SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______________ to _______________
Commission file number 1-11784
THE NETPLEX GROUP, INC.
(Exact name of registrant as specified in its charter)
New York 11-2824578
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 Robert Fulton Drive, Ste. 250, Reston, VA 20191-4346
(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:
================================================================================
Title of Each Class Name of Each Exchange on Which Registered
- --------------------------------------------------------------------------------
Common Stock, $.001 par value NASDAQ SmallCap Stock Market
Boston Stock Exchange
================================================================================
Securities registered under Section 12(g) of the Exchange Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of March 31, 1999, was approximately
$28,731,184.
Indicate the number of shares outstanding of each of the registrant's classes of
Common Stock as of March 31, 1999: 11,463,221 shares.
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INDEX TO FORM 10-K
PART I.......................................................................3
Item 1. Business..........................................................3
Item 2. Properties.......................................................12
Item 3. Legal Proceedings................................................12
Item 4. Submission of Matters to a Vote of Security Holders..............12
PART II.....................................................................13
Item 5. Market for Common Equity and Related Stockholder Matters.........13
Item 6. Selected Financial Data..........................................16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......23
Item 8. Financial Statements and Supplementary Data......................24
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................24
PART III....................................................................25
Item 10. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act...............25
Item 11. Executive Compensation.........................................26
Item 12. Security Ownership of Certain Beneficial Owners
and Management...........................................................28
Item 13. Certain Relationships and Related Transactions.................30
PART IV.....................................................................31
Item 14. Exhibits and Reports on Form 8-K...............................31
Signatures...............................................................33
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PART I
ITEM 1. BUSINESS.
The Netplex Group, Inc. (the "Company" or "Netplex") desires to take advantage
of the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995. Specifically, the Company wishes to alert readers that the factors set
forth in the sections entitled "Market Opportunity," "Competition," "Service
Fulfillment Model," "Growth Strategy", and "Additional Factors That May Affect
Future Results," below, as well as other factors, could in the future affect,
and in the past have affected, the Company's actual results and could cause the
Company's results for future years or quarters to differ materially from those
expressed in any forward looking statements made by or on behalf of the Company,
including without limitation those contained in this Form 10-K report. Forward
looking statements can be identified by forward looking words, such as "may,"
"will," "expect," "intend," "anticipate," "believe," "estimate," and "continue"
or similar words.
Netplex is an information technology and electronic business ("e-business")
services and solutions provider dedicated to helping customers capitalize on
information systems designed for a connected business world. As businesses
maneuver to benefit from the opportunities created by the emerging global
networked economy, our services help customers leverage their information
systems to gain a competitive advantage.
Netplex provides highly specialized solutions (delivered through various
Specialized Practice Groups) that build, manage, and protect customers'
information systems and the networks upon which they run. Each Specialized
Practice Group is capable of delivering its services anywhere in the world.
We also have two business lines that combine to deliver services focused on
specific geographic regions. Our System Integration (SI) units, operating from
several East Coast locations, serve as "trusted information technology advisors"
for a wide variety of businesses. Each SI unit offers similar network systems
integration and product procurement services, yet is focused exclusively on
serving its own geographic region.
Our Technical Consulting Services (TCS) units, formerly known as IT Staffing,
represent our other regionally focused business line. Our three East Coast
Technical Consulting Services locations draw upon an extensive central database
of approximately 40,000 talented IT professionals to provide short- and
long-term technical consulting solutions.
To better capitalize on the inherent synergies of our business units, we
recently introduced the Netplex Service Fulfillment Model. The Service
Fulfillment Model is a broad and powerful business model designed to accommodate
the changing needs of the IT services industry and the technology workforce that
provides its services. Delivered through our Specialized Practice Groups and
regional field offices, the Service Fulfillment Model positions us to combine
the reliability of a local partner with the expertise of a global specialist.
Our ability to effectively combine "Specialized Expertise" with "Regional
Operations" is one of Netplex's most significant differentiators.
Netplex's Contractors Resources (CR) subsidiary operates as a distinct business.
CR eases administrative burdens for its members (professional independent
contractors) by providing "back office" services such as tax administration,
invoicing and invoice tracking, expense reimbursements, medical and dental
insurance, 401(k), and pension plans, etc. Using CR to supply these services
allows CR members to focus on growing their independent contractor business
without incorporating.
Company Background and Development
Netplex was incorporated in 1986 in New York under the name CompLink, Ltd. In
1992, CompLink performed an initial public offering to finance an effort to
develop a messaging software system. In 1996, CompLink acquired, through a
merger that was accounted for as a reverse merger, The Netplex Group, Inc. and
Contractors Resources (which was a subsidiary of America's Work Exchange, Inc.),
and changed its name to The Netplex Group, Inc. See Note 1 to financial
statements for a further discussion of this merger. This merger resulted in
Netplex providing new management and a revised corporate mission. Since then, we
have focused on taking advantage of significant industry trends, such as the
evolution of "e-business." As a result, we have attempted to grow our
Specialized Practice Groups, Systems Integration units, and
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Technical Consulting Services businesses with an eye toward providing a full
range of services and solutions that benefit organizations as they embrace the
opportunities created by the emerging e-business era.
To facilitate this growth, Netplex has acquired several companies during the
last two years. In 1997, we acquired Onion Peel Solutions, LLC, in Raleigh,
North Carolina. In 1998, we acquired The PSS Group, Inc., Automated Business
Systems of North Carolina, Inc., Kellar Technology Group, Inc., and the retail
technical consulting business of Applied Intelligence Group, Inc. These
businesses expanded our experience, technical staff, customer base, market
exposure, revenue, and management capabilities.
How To Contact Us
On March 11, 1999, our principal executive offices and headquarters moved from
McLean, Va., to 1800 Robert Fulton Drive, Second Floor, Reston, Va., 20191. To
reach these offices, contact us at 703-716-4777 (tel.) and 703-716-1110 (fax).
Please direct all Netplex-related emails to [email protected] or visit our
web site at www.netplexgroup.com.
Market Opportunity
According to several recent reports and industry studies, the Information
Technology (IT) services industry is among the fastest growing economic
segments. A 1998 Legg Mason report states that the IT services market exceeded
$125 billion in 1997(1) and International Data Corporation expects the industry
to grow more than 80% by 2002(2). Meanwhile, demand for the technical talent
needed to perform these services is increasing due to a 42% decline in computer
science graduates(3) coupled with only a 5.5% per year growth rate for the total
U.S. IT workforce(4). Technical talent has escalated in value as a result--a
trend we expect to continue.
As the value of technical talent increases, we believe that the demand for
Netplex's offerings--specialized IT services and capable technology
consultants--will increase as well. We believe that we have positioned ourselves
to take advantage of opportunities that this trend creates.
While we believe that our position within the IT services industry has been and
will continue to be lucrative, we anticipate that the specific industry sector
of Internet and e-business integration services will gain even more attention.
Over the last two years, the demand for IT services has shifted significantly
towards electronic business--the use of the Internet and related technologies to
transform the way businesses operate. According to a 1998 International Data
Corp. report, the Internet systems integration industry is projected to grow
over 750% during the next four years(5).
According to a study performed by IBM, this market is projected to reach $47
billion by the year 2002. One of the primary beneficiaries of this growth is the
"e-business enabler"--the IT service provider that can make connected business
information systems work to their maximum potential in the era of electronic
business in the global networked economy.
To better align ourselves with the trend toward e-business solutions, we
recently shifted our marketing focus towards becoming a provider of
premium-level e-business-related services. Because we are already an established
specialist in many of the IT services that make successful e-business
implementations a reality, this shift in focus necessitates only minimal changes
to Netplex's existing offerings. Further, Internet systems integration is a
natural extension of Netplex's core competency in building, managing, and
protecting sophisticated networked systems.
- ----------
(1) Legg Mason Equity Research, Industry Analysis on Investing in Information
Technology Services, February 6, 1998
(2) International Data Corporation, quoted in Red Herring, August 1998
(3) Legg Mason Equity Research, Industry Analysis on Investing in Information
Technology Services, February 6, 1998, representing 1986 to 1995
(4) Source: Bureau of Labor Statistics, U.S. - Employment Projections
(5) International Data Corporation, quoted in Red Herring, August 1998
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To better facilitate our migration towards becoming an e-business service
industry specialist, Netplex recently announced the launch of an additional
Specialized Practice Group dedicated to developing sophisticated
transaction-based e-commerce systems. We believe that the new practice, which
should begin operations in 1999, may extend Netplex's existing skill base,
helping us better serve existing customers and generate new opportunities
throughout our business lines.
Service Breakdown
As mentioned earlier, one of Netplex's primary differentiators is its ability to
provide "Specialized Expertise" with "Regional Operations." By combining these
directives, we are able to provide a wide variety of complementary services to
customers of different sizes and in different industries. Our diverse offerings
allow us to penetrate new customer accounts from any of several different
"angles." Further, once we have established presence with a new customer, we
strive to learn as many aspects of its business as possible, thus creating
additional opportunities for our other offerings.
Each Netplex business unit is presented below within its directive of
"Specialized Expertise" or "Regional Operation."
Specialized Practice Groups
Netplex's Specialized Practice Groups deliver specialized solutions that build,
manage, and protect customers' information systems and the networks upon which
they run. Because our Specialized Practice Groups are capable of delivering
their services anywhere in the world, they represent our "Specialized Expertise"
directive.
E-commerce Systems (ECS)
ECS provides comprehensive, enterprise-wide design and integration consulting
services that help organizations intelligently take advantage of e-commerce
opportunities. ECS's experts help determine the best ways to define, create, and
integrate sophisticated e-commerce initiatives such as online ordering,
tracking, and transaction processing systems. The practice should begin
operations in 1999.
Enterprise Systems Management (ESM)
ESM, a specialist in the areas of network, systems, and applications management,
has over a decade of experience providing architectural and implementation
services that manage complex networked systems. ESM specializes in service level
management solutions that provide a direct correlation between management
services and return on investment.
Business Protection Services (BPS)
BPS, a specialized consulting practice with information security and business
continuity expertise, provides industry-leading security and contingency
planning services. BPS, whose services include information security consulting,
security integration, and contingency planning consulting, is a specialist in
protecting a company's critical information assets.
Applied Intelligence Group (AIG)
AIG provides information technology consulting and systems integration services
for the retail and distribution industry. AIG's premium-level services help
customers create enterprise applications that manage the merchandise pipeline
from the manufacturer to the customer.
Regional Operations
On the local level, our Regional Operations comprise our Systems Integration
(SI) and Technical Consulting Services (TCS) units. These groups, which are
currently located throughout the eastern United States, use their demonstrated
experience to penetrate local accounts and provide inroads for our higher-margin
Specialized Practice Groups' services.
Systems Integration (SI)
SI's local offices provide reliable systems and infrastructure integration
solutions, hardware and software product procurement, and support for businesses
within specific geographic regions. Customers look to SI as a "trusted advisor"
for all business information issues. SI offers the Netplex middle-market
customer a
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close Information Systems partner relationship, providing an influential role in
the strategy and coordination of all information technology initiatives. Often,
SI will manage third-party vendors and other Netplex business units in
delivering complete information solutions.
Technical Consulting Services (TCS)
TCS (formerly known as IT Staffing) provides customers with hard-to-find,
top-quality talent for their projects' full life cycle. Our personal service and
industry-leading database enable us to meet customers' needs in a rapidly
changing environment. TCS strives to find the "perfect fit" for our customers
without sacrificing the standards customers have established for their own
employees.
Contractors Resources
Operating as a distinct business, Netplex's CR subsidiary provides professional
independent contractors with "back office" services that eliminate the
distraction and expense of tedious administrative duties, thus allowing them to
focus on growing their business without incorporating. CR gives Netplex access
to a fast-growing labor pool, enables us to keep a pulse on the changes in the
information industry, and attracts high-level contract professionals across the
United States.
Financial Information About Segments
For financial information regarding our three business units, Specialized
Practice Groups, Regional Operations and Contractor Resources, see footnote 17
to the Company's Consolidated Financial Statements.
Competition
Netplex competes with many regional small to large size IT services
organizations that have developed a market presence in a particular geographic
market or area of specialization. The larger organizations which Netplex views
as its competitors in each of its business units include the "Big 5" consulting
firms, International Network Services, Inc. (NASDAQ: INSS), companies purchased
by USWeb (NASDAQ: USWB), Sapient Corporation (NASDAQ: SAPE), Proxicom, AppNet,
and Cap Gemini.
Backlog
Due to the nature of their businesses, the Regional Operations and Contractor
Resources business units do not have any backlog. The backlog of the Specialized
Practice Groups business unit is immaterial.
Service Fulfillment Model
Netplex understands that a successful IT services organization requires more
than premium-level services. It also needs an organized support structure that
ensures successful project fulfillment and competent, motivated
employees--regardless of shifting business requirements or technology changes.
As a result, we have established the Netplex Service Fulfillment Model.
The Netplex Service Fulfillment Model is designed to accommodate the changing
needs of the IT services industry and the technology workforce that provides its
services. Delivered through our Specialized Practice Groups and Regional
Operations field offices, the Service Fulfillment Model positions us to provide
the reliability of a local partner and the expertise of a specialist.
The Service Fulfillment Model is based on a carefully planned blend of permanent
Netplex technical associates (our Specialized Practice Groups and System
Integration units), as well as a vast pool of contingent technical talent
(accessible through our Technical Consulting Services units and Contractors
Resources). A contingent workforce means that our operational structure becomes
more streamlined without sacrificing our ability to provide effective services.
This boosts our flexibility in reacting to industry changes and improves our
overall resource utilization. This flexibility means that we can continually
reshape and refine our portfolio of core specialized services based on the
changes we foresee in the IT service industry. As a result, we believe that we
will be able to provide complete, ongoing, customer-tailored services and
consulting, no matter which direction technology evolves.
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A list of the current business units and the headings under which their
financial results will now be presented is below.
Specialized Practice Groups Regional Operations Contractors Resources
- --------------------------- ------------------- ---------------------
o E-Commerce Systems o All Systems o Contractors
(ECS) Integration units Resources
o Applied Intelligence o All Technical
Group (AIG) (Retail Consulting Services
Industry Systems units
Solutions)
o Business Protections
Services (BPS)
o Enterprise Systems
Management (ESM)
Acquisitions
In order to reach critical mass and create a platform upon which we can most
effectively reach our e-business leadership goals, Netplex vigorously pursued
acquisitions as an avenue toward growth in 1998. During the year, Netplex
acquired four companies that added significantly to Netplex's core competencies
and helped position us to take advantage of a wider variety of opportunities in
a greater number of locations. Netplex's 1998 acquisitions are listed below. For
details concerning these mergers, please refer to the discussion in "Acquisition
or Disposition of Assets" later in this document.
The PSS Group
In January, Netplex acquired The PSS Group, which now operates as a
Technical Consulting Services unit.
Automated Business Systems
In June, Netplex acquired Automated Business Systems, which now operates as
a Systems Integration unit for the southeast region.
Applied Intelligence Group
In September, Netplex acquired Applied Intelligence Group, which now
operates as a Specialized Practice Group. AIG is widely recognized as the
premier provider of IT consulting and solutions focused on the retail and
distribution industry.
Netplex believes that 1998's acquisitions contributed to the critical mass we
need to sustain profitability and represent a platform for significant growth as
an e-business services specialist. With this platform in place, we anticipate
that our growth will become more organic during 1999; however, we will continue
to consider qualified acquisition opportunities that will help us attain
leadership in the e-business integration industry.
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Strategic Relationships
Netplex understands the critical importance of developing and nurturing
relationships with key information industry leaders. We believe that such
partnerships are essential for maintaining our position as a premium-level
service provider. As technologies evolve, Netplex's ability to deliver the most
advanced solutions possible depends significantly on our alliances with leading
technology manufacturers. With the addition of several new strategic
relationships in 1998, Netplex's major technology partners now include:
o AT&T o Lucent Technologies
o Check Point Software o Microsoft
o Cisco Systems o Novell
o Hewlett-Packard o Packeteer
o IBM o Unisys
Customers
While many of Netplex's recent contract victories have been with existing
customers, the Company has continued to add new clients. Because our diverse
service offerings often target businesses of contrasting sizes and industries,
Netplex's customer base includes a wide variety of companies. Our clients
include Fortune 500, Fortune 1000, and middle-market firms. In addition, our
customers extend into the retail, healthcare, financial services, and
telecommunications industries, among others. Some of our customers include:
o America Online o General Electric
o Amtrak o GTE
o Andersen Consulting o Hewlett-Packard
o AT&T o Lucent Technologies
o Bankers Trust o MCI Worldcom
o Brinker International o Mobil
o Chase o New York Life
o Crabtree & Evelyn o Union Camp
o Deloitte & Touche o Unisys
o Freddie Mac o The World Bank
Geographic Positioning
Netplex expanded its geographic scope significantly in 1998 and currently has 12
office locations. Of these, 11 are on the East Coast of the United States (from
Connecticut to Florida) and one is in Oklahoma City, OK. Most of the offices
represent points of presence for one or both of Netplex's two regionally focused
business lines: Systems Integration and Technical Consulting Services. Over
time, we intend to expand each regional office to include both a Systems
Integration and Technical Consulting Services unit.
As discussed earlier, the Specialized Practice Groups represent the nationally
focused component of Netplex's business model. While these groups can deliver
services anywhere in the world, they are based in the following locations:
Applied Intelligence Group..................Oklahoma City, OK
Business Protection Services................McLean, VA
Enterprise Systems Management...............New York, NY and Raleigh, NC
E-commerce Systems..........................Oklahoma City, OK
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Acquisitions were primarily responsible for our geographic expansion in 1998.
Netplex's purchase of Automated Business Systems (ABS) greatly increased our
Systems Integration presence in the southeast region, while our purchase of The
PSS Group brought our Technical Consulting Services to the Washington, D.C.,
metropolitan area.
In addition to the new offices introduced through our acquisitions, we also
opened our Tampa, Fl., office, which offers Technical Consulting Services.
Expanding our geographic reach is a Netplex priority in 1999 and beyond. We are
continually assessing the most suitable areas for geographic expansion and
expect to penetrate new markets when appropriate, either organically or through
acquisitions.
Growth Strategy
Netplex intends to become an industry-leading provider of services and solutions
that help businesses as they position themselves to succeed in the e-business
era. Our Specialized Practice Groups currently offer Netplex customers a focused
expertise in enterprise systems applications for the Retail and Distribution
industry, network implementation and performance enhancement, information
security, and Internet-based transaction processing systems development. Our
geographic reach into a growing number of local markets enables Netplex to
leverage our "Specialized Expertise" of these Specialized Practice Groups with
"Regional Operations" to build close, long-term relationships with prospects and
customers as they evolve into e-business enterprises.
Netplex plans to continue its strategy of growth in building and/or acquiring
qualified organizations in new geographic regions throughout the United States.
Netplex intends to continue to build or acquire additional Specialized Practices
that will add core competencies in technologies and targeted industries to
further enhance our collection of expertise in e-business systems. We believe
that the blend of these capabilities places us in a leadership position as a
leading e-business IT services and solutions provider.
As mentioned earlier, the Internet systems integration industry--the services
that will make e-business a reality--is projected to grow over 750% during the
next four years. By aligning our future marketing initiatives with an e-business
perspective, we expect that the high growth of this industry will translate into
significant growth for Netplex. As a result our pursuit of e-business
opportunities is the primary component of our growth strategy in 1999 and
beyond.
Further, Netplex feels that, through its proven success of integrating
acquisitions with organic growth, it has established a model through which it
can deliver a full suite of quality, premium-level services while maintaining a
healthy year-over-year growth rate.
Operations and Support
Despite the recent move of Netplex's headquarters from McLean, Va., to Reston,
Va., many of our operations and support services are still located in our McLean
office. The McLean office continues to house most of Netplex's critical
information systems, including the management infrastructure for our wide area
network (WAN), the Netplex web site and intranet, all electronic mail gateways,
finance and accounting systems, and purchasing systems. A centralized management
information systems department located in the McLean office manages all of the
systems.
Our marketing, legal, and human resources support services have moved to the
Reston, Va., office.
During 1998, Netplex improved its financial systems by streamlining and
simplifying its transaction processes. We believe that our investment in this
infrastructure improvement will vastly improve the timeliness of data collection
and reporting to the business units.
Intellectual Property
Netplex does not hold any patents or registered trademarks other than those of
Onion Peel Solutions. However, we consider the Netplex name and our database of
independent consultants to be highly proprietary.
Employees
As of March 20, 1999, we had approximately 617 full-time employees (including
permanent and contract employees).
We are responsible for, and pay 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 our employees. The suite of benefits we offer
our contract employees differs from the one we offer to our permanent employees.
Our Contractors
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Resource's subsidiary tailors its benefits to its members, representing a third
suite of benefits offered by Netplex. We believe that our relations with our
employees are good.
Acquisition or Disposition of Assets
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 January 15, 1999 paid
$300,000 in cash. The Company used working capital to finance the acquisition.
The original agreement also provided that Preferred would receive additional
consideration if PSS met certain operating targets. Subsequent to December 31,
1998, Preferred and Netplex amended the agreement to eliminate the additional
consideration. Netplex instead agreed to purchase a split dollar life insurance
policy on the life of Preferred's sole shareholder and to fund the policy with
$1,700,000. The funding is paid in four equal annual premiums, and the first
annual premium was paid on January 29, 1999. Under the terms of the split dollar
life policy, Netplex will receive a refund of the premiums paid upon the death
of Preferred's sole shareholder. The acquisition was accounted for using the
purchase method of accounting.
ABS
On June 18, 1998, the Company completed the purchase of all of the stock of
Automated Business Systems of North Carolina, Inc. and Kellar Technology Group,
Inc. (Collectively "ABS"). In consideration for the purchase, the Company paid
$200,000 and issued 450,000 shares of its Common Stock. The agreement also
provides that the former shareholders of ABS will receive additional
consideration (the "Earn-out") if ABS meets certain operating targets through
December 31, 2000. The additional consideration will be paid one-half in cash
and one-half in Common Stock. In connection with the acquisition, the Company
has entered into employment agreements with certain employees of ABS. The
acquisition was recorded effective June 30, 1998 using the purchase method of
accounting. The results of operations for the period from June 18, 1998 to June
30, 1998 are not material and the future results of operations of ABS are
included beginning effective July 1, 1998.
AIG
On October 16, 1998, the Company completed the purchase of the information
technology consulting business of Applied Intelligence Group, Inc. of Oklahoma
City ("AIG") effective September 1, 1998. In consideration for the purchase, the
Company paid $3,000,000 and issued 643,770 shares of Class B Preferred Stock
(valued at $1,000,000) at closing. The Company used working capital to finance
the acquisition. Such working capital was provided by (i) an increase in the
Company's line of credit from $2.0 million to $6.0 million, which credit line is
based on 80% of the Company's eligible accounts receivable and (ii) certain
equity instruments as further described in Note 3 to the consolidated financial
statements. The Class B Preferred Stock is convertible into Common Stock of the
Company at any time on a share for share basis. No dividends are payable on the
Preferred Stock. The holders of the Preferred Stock have agreed not to sell or
otherwise distribute their Preferred Stock or the Common Stock underlying the
Preferred Stock for a period of one year. The agreement also provides that AIG
will receive additional consideration (the "Earn-out") if AIG meets certain
operating targets. The Earn-out will consist of (i) $1.5 million of cash if AIG
achieves approximately $9 million in net profits over the six quarters beginning
October 1998 and (ii) 643,700 shares of Class B Preferred Stock if AIG achieves
certain net profit targets over the nine quarters beginning October 1998. The
Company has paid $340,670 as of March 31, 1999 toward the Earn-out earned
through December 31, 1998. The acquisition was accounted for using the purchase
method of accounting. In connection with the acquisition, the Company entered
into employment agreements with certain employees of AIG.
Additional Factors That May Affect Future Results
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that the factors set forth in the sections entitled
"Manufacturing and Suppliers," "Competition" and "Proprietary Rights and
Licenses," above, the factors set forth below, as well as other factors, could
in the future affect, and in the past have affected, the Company's actual
results and could cause the Company's results for future years or quarters to
differ materially from those expressed in any forward looking statements made by
or on behalf of the Company, including without limitation those contained in
this 10-K report. Forward looking statements can be identified by forward
looking words, such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words.
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Failure to Successfully Integrate Newly Acquired Business. During 1998 the
Company acquired substantially all of the assets of The PSS Group, Inc.,
Automated Business Systems of North Carolina, Inc., Keller Technology Group,
Inc. and the consulting division of Applied Intelligence Group, Inc. See
"Acquisition or Disposition of Assets." The Company entered into the
acquisitions with the expectation that the acquisitions would result in certain
benefits for the combined businesses. Achieving the anticipated benefits of the
acquisitions will depend in part upon whether certain of the other companies'
business operations and their product offerings can be integrated in an
efficient and effective manner. This will require the dedication of management
resources that may temporarily distract attention from the day-to-day business
of the Company. As of March 31, 1999, integration of facilities as well as the
various functional departments has been partially accomplished. The full extent
of the cost savings in operations is not known. If the integration does not
result in the anticipated cost savings in operations, there may be an adverse
effect on the Company's results of operations and financial condition.
Potential Fluctuations in Operating Results. The Company incurred net losses of
$2.5, $2.9 and $2.0, million respectively, in the years ended December 31, 1998,
1997 and 1996. There can be no assurance that the Company will be profitable on
a quarterly or annual basis in the future. The Company's quarterly operating
results in the past have fluctuated and may fluctuate significantly in the
future depending on such factors as the timing and delivery of significant
orders and contracts, new product introductions and changes in pricing policies
by the Company.
The Company's expense levels are based, in part, on its expectations of future
revenues. Many of the Company's expenses are relatively fixed and cannot be
changed in short periods of time. If revenue levels are below expectations, net
income will be disproportionately affected because only a portion of the
Company's expenses varies with its revenue during any particular quarter. In
addition, the Company typically does not have a significant backlog to support
more than one quarter of revenue at any particular date.
As a result of the foregoing factors and potential fluctuations in operating
results, the Company believes that its results of operations in any particular
quarter should not be relied upon as an indicator of future performance. In
addition, in some future quarter the Company's operating results may be below
the expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock would likely be materially and adversely
affected.
Dependence on Key Personnel. The Company's success depends in large part on the
continued service of its key technical and senior management personnel and on
its ability to attract, motivate and retain highly qualified employees.
Competition for highly qualified employees is intense, and the process of
identifying and successfully recruiting personnel with the combination of skills
and attributes required to execute the Company's strategies is often lengthy.
Accordingly, the loss of the services of key personnel could have a material
adverse effect upon the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be successful in
retaining its key technical and management personnel and in attracting and
retaining the personnel it requires for continued growth.
Management of Growth. Although the Company streamlined its operations during
1998, the Company's long-term success will depend in part on its ability to
manage growth. If the Company is unable to hire a sufficient number of employees
with the appropriate levels of experience to effectively manage its growth, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
Possible Volatility of Stock Price; Decreased Liquidity. The Company's stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by securities
analysts or others could have an immediate and significant adverse effect on the
trading price of the Company's Common Stock in any given period. Additionally,
the Company may not learn of, or be able to confirm, revenue or earnings
shortfalls until late in the fiscal quarter or following the end of the quarter,
which could result in an even more immediate and adverse effect on the trading
of the Company's Common Stock.
Liquidity 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.
11
<PAGE>
ITEM 2. PROPERTIES.
The Company leases approximately 10,000 square feet of space in McLean, Va. for
its corporate offices and the operations of some business units at a monthly
rental rate of $16,010. The Company also leases office space in Reston, Va., New
York City, Central and Western New Jersey, Raleigh and Charlotte, North
Carolina, Atlanta, Georgia, Tampa, Florida, and Edmond, Oklahoma to serve as
operating offices of its businesses. These leases expire on different dates from
May 2000 to January 2006
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 McLean, VA. 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, the Company is subject to litigation in the ordinary course
of business.
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 agreement
included a licensing fee payable to the Company by DSA on revenue from the
licensing by DSA of software purchased under the agreement. The licensing fee is
payable for the three years following the effective date of the agreement at
12%, 10% and 5%, respectively. The Company has received no significant licensing
fees. 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 other litigation or proceedings,
which, if decided against the Company, would have a material adverse affect,
either individually or in the aggregate.
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, 1998.
12
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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.
In 1998, NASDAQ enacted new requirements for continued listing on NASDAQ. The
Company complies with the NASDAQ requirements. However, there can be no
assurance that the Company will continue to meet the applicable requirements for
continued listing.
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.
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 1997 High Low
- ----------- ---- ---
1st Quarter (Boston Stock Exchange) ...................... $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
Fiscal 1998
1st Quarter .............................................. $1.72 $0.81
2nd Quarter .............................................. 1.81 1.25
3rd Quarter .............................................. 1.81 1.09
4th Quarter .............................................. 1.44 .88
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, 1999, there were approximately 185 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.
Recent Sales of Unregistered Securities
The Company sold the following securities in the past three years which were not
registered under the Securities Act of 1933, as amended:
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<PAGE>
In June 1996, the Company, then known as CompLink, Ltd., issued 3,245,000 shares
of Common Stock and options to purchase 1,691,000 shares of Common Stock in
connection with its merger with America's Work Exchange and The Netplex Group,
Inc. to the former shareholders of such companies. The options have a 5-year
term and are immediately exercisable. This transaction was completed without an
underwriter and exemption from registration is claimed under Section 4(2) of the
Securities Act because it did not involve a public offering.
In July 1997, the Company issued 80,000 shares of Common Stock and the
obligation to issue additional shares of Common Stock based on the closing price
of the Common Stock on December 31, 1998 in exchange for the outstanding
membership interests of Onion Peel Solutions LLC. In February 1999, the Company
issued an additional 297,396 shares of Common Stock based on the December 31,
1998 closing price. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In February 1998 the Company sold 80,000 shares of Common Stock and warrants to
purchase 100,000 shares of Common Stock at a price of $1.20 per share, for an
aggregate of $100,000. The warrants have a 5-year term and are immediately
exercisable. This transaction was completed without an underwriter and exemption
from registration is claimed under Section 4(2) of the Securities Act because it
did not involve a public offering.
In March 1998, the Company sold 1,457,000 shares of Common Stock at a price of
$1.00 per share for an aggregate of $1,457,000 to certain accredited investors
and employees of the Company. These shares carry registration rights. This
transaction was completed without an underwriter and exemption from registration
is claimed under Section 4(2) of the Securities Act because it did not involve a
public offering.
In April 1998, the Company sold 1,500 units at a price of $1,000 per unit for an
aggregate of $1.5 million to certain accredited investors. Each unit consists of
a warrant to purchase the number of shares of Common Stock equal to $1,000
divided by an adjustable exercise price and an additional warrant to acquire 52
shares of Common Stock at a price equal to the adjustable exercise price. The
warrants have a 5-year term and are immediately exercisable. The Company paid an
aggregate placement fee and non-accountable expense allowance of $284,500 and
also granted the placement agent a warrant to purchase 39,000 shares of Common
Stock at a price of $1.47. The warrants have a 10-year term and are immediately
exercisable. The placement agent for this transaction was The Zanett Corporation
and exemption from registration is claimed under Section 4(2) of the Securities
Act because it did not involve a public offering.
In April 1998, the Company sold 100,000 shares of Common Stock at a price of
$1.50 per share for an aggregate of $150,000 to certain accredited investors.
These shares carry registration rights. This transaction was completed without
an underwriter and exemption from registration is claimed under Section 4(2) of
the Securities Act because it did not involve a public offering.
In April 1998, the Company sold 35,000 shares of Common Stock at a price of
$1.375 per share for an aggregate of $48,125 to certain accredited investors.
These shares carry registration rights. This transaction was completed without
an underwriter and exemption from registration is claimed under Section 4(2) of
the Securities Act because it did not involve a public offering.
In June 1998, the Company, in addition to other consideration, issued 450,000
shares of Common Stock in exchange for all of the outstanding equity securities
of Automated Business Systems of North Carolina, Inc. and Kellar Technology
Group, Inc. (collectively "ABS") to the former shareholders of ABS. The Company
also agreed to issue additional shares of Common Stock through December 31, 2000
if ABS meets certain operating targets. This transaction was completed without
an underwriter and exemption from registration is claimed under Section 4(2) of
the Securities Act because it did not involve a public offering.
In August 1998, the Company sold 451,000 shares of Common Stock at a price of
$1.3125 per share for an aggregate of $592,000 to certain accredited investors.
These shares carry registration rights. This transaction was completed without
an underwriter and exemption from registration is claimed under Section 4(2) of
the Securities Act because it did not involve a public offering.
In September 1998, the Company sold 1,700 units at a price of $1,000 per unit
and warrants to purchase 141,667 shares of Common Stock at an exercise price of
$1.3938 per share for an aggregate of $1.5 million to certain accredited
investors. Each unit consists of a warrant to purchase the number of shares of
Common Stock computed by dividing $1,700,000 by 125% of the fixed exercise price
of $1.3938, with respect to any exercise within the first year, and the lower of
the fixed exercise price and a variable exercise price (subject to a floor price
of $1.00), with
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<PAGE>
respect to any exercise after the first year. The warrants have a 10-year term
and are immediately exercisable. The Company paid an aggregate placement fee of
$175,000 and issued the placement agent 50,000 shares of Common Stock. The
placement agent for this transaction was Zanett Securities Corporation and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In September 1998, the Company sold 1,500,000 shares of Class C, 9.9%
Convertible Preferred Stock at a price of $1,000 per share and warrants to
purchase up to 600,000 shares of Common Stock (under certain circumstances) for
a price of $1.375 per share for an aggregate of $1.5 million to Waterside
Capital. The Class C Preferred Stock bears a dividend rate of 9.99% for the
first year, and 15% thereafter. The Preferred Stock is convertible at any time
after the earlier of a change in control of the Company or five years from the
date of issuance and is redeemable at the option of the Company at any time
within the first five years.. The number of shares into which the Preferred
Stock is convertible is equal to $1,500,000 (plus accrued but unpaid dividends)
divided by 25% of the 20 day average trading price of the Common Stock
immediately prior to conversion. The warrants issued entitle the holder to
acquire 150,000 shares of Common Stock at $1.375 per share. The Company may be
required to issue up to an additional 450,000 shares of Common Stock under the
warrants, depending upon the term in which the Class C Preferred Stock is
outstanding. The warrants have a 10-year term and are immediately exercisable.
The Company paid an aggregate placement fee of $175,000 and issued the placement
agent warrants to purchase 125,000 shares of Common Stock at $1.59 per share.
The warrants have a 5-year term and are immediately exercisable. The placement
agent for this transaction was Ferris Baker & Watts and exemption from
registration is claimed under Section 4(2) of the Securities Act because it did
not involve a public offering.
In October 1998, the Company issued 643,770 shares of Class B Preferred Stock to
Applied Intelligence Group, Inc. in connection with the purchase of such
company's information technology consulting business. Each share of Class B
Preferred Stock is immediately convertible into one share of Common Stock. No
dividends are payable on Class B Preferred Stock. The Company also agreed to pay
AIG additional consideration if the information technology consulting business
meets certain operating targets. Such additional consideration would include up
to 643,770 shares of Class B Preferred Stock if the information technology
consulting business achieves approximately $9 million in net profits over the
next 9 quarters. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(dollar amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 61,279 $ 40,468 $ 33,525 $ 26,782 $ 18,643
Cost of revenue 49,315 35,416 30,878 23,513 16,873
-------- -------- -------- -------- --------
Gross profit 11,964 5,052 2,647 3,269 1,770
Expenses:
Selling, general and administrative 13,949 7,899 5,206 3,466 1,686
Restructuring costs 160 -- -- -- --
Acquired in-process technology 250 -- -- -- --
-------- -------- -------- -------- --------
Operating loss (2,395) (2,873) (2,559) (197) 84
Other income (expense):
Interest income (expense), net (154) (26) 33 5 8
Other income -- -- 5 23 24
-------- -------- -------- -------- --------
Loss from continuing operations before
income taxes (2,549) (2,873) (2,521) (169) 116
Income tax (benefit) provision -- -- (34) (4) 49
-------- -------- -------- -------- --------
Loss from continuing operations (2,549) (2,873) (2,487) (165) 67
Discontinued operations: --
Loss from operations of discontinued
business -- -- (1,332) -- --
Net gain from disposal -- -- 1,820 -- --
-------- -------- -------- -------- --------
Income from discontinued operations -- -- 488 -- --
Net income (loss) $ (2,549) $ (2,873) $ (1,999) $ (165) $ 67
======== ======== ======== ======== ========
Basic and diluted earnings (loss) per
common share
Continuing operations $ (0.31) $ (0.46) (0.51) (0.05) 0.02
Discontinued operations -- -- 0.09 -- --
-------- -------- -------- -------- --------
Total $ (0.31) $ (0.46) $ (0.42) $ (0.05) $ 0.02
======== ======== ======== ======== ========
Weighted average common shares
outstanding, basic and diluted 9,260 6,821 5,026 3,246 3,685
======== ======== ======== ======== ========
At year-end
Total assets $ 20,651 $ 6,912 $ 9,889 $ 7,799 $ 2,592
======== ======== ======== ======== ========
Stockholders' equity $ 6,355 $ 1,331 $ 3,239 $ 409 $ 266
======== ======== ======== ======== ========
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Based in Reston, Virginia with twelve offices, eleven offices throughout the
eastern U.S and one office in Oklahoma City, OK, The Netplex Group, Inc.,
together with its wholly owned subsidiaries ("the Company" or "Netplex"), is an
Information Technology (IT) and electronic business ("e-business") services and
solutions provider.
The Company's operations have been concentrated on providing IT services and
solutions to U.S.-based commercial organizations since the beginning of 1994.
In July 1997, the Company acquired all membership interests 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 January 1998, the Company acquired all outstanding stock of The PSS Group,
Inc. ("PSS") to expand its staffing organization in the Washington DC
metropolitan area and to broaden its customer base.
In June 1998, the Company acquired Automated Business Systems ("ABS") which
expands the geographic reach of the Company's business to the Charlotte, NC;
Spartanburg, SC, and Atlanta, GA markets and broadens its customer base.
In September 1998, the Company acquired certain assets of the Applied
Intelligence Group ("AIG") which expands the Specialized Practice Group adding
information technology consulting expertise in the retail and distribution
industry and expands the Company's geographic reach into the southwest.
The Company's IT and e-business services, including the above acquisitions, fall
into one of the following categories:
Specialized Practice Groups: Deliver highly specialized solutions and services
that build, manage and protect customer's information systems and the networks
upon which they run. These solutions and services are generally firm
deliverables that can be provided anywhere in the world by Specialized Practice
Groups, generally delivered on a "proposed estimate" or "fixed fee" basis.
Netplex may re-sell and implement "best in class" technology products, under
certification with several leading technology manufacturers in conjunction with
the solutions and services.
Regional Operations: Two business lines that deliver the following solutions and
services focused to specific geographic regions:
Systems Integration: Deliver network systems integration and product
procurement services delivered to a wide variety of businesses within a
geographic region. These solutions and services provide customers with firm
deliverables that are generally delivered on a "proposed estimate" or "fixed fee
basis". Netplex may re-sell and implement `best in class" technology products
under certification with several leading technology manufacturers in conjunction
with the solutions and services.
Technical Consulting Services: provides regionally focused services,
drawing on a growing database of approximately 40,000 talented IT professionals
to provide both short-term and long-term technical consulting services.
Consulting rates vary based on the skills and experience of the consultants
requested by the customer.
Contractor Resources: Provides "back office" services such as tax
administration, invoicing and invoice tracking, expense reimbursements and
benefits administration to contract IT professionals. These "back office"
services are targeted at independent-minded IT professionals who are
entrepreneurial and accustomed to the variability of contract assignments.
The results of operations for PSS, ABS, and AIG are included in the statements
for operations for the year ended December 31, 1998 beginning on the effective
date of their acquisitions January 1, 1998, June 30, 1998, and September 1,
1998, respectively.
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<PAGE>
The following table sets forth the revenue, gross profit, business unit
expenses, and business unit income of each of the business areas for the years
ended December 31, 1998, 1997, and 1996.
Consolidated Operating Results by Business Segment
Amounts in 000's
Year Ended December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
Revenues
Specialized Practice Groups $ 8,385 $ 3,229 $ 3,358
Regional Operations 18,013 5,191 3,725
Contractors Resources 34,881 32,048 26,442
-------- -------- --------
Revenues 61,279 40,468 33,525
-------- -------- --------
Gross profit
Specialized Practice Groups 4,830 2,062 836
Regional Operations 5,802 1,894 676
Contractors Resources 1,332 1,096 1,135
-------- -------- --------
Gross profit 11,964 5,052 2,647
-------- -------- --------
Gross profit percentage
Specialized Practice Groups 57.6% 63.9% 24.9%
Regional Operations 32.2% 36.5% 18.1%
Contractors Resources 3.8% 3.4% 4.3%
-------- -------- --------
Gross profit percentage 19.5% 12.5% 7.9%
-------- -------- --------
Business unit expenses
Specialized Practice Groups 4,584 2,497 657
Regional Operations 4,471 2,289 1,428
Contractors Resources 1,165 1,169 1,081
-------- -------- --------
Business unit expenses 10,220 5,955 3,166
-------- -------- --------
Business unit income (loss)
Specialized Practice Groups 246 (435) 179
Regional Operations 1,331 (395) (752)
Contractors Resources 167 (73) 54
-------- -------- --------
Business unit income (loss) 1,744 (903) (519)
-------- -------- --------
Corporate expenses 2,514 1,480 1,733
Inventory write-off 131 -- --
Restructuring Costs 160 -- --
Acquired in process technology 250 -- --
-------- -------- --------
Total corporate and other costs 3,055 1,480 1,733
-------- -------- --------
EBITDA (1,311) (2,382) (2,253)
Interest, taxes, depreciation
and amortization 1,238 491 235
-------- -------- --------
Loss from continuing operations $ (2,549) $ (2,873) $ (2,487)
======== ======== ========
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<PAGE>
RESULTS OF OPERATIONS
1998 Compared to 1997
Revenue for the year ended December 31, 1998 increased approximately $20.8
million or 51% to approximately $61.3 million, compared to $40.5 million for the
same period in 1997. This increase includes a $12.8 million or 247% increase in
Regional Operations revenue, a $5.2 million or 160% increase in Specialized
Practice Groups revenue, and a $2.8 million or 9% increase in Contractors
Resources revenue.
The revenue growth in 1998 includes $13.5 million of revenue contributed
collectively by PSS ABS, and AIG acquired by the Company in January 1998, June
1998, and September 1998, respectively, and $7.3 million or 18% in revenue
growth of the businesses owned as of December 31, 1997 ("organic growth"). The
organic revenue growth in 1998 includes increased in Regional Operations,
Specialized Practice Groups, and Contractors Resources revenues of $2.8 million
(56%), $1.6 million (33%), and $2.9 million (9%), respectively. The organic
revenue growth in the Regional Operations and Specialized Practice Groups is due
primarily to increased sales volume in 1998 as compared to the same period of
1997. The growth in Contractors Resources revenues is to due to an increase in
the number of contractor members increasing sales volume and increased rates for
services.
Gross Profit for the year ended December 31, 1998 increased approximately $6.9
million or 137% to approximately $12.0 million as compared to approximately $5.1
million for the same period of 1997. This increase includes an increased gross
profit in Regional Operations of $3.9 million or 206%, a $ 2.8 million or 134%
increase in Specialized Practice Groups and a $ 236,000 or 22% increase in
Contractors Resources gross profit.
The gross profit growth includes $5.2 million of gross profit contributed
collectively by PSS, ABS, and AIG acquired in January 1998, June 1998, and
September 1998, respectively, and a $1.7 million increase in gross profits from
businesses owned as of December 31, 1997. The growth in gross profit for the
businesses owned as of December 31, 1997 includes a $1.5 million increase or 37%
in Regional Operations and Specialized Practice Groups gross profit and a
$236,000 increase in Contractors Resources gross profits.
Gross profit margins increased to approximately 19.5% for the year ended
December 31, 1998 from 12.5% in the same period of 1997. Specialized Practice
Groups gross profit margins decreased from 63.9% in 1997 to 57.6% in 1998.
Regional Operations gross profit margins decreased from 36.5% in 1997 to 32.2%
in 1998. Contractors Resources gross profit margins increased from 3.4% in 1997
to 3.8% in 1998. The Gross profit margin for PSS, ABS, and AIG was 39%.
The decrease in Specialized Practice Groups gross profit margins is primarily
due to the higher product content in the 1998 revenues than in 1997 and
increased systems implementation consulting revenue. Product revenue and systems
implementation consulting revenue commands a lower gross profit margin than
custom software development, high end consulting and system design work revenue,
which did not grow as rapidly as the product or systems implementation
consulting revenue in 1998. The Regional Operations gross profit margin decrease
is due to higher growth in Technical Consulting Services than in Systems
Integration. Technical Consulting Services command a lower gross profit margin
than Systems Integration work. The acquisition of PSS in January 1998 and the
opening of a Tampa office in April 1998 fueled the Technical Consulting Services
growth. Contractors Resources achieved higher gross profit margins primarily
through increased service fees to its members.
Business unit expenses for the year ended December 31, 1998 increased
approximately $4.3 million or 72% to approximately $10.2 million from
approximately $5.9 million for the same period of 1997. This increase includes
increases in Regional Operations and Specialized Practice Groups business unit
expenses of approximately $2.2 million and $2.1 million, respectively.
Contractors Resources business unit expenses increased by $19,000. The increase
in business unit expenses was primarily due to the acquisitions of PSS, ABS, and
AIG that collectively increased business unit expenses in 1998 by $4.3 million.
Business unit income for the year was approximately $1.7 million as compared to
a business unit loss of $903,000 for the same period of 1997, an improvement of
approximately $2.6 million. This improvement includes increases in business unit
profits from Regional Operations, Specialized Practice Groups, and Contractors
Resources of $1.7 million, $681,000, and $217,000, respectively. Business unit
income for PSS, ABS, and AIG accounted for $923,000 of this improvement.
Corporate expense for the year ended December 31, 1998 increased approximately
$1.0 million or 67% to approximately $2.5 million from approximately $1.5
million in the same period of 1997. This increase reflects an
19
<PAGE>
additional investment in corporate development capability to support the growth
of operations and the integration of acquisitions.
Restructuring costs of $160,000 were recorded in the year ended December 31,
1998 related to the reduction of duplicate costs and consolidation of
facilities. Acquired in-process technology of $250,000 from the Company's
acquisition of AIG was written-off in the 1998. The Company also wrote off
$131,000 of certain software items in its inventory that became obsolete.
Earnings before interest, income taxes, depreciation, and amortization
("EBITDA") for the year ended December 31, 1998 was a loss of approximately $1.3
million as compared to a loss of approximately $2.4 million for the same period
of 1997, an improvement in EBITDA of $1.1 million. The components of this
improvement are discussed above.
Depreciation, amortization, and interest expense for the year ended December 31,
1998 increased approximately $747,000 to approximately $1.2 million from
approximately $491,000 for the same period of 1997. This increase is principally
due to increased amortization and depreciation from the acquisitions of PSS,
ABS, and AIG and increased borrowings under the Company's line of credit
facility to support growth for the year ended December 31, 1998.
Due to the generation of net losses, no provision or benefit for income taxes
was required for either the year ended December 31, 1998 or 1997.
The net loss decreased approximately $325,000 to approximately $2.5 million from
approximately $2.9 million in the same period of 1997. The components of this
improvement are discussed above.
1997 Compared to 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 of 1996. This increase includes a $5.6 million or 21% increase
in Contractors Resources revenue, $1.5 million or 39% increase in Regional
Operations revenue, partially offset by a decrease of $129,000 (or 4%) in
Specialized Practice Groups revenue.
The revenue growth in Contractors Resources is principally due to an increase in
the number of contractor members working through Contractors resources. The
revenue growth in Regional Operations was generated by increased sales volume of
the Technical Consulting Services (formerly IT staffing). The $129,000 decrease
in Specialized Practice Groups includes a $1.1 million decrease in revenue from
Specialized Practice Groups owned by the Company at December 31, 1996, offset in
part by a $1.0 million increase in revenue generated by Onion Peel Solutions
which was acquired by the Company in July 1997. The $1.1 million decrease in
revenues from Specialized Practice Groups owned by the Company in 1996 is due to
a decline in computer product resales volume in 1997 when compared to the same
period of 1996.
Gross Profit for the year ended December 31, 1997 increased approximately $2.4
million or 91% to approximately $5.1 million as compared to approximately $2.6
million for the same period of 1996. This increase includes an increase of $1.2
million or 147% in Specialized Practice Groups gross profit, and an increase of
$1.2 million or 180% increase in Regional Operations gross profit, offset by a
$39,000 or 3% decrease in Contractors Resources gross profit. The increased
Specialized Practice Groups gross profit, which includes a $500,000 increase in
gross profit generated by Specialized Practice Groups that were owned by the
Company at December 31, 1996, is due to a shift in the revenue mix to a higher
proportion of pure services revenue than in the same period of 1996. The
increased Specialized Practice Groups gross profits also include approximately
$700,000 in gross profits generated by Onion Peel, which was acquired in July
1997. The increase in Regional Operations Gross profits is due principally to
the revenue growth from the Technical Consulting Services Group. The decrease in
the Contractors Resources gross profit is due primarily to discounting service
rates to increase the number of contractor members and increase revenue volume.
Gross Profit margin increased to approximately 12.51% for the year ended
December 31, 1997, from approximately 7.9 % for the same period of 1996.
Specialized Practice Groups gross profit margins increased from 24.9% in 1996 to
63.9% in 1997. Regional Operations gross profit margins increased from 18.1% in
1996 to 36.5% in 1997. Contractors Resources gross profit margins declined
slightly, from 4.3% in 1996 to 3.4% in 1997.
The Specialized Practice Groups gross profit growth in 1997 is due to the shift
to a higher proportion of pure services revenue generated by the Specialized
Practice Groups that the Company operated at December 31, 1996.
20
<PAGE>
Onion Peel (acquired in July 1997) contributed gross profit margins of
approximately 80% on revenues it produced during 1997. The increase in Regional
Operations gross profit margin is primarily due to the growth in Technical
Services Group revenue.
Business unit expenses for the year ended December 31, 1997 increased
approximately $2.8 million or 87% to approximately $5.9 million from
approximately $3.1 million for the same period of 1996. This increase includes
increases in Specialized Practice Groups, Regional Operations, and Contractors
Resources business unit expenses of approximately $1.8 million, $861,000, and
$88,000, respectively. The increase in Specialized Practice Groups business unit
expenses of $1.8 million is principally due to expansion of the sales force and
the hiring of additional practice management technical staff and related
training expenditures to pursue and prepare for prospective engagements. The
Specialized Practice Groups increase also includes $420,000 of business unit
expenses for Onion Peel (acquired in July 1997). The Regional Operations
business unit expense increase is principally due to the expansion of the sales
and recruiting forces in the Technical Consulting Group. The increase in
business unit expenses for Contractors Resources is principally due to the
expansion of its administrative workforce.
The business unit income for the year ended December 31, 1997 was a loss of
approximately $903,000 as compared to an operating business unit loss of
$519,000 for the same period of 1996, an increased loss of $361,000. This
increase includes increased business unit losses from Specialized Practice
Groups and Contractors Resources of $213,000 and $104,000, respectively,
partially offset by a reduction in business unit loss of $357,000 for Regional
Operations. Onion Peel contributed $489,000 of business unit income in 1997.
Corporate expense for the year ended December 31, 1997 decreased approximately
$231,000 or 13% to approximately $1.5 million from approximately $1.7 million
when compared to the same period of 1997. This decrease resulted from the
Company's reduction of duplicate corporate and central support infrastructure
and related professional fees that occurred after the merger with CompLink in
June 1996.
Earnings before interest, income taxes, depreciation, and amortization
("EBITDA") for year ended December 31, 1997 was a loss of $2.4 million as
compared to a loss of approximately $2.3 million for the same period of 1997, an
additional loss of approximately $100,000. The components of this additional
loss are discussed above.
Depreciation, amortization, and interest expense for the year ended December 31,
1997 increased approximately $256,000 to approximately $491,000 from
approximately $235,000 for the same period of 1997. This increase is principally
due to increased borrowings under the Company's line of credit facility during
the year ended December 31, 1997 as compared to the same period of 1996, and to
the increased depreciation and amortization from assets acquired in the
acquisition of Onion Peel.
The loss from continuing operations increased approximately $386,000 to
approximately $2.9 million compared to loss from continuing operations of
approximately $2.5 million in the same period of 1996. The components of the
increased loss are discussed above,
As a result of the net loss from continuing operations no provision or benefit
for income taxes was required for the year ended December 31, 1997. In 1996, the
Company recorded a $34,000 income tax benefit generated from a change in the
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 resulting 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 acquisition in the
merger with CompLink (June 1, 1996 for accounting purposes) through the disposal
date.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of $870,465. The
Company had $4,041,000 outstanding on its line of credit facilities and had long
term capital lease obligations of $57,901.
The following increased the Company's liquidity and capital resources:
For the year ended December 31, 1998 the Company's cash increased by $518,000.
This increase is comprised of cash used in operating activities of approximately
$4,655,000, cash used in investing activities of approximately $3,722,000 and
cash provided by financing activities of approximately $8,894,000.
21
<PAGE>
As of December 31, 1998, the Company maintains a line of credit with a bank that
allows the Company to borrow the lesser of $6,000,000 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 was not in compliance with certain covenants and has
obtained a waiver from the bank as of December 31, 1998. The Company had
borrowings of $4,041,000 under the line of credit as of December 31, 1998. As of
April 5, 1999 the Company had net availability of $1,846,000 under the line.
This line of credit expires on July 1, 2000.
The Company also had a line of credit facility with a bank that it acquired in
the PSS acquisition (the "PSS line of credit"). The Company retired the PSS line
of credit in April 1998 and repaid the outstanding balance of approximately
$803,000.
In January 1998, the Company completed the purchase of all of the stock of PSS.
In June 1998 the Company completed the purchase of all of the stock of ABS.
Effective September 1, 1998 the Company acquired certain assets of AIG. See
additional discussion of the PSS, ABS, and AIG acquisitions in Note 1(1)
- -Acquisitions.
Capital expenditures for the year ended December 31, 1998 were approximately
$448,000. Cash paid in the acquisitions of ABS, AIG, and PSS; net of cash
acquired totaled approximately $3,339,000.
Between January 1, 1998 and December 31, 1998, the Company has raised additional
equity totaling $6,347,000, as follows:
In February 1998 the Company raised $100,000 through the sale of 80,000 shares
of un-registered Common Stock plus a warrant to purchase an additional 100,000
shares 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 un-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 ($1.3 million net of expenses). 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. See additional discussion in Note 3- Equity
Financings.
On April 26, 1998, the Company raised $150,000 of financing in a private
placement with accredited investors. The Company issued non-registered shares of
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 $1.50 per share.
On April 27, 1998, the Company raised $48,125 of financing in a private
placement with accredited investors. The Company issued non-registered shares of
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 $1.375 per share.
On August 28, 1998, the Company raised $592,000 of financing in a private
placement with accredited investors. The Company issued non -registered shares
of 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 $1.3125 per share.
On September 28, 1998, the Company completed the sale of 1,700 units of a
Private placement, totaling $1.5 million ($1.3 million net of expenses). See
additional discussion in Note 3 - Equity Financings.
On September 30, 1998, the Company completed the sale of 1,500,000 shares of its
Class C, 9.9% Preferred Stock for $1.5 million ($1.4 million net of expenses)
and warrants to acquire up to 550,000 shares of common stock based on certain
conditions. See additional discussion in Note 3 -Equity Financings.
Based on the Company's current operating plan, the Company believes that the
cash generated from operating activities, coupled with borrowings on its line of
credit facility which was expanded from $2.0 million to $6.0 million in
September 1998, will be sufficient to meet the anticipated needs for working
capital and capital expenditure for at least the next 12 months. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's
liquidity needs, the Company may seek to obtain additional capacity on its line
of credit, sell convertible
22
<PAGE>
debt securities or sell additional equity securities. However, no assurances can
be given that any such addition financing sources will be available on
acceptable terms or at all. The sale of convertible debt securities or
additional equity securities could result in additional dilution to the
Company's stockholders. The Company has no current plans, agreements, and
commitments and is not engaged in any negotiations with respect to such
transactions.
The proceeds of these equity financings have been used to finance acquisitions
and to provide additional corporate working capital.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four- digit entries to distinguish 21st century dates from
20th century dates. This problem could result in system failures or
miscalculations causing disruptions of business operations. As a result,
computer systems and/or software used by many companies may need to be upgraded
to comply with such "Year 2000" requirements. Significant uncertainty exists in
the software industry concerning the potential effects associated with such
compliance.
The Company's vendors, customers, suppliers, and service providers are under no
contractual obligation to provide Year 2000 information to the Company.
Generally, the Company believes its key internal software systems are either
compliant, the vendors claim compliance, or the problems can be corrected by
purchasing small amounts of hardware, software or software upgrades, where
necessary. The Company is also continuing its assessment of the readiness of
external entities, such as subcontractors, suppliers, vendors, and service
providers that interface with the company.
Based on its assessments and current knowledge, the Company believes it will
not, as a result of the Year 2000 issue, experience any material disruptions in
internal processes, information processing or services from outside
relationships. The Company presently believes that the Year 2000 issue will not
pose significant operational problems and the Company will be able to manage its
total Year 2000 transition without any material effect on the Company's results
of operations or financial condition. The most likely risks to the Company from
Year 2000 issues are external, due to the difficulty of validating all key third
parties' readiness for Year 2000. The Company has sought and will continue to
seek confirmation of such compliance and seek relationships, which are
compliant.
The Company currently anticipates that all of its internal systems and equipment
will be Year 2000 compliant by the end of the second quarter of 1999 and that
the associated costs will not have a material adverse effect on the Company's
results of operations and financial condition. However, the failure to properly
assess or timely implement a material Year 2000 problem could result in a
disruption in the Company's normal business activities or operations. Such
failures, depending on the extent and nature, could materially and adversely
effect the Company's operations and financial condition. To date, the Company
has not developed a contingency plan.
The Company does not believe that the costs of its Year 2000 Program have been
or are material to its financial position or results of operations. All expenses
have been charged against earnings as incurred and the Company intends to
continue to charge such costs against earnings as the costs are incurred.
The Company believes that all of its network management software products
(America, Productivity Series, Network Data Collector, ROVE, and ROVE Motif)
will properly process/utilize dates beyond December 31, 1999.
The estimates and conclusions set forth herein regarding Year 2000 compliance
contain forward-looking statements and are based on management's estimates of
future events and information provided by third parties. There can be no
assurance that such estimates and information provided will prove to be
accurate. Risks to completing the Year 2000 project include the availability of
resources, the Company's ability to discover and correct potential Year 2000
problems and the ability of suppliers and other third parties to bring their
systems into Year 2000 compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments that would require
disclosure under this item. The Company's obligations under its line of credit
are short-term in nature with an interest rate which approximates the market
rate.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements listed in the accompanying index to
Consolidated Financial Statements on Page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
24
<PAGE>
PART III
ITEM 10. 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 41 President, Chief Executive Officer and
Chairman
Robert Skelton 37 Vice President - Corporate Development,
General Counsel and Secretary
Walton E. Bell, III 57 Chief Financial Officer and Treasurer
Frank Lagattuta 55 Chief Operating Officer
Richard Goldstein (1) (2) 52 Director
Steven Hanau (1) 54 Director
J. Alan Lindauer 59 Director
Deborah Novick (2) 34 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 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 that led to the formation
of Netplex. Mr. Zaino is a graduate of the University of Pennsylvania's Wharton
School of Business 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.
Walton E. Bell, III joined the Company in June 1998 as its Chief Financial
Officer and became its Treasurer in August 1998. Prior thereto, he was the Chief
Financial Officer of Boat US from 1995 to 1998. Prior thereto, Mr. Bell was the
Chief Financial Officer of A.J. Dwoskin & Associates, Inc. from 1993 to 1995.
From 1987 to 1993, Mr. Bell was the Chief Executive Officer of Sector
Technology, Inc. Mr. Bell also spent 22 years with Arthur Andersen (from 1966 to
1987) achieving partner status and establishing a microcomputer-consulting
group. Mr. Bell holds a Bachelor of Science Degree in Accounting from Abilene
Christian College in Abilene, Texas, and is a Certified Public Accountant.
Frank Lagattuta was a director of the Company from 1997 to 1999 and was its
Chief Operating Officer in 1998 and 1999. Mr. Lagattuta served as the President
and Chief Operating Officer of CompuLaw, Ltd. of Los Angeles
25
<PAGE>
from 1996 until June 1998. Prior thereto, he was the Vice President of Sales and
Marketing for Saft America, Inc. from 1993 to 1996. Mr. Lagattuta was the Vice
President of Sales and Marketing for BISS Sales, Inc., from 1991 to 1993 and 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. Mr. Lagattuta declined to stand for re-election to the
Board and has therefore resigned as Vice President, Chief Operating Officer and
director of the Company. Mr. Lagattuta continues to be employed by the Company
and is directing the Company's Technical Consulting Services operations.
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.
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. Goldstein was a Tax
Partner with KPMG 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.
J. Alan Lindauer became a Director of the Company in November 1998. Mr. Lindauer
has also been serving as a Director of Waterside Capital Corporation since July
1993 and was named as its President and Chief Executive Officer in March 1994.
Mr. Lindauer has also served as President of JTL, Inc., since 1986. Also since
1986, Mr. Lindauer has served as a Director of Commerce Bank of Virginia. In
1963, Mr. Lindauer started Minute-Man Fuels and managed the Company until 1985.
Mr. Lindauer holds a Bachelor of Business Administration in Accounting and a
Master of Business Administration from Old Dominion University. He is a
Certified Management Consultant.
Steven Hanau became a Director of the Company in July 1998. Mr. Hanau has served
as President of Enterprise Services at Wang Global since August 1996. Prior
thereto, Mr. Hanau spent eight years at I-NET, becoming its President of
Enterprise Services until Wang Global acquired I-NET. Prior thereto, Mr. Hanau
spent twenty two years in the U.S. Army, holding high level positions with the
Army Chief of Staff and the Office of the Secretary of Defense. Mr. Hanau holds
a degree from the United States Military Academy and earned advanced degrees in
operations research from Stanford University and in business administration from
Long Island University.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth, for the fiscal years indicated, all compensation
the Company paid to Gene Zaino, President and Chief Executive Officer and Robert
M. Skelton, Vice President - Corporate Development, General Counsel and
Secretary. In June 1996, the Company then called CompLink merged with The
Netplex Group, Inc. and America's Work Exchange, Inc. and changed its name to
The Netplex Group, Inc. Compensation paid for periods prior to June 1996
constitutes compensation paid by such predecessor companies. The Company had no
executive officers, other than Mr. Zaino and Mr. Skelton, whose salary and bonus
exceeded $100,000 for the year ended December 31, 1998.
26
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary($) Options(#) Compensation($)
- --------------------------- ---- --------- ------------ ---------------
<S> <C> <C> <C> <C>
Gene Zaino, President(1) 1998 $140,747 $15,000
1997 $130,000 600,000 (3) $ 4,563
1996 $116,423 $27,125 (2)
Robert Skelton, Secretary 1998 $101,988 $11,000
1997 $100,000 70,000 (3) $ 2,903
1996 $ 32,731 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, which was increased by the Board in 1998 to
$163,000 per annum. See "Executive Compensation -- Employment and Related
Agreements."
(2) Mr. Zaino received $5,425 per month from December 1995 through May 1996
pursuant to a consulting agreement with the Company.
(3) Options to purchase 600,000 shares issued to Mr. Zaino in 1995 under the
1992 Incentive and Nonqualified Stock Option Plan were canceled in December
1997. Options to purchase 600,000 shares were issued immediately thereafter
at a lower exercise price. None of Mr. Zaino's options have been exercised
and 300,000 are vested as of December 31, 1998. Options to purchase 70,000
shares granted to Mr. Skelton in 1996 and 1997 under the Plan were canceled
in December 1997 and options to purchase 70,000 shares were issued
immediately thereafter to Mr. Skelton at a lower exercise price. None of
Mr. Skelton's options have been exercised and 35,000 shares are vested as
of December 31, 1998. Mr. Skelton's employment with the Company commenced
in 1996.
Aggregated Option Exercises and Fiscal Year-end Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised In-The-Money
Unexercised Options at Options at
December 31, 1998(1) December 31, 1998($)(1)
-------------------------- ---------------------------------
Name Exercisable/ Unexercisable Exercisable/ Unexercisable
---- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Gene Zaino 300,000 300,000 $27,900 $27,900
Robert Skelton 35,000 35,000 $3,255 $3,255
</TABLE>
- ----------
(1) At December 31, 1998 the closing price of the Company's Common Stock on the
Nasdaq SmallCap Market was $1.063.
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,
which was increased by the Company's Board in 1998 to $163,000. Mr. Zaino is
also entitled to receive an annual bonus based on the financial and operating
performance of the
27
<PAGE>
Company. Mr. Zaino may also receive an annual bonus at the sole discretion of
the Board, based upon the financial and operating performance of the Company,
which shall not exceed 60% of base salary.
The Company has obtained and is the beneficiary under a key-person life
insurance policy for $1 million on 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 90,000 shares at exercise prices
ranging from $1.06 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. Hanau 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information concerning ownership of the Company's
Common Stock, as of March 31, 1999, 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 1,638,350(2) 15.5%
The Netplex Group, Inc.
1800 Robert Fulton Drive, Second Floor
Reston, Virginia 20191-9992
28
<PAGE>
Name of Beneficial Owner Number of Shares of Common Stock
Beneficially Owned
(1)
Number Percent
------ -------
Zanett Lombardier, Ltd. 1,076,040(3) 9.5%
Tower 49 31st Floor
12 E. 49th Street
New York, NY 10021
The viaLink Company 643,770 6.3%
13800 Benson Road
Edmond, OK 28227
Goldman Sachs Performance Partners LP 591,444(4) 5.5%
c/o Commodities Corporation LLC
701 Mount Lucas Road CN 850
Princeton, NJ 08540
The Estate of John Thompson 585,716(5) 5.5%
1800 Robert Fulton Drive Second Floor
Reston, Virginia 20191
Robert Skelton 71,918(6) *
Richard Goldstein 30,000(7) *
Deborah Novick 16,250(8) *
Steve Hanau 15,000 *
J. Alan Lindauer 0 --
Walton E. Bell, III 0(9) --
Pamela Fredette 0 --
All directors and 1,757,703(10) 16.5%
executive officers as a
Group (8 persons)
- ----------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and, unless otherwise indicated,
includes sole voting and 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 outstanding Common Stock beneficially owned
by the person holding such options or warrants but are not deemed
outstanding for computing the percentage beneficially owned by any other
person. Based solely on a 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 373,420 shares of Common Stock, subject to currently exercisable
options or warrants.
(3) Includes 1,065,836 shares of Common Stock subject to currently exercisable
warrants.
(4) Consists of 539,310 shares of Common Stock subject to a currently
exercisable prepaid warrant and 52,134 shares of Common Stock subject to a
currently exercisable incentive warrant.
(5) Includes 385,194 shares of Common Stock subject to currently exercisable
options or warrants.
(6) Includes 70,000 shares of Common Stock subject to currently exercisable
options.
(7) Includes 15,000 shares of Common Stock subject to currently exercisable
options.
29
<PAGE>
(8) Consists of 16,250 shares of Common Stock subject to currently exercisable
options or warrants.
(9) Started July 1, 1998 and holds options to purchase 100,000 shares of Common
Stock, none of which are currently exercisable.
(10) Includes 507,361 shares of Common Stock subject to options or warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In January 1997, on the occasion of its move from New York to McLean, Virginia,
the Company loaned $150,000 to Gene Zaino, its chief executive officer, for
relocation expenses. The loan bears interest at 8% per annum and is due in
January 2002. The amount is classified as long-term debt on the Company's
consolidated balance sheet at December 31, 1998. At December 31, 1997, the
outstanding amount due on the loan was approximately $161,000 which was the
largest aggregate amount outstanding at any time during 1997. At December 31,
1998, the outstanding amount due under the loan was approximately $175,000,
including approximately $25,000 in accrued interest, which was the largest
aggregate amount outstanding at any time during 1998.
Ms. Novick, who is presently a director of the Company, is a Senior Vice
President of GKN Securities Corp., the Placement Agent of the 1996 Private
placement of $3,500,000 Class A Convertible Preferred Shares consummated by the
Company in 1996. The Company paid GKN Securities Corp. $432,500 in fees
associated with the completion of this transaction.
Mr. Lindauer, who is presently a director of the Company, is a Director of
Waterside Capital Corporation as well as its President and Chief Executive
Officer. Waterside Capital Corporation is a holder of class C preferred shares
and also lent the Company $800,000 under a subordinated note in 1999.
Please refer to Note 14 of the Notes to Consolidated Financial Statements
regarding related party transactions.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements and Schedules. The following financial statements
are included herein:
Page
Independent Auditors' Report.................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended F-4
December 31, 1998, 1997 and 1996.....................
Consolidated Statements of Stockholders' Equity for the years F-5
ended December 31, 1998, 1997 and 1996...............
Consolidated Statements of Cash Flows for the years ended..... F-8
December 31, 1998, 1997 and 1996.....................
Notes to Consolidated Financial Statements.................... F-9
2. Consolidated Financial Statement Schedules
The following consolidated financial statement schedule of the Company for each
of the years ended December 31, 1998, 1997, and 1996 is filed as part of this
Form 10-K, and should be read in conjunction with the Consolidated Financial
Statements, and the related notes thereto of the Company.
Schedule II -- Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or the Notes thereto.
3. Exhibits
Exhibit Description of Document
Number
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 Composite Certificate of Incorporation, as amended.******
3.2 The Company's By-laws.**
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 Private 1998
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.**
31
<PAGE>
Exhibit Description of Document
Number
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******
21 Subsidiaries of The Netplex Group, Inc.******
23 Consent of KPMG LLP.******
27 Financial Data Schedule.******
(b) The Company filed one report Form 8-K/A in the quarter ended December 30,
1998, 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.
32
<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 20 , 1999
- -------------------------- Chief Executive Officer
Gene Zaino [Principal Executive
Officer]
/s/ Walton E. Bell, III Chief Financial Officer April 20 , 1999
- -------------------------- and Treasurer [Principal
Walton E. Bell, III Financial Officer]
/s/ Neil Luden Vice President & Director April 20, 1999
- --------------------------
Neil Luden
/s/ Richard Goldstein Director April 20, 1999
- --------------------------
Richard Goldstein
/s/ Frank C. Lagattuta Director April 20, 1999
- --------------------------
Frank C. Lagattuta
/s/ Deborah Novick Director April 20, 1999
- --------------------------
Deborah Novick
/s/ Steven Hanau Director April 20, 1999
- --------------------------
Steven Hanu
33
<PAGE>
SCHEDULE II
THE NETPLEX GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance at Additions Balance
beginning of charged to at end of
period operations Write-offs *Other period
------------ ---------- ---------- ------ --------
Allowance for doubtful accounts
Year Ended:
December 31, 1996 $ 46 $ 140 $ (9) $ -- $ 177
===== ===== ======== ======== =====
December 31, 1997 177 (26) (18) -- 133
===== ===== ======== ======== =====
December 31, 1998 $ 133 $ 200 $ -- $ 256 $ 589
===== ===== ======== ======== =====
* Amount represents allowance for bad debts on acquired accounts receivable.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............ F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................... F-8
Notes to Consolidated Financial Statements.............................. F-9
F-1
<PAGE>
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, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1998. In connection with our audits of the consolidated financial statements, we
also have audited the accompanying financial statement Schedule II - Valuation
and Qualifying Accounts, for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
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, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
McLean, Virginia
April 19, 1999
F-2
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Assets
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 870,465 $ 353,005
accounts receivable, net of allowance for doubtful
accounts of $589,000 and $133,000, respectively 11,654,743 4,133,148
Prepaids and other current assets 523,480 432,842
------------ ------------
Total current assets 13,048,688 4,918,995
------------ ------------
Property and equipment, net 1,704,975 952,546
Employee notes receivable 248,762 193,464
Other assets 213,174 82,738
Acquired software, net 1,091,624 418,225
Fulfillment data base, net 797,148 --
Other acquired intangible assets, net 1,773,333 --
Goodwill, net 1,772,919 346,529
------------ ------------
Total assets $ 20,650,623 $ 6,912,497
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,545,730 $ 567,805
Line of credit 4,041,000 1,316,300
Notes payable 300,000 --
Accrued expenses and other current liabilities 6,418,326 3,383,024
Obligation under capital lease, current portion 97,315 96,073
Deferred revenues 835,827 109,497
------------ ------------
Total current liabilities 14,238,198 5,472,699
Capital lease obligations, net of current portion 57,901 109,096
------------ ------------
Total liabilities 14,296,099 5,581,795
------------ ------------
Stockholders' equity:
Class A Cumulative Preferred Stock: $.01 par value; liquidation
preference of $4.00 per share for 1998 and 1997 and unpaid
dividends of $267,004; 2,000,000 authorized, 987,753 shares
outstanding in 1998 and 1,062,500 shares in 1997 9,875 10,625
Class B Preferred Stock: $.01 par value; liquidation preference of
$3.50 per share; 1,500,000 authorized, 643,770 shares outstanding
in 1998 and no shares outstanding in 1997 6,438 --
Class C Cumulative Preferred Stock: $.01 par value; liquidation
preference of $3.99 per share and unpaid dividends of $37,500;
2,500,000 authorized; 1,500,000 share outstanding in 1998 and no
shares outstanding in 1997 15,000 --
Common Stock $.001 par value: 40,000,000 authorized; 10,204,735
shares outstanding in 1998 and 7,470,370 shares in 1997 10,204 7,470
Additional paid in capital 13,821,531 6,272,407
Accumulated deficit (7,508,524) (4,959,800)
------------ ------------
Commitments and contingencies
Total stockholders' equity 6,354,524 1,330,702
------------ ------------
Total liabilities and stockholders' equity $ 20,650,623 $ 6,912,497
============ ============
</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, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues
Services $ 55,872,750 $ 39,394,880 $ 31,364,225
Product 5,406,410 2,073,254 2,160,454
------------ ------------ ------------
61,279,160 40,468,134 33,524,679
------------ ------------ ------------
Cost of revenues
Services 45,419,944 34,291,908 29,028,743
Product 3,894,757 1,123,736 1,849,423
------------ ------------ ------------
49,314,701 35,415,644 30,878,166
------------ ------------ ------------
Gross profit 11,964,459 5,052,490 2,646,513
Operating expenses
Selling, general and administrative expenses 13,949,309 7,899,756 5,205,906
Restructuring costs 160,000 -- --
Acquired in-process technology 250,000 -- --
------------ ------------ ------------
Operating expenses 14,359,309 7,899,756 5,205,9061
Operating loss (2,394,850) (2,847,266) (2,559,393)
Other income (expense)
Interest income (expense), net (153,874) (26,337) 33,119
Other income -- -- 4,808
------------ ------------ ------------
(153,874) (26,337) 37,927
Loss from continuing operations
before income taxes (2,548,724) (2,873,603) (2,521,466)
Income tax provision(benefit) -- -- (34,000)
------------ ------------ ------------
Net loss from continuing operations (2,548,724) (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 $ (2,548,724) $ (2,873,603) $ (1,999,387)
============ ============ ============
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.31) $ (0.46) $ (0.51)
Discontinued operations -- -- 0.09
------------ ------------ ------------
Total $ (0.31) $ (0.46) $ (0.42)
============ ============ ============
Weighted average common shares outstanding
basic and diluted 9,259,599 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, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Class A Cumulative Class B Class C Cumulative
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
------------------------ ----------------------- -----------------------
Shares $ Shares $ Shares $
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 -- $ -- -- $ -- -- $ --
Private placement of Class A Cumulative,
Convertible Preferred Stock 1,750,000 17,500 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 1,750,000 17,500 -- -- -- --
Conversions of Preferred Stock to Common Stock (687,500) (6,875) -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 1,062,500 10,625 -- -- -- --
Conversions of Preferred Stock to Common Stock (141,865) (1,419) -- -- -- --
Dividends Paid in Kind 66,938 669 -- -- -- --
Issuance of Class B Preferred Stock in
connection with the Acquisition of AIG -- -- 643,770 6,438 -- --
Private Placement of Class C Preferred Stock -- -- -- -- 1,500,000 15,000
========== ========== ========== ========== ========== ==========
Balance at December 31, 1998 987,573 9,875 643,770 6,438 1,500,000 15,000
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONT'D)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional
----------------------------- Paid In
Shares $ Capital
----------- ----------- -----------
<S> <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 to $.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 -- -- 3,024,346
Preferred Stock dividends -- -- (98,194)
----------- ----------- -----------
Balance at December 31, 1996 6,442,903 6,443 5,301,542
Net loss -- -- --
Conversions of Preferred Stock to Common Stock 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 the 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 7,470,370 7,470 6,272,407
<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 to $.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 the 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-6
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONT'D)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional
---------------------------- Paid In
Shares $ Capital
------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1997 7,470,370 7,470 6,272,407
Net loss -- -- --
Conversions of Preferred Stock to Common Stock 141,865 142 1,277
Dividends Paid in Kind -- -- (669)
Preferred Stock dividends -- -- (304,504)
Private placements of Common Stock 2,123,000 2,123 2,343,440
Private placements of Prepaid Common Stock purchase warrants -- -- 2,582,490
Issuance of Common Stock in connection with the Acquisition of ABS 450,000 450 590,175
Issuance of Class B Preferred Stock in connection with the Acquisition
of AIG -- -- 993,562
Private placement of Class C Preferred Stock -- -- 1,324,457
Exercise of Common Stock Options 19,500 19 18,896
------------ ------------ ------------
Balance at December 31, 1998 10,204,735 $ 10,204 $ 13,821,531
============ ============ ============
<CAPTION>
Accumulated
Deficit Total
------------ ------------
<S> <C> <C>
Balance at December 31, 1997 (4,959,800) 1,330,702
Net loss (2,548,724) (2,548,724)
Conversions of Preferred Stock to Common Stock -- --
Dividends Paid in Kind --
Preferred Stock dividends -- (304,504)
Private placements of Common Stock -- 2,345,563
Private placements of Prepaid Common Stock purchase warrants -- 2,582,490
Issuance of Common Stock in connection with the Acquisition of ABS -- 590,625
Issuance of Class B Preferred Stock in connection with the Acquisition
of AIG -- 1,000,000
Private placement of Class C Preferred Stock -- 1,339,457
Exercise of Common Stock Options -- 18,915
------------ ------------
Balance at December 31, 1998 $ (7,508,524) $ 6,354,524
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net loss $(2,548,724) $(2,873,603) $(1,999,387)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,083,741 464,213 587,902
Acquired in-process R&D write-off 250,000
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 acquisitions:
Accounts receivable (5,985,628) 301,321 (789,955)
Prepaid expenses and other current assets 32,656 117,712 (126,900)
Accounts payable and accrued expenses 1,786,228 (2,159,896) 1,190,669
Deferred revenue 726,628 (219,770) (131,643)
----------- ----------- -----------
Net cash used in operating activities (4,655,099) (4,330,023) (3,123,443)
----------- ----------- -----------
Investing activities:
Net cash (paid )acquired in acquisitions (3,339,043) 2,149 1,245,062
Net proceeds from the sale of Worldlink product technology -- -- 2,492,795
Purchases of property and equipment (382,779) (105,438) (631,983)
----------- ----------- -----------
Net cash provided by/(used in) operating activities (3,721,882) (103,289) 3,105,874
----------- ----------- -----------
Financing activities:
Net proceeds from stock offerings 6,267,510 -- 3,041,846
Line of credit advances 2,724,700 1,316,300 650,000
Line of credit repayments -- (95,000) (650,000)
Proceeds from the exercise of stock options and warrants 18,915 607,517 --
Payment of dividends on Class A Preferred Stock -- (180,694) --
Principal payments on capital lease obligations (116,744) (99,945) (14,019)
Repayments of other notes payable -- (59,496) (159,870)
Issuance of note receivable -- (200,000) --
Repayment of note receivable 100,000 -- --
Issuance of employee notes receivable -- (193,464) --
----------- ----------- -----------
Net cash used in financing activities 8,894,381 1,095,218 2,867,957
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 517,460 (3,338,094) 2,850,388
Cash and equivalents at beginning of period 353,005 3,691,099 840,711
----------- ----------- -----------
Cash and equivalents at end of period $ 870,465 $ 353,005 $ 3,691,099
=========== =========== ===========
Supplemental information:
Cash paid during the period for:
Interest $ 187,201 $ 61,366 $ 24,247
=========== =========== ===========
Income taxes $ -- $ -- $ 12,985
=========== =========== ===========
Non-cash financing activity:
Capital lease obligation 52,732 88,098 241,561
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 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. At December 31, 1998, the Company was obligated to issue an
additional 297,396 shares to the acquirees under the purchase agreement.
These shares were issued in February 1999. 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.
F-9
<PAGE>
Acquisition of 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
$300,000 on January 15, 1999. Subsequent to December 31, 1998 the Company
and Preferred amended the agreement to eliminate the Earn-out provision. In
accordance with the amendment, the Company agreed to purchase a split
dollar life insurance policy on the life of Preferred's shareholder and to
fund the policy with four equal annual payments beginning January 29, 1999.
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 and
was preliminarily 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
===========
The Company is amortizing the fulfillment database (resume database) over 7
years using the straight-line method.
As of December 31, 1998, the Company has not paid and does not owe any
additional consideration to Preferred, in connection with the acquisition
of PSS.
Acquisition of Automated Business Systems of North Carolina, Inc.:
On June 18 1998, the Company completed the purchase of all of the stock of
Automated Business Systems of North Carolina, Inc. and Kellar Technology
Group, Inc. (Collectively "ABS"). In consideration for the purchase, the
Company paid $200,000 and issued 450,000 shares of its Common Stock. The
agreement also provides that the former shareholders of ABS will receive
additional consideration, payable 50% in cash and 50% in stock, through
December 31, 2000, if ABS meets certain operating targets. In connection
with the acquisition, the Company has entered into employment agreements
with certain employees of ABS. The acquisition was recorded effective June
30, 1998 using the purchase method of accounting.
The purchase price of the ABS acquisition was determined to be $791,000
(subject to adjustment for contingent consideration) and was preliminarily
allocated to the fair value of the assets and liabilities acquired, as
follows:
Cash $ 205,000
Accounts receivable 736,000
Property and equipment 51,000
Other assets 33,000
Goodwill 678,000
Less liabilities assumed (912,000)
=========
Net assets acquired $ 791,000
=========
The Company is amortizing the goodwill resulting from the acquisition over
an estimated useful life of 7 years using the straight-line method.
As of December 31, 1998, the Company has recorded $171,000 of additional
consideration in accordance with the ABS acquisition agreement. The
consideration consists of $85,000 in cash and 31,736 shares of Common
Stock. Such consideration was recorded as an addition to goodwill and will
be recovered over the remaining life of the goodwill resulting from the
transaction.
F-10
<PAGE>
Acquisition of Applied Intelligence Group, Inc.
On October 16, 1998, the Company completed the purchase of the information
technology consulting business of Applied Intelligence Group, Inc. of
Oklahoma City ("AIG") effective September 1, 1998. In consideration for the
purchase, the Company paid $3,000,000 and issued 643,770 shares of Class B
Preferred Stock ("Preferred Stock") valued at $1,000,000 at closing. The
Class B Preferred Stock is convertible into Common Stock of the Company at
anytime on a share for share basis. No dividends are payable on the
Preferred Stock. The holders of the Preferred Stock have agreed not to sell
or otherwise distribute the Common Stock underlying the Preferred Stock for
a period of one year. The agreement also provides that AIG will receive
additional consideration (the "AIG Earn-out") if AIG meets certain
operating targets. Such Earn-out would consist of (i) up to $1.5 million of
cash based on net profit, as defined in the agreement, AIG generates over
the next six quarters and (ii) up to 643,770 shares of Class B Preferred
Stock if AIG achieves approximately $9 million net profits over the next 9
quarters. The acquisition was accounted for using the purchase method of
accounting. In connection with the acquisition, the Company entered into
employment agreements with certain employees of AIG.
The purchase price of the AIG acquisition was determined to be $4,000,000
(subject to adjustment for contingent consideration). The Company has
allocated the purchase price on a preliminary basis to the fair value of
the assets and liabilities acquired and to the acquired in-process
technology, as follows:
Prepaid and other assets $ 52,000
Property and equipment 450,000
Acquired software 850,000
Assembled workforce 1,000,000
viaLink non-compete agreement 900,000
Goodwill 836,000
Less: liabilities assumed (338,000)
-----------
Net assets acquired 3,750,000
Acquired in process technology 250,000
-----------
Purchase price $ 4,000,000
-----------
The Company is amortizing the acquired software, assembled workforce, the
non-compete, and goodwill resulting from the acquisition over estimated
useful lives of 5, 5, 4, and 7 years, respectively, using the straight-line
method.
The Company has allocated $250,000 of the purchase price to its estimate of
the fair value of certain in-process Internet commerce product technology
that had not achieved technological feasibility as of acquisition date.
Accordingly, such costs were included in the statement of operations for
1998.
As of December 31, 1998, the Company has recorded approximately $340,000 of
additional consideration in accordance with the AIG acquisition agreement.
Such consideration was recorded as an addition to goodwill and will be
recovered over the remaining life of such goodwill.
The following supplemental financial information presents the consolidated
results of the Company from continuing operations, on a pro forma basis,
and the resulting increase in common shares outstanding, as though the
acquisitions of Onion Peel, PSS, ABS, and AIG were consummated on January
1, 1996.
(Unaudited)
Year Ended December 31,
1998 1997 1996
-------- -------- --------
(In Thousands Except Per Share Amounts)
Revenue $ 71,424 $ 57,382 $ 47,242
Net loss (817) (3,188) (1,436)
Basic and diluted loss per share (0.08) (0.40) (0.23)
Weighted Average shares outstanding 9,914 7,915 6,200
F-11
<PAGE>
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. 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, which does not involve significant integration
services, when the products are delivered to the customer site. Revenue on
fixed price contracts for services, or both hardware and significant
integration services is recognized on the percentage of completion basis,
based on the efforts expended method in accordance with SOP 81-1,
"Accounting for Performance of Construction Type and Certain Production
Type Contracts." The amount of revenue recognized on the percentage of
completion basis for 1996 and 1997 was immaterial. During 1998 Netplex
recognized $814,841 of revenue under the percentage of completion method
The Company's systems integration contracts are typically 3-6 months and
are priced either on a time and material ("T&M") or a fixed price basis.
All but a de minimis amount of the Company's contracts through 1997 were
T&M. In 1998 the Company proposed more business on a fixed price basis
because it has found it is able to generate higher margins than under the
T&M proposal and pricing method. 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 work performed, 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, and are stated at cost,
which approximates fair value.
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 5 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.
Depreciation and amortization expense related to property and equipment was
$578,564, $391,091, and $318,865 for the years ended December 31, 1998,
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 exceeds
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.
F-12
<PAGE>
Goodwill and Other Intangible Assets
Goodwill, the cost in excess of the fair value of net assets acquired, is
being amortized by the straight-line method, for periods ranging from 5 to
15 years. Accumulated amortization is $140,081 and $53,308 at December 31,
1998 and 1997. Management reviews the valuation and amortization period of
goodwill continually. As part of this review, the Company estimates the
value and future benefits of income generated, to determine that no
impairment has occurred.
Other intangible assets resulting from the Company's acquisitions consist
of a fulfillment database, acquired software, an assembled workforce, and a
non-compete agreement. Such assets are being amortized on the straight-line
basis over periods of 4 to 7 years. Accumulated amortization of the
intangibles was $468,592 and $46,470 at December 31, 1998 and 1997.
Income Taxes
Income taxes are accounted for using the asset and liability method. 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
The Company accounts for earnings per share in accordance with SFAS No.
128, "Earnings Per Share" which requires companies to present basic
earnings per share and diluted earnings per share (EPS). 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, 1998, 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.
A reconciliation of the numerators and denominators of the basic and
diluted EPS for the years ended December 31, 1998, 1997 and 1996, is
provided below:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- -------------
<S> <C> <C> <C>
1998
Net loss from continuing operations $(2,548,724) $
Preferred Stock dividend (315,778)
----------- ------------- -------------
Basic and diluted EPS
Income available to common shareholders $(2,864,502) 9,259,599 $ (0.31)
=========== ============= =============
1997
Net loss from continuing operations $(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 from continuing operations $(2,487,466) -- $ --
Preferred Stock dividend (98,194) -- --
----------- ------------- -------------
Basic and diluted EPS
Income available to common shareholders $(2,585,660) 5,026,306 $ (0.51)
=========== ============= =============
</TABLE>
F-13
<PAGE>
Stock Options
The Company accounts 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.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." This
standard is effective for reporting periods beginning January 1, 1998. 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:
Specialized Groups, Regional Operations, and Contractors Resources.
Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform to the
current year presentation.
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) Equity Financings
During 1998, the Company has raised additional equity, excluding equity
securities issued in acquisitions, totaling $6,267,510 as follows:
In February 1998 the Company raised $100,000 through the sale of 80,000
shares of un-registered Common Stock plus a warrant to purchase an
additional 100,000 shares of Common Stock 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 1,457,000 shares of un-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.
On April 7, 1998 Netplex completed the sale of 1,500 units of a Private
placement, totaling $1.5 million ($1.2 million after fees and expenses).
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 placement agent a warrant to purchase 39,000
F-14
<PAGE>
shares of Common Stock plus a placement fee 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 of an additional and committed
1,500 units, for $1,000 per unit.
In April 1998 the Company raised $198,000 of financing in two Private
placements raised from accredited investors. The Company issued shares of
un-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 $1.375 to
$1.50 per share.
On August 28, 1998, the Company raised $592,000 of financing in a private
placement to accredited investors. The Company issued un-registered shares
of 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 $1.3125 per share.
On September 28, 1998, the Company completed the sale of 1,700 units of
prepaid Common Stock purchase warrants in a Private placement, totaling
$1.5 million ($1.3 million net of expenses). The prepaid warrants are
exercisable in shares of Common Stock of the Company as is computed by
dividing $1,700,000 by 125% of the fixed exercise price of $1.3938, with
respect to any exercise within thee first year, and the lower of the fixed
exercise price and a variable exercise price (subject to a floor price of
$1.00), with respect to any exercise after the first year. As part of this
transaction, the Company also issued to the holders, warrants to purchase
141,667 shares of Common Stock at an exercise price of $1.3938 per share.
In connection with the issuance of these warrants, the Company issued
50,000 shares of its Common Stock to the placement agent.
On September 30, 1998, the Company completed the sale of 1,500,000 shares
of its Class C Convertible Preferred Stock and warrants to purchase Common
Stock for $1.5 million (1.3 million net of expenses). The Class C Preferred
Stock bears a dividend rate of 9.99% for the first year, and 15%
thereafter. The Preferred Stock is convertible at any time after the
earlier of a change in control of the Company or five years from the date
of issuance. The number of shares into which the Preferred Stock is
convertible is equal to $1,500,000 (plus accrued but unpaid dividends)
divided by 25% of the 20 day average trading price of the Common Stock
immediately prior to conversion. In accordance with EITF Topic No. D-60 and
Issue 98-5, the Company has measured the intrinsic value of the beneficial
conversion feature of the Preferred Stock to be $1,500,000. As a result,
the Company will accrete this discount as additional Preferred Stock
dividends over the five years. During 1998, the accretion of the discount
of approximately $53,000 was reported as additional Preferred Stock
dividends in the Company's EPS calculation. The warrants issued entitle the
holder to acquire 150,000 shares of Common Stock at $1.375 per share. The
Company may be required to issue up to an additional 450,000 shares of
Common Stock under the warrants, depending upon the term in which the Class
C Preferred Stock is outstanding. The Preferred Stock is redeemable at the
option of the Company at any time within the first five years. In
connection with the issuance of this Preferred Stock and warrants, the
Company issued warrants to purchase 250,000 shares of Common Stock at $1.59
per share to the placement agent.
(4) Liquidity
Based on its current operating plan, the Company believes that the net
proceeds from the private placements together with cash anticipated to be
provided by operating activities and amounts expected to be available under
the 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. 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 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.
F-15
<PAGE>
(5) 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.
(6) Property and Equipment
Property and equipment consists of the following:
December 31,
---------------------------
1998 1997
----------- -----------
Computer software $ 896,134 $ 493,935
Computer and office equipment 1,011,359 628,537
Furniture and fixtures 907,679 188,563
Equipment under capital leases 598,653 335,197
Leasehold improvements 101,682 38,520
----------- -----------
3,515,507 1,684,752
Accumulated depreciation and amortization (1,810,532) (732,206)
----------- -----------
Property and equipment, net $ 1,704,975 $ 952,546
=========== ===========
Computer software at December 31, 1998 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. Accumulated
depreciation related to this software was $172,000 and $70,000 at December
31, 1998 and 1997. Accumulated depreciation and amortization includes
$445,344, and $119,925 related to assets under capital leases at December
31, 1998 and 1997, respectively.
(7) Accrued Expenses
Accrued expenses consists of the following:
December 31,
-----------------------
1998 1997
---------- ----------
Payroll and employee benefits $5,403,764 $2,954,522
Other 1,014,562 428,502
---------- ----------
$6,418,326 $3,383,024
========== ==========
(8) Notes Payable to Bank
On September 29, 1998, the Company entered into a renewed bank line of
credit facility agreement that expires on May 31, 2000. This line of credit
facility provides for advances of 80% of eligible accounts receivable (as
defined in the agreement) up to $6,000,000. Amounts borrowed bear interest
at the bank's prime rate plus 3/4% (8.5% at December 31, 1998). The Company
had outstanding advances of $4,041,000 and $1,316,300 on the
F-16
<PAGE>
line of credit at December 31, 1998 and 1997, respectively. The Company is
required to maintain a tangible net worth of $2,100,000 through June 29,
1999 and $2,750,000 thereafter. The Company was not in compliance with
certain covenants and has obtained a waiver from the bank as of December
31, 1998. The Company is in compliance with this covenant at December 31,
1998.
(9) 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, 1998,
1997 and 1996 is as follows:
1998 1997 1996
----- ----- -----
(in thousands)
Computed expected tax benefit on income from
continuing operations $(867) $(977) $(857)
Non-deductible expenses:
Change in valuation allowance for deferred tax 576 699 873
assets
Meals 291 198 --
Other -- 80 (50)
$ -- $ -- $ (34)
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of deferred taxes assets and deferred tax liabilities at December
31, 1998, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
As of December 31,
-----------------------------
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,272 $ 4,010 $ 2,794
Research and development credit carryforwards 187 187 187
Excess tax basis over book of net assets 302 180 200
acquired
Inventory obsolescence reserve 108 56 59
Allowance for doubtful accounts receivable 146 48 74
Accrued liabilities, not presently deductible -- 8 496
Other -- -- 12
------- ------- -------
Total gross deferred tax assets 5,015 4,489 3,822
Less valuation allowance (4,700) (4,489) (3,790)
------- ------- -------
Net deferred tax asset 315 -- 32
------- ------- -------
Deferred tax liabilities:
Intangible assets acquired (315) -- --
Obligation under capital leases -- -- (13)
Other -- -- (19)
------- ------- -------
Total deferred tax liabilities (315) -- (32)
------- ------- -------
Net deferred tax asset (liability) $ -- $ -- $ --
======= ======= =======
</TABLE>
The net change in the valuation allowance in 1998, 1997, and 1996 were
increases of $211,000, $699,000, and$$699,000, respectively. The Company
has provided a valuation allowance for the majority of its deferred tax
assets at December 31, 1998, 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.
F-17
<PAGE>
As of December 31, 1998 the Company had net operating loss carry forwards
(NOL's) for Federal income tax purposes of approximately $12,563,000.
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 2018.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.
(10) Commitments
Employment Agreements
The Company has entered into employment agreements with several key
employees of the Company. At December 31, 1998, the Company's annual
obligation under the agreements is approximately $923,183per year over the
next three years.
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, 1998:
Capital Operating
Year ending December 31: Leases Leases
------- ---------
1999 $ 110,685 $1,025,670
2000 36,168 1,027,468
2001 14,472 794,042
2002 14,472 666,121
2003 2,363 295,320
Thereafter -- --
---------- ----------
Total minimum lease payments 178,160 $3,808,621
==========
Less: amount representing interest 22,944
----------
Present value of minimum lease payments $ 155,216
==========
Total rent expense was approximately $900,000, $647,000, and $577,000 for
the years ended December 31, 1998, 1997, and 1996.
(11) Preferred Stock
On July 29, 1998, at the Company's annual meeting of shareholders, the
number of authorized shares of Preferred Stock was increased from 2,000,000
to 6,000,000.
Class A Cumulative Convertible
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
F-18
<PAGE>
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 years ended December 31, 1998
and 1997, 141,865 and 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. No warrants to acquire share of Common Stock
were exercised in 1998.
Class B Convertible
On October 16, 1998, the Company completed the purchase of the information
technology consulting business of Applied Intelligence Group, Inc. of
Oklahoma City ("AIG") effective September 1, 1998. In consideration for the
purchase, the Company paid $3,000,000 and issued 643,770 shares of Class B
Preferred Stock valued at $1,000,000 at closing. The Class B Preferred
Stock is convertible into Common Stock of the Company at anytime on a share
for share basis. No dividends are payable on the Preferred Stock. The
holders of the Preferred Stock have agreed not to sell or otherwise
distribute the Common Stock underlying the Preferred Stock for a period of
one year.
Class C Cumulative Convertible
See Note 3 "Equity Financings" for details related to the Company's
issuance of Class C Cumulative Convertible Preferred Stock in connection
with the financing of its acquisition of the information technology
consulting business of Applied Intelligence Group.
(12) Common Stock and Warrants
On July 29, 1998, at the Company's annual meeting of shareholders, the
number of authorized shares of Common Stock, $.001 par value was increased
from 20,000,000 to 40,000,000.
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, 1998.
During 1998, the Company issued warrants in connection with several equity
issues (see Note 3 "Equity Issuances").
F-19
<PAGE>
The following table sets forth the warrants outstanding and their weighted
average exercise price:
Shares Price
--------- -----
December 31, 1995 2,070,000 $2.64
Issued 225,000 2.83
Exercised -- --
--------- -----
December 31, 1996 2,295,000 $2.66
Issued -- --
Exercised -- --
--------- -----
December 31, 1997 2,295,000 $2.66
Issued 814,102 1.29
Exercised -- --
--------- -----
December 31, 1998 3,109,102 $2.30
========= =====
As of December 21, 1998 and 1997 all of the warrants were exercisable and
had an average remaining life of 3 years and 4 years for 1998 and 1997,
respectively.
(13) Stock Options
As of December 31, 1998, 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 ratably and become
fully exercisable after 3 years from the date of grant but never less than
6 months. At December 31, 1998, there were 514,800 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 300,000 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 period for the Directors' Plan is at the Board's discretion. Option
grants under this Plan from inception to date have contained two-year
vesting periods. At December 31,1998, there were 210,000 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 31,1998, there were 376,172 shares
available for grant under this Plan.
F-20
<PAGE>
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
Granted 879,150 1.36 30,000 1.28 391,828 0.94
Exercised (19,500) 0.97 -- -- -- --
Forfeited Canceled (864,450) 2.04 -- -- -- --
Expired -- -- -- -- -- --
---------- ----- ---------- ----- ---------- -----
December 31, 1998 2,485,200 1.13 90,000 2.53 423,828 1.49
========== ===== ========== ===== ========== =====
</TABLE>
ISO Plan options
At December 31,1998, the range of exercise prices for the options granted
under the ISO plan was $0.97-$2.00 and the weighted average remaining
contractual life of those options was 8.9 years. At December 31, 1998 and
1997, the number of options exercisable under the ISO Plan totaled 936,750
and 545,834, respectively. The weighted average exercise price of those
options was $1.08, and $2.73, respectively.
Directors' Plan options
At December 31, 1998, the range of exercise prices for options granted
under the Directors' Plan was $1.06- $3.56 and the weighted-average
remaining contractual life of those options was 8.2 years. At December 31,
1998 and 1997 the number of options exercisable under the Directors' Plan
totaled 52,500 and 25,000, respectively. The weighted-average exercise
price of those options was $3.17 and $3.55, respectively.
Consultants' Plan options
At December 31, 1998, the range of exercise price for all options granted
under the Consultants' Plan was $1.25 to $2.50 and the weighted-average
remaining contractual life of those options was 4.1 years. At December 31,
1998 and 1997 the number of options exercisable under the Consultants' Plan
totaled 432,828 and 32,000, respectively. No options were granted prior to
1997. The weighted-average exercise price of those options was $1.49 and
$2.50 at December 31, 1998 and 1997, respectively. The Company accounts for
the options granted under the Consultant's Plan in accordance with SFAS
123. As a result, the Company recorded compensation expense of $40,000
during 1997 for the 32,000 options granted, based on the value of the
services provided. The options granted during 1998 were granted in
connection with certain equity issues, and as a result had no impact on the
financial statements.
F-21
<PAGE>
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
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:
1998 1997 1996
(Thousands except per share amounts)
Net loss - As reported $(2,549) $(2,874) $(1,999)
======= ======= =======
Net loss - Pro forma $(3,466) $(4,836) $(3,462)
======= ======= =======
Net loss per share - As reported $ (0.31) $ (0.46) $ (0.42)
======= ======= =======
Net loss per share - Pro forma $ (0.37) $ (0.71) $ (0.71)
======= ======= =======
Weighted average shares outstanding 9,260 6,821 5,026
======= ======= =======
The per share weighted average fair value of the ISO options granted in
1998, 1997, and 1996 was $1.17, $1.20, and $1.83 respectively on the grant
date using the Black - Scholes option pricing model with the following
weighted average assumptions:
o 1998: expected dividend yield 0.0%, risk free interest rate of 5.36%,
expected volatility of 106%, and an expected life of 6.75 years
o 1997: expected dividend yield 0.0%, risk free interest rate of 6.24%,
expected volatility of 103%, and an expected life of 10 years
o 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 1998, 1997 and 1996 was $1.02, $2.76 and $1.67 respectively on
the grant date using the Black - Scholes option pricing model with the
following weighted average assumptions:
o 1998 expected dividend yield 0.0%, risk free interest rate of 5.27%,
expected volatility of 106%, and an expected life of 5 years
o 1997: expected dividend yield 0.0%, risk free interest rate of 6.97%,
expected volatility of 103%, and an expected life of 10 years
o 1996: expected dividend yield 0.0%, risk free interest rate of 6.81%,
expected volatility of 44%, and an expected life of 10 years.
(14) Related Party Transactions
The Company paid $23,756 in 1998, $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 in January 2002.
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.
F-22
<PAGE>
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. 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.
(15) Litigation
From time to time, the Company is subject to litagation in the ordinary
course of business.
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 agreement included a licensing fee payable to the Company by
DSA on revenue from the licensing by DSA of software purchased under the
agreement. The licensing fee is payable for the three years following the
effective date of the agreement at 12%, 10%, and 5%, respectively. The
Company has received no significant licensing fees. 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.
(16) 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 1998 and 1997 was $704,333 and $647,418,
respectively.
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
1998, 1997, and 1996.
The Company does not provide any post retirement or any post employment
benefits.
(17) Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company's reportable segments are
strategic business units that offer different products and services to
different industries through out the United States.
The Company's reportable segments are as follows:
-- Specialized Practice Groups (SPG)--provides global specialized
solutions that build, manage, and protect customers' information
systems and the networks upon which they run.
-- Regional Operations (RO)--provides local systems integration and
technical consulting services within regional markets.
-- Contractors Resources (CR)--provides professional independent
contractors with "back office" services that eliminate the distraction
and expense of tedious administrative duties, thus allowing them to
focus on growing their business without incorporating.
The Specialized Practice Groups Segment consists of three business units:
Enterprise Management Systems, Business Protection Services, and Applied
Intelligence Group.
F-23
<PAGE>
The Company's accounting policies for these segments are the same as those
described in the summary of Significant Accounting Policies, except that
income tax expense is not allocated to each segment. In addition, the
Company evaluates the performance of its segments and allocates resources
based on gross margin, and earnings before interest, taxes, depreciation
and amortization ("EBITDA"). Intersegment revenues are immaterial.
The table below presents information about segments used by the chief
operating decision-maker of Netplex as of and for the years ended December
31, 1998, 1997, and 1996:
Segment
SPG RO CR Total
-------- -------- -------- --------
1998:
Revenues $ 8,385 $ 18,013 $ 34,881 $ 61,279
Gross profit 4,831 5,802 1,332 11,965
EBITDA 247 1,330 167 1,744
Total assets 8,378 6,794 4,269 19,441
===========================================================
1997:
Revenues $ 3,329 $ 5,191 $ 32,048 $ 40,468
Gross profit 2,062 1,894 1,096 5,052
EBITDA (435) (395) (73) (903)
Total assets 1,685 913 3,094 5,692
===========================================================
1996:
Revenues $ 3,358 $ 3,725 $ 26,442 $ 33,525
Gross profit 835 676 1,135 2,646
EBITDA 178 (752) 54 (520)
Total assets 1,647 521 3,116 5,284
===========================================================
Reconciliation of Segment Profit or (Loss) to (Loss) from Continuing Operations
1998 1997 1996
------- ------- -------
Segment EBITDA $ 1,744 $ (903) $ (520)
Unallocated corporate expenses (3,055) (1,480) (1,378)
Depreciation & amortization (1,084) (464) (588)
Interest expense, net (154) (26) 33
Tax expense -- -- (34)
------- ------- -------
(Loss) from continuing operations $(2,549) $(2,873) $(2,487)
======= ======= =======
(18) Restructuring Charge
The Company recorded a restructuring charge of $275,000 during the third
quarter of 1998, related to the reduction of duplicate costs and the
consolidation of facilities, including severance costs. The Company
recorded $115,000 during the forth quarter of 1998, as a reduction to the
restructuring charge, resulting from an update of the Company's estimated
restructuring costs.
(19) Subsequent Events
On January 28, 1998, the Company raised $800,000 of financing in a private
placement to accredited investors; the Company issued a note payable,
subordinated to its line of credit with the bank. The note is payable
February 24, 2004 and bears interest at 14% payable monthly.
.
F-24
EXHIBIT 21
SUBSIDIARIES OF THE NETPLEX GROUP, INC.
The PSS Group, Inc., a Virginia corporation
Technology Development Systems, Inc. an Illinois corporation
ABS Acquisition, Inc., a Delaware corporation
Onion Peel Solutions, LLC, a Delaware limited liability company
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) of our report dated April 19,
1999, with respect to the consolidated balance sheets of The Netplex Group, Inc.
and subsidiaries as of December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity, and cash flows and the related
schedule for each of the years in the three-year period ended December 31, 1998,
which report appears in the December 31, 1998, Annual Report on Form 10-K of The
Netplex Group, Inc.
KPMG LLP
McLean, VA
April 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN
THE COMPANY'S 10-K FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 870,465
<SECURITIES> 0
<RECEIVABLES> 12,243,743
<ALLOWANCES> (589,000)
<INVENTORY> 0
<CURRENT-ASSETS> 13,048,688
<PP&E> 3,515,507
<DEPRECIATION> (1,810,532)
<TOTAL-ASSETS> 20,650,623
<CURRENT-LIABILITIES> (14,238,198)
<BONDS> 0
0
(31,313)
<COMMON> (10,204)
<OTHER-SE> (13,821,531)
<TOTAL-LIABILITY-AND-EQUITY> (20,650,623)
<SALES> (61,279,160)
<TOTAL-REVENUES> (61,279,160)
<CGS> 49,314,701
<TOTAL-COSTS> 14,359,309
<OTHER-EXPENSES> 153,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,548,724)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,548,724)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,548,724)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
