings
which if decided against the Company would have a material adverse affect,
either individually or in the aggregate. To the Company's knowledge, no
other legal proceedings, that if decided against the Company would have a
material adverse affect, are currently contemplated by any individuals,
entities or governmental authorities.
(15) Employee Benefit Plans
During 1996, the Company sponsored a 401(k) retirement plan ("the Plan")
under which substantially all full-time employees were eligible to
participate. The Company made no matching contributions to the Plan during
1996. In addition, the Company's CR subsidiary provided a separate 401(k)
plan for its employees during 1996. The Company's contribution to the
subsidiary's 401(k) plan during 1996 was $628,333.
On January 1, 1997, the Company and subsidiary 401(k) plans were merged.
Under the merged Plan, all full time employees with over 1000 hours of
service to the Company or its subsidiaries are eligible to participate. The
Company matches one-half of the employees' voluntary contributions up to a
maximum Company contribution of 5% of participants' salaries. The Company's
contribution to the Plan during 1997 was $647,418.
The Company's CR subsidiary provides a profit sharing plan for its
employees whereas up to 10% of the employees salary can be contributed to
the plan. The Company made no matching contributions to this plan during
1997 and 1996.
The Company does not provide any post retirement or any post employment
benefits.
(16) Recent Accounting Pronouncements
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure" which is effective for the year ending December
31, 1998. This statement continues the previous requirements to disclose
certain information about an entity's capital structure found in Accounting
Principles Board (APB) Opinion No. 10, "Omnibus Opinion -1966" and No. 15,
"Earnings per Share" and FASB Statement No. 47, "Disclosure of Long-Term
Obligations." The Company has been subject to the requirements of those
standards and as a result does not expect the adoption of SFAS No. 129 to
have a material impact on the Company's financial statements.
In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income",
which is effective for the year ending December 31, 1998. This statement
establishes standards for the reporting and display of comprehensive income
and its components in the financial statements. Earlier application of this
standard is
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permitted; however, upon adoption the Company will be required to
reclassify previously reported annual and interim financial statements. The
Company believes that the disclosure of comprehensive income in accordance
with the provisions of SFAS No. 130 will not impact the manner of
presentation of its financial statements as currently and previously
reported.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for the year ending
December 31, 1998. This statement requires companies to present certain
information about operating segments and related information, including
geographic and major customer data, in its annual financial statements and
in condensed financial statements for interim periods. The Company believes
that the adoption of SFAS No. 131 will impact the manner of presentation of
its financial statements.
In October, 1997, the AICPA Accounting Standards Executive Committee issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"),
which supercedes Statement of Position 91-1 "Software Revenue Recognition.
SOP 97-2 focuses on when and in what amounts revenue should be recognized
for licensing, selling, leasing, or otherwise marketing computer software,
and is effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company does not believe that the adoption of
this new pronouncement will have a material impact on its financial
position and results of operations.
(17) Subsequent Events
On January 30, 1998, the Company completed the purchase of all of the stock
of The PSS Group, Inc. ("PSS"), the technical professional staff
augmentation operations and business of Preferred Systems Solutions, Inc.
("Preferred") and formerly a wholly owned subsidiary of Preferred. In
consideration for the purchase, the Company paid $300,000 at closing and on
or before January 15, 1999 will pay $300,000 in cash or 200,000 shares of
its Common Stock or any combination thereof, at Preferred's option. The
Company used working capital to finance the acquisition. The agreement also
provides that Preferred will receive additional consideration (the
"Earn-out") if PSS meets certain operating targets. Such Earn-out may be
paid at the Company's option in cash or its Common Stock, or any
combination thereof. In connection with the acquisition, the Company and
PSS has entered into employment agreements with certain employees of PSS.
The acquisition was recorded effective January 1, 1998 using the purchase
method of accounting. A $200,000 advance to the purchase price was made to
PSS as of December 31, 1997 and is included in notes receivable in the
accompany consolidated balance sheet.
Between January 1, 1998 and April 14, 1998, the Company has raised
additional equity totaling $3,057,000 as follows:
In February 1998 the Company raised $100,000 through the sale of 80,000
shares of nonregistered Common Stock plus a warrant to purchase an
additional 100,000 warrants at $1.20.
On March 17, 1998 the Company raised $1,457,000 of financing in a Private
Placement raised primarily from accredited investors and employees of the
Company. The Company issued shares of non-registered Common Stock to
purchasers who have agreed to a one-year lock-up provision. These
restricted shares carry registration rights and were offered at $1.00 per
share. The funds will be used to finance operations and additional
acquisitions.
On April 7, 1998 Netplex completed the sale of 1,500 units of a Private
Placement, totaling $1.5 million, to various purchasers The Zanett
Corporation acted as placement agent for the Private Placement. The sale
represents the first half of a transaction that will include the sale of an
additional 1,500 units for $1.5 million at a future date. Zanett Lombardier
purchased 1,500 units at $1,000 per unit, with each unit consisting of a
prepaid Common Stock purchase warrant entitling the holder to acquire such
number of shares of the Company's Common Stock as is equal to $1,000
divided by an adjustable exercise price and an additional incentive warrant
to acquire 52 shares of Common Stock (or an aggregate of 78,000 shares of
Common Stock). The Company also granted Zanett a warrant to purchase 39,000
shares of Common Stock. Zanett also received placement fees and a
non-accountable expense allowance equal to 12.53% of the proceeeds of the
offering. The second half of the transaction is for the sale to Zanett of
an additional and committed 1,500 units, for $1,000 per unit, contingent on
Netplex recording three consecutive quarters of increased profits and
revenues, excluding any extraordinary items. With respect to the second
half of the transaction, the exercise price of the purchase
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warrants and the incentive warrants will be based on the bid price of the
Common Stock at the time of such closing. The funds from the Private
Placement will be used to fund operations and acquisitions. Under NASDAQ
regulations, certain aspects of the transaction must receive shareholder
approval. Such shareholder approval is expected in the Company's annual
meeting. The Company believes that the proceeds should ensure that the
Company will exceed NASDAQ's published net tangible assets requirement of
$2 million.
F-20
ACQUISITION AGREEMENT
This Acquisition Agreement is made effective as of the 3rd day of
January, 1998 (the "Contract Date") by and between The Netplex Group, Inc., a
New York corporation ("Netplex"), Preferred Systems Solutions, Inc., a Virginia
corporation ("Preferred"), The PSS Group, Inc., a Virginia corporation ("PSS"),
and Robert J. Hisel, Jr., an individual residing at 11309 Winterpointe Circle,
Reston, Virginia 20194 ("Hisel"), pursuant to which Netplex shall acquire all of
the outstanding common stock of The PSS Group, Inc., a wholly owned subsidiary
of Preferred ("PSS") and in exchange for cash and a certain number of shares of
Class A common stock, par value $.001, of Netplex ("Netplex Stock") to be
determined by and in accordance with the following terms and conditions.
WHEREAS, Netplex has agreed to purchase the technical professional
staff augmentation operations and business of Preferred, which does not include
Preferred's government contracting business (the "PSS Business"); and
WHEREAS, part of the consideration for the purchase price is the
agreement of Preferred and Robert J. Hisel, Jr. that they will not compete with
the business Netplex is purchasing; and
WHEREAS, Preferred recently formed a subsidiary, PSS, and transferred
the assets and liabilities of the PSS Business to PSS prior to the date of this
Agreement.
NOW THEREFORE, in consideration of the mutual representations,
warranties, covenants, terms and conditions set forth herein, the parties agree
as follows:
1. Purchase and Sale of PSS Stock. On the terms and subject to the
conditions set forth in this Agreement, at the Closing (hereinafter
defined) Preferred agrees to sell, transfer, convey and deliver to
Netplex, and Netplex agrees to purchase, acquire and accept from
Preferred, all of the capital stock of PSS (the "PSS Stock").
2. Closing. The Closing shall take place on such date, time and place as
the parties shall agree (the "Closing Date") after all of the
conditions to the parties' obligations to close have been satisfied or
waived; however, in no event shall the Closing occur later than January
30, 1998, provided however that Closing shall be effective as of
January 3, 1998.
3. Consideration. In exchange for the PSS Stock, Netplex shall pay
Preferred $600,000, payable $300,000 in cash on the Closing Date,
payable by check to Preferred or by wire transfer to Signet Bank, ABA
Number 051006778, Account Number 6520417376; and on or before January
15, 1999, $300,000 either in cash or 200,000 shares of Netplex common
stock, or any combination thereof, at Preferred's option. The price of
the Netplex common stock for this purpose is $1.50 per share.
4. Items To Be Delivered At Closing. The parties hereto shall deliver to
each other the following fully executed agreements:
a. The Earn Out Agreement in the form set forth in Exhibit A hereto.
b. Netplex Stock Option Agreements for up to a total of 40,000 shares
will be distributed to the employees of PSS other than Hisel and
William Fonseca pursuant to the attached Option Schedule set forth
as Schedule 4.b hereto. The form of option agreement is attached
hereto as Exhibit B. The exercise price of the options will be the
closing price of the Netplex Stock on the date of execution of
this Agreement.
c. The Employment Agreement with William Fonseca in the form attached
hereto as Exhibit C.
d. The Management Services Agreement in the form attached hereto as
Exhibit D.
<PAGE>
e. The letter escrow agreement and the pledge agreement and stock
power from Preferred's counsel in the form attached hereto as
Exhibit E.
f. The Master Contribution, Assignment and Assumption Agreement in
the form attached hereto as Exhibit F (the "Drop Down Agreement").
5. Termination of Personal Guarantee. As soon as practicable after the
Closing Date, but in no event later than sixty days after the Closing
Date, Netplex will cause Preferred's lender to amend, modify or
terminate the Preferred Line of Credit with First Union Bank (formerly
Signet Bank) for $1,000,000 (liability for which was assumed by PSS),
so that Preferred's liability on and the personal guarantee of Hisel on
the line of credit is extinguished. Netplex agrees that the PSS stock
certificates shall be pledged to Preferred as security for Netplex's
obligations under this Section 5 and the PSS stock certificates shall
be held in escrow by Preferred's counsel until such time as Preferred's
liability on and Hisel's personal guarantee thereon is extinguished.
6. Management Services To Be Provided by Preferred. Schedule 6 sets forth
a complete list of the contracts assigned by Preferred to PSS under the
Drop Down Agreement. Any contract or agreement which could not be
transferred to PSS as part of the Acquisition Agreement because of a
non-assignment clause (or similar restriction) is set forth on Schedule
3 to the Drop Down Agreement and shall be maintained and managed by
Preferred for the benefit of PSS and Netplex, and any profits resulting
from such a contract or agreement shall be immediately, after receipt
of said profits, paid over to PSS or Netplex pursuant to the Management
Services Agreement. Preferred will assist PSS and Netplex in novating
such contracts or agreements so that the contracts or agreements can be
assigned to PSS or Netplex.
7. Non-competition by Preferred. Preferred agrees:
a. For a period of five (5) years after the date of this Agreement,
Preferred and any of its shareholders shall not, directly or
indirectly, alone, or as a partner, officer, director, employee,
stockholder, consultant or agent of any other corporation,
partnership or other business organization, engage in any business
activity which is directly or indirectly in competition with the
products or services owned, sold, manufactured, marketed, provided
or developed by PSS and/or Netplex and its subsidiaries during the
three (3) year period beginning as of the date of this Agreement.
b. For a period of five (5) years after the date of this Agreement,
Preferred and any of its shareholders shall not, directly or
indirectly, alone, or as a partner, officer, director, employee,
stockholder, consultant or agent of any other corporation,
partnership or other business organization, solicit the employment
of, or hire, any employee of PSS, Netplex, or any Netplex
subsidiary, or cause any such employee to terminate the employee's
relationship with PSS, Netplex or any Netplex subsidiary, without
the prior written approval of Netplex. Netplex and PSS agree that
they shall not directly or indirectly solicit the employment of,
or hire any employee of Preferred, or cause any such employee to
terminate the employee's relationship with Preferred without the
prior written approval of Preferred.
c. For a period of five (5) years after the date of this Agreement ,
Preferred or any of its shareholders shall not, directly or
indirectly, alone, or as a partner, officer, director, employee,
stockholder, consultant or agent of any other corporation,
partnership or other business organization, solicit any of the
accounts of PSS or Netplex unless such solicitation is undertaken
on behalf of a business venture which does not compete, directly
or indirectly, with the products or services owned, sold,
manufactured, marketed, provided or developed by PSS and/or
Netplex and its subsidiaries during the three (3) year period
beginning on the date of this Agreement.
d. The parties agree that this Agreement is being entered into by
Netplex in connection with the acquisition of PSS, a wholly owned
subsidiary of Preferred, and that any breach or threatened breach
of the provisions of this Agreement will cause irreparable injury
to PSS and Netplex and
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that money damages will not provide an adequate remedy.
Accordingly, PSS and Netplex shall, in addition to other remedies
provided by law, be entitled to such equitable and injunctive
relief as may be necessary to enforce the provisions of this
agreement against Preferred or any of its shareholders or any
person or entity participating in such breach or threatened
breach. Nothing contained herein shall be construed as prohibiting
PSS and/or Netplex from pursuing any other and additional remedies
available to it, at law or in equity, for such breach or
threatened breach including any recovery of damages from Preferred
and any of its shareholders and the immediate termination of this
Agreement.
e. The provisions of this Section 7 shall not be enforceable against
Preferred if PSS or Netplex has materially breached this
Agreement.
f. Notwithstanding anything herein to the contrary, the provisions of
Sections 7.a and 7.c shall not apply to any government contracting
business conducted by Preferred, whether as a prime contractor to
a governmental agency or unit or as a subcontractor to a
commercial enterprise with respect to any governmental agency or
unit.
8. Representations and Warranties of Preferred, PSS and Robert J. Hisel,
Jr. As an inducement to Netplex to enter into this Agreement, and as a
condition precedent to its purchase of the PSS Stock:
a. Organization and Power. Hisel, Preferred and PSS hereby jointly
and severally represent and warrant to Netplex as of the date
hereof and as of the Closing date that Preferred and PSS are
corporations duly organized, validly existing and in good standing
under the laws of the Commonwealth of Virginia, and they are
qualified to do business and is in good standing in the
jurisdictions specified on the "Schedule 8.a - Qualifications"
annexed hereto, which, except as otherwise disclosed on Schedule
8.a, are the only jurisdictions in which the ownership of
properties or the conduct of business requires it to be so
qualified. Except as otherwise disclosed on Schedule 8.a, PSS has
all requisite power and authority and all material licenses,
permits and other authorizations necessary to own and operate its
properties and to carry on its businesses as now conducted. The
copies of the Articles of Incorporation, By-Laws, minute books,
stock transfer ledgers and other records of corporate proceedings
of PSS which have been previously furnished to Netplex reflect all
amendments made thereto at any time prior to the date of this
Agreement and are correct and complete in all material respects,
and there have been no changes, alteration or additions thereto
that have not been furnished to Netplex prior to the Closing Date.
b. Subsidiaries. Hisel, Preferred and PSS hereby jointly and
severally represent and warrant to Netplex as of the date hereof
and as of the Closing date that other than PSS, Preferred owns no
controlling interest in any corporation, partnership, joint
venture or other entity.
c. Assets and Liabilities Assigned by Preferred to PSS. Hisel and
Preferred hereby jointly and severally represent and warrant to
Netplex as of the date hereof and as of the Closing date that the
assets and liabilities transferred by Preferred to PSS on January
2, 1998 pursuant to the Drop Down Agreement are set forth in
Schedule 8.c attached hereto.
d. Authorization; No Breach. Hisel, Preferred and PSS hereby jointly
and severally represent and warrant to Netplex as of the date
hereof and as of the Closing date that the execution, delivery and
performance by Preferred and PSS of this Agreement and the other
agreements contemplated hereby and the consummation of the
transactions contemplated hereby and thereby have been duly and
validly authorized by all requisite board of directors and
shareholder action, and no other proceedings on the part of
Preferred and PSS are necessary to authorize the execution,
delivery or performance of this Agreement or the other agreements
contemplated hereby. This Agreement and the other agreements
contemplated hereby each constitutes a valid and binding
obligation of Preferred or PSS, enforceable against Preferred
3
<PAGE>
or PSS in accordance with its respective terms. To the best of
their commercially reasonable knowledge, the execution, delivery
and performance of this Agreement by Preferred or PSS and the
consummation of the transactions contemplated hereby and thereby
do not and shall not conflict with or result in any breach of any
of the provisions of or constitute a default under, result in a
violation of, or cause the acceleration of any obligation under
any indenture, mortgage, lease, loan agreement or other agreement
or instrument to which Preferred or PSS is bound or affected, or
any law, statute, rule, regulation, judgment, order or decree to
which Preferred or PSS is subject, except as set forth in Schedule
8.d attached hereto.
e. Financial Condition; Financial Statements; Accounts Receivable.
Hisel, Preferred and PSS hereby jointly and severally represent
and warrant to Netplex as of the date hereof and as of the Closing
date that all of the Preferred financial statements provided to
Netplex are materially true and correct statements of the
financial condition of Preferred with respect to the PSS Business;
there are no material omissions or misstatements in the financial
statements or financial materials provided to Netplex; and the
financial statements, taken as a whole, fairly present the
financial condition and results of operations of Preferred with
respect to the PSS Business as of the dates thereof and for the
periods then ended . To the best of their commercially reasonable
knowledge, Preferred, PSS and Robert J. Hisel, Jr. warrant and
represent that the accounts receivable of Preferred and PSS are
valid, existing and collectible obligations owed to Preferred and
PSS, that the accounts receivable are not subject to any defense,
counterclaim, or set off, and that Preferred and PSS have good and
marketable title to all of their accounts receivable. The current
accounts receivable and financial statements are set forth in
Schedule 8.e attached hereto.
f. Absence of Undisclosed Liabilities. Hisel, Preferred and PSS
hereby jointly and severally represent and warrant to Netplex as
of the date hereof and as of the Closing date that:
1. As of the Closing, PSS shall have no material liabilities or
obligations in excess of $15,000 with respect to any person
or entity whether accrued, absolute, contingent, unliquidated
or otherwise, whether or not known to Preferred and PSS,
whether due or to become due, arising out of transactions
entered into at or prior to the Closing, or any action or
inaction at or prior to the Closing, or any state of facts
existing at or prior to the Closing, regardless of when any
such liability or obligation is asserted, including, without
limitation, taxes with respect to or based upon transactions
or events occurring on or before the Closing, except:
(A) liabilities and obligations under agreements, contracts,
leases or commitments described on the "Schedule 6 -
Contracts" attached hereto (but not liabilities for breaches
thereof), or
(B) liabilities and obligations otherwise expressly disclosed
in this Agreement or the "Schedule 8.f - Liabilities"
attached hereto.
2. Preferred and PSS are not signatory to, and are not in any
manner a guarantor, endorser, assumptor or otherwise
primarily or secondarily liable for or responsible for the
payment of, any notes payable or other obligations other than
those set forth in Schedule 8.f.
3. Provided that an undisclosed liability is not due to the
fraud or misrepresentation by Hisel, Preferred or PSS, in the
event an undisclosed liability described above exceeds
$15,000, but is less than $50,000, then Hisel, Preferred and
PSS shall bear the costs of extinguishing such liability. To
the extent such a liability exceeds $50,000, Hisel, Preferred
and PSS on one hand, and Netplex on the other hand, shall
share equally in the costs of extinguishing the portion of
the liability which exceeds $50,000; provided however, that
Preferred's, PSS's and Hisel's liability hereunder will be
limited to any amounts paid under that certain Earn Out
Agreement dated January 3, 1998 between Netplex and
Preferred.
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<PAGE>
g. No Material Adverse Changes. Hisel, Preferred and PSS hereby
jointly and severally represent and warrant to Netplex as of the
date hereof and as of the Closing date that since December 1,
1997, there has been no material adverse change in the financial
condition, operating results, assets, operations, employee
relations, customer relations or business prospects of Preferred
with respect to the PSS Business.
h. PSS Stock Ownership. Hisel, and Preferred hereby jointly and
severally represent and warrant to Netplex as of the date hereof
and as of the Closing date that Preferred owns and represents 100%
of the PSS Stock which is issued and outstanding, and the PSS
Stock is free and clear of all liens and encumbrances. Other than
as disclosed in Schedule 8.h attached hereto, PSS has outstanding
no stock or securities convertible or exchangeable for any portion
of its stock or containing any profit participation features, nor
any outstanding rights or options to subscribe for or purchase an
equity interest, or any stock or securities convertible into or
exchangeable for an equity interest or any stock appreciation
rights or phantom stock plans. PSS is not subject to any
obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any membership interest or any warrants, options
or other rights to acquire any membership interest. All of the
outstanding PSS Stock is validly issued, fully paid and
nonassessable.
i. Absence of Certain Developments. Hisel and Preferred hereby
jointly and severally represent and warrant to Netplex as of the
date hereof and as of the Closing date that, to their commercially
reasonable knowledge, Preferred and PSS have not since November
30, 1997:
1. borrowed any amount or incurred or become subject to any
material liabilities, except current liabilities incurred in
the ordinary course of business and liabilities under
contracts entered into in the ordinary course of business,
and except for those liabilities disclosed on Schedule 8.f
attached hereto;
2. discharged or satisfied any material lien or encumbrance or
paid any material liability, other than current liabilities
paid in the ordinary course of business;
3. mortgaged, pledged or subjected to any lien, charge or any
other encumbrance, any portion of its assets, except liens
for current property taxes not yet due and payable, and
except for those liabilities disclosed on Schedule 8.f
attached hereto;
4. sold, assigned or transferred any of its assets, except in
the ordinary course of business, or canceled without fair
consideration any material debts or claims owing to or held
by it;
5. sold, assigned, transferred, abandoned or permitted to lapse
any patents, trademarks, trade names, copyrights, trade
secrets or other intangible assets, or disclosed (other than
as required to conduct its business) any material proprietary
confidential information to any person including, but not
limited to, any consultant or client databases;
6. materially compromised, settled or waived any rights with
respect to any accounts or notes;
7. suffered any extraordinary losses or waived any rights of
material value, whether or not in the ordinary course of
business or consistent with past practice;
8. entered into any other material transaction other than in the
ordinary course of business.
j. Tax Matters. Hisel and PSS hereby jointly and severally represent
and warrant to Netplex as of the date hereof and as of the Closing
Date that:
1. PSS has duly filed all federal, state and local tax
information and tax returns (the
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<PAGE>
"Returns") required to be filed by them (all such returns
being accurate and complete in all material respects) and
have duly paid or made provision for the payment of all taxes
and other governmental charges which have been incurred or
are shown to be due on said Returns or are claimed in writing
to be due from PSS or imposed on PSS or its payroll,
properties, assets, income, franchises, licenses, sales or
use, by any federal, state, local or foreign taxing
authorities (collectively, the "Taxes ") on or prior to the
date hereof other than Taxes which are being contested in
good faith and by appropriate proceedings and as to which PSS
has set aside on its books adequate reserves, or which may be
attributable to the transactions contemplated hereby. PSS has
not made or entered into, and holds no asset subject to, a
consent filed pursuant to Section 341(f) of the Code and the
regulations thereunder or a "safe harbor lease" subject to
former Section 168(f)(8) of the Code, as amended before the
Tax Reform Act of 1986 and the regulations thereunder; PSS is
not required to include in income any amount for an
adjustment pursuant to Section 481 of the Code or the
regulations thereunder; PSS is not a party to, or obligated
under, any agreement or other arrangement providing for the
payment of any amount that would be an "excess parachute
payment" under Section 280G of the Code; PSS is not, and at
all times during the last five years has not been, a United
States real property holding corporation within the meaning
of Section 897 of the Code; and no claim has ever been made
by a taxing authority in a jurisdiction where PSS files tax
returns that it is or may be subject to taxes assessed by
such jurisdiction. Neither the Internal Revenue Service
("IRS") nor any state, local or other taxing authority has
examined any federal, State, local or other tax return of PSS
nor is any such authority in the process of so doing, except
as disclosed on the "Schedule 8.j - Tax Matters";
2. PSS has not been required to give any currently effective
waivers extending the statutory period of limitation
applicable to any federal, state or local return or for any
period; and
3. PSS has in effect no power of attorney or authorization to
anyone to represent it with respect to any Taxes. PSS has not
filed any consolidated federal income tax return with an
"affiliated group" (within the meaning of Section 1504 of the
Internal Revenue Code of 1986, as amended (the "Code")),
where PSS was not the common parent of the group. PSS is not
and has not been, a party to any tax allocation agreement or
arrangement pursuant to which it has any contingent or
outstanding liability to anyone. PSS has not filed a consent
under Section 341(f) of the Code. PSS has provided to Netplex
or its representatives complete and correct copies of its
federal, state and local income tax returns filed for the
years 1995 and 1996, and there exists no proposed assessment
against PSS or notice, whether formal or informal, of any
deficiency or claim for additional Tax (including, without
limitation, interest, additions to tax or penalties);
4. All monies required to be withheld from employees of PSS for
income taxes, social security and unemployment insurance
taxes or collected from customers or others as sales, use or
other taxes have been withheld or collected and paid, when
due, to the appropriate governmental authority, or if such
payment is not yet due, an adequate reserve has been
established.
k. Contracts and Commitments. Hisel, Preferred and PSS hereby jointly
and severally represent and warrant to Netplex as of the date
hereof and as of the Closing date that to their commercially
reasonable knowledge, PSS is not a party to any of the following
with respect to the business or property of PSS:
1. agreement or indenture relating to the borrowing of money or
to mortgaging, pledging or otherwise placing a lien on any of
the PSS Stock, unless the same is shown on either the
Schedule 6 or Schedule 8.f attached hereto;
2. guarantee of any obligation for borrowed money or otherwise,
other than endorsements made for collection in the ordinary
course of business;
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3. agreement or commitment with respect to the lending or
investing of funds to or in other persons or entities;
4. joint venture, revenues or fee sharing agreement;
5. lease or agreement under which it is lessee of or holds or
operates any personal property owned by any other party other
than the those certain property leases identified in the
Schedule 6, unless the same is shown on Schedule 6 or
Schedule 8.f attached hereto;
6. contract or group of related contracts with the same party
for the purchase or sale of products or services under which
the undelivered balance of such products and services has a
selling price in excess of $1,000, unless the same is shown
on Schedule 6 or Schedule 8.f attached hereto;
7. other contract or group of related contracts with the same
party continuing over a period of more than six months from
the date or dates thereof, not terminable by it on 30 days'
or less notice without penalties or involving more than
$1,000, unless the same is shown on Schedule 6 or Schedule
8.f attached hereto;
8. contract which prohibits it from freely engaging in business
anywhere in the world, unless the same is shown on Schedule 6
or Schedule 8.f attached hereto;
9. other agreement material to it whether or not entered into in
the ordinary course of business, unless the same is shown on
Schedule 6 or Schedule 8.f attached hereto;
l. To their commercially reasonable knowledge, except as specifically
disclosed in Schedule 6, Hisel and Preferred hereby jointly and
severally represent and warrant to Netplex as of the date hereof
and as of the Closing date that:
1. Preferred or PSS has in all material respects performed all
the obligations required to be performed by it to the date of
this Agreement under any contract, and Preferred or PSS is
not in receipt of any claim of default under any contract,
commitment or other agreement to any third party;
2. no event has occurred which with the passage of time or the
giving of notice would result in a breach or default under
any material commitment, or other agreement to which
Preferred or PSS is a party; and
3. Preferred or PSS is a party to no commitment or other
agreement which is materially adverse to its operations,
financial operating results or business prospects; and
4. no customer or supplier has indicated in writing or orally to
Preferred or PSS that it shall stop or decrease the rate of
business done with Preferred or PSS or that it desires to
renegotiate its contract or current arrangement with
Preferred or PSS. The contracts set forth in Schedule 6 are
valid, binding and enforceable by PSS and Preferred in
accordance with their respective terms and are in full force
and effect.
5. To Preferred and PSS's commercially reasonable knowledge,
Netplex has been supplied with a true and correct copy of all
written contracts which are referred to on the Contract
Schedule, together with all amendments, waivers or other
changes thereto.
m. Proprietary Rights. Hisel, Preferred and PSS hereby jointly and
severally represent and warrant to Netplex as of the date hereof
and as of the Closing date that:
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1. Set forth on the "Schedule 8.m - Proprietary Rights" is a
complete and accurate list and summary description of all
patents, patent applications, trademarks, service marks,
trade names, corporate names and copyrights owned by
Preferred or PSS or used by Preferred or PSS in the conduct
of the Business. Preferred or PSS owns and possesses all
right, title and interest in and to the proprietary rights
necessary to conduct the Business, provided no representation
is made as to unregistered tradenames, trademarks, or product
names. Preferred or PSS has not received any notices of
infringement, misappropriation, invalidity or conflict from
any third party with respect to such proprietary rights,
neither Preferred nor PSS has infringed, misappropriated or
otherwise conflicted with any proprietary rights of any third
parties and, to the best of both Preferred and PSS's
knowledge, Preferred or PSS's proprietary rights have not
been infringed by any third parties, and Preferred and PSS
have taken all steps reasonably necessary to preserve its
legal rights in all of its Proprietary Rights.
2. Except as set forth on Schedule 8.m, Preferred and PSS have
not granted, and to the best of their knowledge, there are
not outstanding, any options, licenses or agreements of any
kind relating to any Proprietary Rights, nor is Preferred or
PSS bound by or a party to any option, license or agreement
of any kind with respect to any of its Proprietary Rights.
Preferred and PSS are not obligated to pay any royalties or
other payments to third parties with respect to the
marketing, sale, distribution, manufacture, license or use of
any Proprietary Rights or any other property or rights.
3. Preferred and PSS are not aware that any employee or
consultant of Preferred or PSS are obligated under any
agreement (including licenses, covenants or commitments of
any nature) or subject to any judgment, decree or order of
any court or administrative agency, or any other restriction
that would interfere with the use of his or best efforts to
carry out his or her duties for PSS or to promote the
interests of PSS or that would conflict with PSS's Business.
The carrying on of PSS's Business by the employees and
contractors of PSS will not, to the best of Preferred and
PSS's knowledge, conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any
of such employees or contractors or Preferred or PSS are now
obligated. At no time during the conception of or reduction
of any of the Proprietary Rights to practice was any
developer, inventor or other contributor to such patents
operating under any grants from any governmental entity or
agency or private source, performing research sponsored by
any governmental entity or agency or private source or
subject to any employment agreement or invention assignment
or nondisclosure agreement or other obligation with any third
party that could adversely affect Preferred or PSS's rights
in the Proprietary Rights.
n. Litigation; Proceedings. Hisel, Preferred and PSS hereby jointly
and severally represent and warrant to Netplex as of the date
hereof and as of the Closing date that except as set forth on the
"Litigation Schedule," there are no actions, suits, proceedings,
orders or investigations pending or threatened against or
affecting the PSS Business at law or in equity, or before or by
any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or
foreign, and to the best of their commercially reasonable
knowledge there is no basis known to Preferred or PSS for any of
the foregoing. No officer, director, employee or agent of
Preferred or PSS has been or is authorized to make or receive, and
to the best of their commercially reasonable knowledge, Preferred
or PSS knows of no such person making or receiving, any bribe,
kickback or other illegal payment at any time. Within the three
years preceding the date hereof, Preferred or PSS has received no
opinion or legal advice in writing to the effect that the PSS
Business is materially exposed from a legal standpoint to any
liability or disadvantage which may be material to the PSS
Business as previously or presently conducted.
o. Brokerage. Hisel, Preferred and PSS hereby jointly and severally
represent and warrant to Netplex as of the date hereof and as of
the Closing date that there are no claims for brokerage
commissions, finders fees or similar compensation in connection
with the transactions contemplated by this Agreement based on any
arrangement or agreement made by or on behalf of Preferred or PSS.
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<PAGE>
p. Employees. Hisel, Preferred and PSS hereby jointly and severally
represent and warrant to Netplex as of the date hereof and as of
the Closing date that to the best of Preferred or PSS's
commercially reasonable knowledge, no key employee nor group of
Preferred or PSS's employees has any present plans to terminate
employment with Preferred or PSS. To the best of their
commercially reasonable knowledge, Preferred or PSS has complied
in all material respects with all applicable laws relating to the
employment of labor, including provisions thereof relating to
wages, hours, equal opportunity, collective bargaining and the
payment of social security and other taxes. Preferred or PSS has
no material labor relations problems, and there has been no union
organization efforts by the employees of Preferred or PSS.
q. Employee Benefit Plans. Hisel, Preferred and PSS hereby jointly
and severally represent and warrant to Netplex as of the date
hereof and as of the Closing date that:
1. The "Employee Benefits Schedule" is a true and correct
schedule of any employee benefit plan, as amended, within the
meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), which Preferred
or PSS maintains or has ever maintained, to which Preferred
or PSS contributes or has ever contributed, or under which
any employee or former employee, officer or former officer,
director or former director of Preferred or PSS is covered or
has benefit rights, and each other arrangement, program or
plan pursuant to which any benefit is or shall be provided to
an employee, former employee or retired employee whether
formal or informal, including, without limitation, those
providing any form of medical, health and dental insurance,
severance pay and benefits continuation, relocation
assistance, vacation pay, tuition aid and matching gifts for
charitable contributions to educational or cultural
institutions (collectively, the "Benefit Plans" or,
individually, a "Benefit Plan."). Except as set forth on the
"Employee Benefits Schedule," Preferred or PSS neither
maintains nor has entered into any Benefit Plan or other
document, plan or agreement which contains any change in
control provisions which would cause an increase or
acceleration of benefits or benefit entitlements to employees
or former employees of Preferred or PSS or their respective
beneficiaries, or any provisions which would cause an
increase in liability of Subsidiary or to Netplex as a result
of the transactions contemplated by this Agreement or any
related action thereafter. Each of such plans that is an
employee pension benefit plan within the meaning of Section
3(2) of ERISA that is intended to be a qualified plan under
Section 401(a) of the Code has been amended to comply in all
material respects with current law as required and each such
plan either has obtained a favorable determination letter
with respect to such amendment or the remedial amendment
period for such amendment under Section 401(b) of the Code
has not expired. Preferred and PSS have not participated in
any conduct that could result in the imposition upon
Preferred, PSS or Netplex of a material civil liability under
section 502(i) of ERISA. None of the employee benefit plans
provide for retiree medical or retiree life insurance
benefits for former employees of Preferred or PSS.
2. Except as set forth in the Schedule 8.q, all accrued
contributions and other payments to be made by Preferred or
PSS to any Benefit Plan through the date of the latest
balance sheet have been made or reserves adequate for such
purposes as of the date of the latest balance sheet have been
set aside therefor and reflected on the latest balance sheet.
Preferred or PSS is not in material default in performing any
of its contractual obligations under any of the Benefit Plans
or any related trust agreement or insurance contract, and
there are no material outstanding liabilities of any Benefit
Plan other than liabilities for benefits to be paid to
participants in such Benefit Plan.
3. There is no pending litigation or threatened litigation or
pending claim (other than benefit claims made in the ordinary
course) by or on behalf of or against any of the Benefit
Plans (or with respect to the administration of any of the
Benefit Plans) now or heretofore maintained by Preferred or
PSS which allege violations of applicable state or federal
law.
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<PAGE>
4. Each Benefit Plan is and has been in compliance in all
material respects with, and each such Plan is and has been
materially operated in accordance with, the applicable laws;
rules and regulations governing such Plan, including, without
limitation, the rules and regulations promulgated by the
Department of Labor, the Pension Benefit Guaranty Corporation
("PBGC") and the IRS under ERISA, the Code or any other
applicable law.
5. Neither Preferred or PSS nor any trade or business (whether
or not incorporated) that is or has ever been under common
control, or that is or has ever been treated as a single
employer, the Preferred or PSS under Section 414(b), (c), (m)
or (o) of the Code (each an "ERISA Affiliate") maintains
retiree life or retiree health insurance plans that are
"welfare benefit plans" within the meaning of Section 3 of
ERISA and that provide for continuing benefits or coverage
for any participant or any beneficiary of any participant
except as may be required under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA") or at
the sole expense of the participant or any participant's
beneficiary. Each of Preferred, PSS and any ERISA affiliate
that maintains a "group health plan" within the meaning of
Section 5000(b)(1) of the Code has complied in all respects
with the notice and continuation requirements of Sections
4980B of the Code, COBRA, Part 6 of Subtitle I of ERISA and
the regulations thereunder.
6. Preferred or PSS does not maintain nor has it ever
maintained, does not contribute nor has it ever contributed
to nor is it nor has it ever been obligated to contribute to,
any Benefit Plan subject to Title IV of ERISA. No condition
exists that presents a material risk to Preferred or PSS of
incurring a liability under Title IV of ERISA with respect to
Benefit Plans, other than liability for premiums due to the
PBGC. The PBGC has not instituted proceedings to terminate
any of the ERISA Plans and no condition known to Preferred or
PSS or Preferred or PSS exists that presents a material risk
that such proceedings shall be instituted. All reporting and
disclosure requirements of ERISA and the Code have been
satisfied in all material respects with respect to each of
the Benefit Plans. Preferred or PSS is not required to
contribute to an employee benefit plan that is a
"multi-employer plan" within the meaning of Section 3(3) of
ERISA nor has been so required during the five year period
ending on the Closing Date.
7. Preferred or PSS does not maintain nor has it ever
maintained, does not contribute to nor has it ever
contributed to nor is it nor has it ever been obligated to
contribute to, any Benefit Plan subject to the requirements
of Section 412 of the Code. No prohibited transaction has
occurred with respect to any Benefit Plan that would result,
directly or indirectly, in the imposition of any excise tax
under Section 495 of the Code; nor has any reportable event
under Section 4043 of ERISA occurred with respect to any
Benefit Plan.
r. Compliance with Laws; Permits; Certain Operations. Hisel,
Preferred and PSS hereby jointly and severally represent and
warrant to Netplex as of the date hereof and as of the Closing
date that Preferred or PSS and its officers, directors, agents and
employees have to the best of Preferred or PSS's commercially
reasonable knowledge complied in all material respects with all
applicable laws and regulations of foreign, federal, state and
local governments and all agencies thereof to which Preferred or
PSS may be subject, and no claims have been filed against
Preferred or PSS alleging a violation of any such law or
regulation, except as set forth on the Schedule 8.r. In
particular, but without limiting the generality of the foregoing,
Preferred or PSS has not materially violated, or received a notice
or charge asserting any violation of, the Immigration Reform and
Control Act of 1986, the Occupational Safety and Health Act of
1970, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, the Resource Conservation and Recovery Act
of 1976, the Toxic Substances Control Act of 1976 or any other
state or federal acts (including rules and regulations thereunder)
regulating or otherwise affecting the employment of aliens,
employee health and safety or the environment.
s. Disclosure. Hisel, Preferred and PSS hereby jointly and severally
represent and warrant to Netplex as of the date hereof and as of
the Closing date that the schedules, attachments or exhibits to
this
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<PAGE>
Agreement do not contain any untrue statement of a material fact
or omit a material fact necessary to make the statements contained
herein or therein, in light of the circumstances in which they
were made, not misleading. To the best of their commercially
reasonable knowledge, there is no material fact which has not been
disclosed in writing to Netplex of which any officer, director or
key employee of Preferred or PSS is aware and which materially
adversely affects or could reasonably be anticipated to materially
adversely affect the PSS's Business.
t. Notification. Hisel, Preferred and PSS hereby jointly and
severally represent and warrant to Netplex as of the date hereof
and as of the Closing date that from the date hereof to the
Closing, Hisel, Preferred or PSS shall promptly inform Netplex in
writing of any material variances from the representations and
warranties contained in this Section 8.
u. Closing Date. Hisel, Preferred and PSS hereby jointly and
severally represent and warrant to Netplex as of the date hereof
and as of the Closing date that all of the representations and
warranties in this Agreement and all information delivered in any
schedule, attachment or exhibit hereto or in any certificate
delivered to Netplex are true and correct in all material respects
on the date of this Agreement and shall be materially true and
correct in all respects on the Closing Date.
9. Representations and Warranties of Netplex. Netplex hereby represents
and warrants to Preferred and Hisel as of the date hereof and as of the
Closing Date that:
a. Corporate Organization and Power. Netplex is a corporation duly
organized and validly existing under the laws of the State of New
York with full corporate power and authority to enter into this
Agreement and the other agreements contemplated hereby and perform
its obligations hereunder and thereunder. Netplex is qualified to
do business and is in good standing in the jurisdictions in which
the ownership of properties or the conduct of business requires it
to be so qualified. Netplex has all requisite power and authority
and all material licenses, permits and other authorizations
necessary to own and operate its properties and to carry on its
businesses as now conducted.
b. Authorization. The execution, delivery and performance by Netplex
of this Agreement and the other agreements contemplated hereby and
the consummation of the transactions contemplated hereby and
thereby have been duly and validly authorized by all requisite
corporate action, and no other corporate proceedings on the part
of Netplex is necessary to authorize the execution, delivery or
performance of this Agreement or the other agreements contemplated
hereby. This Agreement and the other agreements contemplated
hereby each constitute a valid and binding obligation of Netplex,
enforceable against Netplex in accordance with their respective
terms.
c. No Violation. To the best of its commercially reasonable
knowledge, Netplex is not subject to or obligated under its
certificate of incorporation or by laws, any applicable law, rule
or regulation of any governmental authority, or any agreement or
instrument, or any license, franchise or permit, or subject to any
order, writ, injunction or decree which would be breached or
violated by its execution, delivery or performance of this
Agreement or the other agreements contemplated hereby. Netplex
shall comply with all applicable laws, and with all applicable
rules and regulations of all governmental authorities in
connection with its execution, delivery and performance of this
Agreement and the other agreements contemplated hereby and the
transactions contemplated hereby and thereby.
d. Governmental Authorities and Consents. After the Closing, Netplex
will submit any notice, report or other filing with any
governmental authority in connection with the execution or
delivery by it of this Agreement or the consummation of the
transactions contemplated hereby. No consent, approval or
authorization of any governmental or regulatory authority or any
other party or person is required to be obtained by Netplex in
connection with its execution, delivery and performance of this
Agreement or the transactions contemplated hereby.
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<PAGE>
e. Brokerage. There are no claims for brokerage commissions, finders'
fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of Netplex.
f. Notification. From the date hereof to the Closing, Netplex shall
promptly inform PSS in writing of any material variances from the
representations and warranties contained in this Section 9.
g. Closing Date. All of the representations and warranties contained
in this Section 9 and elsewhere in this Agreement and all
information delivered in any schedule, attachment or exhibit
hereto or in any certificate delivered to PSS are true and correct
in all material respects on the date of this Agreement and shall
be true and correct in all material respects on the Closing Date.
h. Litigation; Proceedings. Except as set forth in Netplex's public
filings and as have been disclosed to Preferred, there are no
actions, suits, proceedings, orders or investigations pending or
threatened against or affecting Netplex at law or in equity, or
before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which would restrict Netplex's performance of
this Agreement and to the best of Netplex's commercially
reasonable knowledge, there is no basis known to Netplex for any
of the foregoing. No officer, director, employee or agent of
Netplex has been or is authorized to make or receive, and to the
best of Netplex's commercially reasonable knowledge, Netplex knows
of no such person making or receiving, any bribe, kickback or
other illegal payment at any time. Within the three years
preceding the date hereof, Netplex has received no opinion or
legal advice in writing to the effect that Netplex is materially
exposed from a legal standpoint to any liability or disadvantage
which may be material to its business as previously or presently
conducted.
i. Compliance with Laws; Permits; Certain Operations. Netplex and its
officers, directors, agents and employees have to the best of
Netplex's commercially reasonable knowledge complied in all
material respects with all applicable laws and regulations of
foreign, federal, state and local governments and all agencies
thereof to which Netplex may be subject, and no claims have been
filed against Netplex alleging a violation of any such law or
regulation, except as set forth on the "Schedule 9.i -
Compliance." In particular, but without limiting the generality of
the foregoing, to the best of its commercially reasonable
knowledge, Netplex has not materially violated, or received a
notice or charge asserting any violation of, the Immigration
Reform and Control Act of 1986, the Occupational Safety and Health
Act of 1970, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, the Resource Conservation
and Recovery Act of 1976, the Toxic Substances Control Act of 1976
or any other state or federal acts (including rules and
regulations thereunder) regulating or otherwise affecting the
employment of aliens, employee health and safety or the
environment.
j. SEC Reports. Since January 1, 1996, Netplex has filed all forms,
financial statements, documents and reports with the U.S.
Securities and Exchange Commission (the "SEC") required to filed
by it pursuant to Federal securities laws and the SEC rules and
regulations thereunder (the "SEC Reports"). The SEC Reports were
prepared in all material respects in accordance with the
requirements of applicable law, including the Securities Act and
the Exchange Act and the rules and regulations thereunder and did
not at the time they were filed contain any untrue statement of a
material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances
under which they were made, not misleading. Netplex further
represents that the capital structure and outstanding shares of
Netplex as set forth in the SEC Reports are accurate as of the
dates of the SEC Reports. Netplex further represents that it has
disclosed to Preferred the changes, if any, which have occurred in
the capital structure and outstanding shares of Netplex since the
date of its most recent SEC Report.
12
<PAGE>
10. Conditions to Closing.
a. Netplex's obligation to complete the Closing shall be subject to,
among other things, the following conditions having been fulfilled
to the satisfaction of Netplex prior to the Closing Date:
1. there shall have been no material adverse change in the PSS
Business from the Contract Date to the Closing Date;
2. receipt of a certificate signed by Hisel, individually and as
an officer of Preferred, to the effect that the
representations and warranties contained in this Agreement
are true, complete and correct as though they had been
repeated at and as of the Closing and that nothing shall have
come to his attention that would make any representation or
warranty materially incorrect or incomplete.
b. Preferred and PSS's obligation to complete the Closing shall be
subject to, among other things, the following conditions having
been fulfilled to the satisfaction of Preferred and PSS prior to
the Closing Date:
1. there shall have been no material adverse change in the
business or affairs of Netplex from the Contract Date to the
Closing Date;
2. receipt of a certificate signed by Netplex to the effect that
the representations and warranties contained in this
Agreement are true, complete and correct as though they had
been repeated at and as of the Closing and that nothing shall
have come to their attention that would make any
representation or warranty materially incorrect or
incomplete.
c. The parties' obligation to complete the Closing shall be subject
to, among other things, the following conditions having been
fulfilled to the satisfaction of the parties prior to the Closing:
1. approval of this Agreement, and all agreements and actions
contemplated thereby, including without limitation the
employment agreements and the Acquisition Transaction by the
boards of directors of Preferred, PSS and Netplex; and
2. all necessary regulatory consents and approvals to the
Closing, if any, shall have been obtained.
11. Indemnification of Netplex. From and after the Closing, Preferred, PSS
and/or Hisel, with respect to the particular representation or warranty
made by it or him, agree to indemnify in full Netplex and their
officers, directors, employees, agents and stockholders (collectively,
"Netplex Indemnified Parties") and hold them harmless against any loss,
deficiency, damage, expense or cost, including reasonable legal
expenses, (collectively, "Losses") which any of the Netplex Indemnified
Parties may suffer, sustain or become subject to, as a result of:
a. any material misrepresentation in any of the representations or
breach of any of the warranties of Preferred, PSS and Hisel
contained in Section 8 of this Agreement or in any of the
schedules or certificates delivered by Preferred, PSS, and Hisel
pursuant to this Agreement;
b. any material breach of, or failure to perform, any agreement or
covenant of Preferred, PSS or Hisel contained in this Agreement;
c. any liabilities, absolute or contingent, known or unknown to
employees
13
<PAGE>
or former employees under any employee benefit plan of Preferred
or PSS, other than for vacation, sick and personal leave accrued
to the current employees of Preferred or PSS, if the same are
unfunded; and
d. any liabilities, absolute or contingent, known or unknown,
relating to any litigation now pending or threatened against
Preferred or PSS.
The total amount that the Netplex Indemnified Parties may be entitled
to receive under this Section 11 shall not exceed the amounts paid as
consideration hereunder or paid under the Earn Out Agreement between
Preferred and Netplex. Any claim for indemnity by the Netplex
Indemnified Parties shall be barred unless bona fide notice thereof is
given to the parties to be charged within fifteen months after the
Closing Date. In addition, Netplex agrees that it will first proceed
against any consideration paid or payable under the Earn Out Agreement,
and to the extent such consideration is insufficient, it will proceed
against the cash consideration paid hereunder. Netplex also agrees that
its ability to proceed against such cash consideration shall be limited
by the following schedule: (i) if Netplex notifies Preferred of a claim
within six months of the Closing Date, then Netplex will be able to
proceed against all of such cash consideration; (ii) if Netplex
notifies Preferred of a claim within six to nine months of the Closing
Date, then Netplex will be able to proceed only against 75% of such
cash consideration; (iii) if Netplex notifies Preferred of a claim
within nine to twelve months of the Closing Date, then Netplex will be
able to proceed only against 50% of such cash consideration; and (iv)
if Netplex notifies Preferred of a claim within twelve to fifteen
months after the Closing Date, then Netplex will be able to proceed
only against 25% of such cash consideration.
12. Indemnification of Preferred and Hisel. From and after the Closing,
Netplex agrees to indemnify in full Hisel and Preferred and their
officers, directors, employees, agents and members (collectively,
"Preferred Indemnified Parties") and hold them harmless against any
loss, deficiency, damage, expense or cost (including reasonable legal
expenses) (collectively, "Losses") which any of the Preferred
Indemnified Parties may suffer, sustain or become subject to, as a
result of:
a. any material misrepresentation in any of the representations or
breach of any of the warranties of Netplex contained in Article 10
of this Agreement or in the certificate delivered by Netplex
pursuant to this Agreement;
b. any material breach of, or failure to perform, any agreement or
covenant of Netplex contained in this Agreement; and
c. any liability of PSS of any nature arising out of any occurrence
after the Closing.
The total amount that the Preferred Indemnified Parties may be entitled to
receive under this Section 12 shall not exceed $750,000. Any claim for indemnity
by the Preferred Indemnified Parties shall be barred unless bona fide notice
thereof is given to the parties to be charged within fifteen months after the
Closing Date.
13. Exhibits and Schedules. The Exhibits and Schedules to this Agreement
are a material part of this Agreement.
14. Delivery of Schedules. The parties hereto acknowledge that as of the
date of execution of this Agreement, Preferred, PSS or Hisel have not
delivered to Netplex all of the schedules called for in this Agreement
(the "Schedules"). Within five (5) days after the execution of this
Agreement (the "Delivery Period"), Preferred, PSS or Hisel shall
deliver the Schedules to Netplex, and Netplex shall have five (5) days
thereafter (the "Review Period") to review the Schedules. If: (a)
during the Review Period, Netplex shall notify Preferred, PSS and Hisel
that the Schedules are not acceptable (in Netplex's sole discretion),
or (b) Preferred, PSS and Hisel shall fail to meet the Delivery Period,
then this Agreement shall immediately terminate without liability to
any party thereto.
15. Expenses. Each of Preferred, PSS, Robert J. Hisel, Jr., and Netplex
shall be liable and responsible for the respective expenses incurred by
each in connection with the transactions contemplated by this
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<PAGE>
Agreement, including the cost of evaluations, investigations,
appraisals, bank fees, closing costs and professional fees and
expenses, including fees of counsel and accountants.
16. Governing Law. This agreement and the respective rights, duties and
obligations of the parties hereunder shall be governed and construed in
accordance with the laws of the Commonwealth of Virginia without giving
effect to principles of conflicts of law thereunder.
17. Counterparts; Facsimile Signatures. This Agreement may be executed by
the parties hereto in counterparts, each of which shall be deemed to be
original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
Any facsimile signatures received by a party to this Agreement shall be
accepted as the original signatures of the party executing the document
received by facsimile.
18. Further Documentation. The parties agree to execute such other
documents as may be reasonably necessary to consummate the transactions
contemplated by this Agreement.
19. Disclosures. Any information disclosed on any schedule to this
Agreement shall be deemed a disclosure in all other schedules.
20. Notices. All notices, requests, demands and other communications
hereunder must be in writing and shall be deemed to have been duly
given upon receipt if delivered by hand, sent by telecopier or courier,
or three (3) days after such communication is mailed within the
continental United States by first class certified mail, return receipt
requested, postage prepaid, to the other party, in each case addressed
as follows:
a. if to PSS or Netplex, to President, The Netplex Group, Inc., 8260
Greensboro Drive, Fifth Floor, McLean, Virginia 22102, facsimile
number (703) 356-5105;
b. if to Preferred, to President, Preferred Systems Solutions, Inc.,
11180 Sunrise Valley Drive, Reston, Virginia 20191, with a copy to
Max E. Miller, Esq., Reed Smith Shaw & McClay LLP, 1301 K Street,
NW, Washington, DC 20005, facsimile number (202) 214-4299; and
c. if to Robert J. Hisel, Jr.; at 11309 Winterpointe Circle, Reston,
Virginia 20194, with a copy to Max E. Miller, Esq., Reed Smith
Shaw & McClay LLP, 1301 K Street, NW, Washington, DC 20005,
facsimile number (202) 214-4299.
d. Addresses may be changed by written notice sent to the other party
at the last recorded address of that party.
21. No Waiver. The failure by either party to this Agreement at any time to
require performance or compliance by the other of any of its
obligations or agreements shall in no way waive or otherwise affect the
right to require such performance or compliance at any time thereafter.
SIGNATURE PAGE FOLLOWS
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<PAGE>
WHEREFORE, the parties hereto have executed this Agreement on
January 20, 1998.
The Netplex Group, Inc. Preferred Systems Solutions, Inc.
/S/ Gene F. Dano /s/ Robert J. Hisel, Jr.
- ------------------------- ----------------------------------
Gene F. Zaino Robert J. Hisel, Jr.
President President
The PSS Group, Inc.
/s/ Robert J. Hisel, Jr. /s/ Robert J. Hisel, Jr.
- -------------------------- --------------------------
Robert J. Hisel, Jr. Robert J. Hisel, Jr., Individually
Managing Director
16
EXHIBIT A
to Securities
Purchase
Agreement
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES
LAWS UNLESS OFFERED, SOLD OR TRANSFERRED UNDER AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.
PREPAID COMMON STOCK PURCHASE WARRANT
April __, 1998 Right to Purchase $_________ of
Common Stock, par value $.001 per share
FOR VALUE RECEIVED, THE NETPLEX GROUP, INC., a corporation
organized under the laws of the State of New York (hereinafter called the
"Corporation") hereby promises to issue to _______________ or its registered
assigns (the "Holder"), at any time or from time to time upon its receipt of a
Notice of Exercise (as defined in Article I.C below), up to
_________________________ Dollars ($________) (the "Prepaid Amount") of the
Corporation's common stock, par value $.001 per share (the "Common Stock"), in
the manner provided in Article II hereof. This Warrant is being issued by the
Corporation along with similar prepaid common stock purchase warrants (the
"Other Prepaid Warrants" and, together with this Warrant, the "Prepaid
Warrants") pursuant to that certain Securities Purchase Agreement, dated as of
March 31, 1998, by and among the Corporation, the Holder and the other parties
named therein (the "Securities Purchase Agreement").
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ARTICLE I
CERTAIN DEFINITIONS
For purposes hereof, the following terms shall have the following
meanings:
A. "Closing Bid Price" means, for any security as of any date, the
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Corporation and reasonably acceptable to holders of a majority
of the aggregate Prepaid Amount represented by the then outstanding Prepaid
Warrants ("Majority Holders") if Bloomberg Financial Markets is not then
reporting closing bid prices of such security (collectively, "Bloomberg"), or if
the foregoing does not apply, the last reported sale price of such security in
the over-the-counter market on the electronic bulletin board for such security
as reported by Bloomberg, or, if no sale price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc., in each
case for such date or, if such date was not a trading date for such security, on
the next preceding date which was a trading date. If the Closing Bid Price
cannot be calculated for such security as of either of such dates on any of the
foregoing bases, the Closing Bid Price of such security on such date shall be
the fair market value as reasonably determined by an investment banking firm
selected by the Corporation and reasonably acceptable to the Majority Holders,
with the costs of such appraisal to be borne by the Corporation.
B. "Exercise Percentage" shall initially have the meaning set forth
below during each of the periods set forth below. In the event that the
Corporation fails to obtain the Stockholder Approvals contemplated by Section
4(l) of the Securities Purchase Agreement on or before July 31, 1998, the
Exercise Percentage in effect during each of the periods set forth below shall
be permanently reduced by ten percent (10%). The Exercise Percentage also shall
be subject to adjustment as provided herein.
If the Exercise Date is: Then the Exercise Percentage is:
Prior to the 91st day following
the First Closing Date 100%
On or after the 91st day following
the First Closing Date and before
the 151st day following the First
Closing Date 85%
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On or after the 151st day following
the First Closing Date and before
the 211th day following the First
Closing Date 75%
On or after the 211th day following
the First Closing Date 65%
C. "Exercise Amount" means the portion of the Prepaid Amount of this
Warrant being exercised and any Exercise Default Payments payable with respect
thereto, each as specified in the notice of exercise in the form attached hereto
(the "Notice of Exercise").
D. "Exercise Date" means, for any Exercise (as defined below), the date
specified in the Notice of Exercise so long as the copy of the Notice of
Exercise is faxed (or delivered by other means resulting in notice) to the
Corporation at or before 11:59 p.m., New York City time, on the Exercise Date
indicated in the Notice of Exercise; provided, however, that if the Notice of
Exercise is not so faxed or otherwise delivered before such time, then the
Exercise Date shall be the date the holder faxes or otherwise delivers the
Notice of Exercise to the Corporation.
E. "Exercise Price" means, with respect to any Exercise Date, the lower
of the Fixed Exercise Price and the Variable Exercise Price, each in effect as
of such date and subject to adjustment as provided herein.
F. "First Closing Date" means the date of the First Closing under
Securities Purchase Agreement.
G. "Fixed Exercise Price" means $1.47 (average of the Closing Bid
Prices for the Common Stock during the five (5) consecutive trading day period
ending on the trading day immediately preceding the date of issuance), and shall
be subject to adjustment as provided herein.
H. "Variable Exercise Price" means, as of any date of determination,
the amount obtained by multiplying the Exercise Percentage then in effect by the
average of the five (5) lowest Closing Bid Prices for the Common Stock during
the twenty (20) consecutive trading day period ending on the trading day
immediately preceding such date of determination (subject to equitable
adjustment for any stock splits, stock dividends, reclassifications or similar
events during such twenty (20) trading day period), and shall be subject to
adjustment as provided herein.
I. "business day" and "trading day" means any day on which the New York
Stock Exchange is open for trading.
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ARTICLE II
EXERCISE
A. Exercise by the Holder. Subject to the limitations on exercise
contained in Paragraph C of this Article II, the Holder may, at any time and
from time to time, exercise all or any part of the outstanding Prepaid Amount of
this Warrant in accordance with the procedures set forth in Paragraph B of this
Article II for a number of fully paid and nonassessable shares of Common Stock
determined in accordance with the following formula:
Exercise Amount
---------------
Exercise Price
B. Mechanics of Exercise. In order to exercise this Warrant, Holder
shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice of
Exercise to the Corporation and (y) surrender or cause to be surrendered this
Warrant along with a copy of the Notice of Exercise as soon as practicable
thereafter to the Corporation. Upon receipt by the Corporation of a facsimile
copy of a Notice of Exercise from Holder, the Corporation shall immediately
send, via facsimile, a confirmation to Holder stating that the Notice of
Exercise has been received, the date upon which the Corporation expects to
deliver the Common Stock issuable upon such exercise and the name and telephone
number of a contact person at the Corporation regarding the exercise. The
Corporation shall not be obligated to issue shares of Common Stock upon an
exercise hereof unless either this Warrant is delivered to the Corporation as
provided above, or Holder notifies the Corporation that this Warrant has been
lost, stolen or destroyed (subject to the requirements of Article VIII.G).
(i) Delivery of Common Stock Upon Exercise. The Corporation
shall, on or before the later of (a) the third (3rd) business day following the
Exercise Date and (b) the business day following the date of the Corporation's
receipt of this Warrant (or, if this Warrant is lost, stolen or destroyed, the
date on which indemnity pursuant to Article VIII.G is provided) (the "Delivery
Period"), issue and deliver to the Holder or its nominee (x) that number of
shares of Common Stock issuable upon exercise of the portion of this Warrant
being exercised and (y) a new Warrant in the form hereof representing the
balance of the Prepaid Amount hereof not being exercised, if any. If the
Corporation's transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer program, and so long as the
certificates therefor are not required to bear a legend, the Corporation shall
cause its transfer agent to electronically transmit the Common Stock issuable
upon exercise to the Holder by crediting the account of Holder or its nominee
with DTC through its Deposit Withdrawal Agent Commission system ("DTC
Transfer"). If the aforementioned conditions to a DTC Transfer are not
satisfied, the Corporation shall deliver to Holder physical certificates
representing the Common Stock issuable upon such exercise. Further, Holder may
instruct the Corporation to deliver to Holder physical certificates representing
the Common Stock issuable upon such exercise in lieu of delivering such shares
by way of DTC Transfer.
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(ii) Taxes. The Corporation shall pay any and all taxes which
may be imposed upon it with respect to the issuance and delivery of the shares
of Common Stock upon the exercise of this Warrant.
(iii) No Fractional Shares. If any exercise of this Warrant
would result in the issuance of a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon exercise of this Warrant shall be the nearest whole number of
shares.
(iv) Exercise Disputes. In the case of any dispute with
respect to an exercise of this Warrant, the Corporation shall promptly issue
such number of shares of Common Stock as are not disputed in accordance with
subparagraph (i) above. The Corporation and the Holder shall seek to resolve any
such dispute in good faith. If such dispute involves the calculation of the
Exercise Price, the Corporation shall immediately submit the disputed
calculations to KPMG Peat Marwick or such other independent outside accountant
of national reputation selected by the Company via facsimile within two (2)
business days of receipt of the Notice of Exercise. The accountant, at the
Corporation's sole expense (except that if the Corporation's calculation is
correct, the Holder shall bear such expense), shall audit the calculations and
notify the Corporation and Holder of the results no later than two (2) business
days from the date it receives the disputed calculations. The accountant's
calculation shall be deemed conclusive, absent manifest error. The Corporation
shall then issue the appropriate number of shares of Common Stock in accordance
with subparagraph (i) above.
C. Limitations on Exercise. The exercise of this Warrant shall be
subject to the following limitations (each of which limitations shall be applied
independently):
(i) Cap Amount. Unless permitted by the applicable rules and
regulations of the principal securities market on which the Common Stock is
listed or traded, in no event shall the total number of shares of Common Stock
issued upon exercise of the Prepaid Warrants exceed the maximum number of shares
of Common Stock that the Corporation can so issue pursuant to Rules
4310(c)(25)(H) or 4460(i) of the National Association of Securities Dealers
("NASD") (or any successor rules) (the "Cap Amount") which, as of the First
Closing Date, shall be 1,566,000 shares (19.99% of the total shares outstanding
on the First Closing Date less the maximum number of shares issuable upon the
exercise of all Incentive Warrants (as such term is defined in the Securities
Purchase Agreement) issued and/or issuable pursuant to the Securities Purchase
Agreement and all warrants issued and/or issuable to The Zanett Securities
Corporation in connection with the transactions contemplated by the Securities
Purchase Agreement). The Cap Amount shall be allocated pro-rata to the holders
of the Prepaid Warrants as provided in Article VIII.H. In the event the
Corporation is prohibited from issuing shares of Common Stock as a result of the
operation of this subparagraph (i), the Corporation shall comply with Article V.
(ii) No Five Percent Holders. Unless Holder delivers a waiver
in accordance with the last sentence of this subparagraph (ii), in no event
shall Holder be entitled to receive shares of
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<PAGE>
Common Stock upon an exercise of this Warrant to the extent that the sum of (x)
the number of shares of Common Stock beneficially owned by Holder and its
affiliates (exclusive of shares issuable upon exercise of the unexercised
portion of any Prepaid Warrants or the unexercised or unconverted portion of any
other securities of the Corporation (including, without limitation, the
Incentive Warrants (as defined in the Securities Purchase Agreement) issued by
the Corporation pursuant to the Securities Purchase Agreement) subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (y) the number of shares of Common Stock issuable upon the exercise
of the portion of this Warrant with respect to which the determination of this
subparagraph is being made, would result in beneficial ownership by Holder and
its affiliates of more than 4.99% of the then outstanding shares of Common
Stock. For purposes of this subparagraph, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13 D-G thereunder, except as otherwise provided
in clause (x) above. Except as provided in the immediately succeeding sentence,
the restriction contained in this subparagraph (ii) shall not be altered,
amended, deleted or changed in any manner whatsoever unless the holders of a
majority of the outstanding shares of Common Stock and Holder shall approve such
alteration, amendment, deletion or change. Notwithstanding the foregoing, Holder
may waive the restriction set forth in this subparagraph (ii) by written notice
to the Corporation upon not less than sixty-one (61) days prior notice (with
such waiver taking effect only upon the expiration of such sixty-one (61) day
period).
ARTICLE III
RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. On the First Closing Date, the Corporation shall
have reserved 3,300,732 shares of the authorized but unissued shares of Common
Stock for issuance upon the full exercise of all Prepaid Warrants issued or
issuable pursuant to the Securities Purchase Agreement (the "Reserved Amount").
Upon receipt of the Stockholder Approvals contemplated by Section 4(l) of the
Securities Purchase Agreement, the Reserved Amount shall be increased to not
less than 8,000,000 shares (200% of number of shares which would be issuable if
all Prepaid Warrants issued or issuable pursuant to the Securities Purchase
Agreement are exercised in their entirety on the First Closing Date based on the
lowest Exercise Percentage) of the authorized but unissued shares of Common
Stock and thereafter the number of authorized but unissued shares of Common
Stock so reserved shall not be decreased and shall at all times be sufficient to
provide for the full exercise of all Prepaid Warrants issued or issuable
pursuant to the Securities Purchase Agreement at the then current Exercise
Price. The Reserved Amount shall be allocated to the holders of Prepaid Warrants
as provided in Article VIII.H.
B. Increases to Reserved Amount. If, at any time after July 31, 1998,
the Reserved Amount for any three (3) consecutive trading days (the last of such
three (3) trading days being the "Authorization Trigger Date") shall be less
than 135% of the number of shares of Common Stock issuable upon the full
exercise of all Prepaid Warrants issued or issuable pursuant to the Securities
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<PAGE>
Purchase Agreement, the Corporation shall immediately notify the holders of
Prepaid Warrants of such occurrence and shall take immediate action (including,
if necessary, seeking stockholder approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon the full exercise of all
Prepaid Warrants issued or issuable pursuant to the Securities Purchase
Agreement. In the event the Corporation fails to so increase the Reserved Amount
within ninety (90) days after an Authorization Trigger Date, and thereafter
Holder is unable to exercise all or any portion of the outstanding Prepaid
Amount of this Warrant because the Corporation does not have a sufficient number
of shares of Common Stock authorized and reserved for issuance upon exercise
hereof, Holder shall thereafter have the option, exercisable at any time by
delivery of a Default Notice (as defined in Article VI.C) to the Corporation, to
require the Corporation to pay to Holder an amount in cash equal to the Default
Amount (as defined in Article VI.B). Upon payment by the Corporation of the
Default Amount, this Warrant shall be null and void. If the Corporation fails to
deliver the Default Amount to Holder within five (5) business days after its
receipt of such Default Notice, then Holder shall be entitled to the remedies
provided in Article VI.C.
ARTICLE IV
FAILURE TO SATISFY EXERCISES
A. Exercise Default Payments. If, at any time, (x) Holder submits a
Notice of Exercise and the Corporation fails for any reason (other than because
such issuance would exceed Holder's allocated portion of the Reserved Amount or
Cap Amount, for which failures Holder shall have the remedies set forth in
Articles III and V, respectively) to deliver, on or prior to the fourth business
day following the expiration of the Delivery Period for such exercise, such
number of freely tradeable shares of Common Stock to which Holder is entitled
upon such exercise, or (y) the Corporation provides notice to any holder of
Prepaid Warrants (together with all other holders of Prepaid Warrants and the
Holder referred to herein, the "Holders") at any time of its intention not to
issue freely tradeable shares of Common Stock upon the exercise by any Holder of
a Prepaid Warrant in accordance with the terms of the Prepaid Warrants (other
than because such issuance would exceed such Holder's allocated portion of the
Reserved Amount or Cap Amount) (each of (x) and (y) being an "Exercise
Default"), then the Corporation shall pay to Holder, in the case of an Exercise
Default described in clause (x) above, and to all Holders, in the case of a
Exercise Default described in clause (y) above, an amount equal to:
(.24) x (D/365) x (Exercise Default Amount)
where:
"D" means the number of days after the expiration of the Delivery
Period through and including the Default Cure Date;
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"Exercise Default Amount" means the Prepaid Amount of all Warrants held
by Holder; and
"Default Cure Date" means (i) with respect to an Exercise Default
described in clause (x) of its definition, the date the Corporation effects the
exercise of the portion of this Warrant submitted for exercise, and (ii) with
respect to an Exercise Default described in clause (y) of its definition, the
date the Corporation begins to issue freely tradeable shares of Common Stock in
satisfaction of all exercises of Prepaid Warrants in accordance with their terms
and (iii) with respect to either type of Exercise Default, the date on which the
Corporation pays to Holder the Default Amount (as defined in Article VI.B)
pursuant to Paragraph D of this Article IV.
The payments to which Holder shall be entitled pursuant to this
Paragraph A are referred to herein as "Exercise Default Payments." Holder may
elect to receive accrued Exercise Default Payments in cash or to convert all or
any portion of such accrued Exercise Default Payments, at any time, into Common
Stock at the lowest Exercise Price in effect during the period beginning on the
date of the Exercise Default through the Exercise Date for such exercise. In the
event Holder elects to receive any Exercise Default Payments in cash, it shall
so notify the Corporation in writing. Such payment shall be made in accordance
with and be subject to the provisions of Article VIII.J. In the event Holder
elects to convert all or any portion of the Exercise Default Payments into
Common Stock, Holder shall indicate on a Notice of Exercise such portion of the
Exercise Default Payments which Holder elects to so convert and such exercise
shall otherwise be effected in accordance with the provisions of Article II.
B. Adjustment to Exercise Price. If Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to an exercise of
any portion of any of Holder's Prepaid Warrants for any reason (other than
because such issuance would exceed Holder's allocated portion of the Reserved
Amount or Cap Amount, for which failures Holder shall have the remedies set
forth in Articles III and V, respectively), then the Fixed Exercise Price in
respect of all Prepaid Warrants held by Holder (including any Prepaid Warrants
or portions thereof submitted to the Corporation for exercise, but for which
shares of Common Stock have not been issued to Holder) shall thereafter be the
lesser of (i) the Fixed Exercise Price on the Exercise Date specified in the
Notice of Exercise which resulted in the Exercise Default and (ii) the lowest
Exercise Price in effect during the period beginning on, and including, such
Exercise Date through and including the day such shares of Common Stock are
delivered to the Holder. If there shall occur an Exercise Default of the type
described in clause (y) of Article IV.A., then the Fixed Exercise Price with
respect to any exercise thereafter shall be the lowest Exercise Price in effect
at any time during the period beginning on, and including, the date of the
occurrence of such Exercise Default through and including the Default Cure Date.
The Fixed Exercise Price shall thereafter be subject to further adjustment for
any events described in Article VII.
C. Buy-In Cure. Unless the Corporation has notified Holder in writing
prior to the delivery by Holder of a Notice of Exercise that the Corporation is
unable to honor exercises, if (i) (a) the Corporation fails for any reason to
deliver during the Delivery Period shares of Common
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Stock to Holder upon an exercise of this Warrant or (b) there shall occur a
Legend Removal Failure (as defined in Article VI.A(iii) below) and (ii)
thereafter, Holder purchases (in an open market transaction or otherwise) shares
of Common Stock to make delivery in satisfaction of a sale by Holder of the
unlegended shares of Common Stock (the "Sold Shares") which Holder anticipated
receiving upon such exercise (a "Buy-In"), the Corporation shall pay Holder (in
addition to any other remedies available to Holder) the amount by which (x)
Holder's total purchase price (including brokerage commissions, if any) for the
unlegended shares of Common Stock so purchased exceeds (y) the net proceeds
received by Holder from the sale of the Sold Shares. For example, if Holder
purchases unlegended shares of Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to shares of Common Stock it sold for
$10,000, the Corporation will be required to pay Holder $1,000. Holder shall
provide the Corporation written notification indicating any amounts payable to
Holder pursuant to this Paragraph C, together with evidence supporting such
calculation. The Corporation shall make any payments required pursuant to this
Paragraph C in accordance with and subject to the provisions of Article VIII.J.
D. Right to Require Payment of Default Amount. If the Corporation
fails, and such failure continues uncured for five (5) business days after the
Corporation has been notified thereof in writing by Holder, for any reason
(other than because such issuance would exceed Holder's allocable portion of the
Reserved Amount or Cap Amount, for which failures Holder shall have the remedies
set forth in Articles III and V, respectively) to issue shares of Common Stock
within ten (10) business days after the expiration of the Delivery Period with
respect to any exercise of this Warrant, then Holder may elect at any time prior
to the Default Cure Date for such Exercise Default, by delivery of a Default
Notice (as defined in Article VI.C.) to the Corporation, to require the
Corporation to pay to Holder an amount in cash equal to the Default Amount (as
defined in Article VI.B). Upon payment by the Corporation of the Default Amount,
this Warrant shall be null and void. If the Corporation fails to pay such
Default Amount within five (5) business days after its receipt of a Default
Notice, then Holder shall be entitled to the remedies provided in Article VI.C.
ARTICLE V
INABILITY TO EXERCISE DUE TO CAP AMOUNT
A. Obligation to Cure. If at any time the then unissued portion of any
Holder's Cap Amount is less than 135% of the number of shares of Common Stock
then issuable upon the full exercise of all Prepaid Warrants owned by such
Holder (a "Trading Market Trigger Event"), the Corporation shall immediately
notify the Holders of Prepaid Warrants of such occurrence and shall take
immediate action (including, if necessary, seeking the approval of its
stockholders to authorize the issuance of the full number of shares of Common
Stock which would be issuable upon the full exercise of all Prepaid Warrants
issued or issuable pursuant to the Securities Purchase Agreement but for the Cap
Amount) to eliminate any prohibitions under applicable law or the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Corporation or any of
its securities on the Corporation's ability to issue
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shares of Common Stock in excess of the Cap Amount. In the event the Corporation
fails to eliminate all such prohibitions within ninety (90) days after the
Trading Market Trigger Event and thereafter Holder is unable to exercise all or
any portion of the outstanding Prepaid Amount of this Warrant as a result of the
operation of Article II.C.(i), then Holder shall thereafter have the option,
exercisable at any time until such date that all such prohibitions are
eliminated, by delivery of a Default Notice (as defined in Article VI.C.) to the
Corporation, to require the Corporation to pay to Holder an amount in cash equal
to the Default Amount (as defined in Article VI.B). Upon payment by the
Corporation of the Default Amount, this Warrant shall be null and void. If the
Corporation fails to deliver the Default Amount within five (5) business days
after its receipt of such Default Notice, then such holder shall be entitled to
the remedies provided in Articles V.B and VI.C.
B. Remedies. If the Corporation fails to pay the Default Amount
pursuant to Article V.A. within five (5) business days after its receipt of such
Default Notice, Holder may elect either or both of the following additional
remedies:
(i) to require, with the consent of the Majority Holders, the
Corporation to terminate the listing of its Common Stock on the Nasdaq SmallCap
Market (or any other stock exchange, interdealer quotation system or trading
market) and to cause its Common Stock to be eligible for trading on the
over-the-counter electronic bulletin board; or
(ii) to require the Corporation to issue shares of Common
Stock in accordance with Holder's Notice of Exercise at an Exercise Price equal
to the average of the Closing Bid Prices for the Common Stock during the five
(5) consecutive trading days ending on the trading day immediately preceding the
date of Holder's written notice to the Corporation of its election to receive
shares of Common Stock pursuant to this subparagraph (ii) (subject to equitable
adjustment for any stock splits, stock dividends, reclassifications or similar
events during such five (5) trading day period).
ARTICLE VI
EVENTS OF DEFAULT
A. Events of Default. If any of the following events of default (each,
an "Event of Default") shall occur:
(i) the Common Stock (including any of the shares of Common
Stock issuable upon exercise of this Warrant) is suspended from trading on any
of, or is not listed (and authorized) for trading on at least one of, the New
York Stock Exchange, the American Stock Exchange, the Nasdaq National Market or
the Nasdaq SmallCap Market for an aggregate of ten (10) trading days in any nine
(9) month period;
(ii) any Registration Statement required to be filed by the
Corporation pursuant to Sections 2(a) or 3(b) of that certain Registration
Rights Agreement by and among the Corporation
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and the other signatories thereto entered into in connection with the Securities
Purchase Agreement (the "Registration Rights Agreement") has not been declared
effective by the ninetieth (90th) day following the date on which such
Registration Statement is required to be declared effective pursuant to the
Registration Rights Agreement, or any such Registration Statement, after being
declared effective, cannot be utilized by Holders for the resale of all of its
Registrable Securities (as defined in the Registration Rights Agreement) for an
aggregate of more than thirty (30) days;
(iii) the Corporation fails to remove any restrictive legend
on any certificate or any shares of Common Stock issued to Holder upon exercise
of any Prepaid Warrant owned by Holder as and when required by the Prepaid
Warrants, the Securities Purchase Agreement or the Registration Rights Agreement
(a "Legend Removal Failure"), and any such failure continues uncured for five
(5) business days after the Corporation has been notified thereof in writing by
the holder;
(iv) the Corporation provides notice to any of the Holders of
Prepaid Warrants, including by way of public announcement, at any time, of its
intention not to issue shares of Common Stock to any of the Holders of Prepaid
Warrants upon exercise in accordance with the terms of the Prepaid Warrants
(other than due to the circumstances contemplated by Articles III or V for which
the Holders shall have the remedies set forth in such Articles);
(v) the Corporation shall:
(a) sell, convey or dispose of all or substantially all
of its assets;
(b) merge, consolidate or engage in any other business
combination with any other entity (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation of
the Corporation, other than pursuant to a merger in which the Corporation is the
surviving or continuing entity and its authorized capital stock is unchanged and
other than pursuant to a merger in which the surviving or continuing entity (if
other than the Corporation) assumes the Corporation's obligations under the
Securities Purchase Agreement, the Prepaid Warrants, the Incentive Warrants and
the Registration Rights Agreement and is a publicly-traded corporation whose
common stock is listed for trading on the New York Stock Exchange, the American
Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap Market); or
(c) have fifty percent (50%) or more of the voting power
of its capital stock owned beneficially by one person, entity or "group" (as
such term is used under Section 13(d) of the Securities Exchange Act of 1934, as
amended);
(vi) the Corporation otherwise shall breach any material term
hereunder (other than as specifically provided in subparagraphs (i)-(v) of this
Paragraph A) or under the Securities Purchase Agreement or the Registration
Rights Agreement and such breach continues uncured for ten (10) business days
after the Corporation has been notified thereof in writing by the holder;
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(vii) any representation or warranty of the Corporation made
herein or in any agreement, statement or certificate given in writing pursuant
hereto or in connection herewith (including, without limitation, the Securities
Purchase Agreement and the Registration Rights Agreement), shall be false or
misleading in any material respect when made and the breach of which would have
a Material Adverse Effect (as defined in the Securities Purchase Agreement);
(viii) the Corporation or any subsidiary of the Corporation
(other than Technology Development Systems, Inc.) shall make an assignment for
the benefit of creditors, or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business; or such a receiver or trustee shall otherwise be appointed; or
(ix) bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Corporation or
any subsidiary of the Corporation (other than Technology Development Systems,
Inc.);
then, upon the occurrence and during the continuation of any Event of Default
specified in subparagraphs (i)-(vii) of this Paragraph A, at the option of
Holder exercisable through the delivery of a Default Notice (as defined in
Paragraph C below), and upon the occurrence of an Event of Default specified in
subparagraphs (viii) or (ix) of this Paragraph A, the Corporation shall pay
Holder, in satisfaction of its obligation to issue shares of Common Stock upon
exercise of this Warrant, an amount equal to the Default Amount and such Default
Amount, together with all other ancillary amounts payable hereunder, shall
immediately become due and payable, all without demand, presentment or notice,
all of which hereby are expressly waived, together with all costs, including,
without limitation, legal fees and expenses of collection, and Holder shall be
entitled to exercise all other rights and remedies available at law or in
equity; provided, however, that if the Corporation pays the Default Amount to
Holder within five (5) business days after the Corporation's receipt of a
Default Notice from Holder delivered as a result of the occurrence of an Event
of Default specified in subparagraph (v)(b) of this Paragraph A, Holder shall
have no other rights or remedies, at law or in equity, with respect to such
Event of Default. For the avoidance of doubt, the occurrence of any event
described in clauses (i), (ii), (iv), (v), (vii), (viii) or (ix) above shall
immediately constitute an Event of Default and there shall be no cure period.
B. Definition of Default Amount. The "Default Amount" with respect to
this Warrant means an amount equal to the greater of:
(i) A X M
------------------
EP
and
(ii) The sum of (x) the product of (I) one hundred percent
(100%) divided by the Exercise Percentage in effect on the date on which the
Corporation receives the Default Notice, times (II) the outstanding Prepaid
Amount hereof on the date on which the Corporation receives the
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Default Notices, plus (y) all unpaid Exercise Default Payments owing (if any)
with respect thereto through the date of payment of the Default Amount.
where:
"A" means the outstanding Prepaid Amount of this Warrant on the date on
which the Corporation receives the Default Notice plus all unpaid Exercise
Default Payments owing (if any) with respect thereto through the date of payment
of the Default Amount;
"EP" means the Exercise Price in effect on the date on which the
Corporation receives the Default Notice; and
"M" means (i) with respect to all Events of Default other than an Event
of Default specified in Article VI.A(v) hereof, the highest Closing Bid Price of
the Corporation's Common Stock during the period beginning on the date on which
the Corporation receives the Default Notice and ending on the date immediately
preceding the date of payment of the Default Amount and (ii) with respect to an
Event of Default specified in Article VI.A(v) hereof, the greater of (a) the
amount determined pursuant to clause (i) of this definition or (b) the fair
market value, as of the date on which the Corporation receives the Default
Notice, of the consideration payable to the holder of a share of Common Stock
pursuant to the transaction which triggers the Event of Default. For purposes of
this definition, "fair market value" shall be determined by an investment
banking firm selected by the Corporation and reasonably acceptable to the
Majority Holders, with the costs of such appraisal to be borne by the
Corporation.
C. Failure to Pay Default Amount. If the Corporation fails to pay the
Default Amount within five (5) business days of its receipt of a notice
requiring such payment (a "Default Notice"), then the Holder (i) shall be
entitled to interest on the Default Amount at a per annum rate equal to the
lower of twenty-four percent (24%) and the highest interest rate permitted by
applicable law from the date on which the Corporation receives the Default
Notice until the date of payment of the Default Amount hereunder, and (ii) shall
have the right, at any time and from time to time, to require the Corporation,
upon written notice, to immediately convert (in accordance with the terms of
Paragraph A of Article II) all or any portion of the Default Amount, plus
interest as aforesaid, into shares of Common Stock at the lowest Exercise Price
in effect during the period beginning on the date on which the Corporation
receives the Default Notice and ending on the Exercise Date with respect to the
conversion of such Default Amount. In the event the Corporation is not able to
pay all amounts due and payable with respect to all Prepaid Warrants subject to
Default Notices, the Corporation shall pay the Holders of such Prepaid Warrants
which are the subject of Default Notices such amounts pro rata, based on the
total amounts payable to each such Holder relative to the total amounts payable
to all such Holders.
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ARTICLE VII
ADJUSTMENTS TO THE EXERCISE PRICE
The Exercise Price shall be subject to adjustment from time to time as
follows:
A. Stock Splits, Stock Dividends, Etc. If, at any time on or after the
First Closing Date, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination, reclassification or
other similar event, the Fixed Exercise Price shall be proportionately reduced,
or if the number of outstanding shares of Common Stock is decreased by a reverse
stock split, combination or reclassification of shares, or other similar event,
the Fixed Exercise Price shall be proportionately increased. In such event, the
Corporation shall notify the Corporation's transfer agent of such change on or
before the effective date thereof.
B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after
the First Closing Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a migratory merger effected solely
for the purpose of changing the jurisdiction of incorporation of the Corporation
and other than a merger in which the Corporation is the surviving or continuing
entity and its authorized capital stock is unchanged), (iii) any sale or
transfer of all or substantially all of the assets of the Corporation or (iv)
any share exchange pursuant to which all of the outstanding shares of Common
Stock are converted into other securities or property (each of (i) - (iv) above
being a "Corporate Change"), then the Holders shall thereafter have the right to
receive upon exercise hereof, in lieu of the shares of Common Stock otherwise
issuable, such shares of stock, securities and/or other property as would have
been issued or payable in such Corporate Change with respect to or in exchange
for the number of shares of Common Stock which would have been issuable upon
exercise hereof (without giving effect to the limitations contained in Article
II.C.) had such Corporate Change not taken place, and in any such case,
appropriate provisions shall be made with respect to the rights and interests of
Holder to the end that the provisions hereof (including, without limitation,
provisions for adjustment of the Exercise Price and of the number of shares of
Common Stock issuable upon exercise of this Warrant) shall thereafter be
applicable, as nearly as may be practicable in relation to any shares of stock
or securities thereafter deliverable upon the exercise thereof. The Corporation
shall not effect any Corporate Change unless (i) Holder has received written
notice of such transaction at least seventy-five (75) days prior thereto, but in
no event later than twenty (20) days prior to the record date for the
determination of stockholders entitled to vote with respect thereto, and (ii)
the resulting successor or acquiring entity (if not the Corporation) assumes by
written instrument the obligations of the Corporation under this Warrant. The
above provisions shall apply regardless of whether or not there would have been
a sufficient number of shares of Common Stock authorized and available for
issuance upon exercise of the Prepaid Warrants outstanding as of the date of
such transaction, and shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
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C. Adjustment Due to Major Announcement. In the event the Corporation
at any time after the First Closing Date (i) makes a public announcement that it
intends to consolidate or merge with any other entity (other than a migratory
merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Corporation and other than a merger in which the
Corporation is the surviving or continuing entity and its capital stock is
unchanged) or to sell or transfer all or substantially all of the assets of the
Corporation or (ii) any person, group or entity (including the Corporation)
publicly announces a tender offer, exchange offer or another transaction to
purchase 50% or more of the Corporation's Common Stock or otherwise publicly
announces an intention to replace a majority of the Corporation's Board of
Directors by waging a proxy battle or otherwise (the date of the announcement
referred to in clause (i) or (ii) of this Paragraph C is hereinafter referred to
as the "Announcement Date"), then the Exercise Price shall, effective upon the
Announcement Date and continuing through the sixth (6th) trading day following
the earlier of the consummation of the proposed transaction or tender offer,
exchange offer or another transaction or the Abandonment Date (as defined
below), be equal to the lower of (x) the Exercise Price which would have been
applicable for an exercise occurring on the Announcement Date and (y) the
Exercise Price determined in accordance with Article I.E. on the Exercise Date
set forth in the applicable Notice of Exercise. From and after the sixth (6th)
trading day following the Abandonment Date, the Exercise Price shall be
determined as set forth in Article I.E. "Abandonment Date" means with respect to
any proposed transaction or tender offer, exchange offer or another transaction
for which a public announcement as contemplated by this Paragraph C has been
made, the date upon which the Corporation (in the case of clause (i) above) or
the person, group or entity (in the case of clause (ii) above) publicly
announces the termination or abandonment of the proposed transaction or tender
offer, exchange offer or another transaction which caused this Paragraph C to
become operative.
D. Adjustment Due to Distribution. If, at any time after the First
Closing Date, the Corporation shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including any
dividend or distribution to the Corporation's shareholders in cash or shares (or
rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"Distribution"), then Holder shall be entitled, upon any exercise of this
Warrant after the date of record for determining stockholders entitled to such
Distribution, to receive the amount of such assets which would have been payable
to Holder with respect to the shares of Common Stock issuable upon such exercise
(without giving effect to the limitations contained in Article II.C.) had Holder
been the holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to such Distribution.
E. Issuance of Other Securities With Variable Conversion Price. If, at
any time after the First Closing Date, the Corporation shall issue any
securities which are convertible into or exchangeable for Common Stock
("Convertible Securities") at a conversion or exchange rate based on a discount
to the market price of the Common Stock at the time of conversion or exercise,
then the Exercise Percentage in respect of any exercise of any portion of this
Warrant after such issuance shall be calculated utilizing the higher of the
greatest discount applicable to any such Convertible
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Securities and the difference between one hundred percent (100%) and the
Exercise Percentage then in effect.
F. Purchase Rights. If, at any time after the First Closing Date, the
Corporation issues any Convertible Securities or rights to purchase stock,
warrants, securities or other property (the "Purchase Rights") pro rata to the
record holders of any class of Common Stock, then Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which Holder could have acquired if Holder had held the number
of shares of Common Stock acquirable upon complete exercise of this Warrant
(without giving effect to the limitations contained in Article II.C.)
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
G. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Exercise Price pursuant to this Article VII, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to Holder a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of Holder, furnish to Holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Exercise Price at the time
in effect and (iii) the number of shares of Common Stock and the amount, if any,
of other securities or property which at the time would be received upon
exercise of this Warrant.
ARTICLE VIII
MISCELLANEOUS
A. Failure or Indulgency Not Waiver. No failure or delay on the part of
the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege.
B. Notices. Any notice herein required or permitted to be given shall
be in writing and may be personally served or delivered by courier and shall be
deemed to have been given upon receipt (which shall include telephone line
facsimile transmission). The addresses for such communications shall be:
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<PAGE>
If to the Company:
The Netplex Group, Inc.
8260 Greensboro Drive
McLean, VA 22102
Telecopy: (703) 356-5105
Attn: Gene Zaino, President and CEO
with a copy simultaneously transmitted by like means to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, NY 10022
Telecopy: (212) 935-1787
Attn: Steven Wolosky, Esq.
If to the Holder, at such address as such Holder shall have
provided in writing to the Corporation.
C. Amendment Provision. Except as otherwise provided herein, this
Warrant and any provision hereof may only be amended by an instrument in writing
signed by the Corporation and the Majority Holders. The term "Warrant" and all
references thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented.
D. Assignability. This Warrant shall be binding upon the Corporation
and its successors and assigns and shall inure to the benefit of the Holder and
its successors and assigns.
E. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed in the State of New York. The Corporation irrevocably
consents to the jurisdiction of the United States federal courts and state
courts located in the City of New York in the State of New York in any suit or
proceeding based on or arising under this Warrant and irrevocably agrees that
all claims in respect of such suit or proceeding may be determined in such
courts. The Corporation irrevocably waives the defense of an inconvenient forum
to the maintenance of such suit or proceeding. The Corporation further agrees
that service of process upon the Corporation mailed by first class mail shall be
deemed in every respect effective service of process upon the Corporation in any
such suit or proceeding. Nothing herein shall affect Holder's right to serve
process in any other manner permitted by law. The Corporation agrees that a
final non-appealable judgment in any such suit or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on such judgment or in any
other lawful manner.
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<PAGE>
F. Denominations. At the request of Holder, upon surrender of this
Warrant, the Corporation shall promptly issue new Warrants in the aggregate
outstanding Prepaid Amount hereof, in the form hereof, in such denominations as
Holder shall request.
G. Lost or Stolen Warrants. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of this Warrant and (ii)
(y) in the case of loss, theft or destruction, of indemnity and affidavit
reasonably satisfactory to the Corporation, or (z) in the case of mutilation,
upon surrender and cancellation of this Warrant, the Corporation shall execute
and deliver new Warrants, in the form hereof, in such denominations as Holder
may request. However, the Corporation shall not be obligated to reissue such
lost or stolen Warrants if Holder contemporaneously requests the Corporation to
exercise this Warrant.
H. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount
and Reserved Amount shall be allocated pro rata among the Holders of Prepaid
Warrants based on the aggregate Prepaid Amount of the Prepaid Warrants issued to
each Holder. Each increase to the Cap Amount and the Reserved Amount shall be
allocated pro rata among the Holders of Prepaid Warrants based on the aggregate
Prepaid Amount of the Prepaid Warrants held by each Holder at the time of the
increase in the Cap Amount or Reserved Amount. In the event a Holder shall sell
or otherwise transfer any of such Holder's Prepaid Warrants, each transferee
shall be allocated a pro rata portion of such transferor's Cap Amount and
Reserved Amount. Any portion of the Cap Amount or Reserved Amount which remains
allocated to any person or entity which does not hold any Prepaid Warrants shall
be allocated to the remaining Holders of Prepaid Warrants pro rata based on the
aggregate Prepaid Amount of the Prepaid Warrants then held by such Holders.
I. Quarterly Statements of Available Shares. The Corporation shall
deliver (or cause its transfer agent to deliver) to Holder a written report
notifying Holder of any occurrence which prohibits the Corporation from issuing
Common Stock upon any exercise of Prepaid Warrants. The Corporation (or its
transfer agent) shall also provide, within fifteen (15) days after delivery to
the Corporation of a written request by any Holder, any of the following
information as of the date of such request: (i) the total outstanding Prepaid
Amount of all Prepaid Warrants, (ii) the total number of shares of Common Stock
issued upon all exercises of all Prepaid Warrants prior to such date, (iii) the
total number of shares of Common Stock which are reserved for issuance upon
exercise of the Prepaid Warrants which are then outstanding, and (iv) the total
number of shares of Common Stock which may thereafter be issued by the
Corporation upon exercise of the Prepaid Warrants before the Corporation would
exceed the Reserved Amount and the Cap Amount.
J. Payment of Cash; Defaults. Whenever the Corporation is required to
make any cash payment to Holder under this Warrant (as an Exercise Default
Payment or otherwise), such cash payment shall be made to Holder within five (5)
business days after delivery by Holder of a notice specifying that Holder elects
to receive such payment in cash and the method (e.g., by check, wire transfer)
in which such payment should be made. If such payment is not delivered within
such five (5) business day period, Holder shall thereafter be entitled to
interest on the unpaid amount at a per
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annum rate equal to the lower of twenty-four percent (24%) and the highest
interest rate permitted by applicable law until such amount is paid in full to
Holder.
K. Restrictions on Shares. The shares of Common Stock issuable upon
exercise of this Warrant may not be sold or transferred unless (i) they first
shall have been registered under the Securities Act and applicable state
securities laws, (ii) the Corporation shall have been furnished with an opinion
of legal counsel (in form, substance and scope customary for opinions in such
circumstances) to the effect that such sale or transfer is exempt from the
registration requirements of the Securities Act or (iii) they are sold under
Rule 144 under the Act. Except as otherwise provided in the Securities Purchase
Agreement, each certificate for shares of Common Stock issuable upon exercise of
this Warrant that have not been so registered and that have not been sold under
an exemption that permits removal of the legend, shall bear a legend
substantially in the following form, as appropriate:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE
SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS
UNLESS OFFERED, SOLD OR TRANSFERRED UNDER AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
Upon the request of a holder of a certificate representing any shares of Common
Stock issuable upon exercise of this Warrant, the Corporation shall remove the
foregoing legend from the certificate and issue to such holder a new certificate
therefor free of any transfer legend, if (i) with such request, the Corporation
shall have received either (A) an opinion of counsel, in form, substance and
scope customary for opinions in such circumstances, to the effect that any such
legend may be removed from such certificate, or (B) satisfactory representations
from Holder that Holder is eligible to sell such security under Rule 144 or (ii)
a registration statement under the Securities Act covering the resale of such
securities is in effect. Nothing in this Warrant shall (i) limit the
Corporation's obligation under the Registration Rights Agreement, or (ii) affect
in any way Holder's obligations to comply with applicable securities laws upon
the resale of the securities referred to herein.
L. Status as Warrantholder. Upon submission of a Notice of Exercise by
Holder, the Prepaid Amount of this Warrant (other than any portion of this
Warrant, if any, which cannot be exercised because the exercise thereof would
exceed Holder's allocated portion of the Reserved Amount or Cap Amount) shall be
deemed exercised for shares of Common Stock as of the Exercise Date and Holder's
rights as a holder of this Warrant shall cease and terminate, excepting only the
right to receive certificates for such shares of Common Stock and to any
remedies provided herein or otherwise available at law or in equity to Holder
because of a failure by the Corporation to comply with the terms of this
Warrant.
PHIL1\112034-6
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<PAGE>
Notwithstanding the foregoing, if Holder has not received certificates for all
shares of Common Stock prior to the tenth (10th) business day after the
expiration of the Delivery Period with respect to an exercise for any reason,
then (unless Holder otherwise elects to retain its status as a holder of Common
Stock by so notifying the Corporation) the portion of the Prepaid Amount subject
to such exercise shall be deemed outstanding under this Warrant and the
Corporation shall, as soon as practicable, return this Warrant to Holder. In all
cases, Holder shall retain all of its rights and remedies (including, without
limitation, (i) the right to receive Exercise Default Payments pursuant to
Article IV.A to the extent required thereby for such Exercise Default and any
subsequent Exercise Default and (ii) the right to have the Exercise Price with
respect to subsequent exercises determined in accordance with Article IV.B) for
the Corporation's failure to honor the exercise of this Warrant.
M. Remedies Cumulative. The remedies provided in this Warrant shall be
cumulative and in addition to all other remedies available under this Warrant,
at law or in equity (including a decree of specific performance and/or other
injunctive relief), no remedy contained herein shall be deemed a waiver of
compliance giving rise to such remedy and nothing herein shall limit Holder's
right to pursue actual damages for any failure by the Corporation to comply with
the terms of this Warrant. The Corporation acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, the Holder shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Corporation has caused this Warrant to be signed
by its duly authorized officer.
THE NETPLEX GROUP, INC.
By:____________________________________
Name:
Title:
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<PAGE>
Exhibit 1
NOTICE OF EXERCISE
To: The Netplex Group, Inc.
8260 Greensboro Drive
McLean, VA 22102
Telecopy: (703) 356-5105
Attn: Gene Zaino, President and CEO
The undersigned hereby irrevocably elects to exercise $____________ of the
Prepaid Amount of this Warrant (the "Exercise") into shares of common stock
("Common Stock") of The Netplex Group, Inc. (the "Corporation") according to the
conditions of the Prepaid Common Stock Purchase Warrant dated April __, 1998
(the "Warrant"), as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any Exercise, except for transfer taxes, if any. A copy of the
Warrant is attached hereto (or evidence of loss, theft or destruction thereof).
If the Corporation's transfer agent is participating in the Depository Trust
Company ("DTC") Fast Automated Securities Transfer program, the Corporation
shall electronically transmit the Common Stock issuable pursuant to this Notice
of Exercise to the account of the undersigned or its nominee (which is
________________) with DTC through its Deposit Withdrawal Agent Commission
System ("DTC Transfer"). If the Corporation's transfer agent does not
participate in the DTC program as aforementioned, or if Holder checks the box
set forth below, the Corporation shall deliver to Holder physical certificates
representing the Common Stock issuable upon exercise of the Warrant.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon exercise of this
Warrant shall be made pursuant to registration of the Common Stock under the
Securities Act or pursuant to an exemption from registration under the Act.
In the event of partial exercise, please reissue an appropriate Warrant(s) for
the portion of the Prepaid Amount which shall not have been exercised.
Check Box if Applicable:
|_| In lieu of receiving the shares of Common Stock issuable pursuant to
this Notice of Exercise by way of DTC Transfer, the undersigned hereby
requests that the Corporation issue and deliver to the undersigned
physical certificates representing such shares of Common Stock.
Date of Exercise:
Applicable Exercise Price:
Portion of Prepaid Amount to be exercised:
Amount of Exercise Default
Payments to be exercised, if any:
Number of Shares of
Common Stock to be Issued:
Signature:
Name:
Address:
VOID AFTER 5:00 P.M., NEW YORK CITY
TIME, ON APRIL __, 2003
(UNLESS EXTENDED PURSUANT TO SECTION 2 HEREOF)
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
JURISDICTION. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
APPLICABLE SECURITIES LAWS UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
Right to Purchase __________ Shares of
Common Stock, par value $.001 per share
Date: April __, 1998
THE NETPLEX GROUP, INC.
INCENTIVE STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, _________________________, or
its registered assigns, is entitled to purchase from THE NETPLEX GROUP, INC., a
corporation organized under the laws of the State of New York (the "Company"),
at any time or from time to time during the period specified in Section 2
hereof, _______________________ (__________) fully paid and nonassessable shares
of the Company's common stock, par value $.001 per share (the "Common Stock"),
at an exercise price per share (the "Exercise Price") equal to $_____. The
number of shares of Common Stock purchasable hereunder (the "Warrant Shares")
and the Exercise Price are subject to adjustment as provided in Section 4
hereof. The term "Incentive Warrants" means this Warrant and the other warrants
of the Company issued pursuant to, and identified as Incentive Warrants in, that
certain Securities Purchase Agreement, dated as of March 31, 1998, by and among
the Company and the other signatories thereto (the "Securities Purchase
Agreement").
<PAGE>
This Warrant is subject to the following terms, provisions and
conditions:
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, including, without limitation, the limitations
contained in Section 7 hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
Agreement"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company, of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the holder is effectuating
a Cashless Exercise (as defined in Section 11(c) hereof) pursuant to Section
11(c) hereof, delivery to the Company of a written notice of an election to
effect a Cashless Exercise for the Warrant Shares specified in the Exercise
Agreement. The Warrant Shares so purchased shall be deemed to be issued to the
holder hereof or such holder's designee, as the record owner of such shares, as
of the close of business on the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement shall have been delivered, and
payment shall have been made for such shares as set forth above or, if such date
is not a business date, on the next succeeding business date. Certificates for
the Warrant Shares so purchased, representing the aggregate number of shares
specified in the Exercise Agreement, shall be delivered to the holder hereof
within a reasonable time, not exceeding three (3) business days, after this
Warrant shall have been so exercised (the "Delivery Period"). The certificates
so delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or such other name as
shall be designated by such holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the holder a
new Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised.
If, at any time, a holder of this Warrant submits this Warrant, an
Exercise Agreement and payment to the Company of the Exercise Price for each of
the Warrant Shares specified in the Exercise Agreement (including pursuant to a
Cashless Exercise), and the Company fails for any reason to deliver, on or prior
to the fourth business day following the expiration of the Delivery Period for
such exercise, the number of shares of Common Stock to which the holder is
entitled upon such exercise (an "Exercise Default"), then the Company shall pay
to the holder payments ("Exercise Default Payments") for an Exercise Default in
the amount of (a) (N/365), multiplied by (b) the amount by which the Market
Price (as defined in Section 4(l) hereof) on the date the Exercise Agreement
giving rise to the Exercise Default is transmitted in accordance with this
Section 1 (the "Exercise Default Date") exceeds the Exercise Price, multiplied
by (c) the number of shares of Common Stock the Company failed to so deliver in
such Exercise Default, multiplied by (d) .24, where N = the number of days from
the Exercise Default Date to the date that the Company effects the full exercise
of this Warrant which gave rise to the Exercise Default. The accrued Exercise
Default Payment for each calendar month shall be paid in cash or shall be
convertible into Common Stock, at the holder's option, as follows:
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(a) In the event holder elects to take such payment in cash,
cash payment shall be made to holder by the fifth (5th) day of the month
following the month in which it has accrued; and
(b) In the event holder elects to take such payment in Common
Stock, the holder may convert such payment amount into Common Stock at the lower
of the Exercise Price or the Market Price (as defined in Section 4(l)) (as in
effect at the time of conversion) at any time after the fifth (5th) day of the
month following the month in which it has accrued.
Nothing herein shall limit the holder's right to pursue
actual damages for the Company's failure to maintain a sufficient number of
authorized shares of Common Stock as required pursuant to the terms of Section
3(b) hereof or to otherwise issue shares of Common Stock upon exercise of this
Warrant in accordance with the terms hereof, and the holder shall have the right
to pursue all remedies available at law or in equity (including a decree of
specific performance and/or injunctive relief).
2. Period of Exercise.
(a) This Warrant is immediately exercisable, at any time or
from time to time on or after the date of initial issuance of this Warrant (the
"Issue Date") and before 5:00 p.m., New York City time, on the fifth (5th)
anniversary of the Issue Date (the "Exercise Period"). The Exercise Period shall
automatically be extended by one (1) day for each day on which the Company does
not have a number of shares of Common Stock reserved for issuance upon exercise
hereof at least equal to the number of shares of Common Stock issuable upon
exercise hereof.
3. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid, and nonassessable and free from all taxes, liens, claims and encumbrances.
(b) Reservation of Shares. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a suf ficient number of shares of Common
Stock to provide for the exercise in full of this Warrant (without giving effect
to the limitations on exercise set forth in Section 7(g) hereof).
(c) Listing. The Company shall promptly secure the listing of
the shares of Common Stock issuable upon exercise of this Warrant upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed or become listed (subject to official
notice of issuance upon exercise of this Warrant) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all shares
of Common Stock from time to time issuable upon the exercise of this Warrant;
and the Company shall so list on each
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national securities exchange or automated quotation system, as the case may be,
and shall maintain such listing of, any other shares of capital stock of the
Company issuable upon the exercise of this Warrant if and so long as any shares
of the same class shall be listed on such national securities exchange or
automated quotation system.
(d) Certain Actions Prohibited. The Company will not, by
amendment of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may reasonably be requested by the holder of
this Warrant in order to protect the economic benefit inuring to the holder
hereof and the exercise privilege of the holder of this Warrant against dilution
or other impairment, consistent with the tenor and purpose of this Warrant.
Without limiting the generality of the foregoing, the Company (i) will not
increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the Exercise Price then in effect, and (ii) will
take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
(e) Successors and Assigns. This Warrant will be binding upon
any entity succeeding to the Company by merger, consolidation, or acquisition of
all or substantially all of the Company's assets.
(f) Blue Sky Laws. The Company shall, on or before the date of
issuance of any Warrant Shares, take such actions as the Company shall
reasonably determine are necessary to qualify the Warrant Shares for, or obtain
exemption for the Warrant Shares for, sale to the holder of this Warrant upon
the exercise hereof under applicable securities or "blue sky" laws of the states
of the United States, and shall provide evidence of any such action so taken to
the holder of this Warrant prior to such date; provided, however, that the
Company shall not be required to qualify as a foreign corporation or file a
general consent to service of process in any such jurisdiction.
4. Antidilution Provisions. During the Exercise Period, the Exercise
Price and the number of Warrant Shares issuable hereunder and for which this
Warrant is then exercisable pursuant to Section 2 hereof shall be subject to
adjustment from time to time as provided in this Section 4.
In the event that any adjustment of the Exercise Price as required
herein results in a fraction of a cent, such Exercise Price shall be rounded up
or down to the nearest cent.
(a) Adjustment of Exercise Price. Except as otherwise provided
in Sections 4(c) and 4(e) hereof, if and whenever during the Exercise Period the
Company issues or sells, or in accordance with Section 4(b) hereof is deemed to
have issued or sold, any shares of Common Stock for no consideration or for a
consideration per share less than the Market Price (as hereinafter
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defined) on the date of issuance (a "Dilutive Issuance"), then effective
immediately upon the Dilutive Issuance, the Exercise Price will be adjusted in
accordance with the following formula:
E' = E x O + P/M
--------
CSDO
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the then current Market Price (as defined in
Section 4(1)(ii));
O = the number of shares of Common Stock
outstanding immediately prior to the
Dilutive Issuance;
P = the aggregate consideration, calculated as
set forth in Section 4(b) hereof, received
by the Company upon such Dilutive Issuance;
and
CSDO = the total number of shares of Common Stock
Deemed Outstanding (as defined in Section
4(l)(i)) immediately after the Dilutive
Issuance.
(b) Effect on Exercise Price of Certain Events. For purposes
of determining the adjusted Exercise Price under Section 4(a) hereof, the
following will be applicable:
(i) Issuance of Rights or Options. If the Company in any
manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities exercisable, convertible into or exchangeable for Common Stock
("Convertible Securities") (such warrants, rights and options to purchase Common
Stock or Convertible Securities are hereinafter referred to as "Options") and
the price per share for which Common Stock is issuable upon the exercise of such
Options is less than the Market Price in effect on the date of issuance of such
Options ("Below Market Options"), then the maximum total number of shares of
Common Stock issuable upon the exercise of all such Below Market Options
(assuming full exercise, conversion or exchange of Convertible Securities, if
applicable) will, as of the date of the issuance or grant of such Below Market
Options, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For purposes of the preceding sentence, the
"price per share for which Common Stock is issuable upon the exercise of such
Below Market Options" is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or
granting of all such Below Market Options, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise of
all such Below Market Options, plus, in the case of Convertible Securities
issuable upon the exercise of such Below Market Options, the minimum aggregate
amount of additional consideration payable upon the exercise, conversion or
exchange thereof at the time such Convertible Securities first become
exercisable, convertible or exchangeable, by (ii) the maximum total number of
shares of Common Stock issuable upon the exercise of all such Below Market
Options (assuming full conversion of Convertible Securities, if applicable). No
further adjustment to the Exercise Price will be made upon the actual issuance
of such Common Stock upon
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the exercise of such Below Market Options or upon the exercise, conversion or
exchange of Convertible Securities issuable upon exercise of such Below Market
Options.
(ii) Issuance of Convertible Securities.
(A) If the Company in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options) and the price per share for
which Common Stock is issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 4(b)(ii)(B) if applicable) is less than the
Market Price in effect on the date of issuance of such Convertible Securities,
then the maximum total number of shares of Common Stock issuable upon the
exercise, conversion or exchange of all such Convertible Securities will, as of
the date of the issuance of such Convertible Securities, be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For the purposes of the preceding sentence, the "price per share for
which Common Stock is issuable upon such exercise, conversion or exchange" is
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the exercise, conversion or exchange thereof at
the time such Convertible Securities first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise, conversion or exchange of all such Convertible
Securities. No further adjustment to the Exercise Price will be made upon the
actual issuance of such Common Stock upon exercise, conversion or exchange of
such Convertible Securities.
(B) If the Company in any manner issues or sells any
Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio (a "Variable Rate Convertible Security"), then the "price per
share for which Common Stock is issuable upon such exercise, conversion or
exchange" for purposes of the calculation contemplated by Section 4(b)(ii)(A)
shall be deemed to be the lowest price per share which would be applicable
(assuming all holding period and other conditions to any discounts contained in
such Convertible Security have been satisfied) if the Market Price on the date
of issuance of such Convertible Security was 75% of the Market Price on such
date (the "Assumed Variable Market Price"). Further, if the Market Price at any
time or times thereafter is less than or equal to the Assumed Variable Market
Price last used for making any adjustment under this Section 4 with respect to
any Variable Rate Convertible Security, the Exercise Price in effect at such
time shall be readjusted to equal the Exercise Price which would have resulted
if the Assumed Variable Market Price at the time of issuance of the Variable
Rate Convertible Security had been 75% of the Market Price existing at the time
of the adjustment required by this sentence.
(iii) Change in Option Price or Conversion Rate. If there
is a change at any time in (i) the amount of additional consideration payable to
the Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
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Convertible Securities are convertible into or exchangeable for Common Stock (in
each such case, other than under or by reason of provisions designed to protect
against dilution), the Exercise Price in effect at the time of such change will
be readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised
Convertible Securities. If, in any case, the total number of shares of Common
Stock issuable upon exercise of any Option or upon exercise, conversion or
exchange of any Convertible Securities is not, in fact, issued and the rights to
exercise such Option or to exercise, convert or exchange such Convertible
Securities shall have expired or terminated, the Exercise Price then in effect
will be readjusted to the Exercise Price which would have been in effect at the
time of such expiration or termination had such Option or Convertible
Securities, to the extent outstanding immediately prior to such expiration or
termination (other than in respect of the actual number of shares of Common
Stock issued upon exercise or conversion thereof), never been issued.
(v) Calculation of Consideration Received. If any Common
Stock, Options or Convertible Securities are issued, granted or sold for cash,
the consideration received therefor for purposes of this Warrant will be the
amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or sale.
In case any Common Stock, Options or Convertible Securities are issued or sold
for a consideration part or all of which shall be other than cash, the amount of
the consideration other than cash received by the Company will be the fair
market value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Market Price thereof as of the date of receipt. In case any Common
Stock, Options or Convertible Securities are issued in connection with any
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair market value of
such portion of the net assets and business of the non-surviving corporation as
is attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair market value of any consideration other than cash or
securities will be determined in good faith by an investment banker or other
appropriate expert of national reputation selected by the Company and reasonably
acceptable to the holder hereof, with the costs of such appraisal to be borne by
the Company.
(vi) Exceptions to Adjustment of Exercise Price. No
adjustment to the Exercise Price will be made (i) upon the exercise of any
warrants, options or convertible securities issued and outstanding on the Issue
Date and set forth on Schedule 3(c) of the Securities Purchase Agreement in
accordance with the terms of such securities as of such date; (ii) upon the
grant or exercise of any stock or options which may hereafter be granted or
exercised under any employee benefit plan of the Company now existing or to be
implemented in the future, so long as the issuance of such stock or options is
approved by a majority of the non-employee members of the Board of
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Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose; (iii) upon the issuance of
any Prepaid Warrants (as such term is defined in the Securities Purchase
Agreement) or Incentive Warrants issued or issuable in accordance with the terms
of the Securities Purchase Agreement; or (iv) upon exercise of the Prepaid
Warrants and the Incentive Warrants.
(c) Subdivision or Combination of Common Stock. If the
Company, at any time during the Exercise Period, subdivides (by any stock split,
stock dividend, recapitalization, reorganization, reclassification or otherwise)
its shares of Common Stock into a greater number of shares, then, after the date
of record for effecting such subdivision, the Exercise Price in effect
immediately prior to such subdivision will be proportionately reduced. If the
Company, at any time during the Exercise Period, combines (by reverse stock
split, recapitalization, reorganization, reclassification or otherwise) its
shares of Common Stock into a smaller number of shares, then, after the date of
record for effecting such combination, the Exercise Price in effect immediately
prior to such combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant and for which this
Warrant is or may become exercisable shall be adjusted by multiplying a number
equal to the Exercise Price in effect immediately prior to such adjustment by
the number of shares of Common Stock issuable or for which this Warrant is or
may become exercisable (as applicable) upon exercise of this Warrant immediately
prior to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
(e) Consolidation, Merger or Sale.
(i) In case of any consolidation of the Company with, or
merger of the Company into any other corporation, or in case of any sale or
conveyance of all or substantially all of the assets of the Company other than
in connection with a plan of complete liquidation of the Company at any time
during the Exercise Period, then as a condition of such consolidation, merger or
sale or conveyance, adequate provision will be made whereby the holder of this
Warrant will have the right to acquire and receive upon exercise of this Warrant
in lieu of the shares of Common Stock immediately theretofore acquirable upon
the exercise of this Warrant, such shares of stock, securities, cash or assets
as may be issued or payable with respect to or in exchange for the number of
shares of Common Stock immediately theretofore acquirable and receivable upon
exercise of this Warrant had such consolidation, merger or sale or conveyance
not taken place. In any such case, the Company will make appropriate provision
to insure that the provisions of this Section 4 hereof will thereafter be
applicable as nearly as may be in relation to any shares of stock or securities
thereafter deliverable upon the exercise of this Warrant. The Company will not
effect any consolidation, merger or sale or conveyance unless prior to the
consummation thereof, the successor corporation (if other than the Company)
assumes by written instrument the obligations under this Warrant and the
obligations to deliver to the holder of this Warrant such shares of stock,
securities or assets as, in accordance with the foregoing provisions, the holder
may be entitled to acquire. Notwithstanding
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the foregoing, in the event of any such sale or conveyance, the holder of this
Warrant shall, at its option, have the right to receive, and, in the event of
any such merger, consolidation, sale or conveyance which involves the receipt of
cash consideration by the equity holders of the Company's capital stock or in
which the surviving or continuing entity is not a publicly traded corporation
whose common stock is listed for trading on the New York Stock Exchange, the
American Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap
Market, the holder of this Warrant shall be entitled to receive, in connection
with such transaction, cash consideration equal to the fair market value (as
determined by the holder of this Warrant) of this Warrant.
(ii) No adjustment shall be made to the Exercise Price
pursuant to the provisions of this Section 4 upon the issuance by the Company of
any securities as consideration in a merger, consolidation or acquisition of
assets, or in connection with any strategic partnership or joint venture (the
primary purpose of which is not to raise equity capital), or as consideration
for the acquisition of a business, product or license by the Company.
(f) Distribution of Assets. In case the Company shall declare
or make any distribution of its assets (or rights to acquire its assets) to
holders of Common Stock as a partial liquidating dividend, stock repurchase by
way of return of capital or otherwise (including any dividend or distribution to
the Company's shareholders of cash or shares (or rights to acquire shares) of
capital stock of a subsidiary) (a "Distribution"), at any time during the
Exercise Period, then the holder of this Warrant shall be entitled upon exercise
of this Warrant for the purchase of any or all of the shares of Common Stock
subject hereto, to receive the amount of such assets (or rights) which would
have been payable to the holder had such holder been the holder of such shares
of Common Stock on the record date for the determination of shareholders
entitled to such Distribution.
(g) Notice of Adjustment. Upon the occurrence of any event
which requires any adjustment of the Exercise Price, then, and in each such
case, the Company shall give notice thereof to the holder of this Warrant, which
notice shall state the Exercise Price resulting from such adjustment and the
increase or decrease in the number of Warrant Shares purchasable at such price
upon exercise, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based. Such calculation shall be
certified by the chief financial officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) No Fractional Shares. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a share
of Common Stock on the date of such exercise.
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(j) Other Notices. In case at any time:
(i) the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution
(other than dividends or distributions payable in cash out of retained earnings
consistent with the Company's past practices with respect to declaring dividends
and making distributions) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to
the holders of the Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any capital reorganization of the
Company, or reclassification of the Common Stock, or consolidation or merger of
the Company with or into, or sale of all or substantially all of its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable estimate thereof by the Company)
when the same shall take place. Such notice shall also specify the date on which
the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least seventy-five
(75) days prior to the record date or the date on which the Company's books are
closed in respect thereto. Failure to give any such notice or any defect therein
shall not affect the validity of the proceedings referred to in clauses (i),
(ii), (iii) and (iv) above.
(k) Certain Events. If, at any time during the Exercise
Period, any event occurs of the type contemplated by the adjustment provisions
of this Section 4 but not expressly provided for by such provisions, the Company
will give notice of such event as provided in Section 4(g) hereof, and the
Company's Board of Directors will make an appropriate adjustment in the Exercise
Price and the number of shares of Common Stock acquirable upon exercise of this
Warrant so that the rights of the holder shall be neither enhanced nor
diminished by such event.
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(l) Certain Definitions.
(i) "Common Stock Deemed Outstanding" shall mean the
number of shares of Common Stock actually outstanding (not including shares of
Common Stock held in the treasury of the Company), plus (x) in the case of any
adjustment required by Section 4(a) resulting from the issuance of any Options,
the maximum total number of shares of Common Stock issuable upon the exercise of
the Options for which the adjustment is required (including any Common Stock
issuable upon the conversion of Convertible Securities issuable upon the
exercise of such Options), and (y) in the case of any adjustment required by
Section 4(a) resulting from the issuance of any Convertible Securities, the
maximum total number of shares of Common Stock issuable upon the exercise,
conversion or exchange of the Convertible Securities for which the adjustment is
required, as of the date of issuance of such Convertible Securities, if any.
(ii) "Market Price," as of any date, (i) means the average
of the closing bid prices for the shares of Common Stock as reported on the
Nasdaq SmallCap Market by Bloomberg Financial Markets ("Bloomberg") for the five
(5) consecutive trading days immediately preceding such date, or (ii) if the
Nasdaq SmallCap Market is not the principal trading market for the shares of
Common Stock, the average of the last sale prices reported by Bloomberg on the
principal trading market for the Common Stock during the same period, or, if
there is no sale price for such period, the last bid price reported by Bloomberg
for such period, or (iii) if the foregoing do not apply, the last sale price of
such security in the over-the-counter market on the pink sheets or bulletin
board for such security as reported by Bloomberg, or if no sale price is so
reported for such security, the last bid price of such security as reported by
Bloomberg, or (iv) if market value cannot be calculated as of such date on any
of the foregoing bases, the Market Price shall be the average fair market value
as reasonably determined by an investment banking firm selected by the Company
and reasonably acceptable to a majority in interest of the holders of Incentive
Warrants, with the costs of the appraisal to be borne by the Company. The manner
of determining the Market Price of the Common Stock set forth in the foregoing
definition shall apply with respect to any other security in respect of which a
determination as to market value must be made hereunder.
(iii) "Common Stock," for purposes of this Section 4,
includes the Common Stock and any additional class of stock of the Company
having no preference as to dividends or distributions on liquidation, provided
that the shares purchasable pursuant to this Warrant shall include only Common
Stock in respect of which this Warrant is exercisable, or shares resulting from
any subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Section 4(e) hereof, the stock or other securities or
property provided for in such Section.
5. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
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6. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. Transfer, Exchange, Redemption and Replacement of Warrant.
(a) Restriction on Transfer. This Warrant and the rights
granted to the holder hereof are transferable, in whole or in part, upon
surrender of this Warrant, together with a properly executed assignment in the
form attached hereto, at the office or agency of the Company referred to in
Section 7(e) below, provided, however, that any transfer or assignment shall be
subject to the conditions set forth in Sections 7(f) and (g) hereof and to the
provisions of Sections 2(f) and 2(g) of the Securities Purchase Agreement. Until
due presentment for registration of transfer on the books of the Company, the
Company may treat the registered holder hereof as the owner and holder hereof
for all purposes, and the Company shall not be affected by any notice to the
contrary. Notwithstanding anything to the contrary contained herein, the
registration rights described in Section 8 hereof are assignable only in
accordance with the provisions of that certain Registration Rights Agreement,
dated as of March 31, 1998, by and among the Company and the other signatories
thereto (the "Registration Rights Agreement").
(b) Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, upon the surrender hereof by the holder hereof at the
office or agency of the Company referred to in Section 7(e) below, for new
Warrants of like tenor of different denominations representing in the aggregate
the right to purchase the number of shares of Common Stock which may be
purchased hereunder, each of such new Warrants to represent the right to
purchase such number of shares as shall be designated by the holder hereof at
the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant and, in the case of any such loss, theft, or
destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Warrant, the Company, at its expense, will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
(d) Cancellation; Payment of Expenses. Upon the surrender of
this Warrant in connection with any transfer, exchange, or replacement as
provided in this Section 7, this Warrant shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses (other than legal expenses, if any, incurred by the
Holder or transferees) and charges payable in connection with the preparation,
execution, and delivery of Warrants pursuant to this Section 7. The Company
shall indemnify and reimburse the holder of this
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Warrant for all costs and expenses (including legal fees) incurred by such
holder in connection with the enforcement of its rights hereunder.
(e) Warrant Register. The Company shall maintain, at its
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the holder hereof), a register for this Warrant, in
which the Company shall record the name and address of the person in whose name
this Warrant has been issued, as well as the name and address of each transferee
and each prior owner of this Warrant.
(f) Exercise or Transfer Without Registration. If, at the time
of the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act and under applicable state securities or blue sky laws, the Company may
require, as a condition of allowing such exercise, transfer, or exchange, (i)
that the holder or transferee of this Warrant, as the case may be, furnish to
the Company a written opinion of counsel (which opinion shall be in form,
substance and scope customary for opinions of counsel in comparable
transactions) to the effect that such exercise, transfer, or exchange may be
made without registration under the Securities Act and under applicable state
securities or blue sky laws (the cost of which shall be borne by the Company if
the Company's counsel renders such an opinion and up to $250 of such cost shall
be borne by the Company if the holder's counsel is requested to render such
opinion), (ii) that the holder or transferee execute and deliver to the Company
an investment letter in form and substance acceptable to the Company and (iii)
that the transferee be an "accredited investor" as defined in Rule 501(a)
promulgated under the Securities Act; provided that no such opinion, letter, or
status as an "accredited investor" shall be required in connection with a
transfer pursuant to Rule 144 under the Securities Act.
(g) Additional Restrictions on Exercise or Transfer.
Notwithstanding anything contained herein to the contrary, unless the holder
hereof delivers a waiver in accordance with the last sentence of this Section
7(g), this Warrant shall not be exercisable by a holder hereof to the extent
(but only to the extent) that (a) the number of shares of Common Stock
beneficially owned by such holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unexercised portion of the Incentive Warrants and the Prepaid Warrants or the
unexercised or unconverted portion of any other securities of the Company
subject to a limitation on conversion or exercise analogous to the limitation
contained herein) and (b) the number of shares of Common Stock issuable upon
exercise of this Warrant (or portion hereof) with respect to which the
determination described herein is being made, would result in beneficial
ownership by such holder and its affiliates of more than 4.99% of the
outstanding shares of Common Stock. To the extent the above limitation applies,
the determination of whether and to what extent this Warrant shall be
exercisable vis-a-vis other securities owned by such holder shall be in the sole
discretion of the holder and submission of this Warrant for full or partial
exercise shall be deemed to be the holder's determination of whether and the
extent to which this Warrant is exercisable, in each case subject to such
aggregate percentage limitation. No prior inability to exercise the Warrant
pursuant to this Section shall have any effect on the applicability of the
-13-
<PAGE>
provisions of this Section with respect to any subsequent determination of
exerciseability. For purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as
otherwise provided in clause (a) hereof. Except as provided in the immediately
succeeding sentence, the restrictions contained in this Section 7(g) may not be
amended without the consent of the holder of this Warrant and the holders of a
majority of the Company's then outstanding Common Stock. Notwithstanding the
foregoing, the holder hereof may waive the restrictions set forth in this
Section 7(g) by written notice to the Company upon not less than sixty-one (61)
days prior notice (with such waiver taking effect only upon the expiration of
such sixty-one (61) day notice period).
8. Registration Rights. The initial holder of this Warrant (and certain
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in the Registration Rights
Agreement, including the right to assign such rights to certain assignees, as
set forth therein.
9. Notices. Any notices required or permitted to be given under the
terms of this Warrant shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier, or by confirmed telecopy, in each case addressed to a party. The
addresses for such communications shall be:
If to the Company:
THE NETPLEX GROUP, INC.
8260 Greensboro Drive
McLean, VA 22102
Telecopy: (703) 356-5105
Attn: Gene Zaino, President and CEO
with a copy simultaneously transmitted by like means to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, NY 10022
Telecopy: (212) 935-1787
Attn: Steven Wolosky, Esq.
If to the holder, at such address as such holder shall have provided in writing
to the Company, or at such other address as such holder furnishes by notice
given in accordance with this Section 9.
10. Governing Law; Jurisdiction. This Warrant shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed
-14-
<PAGE>
in the State of New York. The Company irrevocably consents to the jurisdiction
of the United States federal courts and state courts located in the City of New
York in the State of New York in any suit or proceeding based on or arising
under this Warrant and irrevocably agrees that all claims in respect of such
suit or proceeding may be determined in such courts. The Company irrevocably
waives any objection to the laying of venue and the defense of an inconvenient
forum to the maintenance of such suit or proceeding. The Company further agrees
that service of process upon the Company mailed by certified or registered mail
shall be deemed in every respect effective service of process upon the Company
in any such suit or proceeding. Nothing herein shall affect the holder's right
to serve process in any other manner permitted by law. The Company agrees that a
final non-appealable judgment in any such suit or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on such judgment or in any
other lawful manner.
11. Miscellaneous.
(a) Amendments. This Warrant and any provision hereof may only
be amended by an instrument in writing signed by the Company and the holder
hereof.
(b) Descriptive Headings. The descriptive headings of the
several Sections of this Warrant are inserted for purposes of reference only,
and shall not affect the meaning or construction of any of the provisions
hereof.
(c) Cashless Exercise. Notwithstanding anything to the
contrary contained in this Warrant, if the resale of the Warrant Shares by the
holder is not then registered pursuant to an effective registration statement
under the Securities Act, this Warrant may be exercised at any time after the
first anniversary of the Issue Date until the end of the Exercise Period, by
presentation and surrender of this Warrant to the Company at its principal
executive offices with a written notice of the holder's intention to effect a
cashless exercise, including a calculation of the number of shares of Common
Stock to be issued upon such exercise in accordance with the terms hereof (a
"Cashless Exercise"). In the event of a Cashless Exercise, in lieu of paying the
Exercise Price in cash, the holder shall surrender this Warrant for that number
of shares of Common Stock determined by multiplying the number of Warrant Shares
to which it would otherwise be entitled by a fraction, the numerator of which
shall be the difference between the then current Market Price of a share of the
Common Stock on the date of exercise and the Exercise Price, and the denominator
of which shall be the then current Market Price per share of Common Stock.
(d) Business Day. For purposes of this Warrant, the term
"business day" means any day, other than a Saturday or Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by
law, regulation or executive order to close.
-15-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
THE NETPLEX GROUP, INC.
By: _________________________________
Name:_____________________________
Title:______________________________
-16-
<PAGE>
FORM OF EXERCISE AGREEMENT
(To be Executed by the Holder in order to Exercise the Warrant)
To: THE NETPLEX GROUP, INC.
8260 Greensboro Drive
McLean, VA 22102
Telecopy: (703) 356-5105
Attn: Gene Zaino, President and CEO
The undersigned hereby irrevocably exercises the right to purchase
_____________ shares of the Common Stock of THE NETPLEX GROUP, INC., a
corporation organized under the laws of the State of New York (the "Company"),
evidenced by the attached Warrant, and herewith makes payment of the Exercise
Price with respect to such shares in full, all in accordance with the conditions
and provisions of said Warrant.
(i) The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained on exercise of the Warrant, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any state securities laws, and agrees that the following legend
may be affixed to the stock certificate for the Common Stock hereby subscribed
for if resale of such Common Stock is not registered or if Rule 144 is
unavailable:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE
SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER APPLICABLE SECURITIES LAWS UNLESS OFFERED,
SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
(ii) The undersigned requests that stock certificates for such shares
be issued, and a Warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Holder and delivered to the
undersigned at the address set forth below:
Dated:_________________ _____________________________________
Signature of Holder
-------------------------------------
Name of Holder (Print)
Address:
-------------------------------------
-------------------------------------
-17-
EXHIBIT 11
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------------
1997 1996
----------- ------------
Basic loss per share:
<S> <C> <C>
Weighted average number of common shares outstanding 6,820,863 5,026,306
=========== ===========
Net loss $(2,873,603) $(1,999,387)
Preferred dividends 275,625 98,194
----------- ----------
Loss attributable to Common Stockholders $(3,149,228) $(2,097,581)
=========== ===========
Basic loss per share $ (0.46) $ (0.42)
=========== ===========
Diluted loss per share: (1)
Weighted average number of common shares outstanding 6,820,863 5,026,306
Preferred stock convertible into common shares (1) - -
Common stock equivalents from outstanding stock options - -
----------- -----------
weighted average shares outstanding 6,820,863 5,026,306
=========== ===========
Net loss $(2,873,603) $(1,999,387)
Preferred dividends 275,625 98,194
--------------- -----------
Loss attributable to Common Stockholders $(3,149,228) $(2,097,581)
=============== ===========
Diluted Loss Per Share (1) $ (0.46) $ (0.42)
=============== ===========
</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 is thus
not presented in the computations of diluted loss per common share.
EXHIBIT 23
ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders
The Netplex Group, Inc.:
We consent to incorporation by reference in the registration statement of
The Netplex Group, Inc. on Form S-8 (No. 333-19115) and Form S-3 (No.
333-16423) of our report dated April 10, 1998, with respect to the
consolidated balance sheets of The Netplex Group, Inc. and subsidiaries as
of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in
the two-year period ended December 31, 1997, which report appears in the
December 31, 1997, Annual Report on Form 10-KSB of The Netplex Group, Inc.
KPMG Peat Marwick LLP
McLean, VA
April 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 353,005
<SECURITIES> 0
<RECEIVABLES> 4,446,148
<ALLOWANCES> 133,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,918,995
<PP&E> 952,546
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,912,497
<CURRENT-LIABILITIES> 5,472,699
<BONDS> 0
0
10,625
<COMMON> 7,470
<OTHER-SE> 1,312,607
<TOTAL-LIABILITY-AND-EQUITY> 6,912,497
<SALES> 40,468,134
<TOTAL-REVENUES> 40,468,134
<CGS> 35,415,644
<TOTAL-COSTS> 7,899,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,337
<INCOME-PRETAX> (2,873,603)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,873,603)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,873,603)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
