SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 001-11784
THE NETPLEX GROUP, INC.
(Exact name of small business issuer as specified in its charter)
NEW YORK 11-2824578
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8260 Greensboro Drive, 5th Floor
McLean, Virginia 22102
(Address of principal executive offices and zip code)
(703) 356-3001
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes . X . . No . . . .
As of April 26, 1998, 9,007,370 shares of the registrant's Common Stock were
outstanding.
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THE NETPLEX GROUP, INC.
FORM 10-Q/A FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Facing sheet
Index
Part I. Financial information
Item 1. Financial statements and supplementary data
a) Condensed consolidated balance sheets as of
March 31, 1998 and December 31, 1997 . . . . . . . . . . 3
b) Condensed consolidated statements of operations
for the three months ended March 31, 1998 and 1997 . . . .4
c) Condensed consolidated statements of cash flows
for the three months ended March 31, 1998 and 1997 . . . 5
d) Notes to condensed consolidated financial statements . . 6
Item 2. Management's discussion and analysis of financial
condition and results of operations . . . . . . . . . . . . 10
Part II Other information . . . . . . . . . . . . . . . . . . . . . 15
Signature . . . . . . . . . . . . . . . . . . . . . . . . . 18
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PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and December 31, 1997
(Unaudited)
March 31, December 31,
1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,326,291 $ 353,005
Accounts receivable, net 6,293,041 4,133,148
Prepaids and other current assets 419,630 432,842
----------- ------------
Total current assets 8,038,962 4,918,995
Property and equipment, net 1,012,474 952,546
Employee notes receivable 195,014 193,464
Other assets 142,197 82,738
Fulfillment database, net 930,000 --
Acquired software, net 394,991 418,225
Goodwill, net 339,866 346,529
----------- ------------
Total assets $11,053,504 $ 6,912,497
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,051,407 $ 567,805
Line of credit 2,404,670 1,316,300
Accrued expenses and other 4,930,319 3,588,594
----------- ------------
Total current liabilities 8,386,396 5,472,699
Other liabilities 196,164 109,096
----------- ------------
Total liabilities 8,582,560 5,581,795
----------- ------------
Stockholders' equity:
Class A cumulative preferred stock;
$.01 par value; 2,000,000 authorized,
outstanding 1,062,500 shares in 1998
and 1,062,500 shares in 1997
(liquidation preference of the greater of
[i]two times the stated value of $2 per
share plus all accrued and unpaid dividends,
or [ii] the amount that would have
been received if such shares were converted
to Common Stock on the business day
immediately prior to the liquidation) 10,625 10,625
Common stock $.001 par value
20,000,000 authorized, outstanding
9,007,370 share in 1998
7,470,370 shares in 1997 9,007 7,470
Additional paid in capital 7,826,370 6,272,407
Accumulated deficit (5,375,058) (4,959,800)
----------- ------------
Commitments and contingencies
Total stockholders' equity 2,470,944 1,330,702
----------- ------------
Total liabilities and stockholders' equity $11,053,504 $ 6,912,497
=========== ============
See accompanying notes to condensed consolidated financial statements
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THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
(Unaudited)
1998 1997
----------- -------------
Revenues $13,311,308 $9,778,312
Cost of Revenues 11,176,766 8,844,054
------------ -----------
Gross Profit 2,134,542 934,258
Selling general and administrative expenses 2,483,723 1,708,329
------------ -----------
Operating loss (349,181) (774,071)
Interest income (expense), net (66,076) 8,220
------------ -----------
Loss before Income Taxes (415,257) (765,851)
Provision for Income taxes - -
------------ -----------
Net loss $ (415,257) $ (765,851)
============ ===========
Loss per common share:
Basic and diluted loss per common share $ (0.06) $ (0.13)
============ ===========
Weighted average common shares outstanding,
basic and diluted 7,773,292 6,457,631
============ ===========
See accompanying notes to condensed consolidated financial statements
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THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
(Unaudited)
1998 1997
----------- ----------
Operating activities:
Net cash flow from operating activities $ (580,364) $ (146,600)
---------- -----------
Investing activities:
Purchases of property and equipment (109,127) (54,632)
Cash paid in acquisition, net of cash acquired (151,615) --
Proceeds from the exercise of stock options -- 69,934
---------- -----------
Net cash flow from investing activities (260,742) 15,302
---------- -----------
Financing activities:
Net proceeds from stock offering 1,555,500 --
Borrowings under line of credit 282,548 --
Principal payments on capital lease obligations (23,656) (15,086)
---------- -----------
Net cash flow from financing activities 1,814,392 (15,086)
---------- -----------
Increase (decrease) in cash and cash equivalents 973,286 (146,384)
Cash and equivalents at beginning of period 353,005 3,691,099
---------- -----------
Cash and equivalents at end of period $1,326,291 $ 3,544,715
========== ===========
Supplemental information:
Cash paid (received) during the period for:
Interest $ 45,585 $ 4,612
========== ===========
Income taxes $ -- $ --
========== ===========
See accompanying notes to condensed consolidated financial statements
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THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and 1997
(Unaudited)
(1) General
The accompanying unaudited condensed consolidated financial
statements of The Netplex Group, Inc. and Subsidiaries ("Netplex" or
the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and note disclosures normally
included in the financial statements presented in accordance with
generally accepted accounting principles have been condensed or
omitted. The Company believes the disclosures made are adequate to
make the information presented consistent with past practices.
However, these condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report on Form 10-KSB
for the fiscal year ended December 31, 1997.
In the opinion of the Company, the accompanying condensed
consolidated financial statements reflect all adjustments and
reclassifications (which include only normal recurring adjustments)
necessary to present fairly the financial position of the Company as
of March 31, 1998 and December 31, 1997 and the results of its
operations and its cash flows for the three months ended March 31,
1998 and 1997. Interim results are not necessarily indicative of the
results that may be expected for the fiscal year ended December 31,
1998.
Business
Based in McLean, Virginia with seven offices throughout the U.S., The
Netplex Group, Inc., together with its wholly owned subsidiaries
("the Company" or "Netplex"), is an Information Technology (IT)
company that provides the people, technology, and processes to build,
manage, and protect business information systems. Through the
strategic teaming of business consulting practice areas, operating
units, and wholly owned subsidiaries, Netplex believes that it is
positioned to deliver: IT Solutions - Design and implementation of
systems solutions to address IT related business needs; IT Staffing -
Staff augmentation and flexible task outsourcing; and IT Contractor
Resources - Business services for the independent IT Consultant.
Basis of Presentation
The accompanying financial statements include the accounts of Netplex
Systems, Inc. (formerly The Netplex Group, Inc.) America's Work
Exchange, Inc., its wholly owned subsidiaries Software Resources of
New Jersey, Inc, now known as Contractors Resources ("CR"), Onion
Peel Solutions, L.L.C. ("Onion Peel"), and PSS Group, Inc. ("PSS")
for the three months ended March 31, 1998. The financial statements
exclude the accounts of Onion Peel and PSS for the three months ended
March 31, 1997 because the effective dates of their acquisitions,
which were accounted for using the purchase method of accounting,
were subsequent to March 31, 1997. All significant intercompany
transactions were eliminated in consolidation.
Earnings (loss) per share
Basic net loss per share is calculated using the weighted average
number of common shares outstanding during the periods. Diluted net
loss per common share is calculated using the weighted average number
of common shares and dilutive potential common shares outstanding
during the periods. For the quarters ended March 31, 1998 and 1997,
the assumed exercise of the company's outstanding stock options and
warrants and Convertible Preferred Stock has not been included in the
calculation as the effect would be anti- dilutive.
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A reconciliation of the numerators and denominators of the basic and diluted EPS
for the three months ended March 31, 1998 and 1997, is provided below:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Three months ended March 31, 1998
<S> <C> <C> <C>
Net Loss $(415,257)
Preferred stock dividend 56,472
----------
Basic and diluted EPS
Income available to common shareholders $(471,729) 7,773,292 $(0.06)
========== =======
Three months ended March 31, 1997
Net Loss $(765,851)
Preferred stock dividend 82,500
---------- -------
Basic and diluted EPS
Income available to common shareholders $(848,351) 6,457,631 $(0.13)
========== =======
</TABLE>
(2) Acquisitions
Onion Peel Solutions L.L.C.
The Company acquired Onion Peel Solutions L.L.C., a Raleigh, NC based
provider of network management solutions as of July 1, 1997, by
issuing 80,000 shares of its Common Stock to the members of Onion
Peel, subject to the issuance of additional shares based on the
closing price of the Company's Common Stock on December 31, 1998. The
acquisition was accounted for using the purchase method of
accounting, whereby the $400,000 purchase price was allocated to the
fair value of the assets acquired and the liabilities assumed.
PSS Group, Inc.
On January 30, 1998, the Company completed the purchase of all of the
stock of The PSS Group, Inc. ("PSS"), the technical professional
staff augmentation operations and business of Preferred Systems
Solutions, Inc. ("Preferred") and formerly a wholly owned subsidiary
of Preferred. In consideration for the purchase, the Company paid
$300,000 at closing and on or before January 15, 1999 will pay
$300,000 in cash or 200,000 shares of its Common Stock or any
combination thereof, at Preferred's option. The Company also issued
130,435 warrants with exercise prices ranging from $1.15 to $1.80 in
connection with the financing of this acquisition. These warrants
expire in February 2000. The agreement also provides that Preferred
will receive additional consideration (the "Earn-out") if PSS meets
certain operating targets. Such Earn-out may be paid at the Company's
option in cash or its Common Stock, or any combination thereof. In
connection with the acquisition, the Company and PSS have entered
into employment agreements with certain employees of PSS. The
acquisition was recorded effective January 1, 1998 using the purchase
method of accounting.
The purchase price of the PSS acquisition was determined to be
$600,000 (subject to adjustment for contingent consideration) and was
allocated to the fair value of the assets and liabilities acquired,
as follows:
Cash $ 148,000
Accounts receivable 800,000
Fulfillment database 930,000
Other assets 122,000
Less liabilities assumed (1,400,000)
Net assets acquired $ 600,000
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The following unaudited supplemental financial information presents
the consolidated results of the Company from continuing operations,
on a proforma basis, as though the acquisitions of Onion Peel and PSS
was consummated on January 1, 1997 and reflects the historical
results of operations of the purchased business adjusted for
increased common shares outstanding from the merger.
Unaudited
Three Months Ended
March 31, 1997
--------------------
(in thousands except
per share data)
Revenues $11,267
=======
Net loss from continuing operations $ (849)
=======
Net loss per share from continuing operations $ (0.13)
=======
Weighted average common shares outstanding 6,538
=======
(3) Class A Cumulative Preferred Stock
0n September 19, 1996, the Company raised approximately $3,000,000
through the completion of a Private Placement offering of units of
equity securities. Each unit of equity securities consists of one
share of $.01 par value Class A Cumulative Convertible Preferred
Stock (the "Preferred Stock") and one Common Stock warrant to
purchase one share of the Company's $0.001 par value Common Stock at
an exercise price of $2.50.
Each share of Preferred Stock is convertible into one share of Common
Stock at any time, at the discretion of the holder. The Preferred
Stock earns cumulative dividends at 10% per annum, payable in either
cash or additional shares of Preferred Stock at the Company's option.
Subject to the conversion rights, the Company may redeem the
Preferred Stock at its stated value plus all accrued and unpaid
dividends upon: (1) registration of the shares underlying the
Preferred Stock, and (2) 30 days written notice given at any time
upon attaining certain per share trading prices and sustaining such
prices for a specified period. The Preferred Stock has a per share
liquidation preference of the greater of: (i) two times the stated
value of the Preferred Stock (stated value is $2 per share) plus any
accrued and unpaid dividends, or (ii) the amount that would have been
received if such shares were converted to Common Stock on the
business day immediately prior to liquidation. During the year ended
December 31, 1997, 687,500 preferred shares were converted to Common
Stock.
Each warrant issued in connection with the Private Placement became
Exercisable on March 19, 1997 and expires on September 19, 2001. The
Company has the right to call the warrants at a redemption price of
$.01 per share upon: (1) registration of the shares underlying the
warrant, and (2) 30 days written notice given at any time upon the
Common Stock attaining certain per share trading prices and
maintaining such prices for a specified period. During 1997, warrants
to acquire 175,000 shares of Common Stock were exercised.
On March 27, 1997, the Company declared a dividend in the amount of
$0.05 per share ($82,500) payable in cash to the holders of record of
the Company's Class A Preferred Stock on March 28, 1997.
On November 14, 1997, the Company declared a dividend payable to the
holders of record of its Class A Preferred Stock on account of
dividends in arrears which were payable on June 30, 1997 and
September 30, 1997, in the amount of 0.0582 shares of Class A
Preferred Stock per share of Class A Preferred Stock. The related
shares were issued by the Company subsequent to December 31, 1997.
On December 31, 1996, the Company declared a dividend payable of
approximately $0.056 per share to all holders of record of the Class
A Preferred Stock on January 15, 1997.
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Accordingly, the Company accrued a dividend payable of $98,194 at
December 31, 1996, which was paid during 1997.
(4) Equity Financings
Between January 1, 1998 and April 14, 1998, the Company has raised
additional equity totaling $3,057,000 as follows:
In February 1998 the Company raised $100,000 through the sale of
80,000 shares of nonregistered Common Stock plus a warrant to
purchase an additional 100,000 warrants at $1.20.
In March 1998 the Company raised $1,457,000 of financing in a Private
Placement raised primarily from accredited investors and employees of
the Company. The Company issued shares of non-registered Common Stock
to purchasers who have agreed not to sell or otherwise distribute
their shares for a period of one year. These restricted shares carry
registration rights and were offered at $1.00 per share. The funds
will be used to finance operations and additional acquisitions.
On April 7, 1998 Netplex completed the sale of 1,500 units of a
Private Placement, totaling $1.5 million, to various purchasers. The
Zanett Corporation acted as placement agent for the Private
Placement. The sale represents the first half of a transaction that
could include the sale of an additional 1,500 units for $1.5 million
at a future date, subject to the satisfaction of certain conditions.
Each unit sold in the private placement consisted of a prepaid Common
Stock purchase warrant entitling the holder to acquire such number of
shares of the Company's Common Stock as is equal to $1,000 divided by
an adjustable exercise price and an additional incentive warrant to
acquire 52 shares of Common Stock (or an aggregate of 78,000 shares
of Common Stock). The Company also granted the Zanett Securities
Corporation (which acted as placement agent) a warrant to purchase
39,000 shares of Common Stock. Zanett also received placement fees
and a non-accountable expense allowance equal to 12.53% of the
proceeds of the offering. The second half of the transaction would be
for the sale to Zanett of an additional and committed 1,500 units,
for $1,000 per unit, contingent at the discretion of the Zanett
Securities Corporation on Netplex recording three consecutive
quarters of increased profits and revenues, excluding any
extraordinary items. With respect to the second half of the
transaction, the exercise price of the purchase warrants and the
incentive warrants will be based on the bid price of the Common Stock
at the time of such closing. The funds from the Private Placement
will be used to fund operations and acquisitions. Under NASDAQ
regulations, certain aspects of the transaction must receive
shareholder approval. The Company believes that it will obtain such
shareholder approval at the Company's annual meeting. The Company
believes that the proceeds should ensure that the Company will exceed
NASDAQ's published net tangible assets requirement of $2 million. The
Company has an oral hearing with NASDAQ on April 30, 1998 to review
whether the Company is in compliance with the $2,000,000 net tangible
asset requirement and to review the terms of this private placement.
The failure to meet and maintain the NASDAQ requirements may result
in the Common Stock no longer being eligible for quotation on NASDAQ
and trading, if any, of the Common Stock would thereafter be
conducted in the non-NASDAQ over-the-counter market. As a result of
such delisting of the Common Stock 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.
(5) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS') No. 130,
Reporting Comprehensive Income and SFAS No. 131 Segment Information.
Both of those standards are effective for reporting periods beginning
after December 15, 1997, and thus are effective for the Company
beginning January 1, 1998. SFAS No. 130 requires that all components
of comprehensive income, including net income, be reported in the
financial statements in the period in which they are recognized.
Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from
non-owner sources.
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Net income and other comprehensive income, including foreign currency
translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to
arrive at comprehensive income. Management does not believe that
comprehensive income or loss is materially different than net income
or loss. SFAS No. 131 amends the requirements for public enterprises
to report financial and descriptive information about its reportable
operating segments. Operating segments, as defined in SFAS No. 131,
are components of an enterprise for which separate financial
information is available and is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance. The
financial information is required to be reported on the basis that it
is used internally for evaluating the segment performance. The
Company believes it operates in three segments as defined, IT
Solutions, IT Staffing, and IT Contractors Resources. The Company
does not believe that the implementation of this pronouncement will
have a material effect on its financial statement presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Based in McLean, Virginia with seven offices throughout the U.S., The Netplex
Group, Inc., together with its wholly owned subsidiaries ("the Company" or
"Netplex"), is an Information Technology (IT) company that provides the people,
technology, and processes to build, manage, and protect business information
systems. Through the strategic teaming of business consulting practice areas,
operating units, and wholly owned subsidiaries, Netplex believes that it is
positioned to deliver: IT Solutions - Design and implementation of systems
solutions to address IT related business needs; IT Staffing - Staff augmentation
and flexible task outsourcing; and IT Contractor Resources - Business services
for the independent IT Consultant.
The Company's operations have been concentrated on providing IT services and
solutions to U.S.-based commercial organizations since the beginning of 1997.
In July 1997, the Company acquired the net assets of Onion Peel Solutions, L.L.C
("Onion Peel") to broaden its customer base and expand the fulfillment capacity
of its Enterprise Systems Management service offerings in exchange for 80,000
shares of its Common Stock, subject to adjustment.
In January 1998, the Company acquired the net assets of The PSS Group, Inc.
("PSS") to expand its staffing organization in the Washington DC metropolitan
area and to broaden its customer base, for $300,000 in cash a $300,000 note to
be paid in either cash or 200,000 shares of the Company's Common Stock and is
subject to additional payments based on PSS's future profitability.
The statement of operations for the three months ended March 31, 1998 reflects
the results of PSS from January 1, 1998, the date of acquisition.
The above acquisitions have resulted in the Company emerging in 1997 with three
distinct, but inter-related business operations:
o IT Solutions - Design and implementation of systems
solutions to address all information technology-related business
needs. This business is comprised of several specialized
technology consulting practices and provides customers with firm
deliverables, generally on a "proposed estimate" or "fixed-fee"
basis. IT Solutions also maintains certifications with several
leading technology manufacturers, which authorizes Netplex to
resell and implement "best-in-class" technology products.
o IT Staffing - Providing technical staff augmentation
services to organizations based on technical need and Information
Technology goals. IT Staffing provides customers with IT
consulting and resource services on an as-needed basis, generally
for contract terms ranging from three to 12 months.
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Consulting rates vary based on the skills and experience of the
consultants requested.
o IT Contractor's Resources - Providing business advice,
skills training, and administrative employer services to IT
contract professionals. IT Contractor's Resources targets
independent-minded IT professionals who are entrepreneurial and
accustomed to the variability and flexibility of contract
assignments. This service provides the stability and
"back-office" infrastructure to enable and encourage IT
professionals to build skills-based careers across multiple
customer environments.
The following table sets forth the revenue and gross profit of each of the
business areas for the three months ended March 31, 1998 and 1997.
Consolidated Operating Results by Segment
For the three months ended March 31,
Operating Revenue
------------------------------------
(in thousands)
1998 1997
------- -------
IT Solutions $ 2,504 $ 1,087
IT Staffing 2,273 714
IT Contractors Resources 8,534 7,977
------- -------
Operating revenues $13,311 $ 9,778
======= =======
Gross Profit
------------------------------------
(in thousands)
1998 1997
------- -------
IT Solutions $ 1,251 $ 496
IT Staffing 592 191
IT Contractors Resources 292 247
------- -------
2,135 $ 934
======= =======
Operating Income
-----------------------------------
(in thousands)
1998 1997
------- -------
IT Solutions $ 27 $ (198)
IT Staffing 52 (95)
IT Contractors Resources 79 (12)
------- --------
Operating income 158 (305)
Corporate expenses 384 364
------- --------
EBITDA (226) (669)
Interest, taxes,
depreciation, & amortization 189 97
-------- --------
Net operating loss $ (415) $ (766)
======== ========
Results of Operations
Three months ended March 31, 1998 and 1997
Revenue for the three months ended March 31,1998 increased approximately $3.5
million or 36% to approximately $13.3 million, as compared to $9.8 million for
the same period in 1997. This increase includes a $1.4 million or 130% increase
in IT Solutions revenue, a $1.6 million or 218% increase in IT Staffing revenue,
and $560,000 or 6.5% increase in IT Contractor Resources revenue. The increase
in revenues is due to a combination of growth, better integration across the
three business units and the acquisition of Onion Peel and the PSS Group.
Gross Profit for the three months ended March 31,1998 increased approximately
$1.2 million or 128% to approximately $2.1 million as compared to approximately
$934,000 for the same period of 1997. This increase includes an increase of
approximately $750,000 or
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152% in IT Solutions gross profit, an approximately $400,000 or 210% increase in
IT Staffing gross profit and a $45,000 or 18% increase in IT Contractor
Resources gross profit. The increased IT Solutions gross profit is primarily due
to an increase in revenues from the IT Solutions practice areas including Onion
Peel. The increase in IT Staffing is attributable to growth and to the
acquisition of The PSS Group, Inc in January 1998. The IT Contractor Resources
increase is due to revenue growth.
Gross Profit margin increased to approximately 16.0% for the three months ended
March 31, 1998, from approximately 9.6 % for the same period of 1997, this
increase is due to higher revenue growth rates in the IT Solutions and IT
Staffing businesses than experienced in the IT Contractor Resources business.
The profit margins generated by IT Solutions and IT Staffing product offerings
generate higher gross profit margins than IT Contractor Resources Revenues.
Operating expenses for the three months ended March 31, 1998 increased
approximately $738,000 or 60 % to approximately $2.0 million from approximately
$1.2 million for the same period of 1997. This increase includes increases in IT
Solutions and IT Staffing operating expense of approximately $530,000 and
$250,000, respectively. The IT Solutions increase includes increases of $300,000
for the inclusion of Onion Peel operating expenses and approximately $130,000 of
expansion in the IT Solutions technical staff as well as an expanded sales
force, and practice management. IT Staffing operating expense increase is
primarily due to the acquisition of PSS in January 1998. Contractor's Resources
operating expenses declined by approximately $50,000 during the three months
ended March 31, 1998 as compared to the same period of 1997.
Operating income for the three months ended March 31, 1998 was approximately
$160,000 as compared to an operating loss of $305,000 for the same period of
1997, and increase of approximately $465,000 which includes increased operating
profits from IT Solutions, IT Staffing and IT Contractor Resources of
approximately $225,000, $150,000, and $90,000, respectively.
Corporate expense for the three months ended March 31, 1998 increased
approximately $20,000 or 6% to approximately $380,000 from approximately
$364,000 when compared to the same period of 1997.
Earnings before interest, income taxes, depreciation and amortization ("EBITDA")
for the three months ended March 31, 1998 was a loss of $225,000 as compared to
a loss of approximately $670,000 for the same period of 1997, an improvement of
approximately $445,000. The components of this improvement are discussed above.
Depreciation and interest expense for the three months ended March 31, 1998
increased approximately $93,000 to approximately $190,000 from approximately
$97,000 for the same period of 1997. This increase is principally due to
increased borrowings under the Company's line of credit facility in the three
months ended March 31, 1998 as compared to the same period of 1997.
No provision or benefit for income taxes was required for either the three
months ended March 31, 1998 or 1997.
The net loss decreased approximately $350,000 to approximately $415,000 from
approximately $765,000 in the same period of 1997. The components of this
improvement are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company had cash and cash equivalents of $1,326,291. The
Company had $2,404,670 outstanding on its line of credit facilities and had long
term capital lease obligations of $240,130.
The Company's liquidity and capital resources were increased by the following:
For the three months ended March 31, 1998 the Company's cash increased by
$975,000. This increase is comprised of cash used in operating activities of
approximately $580,000,cash used in investing activities of approximately
$260,000 and cash provided by financing
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activities of approximately $1.8 million. The primary uses of cash were the
Company's increased accounts receivable of approximately $1.4 million, the
Company's net loss of $415,000, and $300,000 paid in the acquisition of PSS.
These uses of cash were offset by cash provided from the net proceeds from the
Company's private placements of equity of $1,555,000, increased accounts payable
and accrued expenses of $1.0 million, and borrowings under the Company's line of
credit of $280,000.
The Company is actively pursuing the acquisition of additional technical
consulting firms to broaden its customer base, expand its technical capacity and
enhance its fulfillment capability.
As of March 31, 1998, the Company maintains two credit facilities with banks.
The first is a line of credit of $2,000,000 (the $2 million line of credit)
which allows the Company to borrow the lesser of $2,000,000 or 80% of eligible
accounts receivable. Advances against this line of credit bear interest at 0.75%
over the bank's prime rate and require the Company to maintain certain financial
covenants. The Company had borrowings of $1,602,300 on this line of credit as of
March 31, 1998.
The Company also has a line of credit facility with a bank that it acquired in
the PSS acquisition (the "PSS line of credit"). The PSS line of credit allows
the Company to borrow the lesser of $1,000,000 or 80% of eligible accounts
receivable with an interest rate of 1.00% over the bank's prime rate. The
Company had borrowings of $802,370 on the PSS line of credit as of March 31,
1998. The Company retired the PSS line of credit in April 1998.
The Company will discuss with the bank the extension of its line of credit
facility prior to its expiration in July 1998, as well as entering into
discussions with other financial institutions to expand its credit facilities.
On January 30, 1998, the Company completed the purchase of all of the stock of
The PSS Group, Inc. ("PSS") the technical professional staff augmentation
operations and business of Preferred Systems Solutions, Inc. ("Preferred") and
formerly a wholly-owned subsidiary of Preferred. In consideration for the
purchase, the Company paid $300,000 at closing and on or before January 15, 1999
will pay $300,000 in cash or 200,000 shares of its Common Stock or any
combination thereof, at Preferred's option. The Company used working capital to
finance the acquisition. The agreement also provides that Preferred will receive
additional consideration (the "Earn-out") if PSS meets certain operating
targets. Such Earn-out may be made at the Company's option in cash or its Common
Stock, or any combination thereof. If the Company elects to pay the Earn-out in
Common Stock, the value of the Common Stock will be based on the average closing
price of the Company's Common Stock for the last quarter of the year in which
the payment was made.
Capital expenditures for the three months ended March 31, 1998 were
approximately $109,000.
Between January 1, 1998 and April 14, 1998, the Company has raised additional
equity totaling $3,057,000, as follows:
In February 1998 the Company raised $100,000 through the sale of 80,000 shares
of non-registered Common Stock plus a warrant to purchase an additional 100,000
warrants at $1.20.
In March 1998 the Company raised $1,457,000 of financing in a Private Placement
with accredited investors and employees of the Company. The Company issued
shares of non-registered Common Stock to purchasers who have agreed not to sell
or otherwise distribute their shares for a period of one year. These restricted
shares carry registration rights and were offered at $1.00 per share. The funds
will be used to finance operations and additional acquisitions.
On April 7, 1998 Netplex completed the sale of 1,500 units of a Private
Placement, totaling $1.5 million, to various purchasers. The Zanett Corporation
acted as placement agent for the Private Placement. The sale represents the
first half of a transaction that could include the sale of an additional 1,500
units for $1.5 million at a future date, subject to the satisfaction of certain
conditions. Each unit sold in the private placement consisted of a prepaid
Common Stock purchase warrant entitling the holder to acquire such number of
shares of the Company's Common Stock as is equal to $1,000 divided
13 of 20
<PAGE>
by an adjustable exercise price and an additional incentive warrant to acquire
52 shares of Common Stock (or an aggregate of 78,000 shares of Common Stock).
The Company also granted the Zanett Securities Corporation (which acted as
placement agent) a warrant to purchase 39,000 shares of Common Stock. Zanett
also received placement fees and a non-accountable expense allowance equal to
12.53% of the proceeds of the offering. The second half of the transaction would
be for the sale to Zanett of an additional and committed 1,500 units, for $1,000
per unit, contingent at the discretion of the Zanett Securities Corporation on
Netplex recording three consecutive quarters of increased profits and revenues,
excluding any extraordinary items. With respect to the second half of the
transaction, the exercise price of the purchase warrants and the incentive
warrants will be based on the bid price of the Common Stock at the time of such
closing. The funds from the Private Placement will be used to fund operations
and acquisitions. Under NASDAQ regulations, certain aspects of the transaction
must receive shareholder approval. The Company believes that it will obtain such
shareholder approval at the Company's annual meeting. The Company believes that
the proceeds should ensure that the Company will exceed NASDAQ's published net
tangible assets requirement of $2 million. The Company has an oral hearing with
NASDAQ on April 30, 1998 to review whether the Company is in compliance with the
$2,000,000 net tangible asset requirement and to review the terms of this
private placement. The failure to meet and maintain the NASDAQ requirements may
result in the Common Stock no longer being eligible for quotation on NASDAQ and
trading, if any, of the Common Stock would thereafter be conducted in the
non-NASDAQ over-the-counter market. As a result of such delisting of the Common
Stock from NASDAQ, it may be more difficult for investors to dispose of, or to
obtain accurate quotations as to the market value of, the Common Stock.
Based on its current operating plan, the Company believes that the net proceeds
from the Private Placement together with cash anticipated to be provided by
operating activities and amounts expected to be available under a renegotiated
line of credit will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's
liquidity requirements, the Company may seek to sell additional equity or
convertible debt securities or obtain additional credit facilities. However, no
assurance can be given that any such additional sources of financing will be
available on acceptable terms or at all. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. A portion of the Company's cash may be used for acquisitions or to
acquire or invest in complimentary businesses or products or to obtain the right
to use complementary technologies. The Company has no current plans, agreements
or commitments, and is not currently engaged in any negotiations with respect to
any such transaction.
The Company is expecting to incur operating losses until it achieves quarterly
revenue and operating income levels of approximately $15,000,000 and $600,000
respectively. While it cannot be certain as to when such levels of revenue and
profitability can be attained, the Company anticipates that such levels will be
achieved during the next twelve months. The Company will continue to make
significant investments in its technical workforce, marketing, training and
infrastructure to increase productivity, build its core competency practice unit
skill base and product offerings and foster growth of its operations.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, (including without
limitation, future financings and expenses, as well as general market
conditions) though the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the
14 of 20
<PAGE>
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
Inflation
Inflation has not had and the Company does not expect inflation to have a
significant adverse impact on its operations.
PART II
Item 1. Legal Proceedings
Nothing to report
Item 2. Changes in Securities
In February 1998 the Company sold 80,000 shares of Common Stock to a
purchaser at a price of $1.25 per share. In addition, the purchaser
received a warrant to purchase an additional 100,000 shares of Common
Stock at an exercise price of $1.80 per share.
In March 1998 the Company closed a private placement of 1,457,000
shares of Common Stock. Such shares were sold at a price of $1.00 per
share.
Both of the above transactions were made pursuant to the exemption
contained in Section 4(2) of the Securities Act of 1933, as amended. In
each case the Company engaged no underwriter or placement agent. For
further information relating to such transactions, please see Note 5 to
the Condensed Consolidated Fianancial Statements.
Item 3. Defaults Upon Senior Securities
Nothing to Report
Item 4. Submission of Matters to a Vote of Security Holders
Nothing to Report
Item 5. Other Information
On April 7, 1998, the Company completed the sale of 1,500 units to certain
investors in a private placement transaction totaling $1.5 million. The units
consist of prepaid warrants to purchase Common Stock at an adjustable exercise
price and an incentive warrant to acquire an aggregate of 78,000 shares of
Common Stock at $1.47 per share, the exercise price. The Company also granted
the placement agent a warrant to purchase 39,000 shares of Common Stock at $1.47
per share. Net proceeds from this transaction were $1,312,000.
On April 27, 1998 the Company completed a private placement of 135,000 shares of
its Common Stock to certain accredited investors for $198,125.
The accompanying proforma condensed consolidated balance sheet as of March 31,
1998 assumes that the April 7 and April 27 private placements were completed on
March 31, 1998.
15 of 20
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
March 31, Proforma March 31,
1998 Adjustments 1998
-------------- --------------- -------------
(unaudited) (proforma)
ASSETS
Current Assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 1,326,291 1,312,050 (1) $ -
198,125 (2) 2,836,466
Accounts receivable, net 6,293,041 6,293,041
Prepaids and other current assets 419,630 419,630
------------ ----------- -----------
Total current assets 8,038,962 1,510,175 9,549,137
Property and equipment, net 1,012,474 1,012,474
Employee notes receivable 195,014 195,014
Other assets 142,197 142,197
Fulfillment database, net 930,000 930,000
Acquired software, net 394,991 394,991
Goodwill, net 339,866 339,866
------------ ------------ -----------
Total assets $ 11,053,504 1,510,175 $12,563,679
============ ============ ===========
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Accounts payable $ 1,051,407 $ 1,051,407
Line of credit 2,404,670 2,404,670
Accrued expenses and other 4,930,319 4,930,319
------------- ------------- -----------
Total current liabilities 8,386,396 8,386,396
Other liabilities 196,164 196,164
------------- ------------- -----------
Total liabilities 8,582,560 - 8,582,560
------------- ------------- -----------
Stockholders' equity:
Class A cumulative preferred stock;
$.01 par value; 2,000,000 authorized,
outstanding 1,062,500 shares in 1998
and 1,062,500 shares in 1997
(liquidation preference of the greater of
[i]two times the stated value of $2 per
share plus all accrued and unpaid dividends,
or [ii] the amount that would have
been received if such shares were converted
to Common Stock on the business day
immediately prior to the liquidation) 10,625 10,625
Common stock $.001 par value
20,000,000 authorized, outstanding
9,007,370 share in 1998
7,470,370 shares in 1997 9,007 135 (2) 9,142
Additional paid in capital 7,826,370 1,312,050 (1)
197,990 (2) 9,336,410
Accumulated deficit (5,375,058) (5,375,058)
------------- ------------- -----------
Commitments and contingencies
Total stockholders' equity 2,470,944 1,510,175 3,981,120
------------- ------------- -----------
Total liabilities and stockholders' equity $ 11,053,504 1,510,175 $12,563,679
============= ============= ===========
</TABLE>
Proforma Adjustments:
(1) Private placement completed April 7, 1998
(2) Private placement completed April 27, 1998
16 of 20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits:
11 - Statement re: Computation of Per Share Earnings
27 - Financial Data Schedule
(b). Reports on Form 8-K:
The Company filed a form 8-K describing the PSS Group, Inc.
Acquisition under Item 2 - - Acquisition or Disposition of
Assets. The Company filed a form 8-K describing a private
placement to certain accredited investors and employees under
Item 5 - - Other Events.
17 of 20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The Netplex Group, Inc.
Date: April 28, 1997 By: /s/ Gene Zaino
----------------- ---------------------------
Gene Zaino, President and CEO
(Principal Executive Officer) and Chairman
of the Board
Date: April 28, 1997 By: /s/ Matthew G. Jones
----------------- ---------------------------
Matthew G. Jones, Chief Financial Officer
(Principal Accounting Officer)
18 of 20
EXHIBIT 11
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------
1998 1997
-------------------------------
Basic Loss Per Share:
<S> <C> <C>
Weighted average number of common shares outstanding 7,773,292 6,457,631
Common stock equivalents from outstanding stock options
----------- ------------
Average shares outstanding 7,773,292 6,457,631
=========== ============
Net loss $ (415,257) $ (765,851)
Preferred dividends 56,472 82,500
----------- ------------
Loss attributable to Common $ (471,729) $ (848,351)
=========== ============
Basic Loss Per Share $ (0.06) $ (0.13)
=========== ============
Diluted Loss Per Share:
Weighted average number of common shares outstanding 7,773,292 6,457,631
Preferred stock convertible into common shares - (1) -
Common stock equivalents from outstanding stock options - (1) -
----------- ------------
Average shares outstanding 7,773,292 6,457,631
=========== ============
Net loss $ (415,257) $ (765,851)
Preferred dividends 56,472 82,500
----------- ------------
Loss attributable to Common $ (471,729) $ (848,351)
=========== ============
Diluted Loss Per Share $ (0.06) $ (0.13)
=========== ============
</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 loss per common share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S 10-Q/A FOR THE PERIOD
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,326,291
<SECURITIES> 0
<RECEIVABLES> 6,628,892
<ALLOWANCES> (335,851)
<INVENTORY> 0
<CURRENT-ASSETS> 8,038,962
<PP&E> 2,345,106
<DEPRECIATION> (1,332,632)
<TOTAL-ASSETS> 11,053,504
<CURRENT-LIABILITIES> (8,386,396)
<BONDS> 0
0
(10,625)
<COMMON> (9,007)
<OTHER-SE> (7,826,370)
<TOTAL-LIABILITY-AND-EQUITY> (11,053,504)
<SALES> (13,311,308)
<TOTAL-REVENUES> (13,311,308)
<CGS> 11,176,766
<TOTAL-COSTS> 2,483,723
<OTHER-EXPENSES> (66,076)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (415,257)
<INCOME-TAX> 0
<INCOME-CONTINUING> (415,257)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (415,257)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
