SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 30, 1998
The Netplex Group, Inc.
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(Exact name of registrant as specified in its charter)
New York 1-11784 11-2824578
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
8260 Greensboro Drive, 5th Floor, McLean, Virginia 22101
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(Address of principal executive offices)
Registrant's telephone number, including area code: (703) 356-1717
N/A
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(Former name or former address, if changed since last report.)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On January 30, 1998, The Netplex Group, Inc. (the "Company")
completed the purchase of all of the stock of The PSS Group, Inc. ("PSS") the
technical professional staff augmentation operations and business of Preferred
Systems Solutions, Inc. ("Preferred") and formerly a wholly-owned subsidiary of
Preferred. In consideration for the purchase, the Company paid $300,000 at
closing and on or before January 15, 1999 will pay $300,000 in cash or 200,000
shares of its Common Stock or any combination thereof, at Preferred's option.
The Company used working capital to finance the acquisition. The agreement also
provides that Preferred will receive additional consideration (the "Earn-out")
if PSS meets certain operating targets. Such Earn-out may be made at the
Company's option in cash or its Common Stock, or any combination thereof. The
acquisition was accounted for using the purchase method of accounting.
In connection with the acquisition, the Company and PSS also
will enter into employment agreements with certain employees of PSS.
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
Exhibit No. Description
99.1 Audited Financial Statements for the PSS Group, Inc.
for the year ended December 31, 1997.
99.2 Pro forma financial information (to be filed within
60 days of the filing of this Report on Form 8-K).
-2-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE NETPLEX GROUP, INC.
Dated: April 18, 1998 By:/s/ Gene Zaino
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Name: Gene Zaino
Title: Chairman of the Board
and President
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The PSS Group, Inc.
Financial Statements
December 31, 1997
(With Independent Auditors' Report Thereon)
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
Independent Auditors' Report
The Stockholder of The PSS Group, Inc.
We have audited the accompanying balance sheet of The PSS Group, Inc. (the
"Company") as of December 31, 1997, and the related statement of operations and
retained earnings (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The PSS Group, Inc. as of
December 31, 1997 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
McLean, Virginia
April 10, 1998
<PAGE>
The PSS Group, Inc.
Balance Sheet
December 31, 1997
Assets:
Current assets
Cash $ 148,385
Accounts receivable, net of allowance for
doubtful accounts of $230,061 799,789
Prepaid expenses and other current assets 7,240
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Total current assets 955,414
Property and equipment, net 44,468
Other assets 70,000
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Total Assets $ 1,069,882
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Liabilities and Stockholder's Deficit
Current liabilities:
Line of credit $ 805,822
Accounts payable 172,164
Current portion of long-term debt 14,216
Accrued payroll 160,470
Accrued expenses 3,212
Due to stockholder 15,293
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Total current liabilities 1,171,177
Long-term debt, net of current portion 43,819
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Total Liabilities 1,214,996
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Stockholder's deficit
Common stock, $1 par value
100 shares authorized,
issued and outstanding 100
Paid in capital 53,584
Retained deficit (198,798)
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Total Stockholder's deficit (145,114)
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Commitments and contingencies
Total Liabilities and Stockholder's Deficit $ 1,069,882
==========
See accompanying notes to financial statements
<PAGE>
The PSS Group, Inc.
Statement of Operations and Retained Earnings (Deficit)
Year Ended December 31, 1997
Revenues $5,213,684
Cost of revenues 4,048,474
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Gross profit 1,165,210
Selling, general & administrative expenses 1,606,691
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Operating loss (441,481)
Other expenses (63,918)
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Net loss $ (505,399)
Beginning retained earnings 306,601
=========
Ending retained deficit $ (198,798)
=========
See accompanying notes to financial statements
<PAGE>
The PSS Group, Inc.
Statement of Cash Flows
Year Ended December 31, 1997
Operating activities:
Net loss $(505,399)
Adjustments to reconcile net loss to
net cash used in operations:
Depreciation and amortization 20,373
Write-off of investments 13,313
Change in assets and liabilities:
Accounts receivable 26,708
Prepaid expenses and other current assets (1,440)
Other assets (60,000)
Accounts payable 108,187
Accrued payroll 85,340
Accrued expenses 1,866
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Net cash used in operating activities (311,052)
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Investing activities:
Capital expenditures (32,349)
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Net cash used in investing activities (32,349)
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Financing activities:
Net borrowings under line of credit facility 455,822
Principal payments on long term debt (13,958)
Proceeds from note to stockholder 110,000
Advances to stockholder (109,727)
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Net cash provided by financing activities 442,137
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Increase in cash 98,736
Cash - beginning of the year 49,649
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Cash - end of the year $ 148,385
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Supplemental information:
Cash paid during the period for:
Interest $ 57,498
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See accompanying notes to financial statements
<PAGE>
The PSS Group, Inc.
Notes to Financial Statements
December 31, 1997
(1) The Business:
The PSS Group, Inc. ("PSS" or the "Company"), a wholly owned subsidiary
of Preferred Staffing Solutions ("Preferred"), was incorporated under
the laws of the Commonwealth of Virginia in 1997. Prior to its
incorporation, the Company operated as a division of Preferred, a
Subchapter S corporation formed in 1991. Since 1991, the Company has
been a provider of personnel consulting services that help
organizations obtain access to individuals with Information Technology
("IT") technical talent for staffing needs on a temporary (contract),
temporary to permanent or permanent basis in the Washington D.C.
metropolitan area.
(2) Summary of Significant Accounting Policies:
Revenue Recognition:
The majority of the Company's revenue is generated from temporary
staffing services contracts. The revenue under these contracts is
recognized when the services are provided to the customer and the
related costs are incurred. Revenues for the placement of individuals
as permanent additions to the customer's staff (permanent placements)
are recognized upon achieving a satisfactory placement under the
contract.
Property and Equipment:
Property and equipment is recorded at cost. Depreciation and
amortization is provided for using an accelerated method over the
estimated useful lives of the underlying assets which range from 6 to
10 years.
Use of Estimates:
The preparation of 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 financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
Income Taxes:
The Company has elected Subchapter S corporation status as defined by
the Internal Revenue Code. Accordingly, the financial statements do not
include a provision for federal or state income taxes. The
responsibility of income taxes is passed on to the stockholder of the
Company.
<PAGE>
(3) Property and Equipment:
Property and Equipment at December 31, 1997 is comprised of the
following:
Office furniture $ 17,049
Computer equipment 74,569
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91,618
Less: accumulated depreciation (47,151)
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Property and equipment, net $ 44,468
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Depreciation expense for 1997 was $20,373.
(4) Line of Credit:
The Company has a line of credit agreement with a bank which expires on
April 30, 1998, and which provides for borrowings under the line of
credit not to exceed the greater of $1 million or 80% of the eligible
accounts receivable, as defined in the agreement. Outstanding
borrowings under the line of credit bear interest at the Bank's prime
rate (8.5% at December 31, 1997) plus 1.0%. The Company had outstanding
advances under this line of credit of $805,822 at December 31, 1997.
(5) Long - Term Debt:
Long-term debt consists of a bank promissory note due in monthly
installments of $1,601, including interest at 9.5% per annum and
matures in August 2001. The note is secured by a lien on the Company's
assets and is personally guaranteed by the Company's stockholder. As of
December 31, 1997, the balance due under the promissory note was as
follows:
Total long-term debt $58,035
Less: current portion 14,216
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Long term debt, net of current portion $43,819
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Future minimum payments required under this note agreement are as
follows:
1998 $19,215
1999 19,215
2000 19,215
2001 12,809
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70,454
Less: amounts representing interest 12,419
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Present value of note payments $58,035
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(6) Amounts due to Stockholder:
As of December 31, 1997, the Company owed its stockholder $15,293. This
amount is the cumulative net result of $200,000 advanced by the
Stockholder to the Company and $184,707 in advances made by the Company
to the Stockholder. Amounts due to (from) Stockholder bear interest at
9% per annum and are payable on demand.
<PAGE>
(7) Commitments:
During 1997, the Company leased approximately 3,200 square feet of
office space under a non-cancelable operating lease to house the
Company's operations. The Company's monthly payments under this lease
during 1997 were approximately $4,700.
In December 1997, the Company signed a lease for approximately 7,300
square feet of office space to serve as the Company's new headquarters.
This new lease provides for initial monthly payments of $13,968 and
provides for a 3% annual increase in the base rent . As of December 31,
1997, the Company had made a security deposit of $60,000 in conjunction
with the new lease premises.
Future minimum lease payments as of December 31, 1997, under the
Company's office facilities, equipment, and automobile operating leases
are as follows:
Year ending December 31:
1998 $169,182
1999 190,931
2000 177,661
2001 182,278
2002 187,692
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Thereafter 31,444
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Total minimum lease payments $939,188
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Total rent expense for 1997 was approximately $95,000.
(8) 401(k) Retirement Plan:
In 1997, the Company established a 401(k) retirement plan (the "Plan")
for employees who meet the eligibility requirements as outlined in the
Plan. Participants to the Plan make voluntary tax deferred
contributions to the Plan. The Company does not make contributions to
match the participants contributions but has the ability to make
discretionary contributions to the Plan. During 1997, the Company made
no discretionary contributions to the Plan.
(9) Subsequent Event
On January 30, 1998, the Company was purchased by The Netplex Group,
Inc. ("Netplex"), a McLean VA based provider of IT services and
solutions that help businesses build, manage and protect networked
information systems. Netplex paid $300,000 at closing and on or before
January 15, 1999, will pay $300,000 in cash or 200,000 shares of its
common stock or any combination thereof, at Preferred's option. The
agreement also provides that Preferred will receive additional
consideration (the "Earn Out") if PSS meets certain operating targets
for its fiscal years ended December 31, 1998, 1999 and 2000. Such Earn
Out will be paid in cash or Netplex's common stock , or any combination
thereof, at Netplex's option. If Netplex elects to pay the Earn Out in
common stock, the value of the common stock will be based on the
average closing price of Netplex's common stock for the last quarter of
the year in which the payment is made.
The Netplex Group, Inc.
Pro Forma Consolidated Financial Statements
The following unaudited pro forma consolidated financial statements assume that
the acquisition of The PSS Group, Inc.("PSS") was consummated as of the
beginning of the period presented and combines the audited statements of
operations of PSS for the year ended December 31, 1997 with the audited
historical consolidated statements of operations of The Netplex Group, Inc. for
the same period. The pro forma consolidated statements reflect certain
adjustments to bring the historical cost basis financial statements of PSS to
fair market value, to eliminate related party transactions and to record
amortization expense of certain intangible assets.
The pro forma combined statements of operations are not necessarily indicative
of operating results which would have been achieved had the acquisition been
consummated as of the beginning of the period and should not be construed as
representative of future operations.
Netplex acquired all of the outstanding shares of PSS from Preferred Systems
Solutions ("Preferred") on January 30, 1998 for: $300,000 of cash and a note
payable t on or before January 15, 1999 in either $300,000 in cash or 200,000
shares of Netplex Common Stock or any combination thereof at Preferred's option.
The acquisition agreement also provides for additional payments to Preferred
based on the profitability of PSS in 1998, 1999 and 2000. This merger has been
accounted for as a purchase transaction, with the assets and liabilities of PSS
being recorded at fair value
<PAGE>
Assets
Current assets
Cash and cash equivalents $ 201,390
Accounts receivable, net of allowance 4,932,937
Prepaid expenses and other current assets 240,082
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Total current assets 5,374,409
Property and equipment, net 997,014
Other assets 1,083,345
Acquired software development costs 418,225
Goodwill, net 346,529
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Total assets $ 8,219,522
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Liabilities and Stockholder's Equity
Current liabilities
Accounts payable $ 739,969
Line of credit 2,122,122
Accrued expenses and other current liabilities 3,781,785
Note payable - Preferred Systems 300,000
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Total current liabilities 6,943,876
Obligations under capital lease, net of current portion 152,915
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Total Liabilities 7,096,791
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Stockholder's deficit
Class A cumulative preferred stock 10,625
Common Stock 7,470
Additional paid in capital 6,187,293
Accumulated deficit (5,082,657)
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Commitments and contingencies
Total Stockholder's Deficit 1,122,731
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Total Liabilities and Stockholder's Deficit $ 8,219,522
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<PAGE>
Revenues $ 45,681,818
Cost of revenue 39,587,175
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Gross profit 6,094,643
Selling, general and administrative expense 9,506,247
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Operating loss (3,411,604)
Other expenses (90,255)
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Loss before income taxes (3,501,859)
Provision for income taxes -
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Net loss $ (3,501,859)
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The pro forma numbers above include the full $(505,399) loss of PSS Group, Inc.
as a subsidiary of Preferred Staffing Solutions, Inc. and do not reflect the
following adjustments that are not related to the continuing operations of PSS
PSS Group, Inc. loss for the year ended December 31, 1997 $ (505,399)
Add back items not included in purchase:
Write off of bad debts 232,000
Write off of shareholder receivable 184,707
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Adjusted loss $ (88,692)
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