SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------------------
F O R M 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
-------------------------------------------------------
For the quarterly period Commission file number 001-11784
ended September 30, 1999
THE NETPLEX GROUP, INC.
-------------------------------------------------------
(Exact name of issuer as specified in its charter)
NEW YORK 11-2824578
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1800 Robert Fulton Drive, Ste. 250, Reston, Virginia 20191-4346
---------------------------------------------------------------
(Address of principal executive offices and zip code)
(703) 716-4777
---------------------------------------------------
Registrant's telephone number, including area code)
-------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |_| No |X|
As of November 5, 1999, 13,285,580 shares of the issuer's Common Stock were
outstanding.
1
<PAGE>
THE NETPLEX GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Part I. Financial information
Item 1. Financial statements and supplementary data
a) Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998........................... 3
b) Condensed Consolidated Statements of Operations for
the Three Months and the Nine Months Ended September 30,
1999 and 1998...................................................... 4
c) Condensed Consolidated Statements of Cash Flows for
the Nine Months ended September 30, 1999 and 1998.................. 5
d) Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 15
Part II Other information.................................................... 15
Item 6. Exhibits and Reports on Form 8-K..................................... 15
Signatures........................................................... 16
2
<PAGE>
Part I Financial Information
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------ ------------
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,758,959 $ 870,465
Accounts receivable, net of allowance for doubtful
accounts of $305,459 and $588,670, respectively 13,847,245 11,654,743
Prepaids and other current assets 1,535,043 523,480
------------ ------------
Total current assets 17,141,247 13,048,688
Property and equipment, net 1,646,737 1,704,975
Employee receivables 301,488 248,762
Other assets 437,903 213,174
Acquired software, net 881,430 1,091,624
Fulfillment data base, net 695,130 797,148
Other acquired intangible assets, net 1,814,362 1,773,333
Goodwill, net 3,104,331 1,772,919
------------ ------------
Total assets $ 26,022,628 $ 20,650,623
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 4,511,155 $ 2,545,730
Line of Credit 5,036,000 4,041,000
Notes Payable -- 300,000
Accrued expenses and other 9,244,263 7,351,468
------------ ------------
Total current liabilities 18,791,418 14,238,198
Note payable 800,000 --
Other liabilities 57,950 57,901
------------ ------------
Total liabilities 19,649,368 14,296,099
------------ ------------
Stockholders' equity:
Class A cumulative preferred stock: $.01 par value;
liquidation preference of $4.00 per share, unpaid
dividends of $23,745 in 1999 and $267,204 in 1998;
2,000,000 shares authorized; 435,289 and 987,753
shares outstanding in 1999 and 1998 4,352 9,875
Class B cumulative preferred stock: $.01 par
value; liquidation preference of $3.50 per share;
1,500,000 shares authorized; 643,770 shares
outstanding in 1998 -- 6,438
Class C cumulative preferred stock:$.01 par value;
liquidation preference of $3.99 per share; unpaid
dividends of $37,500 in 1999 and $37,500 in 1998;
2,500,000 shares authorized; 1,500,000 shares
outstanding in 1999 and 1998 15,000 15,000
Common stock $.001 par value; 40,000,000 authorized,
13,200,164 shares outstanding in 1999 and 10,204,735
shares in 1998 13,200 10,204
Additional paid in capital 15,063,552 13,821,531
Accumulated deficit (8,722,844) (7,508,524)
------------ ------------
Commitments and contingencies
Total stockholders' equity 6,373,260 6,354,524
------------ ------------
Total liabilities and stockholders' equity $ 26,022,628 $ 20,650,623
============ ============
</TABLE>
See notes to condensed consolidated statements
3
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
---------------(Unaudited)---------------
<S> <C> <C> <C> <C>
Revenue
Services $ 17,282,668 $ 15,353,289 $ 52,107,703 $ 39,779,557
Product 3,932,773 714,574 13,560,021 3,512,410
------------ ------------ ------------ ------------
21,215,441 16,067,863 65,667,724 43,291,967
Cost of revenues
Services 13,274,584 12,540,680 39,580,388 33,572,438
Product 2,977,352 387,489 10,349,359 2,211,122
------------ ------------ ------------ ------------
16,251,936 12,928,169 49,929,747 35,783,560
------------ ------------ ------------ ------------
Gross profit 4,963,505 3,139,694 15,737,977 7,508,407
Selling, general and administrative expenses 6,315,274 4,029,476 16,638,869 9,301,583
Inventory write-off -- 131,104 -- 131,104
Restructuring costs -- 345,000 -- 345,000
Acquired in-process technology -- 250,000 -- 250,000
------------ ------------ ------------ ------------
6,315,274 4,755,580 16,638,869 10,027,687
------------ ------------ ------------ ------------
Operating loss (1,351,769) (1,615,886) (900,892) (2,519,280)
Interest expense, net (113,827) (38,462) (313,427) (118,941)
------------ ------------ ------------ ------------
Net loss before income taxes (1,465,596) (1,654,348) (1,214,319) (2,638,221)
Provision for (benefit from) income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (1,465,596) $ (1,654,348) $ (1,214,319) $ (2,638,221)
============ ============ ============ ============
LOSS PER SHARE:
Basic and diluted $ (0.12) $ (0.17) $ (0.13) $ (0.31)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic and diluted 12,931,850 9,889,062 11,746,693 8,945,022
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated statements
4
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
For the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
------------- ------------
Unaudited
<S> <C> <C>
Net cash provided by (used in) operating activities $ 959,999 $ (2,784,108)
------------ ------------
Investing activities:
Net paid acquired in acquisitions and earnouts (1,764,262) (3,146,670)
Purchases of property and equipment (492,799) (299,986)
------------ ------------
Net cash used in investing activities (2,257,061) (3,446,656)
------------ ------------
Financing activities:
Net proceeds from stock offerings -- 6,462,510
Net borrowings on line of credit 995,000 683,595
Proceeds from borrowings of subordinated debt 800,000 --
Proceeds from the exercise of stock options and
warrants 1,307,523 22,799
Payment of dividends on preferred stock (490,495) --
Principal payments on capital lease obligations (73,747) --
Payment of other notes payable (300,000) --
Employee receivables (52,726) --
------------ ------------
Net cash provided in financing activities 2,185,555 7,168,904
------------ ------------
Increase (decrease) in cash and cash equivalents 888,493 938,140
Cash and equivalents at beginning of period 870,465 353,005
------------ ------------
Cash and equivalents at end of period $ 1,758,958 $ 1,291,145
============ ============
Supplemental information:
Cash paid during the period for:
Interest $ 451,691 $ 118,941
============ ============
Income taxes $ -- $ --
============ ============
</TABLE>
See notes to condensed consolidated statements
5
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters Ended September 30, 1999 and 1998
(Unaudited)
The accompanying unaudited condensed consolidated financial statements of The
Netplex Group, Inc. and Subsidiaries ("Netplex" or the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and note disclosures normally
included in the financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted. The year-end
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles. The Company believes the disclosures made are adequate to make the
information presented consistent with past practices. However, these condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the fiscal year ended December 31, 1998.
In the opinion of the Company, the accompanying condensed consolidated financial
statements reflect all adjustments and reclassifications (which include only
normal recurring adjustments) necessary to present fairly the financial position
of the Company as of September 30, 1999 and December 31, 1998, the results of
its operations for the three months and the nine months ended September 30, 1999
and 1998 and its cash flows for the nine months ended September 30, 1999 and
1998. Interim results are not necessarily indicative of the results that may be
expected for the fiscal years ended December 31, 1999 and 1998.
Basis of Presentation
The accompanying financial statements include the accounts of The Netplex Group,
Inc. and its wholly-owned subsidiaries for the three months ended September 30,
1999 and 1998. The accounts of Onion Peel Solutions, LLC, the PSS Group, Inc.,
Automated Business Systems of North Carolina, Inc., Kellar Technology Group,
Inc., the technology consulting division of The viaLink Company, Inc. (formerly
Applied Intelligence Group, Inc.) and Dean Liles & Associates are included from
the effective dates of their acquisitions, accounted for as purchases, which
were July 1, 1997, January 1, 1998, June 18, 1998, September 1, 1998, and, April
1, 1999 respectively. All material intercompany transactions were eliminated in
consolidation.
Earnings (loss) per share
Basic net income (loss) per share is calculated using the weighted average
number of common shares outstanding during the periods. Diluted net income
(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 three month periods ended September 30, 1999 and 1998, the
assumed exercise of the Company's outstanding stock options and warrants,
Convertible Preferred Stock and contingently issuable shares in connection with
certain business combinations would be anti-dilutive. The base of shares for the
diluted calculation including common stock equivalents would be 16,515,34 and
9,889,062 shares respectively at September 30, 1999 and 1998.
A reconciliation of the numerators and denominators of the basic and diluted EPS
for the three months and the Nine months ended September 30, 1999 and 1998, is
provided below:
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
Three months ended September 30, 1999
Net loss $(1,465,596)
Preferred stock dividend (114,064)
-----------
Basic and diluted EPS:
Loss to common shareholders $(1,579,660) 12,931,850 $ (0.12)
=========== ========
Three months ended September 30, 1998
Net loss $(1,654,348)
Preferred stock dividend (49,379)
-----------
Basic and diluted EPS:
Loss to common shareholders $(1,703,727) 9,889,062 $ (0.17)
=========== ========
6
<PAGE>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
Nine months ended September 30, 1999
Net loss $(1,214,319)
Preferred stock dividend (350,399)
-----------
Basic and diluted EPS:
Loss to common shareholders $(1,564,718) 11,746,693 $ (0.13)
=========== ========
Nine months ended September 30, 1998
Net loss $(2,638,221)
Preferred stock dividend (161,000)
-----------
Basic and diluted EPS
Loss to common shareholders $(2,799,221) 8,945,022 $ (0.31)
=========== ========
Subordinated Debt:
On January 28, 1999, the Company raised $800,000 in a private placement to
accredited investors. The Company issued a note payable, subordinated to the
Company's line of credit. The note is payable on or before February 24, 2004 and
bears interest at 14% payable monthly.
PSS:
In January 1999, the Company and Preferred Systems Solutions amended the
acquisition agreement for the purchase of the PSS Group, Inc. to eliminate the
earn-out provision of the original agreement. The amendment requires the Company
to purchase a split-dollar life insurance policy on the life of Preferred's
shareholder and fund the policy with four equal annual payments of $425,000
beginning on January 29, 1999. The Company is a beneficiary of this life
insurance policy. The discounted present value of the premium is charged to
split-dollar life insurance in other assets and the difference is charged to
non-compete agreement included in other acquired intangible assets and is being
amortized over the remaining four years of the non-compete agreement.
Proforma Data:
The following table sets forth the proforma results for the three months and the
nine months ended September 30, 1998 resulting from the acquisition of Automated
Business Systems of North Carolina, Inc., Kellar Technology Group, Inc., and the
technology consulting division of The viaLink Company, Inc. (formerly Applied
Intelligence Group, Inc.):
(Amounts in thousands, except per share amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1998
------------- -------------
Revenues 17,503 $ 52,588
============ ============
Net loss (1,500) $ (850)
============ ============
Net loss per share:
Weighted Average common shares outstanding 9,889 9,395
============ ============
Proforma EPS $ (0.15) $ (0.09)
============ ============
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 throughout the United States.
7
<PAGE>
The Company's reportable segments are as follows:
- --Specialized Practices (SP) - a group of specialized industry or technology
focused services organizations that combine to strategize, build, manage, and
protect customers' electronic business systems and their associated network
infrastructure.
- --Regional Operations (RO)-- a series of regional organizations that provide
systems integration and technical consulting services within targeted markets.
- --Contractor's Resources (CR)-- a membership-based financial services
organization that provides "back office" administrative services (such as
insurance, tax planning, 401(k), and client billing) that allow IT
professionals to become successful independent contractors.
The Specialized Practices segment consists of four business units: Retail
Consulting, e-business Systems, Business Protection Services, and
Internetworking.
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 three months and the nine months
ended September 30, 1999 and 1998:
Segment
SP RO CR Total
------- ------- ------- --------
1999 - Three months:
Revenues $ 4,888 $ 7,215 $ 9,112 $ 21,215
Gross profit 2,601 2,034 328 4,963
EBITDA 570 312 (436) 446
===================================================================
1998 - Three months:
Revenues $ 3,898 $ 3,409 $ 8,760 $ 16,067
Gross profit 1,737 1,112 291 3,140
EBITDA 123 250 19 392
===================================================================
1999 - Nine months:
Revenues $ 14,575 $ 23,139 $ 27,954 $ 65,668
Gross profit 8,262 6,462 1,014 15,738
EBITDA 2,566 1,565 (319) 3,812
===================================================================
1998 - Nine months:
Revenues $ 6,100 $ 11,309 $ 25,883 $ 43,292
Gross profit 3,332 3,299 877 7,508
EBITDA 61 351 106 518
===================================================================
Total assets:
September 30, 1999: $ 8,437 $ 9,084 $ 8,658 $ 26,179
Unallocated 1,686
Total 27,865
===================================================================
September 30, 1998: $ 5,734 $ 5,939 $ 4,380 $ 16,053
- -------------------------------------------------------------------
Unallocated 2,333
Total 18,386
===================================================================
8
<PAGE>
Reconciliation of Segment Profit (Loss) to Loss from Continuing Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
September 30, September 30, September 30, September 30,
------------ ------------ ------------ ------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Segment EBITDA $ 446 $ 392 $ 3,812 $ 518
Unallocated corporate expenses (1,262) (1,741) (3,250) (2,402)
Depreciation & amortization (536) (267) (1,463) (635)
Interest expense, net (114) (38) (313) (119)
Tax expense -- -- -- --
------------ ------------ ------------ ------------
Loss from continuing operations $ (1,466) $ (1,654) $ (1,214) $ (2,638)
============ ============ ============ ============
</TABLE>
Acquisition
On April 23, 1999, the Company completed the purchase of the assets of Dean
Liles & Associates, Inc, ("DLA") a Dallas, Texas based information technology
consulting practice for $600,000 in cash. The Company used working capital to
finance the acquisition. The acquisition is recorded effective April 1, 1999
using the purchase method of accounting. In connection with the acquisition, the
Company has entered into employment agreements with certain employees of DLA.
The acquisition price of $600,000 has been allocated $595,000 to goodwill and
$5,000 to Property and Equipment. The goodwill is being amortized over 60
months.
9
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Quarters and the Six Months Ended September 30, 1999 and 1998
The following table sets forth the revenue, gross profit, business unit
expenses, and business unit income of each of the business areas for the
three months and the nine months ended September 30, 1999 and 1998:
Consolidated Operating Results by Segment
Amounts in 000's
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
September 30, September 30, September 30, September 30,
------------ ------------ ------------ ------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues
Specialized Practices $ 4,888 $ 3,898 $ 14,575 $ 6,100
Regional Operations 7,215 3,409 23,139 11,309
Contractor's Resources 9,112 8,760 27,954 25,883
------------ ------------ ------------ ------------
Operating revenues 21,215 16,067 65,668 43,292
------------ ------------ ------------ ------------
Cost of Revenues
Specialized Practices 2,287 2,161 6,313 2,768
Regional Operations 5,181 2,297 16,677 8,010
Contractor's Resources 8,784 8,469 26,940 25,006
------------ ------------ ------------ ------------
Cost of Revenues 16,252 12,927 49,930 35,784
------------ ------------ ------------ ------------
Gross profit
Specialized Practices 2,601 1,737 8,262 3,332
Regional Operations 2,034 1,112 6,462 3,299
Contractor's Resources 328 291 1,014 877
------------ ------------ ------------ ------------
Gross profit 4,963 3,140 15,738 7,508
------------ ------------ ------------ ------------
Gross profit percentage
Specialized Practices 53.2% 44.5% 56.7% 54.6%
Regional Operations 28.2% 32.6% 27.9% 29.2%
Contractor's Resources 3.6% 3.3% 3.6% 3.4%
------------ ------------ ------------ ------------
Gross profit percentage 23.4% 19.5% 24.0% 17.3%
------------ ------------ ------------ ------------
Operating Expenses
Specialized Practices 2,031 1,614 5,696 3,271
Regional Operations 1,722 862 4,897 2,948
Contractor's Resources 764 272 1,333 771
------------ ------------ ------------ ------------
Operating expenses 4,517 2,748 11,926 6,990
------------ ------------ ------------ ------------
Operating income
Specialized Practices 570 123 2,566 61
Regional Operations 312 250 1,565 351
Contractor's Resources (436) 19 (319) 106
------------ ------------ ------------ ------------
Operating income 446 392 3,812 518
Corporate Expenses 1,262 1,419 3,250 2,422
------------ ------------ ------------ ------------
EBITDA (816) (1,027) 562 (1,904)
Interest, taxes, depreciation
& amortization 650 627 1,776 734
------------ ------------ ------------ ------------
Net operating loss $ (1,466) $ (1,654) $ (1,214) $ (2,638)
============ ============ ============ ============
</TABLE>
10
<PAGE>
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 various
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-Q 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.
The amounts expressed below are approximations and roundings.
Results of Operations
Three months ended September 30, 1999 compared to the three months ended
September 30, 1998:
Revenue for the three months ended September 30, 1999 increased $5.1 million or
32% to $21.2 million, compared to $16.1 million for 1998. This increase includes
a $1.0 million or 25% increase in Specialized Practices revenue, a $3.8 million
or 112% increase in Regional Operations revenue, and a $0.3 million or 4%
increase in Contractor's Resources revenue.
The revenue growth in the three months ended September 30, 1999 includes $3.8
million of revenue contributed by AIG and DLA which were acquired by the Company
in September 1998, and April 1999, respectively, and $1.3 million or 8% in
revenue growth of the businesses owned as of July 1, 1998 ("organic growth").
The organic revenue growth includes increases for Regional Operations, and
Contractor's Resources of $3.8 million and $0.3 million, respectively, or 112%
and 4%, respectively. This was offset by decline in Specialized Practices
revenue of $2.8 million or 73%. The organic revenue growth in the Regional
Operations is due primarily to increased sales volume in 1999 compared to 1998.
The growth in Contractor's Resources revenues is due to an increase in the
number of contractor members, which increased sales volume, and increased rates
for services. The decline in Specialized Practices revenue is due to a shift in
core business from legacy network services to business-to-business e-commerce
services.
Gross profit for the three months ended September 30, 1999 increased $1.8
million or 58% to $5.0 million compared to $3.1 million for 1998. This increase
includes increases in Specialized Practices, Regional Operations, and
Contractor's Resources of $0.9 million or 50%, $0.9 million or 83%, and $37,000
or 13%, respectively.
The gross profit growth includes $2.0 million of gross profit contributed by AIG
and DLA. acquired in September 1998, and April, 1999, respectively and a $0.2
million decrease in gross profits from businesses owned as of July 1, 1998
(organic growth). The organic gross profit decline includes an increase in gross
profits for Regional Operations and Contractor's Resources of $0.9 million or
83%, and $37,000 or 13%, respectively, offset by a decrease in Specialized
Practices $1.1 million or 66%.
Gross profit margins increased to 23.4% for the three months ended September 30,
1999 from 19.5% in 1998. Specialized Practices gross profit margins increased
from 44.6% in 1998 to 53.2% in 1999. Regional Operations gross profit margins
decreased from 32.6% in 1998 to 28.2% in 1999. Contractor's Resources gross
profit margins increased from 3.3% in 1998 to 3.6% in 1999. The gross profit
margin for AIG and DLA. was 52.3% for the three months.
The increase in Specialized Practices gross profit margins is primarily due to a
shift in core business from legacy network services to business-to-business
e-commerce services. The Regional Operations gross profit margin decrease is due
to a heavier mix of lower margin Systems Integration product sales. Contractor's
Resources achieved slightly higher gross profit margins due to a increased fees
for newer associates.
Business unit expenses for the three months ended September 30, 1999 increased
$1.8 million or 64% to $4.5 million from $2.7 million in 1998. This increase
includes increases in Specialized Practices, Regional Operations, and
Contractor's Resources business unit expenses of $417,000, $861,000, and
$491,000, respectively. The increase in business unit expenses was primarily due
to the acquisitions of AIG and DLA. which increased business unit expenses in
1999. The increase in Contractor's Resources business unit expenses is due to
the addition of operations staff to support growth and infrastructure costs for
a new initiative to web-enable Contractor's Resources' service offerings.
Business unit income for the three months ended September 30, 1999 was $447,000
compared to $392,000 in 1998, an increase of $55,000. This increase includes
increases in business unit profits from Specialized Practices and Regional
Operations of $447,000 and $62,000, respectively, or 363%, and 25%,
respectively, offset by a decline
11
<PAGE>
from Contractor's Resources of $454,000 or 2,410%. Business unit income for AIG
and DLA. accounted for $1.4 million of this improvement and was offset by
declines in other business units.
Corporate expense for the three months ended September 30, 1999 decreased
$156,000 or 11% to $1.3 million from $1.4 million in 1998. This decrease
reflects an absence of certain restructuring costs and write-offs in 1998 of
$726,000 offset by increased corporate expenses of $570,000. This increase
reflects an additional investment in management and infrastructure development
to support the growth of operations and the integration of acquisitions.
Earnings before interest, income taxes, depreciation and amortization ("EBITDA")
for the three months ended September 30, 1999 was a loss of $0.8 million
compared to a loss of $1.0 million in 1998, an improvement in EBITDA of
$211,000. The components of this improvement are discussed above.
Depreciation, amortization and interest expense for the three months ended
September 30, 1999 increased $23,000 to $650,000 from $627,000 in 1998. This
increase is principally due to increased amortization and depreciation from the
acquisitions of ABS, AIG and DLA. and increased borrowings under the Company's
line of credit facility to support growth for the three months ended September
30, 1999.
No provision for income taxes was required for the three months ended September
30, 1999 due to utilization of net operating loss carryforwards generated in
previous years. No provision for income taxes was required for the three months
ended September 30, 1998 due to the generation of net losses.
Net loss for the three months ended September 30, 1999 was $1.5 million compared
to a net loss of $1.7 million in 1998, a decrease of $189,000. The components of
this decrease are discussed above.
Nine months ended September 30, 1999 compared to the nine months ended September
30, 1998:
Revenue for the nine months ended September 30, 1999 increased $22.4 million or
52% to $65.7 million, compared to $43.3 million for 1998. This increase includes
a $8.5 million or 139% increase in Specialized Practices revenue, a $11.8
million or 105% increase in Regional Operations revenue, and a $2.1 million or
8% increase in Contractor's Resources revenue.
The revenue growth in 1999 includes $16.7 million of revenue contributed
collectively by ABS, AIG and DLA. which were acquired by the Company in June
1998, September 1998, and April, 1999, respectively, and $5.7 million or 13% in
revenue growth of the businesses owned as of January 1, 1998 ("organic growth").
The organic revenue growth includes increases for Regional Operations and
Contractor's Resources of $4.9 million and $2.1 million, respectively, or 44%
and 8%, respectively. This was offset by decline in Specialized Practices
revenue of $1.3 million or 21%. The organic revenue growth in the Regional
Operations is due primarily to increased sales volume in 1999 compared to 1998.
The growth in Contractor's Resources revenues is due to an increase in the
number of contractor members, which increased sales volume, and increased rates
for services. The decline in Specialized Practices revenue is due to a shift in
core business from legacy network services to business-to-business e-commerce
services.
Gross profit for the nine months ended September 30, 1999 increased $8.2 million
or 110% to $15.7 million compared to $7.5 million in 1998. This increase
includes increases in Specialized Practices, Regional Operations, and
Contractor's Resources of $4.9 million or 148%, $ 3.2 million or 96% and $
137,000 or 16%, respectively.
The gross profit growth includes $7.1 million of gross profit contributed
collectively by ABS, AIG and DLA. acquired in June 1998, September 1998, and
April, 1999, respectively and a $1.1 million increase in gross profits from
businesses owned as of January 1, 1998 (organic growth). The organic gross
profit growth includes increases in gross profits for Regional Operations, and
Contractor's Resources of $1.5 million or 44%, and $137,000 or 16%,
respectively, offset by a decline in Specialized Practices of $466,000 or 14%.
Gross profit margins increased to 24% for the nine months ended September 30,
1999 from 17% in 1998. Specialized Practices gross profit margins increased from
55% in 1998 to 57.0% in 1999. Regional Operations gross profit margins decreased
from 29% in 1998 to 28% in 1999. Contractor's Resources gross profit margins
increased from 3.4% in 1998 to 3.6% in 1999. The gross profit margin for ABS,
AIG and DLA. was 43% for the nine months.
The increase in Specialized Practices gross profit margins is primarily due to
the 1998 quarter revenue mix of proprietary product sales revenue with higher
margins in proportion to systems implementation revenues for the nine months at
lower gross margins. This change in mix is not expected to be repeated.
The Regional Operations gross profit margin decrease is due to a higher mix of
lower margin hardware sales during the nine months. Contractor's Resources gross
profit margins increased due to a higher fees for newer associates.
Business unit expenses for the nine months ended September 30, 1999 increased
$4.9 million or 71% to $11.9 million from $7.0 million in 1998. This increase
includes increases in Specialized Practices, Regional Operations,
12
<PAGE>
and Contractor's Resources business unit expenses of $2.5 million, $2.0 million,
and $0.6 million, respectively. The increase in business unit expenses was
primarily due to the acquisitions of ABS, AIG and DLA. which increased business
unit expenses in 1999. The increase in Contractor's Resources business unit
expenses is due to the addition of operations staff to support growth and
management and infrastructure costs for a new initiative to web-enable
Contractor's Resources' service offerings.
Business unit income for the nine months ended September 30, 1999 was $3.8
million compared to $0.5 million in 1998, an improvement of $3.3 million. This
improvement includes increases in business unit profits from Specialized
Practices and Regional Operations of $2.5 million, and $1.2 million,
respectively, or 4,119% and 346%, respectively. Contractor's Resources business
unit income declined by $424,000 or 402%. Business unit income for ABS, AIG and
DLA. accounted for $1.9 million or 50% of this improvement.
Corporate expense for the nine months ended September 30, 1999 increased $0.8
million or 34% to $3.3 million from $2.4 million in 1998. This increase reflects
an additional investment in management and infrastructure development to support
the growth of operations and the integration of acquisitions.
Earnings before interest, income taxes, depreciation and amortization ("EBITDA")
for the nine months ended September 30, 1999 was $0.6 million compared to a loss
of $1.9 million in 1998, an improvement in EBITDA of $2.5 million. The
components of this improvement are discussed above.
Depreciation, amortization and interest expense for the nine months ended
September 30, 1999 increased $1.0 million to $1.8 million from $0.8 million in
1998. This increase is principally due to increased amortization and
depreciation from the acquisitions of ABS, AIG and DLA. and increased borrowings
under the Company's line of credit facility to support growth for the nine
months ended September 30, 1999.
No provision for income taxes was required for the nine months ended September
30, 1999 due to utilization of net operating loss carryforwards generated in
previous years. No provision for income taxes was required for the nine months
ended September 30, 1998 due to the generation of net losses.
Net loss for the nine months ended September 30, 1999 was $1.2 million compared
to a net loss of $2.6 million in 1998, a decrease of $1.4 million. The
components of this decrease are discussed above.
Liquidity and Capital Resources
At September 30, 1999, the Company had cash and cash equivalents of $1.7
million. The Company had $5,036,000 outstanding on its line of credit facilities
and $800,000 in long term subordinated debt.
The following increased the Company's liquidity and capital resources:
For the nine months ended September 30, 1999 the Company's cash increased by
$888,000. This increase is comprised of cash provided by operating activities of
$960,000, cash used in investing activities of $2,257,000 and cash provided by
financing activities of $2,186,000.
As of September 30, 1998, the Company maintains a line of credit with a bank
that allows the Company to borrow the lesser of $6 million 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 is required to maintain Tangible Net Assets of $600,000
through November 30, 1999, $900,000 through March 30, 2000 and $1,200,000 at all
times thereafter. As of September 30, 1999 the Company was not in compliance
with this covenant and is initiating discussions with the bank to waive this
covenant until additional capital is raised to place the Company in compliance.
The Company had borrowings of $5,036,000 under the line of credit as of
September 30, 1999. As of November 9, 1999 the Company had net availability of
$595,000 under the line. This line of credit expires on July 1, 2000.
Capital expenditures for the nine months ended September 30, 1999 were $493,000.
Dividends of $490,000 were paid on the Company's Class A and Class C Cumulative
Preferred Stock during the nine months ended September 30, 1999. The Company's
Class B Preferred Stock does not bear dividends. At September 30, 1999, the
Company had accrued dividends of $61,245 on the Class A and Class C Preferred
Stock .
During the nine months ended September 30, 1999, 552,464 shares of Class A
Preferred Stock and 643,770 shares of Class B Preferred Stock were converted
into 1,196,243 shares of Common Stock. No Class C Preferred Stock were converted
into Common Stock during the nine months ended September 30, 1999. The Class C
shares are not eligible for conversion to Common Stock until September 2003. The
conversions of the Class A Cumulative Preferred Stock during the nine months
ended September 30, 1999 will reduce the Company's obligation for dividend
payments by $27,623 per quarter ($110,493 annually).
Incentive and consultant stock options and Common Stock purchase warrants to
purchase an aggregate of 849,182 shares of the Company's Common Stock were
exercised during the nine months ended September 30, 1999,
13
<PAGE>
generating cash proceeds to the Company of $1,308,000. In addition, 554,421
shares were issued in connection with the exercise of prepaid warrants.
In February 1999, the Company borrowed $800,000 of subordinated debt from
Waterside Capital. The subordinated debt bears interest at 14% and matures in
February 2004.
In January 1999, the Company paid a $300,000 note payable related to its January
1, 1998 acquisition of the PSS Group, Inc.
Acquisitions and Future Plans.
On April 23, 1999, the Company completed the purchase of the assets of DLA. a
Dallas, TX based information technology consulting practice, for $600,000 in
cash.
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 assuming receipt of the waiver, will be sufficient to meet the
anticipated needs for working capital and capital expenditure for at least the
next 3 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 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, commitments, and is not engaged in any negotiations with
respect to such transactions.
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
are Year 2000 compliant. 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
(Amerigo and Amerigo/L2, 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.
14
<PAGE>
Item 3. 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.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
15
<PAGE>
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE NETPLEX GROUP, INC.
(Registrant)
DATE: November 15, 1999 /s/ Gene Zaino
------------------- ---------------------------------------
Gene Zaino
Chairman of the Board
And Chief Executive Officer
(Principal Executive Officer)
DATE: November 15, 1999 /s/ Walton E. Bell, III
------------------- ---------------------------------------
Walton E. Bell, III
Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S 10-Q/A FOR THE PERIOD
ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,758,959
<SECURITIES> 0
<RECEIVABLES> 14,152,704
<ALLOWANCES> (305,459)
<INVENTORY> 0
<CURRENT-ASSETS> 17,048,564
<PP&E> 4,008,304
<DEPRECIATION> (2,361,567)
<TOTAL-ASSETS> 26,022,628
<CURRENT-LIABILITIES> (19,649,368)
<BONDS> 0
0
(19,352)
<COMMON> (13,200)
<OTHER-SE> (6,340,708)
<TOTAL-LIABILITY-AND-EQUITY> (26,022,628)
<SALES> (65,667,724)
<TOTAL-REVENUES> (65,667,724)
<CGS> 49,929,747
<TOTAL-COSTS> 16,638,869
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 313,427
<INCOME-PRETAX> 1,214,319
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,214,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,214,319
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.13
</TABLE>
