SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 001-11784
THE NETPLEX GROUP, INC.
(Exact name of small business issuer as specified in its charter)
NEW YORK 11-2824578
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8260 Greensboro Drive, 5th Floor
McLean, Virginia 22102
(Address of principal executive offices and zip code)
(703) 356-3001
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes [X] No [_].
As of April 26, 1998, 9,007,370 shares of the registrant's Common Stock were
outstanding.
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THE NETPLEX GROUP, INC.
FORM 10-Q/A FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Facing sheet
Index
Part I. Financial information
Item 1. Financial statements and supplementary data
a) Condensed consolidated balance sheets as of
March 31, 1998 and December 31, 1997..................... 3
b) Condensed consolidated statements of operations
for the three months ended March 31, 1998 and 1997..... 4
c) Condensed consolidated statements of cash flows
for the three months ended March 31, 1998 and 1997....... 5
d) Notes to condensed consolidated financial statements..... 6
Item 2. Management's discussion and analysis of financial
condition and results of operations.......................... 10
Part II Other information............................................ 15
Signature ................................................... 18
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PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $1,326,291 $ 353,005
Accounts receivable, net 6,293,041 4,133,148
Prepaids and other current assets 419,630 432,842
------------ ------------
Total current assets 8,038,962 4,918,995
Property and equipment, net 1,012,474 952,546
Employee notes receivable 195,014 193,464
Other assets 142,197 82,738
Fulfillment database, net 920,007 --
Acquired software, net 394,991 418,225
Goodwill, net 339,866 346,529
------------ ------------
Total assets $11,043,501 $6,912,497
============ ============
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Accounts payable $1,051,407 $567,805
Line of credit 2,404,670 1,316,300
Accrued expenses and other 4,947,199 3,588,594
------------ ------------
Total current liabilities 8,403,276 5,472,699
Other liabilities 196,164 109,096
------------ ------------
Total liabilities 8,599,440 5,581,795
------------ ------------
Stockholders' equity:
Class A cumulative preferred stock;
$.01 par value; 2,000,000 authorized,
outstanding 1,062,500 shares in 1998
and 1,062,500 shares in 1997
(liquidation preference of the greater of
[i]two times the stated value of $2 per
share plus all accrued and unpaid dividends,
or [ii] the amount that would have
been received if such shares were converted
to Common Stock on the business day
immediately prior to the liquidation) 10,625 10,625
Common stock $.001 par value
20,000,000 authorized, outstanding
9,007,370 share in 1998
7,470,370 shares in 1997 9,007 7,470
Additional paid in capital 7,826,370 6,272,407
Accumulated deficit (5,401,901) (4,959,800)
------------ ------------
Commitments and contingencies
Total stockholders' equity 2,444,101 1,330,702
------------ ------------
Total liabilities and stockholders' equity $11,043,541 $6,912,497
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 13,294,428 $ 9,778,312
Cost of Revenues 11,176,766 8,844,054
------------ ------------
Gross Profit 2,117,662 934,258
Selling general and administrative expenses 2,483,723 1,708,329
------------ ------------
Operating loss (376,028) (774,071)
Interest income (expense), net (66,076) 8,220
------------ ------------
Loss before Income Taxes (442,100) (765,851)
Provision for Income taxes -- --
------------ ------------
Net loss $ (442,100) $ (765,851)
============ ============
Loss per common share:
Basic and diluted loss per common share $ (0.06) $ (0.12)
============ ============
Weighted average common shares outstanding,
basic and diluted 7,773,292 6,457,631
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
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THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net cash flow from operating activities $ (580,364) $ (146,600)
----------- -----------
Investing activities:
Purchases of property and equipment (109,127) (54,632)
Cash paid in acquisition, net of cash acquired (151,615) --
Proceeds from the exercise of stock options -- 69,934
----------- -----------
Net cash flow from investing activities (260,742) 15,302
----------- -----------
Financing activities:
Net proceeds from stock offering 1,555,500 --
Borrowings under line of credit 282,548 --
Principal payments on capital lease obligations (23,656) (15,086)
----------- -----------
Net cash flow from financing activities 1,814,392 (15,086)
----------- -----------
Increase (decrease) in cash and cash equivalents 973,286 (146,384)
Cash and equivalents at beginning of period 353,005 3,691,099
----------- -----------
Cash and equivalents at end of period $ 1,326,291 $ 3,544,715
=========== ===========
Supplemental information:
Cash paid (received) during the period for:
Interest $ 45,585 $ 4,612
=========== ===========
Income taxes $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and 1997
(Unaudited)
(1) General
The accompanying unaudited condensed consolidated financial statements of
The Netplex Group, Inc. and Subsidiaries ("Netplex" or the "Company") have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, certain information and note
disclosures normally included in the financial statements presented in
accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the disclosures made are
adequate to make the information presented consistent with past practices.
However, these condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-KSB for the fiscal year
ended December 31, 1997.
In the opinion of the Company, the accompanying condensed consolidated
financial statements reflect all adjustments and reclassifications (which
include only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of March 31, 1998 and December 31,
1997 and the results of its operations and its cash flows for the three
months ended March 31, 1998 and 1997. Interim results are not necessarily
indicative of the results that may be expected for the fiscal year ended
December 31, 1998.
Business
Based in McLean, Virginia with seven offices throughout the U.S., The
Netplex Group, Inc., together with its wholly owned subsidiaries ("the
Company" or "Netplex"), is an Information Technology (IT) company that
provides the people, technology, and processes to build, manage, and
protect business information systems. Through the strategic teaming of
business consulting practice areas, operating units, and wholly owned
subsidiaries, Netplex believes that it is positioned to deliver: IT
Solutions - Design and implementation of systems solutions to address IT
related business needs; IT Staffing - Staff augmentation and flexible task
outsourcing; and IT Contractor Resources - Business services for the
independent IT Consultant.
Basis of Presentation
The accompanying financial statements include the accounts of Netplex
Systems, Inc. (formerly The Netplex Group, Inc.) America's Work Exchange,
Inc., its wholly owned subsidiaries Software Resources of New Jersey, Inc,
now known as Contractors Resources ("CR"), Onion Peel Solutions, L.L.C.
("Onion Peel"), and PSS Group, Inc. ("PSS") for the three months ended
March 31, 1998. The financial statements exclude the accounts of Onion Peel
and PSS for the three months ended March 31, 1997 because the effective
dates of their acquisitions, which were accounted for using the purchase
method of accounting, were subsequent to March 31, 1997. All significant
intercompany transactions were eliminated in consolidation.
Earnings (loss) per share
Basic net loss per share is calculated using the weighted average number of
common shares outstanding during the periods. Diluted net loss per common
share is calculated using the weighted average number of common shares and
dilutive potential common shares outstanding during the periods. For the
quarters ended March 31, 1998 and 1997, the assumed exercise of the
company's outstanding stock options and warrants and Convertible Preferred
Stock has not been included in the calculation as the effect would be anti-
dilutive.
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A reconciliation of the numerators and denominators of the basic and
diluted EPS for the three months ended March 31, 1998 and 1997, is provided
below:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------- --------------------- ----------------
<S> <C> <C> <C>
Three months ended March 31, 1998
Net Loss $(442,100)
Preferred stock dividend 56,472
---------
Basic and diluted EPS
Income available to common shareholders $(498,572) 7,773,292 $ (0.06)
========= =========
Three months ended March 31, 1997
Net Loss $(765,851)
Preferred stock dividend 82,500
---------
Basic and diluted EPS
Income available to common shareholders $(848,351) 6,457,631 $ (0.13)
========= =========
</TABLE>
(2) Acquisitions
Onion Peel Solutions L.L.C.
The Company acquired Onion Peel Solutions L.L.C., a Raleigh, NC based
provider of network management solutions as of July 1, 1997, by issuing
80,000 shares of its Common Stock to the members of Onion Peel, subject to
the issuance of additional shares based on the closing price of the
Company's Common Stock on December 31, 1998. The acquisition was accounted
for using the purchase method of accounting, whereby the $400,000 purchase
price was allocated to the fair value of the assets acquired and the
liabilities assumed.
PSS Group, Inc.
On January 30, 1998, the Company completed the purchase of all of the stock
of The PSS Group, Inc. ("PSS"), the technical professional staff
augmentation operations and business of Preferred Systems Solutions, Inc.
("Preferred") and formerly a wholly owned subsidiary of Preferred. In
consideration for the purchase, the Company paid $300,000 at closing and on
or before January 15, 1999 will pay $300,000 in cash or 200,000 shares of
its Common Stock or any combination thereof, at Preferred's option. The
Company also issued 130,435 warrants with exercise prices ranging from
$1.15 to $1.80 in connection with the financing of this acquisition. These
warrants expire in February 2000. The agreement also provides that
Preferred will receive additional consideration (the "Earn-out") if PSS
meets certain operating targets. Such Earn-out may be paid at the Company's
option in cash or its Common Stock, or any combination thereof. In
connection with the acquisition, the Company and PSS have entered into
employment agreements with certain employees of PSS. The acquisition was
recorded effective January 1, 1998 using the purchase method of accounting.
The purchase price of the PSS acquisition was determined to be $600,000
(subject to adjustment for contingent consideration) and was allocated to
the fair value of the assets and liabilities acquired, as follows:
Cash $ 148,000
Accounts receivable 800,000
Fulfillment database 930,000
Other assets 122,000
Less liabilities assumed (1,400,000)
Net assets acquired $ 600,000
<PAGE>
The following unaudited supplemental financial information presents the
consolidated results of the Company from continuing operations, on a proforma
basis, as though the acquisitions of Onion Peel and PSS were consummated on
January 1, 1997 and reflects the historical results of operations of the
purchased business adjusted for increased common shares outstanding from the
merger.
Unaudited
Three Months Ended
March 31, 1997
------------------------
(in thousands except per
share data)
Revenues $ 11,267
========
Net loss from continuing operations $ (849)
========
Net loss per share from continuing operations $ (0.14)
========
Weighted average common shares outstanding 6,538
========
(3) Class A Cumulative Preferred Stock
0n September 19, 1996, the Company raised approximately $3,000,000 through
the completion of a Private Placement offering of units of equity
securities. Each unit of equity securities consists of one share of $.01
par value Class A Cumulative Convertible Preferred Stock (the "Preferred
Stock") and one Common Stock warrant to purchase one share of the Company's
$0.001 par value Common Stock at an exercise price of $2.50.
Each share of Preferred Stock is convertible into one share of Common Stock
at any time, at the discretion of the holder. The Preferred Stock earns
cumulative dividends at 10% per annum, payable in either cash or additional
shares of Preferred Stock at the Company's option. Subject to the
conversion rights, the Company may redeem the Preferred Stock at its stated
value plus all accrued and unpaid dividends upon: (1) registration of the
shares underlying the Preferred Stock, and (2) 30 days written notice given
at any time upon attaining certain per share trading prices and sustaining
such prices for a specified period. The Preferred Stock has a per share
liquidation preference of the greater of: (i) two times the stated value of
the Preferred Stock (stated value is $2 per share) plus any accrued and
unpaid dividends, or (ii) the amount that would have been received if such
shares were converted to Common Stock on the business day immediately prior
to liquidation. During the year ended December 31, 1997, 687,500 preferred
shares were converted to Common Stock.
Each warrant issued in connection with the Private Placement became
Exercisable on March 19, 1997 and expires on September 19, 2001. The
Company has the right to call the warrants at a redemption price of $.01
per share upon: (1) registration of the shares underlying the warrant, and
(2) 30 days written notice given at any time upon the Common Stock
attaining certain per share trading prices and maintaining such prices for
a specified period. During 1997, warrants to acquire 175,000 shares of
Common Stock were exercised.
On March 27, 1997, the Company declared a dividend in the amount of $0.05
per share ($82,500) payable in cash to the holders of record of the
Company's Class A Preferred Stock on March 28, 1997.
On November 14, 1997, the Company declared a dividend payable to the
holders of record of its Class A Preferred Stock on account of dividends in
arrears which were payable on June 30, 1997 and September 30, 1997, in the
amount of 0.0582 shares of Class A Preferred Stock per share of Class A
Preferred Stock. The related shares were issued by the Company subsequent
to December 31, 1997.
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<PAGE>
On December 31, 1996, the Company declared a dividend payable of
approximately $0.056 per share to all holders of record of the Class A
Preferred Stock on January 15, 1997. Accordingly, the Company accrued a
dividend payable of $98,194 at December 31, 1996, which was paid during
1997.
(4) Equity Financings
Between January 1, 1998 and April 14, 1998, the Company has raised
additional equity totaling $3,057,000 as follows:
In February 1998 the Company raised $100,000 through the sale of 80,000
shares of nonregistered Common Stock plus a warrant to purchase an
additional 100,000 warrants at $1.20.
In March 1998 the Company raised $1,457,000 of financing in a Private
Placement raised primarily from accredited investors and employees of the
Company. The Company issued shares of non-registered Common Stock to
purchasers who have agreed not to sell or otherwise distribute their shares
for a period of one year. These restricted shares carry registration rights
and were offered at $1.00 per share. The funds will be used to finance
operations and additional acquisitions.
On April 7, 1998 Netplex completed the sale of 1,500 units of a Private
Placement, totaling $1.5 million, to various purchasers. The Zanett
Corporation acted as placement agent for the Private Placement. The sale
represents the first half of a transaction that could include the sale of
an additional 1,500 units for $1.5 million at a future date, subject to the
satisfaction of certain conditions. Each unit sold in the private placement
consisted of a prepaid Common Stock purchase warrant entitling the holder
to acquire such number of shares of the Company's Common Stock as is equal
to $1,000 divided by an adjustable exercise price and an additional
incentive warrant to acquire 52 shares of Common Stock (or an aggregate of
78,000 shares of Common Stock). The Company also granted the Zanett
Securities Corporation (which acted as placement agent) a warrant to
purchase 39,000 shares of Common Stock. Zanett also received placement fees
and a non-accountable expense allowance equal to 12.53% of the proceeds of
the offering. The second half of the transaction would be for the sale to
Zanett of an additional and committed 1,500 units, for $1,000 per unit,
contingent at the discretion of the Zanett Securities Corporation on
Netplex recording three consecutive quarters of increased profits and
revenues, excluding any extraordinary items. With respect to the second
half of the transaction, the exercise price of the purchase warrants and
the incentive warrants will be based on the bid price of the Common Stock
at the time of such closing. The funds from the Private Placement will be
used to fund operations and acquisitions. Under NASDAQ regulations, certain
aspects of the transaction must receive shareholder approval. The Company
believes that it will obtain such shareholder approval at the Company's
annual meeting. The Company believes that the proceeds should ensure that
the Company will exceed NASDAQ's published net tangible assets requirement
of $2 million. The Company has an oral hearing with NASDAQ on April 30,
1998 to review whether the Company is in compliance with the $2,000,000 net
tangible asset requirement and to review the terms of this private
placement. The failure to meet and maintain the NASDAQ requirements may
result in the Common Stock no longer being eligible for quotation on NASDAQ
and trading, if any, of the Common Stock would thereafter be conducted in
the non-NASDAQ over-the-counter market. As a result of such delisting of
the Common Stock from NASDAQ, it may be more difficult for investors to
dispose of, or to obtain accurate quotations as to the market value of, the
Common Stock.
(5) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS') No. 130, Reporting Comprehensive
Income and SFAS No. 131 Segment Information. Both of those standards are
effective for reporting periods beginning after December 15, 1997, and thus
are effective for the Company beginning January 1, 1998. SFAS No. 130
requires that all components of comprehensive income, including net income,
be reported in the financial statements in the period in which
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they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances
from non-owner sources. Net income and other comprehensive income,
including foreign currency translation adjustments, and unrealized gains
and losses on investments, shall be reported, net of their related tax
effect, to arrive at comprehensive income. Management does not believe that
comprehensive income or loss is materially different than net income or
loss. SFAS No. 131 amends the requirements for public enterprises to report
financial and descriptive information about its reportable operating
segments. Operating segments, as defined in SFAS No. 131, are components of
an enterprise for which separate financial information is available and is
evaluated regularly by the Company in deciding how to allocate resources
and in assessing performance. The financial information is required to be
reported on the basis that it is used internally for evaluating the segment
performance. The Company believes it operates in three segments as defined,
IT Solutions, IT Staffing, and IT Contractors Resources. The Company does
not believe that the implementation of this pronouncement will have a
material effect on the financial statement presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Based in McLean, Virginia with seven offices throughout the U.S., The Netplex
Group, Inc., together with its wholly owned subsidiaries ("the Company" or
"Netplex"), is an Information Technology (IT) company that provides the people,
technology, and processes to build, manage, and protect business information
systems. Through the strategic teaming of business consulting practice areas,
operating units, and wholly owned subsidiaries, Netplex believes that it is
positioned to deliver: IT Solutions - Design and implementation of systems
solutions to address IT related business needs; IT Staffing - Staff augmentation
and flexible task outsourcing; and IT Contractor Resources - Business services
for the independent IT Consultant.
The Company's operations have been concentrated on providing IT services and
solutions to U.S.-based commercial organizations since the beginning of 1997.
In July 1997, the Company acquired the net assets of Onion Peel Solutions, L.L.C
("Onion Peel") to broaden its customer base and expand the fulfillment capacity
of its Enterprise Systems Management service offerings in exchange for 80,000
shares of its Common Stock, subject to adjustment.
In January 1998, the Company acquired the net assets of The PSS Group, Inc.
("PSS") to expand its staffing organization in the Washington DC metropolitan
area and to broaden its customer base, for $300,000 in cash a $300,000 note to
be paid in either cash or 200,000 shares of the Company's Common Stock and is
subject to additional payments based on PSS's future profitability.
The statement of operations for the three months ended March 31, 1998 reflects
the results of PSS from January 1, 1998, the date of acquisition.
The above acquisitions have resulted in the Company emerging in 1997 with three
distinct, but inter-related business operations:
o IT Solutions - Design and implementation of systems solutions to
address all information technology-related business needs. This business is
comprised of several specialized technology consulting practices and
provides customers with firm deliverables, generally on a "proposed
estimate" or "fixed-fee" basis. IT Solutions also maintains certifications
with several leading technology manufacturers, which authorizes Netplex to
resell and implement "best-in-class" technology products.
o IT Staffing - Providing technical staff augmentation services to
organizations based on technical need and Information Technology goals. IT
Staffing provides customers with IT consulting and resource services on an
as-
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needed basis, generally for contract terms ranging from three to 12 months.
Consulting rates vary based on the skills and experience of the consultants
requested.
o IT Contractor's Resources - Providing business advice, skills
training, and administrative employer services to IT contract
professionals. IT Contractor's Resources targets independent-minded IT
professionals who are entrepreneurial and accustomed to the variability and
flexibility of contract assignments. This service provides the stability
and "back-office" infrastructure to enable and encourage IT professionals
to build skills-based careers across multiple customer environments.
The following table sets forth the revenue and gross profit of each of the
business areas for the three months ended March 31, 1998 and 1997.
Consolidated Operating Results by Segment
<TABLE>
<CAPTION>
For the three months ended March 31,
Operating Revenue
------------------------------------
(in thousands)
1998 1997
-------- --------
<S> <C> <C>
IT Solutions $ 2,487 $ 1,087
IT Staffing 2,273 714
IT Contractors Resources 8,534 7,977
--------
========
Operating revenues $ 13,294 $ 9,778
======== ========
Gross Profit
------------------------------------
(in thousands)
1998 1997
-------- --------
IT Solutions $ 1,234 $ 496
IT Staffing 592 191
IT Contractors Resources 292 247
-------- --------
$ 2,118 $ 934
======== ========
Operating Income
------------------------------------
(in thousands)
1998 1997
-------- --------
IT Solutions $ 10 $ (198)
IT Staffing 52 (95)
IT Contractors Resources 79 (12)
-------- --------
Operating income 141 (305)
Corporate expenses 384 364
-------- --------
EBITDA (243) (669)
Interest, taxes, depreciation, & amortization 199 97
--------
========
Net operating loss $ (442) $ (766)
======== ========
</TABLE>
Results of Operations
Three months ended March 31, 1998 and 1997 Revenue for the three months ended
March 31,1998 increased approximately $3.5 million or 36% to approximately $13.3
million, as compared to $9.8 million for the same period in 1997. This increase
includes a $1.4 million or 130% increase in IT Solutions revenue, a $1.6 million
or 218% increase in IT Staffing revenue, and $560,000 or 6.5% increase in IT
Contractor Resources revenue. The increase in revenues is due to a combination
of growth, better integration across the three business units and the
acquisition of Onion Peel and the PSS Group.
Gross Profit for the three months ended March 31,1998 increased approximately
$1.2 million or 128% to approximately $2.1 million as compared to approximately
$934,000 for
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the same period of 1997. This increase includes an increase of approximately
$738,000 or 149% in IT Solutions gross profit, an approximately $400,000 or 210%
increase in IT Staffing gross profit and a $45,000 or 18% increase in IT
Contractor Resources gross profit. The increased IT Solutions gross profit is
primarily due to an increase in revenues from the IT Solutions practice areas
including Onion Peel. The increase in IT Staffing is attributable to growth and
to the acquisition of The PSS Group, Inc in January 1998. The IT Contractor
Resources increase is due to revenue growth.
Gross Profit percent increased to approximately 16.0% for the three months ended
March 31, 1998, from approximately 9.6 % for the same period of 1997, this
increase is due to higher revenue growth rates in the IT Solutions and IT
Staffing businesses than experienced in the IT Contractor Resources business.
The profit margins generated by IT Solutions and IT Staffing product offerings
generate higher gross profit margins than IT Contractor Resources Revenues.
Operating expenses for the three months ended March 31, 1998 increased
approximately $738,000 or 60 % to approximately $2.0 million from approximately
$1.2 million for the same period of 1997. This increase includes increases in IT
Solutions and IT Staffing operating expense of approximately $530,000 and
$250,000, respectively. The IT Solutions increase includes increases of $300,000
for the inclusion of Onion Peel operating expenses and approximately $130,000 of
expansion in the IT Solutions technical staff as well as an expanded sales
force, and practice management. IT Staffing operating expense increase is
primarily due to the acquisition of PSS in January 1998. Contractor's Resources
operating expenses declined by approximately $50,000 during the three months
ended March 31, 1998 as compared to the same period of 1997.
Operating income for the three months ended March 31, 1998 was approximately
$141,000 as compared to an operating loss of $305,000 for the same period of
1997, and increase of approximately $446,000 which includes increased operating
profits from IT Solutions, IT Staffing and IT Contractor Resources of
approximately $208,000, $147,000, and $91,000, respectively.
Corporate expense for the three months ended March 31, 1998 increased
approximately $20,000 or 6% to approximately $380,000 from approximately
$364,000 when compared to the same period of 1997.
Earnings before interest, income taxes, depreciation and amortization ("EBITDA")
for the three months ended March 31, 1998 was a loss of $243,000 as compared to
a loss of approximately $670,000 for the same period of 1997, an improvement of
approximately $427,000. The components of this improvement are discussed above.
Depreciation and interest expense for the three months ended March 31, 1998
increased approximately $103,000 to approximately $190,000 from approximately
$97,000 for the same period of 1997. This increase is principally due to
increased borrowings under the Company's line of credit facility in the three
months ended March 31, 1998 as compared to the same period of 1997.
No provision or benefit for income taxes was required for either the three
months ended March 31, 1998 or 1997.
The net loss decreased approximately $323,000 to approximately $442,000 from
approximately $765,000 in the same period of 1997. The components of this
improvement are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company had cash and cash equivalents of $1,326,291. The
Company had $2,404,670 outstanding on its line of credit facilities and had long
term capital lease obligations of $240,130.
The Company's liquidity and capital resources were increased by the following:
For the three months ended March 31, 1998 the Company's cash increased by
$975,000. This increase is comprised of cash used in operating activities of
approximately $580,000,cash
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<PAGE>
used in investing activities of approximately $260,000 and cash provided by
financing activities of approximately $1.8 million. The primary uses of cash
were the Company's increased accounts receivable of approximately $1.4 million,
the Company's net loss of $415,000, and $300,000 paid in the acquisition of PSS.
These uses of cash were offset by cash provided from the net proceeds from the
Company's private placements of equity of $1,555,000, increased accounts payable
and accrued expenses of $1.0 million, and borrowings under the Company's line of
credit of $280,000.
The Company is actively pursuing the acquisition of additional technical
consulting firms to broaden its customer base, expand its technical capacity and
enhance its fulfillment capability.
As of March 31, 1998, the Company maintains two credit facilities with banks.
The first is a line of credit of $2,000,000 (the $2 million line of credit)
which allows the Company to borrow the lesser of $2,000,000 or 80% of eligible
accounts receivable. Advances against this line of credit bear interest at 0.75%
over the bank's prime rate and require the Company to maintain certain financial
covenants. The Company had borrowings of $1,602,300 on this line of credit as of
March 31, 1998.
The Company also has a line of credit facility with a bank that it acquired in
the PSS acquisition (the "PSS line of credit"). The PSS line of credit allows
the Company to borrow the lesser of $1,000,000 or 80% of eligible accounts
receivable with an interest rate of 1.00% over the bank's prime rate. The
Company had borrowings of $802,370 on the PSS line of credit as of March 31,
1998. The Company retired the PSS line of credit in April 1998.
The Company will discuss with the bank the extension of its line of credit
facility prior to its expiration in July 1998, as well as entering into
discussions with other financial institutions to expand its credit facilities.
On January 30, 1998, the Company completed the purchase of all of the stock of
The PSS Group, Inc. ("PSS") the technical professional staff augmentation
operations and business of Preferred Systems Solutions, Inc. ("Preferred") and
formerly a wholly-owned subsidiary of Preferred. In consideration for the
purchase, the Company paid $300,000 at closing and on or before January 15, 1999
will pay $300,000 in cash or 200,000 shares of its Common Stock or any
combination thereof, at Preferred's option. The Company used working capital to
finance the acquisition. The agreement also provides that Preferred will receive
additional consideration (the "Earn-out") if PSS meets certain operating
targets. Such Earn-out may be made at the Company's option in cash or its Common
Stock, or any combination thereof. If the Company elects to pay the Earn-out in
Common Stock, the value of the Common Stock will be based on the average closing
price of the Company's Common Stock for the last quarter of the year in which
the payment was made.
Capital expenditures for the three months ended March 31, 1998 were
approximately $109,000.
Between January 1, 1998 and April 14, 1998, the Company has raised additional
equity totaling $3,057,000, as follows:
In February 1998 the Company raised $100,000 through the sale of 80,000 shares
of non-registered Common Stock plus a warrant to purchase an additional 100,000
warrants at $1.20.
In March 1998 the Company raised $1,457,000 of financing in a Private Placement
with accredited investors and employees of the Company. The Company issued
shares of non-registered Common Stock to purchasers who have agreed not to sell
or otherwise distribute their shares for a period of one year. These restricted
shares carry registration rights and were offered at $1.00 per share. The funds
will be used to finance operations and additional acquisitions.
On April 7, 1998 Netplex completed the sale of 1,500 units of a Private
Placement, totaling $1.5 million, to various purchasers. The Zanett Corporation
acted as placement agent for the Private Placement. The sale represents the
first half of a transaction that could include the sale of an additional 1,500
units for $1.5 million at a future date, subject to the satisfaction of certain
conditions. Each unit sold in the private placement consisted of a prepaid
Common Stock purchase warrant entitling the holder to
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<PAGE>
acquire such number of shares of the Company's Common Stock as is equal to
$1,000 divided by an adjustable exercise price and an additional incentive
warrant to acquire 52 shares of Common Stock (or an aggregate of 78,000 shares
of Common Stock). The Company also granted the Zanett Securities Corporation
(which acted as placement agent) a warrant to purchase 39,000 shares of Common
Stock. Zanett also received placement fees and a non-accountable expense
allowance equal to 12.53% of the proceeds of the offering. The second half of
the transaction would be for the sale to Zanett of an additional and committed
1,500 units, for $1,000 per unit, contingent at the discretion of the Zanett
Securities Corporation on Netplex recording three consecutive quarters of
increased profits and revenues, excluding any extraordinary items. With respect
to the second half of the transaction, the exercise price of the purchase
warrants and the incentive warrants will be based on the bid price of the Common
Stock at the time of such closing. The funds from the Private Placement will be
used to fund operations and acquisitions. Under NASDAQ regulations, certain
aspects of the transaction must receive shareholder approval. The Company
believes that it will obtain such shareholder approval at the Company's annual
meeting. The Company believes that the proceeds should ensure that the Company
will exceed NASDAQ's published net tangible assets requirement of $2 million.
The Company has an oral hearing with NASDAQ on April 30, 1998 to review whether
the Company is in compliance with the $2,000,000 net tangible asset requirement
and to review the terms of this private placement. The failure to meet and
maintain the NASDAQ requirements may result in the Common Stock no longer being
eligible for quotation on NASDAQ and trading, if any, of the Common Stock would
thereafter be conducted in the non-NASDAQ over-the-counter market. As a result
of such delisting of the Common Stock from NASDAQ, it may be more difficult for
investors to dispose of, or to obtain accurate quotations as to the market value
of, the Common Stock.
Based on its current operating plan, the Company believes that the net proceeds
from the Private Placement together with cash anticipated to be provided by
operating activities and amounts expected to be available under a renegotiated
line of credit will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's
liquidity requirements, the Company may seek to sell additional equity or
convertible debt securities or obtain additional credit facilities. However, no
assurance can be given that any such additional sources of financing will be
available on acceptable terms or at all. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. A portion of the Company's cash may be used for acquisitions or to
acquire or invest in complimentary businesses or products or to obtain the right
to use complementary technologies. The Company has no current plans, agreements
or commitments, and is not currently engaged in any negotiations with respect to
any such transaction.
The Company is expecting to incur operating losses until it achieves quarterly
revenue and operating income levels of approximately $15,000,000 and $600,000,
respectively. While it cannot be certain as to when such levels of revenue and
profitability can be attained, the Company anticipates that such levels will be
achieved during the next twelve months. The Company will continue to make
significant investments in its technical workforce, marketing, training and
infrastructure to increase productivity, build its core competency practice unit
skill base and product offerings and foster growth of its operations.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, (including without
limitation, future financings and expenses, as well as general market
conditions) though the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Form 10-Q will prove to be
accurate. In light of the
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<PAGE>
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
Inflation
Inflation has not had and the Company does not expect inflation to have a
significant adverse impact on its operations.
PART II
Item 1. Legal Proceedings
Nothing to report
Item 2. Changes in Securities
In February 1998 the Company sold 80,000 shares of Common Stock to a
purchaser at a price of $1.25 per share. In addition, the purchaser
received a warrant to purchase an additional 100,000 shares of Common
Stock at an exercise price of $1.80 per share.
In March 1998 the Company closed a private placement of 1,457,000
shares of Common Stock. Such shares were sold at a price of $1.00 per
share.
Both of the above transactions were made pursuant to the exemption
contained in Section 4(2) of the Securities Act of 1933, as amended.
In each case the Company engaged no underwriter or placement agent.
For further information relating to such transactions, please see Note
5 to the Condensed Consolidated Fianancial Statements.
Item 3. Defaults Upon Senior Securities
Nothing to Report
Item 4. Submission of Matters to a Vote of Security Holders
Nothing to Report
Item 5. Other Information
On April 7, 1998, the Company completed the sale of 1,500 units to certain
investors in a private placement transaction totaling $1.5 million. The units
consist of prepaid warrants to purchase Common Stock at an adjustable exercise
price and an incentive warrant to acquire an aggregate of 78,000 shares of
Common Stock at $1.47 per share, the exercise price. The Company also granted
the placement agent a warrant to purchase 39,000 shares of Common Stock at $1.47
per share. Net proceeds from this transaction were $1,312,000.
On April 27, 1998 the Company completed a private placement of 135,000 shares of
its Common Stock to certain accredited investors for $198,125.
The accompanying proforma condensed consolidated balance sheet as of March 31,
1998 assumes that the April 7 and April 27 private placements were completed on
March 31, 1998.
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<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
March 31, Proforma March 31,
1998 Adjustments 1998
------------ ------------ ------------
(unaudited) (proforma)
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,326,291 1,312,050(1) $
198,125(2) 2,836,466
Accounts receivable, net 6,293,041 6,293,041
Prepaids and other current assets 419,630 419,630
------------ ------------ ------------
Total current assets 8,038,962 1,510,175 9,549,137
Property and equipment, net 1,012,474 1,012,474
Employee notes receivable 195,014 195,014
Other assets 142,197 142,197
Fulfillment database, net 920,007 920,007
Acquired software, net 394,991 394,991
Goodwill, net 339,866 339,866
------------ ------------ ------------
Total assets $ 11,043,541 1,510,175 $ 12,553,716
============ ============ ============
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Accounts payable $ 1,051,407 $ 1,051,407
Line of credit 2,404,670 2,404,670
Accrued expenses and other 4,947,199 4,947,199
------------ ------------ ------------
Total current liabilities 8,403,276 8,403,276
Other liabilities 196,164 196,164
------------ ------------ ------------
Total liabilities 8,599,440 -- 8,599,440
------------ ------------ ------------
Stockholders' equity:
Class A cumulative preferred stock;
$.01 par value; 2,000,000 authorized,
outstanding 1,062,500 shares in 1998
and 1,062,500 shares in 1997
(liquidation preference of the greater of
[i] two times the stated value of $2 per
share plus all accrued and unpaid dividends,
or [ii] the amount that would have
been received if such shares were
converted to Common Stock on the business day
immediately prior to the liquidation) 10,625 10,625
Common stock $.001 par value
20,000,000 authorized, outstanding
9,007,370 share in 1998
7,470,370 shares in 1997 9,007 135 9,142
Additional paid in capital 7,826,370 1,312,050
197,990 9,336,410
Accumulated deficit (5,401,901) (5,401,901)
------------ ------------ ------------
Commitments and contingencies
Total stockholders' equity 2,444,901 1,510,175 3,954,276
------------ ------------ ------------
Total liabilities and stockholders' equity $ 11,043,541 1,510,175 $ 12,553,716
============ ============ ============
</TABLE>
Proforma Adjustments:
(1) Private placement completed April 7, 1998
(2) Private placement completed April 27, 1998
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits:
11 - Statement re: Computation of Per Share Earnings
27 - Financial Data Schedule
(b). Reports on Form 8-K:
The Company filed a form 8-K describing the PSS Group, Inc.
Acquisition under Item 2 - - Acquisition or Disposition of
Assets.
The Company filed a form 8-K describing a private
placement to certain accredited investors and employees under
Item 5 - - Other Events.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The Netplex Group, Inc.
Date: April 28, 1997 By: /s/ Gene Zaino
-------------- --------------------------------------
Gene Zaino, President and CEO
(Principal Executive Officer) and Chairman
of the Board
Date: April 28, 1997 By: /s/ Matthew G. Jones
-------------- --------------------------------------
Matthew G. Jones, Chief Financial Officer
(Principal Accounting Officer)
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<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Basic Loss Per Share:
Weighted average number of common shares outstanding 7,773,292 6,457,631
Common stock equivalents from outstanding stock options
----------- -----------
Average shares outstanding 7,773,292 6,457,631
=========== ===========
Net loss $ (415,257) $ (765,851)
Preferred dividends 56,472 82,500
=========== ===========
Loss attributable to Common $ (471,729) $ (848,351)
=========== ===========
Basic Loss Per Share $ (0.06) $ (0.13)
=========== ===========
Diluted Loss Per Share:
Weighted average number of common shares outstanding 7,773,292 6,457,631
Preferred stock convertible into common shares -- (1) --
Common stock equivalents from outstanding stock options -- (1) --
----------- -----------
Average shares outstanding 7,773,292 6,457,631
=========== ===========
Net loss $ (415,257) $ (765,851)
Preferred dividends 56,472 82,500
=========== ===========
Loss attributable to Common $ (471,729) $ (848,351)
=========== ===========
Diluted Loss Per Share $ (0.06) $ (0.13)
=========== ===========
</TABLE>
(1) As the Company is in a net loss position the effect of all options and
warrants, including Common Stock equivalents is anti-dilutive and is thus
not presented in the computations of loss per common share.
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULETHIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
10-Q/A FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,326,291
<SECURITIES> 0
<RECEIVABLES> 6,628,892
<ALLOWANCES> (335,851)
<INVENTORY> 0
<CURRENT-ASSETS> 8,038,962
<PP&E> 2,345,106
<DEPRECIATION> (1,332,632)
<TOTAL-ASSETS> 11,043,541
<CURRENT-LIABILITIES> (8,403,276)
<BONDS> 0
0
(10,625)
<COMMON> (9,007)
<OTHER-SE> (7,826,370)
<TOTAL-LIABILITY-AND-EQUITY> (11,043,541)
<SALES> (13,294,428)
<TOTAL-REVENUES> (13,294,428)
<CGS> 11,176,766
<TOTAL-COSTS> 2,493,690
<OTHER-EXPENSES> (66,076)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (442,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (442,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (442,100)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
