<PAGE>
As filed with the Securities and Exchange Commission on September 1, 2000
Registration No. 333-36572
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 4
TO
FORM S-3
ON
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE NETPLEX GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------
<TABLE>
<S> <C> <C>
New York 7372 11-2824578
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) Number)
</TABLE>
1800 Robert Fulton Drive, Suite 250
Reston, Virginia 20191
(703) 716-4777
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
GENE ZAINO
Chief Executive Officer
The Netplex Group, Inc.
1800 Robert Fulton Drive, Suite 250
Reston, Virginia 20191
(703) 716-4777
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
--------------------
Copies to:
JOHN L. SULLIVAN, III, ESQ.
WALLACE E. CHRISTNER, ESQ.
DONALD P. CRESTON, ESQ.
Venable, Baetjer and Howard, LLP
2010 Corporate Ridge, Suite 400
McLean, VA 22102
(703) 760-1600
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement is declared effective.
<PAGE>
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), other than securities
offered only in connection with dividend or interest reinvestment plans, check
the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the # following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
Proposed Proposed
Maximum Maximum
Title Of Shares Amount To Be Aggregate Price Aggregate Offering Amount Of
To Be Registered Registered (1) Per Unit (2) Price (2) Registration Fee (3)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value $.001 15,498,907 shares $1.31 $20,303,568 $5,360
per share
========================================================================================================================
</TABLE>
(1) Shares of common stock that may be offered pursuant to this Registration
Statement include 7,507,161 shares issuable upon conversion of and as
dividends upon 10,000 shares of Series D Preferred Stock and upon exercise
of related warrants. For purposes of estimating the number of shares of
common stock to be included in this Registration Statement with respect to
the Series D Preferred Stock and related warrants, we included (i)
3,398,638 shares, representing 175% of the number of shares of common stock
issuable upon conversion of the Series D Preferred Stock, determined as if
the Series D Preferred Stock were converted in full at the fixed conversion
price of $5.87; plus (ii) 2,068,645 shares, representing 175% of the number
of shares of common stock issuable in lieu of cash dividends payable on the
Series D Preferred Stock over its entire term, based on a price of $1.18
per share, the applicable dividend conversion price as of August 28, 2000;
plus (iii) 2,039,877 shares, representing 175% of the number of shares of
common stock issuable upon exercise of the warrants. Shares of common stock
that may be offered pursuant to this Registration Statement also include
4,554,870 shares issuable upon conversion and exercise of warrants issuable
to Zanett Lombardier, Ltd. and related parties. For purposes of estimating
the number of shares to be included in this Registration Statement with
respect to the Zanett transaction, we included (i) 4,437,870 shares,
representing 200% of the number of shares of common stock issuable upon the
conversion of the prepaid common stock purchase warrants issued to Zanett
Lombardier, Ltd. and/or its affiliates or designees, determined as if these
warrants were converted in full at a conversion price of $1.04, the
applicable conversion price as of August 28, 2000; 78,000 shares of common
stock issuable upon the exercise of the incentive warrants issued in
connection with the Zanett prepaid warrants; and 39,000 shares of common
stock issuable upon the exercise of the placement agent warrants issued in
connection with the Zanett prepaid warrants. The remaining 3,436,876 shares
of common stock that may be offered pursuant to this Registration Statement
include shares of common stock (i)
<PAGE>
issuable upon exercise of outstanding warrants and (ii) issued in
connection with other transactions. Pursuant to Rule 416 under the
Securities Act, this Registration Statement also covers an additional
number of shares which may be issued as a result of adjustments by reason
of any stock split, stock dividend or similar transaction.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act. The above calculation is based on
the average of the high and low sales prices of the common stock on the
Nasdaq SmallCap Market on August 31, 2000.
(3) Previously paid.
The registrant hereby amends this Registration Statement on such date
and dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
The information in this prospectus is not complete and may be changed.
The selling shareholders may not sell these securities until the Registration
Statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion, dated September 1, 2000
Preliminary Prospectus
The Netplex Group, Inc.
15,498,907 shares
Common Stock
-----------------------------------
The selling shareholders on page 22 of this prospectus are offering
and selling up to 15,498,907 shares of our common stock. The selling
shareholders may offer and sell some, all or none of the common stock under this
prospectus. The selling shareholders may determine the prices at which they will
sell the common stock; the prices may be at market prices prevailing at the time
of the sale or some other price. In connection with these sales, the selling
shareholders may use brokers or dealers which may receive compensation or
commissions for the sales. We will not receive any of the proceeds from the sale
of our common stock by the selling shareholders.
Our common stock is publicly traded on the Nasdaq SmallCap Market under
the symbol "NTPL" and on the Boston Stock Exchange under the symbol "NLX". On
August 31, 2000, the closing sales price for one share of our common stock on
the Nasdaq SmallCap Market was $1.31.
THE PURCHASE OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 7 OF THIS
PROSPECTUS BEFORE PURCHASING ANY OF OUR COMMON STOCK FROM THE SELLING
SHAREHOLDERS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ______, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PROSPECTUS SUMMARY............................................................................................... 3
RISK FACTORS..................................................................................................... 7
FORWARD-LOOKING STATEMENTS....................................................................................... 16
USE OF PROCEEDS.................................................................................................. 16
PRICE RANGE OF COMMON STOCK...................................................................................... 17
DIVIDEND POLICY.................................................................................................. 17
CAPITALIZATION................................................................................................... 18
SELLING SHAREHOLDERS............................................................................................. 20
PLAN OF DISTRIBUTION............................................................................................. 33
SELECTED FINANCIAL DATA.......................................................................................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................ 38
CHANGES IN ACCOUNTANTS........................................................................................... 50
BUSINESS......................................................................................................... 52
MANAGEMENT....................................................................................................... 63
CERTAIN TRANSACTIONS............................................................................................. 67
PRINCIPAL SHAREHOLDERS........................................................................................... 68
DESCRIPTION OF SECURITIES........................................................................................ 69
SHARES ELIGIBLE FOR FUTURE SALE.................................................................................. 80
LEGAL MATTERS.................................................................................................... 81
EXPERTS.......................................................................................................... 81
WHERE YOU CAN FIND MORE INFORMATION.............................................................................. 81
INDEX TO FINANCIAL STATEMENTS.................................................................................... F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
This summary outlines and highlights information contained elsewhere
in this prospectus. You should read the entire prospectus carefully, including
the "Risk Factors" section and the financial statements and related notes,
before you make an investment decision.
The Netplex Group, Inc.
Based in Reston, Virginia, with 12 U.S. operating locations, we are an
Internet services company that leverages industry-specific knowledge, creative
ideas, and technology expertise to create customized Internet services and
electronic business solutions, or "e-solutions."
By thoroughly understanding the business dynamics and technology
trends of specific vertical markets, we seek to better understand the business
problems faced by companies within these industries. This understanding allows
us to develop and deliver e-solutions that serve our customers' unique
strategic, creative, and technological business needs. As a result, our e-
solutions seek to help our customers transition from their existing systems and
processes to business models that are aligned to the demands of the digital age.
e-solutions
Our e-solutions business is divided into five categories:
. e-Strategy Consulting;
. Creative Design;
. e-Application Development, including Internet, intranet, and
extranet;
. e-Infrastructure Services; and
. Systems Integration.
With this portfolio of services, we guide customers' initiatives from idea to
implementation. Our services seek to provide customers with e-business solutions
that cover them "three-dimensionally"--from concept to implementation, from
interface to back-end systems, and from efficiency to value creation. We believe
that our services position customers to benefit from integrated and streamlined
interactive relationships with their customers, partners, and stakeholders.
MyBizOffice
In addition to our e-solutions offerings, we have a subsidiary,
Contractors Resources, Inc., which we recently recast as the provider of an
integrated online service under the brand name MyBizOffice(TM). Targeting
professional consultants from all industries and professions, MyBizOffice is a
business-to-business service designed to provide the financial infrastructure,
resources, and business services that help professionals build careers as
independent consultants. MyBizOffice serves as an on-line "virtual corporate
office" for its member consultants by providing them with the services of a
corporate administration staff while helping them keep abreast of developments
that affect their independent life and work style.
We believe that our transformation of the traditional Contractors
Resources business model into an integrated electronic business, or "e-
business," model has increased the business's flexibility, scalability,
geographic scope, and exposure.
3
<PAGE>
We are currently incubating the MyBizOffice brand and the "Business
Service Provider" model associated with MyBizOffice. In 2000, we are investing
and will continue to invest in the incubation process through:
. increasing the marketing program;
. expanding core service offerings;
. expanding existing strategic relationships; and
. exploring additional strategic relationships.
Our address is 1800 Robert Fulton Drive, Suite 250, Reston Virginia
20191 and our telephone number is (703) 716-4777. Our Web site address is
www.netplexgroup.com.
--------------------
We were incorporated in New York in 1986 under the name CompLink, Ltd.
In 1996, we acquired, through a reverse merger, The Netplex Group, Inc. and
Contractors Resources, and changed our name to The Netplex Group, Inc. This
merger provided us with new management and a revised corporate mission. To
better position ourselves to deliver the comprehensive services required to
compete in the e-solutions market, we have acquired several companies during the
last three years. In 1997, we acquired Onion Peel Solutions, LLC. In 1998, we
acquired The PSS Group, Inc., Automated Business Systems of North Carolina,
Inc., Kellar Technology Group, Inc., and the retail technical consulting
business of Applied Intelligence Group, Inc. In 1999, we purchased Dean Liles &
Associates, Inc. These businesses expanded our:
. experience;
. technical staff;
. customer base;
. market exposure;
. revenue; and
. industry-focused expertise.
4
<PAGE>
THE OFFERING
Common stock offered by the selling shareholders...... 15,498,907 shares
Common stock outstanding as of August 28, 2000........ 18,238,700 shares (1)
Use of proceeds....................................... All of the net proceeds
from the sale of the
common stock covered by
this prospectus will go
to the selling
shareholders who offer
and sell shares of the
common stock. We will
not receive any proceeds
from the sale of the
common stock offered by
the selling
shareholders. See "Use
of Proceeds."
Nasdaq SmallCap Market symbol......................... NTPL
------------
(1) This amount excludes the following outstanding securities as of August 28,
2000:
. 80,597 shares of common stock issuable upon conversion of shares
of our Class A Preferred Stock;
. 7,731,092 shares of common stock issuable upon conversion of
shares of our Class C Preferred Stock, which are convertible
after September 28, 2003 into the number of shares equal to
$2,300,000 plus accrued but unpaid dividends, divided by 25% of
the 20 day average trading price of the common stock immediately
prior to conversion;
. 3,165,015 shares of common stock issuable upon conversion of
10,000 shares of our Series D Preferred Stock, including dividend
shares, and related warrants at a conversion and exercise price
of $5.87 per share;
. 3,818,221 shares of common stock issuable upon exercise of
prepaid warrants; and
. an aggregate of 7,320,206 shares of common stock issuable upon
exercise of other options and warrants at a weighted average
exercise price of $4.82 per share.
5
<PAGE>
SUMMARY FINANCIAL DATA
The following tables summarize our financial results and should be
read in conjunction with the "Selected Financial Data," our audited and
unaudited consolidated financial statements, and their accompanying notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," all of which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months
Year ended December 31 ended June 30
(Unaudited)
1999 1998 1997 1996 1995 2000 1999
------------ ------------ ------------ ------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA: (amounts in thousands, except per share data)
Revenues $ 87,785 $ 61,279 $ 40,468 $ 33,525 $ 26,782 $41,446 $44,453
Gross profit 16,916 9,995 4,383 2,211 2,731 7,017 9,113
Operating income /(loss) (7,123) (2,395) (2,847) (2,559) (197) (7,849) 0
Income (loss) from continuing
operations (7,507) (2,549) (2,873) (2,487) (165) (7,634) 250
Income from discontinued operations - - - 488 - - -
------------ ------------ ------------ ------------ -----------------------------------
Net Income (loss) $ (7,424) $ (2,549) $ (2,873) $ (1,999) $ (165) $(7,634) $250
============ ============ ============ ============ ===================================
Basic and diluted earnings (loss)
per common share
Continuing operations $ (0.63) $ (0.31) $ (0.46) $ (0.51) $ (0.05) (0.46) 0
Discontinued operations - - - 0.09 - -
------------ ------------ ------------ ------------ -----------------------------------
Total $ (0.63) $ (0.31) $ (0.46) $ (0.42) $ (0.05) (0.46) 0
============ ============ ============ ============ ===================================
Weighted average common shares
outstanding, basic and
diluted 12,516 9,260 6,821 5,026 3,246 17,653 11,195
============ ============ ============ ============ ===================================
BALANCE SHEET DATA:
Total assets $ 26,417 $ 20,651 $ 6,912 $ 9,889 $ 7,799 $26,447 $23,662
============ ============ ============ ============ ===================================
Temporary Equity 10,800
------------ ------------ ------------ ------------ -----------------------------------
Stockholders' equity $ 6,862 $ 6,355 $ 1,331 $ 3,239 $ 409 $ 1,537 $7,698
============ ============ ============ ============ ===================================
</TABLE>
6
<PAGE>
RISK FACTORS
Before you invest in shares of our common stock, you should be aware
that there are various risks, including those described below, involved in an
investment. We urge you to carefully consider these risk factors, together with
all of the other information included in this prospectus before you decide to
invest in shares of our common stock.
The risks and uncertainties described below are not the only ones
potentially affecting us. Additional risks and uncertainties that we are unaware
of or that we currently deem immaterial also may become important factors that
affect us. If any of the following risks occur, our business, results of
operations, or financial condition could be harmed. As a result, the trading
price of our common stock could decline, and you may lose all or part of your
investment.
WE HAVE INCURRED OPERATING LOSSES AND MAY NEVER BECOME PROFITABLE.
We incurred a net loss of $7.6 million for the six months ended June
30, 2000 and net losses of $7.4, $2.5 and $2.9 million in the years ended
December 31, 1999, 1998 and 1997, respectively. There can be no assurance that
we will be profitable on a quarterly or annual basis in the future. Our
quarterly operating results in the past have fluctuated and may fluctuate
significantly in the future depending on factors such as the timing and delivery
of significant orders and contracts, new product introductions, and changes in
our pricing policies.
WE MAY BE UNABLE TO OBTAIN THE NECESSARY FUNDING TO EXPAND AND IMPROVE OUR
BUSINESS.
As of December 31, 1999, we had negative working capital of $369,296.
With the influx of cash from the exercise of options and warrants in January and
February, 2000, and from two equity financings in March, 2000, as of June 30,
2000, we had positive net working capital of $4,729,603. We may need to raise
substantial additional capital to pay for our operations. We are uncertain
whether additional financing will be available on acceptable terms or at all. If
we raise additional funds by issuing equity securities, our shareholders will be
further diluted. If adequate funds are unavailable, we may delay, curtail,
reduce the scope of, or eliminate the expansion of our operations and/or our
marketing and sales efforts, and any of these actions could have a material
adverse effect on our financial condition and business operations.
THE TIMING OF OUR REVENUES AND THE INTRODUCTION AND MARKET ACCEPTANCE OF OUR
PRODUCTS MAY VARY RESULTING IN SIGNIFICANT VARIATIONS IN OUR OPERATING RESULTS.
Our revenues may vary due to:
. the number and dollar value of client engagements commenced
and completed during a quarter;
. the number of working days in a quarter; and
. employee hiring and utilization rates.
The timing of revenues is difficult to forecast because our sales
cycle for new clients is relatively long and may depend on the size and scope of
assignments and general economic conditions. Because a high percentage of our
expenses are relatively fixed, a change in the timing of the beginning or end of
client assignments, particularly at or near the end of any quarter, could cause
operating results to significantly vary from quarter to quarter and result in
reported losses for that quarter. In addition, clients can terminate our
engagement at will, and we would then have a higher than expected number of
unassigned persons or higher severance expenses.
7
<PAGE>
While we adjust professional staffs to reflect active projects, we
must maintain a sufficient number of senior professionals to oversee existing
client projects and help our sales force secure new client assignments. Because
we perform some work on a fixed-price basis, we also bear the risk of cost
overruns and inflation. New product introductions and market acceptance of new
and enhanced versions of our products or the products of third parties may also
significantly affect our operating results.
THE FUTURE SUCCESS OF OUR BUSINESS DEPENDS ON THE CONTINUED SERVICES OF GENE
ZAINO, OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, PAMELA FREDETTE, OUR PRESIDENT,
AND OUR ABILITY TO ATTRACT AND RETAIN TECHNICAL, MARKETING, SALES, AND
MANAGEMENT PERSONNEL.
Our future success depends in large part on the continued services of
Gene Zaino, our Chairman and Chief Executive Officer. We have an employment
agreement with Mr. Zaino that expires in June 2002. We have a $2,000,000 key
person insurance policy on the life of Mr. Zaino. Our future success also
depends in large part on the continued services of Pamela Fredette, our
President. We have an employment agreement with Ms. Fredette that expires in May
2002. We have a $1,000,000 key person life insurance policy on the life of Ms.
Fredette.
Our success also depends in large part upon our ability to attract and
retain qualified technical project managers and information technology
personnel. We believe we need to hire additional technical personnel to improve
existing products and services and to develop new products and services. In
addition, we believe we need to hire new sales personnel to sell our products
and services. The inability to attract new personnel could have a material
adverse effect on our results of operations and research and development
efforts. It is difficult to locate technical, marketing, sales, and management
personnel with the combination of skills and attributes required to execute our
strategy. Although we have attracted and retained qualified employees, qualified
project managers are in particularly great demand and will remain a limited
resource for the foreseeable future. Our employees can terminate their
employment at any time. Accordingly, we may be unable to continue to retain and
attract qualified project managers.
OUR BUSINESS IS VERY COMPETITIVE AND SUBJECT TO RAPID CHANGES.
The market for our e-solutions is highly competitive. The rapid growth
of the Internet services market has fueled a significant influx of companies
that pose a competitive threat to our e-solutions business. Many of these
companies have greater resources, greater expertise, or better access to capital
than we do.
In a broad sense, competition for Internet-related services can range
from local Web development companies to large traditional technology providers
such as IBM and Microsoft. However, because we target middle-market and larger
organizations with an approach that focuses on solving business problems within
vertical industries, our e-solutions competitors are generally companies that,
like us, deliver a wide variety of Internet-related services.
We compete with both public and private companies. Companies with
which we most commonly compete include, among others, the following:
. AnswerThink;
. AppNet;
. Cysive;
. iXL Enterprises;
. Predictive Systems;
. Proxicom;
. Sapient;
. US Interactive;
. USWeb/CKS; and
. Xceed.
8
<PAGE>
Of these companies with which we most commonly compete, several have
moved into the full-service e-solutions market by expanding specific core
disciplines, which include network engineering and creative design, while others
are start-ups that have been built upon a full-service solutions delivery model.
Customers also often call upon us to perform individual specialized
services from our portfolio, which includes information security, network
performance enhancements, and enterprise application integration. In these
cases, we frequently compete with the "Big 5" consulting firms such as Deloitte
& Touche and Andersen Consulting.
We believe that the principal competitive factors in the information
technology services industry include:
. responsiveness to client needs;
. speed of project implementation;
. quality of service;
. price;
. project management capability; and
. technical expertise.
The market for Contractors Resources MyBizOffice service offering is
competitive and changing quickly. We expect that additional companies will
emerge in this market and that competition will therefore intensify. Our
competitors in this regard vary in size and in scope of services.
WE MUST RESPOND QUICKLY TO TECHNOLOGICAL DEVELOPMENTS, INTRODUCTIONS OF NEW
COMPETITIVE PRODUCTS AND SERVICES, AND EVOLVING INDUSTRY STANDARDS TO REMAIN
COMPETITIVE.
The information technology services industry is characterized by rapid
technological developments, frequent introductions of new products and services,
and evolving industry standards. In order to remain competitive in this rapidly
evolving industry, we must continually improve the performance, features, and
reliability of our services. We cannot assure you that we will be able to
respond quickly, cost effectively, or sufficiently to any of these developments.
Our inability to respond quickly to any such developments could cause us to lose
substantial market share and could have a material adverse effect on our
business, operating results, and financial condition.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH EFFECTIVELY.
Although we have streamlined our operations, our long-term success
will depend in part on our ability to manage growth. If we are unable to hire a
sufficient number of employees with the appropriate levels of experience to
effectively manage our growth, our business, financial condition, and results of
operations could be materially and adversely affected.
OUR STOCK PRICE MAY BE SUBJECT TO SIGNIFICANT VOLATILITY.
Our stock price may be subject to significant volatility, particularly
on a quarterly basis. Any shortfall in revenue or earnings from levels expected
by securities analysts or others could have an immediate and significant adverse
effect on the trading price of our common stock in any given period.
Additionally, we may not learn of, or be able to confirm, revenue or earnings
shortfalls until late in the fiscal quarter or following the end of the quarter;
learning of these shortfalls late could result in an even more immediate and
adverse effect on the trading of our common stock.
WE MAY BE LIABLE FOR LEGAL VIOLATIONS COMMITTED BY CONSULTANTS WE EMPLOY.
Technical services firms face legal uncertainties, including the
extent of liability for violations of
9
<PAGE>
employment and discrimination laws. Our liability can include violations of
employment and discrimination laws committed by consultants we provide to our
customers. We believe we comply in all material respects with all applicable
rules, regulations, and licensing requirements.
WE MAY BE UNABLE TO SATISFY GUARANTEES THAT WE MAKE TO OUR CUSTOMERS DUE TO
RAPID CHANGES IN OUR BUSINESS.
Occasionally, we must guarantee to our customers that the integrated
system that we are consulting on will operate properly when completed. Due to
rapid changes in technology or other unforeseen developments, we may be unable
to comply with our guarantees.
WE HAVE A SIGNIFICANT NUMBER OF OUTSTANDING SHARES OF CONVERTIBLE PREFERRED
STOCK AND WARRANTS WITH CONVERSION OR EXERCISE PRICES THAT FLUCTUATE BASED ON
THE MARKET PRICE OF OUR COMMON STOCK. THE CONVERSION OF THESE PREFERRED SHARES
OR WARRANTS COULD RESULT IN THE DILUTION OF YOUR OWNERSHIP INTEREST AND
ADVERSELY IMPACT THE PRICE OF OUR COMMON STOCK.
Class C Preferred Stock. To the extent that our stock price decreases
and we do not exercise our right of redemption prior to conversion, the number
of shares of our common stock to be issued upon conversion of our Class C
Preferred Stock could increase significantly; the issuance of additional shares
of common stock could substantially dilute your ownership interest and depress
the price of our common stock. Additionally, the perceived risk of dilution from
conversion of the Class C Preferred Stock may cause other shareholders to sell
their shares before conversion or encourage short sales of our common stock;
those sales could also place further downward pressure on the price of our
common stock.
The Class C Preferred Stock is convertible after September 28, 2003
into the number of shares equal to $2,300,000 plus accrued but unpaid dividends,
divided by 25% of the 20 day average trading price of our common stock
immediately prior to conversion. The conversion of the outstanding Class C
Preferred Stock on the basis of the 20 day average trading price of our common
stock would result in the issuance of 7,731,092 shares of common stock if the
average trading price had been calculated as of August 28, 2000. If this 20 day
average trading price decreased by 75%, then the conversion of the outstanding
Class C Preferred Stock would result in the issuance of 30,924,370 shares of
common stock. The conversion of the Class C Preferred Stock into common stock
may result in the sale of a significant number of shares of common stock into
the market; these sales could decrease the price of our common stock. The rights
and preferences of Class C Preferred Stock are discussed under "Description of
Securities - Class C Preferred Stock."
Series D Preferred Stock and Warrants. In some instances, the number
of shares of common stock that we issue as payment of dividends on, or upon
conversion of, the Series D Preferred Stock, or upon the exercise of warrants
issued to the holders of the Series D Preferred Stock may be based in part upon
the future market value of our common stock. To the extent the price of our
common stock decreases, the number of shares of our common stock to be issued in
satisfaction of dividends payable on the Series D Preferred Stock, upon
conversion of the Series D Preferred Stock or upon exercise of the related
warrants could increase significantly; this increase in the amount of stock
could substantially dilute your ownership interest in us and depress the price
of our common stock. Any of these events could also result in the sale of a
significant number of shares of common stock into the market and could decrease
the price of our common stock. Additionally, the perceived risk of dilution from
the occurrence of any of these events may cause shareholders to sell their
shares to avoid this dilution or encourage short sales of our common stock and
could therefore place further downward pressure on the price of our common
stock.
As of August 28, 2000, the conversion of the outstanding Series D
Preferred Stock at the fixed conversion price of $5.87 would result in the
issuance of 1,753,238 shares of common stock. In certain instances, if the fixed
conversion price is reduced by 75%, then the conversion of the outstanding
Series D Preferred Stock would result in the issuance of 7,012,952 shares of
common stock.
10
<PAGE>
The exercise price of the warrants that we issued on March 29, 2000 in
connection with the issuance of the Series D Preferred Stock is $5.87. However,
the exercise price could be reduced to an amount equal to 120% of the market
price of our common stock on March 29, 2001 if this amount is less than the
exercise price in effect immediately prior to that date. Upon this reduction in
exercise price, the number of shares of common stock we must issue upon exercise
of the warrants will increase without a corresponding increase in the amount of
proceeds we will receive as a result of the exercise.
If all of these warrants were exercised on August 28, 2000, we would
be required to issue 1,165,644 shares of common stock. The closing price of our
common stock on August 28, 2000 was $1.31 per share. If as of March 29, 2001,
the price of our common stock remains at $1.31 per share, the exercise of these
warrants would result in the issuance of 4,352,627 shares of common stock. If
the price of our common stock were to decrease from this amount by 75%, then the
exercise of these warrants would result in the issuance of 17,410,509 shares of
common stock.
The rights and preferences of Series D Preferred Stock and related
warrants are discussed under "Selling Shareholders - Material Terms of Series D
Preferred Stock and Related Warrants" and "Description of Securities - Series D
Preferred Stock."
Zanett prepaid warrants.
In connection with a recent private placement, we issued to Zanett
Lombardier, Ltd. and/or its affiliates or designees prepaid common stock
purchase warrants to purchase an aggregate number of shares of common stock
equal to $1,500,000 divided by the lower of
. $10; or
. the amount obtained by multiplying the average of the 5 lowest
closing bid prices for the common stock during the 20 consecutive
trading day period ending on the trading day immediately
preceding the date of determination or exercise by 1, 0.85, 0.75
or 0.65, depending on how long the warrants have been
outstanding.
If the market value of our common stock decreases and the warrants
remain outstanding until October 19, 2000, the number of shares of common stock
to be issued upon exercise of these prepaid warrants could increase
significantly and result in significant dilution in your ownership interest.
The exercise of these prepaid warrants on the basis of the average of
the 5 lowest closing bid prices for the common stock during the 20 consecutive
trading day period ending on August 28, 2000 would have resulted in the issuance
of 1,923,077 shares of common stock, based on the average of the 5 lowest
closing bid prices for the common stock during the 20 consecutive trading day
period ending on that date, or $1.04 per share. If the warrants are exercised
after October 19, 2000 and the average of the 5 lowest closing bid prices for
the common stock during the 20 consecutive trading day period is decreased by
75%, then the exercise of the outstanding prepaid warrants would result in the
issuance of 8,875,740 shares of common stock. The terms and conditions of the
prepaid warrants are discussed under "Selling Shareholders - Material Terms of
Warrants Issued to Zanett."
THE EXERCISE OF CERTAIN RIGHTS BY THE HOLDERS OF OUR PREFERRED STOCK AND
WARRANTS COULD RESULT IN SUBSTANTIAL DILUTION OF YOUR OWNERSHIP INTEREST AND
ADVERSELY IMPACT THE PRICE OF OUR COMMON STOCK.
The conversion of Series D Preferred Stock and sales of common stock by our
selling shareholders may depress the price of our common stock and substantially
dilute your ownership interest.
11
<PAGE>
To the extent the Series D Preferred Stock is converted or dividends
on the Series D Preferred Stock are paid in shares of common stock rather than
cash, a significant number of additional shares of common stock may be sold into
the market and could decrease the price of our common stock due to the
additional supply of shares relative to demand in the market. If the sale of a
large amount of shares of our common stock upon conversion of, or the payment of
dividends in lieu of cash on, the Series D Preferred Stock results in a decline
in the price of our common stock, this event could encourage short sales of our
common stock. Short sales could place further downward pressure on the price of
our common stock.
The conversion of, and the payment of dividends in shares of common
stock in lieu of cash on, the Series D Preferred Stock may result in substantial
dilution to the interests of other holders of our common stock. Even though no
selling shareholder may convert its Series D Preferred Stock if the conversion
would make the selling shareholder the beneficial owner of more than 4.99% of
our then outstanding common stock, this restriction does not prevent a selling
shareholder from selling a substantial number of shares in the market. By
periodically selling shares into the market, an individual selling shareholder
could eventually sell more than 4.99% of our outstanding common stock while
never holding more than 4.99% at any specific time.
We may be required to issue additional shares of our Series D Preferred Stock
and warrants and thereby further reduce your ownership percentage in our common
stock and dilute the value of your shares.
At a conversion price of $5.87 per share, the Series D Preferred Stock
and warrants would be convertible into approximately 3,165,015 shares,
representing approximately 14.79% of the common stock that would be outstanding
following the conversion, based upon the common shares outstanding on August 28,
2000. The number and percentage of shares into which the Series D Preferred
Stock and warrants are convertible could increase if our stock price decreases
and certain events resulting in the adjustment of the conversion or exercise
price of the Series D Preferred Stock or the warrants occur. Further, if we do
not obtain additional financing on certain terms by October 31, 2000, the
holders of our Series D Preferred Stock and related warrants will be entitled to
purchase additional shares of Series D Preferred Stock and warrants. Any of
these events could significantly dilute your ownership interest in our common
stock.
12
<PAGE>
We may be required to delist our shares from Nasdaq if certain events occur, in
which event trading in our shares and the price of our common stock would likely
decrease substantially.
The National Association of Securities Dealers imposes certain
requirements on the issuance of securities of a company listed on the Nasdaq
Stock Market at a price that fluctuates based on the future market value of the
issuer. For instance, the issuer is required to obtain shareholder approval of
an issuance of securities of this type if the number of securities to be issued
could equal or exceed 20% of the issuer's outstanding listed securities. Also,
the voting rights of holders of securities that are convertible into common
stock based on the future stock price of the issuer cannot be disproportionate
to their investment in the issuer. We believe that the issuances of our Series D
Preferred Stock and the prepaid warrants comply with the NASD rules. For
instance, our preferred stock and warrants do not have voting rights, except as
required by law. Additionally, in order to ensure compliance with the
shareholder approval requirement, we obtained shareholder approval for the
issuance of shares of our common stock upon conversion of, or the payment of
dividends on, the Series D Preferred Stock in excess of 19.99% of the number of
outstanding shares of common stock on March 29, 2000, the date of issuance of
the Series D Preferred Stock. Similarly, we are not obligated to issue shares of
our common stock upon the exercise of the prepaid warrants in excess of 19.99%
of the number of outstanding shares of common stock on the date of issuance of
the prepaid warrants. There is no similar cap on the Class C Preferred Stock.
Consequently, the issuance of our Class C Preferred Stock may not have complied
with the NASD rules. We have not sought an interpretation or waiver from the
NASD with respect to the compliance with the NASD rules of the issuance of the
Class C Preferred Stock.
If our stock price decreases and as a result, the number of shares of
common stock issued upon conversion of or the payment of dividends on the Class
C Preferred Stock or Series D Preferred Stock increases significantly, the NASD
could find that we are in violation of its requirements for securities with
conversion or exercise prices that fluctuate based on future stock price,
particularly with respect to the prohibition on issuing securities which equal
20% or more of the outstanding securities without shareholder approval. One of
the penalties the NASD could impose would be to delist our shares of common
stock from the Nasdaq Stock Market in which event trading in our shares and the
price of our common stock would likely decrease substantially.
13
<PAGE>
WE HAVE A SIGNIFICANT NUMBER OF OUTSTANDING WARRANTS, OPTIONS AND SHARES OF
PREFERRED STOCK THAT COULD ADVERSELY IMPACT THE PRICE OF OUR COMMON STOCK AND
OUR ABILITY TO OBTAIN ADDITIONAL FUNDING.
As of August 28, 2000, we had outstanding:
. shares of Class A Preferred Stock that were immediately
convertible into 80,597 shares of common stock;
. shares of our Class C Preferred Stock that are convertible
after September 28, 2003 into the number of shares equal to
$2,300,000 plus accrued but unpaid dividends, divided by 25% of
the 20 day average trading price of the common stock
immediately prior to conversion, which if converted, would
result in the issuance of 7,731,092 shares of common stock;
. 10,000 shares of our Series D Preferred Stock outstanding and
outstanding warrants that were convertible, together with
unpaid dividends, into a total of 3,165,015 shares of common
stock, at a conversion and exercise price of $5.87 per
share;
. prepaid warrants exercisable into 3,818,221 shares of common
stock; and
. other options and warrants to purchase an aggregate of
7,320,206 shares of our common stock at a weighted average
exercise price of $4.82 per share.
As of August 28, 2000, there were outstanding convertible preferred shares,
warrants and options to acquire up to approximately 22,115,131 shares of common
stock at prices ranging from $.94 to $13.875 per share. The exercise of all of
the outstanding warrants, including the prepaid warrants, options and/or
conversion of the outstanding convertible preferred stock, would dilute the
then-existing shareholders' percentage ownership of our common stock, and any
sales in the public market could adversely affect prevailing market prices for
our common stock. Moreover, because the holders of outstanding warrants, options
and preferred stock will likely exercise or convert these securities, our
ability to obtain additional equity capital could be adversely affected because
we probably could obtain any needed capital on terms more favorable than those
provided by the conversion of these securities. We lack control over the timing
of any exercise or the number of shares issued or sold if exercises or
conversions occur.
WE WILL BE PENALIZED IF WE FAIL TO REGISTER SHARES UNDERLYING OUR SERIES D
PREFERRED STOCK, THE WARRANTS ISSUED TO THE HOLDERS OF OUR SERIES D PREFERRED
STOCK, AND THE PREPAID WARRANTS, INCENTIVE WARRANTS AND PLACEMENT AGENT WARRANTS
THAT WE ISSUED IN MARCH 2000.
We will incur penalties and costs under the terms of the Series D Preferred
Stock, the warrants issued to the holders of our Series D Preferred Stock, and
the prepaid, incentive and placement agent warrants, all issued in the private
placements in March 2000, if we are unable to register the shares of common
stock issuable upon the conversion of the Series D Preferred Stock and the
exercise of those warrants, or if we fail to maintain our listing on the Nasdaq
SmallCap Market, the Nasdaq National Market, or other national securities
exchanges.
FUTURE SALES OF RESTRICTED SHARES COULD DECREASE THE MARKET PRICE OF OUR COMMON
STOCK AND IMPAIR OUR ABILITY TO RAISE CAPITAL.
Future sales of common stock by our existing shareholders under exemptions
from registration or through the exercise of outstanding registration rights
could materially adversely affect the market price of our common stock and could
materially impair our future ability to raise capital through an offering of
equity
14
<PAGE>
securities. A substantial number of shares of common stock are, or will be in
the near future, available for sale under exemptions from registration or have
been, or are being registered pursuant to registration rights and we are unable
to predict the effect, if any, that market sales of these shares or the
availability of these shares for future sale will have on the market price of
the common stock prevailing from time to time.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE PREVIOUSLY ACQUIRED BUSINESSES.
During 1998, we acquired substantially all of the assets of The PSS Group,
Inc., Automated Business Systems of North Carolina, Inc., Keller Technology
Group, Inc. and the consulting division of Applied Intelligence Group, Inc. In
1999, we acquired Dean Liles & Associates, Inc. We entered into the acquisitions
with the expectation that the acquisitions would result in certain benefits for
the combined businesses. Achieving the anticipated benefits of the acquisitions
will depend in part upon whether the business operations and product offerings
of the acquired companies can be integrated in an efficient and effective
manner. This integration will require the dedication of management resources
that may temporarily distract attention from our day-to-day business. The
integration of facilities as well as the various functional departments has been
partially accomplished. The full extent of the cost savings in operations is not
known. If the integration does not result in the anticipated cost savings in
operations, there may be an adverse effect on our results of operations and
financial condition. A change in the anticipated integration of The PSS Group,
Inc. resulted in the write-off in fiscal 1999 of approximately $1.8 million
related to intangibles associated with its acquisition.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR STRATEGY OF ACQUIRING OTHER
COMPANIES.
We intend to look for complementary businesses to acquire so that we can
strengthen and expand our core business. However, we may not be able to find any
attractive candidates, or we may find that the acquisition terms proposed by
potential acquisition candidates are not favorable to us. In addition, we may
compete with other companies for these acquisition candidates, and that
competition may make an acquisition more expensive for us. Similarly,
instability in the U.S. securities markets and volatility in our stock price may
make acquisitions with our stock more expensive. Accordingly, our acquisition
strategy may not improve our overall business, financial condition, and results
of operations and could weaken them.
If we are able to identify and acquire one or more businesses, the
integration of the acquired business or businesses may be costly and may result
in a decrease in our revenues or a decrease in the value of our common stock for
the following reasons, among others:
. we may not adequately assess the risks inherent in a particular
acquisition candidate or correctly assess the candidate's potential
contribution to our financial performance;
. we may need to divert more management resources to integration than we
planned, and this diversion may adversely affect our ability to pursue
other more profitable activities;
. the difficulties of integration may be increased by the necessity of
coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds and combining different
corporate cultures;
. we may not eliminate as many redundant costs as we anticipated in
selecting our acquisition candidates; and
. an acquisition candidate may have liabilities or adverse operating
issues that we failed to discover through our diligence prior to the
acquisition.
15
<PAGE>
Consequently, any acquisition by us may not improve our business, financial
condition, and results of operations in either the short-term or long-term.
WE HAVE NEVER PAID AND DO NOT CURRENTLY INTEND TO PAY DIVIDENDS.
We have never paid dividends on our common stock. We intend to retain any
future earnings to finance our growth. In addition, dividends on common stock
are subject to the preferences for dividends on the preferred stock. Any future
dividends will depend upon our earnings, if any, our financial requirements, and
other factors.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus may contain forward-looking
statements. Forward-looking statements can be identified by the use of forward-
looking terminology such as "may," "will," "believe," "expect," "anticipate,"
"estimate," "continue" or other similar words, and include statements as to the
intent, belief, or current expectations of Netplex and our directors, officers,
and management with respect to future operations, performance or position of
Netplex or which contain other "forward-looking" information. These forward-
looking statements are predictions and are based on current information and
expectation, and we assume no obligation to update these statements. When
considering the forward-looking statements in this prospectus, you should keep
in mind the risk factors and other cautionary statements in this prospectus and
in the documents incorporated in this prospectus by reference. The risk factors
noted in this prospectus and the other factors noted throughout this prospectus
and the documents that we incorporate by reference, including certain known and
unknown risks and uncertainties, could cause our actual results to differ
materially from those contained in any forward-looking statement.
USE OF PROCEEDS
All of the net proceeds from the sale of the common stock covered by this
prospectus will go to the selling shareholders who offer and sell shares of the
common stock. We will not receive any proceeds from the sale of the common stock
offered by the selling shareholders pursuant to this prospectus. If any warrants
are exercised by selling shareholders for cash, we will receive proceeds equal
to the exercise price of the warrants. We will use the net proceeds received
upon the exercise of any warrants for general corporate purposes, including
working capital.
16
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq SmallCap Market under the symbol
"NTPL" and on the Boston Stock Exchange under the symbol "NLX." The following
table sets forth, for the periods indicated, inter-dealer prices from Nasdaq,
without retail mark-up, markdown or commission and may not necessarily represent
actual transactions:
High Low
---- ---
1998
----
1/st/ Quarter $ 1.72 $0.81
2/nd/ Quarter 1.81 1.25
3/rd/ Quarter 1.81 1.09
4/th/ Quarter 1.44 0.88
1999
----
1/st/ Quarter $ 3.50 $0.97
2/nd/ Quarter $ 3.44 $2.44
3/rd/ Quarter $ 3.38 $2.25
4/th/ Quarter $11.62 $1.66
2000
----
1/st/ Quarter $19.50 $9.13
2/nd/ Quarter $10.56 $1.84
On August 31, 2000, the last reported sale price of our common stock on the
Nasdaq SmallCap Market was $1.31 per share and, as of August 28, 2000, there
were 158 shareholders of record.
DIVIDEND POLICY
We have never paid dividends on our common stock. In addition, dividends on
common stock are subject to the preferences for dividends on the preferred
stock. Any future dividends will depend upon our earnings, if any, our financial
requirements and other factors.
17
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of June 30, 2000, on an
actual basis and as adjusted to give effect to:
. the conversion of our Series D Preferred Stock, the exercise of the
related warrants and the number of shares of common stock issuable in
lieu of cash dividends payable on the Series D Preferred Stock over
its entire term, based on a price of $1.18 per share, the applicable
dividend conversion price as of August 28, 2000;
. the conversion of the prepaid common stock purchase warrants issued to
Zanett Lombardier, Ltd. and/or its affiliates or designees, as of
August 28, 2000, the issuance of 78,000 shares of common stock
issuable upon the exercise of the incentive warrants issued in
connection with the Zanett prepaid warrants and the issuance of 39,000
shares of common stock issuable upon the exercise of incentive
warrants issued to the placement agent and/or its designees in
connection with the Zanett prepaid warrants;
. the aggregate amount of shares of common stock issuable upon the
exercise of the PMG warrant;
. the aggregate number of shares of common stock issuable upon the
exercise of warrants issued to TMP Interactive, Inc.;
. the aggregate amount of shares of common stock issuable upon the
exercise of the warrant issued to Silicon Valley Bank; and
. the aggregate amount of shares of common stock issuable upon the
exercise of the warrant issued to Roseland II, LLC.
When you read this table, it is important that you also read "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements and related notes.
<TABLE>
<CAPTION>
June 30, 2000
Actual As Adjusted
<S> <C> <C>
Long term debt $ 195,504 $ 195,504
Redeemable - Preferred Stock-Series D Cumulative $.01 par value; 15,000
shares authorized; 10,000 shares issued and outstanding at June 30,
2000; no shares issued and outstanding, as adjusted and prepaid $ 10,800,000 $ 0
warrants
Stockholders' equity:
Preferred Stock:
Class A, $.01 par value, liquidation preference of $4.00 per share;
2,000,000 shares authorized; 80,597 shares issued and outstanding
at June 30, 2000 and as adjusted 805 805
Class C, $.01 par value; liquidation preference of $3.50 per
share; 2,500,000 shares authorized; 1,500,000 shares issued
and outstanding at June 30, 2000 and as adjusted 15,000 15,000
Common Stock, $.001 par value, 40,000,000 shares authorized;
18,238,284 shares issued and outstanding at June 30, 2000;
27,908,167 shares issued and outstanding, as adjusted (1) 18,238 27,908
Additional paid in capital 24,069,949 57,690,760
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
Accumulated deficit (22,566,707) (22,566,707)
----------------- ---------------
Total stockholders' equity 1,537,285 35,167,766
----------------- ---------------
Total Capitalization $ 12,532,789 $ 35,363,270
================= ===============
</TABLE>
(1) The actual and as adjusted amounts exclude the following outstanding
securities as of August 28, 2000:
. shares of convertible Class A Preferred Stock that are immediately
convertible into 80,597 shares of common stock;
. shares of our Class C Preferred Stock that are convertible after
September 28, 2003 into the number of shares equal to $2,300,000 plus
accrued but unpaid dividends, divided by 25% of the 20 day average
trading price of the common stock immediately prior to conversion,
which if converted, would result in the issuance of 7,731,092 shares
of common stock;
. prepaid warrants exercisable into 1,895,144 shares of common stock;
and
. other options and warrants to purchase an aggregate of 3,938,206
shares of our common stock at a weighted average exercise price of
$2.21 per share.
19
<PAGE>
SELLING SHAREHOLDERS
Holders of Series D Preferred Stock
An aggregate of ten thousand (10,000) shares of Series D Preferred Stock
and related warrants were sold to HFTP Investment L.L.C., Fisher Capital Ltd.
and Wingate Capital Ltd. pursuant to a securities purchase agreement dated March
28, 2000, as amended. The shares of common stock being offered by these selling
shareholders are issuable:
. upon conversion of the Series D Preferred Stock,
. as dividends on the Series D Preferred Stock, or
. upon exercise of the related warrants.
We determined the number of shares of common stock to be offered for resale
by the selling shareholders holding Series D Preferred Stock by agreement with
them and in order to adequately cover the number of shares required. Our
calculation of the number of shares to be offered for resale is based on
. with respect to the Series D Preferred Stock, a conversion price
of $5.87 per share, which represents 120% of the average of the
dollar volume-weighted average prices of the common stock for the
30 consecutive trading days beginning on and including April 4,
2000; and
. with respect to the related warrants, a price of $4.89 per share,
which represents the average of the dollar volume-weighted
average price of the common stock on the Nasdaq SmallCap Market
for the 30 consecutive trading days beginning on and including
April 4, 2000.
The foregoing calculations are not intended to constitute a prediction as to the
number of shares of common stock into which these warrants will be executed.
In accordance with the terms of a Registration Rights Agreement with the
holders of the Series D Preferred Stock, this prospectus covers the resale of
. 175% of the number of shares of common stock issuable upon
conversion of the Series D Preferred Stock, determined as if the
Series D Preferred Stock were converted in full at the conversion
price of $5.87, plus
. 175% of the number of shares of common stock issuable in lieu of
cash dividends payable on the Series D Preferred Stock over its
entire term, plus
. 175% of the number of shares of common stock issuable upon
exercise of the related warrants.
See "Selling Shareholders--Material Terms of Series D Preferred Stock and
Related Warrants--Registration Rights Agreement."
Zanett
The common stock offered by this prospectus also includes up to
. 4,437,870 shares of common stock issuable upon the conversion of
$1,500,000 of prepaid common stock purchase warrants sold to
Zanett Lombardier, Ltd. and/or its affiliates or designees in
connection with a recent private placement,
20
<PAGE>
. 78,000 shares of common stock issuable upon the exercise of the
incentive warrants issued in connection with the Zanett prepaid
warrants, and
. 39,000 shares of common stock issuable upon the exercise of
incentive warrants issued to the placement agent and/or its
designees in connection with the Zanett prepaid warrants.
Our calculation of the number of shares to be offered for resale in connection
with the Zanett prepaid warrants is based on an exercise/conversion of $0.78 per
share, the amount obtained by multiplying a percentage, which decreases over
time and is described in the warrants, by the average of the 5 lowest closing
bid prices for the common stock during the 20 consecutive trading day period
ending on the trading day immediately preceding August 28, 2000.
In the case of the shares of common stock underlying the Zanett
prepaid, incentive and placement agent warrants, there may be changes in the
number of shares offered hereby due to changes in the exercise/conversion price
of those warrants in accordance with the terms of the warrants. This calculation
is not intended to constitute a prediction as to the number of shares of common
stock into which these warrants will be exercised. Moreover, in the case of the
shares of common stock underlying the Zanett prepaid warrants, the number of
shares of common stock owned and offered for sale hereby represents a good faith
estimate of the number of shares of common stock issuable upon conversion of or
otherwise with respect to the Zanett prepaid warrants, based on an
exercise/conversion price of $0.78 per share, the applicable price as of August
28, 2000.
TMP Interactive, Inc., Pennsylvania Merchant Group, Roseland II L.L.C. and
Silicon Valley Bank
The common stock offered by this prospectus also includes:
. 3,000,000 shares of common stock issuable upon the exercise of
warrants issued to TMP Interactive, Inc. in connection with a co-
branded services arrangement we entered into with one of our
subsidiaries and TMP Interactive, Inc. in May 2000;
. 250,000 shares of common stock issuable upon the exercise of the
warrant issued to Pennsylvania Merchant Group in connection with an
investment banking arrangement we have with it;
. 15,000 shares of common stock issuable upon the exercise of the
warrant issued to Roseland II L.L.C. in connection with a leasing
arrangement; and
. 75,000 shares of common stock issuable upon the exercise of the
warrant we issued to Silicon Valley Bank in connection with our line
of credit.
The following table sets forth:
. the name of each selling shareholder;
. the number of shares of outstanding common stock beneficially
owned by each selling shareholder as of August 28, 2000;
. the aggregate number of shares of common stock that each selling
shareholder may offer and sell for its account under this
prospectus; and
. to our knowledge and assuming that all of the shares of common
stock offered under this prospectus are sold, the aggregate
number of shares of common stock and the percentage of
outstanding shares of common stock to be beneficially owned by
each selling shareholder upon completion of the offering made
under this prospectus.
The second column of the table below lists, for each selling shareholder holding
Series D Preferred Stock, the number of shares of common stock (based on its
ownership of Series D Preferred Stock and related warrants) that
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<PAGE>
are issuable to those selling shareholders as of August 28, 2000, assuming
conversion of all Series D Preferred Stock and accrued dividends and the
exercise of all warrants held by each selling shareholder on that date, without
regard to any limitations on conversions or exercise. With respect to each
selling shareholder holding Zanett prepaid warrants, the second column lists the
number of shares of common stock that are issuable to those selling shareholders
as of August 28, 2000, assuming conversion of all prepaid warrants on that date.
Because conversion of the Series D Preferred Stock is based on a formula that
depends on the number of days that have elapsed since the last payment, if any,
of accrued dividends to holders of Series D Preferred Stock and because
conversion of the Zanett prepaid warrants is based on a formula that fluctuates
with the trading price of our common stock and the length of time the warrants
remain outstanding, the number of shares that will actually be issued upon
conversion may vary from the 15,498,907 shares being offered by this prospectus
and the numbers listed in the second column may fluctuate from time to time. The
third column lists each selling shareholder's portion of the 15,498,907 shares
of common stock being offered by this prospectus. The fourth column assumes the
sale of all of the shares offered by each selling shareholder.
To our knowledge, except for the ownership of preferred stock and warrants
and as otherwise indicated below, none of the selling shareholders has had
within the past three years any position, office or other material relationship
with us or any of our predecessors or affiliates. We are registering shares of
our common stock in order to permit the selling shareholders to offer these
shares for resale from time to time. The selling shareholders may sell all, some
or none of their shares in this offering. See "Plan of Distribution."
<TABLE>
<CAPTION>
Number of Shares Beneficially
Shares Owned
Name of Selling Number of Shares Beneficially Offered
Security Holder Owned Prior to Offering (1) Hereby After Offering (2)
--------------- --------------------------- ------ ------------------
Number Percentage
------ ----------
<S> <C> <C> <C> <C>
HFTP Investment L.L.C. (3) 1,076,105 (4) 2,552,435 0 0
Fisher Capital Ltd. (5) 1,357,791 (6) 3,220,572 0 0
Wingate Capital Ltd. (5) 731,119 (7) 1,734,154 0 0
TMP Interactive, Inc. 1,000,000 (8) 3,000,000 (9) 0 0
Zanett Lombardier, Ltd. (10) 2,113,905 (11) 4,349,112 229,290 *
Zanett Lombardier Master Fund, LP 76,440 (12) 76,440 0 0
Pennsylvania Merchant Group 175,000 (13) 250,000 (14) 0 0
Stephen Turner 290,746 (15) 34,882 (16) 255,864 1.4
J. Craig Jones 125,885 (17) 24,426 (16) 101,459 *
David McCarthy (10) 52,453 (18) 102,748 0 0
Claudio Guazzoni (10) 56,870 (19) 12,431 (20) 44,439 *
Samuel Milbank (10) 17,732 (21) 8,288 (22) 9,444 *
Augie LaTorre (10) 27,233 (23) 5,850 (24) 21,383 *
Stephen McBryde 23,936 3,046 (16) 20,890 *
Timothy Shelton 23,936 3,046 (16) 20,890 *
William Bell 55,743 3,594 (16) 52,149 *
</TABLE>
22
<PAGE>
David Turner 18,643 2,882 (16) 15,761 *
Robert Gladstone 12,500 (25) 12,500 (25) 0 0
David Nussbaum 12,500 (25) 12,500 (25) 0 0
Roseland II L.L.C. 15,000 (26) 15,000 (26) 0 0
Silicon Valley Bank 75,000 (27) 75,000 (27) 0 0
_______________________
* Less than one percent of the common stock outstanding.
(1) Unless otherwise indicated in this section of the prospectus, the
selling shareholders have sole voting power and investment power with
respect to all shares listed as owned by the selling shareholders.
Under our amended Certificate of Incorporation and under the terms of
the warrants, the selling shareholders holding Series D Preferred
Stock, HFTP Investment L.L.C., Fisher Capital Ltd and Wingate Capital
Ltd., may not convert Series D Preferred Stock or exercise the related
warrants, respectively, to the extent the conversion or exercise would
cause their respective beneficial ownership of our common stock (other
than shares deemed beneficially owned through ownership of unconverted
shares of the Series D Preferred Stock or unexercised warrants) to
exceed 4.99% of the outstanding shares of our common stock. The number
of shares in the second column does not reflect this limitation.
(2) Assumes that the selling shareholders sell all of the shares offered in
this offering.
(3) Promethean Investment Group, LLC, a New York limited liability company,
serves as investment advisor to HFTP Investment, L.L.C. and may be
deemed to share beneficial ownership of the shares beneficially owned
by HFTP by reason of shared power to vote and to dispose of the shares
beneficially owned by HFTP. Promethean disclaims beneficial ownership
of the shares beneficially owned by HFTP. Mr. James F. O'Brien, Jr.
indirectly controls Promethean. Mr. O'Brien disclaims beneficial
ownership of the shares beneficially owned by Promethean and HFTP. HFTP
is not a registered broker-dealer. HFTP, however, is under common
control with, and therefore an affiliate of, a registered broker-
dealer.
(4) Includes up to 596,101 shares of common stock issuable upon conversion
of the Series D Preferred Stock at a conversion price of $5.87, 83,685
shares of common stock issuable upon conversion of dividends accrued
through August 28, 2000 and up to 396,319 shares of common stock
issuable upon the exercise of the warrant issued in connection
therewith held of record by HFTP Investment, L.L.C. However, in
accordance with the beneficial ownership limitation described in
footnote 1 above, HFTP Investment, L.L.C. may not convert its Series D
Preferred Stock or exercise the related warrants to the extent that the
result of the conversion or exercise exceeds 957,911 shares of common
stock.
(5) Citadel Limited Partnership is the trading manager of each of Fisher
Capital Ltd. and Wingate Capital Ltd. and consequently has voting
control and investment discretion over securities held by Citadel,
Fisher and Wingate. Kenneth C. Griffin indirectly controls Citadel. The
ownership information for each of Citadel, Fisher and Wingate does not
include ownership information for any of the others. Citadel, Kenneth
C. Griffin and each of Citadel, Fisher and Wingate disclaims ownership
of the shares held by any of the others. Neither Fisher nor Wingate is
a registered broker-dealer. Each of Fisher and Wingate, however, is
under common control with, and therefore an affiliate of, a registered
broker-dealer.
(6) Includes up to 752,139 shares of common stock issuable upon conversion
of the Series D Preferred Stock at a conversion price of $5.87, 105,591
shares of common stock issuable upon conversion of dividends accrued
through August 28, 2000 and up to 500,061 shares of common stock
issuable upon the exercise of the warrant issued in connection
therewith held of record by Fisher Capital Ltd. However, in accordance
with the beneficial ownership limitation described in footnote 1 above,
Fisher Capital Ltd may not convert its Series D Preferred Stock or
exercise the related warrants to the extent that the result of the
conversion or exercise exceeds 957,911 shares of common stock.
23
<PAGE>
(7) Includes up to 404,998 shares of common stock issuable upon conversion
of the Series D Preferred Stock at a conversion price of $5.87, 56,857
shares of common stock issuable upon conversion of dividends accrued
through August 28, 2000 and up to 269,264 shares of common stock
issuable upon the exercise of the warrant issued in connection
therewith held of record by Wingate Capital Ltd.
(8) Shares beneficially owned consist of 2,000,000 shares of common stock
issuable upon the exercise of a TMP warrant (at an exercise price of
$9.00, subject to certain adjustments as stated therein), which expires
May 2, 2003 and is not presently exercisable except under conditions as
set forth in the warrant.
(9) Consists of those shares discussed in footnote 8 above and 1,000,000
shares of common stock issuable upon the exercise of a TMP warrant (at
an exercise price of $6.00, subject to certain adjustments as stated
therein), which expires May 2, 2003 and is currently exercisable.
(10) Under the terms of the prepaid, incentive and placement agent warrants
issued to Zanett and/or its affiliates or designees and except under
certain circumstances, none of the selling shareholders is entitled to
exercise those warrants to the extent that exercise would cause the
selling shareholder to beneficially own more than 4.99% of the total
outstanding common stock of the Company, excluding for purposes of such
determination shares of common stock issuable upon exercise of warrants
which have not been exercised. The number of shares in the second
column does not reflect this limitation.
(11) Shares beneficially owned consist of 1,884,615 shares of common stock
issuable upon the exercise of the Zanett prepaid warrants, based on an
exercise price of $1.04 and 229,290 shares of common stock issuable
upon the exercise of prepaid warrants issued in April, 1998, based on
an exercise price of $0.68. Pursuant to the terms of the prepaid
warrants issued in April, 1998, the selling shareholder has the right
to purchase shares of common stock at an exercise price equal to the
lower of (A) $1.47 and (B) the amount obtained by multiplying 65% by
the average of the 5 lowest closing bid prices for the common stock
during the 20 consecutive trading day period ending on the trading day
immediately preceding the date of determination or exercise.
(12) Shares beneficially owned consist of 76,440 shares of common stock
issuable upon the exercise of the Zanett incentive warrants, which
expire March 22, 2005.
(13) Shares beneficially owned consist of shares of common stock issuable
upon the exercise of the PMG warrant, which expires October 21, 2004.
Currently, the PMG warrant is exercisable for 175,000 shares of common
stock.
(14) Consists of those shares discussed in footnote 13 above and 75,000
shares of common stock issuable upon exercise of the PMG warrant after
October 21, 2000 if the conditions described in the warrant are met.
(15) Includes 8,333 shares of common stock issuable upon the exercise of
employee stock options.
(16) Includes shares of common stock issued in February 2000 pursuant to the
amendment of the Agreement of Merger between one of our subsidiaries
and the shareholders of Automated Business Systems of North Carolina,
Inc. and Kellar Technology Group.
(17) Includes 16,666 shares of common stock issuable upon the exercise of
employee stock options.
(18) Consists of 38,462 shares of common stock issuable upon the exercise of
the Zanett prepaid warrants, based on an exercise price of $1.04, 1,560
shares of common stock issuable upon the exercise of the Zanett
incentive warrants and 12,431 shares of common stock issuable upon the
exercise of the Zanett placement agent warrants.
(19) Shares beneficially owned consist of those discussed in footnote 20
below, 27,483 shares of common stock issuable upon the exercise of
other incentive warrants issued in connection with various private
placements and 16,956 shares of common stock.
(20) Shares to be sold in this offering consist of 12,431 shares of common
stock issuable upon the exercise of the Zanett placement agent
warrants, which expire March 22, 2005.
(21) Shares beneficially owned consist of those discussed in footnote 22
below and 9,444 shares of common stock issuable upon the exercise of
other incentive warrants issued in connection with the private
placement in April 1998.
24
<PAGE>
(22) Shares to be sold in this offering consist of 8,288 shares of common
stock issuable upon the exercise of the Zanett placement agent
warrants, which expire March 22, 2005.
(23) Shares beneficially owned consist of those discussed in footnote 24
below and 21,383 shares of common stock.
(24) Shares to be sold in this offering include 5,850 shares of common stock
issuable upon the exercise of the Zanett placement agent warrants,
which expire March 22, 2005.
(25) Consists of shares of common stock issued to the selling shareholder in
December 1999. These shares were issued upon exercise of certain
restricted warrants which were originally issued in 1996 to certain
Class A preferred shareholders and subsequently transferred to the
selling shareholder.
(26) Consists of 15,000 shares of common stock issuable upon exercise of the
Roseland II L.L.C. warrant at an exercise price of $7.72.
(27) Consists of 75,000 shares of common stock issuable upon exercise of the
Silicon Valley Bank warrant at an exercise price of $6.00.
Material Terms of Series D Preferred Stock and Related Warrants
Securities Purchase Agreement, as amended, for Series D Preferred Stock
General. On March 28, 2000, we entered into a securities purchase
agreement, which was subsequently amended, with certain of the selling
shareholders pursuant to which we sold 10,000 shares of our Series D Preferred
Stock for an aggregate purchase price of $10,000,000. In addition, as further
consideration for this purchase, we entered into warrant agreements with the
purchasers of our Series D Preferred Stock pursuant to which we issued warrants
to purchase up to an aggregate of 1,165,644 shares of our common stock. These
warrants are exercisable for a period of three years. The net proceeds of the
offering, after expenses, were approximately $9.5 million.
The rights of the holders of our Series D Preferred Stock are set forth
in our amended Certificate of Incorporation and are summarized under
"Description of Securities--Series D Preferred Stock."
Call Option. The securities purchase agreement, as amended, provides
the holders of our Series D Preferred Stock with a call option to purchase an
aggregate of 5,000 additional shares of the Series D Preferred Stock and related
warrants at an aggregate purchase price of $5,000,000 if we do not obtain
additional financing on the terms described below. This call option will be
triggered if:
. on or prior to October 31, 2000, we have not publicly disclosed,
either through a press release or a Form 8-K, that our
subsidiaries have completed a sale of common stock or equity
securities convertible into common stock which resulted in net
proceeds to the subsidiaries of at least $7,000,000 and which
does not include or involve the exercise, conversion or exchange
of any securities or rights outstanding on April 30, 2000 and is
not pursuant to any agreement that we entered into prior to April
30, 2000;
. on or prior to October 31, 2000, we have not publicly disclosed,
either through a press release or a Form 8-K, that we or our
subsidiaries have received net proceeds of at least $5,000,000
from a sale of common stock or equity securities convertible into
common stock which does not involve the exercise, conversion or
exchange of any securities or rights outstanding on April 30,
2000 and is not pursuant to any agreement that we entered into
prior to April 30, 2000, so long as the subsidiaries make
payments to us of at least $5,000,000 on or before October 31,
2000 if the sale of equity securities is completed by them; or
. at any time after the earlier of the date that we filed our Form
10-Q for the three months ended June 30, 2000 or August 14, 2000,
the new credit facility that we obtain with a bank providing
immediately available funds of at least $5,000,000 on
commercially reasonable terms is no longer effective and
available unless a new credit facility providing immediately
available funds of at least
25
<PAGE>
$5,000,000 and on terms that are no less favorable to us is effective
and available.
This call option survives for a term of two years after the date on
which it is triggered under the terms of the securities purchase agreement. The
Series D Preferred Stock purchased in connection with the exercise of the call
option will have the same rights and preferences as the Series D Preferred Stock
currently outstanding, except that the maturity date will be two years after the
issuance of the shares and the applicable conversion price will be 120% of the
average of the dollar volume-weighted average prices of the common stock for the
15 consecutive trading days beginning on and including the first trading day
after the date the holder becomes entitled to exercise the call option.
In addition, any holder that exercises this call option to purchase
additional shares of Series D Preferred Stock will also receive, for each share
of Series D Preferred Stock purchased, warrants to purchase shares of common
stock equal to:
. $570, divided by
. the average of the dollar volume-weighted average prices of the
common stock for the 15 consecutive trading days beginning on and
including the first trading day after the date the holder becomes
entitled to exercise the call option.
These warrants will be exercisable for common stock at an exercise price of
120% of the average of the dollar volume-weighted average prices of the common
stock for the 15 consecutive trading days beginning on and including the first
trading day after the date the call option is triggered and will be exercisable
for a period of three years.
Warrant Agreements
In connection with the sale of the Series D Preferred Stock, we entered
into warrant agreements with the purchasers of the Series D Preferred Stock
pursuant to which we issued warrants to purchase up to 1,165,644 shares of our
common stock. The exercise price of these warrants is $5.87 per share, which
represents 120% of the dollar volume-weighted average price for our common stock
on the Nasdaq SmallCap Market for the 30 consecutive trading days beginning on
and including April 3, 2000. These warrants expire on March 29, 2003.
If we issue common stock or securities that can be exchanged or converted
into common stock at a price less than the exercise price then in effect for the
warrants, then the exercise price will be reduced to the purchase price per
share of the additional common stock or securities issued, subject to certain
exceptions. Additionally, if we declare or make any dividend or other
distribution of our assets to the holders of our common stock, then the exercise
price of the warrants will be reduced to the price determined by multiplying the
exercise price by a fraction that is calculated based on the value of the
distribution and the market price of our common stock. Also, the exercise price
of these warrants could be reduced to an amount equal to 120% of the market
price of our common stock on the date that is one year after the date we issued
the warrants if this amount is less than the exercise price in effect
immediately prior to that date.
Limitation on Conversion of Series D Preferred Stock and Exercise of Warrants
No holder of shares of the Series D Preferred Stock may convert its shares
if the conversion would make the holder the beneficial owner of more than 4.99%
of our then outstanding common stock excluding for purposes of this
determination shares of common stock issuable upon conversion of Series D
Preferred Stock which have not been converted and upon exercise of warrants
which have not been exercised.
Registration Rights Agreement
We have entered into a registration rights agreement with the holders of
the Series D Preferred Stock pursuant to which we agreed to prepare and file a
registration statement within 120 days of the closing of the sale
26
<PAGE>
of the Series D Preferred Stock. The registration statement must register for
resale at least 175% of the number of shares of common stock issuable upon
conversion and/or exercise of the Series D Preferred Stock and warrants. Subject
to the terms of the registration rights agreement, we will pay all reasonable
expenses, other than underwriting discounts and commissions, incurred in
connection with the registration, filing or qualification of the common stock
underlying the Series D Preferred Stock and warrants, including listing,
accounting, printing and attorney's fees.
The registration rights agreement also requires us to prepare additional
registration statements covering the resale of the common stock issuable upon
conversion and/or exercise of the additional Series D Preferred Stock and
related warrants that are purchased in connection with the call option included
in the securities purchase agreement, as amended. We must file these additional
registration statements within 30 days after the applicable closing relating to
the purchase of additional Series D Preferred Stock and related warrants. Each
additional registration statement prepared in connection with the purchase of
the additional shares and warrants must register for resale at least 175% of the
number of shares of common stock issuable upon conversion and/or exercise of the
additional Series D. Preferred Stock and related warrants. We must use our best
efforts to cause such additional registration statement(s) to be declared
effective by the SEC no later than 120 days after the applicable closing of the
purchase of such additional shares and warrants. If we do not file these
registration statements, or the SEC does not declare them effective, within the
applicable time periods described in the registration rights agreement, we will
have to pay a cash penalty to the holders of the Series D Preferred Stock and
warrants, and the holders could require us to redeem the Series D Preferred
Stock and could convert the warrants into shares of common stock in a cashless
exercise pursuant to a formula described in the warrant agreements.
Placement Agent
The placement agent for the sale of the Series D Preferred Stock was J.C.
Bradford & Co., LLC. Under the terms of the placement agreement, J.C. Bradford
acted as our exclusive agent in connection with the financing transaction,
contacted and solicited interest from investors who purchased Series D Preferred
Stock and assisted in the negotiation of the structure of the transaction. J.C.
Bradford received a placement fee equal to 5% of the funds raised, or $500,000.
Material Terms of Warrants Issued to Zanett
Prepaid Warrants
In connection with a recent private placement, we issued to Zanett
Lombardier Ltd. and/or its affiliates or designees prepaid common stock purchase
warrants to purchase an aggregate number of shares of common stock equal to
$1,500,000 divided by the lower of
. $10, or
. the amount obtained by multiplying the average of the 5 lowest closing
bid prices for the common stock during the 20 consecutive trading day
period ending on the trading day immediately preceding the date of
determination or exercise by 1, 0.85, 0.75 or 0.65, depending on how
long the warrants have been outstanding.
These prepaid warrants are exercisable at any time. No holder of the
prepaid warrants may exercise the warrants if exercise would result in the
holder becoming the beneficial owner of more than 4.99% of our then outstanding
common stock. We are not obligated to issue any shares of common stock upon
exercise of any prepaid warrants if as a result of exercise, the aggregate
number of shares of common stock issued upon exercise of the prepaid warrants
would equal or exceed 20% of the amount of our common stock outstanding on the
date the prepaid warrants were exercised.
There are some events of default under the prepaid warrants, including:
27
<PAGE>
. our failure to deliver shares of common stock upon a proper request to
exercise the warrants under the terms of the prepaid warrant
agreements,
. our failure to file and have declared effective registration
statements covering the resale of the common stock issued on exercise
of the prepaid warrants required under a registration rights agreement
we have entered into with the holders of the prepaid warrants,
. the sale of substantially all of our assets, or
. the consummation of certain other transactions resulting in a change
in control of Netplex.
We will be required to pay cash penalties to the holders of the prepaid
warrants if an event of default occurs.
Additionally, the exercise price of the prepaid warrants will be adjusted
upon the occurrence of certain events, including:
. stock splits,
. payment of stock dividends or other distributions to the holders of
our common stock, and
. the issuance of securities that are convertible or exchangeable into
our common stock at a conversion or exchange rate that is based on a
discount of the market price of our common stock at the time of
conversion or exercise.
If the market value of our common stock decreases and the warrants remain
outstanding until October 19, 2000, the number of shares of common stock to be
issued upon exercise of these prepaid warrants could increase significantly and
result in significant dilution in your ownership interest.
The exercise of these prepaid warrants on the basis of the average of the 5
lowest closing bid prices for the common stock during the 20 consecutive trading
day period ending on August 28, 2000 would have resulted in the issuance of
1,923,077 shares of common stock, based on the average of the 5 lowest closing
bid prices for the common stock during the 20 consecutive trading day period
ending on that date, or $1.04 per share. If the warrants are exercised after
October 19, 2000 and the average of the 5 lowest closing bid prices for the
common stock during the 20 consecutive trading day period is decreased by:
. 25%, then the exercise of the outstanding prepaid warrants would
result in the issuance of 2,958,580 shares of common stock;
. 50%, then the exercise of the outstanding prepaid warrants would
result in the issuance of 4,437,869 shares of common stock; and
. 75%, then the exercise of the outstanding prepaid warrants would
result in the issuance of 8,875,740 shares of common stock.
Incentive and Placement Agent Warrants
We also issued to Zanett Lombardier Ltd. and/or its affiliates or designees
incentive warrants to purchase up to 78,000 shares of our common stock in
connection with the issuance of the prepaid warrants and placement agent
warrants to The Zanett Securities Corporation to purchase up to 39,000 shares of
our common stock in consideration for its services as the placement agent in the
private placement. The incentive and placement agent warrants are exercisable
for a period of five years after their issuance at an exercise price of $13.875
per share
28
<PAGE>
and $10.00 per share, respectively.
The exercise price of the incentive and placement agent warrants will be
adjusted upon the occurrence of certain events, including:
. stock splits,
. payment of stock dividends or other distributions to the holders of
our common stock, and
. the issuance of securities that are convertible or exchangeable into
our common stock at a conversion or exchange rate that is based on a
discount of the market price of our common stock at the time of
conversion or exercise.
Under the terms of our placement agency agreement with Zanett Securities
Corporation, we paid Zanett approximately $182,000 as a placement fee, as well
as the placement agent warrants, for assisting us, on a best efforts basis, in
finding qualified investors to participate in the private placement.
Registration Rights Agreement
We have entered into a registration rights agreement with the holders of
the prepaid, incentive and placement agent warrants pursuant to which we agreed
to prepare and file a registration statement. The registration statement must
register for resale at least 200% of the number of shares of common stock
issuable upon exercise of the prepaid warrants and at least 100% of the number
of shares of common stock issuable upon exercise of the incentive and placement
agent warrants. Subject to the terms of the registration rights agreement, we
will pay all reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with the registration, filing or
qualification of the common stock underlying the warrants, including listing,
accounting, printing and attorney's fees.
If we do not file these registration statements, or the SEC does not
declare them effective, within 105 days of the closing of the sale of the
prepaid, incentive and placement agent warrants, we will have to pay a cash
penalty to the holders of the prepaid, incentive and placement agent warrants.
Dilution Upon Certain Decreases in Our Stock Price
The following table illustrates the effect that a 25%, 50% and 75% decline
in the price of our common stock, as determined on August 28, 2000, would have
on the number of shares of common stock issuable upon conversion of our
outstanding Class C Preferred Stock and the Series D Preferred Stock and upon
exercise of the outstanding warrants issued to holders of the Series D Preferred
Stock and the prepaid common stock purchase warrants being registered in
connection with this prospectus.
The numbers in this table are not intended to constitute a prediction
as to the number of shares of common stock into which the outstanding Class C
Preferred Stock and Series D Preferred Stock may be converted and into which the
outstanding Series D Preferred Stock and prepaid warrants may be exercised. The
number of shares of common stock to be issued upon the conversion of the Class C
Preferred Stock and Series D Preferred Stock and the exercise of the Series D
Preferred Stock and prepaid warrants is dependent on a number of variables that
are different for each security and that we cannot know at this time, including
the future price of our common stock, the time at which the preferred stock or
warrants are converted or exercised, and our failure to take certain actions in
the future. As a result, rather than a prediction, the numbers in the table
below are intended solely to illustrate the impact that decreases in the market
value of our common stock may have on the number of shares of common stock to be
issued upon the conversion of the Class C Preferred Stock and Series D Preferred
Stock and the exercise of the Series D Preferred Stock and prepaid warrants,
assuming that all other factors remain constant.
29
<PAGE>
<TABLE>
-------------------------------------------------------------------------------------------------------------------------
Shares of Shares of Shares of Shares of
Common Stock Common Stock Common Stock Common Stock
Issuable on Issuable on Issuable on Issuable on
Conversion of Conversion of Exercise of Exercise of
Class C Series D Series D Warrants Prepaid Warrants
Preferred Stock Preferred Stock Total
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Price determined as
of August 28, 2000 7,731,092 1,753,238 4,352,627 1,923,077 15,760,034
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
25% decline in the
price determined as 10,308,123 2,337,650 5,803,503 2,564,103 21,013,379
of August 28, 2000
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
50% decline in the
price determined as 15,462,185 3,506,476 8,705,254 3,846,154 31,520,069
of August 28, 2000
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
75% decline in the
price determined as 30,924,370 7,012,952 17,410,509 7,692,308 63,040,139
of August 28, 2000
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
In addition to the factors identified above, this table is subject to the
following:
. As noted elsewhere in this prospectus, the Class C Preferred Stock is
convertible after September 28, 2003 into the number of shares equal
to $2,300,000 plus accrued but unpaid dividends, divided by 25% of the
20 day average trading price of our common stock immediately prior to
conversion. The table assumes that the conversion of the outstanding
Class C Preferred Stock could occur on August 28, 2000. The 20 day
average trading price of our common stock immediately prior to August
28, 2000 was $1.19 per share. Declines of 25%, 50% and 75% in this
price would result in 20 day average trading prices of $0.89, $0.60
and $0.30 per share, respectively. You should note that no selling
shareholder holds any Class C Preferred Stock. See "Description of
Securities -Preferred Stock - Class C Preferred Stock."
. The conversion price of the Series D Preferred Stock is fixed at
$5.87. However, if we were to take certain actions, the conversion
price could decrease if there was a corresponding decrease in the
market price of our common stock. The numbers in the table reflect
decreases of 25%, 50% and 75% in the conversion price of $5.87 as of
August 28, 2000 to $4.40, $2.94 and $1.47, respectively. For purposes
of illustrating the impact that a decrease in the price of our common
stock could have on the conversion price, we have assumed that all
factors other than the conversion price, including any additional
amount based on a 7% return on the amount paid for the Series D
Preferred Stock, are the same. You should note that the table does not
account for any shares of common stock that we may issue in
satisfaction of dividends payable on the Series D Preferred
Stock.
. The warrants that we issued in connection with the issuance of the
Series D Preferred Stock have an exercise price of $5.87. However, the
exercise price could be reduced to an amount equal to 120% of the
market price of our common stock on March 29, 2001 if this amount is
less than the exercise price in effect immediately prior to that date.
Upon this reduction in exercise price, the number of shares of common
stock we must issue upon exercise of the warrants will increase. The
closing price of our common stock on August 28, 2000 was $1.31. If as
of March 29, 2001, the price of our common stock remains at $1.31 per
share, the exercise of these warrants would result in the issuance of
4,352,627 shares of common stock. The foregoing table reflects
decreases of 25%, 50% and 75% of the reduced exercise price based upon
the price of our common stock as of August 28, 2000, resulting in
adjusted exercise prices of $0.98, $0.66 and $0.33 per share,
respectively.
. We issued to Zanett Lombardier Ltd. and/or its affiliates or designees
prepaid common stock purchase warrants to purchase an aggregate number
of shares of common stock equal to $1,500,000 divided by the lower of
(A) $10 or (B) the amount . obtained by multiplying the average of
the 5 lowest closing bid prices for the common stock during the 20
consecutive trading day period ending on the trading day immediately
preceding the date of determination or exercise by 0.75, which number
is subject to reduction at certain times in the future. The average of
the 5 lowest closing bid prices for the common stock during the 20
consecutive trading day period ending on August 28, 2000 was $1.04 per
share. Decreases of 25%, 50% and 75% in this average price would
result in average prices of $0.78, $0.52 and $0.26 per share,
respectively.
Material Terms of Warrants Issued to TMP
Co-branded Services Agreement
31
<PAGE>
We have issued warrants to purchase up to 3,000,000 shares of common
stock to TMP Interactive, Inc. in connection with a co-branded services
arrangement one of our subsidiaries and TMP Interactive, Inc. entered into in
May 2000. Under the terms of this two-year arrangement with TMP Interactive,
Inc., the parent of TMP Worldwide, Inc., whose global online career site and
flagship brand is Monster.com, Contractors Resources MyBizOffice service is now
a co-branded component of the Monster Talent Market, an online auction-style
marketplace for independent professionals. For additional information regarding
MyBizOffice, see "Business." Contractors Resources will create and host a co-
branded website which may be accessed from the Monster Talent Market and
Monster.com. As a result of this co-branded website, MyBizOffice will be
positioned within the Monster Talent Market as the primary provider of e-office
services and the Monster Talent Market will be positioned within mybizoffice.com
as the primary provider of online career information, project search tools,
resume and profile building and search tools, and project listing and resume
data for contract talent. We agreed to guarantee Contractors Resources'
obligations under the agreement. However, this guarantee obligation, as well as
any other of our obligations under the agreement, terminate upon the initial
public offering of the Contractors Resources' securities.
Warrant Agreements
The warrants we issued to TMP Interactive, Inc. in connection with the co-
branded services arrangement are exercisable for a period of three years after
the date they were issued. The exercise price for the warrants to purchase up to
2,000,000 shares of common stock is $9.00 per share. The exercise price for the
remaining warrants to purchase up to 1,000,000 shares of common stock is $6.00
per share.
The exercise price of these warrants will be adjusted upon the occurrence
of certain events, including stock splits, payment of stock dividends or other
distributions to the holders of our common stock, and the reclassification of
our common stock or recapitalization.
The warrants that we issued to TMP Interactive provide the holders with the
right to have the shares of common stock issuable upon exercise of the warrants
included in certain registration statements we file. Also, the holders of 25% or
more of the warrants may request on one occasion that we file a registration
statement covering the shares of common stock issuable upon the exercise of
their warrants. In lieu of effecting these registrations, we may purchase the
securities that are requested to be registered at a price per share equal to the
difference between 95% of the last sales price of the common stock on the day
the request for registration is made and the exercise price then in effect.
Subject to the terms of the warrant, we will pay all reasonable expenses, other
than underwriting discounts and commissions, incurred in connection with the
registration, filing or qualification of the common stock underlying the
warrants, including listing, accounting, printing and attorney's fees.
Material Terms of Warrants Issued to Pennsylvania Merchant Group
The common stock offered by this prospectus also includes 250,000 shares of
common stock issuable upon the exercise of the warrant issued to Pennsylvania
Merchant Group ("PMG") in connection with an investment banking arrangement we
have with it. Under the terms of a letter agreement with PMG, PMG will provide
us with:
. strategic and financial advisory services, including planning
strategy, analyzing various financial data and markets, advising
us on potential strategic alliances and capital requirements, and
assisting our management team on ways to enhance corporate and
shareholder value;
. banking services, including advising us on the timing and
structure of any proposed financing transactions or capital
raising alternatives, including public and private issues or
equity or debt; and
. merger and acquisition services, including advising and assisting
us in determining one or more acquisition or strategic partnering
strategies and tactics and in identifying, evaluating,
negotiating,
32
<PAGE>
and structuring proposed acquisitions of, investments by, or
strategic partnerships with, related companies with complementary
businesses and/or technology.
In addition to the warrants, the one-year arrangement, which is subject to
optional renewal in our sole discretion, requires us to pay PMG a monthly
retainer of $5,000 and issue the warrant for 250,000 shares of our common stock,
at an exercise price of $3.00 per share. Of the 250,000 shares subject to this
warrant, 175,000 vested as of October 21, 1999 and the remaining 75,000 vest
after one year, if we extend the arrangement. The terms of the warrant require
that, upon PMG's request, we register the shares underlying the warrant with any
subsequent registration statement we file during the period the warrant is
exercisable for our common stock. We have agreed to register for resale all
shares of common stock underlying the warrant with this prospectus in accordance
with the registration rights granted to PMG.
Material Terms of Warrant Issued to Roseland II L.L.C.
The warrant exercisable for up to 15,000 shares of common stock that we
issued to Roseland II L.L.C. in connection with our leasing arrangements is
exercisable for a period of five years after the date the warrant was issued.
The exercise price for the warrant is $7.72 per share. The exercise price of
this warrant will be adjusted upon the occurrence of certain events, including
stock splits, payment of stock dividends or other distributions to the holders
of our common stock, and the reclassification of our common stock or
recapitalization. The warrant provides Roseland II L.L.C. with the right to have
the shares of common stock issuable upon exercise of the warrants included in
certain registration statements we file.
Material Terms of Warrant issued to Silicon Valley Bank
The warrant exercisable for up to 75,000 shares of common stock that we
issued to Silicon Valley Bank in connection with our line of credit is
exercisable for a period of five years after the date it was issued. The
exercise price for the warrant is $6.00 per share. The exercise price of this
warrant will be adjusted upon the occurrence of certain events, including stock
splits, payment of stock dividends or other distributions to the holders of our
common stock, and the reclassification of our common stock or recapitalization.
A registration rights agreement we entered into in connection with the warrant
provides Silicon Valley Bank with the right to have the shares of common stock
issuable upon exercise of the warrant included in certain registration
statements we file. Subject to the terms of the registration rights agreement,
we will pay all reasonable expenses, other than underwriting fees, discounts and
commissions, incurred in connection with the registration, filing or
qualification of the common stock underlying the warrants, including listing,
accounting, printing and attorney's fees. An antidilution agreement we entered
into in connection with the warrant provides that, subject to certain
exceptions, if we issue common stock or securities that can be exchanged or
converted into common stock at a price less than the exercise price then in
effect for the warrants after the date of the warrant, then the number of shares
issuable upon the exercise of the warrant shall be increased proportionally
based upon the amount by which the lower price is less than the current exercise
price of the warrant.
PLAN OF DISTRIBUTION
The selling shareholders, or their pledgees, donees, distributees,
transferees or other successors, if any, may sell or distribute some or all of
the shares of common stock offered under this prospectus from time to time
through underwriters, dealers, brokers or other agents or directly to one or
more purchasers in one or more, or a combination, of the following types of
transactions:
. ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
. transactions involving cross and block trades or otherwise on the
Nasdaq SmallCap Market;
. purchases by a broker, dealer or underwriter as principal and resale
by that person for its own account under this prospectus;
. "at the market" or through market makers or into an existing market
for the common stock;
33
<PAGE>
. sales to purchasers or sales effected through agents or in other ways
not including market makers or established trading markets;
. transactions involving cross trades or otherwise on the Nasdaq
SmallCap Market;
. short sales and other types of hedging transactions;
. in privately negotiated transactions; or
. by any other legally available means.
The selling shareholders may sell their shares at market prices prevailing
at the time of sale, at prices related to the prevailing market prices, at
negotiated prices, or at fixed prices, which may be changed. Brokers, dealers,
agents or underwriters participating in these transactions as agent may receive
compensation in the form of discounts: concessions or commissions from the
selling shareholders and, if they act as agent for the purchaser of the shares,
from the purchaser. The discounts, concessions or commissions received by a
particular broker, dealer, agent or underwriter might be in excess of those
customary in the type of transaction involved. The selling shareholders also may
sell shares short and deliver the shares to close out such short positions,
provided that the short sale is made after the registration statement has been
declared effective and a copy of this prospectus is delivered in connection with
the short sale. This prospectus also may be used by donees of the selling
shareholders or by other persons acquiring shares of the common stock from the
selling shareholders who wish to offer and sell the shares under circumstances
requiring the use of the prospectus. If required, we will file, during any
period in which the offers or sales are being made, one or more supplements to
this prospectus to disclose the names of any donees of the selling shareholders,
the names of any other persons acquiring shares of the common stock from the
selling shareholders, and any other material information with respect to the
plan of distribution not previously disclosed.
The selling shareholders and any underwriters, brokers, dealers or agents
that participate in the distribution of common stock may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
commissions or concessions received by any of these underwriters, brokers,
dealers or agents might be deemed to be underwriting discounts and commissions
under the Securities Act. Neither we nor the selling shareholders can presently
estimate the amount of compensation that may be received by the underwriters,
brokers, dealers or agents. We do not know of any existing arrangements between
the selling shareholders and any underwriter, broker, dealer or other relating
to the sale or distribution of the shares of common stock. Further, each selling
shareholder which is affiliated with a broker-dealer has advised us that it
purchased our securities in the ordinary course of its business and, at the time
each selling shareholder purchased our securities, it was not a party to any
agreement or other understanding to distribute the securities, directly or
indirectly.
Under applicable rules and regulations under the Securities Exchange Act of
1934, as amended, any person engaged in a distribution of any of the shares of
common stock may not simultaneously engage in market activities with respect to
the common stock for a period of up to five business days prior to the
commencement of the distribution. The selling shareholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations enacted
under the Exchange Act, including, if applicable, Rule 10b-5 and Regulation M.
The Company has advised the selling shareholders that during such time as they
may be engaged in a distribution of the shares included herein they are required
to comply with Regulation M promulgated under the Exchange Act. With certain
exceptions, Regulation M precludes any selling shareholders, any affiliated
purchases and any broker-dealer or other person who participates in such
distribution from bidding for or purchasing, or attempting to induce any person
to bid for or purchase any security which is the subject of the distribution
until the entire distribution is complete. Regulation M also prohibits any bids
or purchases made in order to stabilize the price of a security in connection
with the distribution of that security. These provisions, if applicable, may
limit the timing of purchases and sales of any of the shares of common stock by
the selling shareholders. All of the foregoing may affect the marketability of
the common stock.
We will pay all of the costs and expenses for the registration of the
shares of common stock by the selling shareholders under this prospectus. In
addition, we have agreed to indemnify the selling shareholders, the
34
<PAGE>
directors and officers of the selling shareholders, each underwriter of the
shares of common stock to be registered under this prospectus, and each person
who controls any selling shareholder or underwriter of the shares of common
stock to be registered under this prospectus against liabilities concerning
untrue statements or omissions that we make or violations of the securities laws
that we commit with respect to the registration of the shares of common stock,
including liabilities under the Securities Act. The selling shareholders have
agreed to indemnify us against certain liabilities concerning untrue statements
or omissions that they make with respect to the registration of the shares of
common stock, including liabilities under the Securities Act.
If shares of the common stock are sold in an underwritten offering, those
shares may be acquired by the underwriters for their own account and may be
further resold from time to time in one or more transactions, including
negotiated transactions. These transactions may be made in the following manner:
. at market prices prevailing at the time of sale;
. at prices related to the prevailing market prices;
. at negotiated prices; or
. at fixed prices.
The names of the underwriters with respect to an offering of the shares of
common stock and the terms of the transactions, including any underwriting
discounts, concessions or commissions and other items constituting compensation
of the underwriters and broker-dealers, if any, will be set forth in a
supplement to this prospectus relating to the offering. Any public offering
price and any discounts, concessions or commissions allowed or reallowed or paid
to broker-dealers may be changed from time to time.
35
<PAGE>
SELECTED FINANCIAL DATA
We present below selected consolidated financial data for our company. The
summary historical data set forth below for the years ended December 31, 1999,
1998 and 1997 have been derived from our audited financial statements that are
included elsewhere in this prospectus. The summary historical data set forth
below for the years ended December 31, 1996 and 1995 have been derived from our
audited financial statements that are not included in this prospectus. Grant
Thornton, LLP audited our financial statements for the year ended December 31,
1999. KPMG LLP audited our financial statements for the years ended December 31,
1998, 1997, 1996 and 1995. See "Changes in Accountants." The unaudited summary
historical data for the six months ended June 30, 2000 and 1999 have been
derived from our unaudited financial statements included elsewhere in this
prospectus. The following selected consolidated financial data should be read in
conjunction with our financial statements and the notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months ended
Year ended December 31 June 30
(Unaudited)
1999 1998 1997 1996 1995 2000 1999
------------ ------------ ------------ ------------ ---------------------------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 87,785 $ 61,279 $ 40,468 $ 33,525 $ 26,782 $41,446 $44,453
Cost of revenues 70,869 51,284 36,085 31,314 24,051 34,429 35,340
--------- --------- --------- -------- ---------- ------- -------
Gross profit 16,916 9,995 4,383 2,211 2,731 7,017 9,113
Expenses:
Selling, general and
administrative 24,039 11,980 7,230 4,770 2,928 14,866 8,664
Restructuring costs - 160 - - - - -
Acquired in-process technology - 250 - - - - -
--------- --------- --------- -------- ---------- -------- -------
Operating income/(loss) (7,123) (2,395) (2,847) (2,559) (197) (7,849) 450
Interest expense and other income,
net (384) (154) (26) 38 28 (37) (200)
--------- --------- --------- -------- ---------- ------- -------
Income (loss) from continuing
operations before income taxes (7,507) (2,549) (2,873) (2,521) (169) (7,886) 250
Income tax (benefit) provision - - - (34) (4) - -
--------- --------- --------- -------- ---------- ------- -------
Income (loss) from continuing
operations (7,507) (2,549) (2,873) (2,487) (165) (7,886) 250
Discontinued operations:
Loss from operations of
discontinued business - - - (1,332) - - -
Net gain from disposal - - - 1,820 - - -
--------- --------- --------- -------- ---------- ------- -------
Income from discontinued operations - - - 488 - - -
Loss before minority interest (7,507) (2,549) (2,873) (1,999) (165) (7,886) 250
Minority interest (83) - - - - 252 -
--------- --------- --------- -------- ---------- ------- -------
Net Income (loss) $ (7,424) $ (2,549) $ (2,873) $ (1,999) $ (165) $(7,634) $ 250
========= ========= ========= ======== ========== ======= =======
Basic and diluted earnings (loss)
per common share
Continuing operations $ (0.63) $ (0.31) $ (0.46) $ (0.51) $ (0.05) $ (0.46) 0
Discontinued operations - - - 0.09 - -
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
--------- -------- --------- -------- -------- ------- --------
Total $ (0.63) $ (0.31) $ (0.46) $ (0.42) $ (0.05) $ (0.46) 0
========= ======== ========= ======== ======== ======= ========
Weighted average common shares
outstanding, basic and
diluted 12,516 $ 9,260 6,821 5,026 3,246 17,653 11,195
========= ======== ========= ======== ======== ======= ========
Total assets $ 26,417 $ 20,651 $ 6,912 $ 9,889 $ 7,799 $26,447 $ 23,662
========= ======== ========= ======== ======== ======= ========
Temporary Equity 10,800
Stockholders' equity $ 6,862 $ 6,355 $ 1,331 $ 3,239 $ 409 1,537 $ 7,698
========= ======== ========= ======== ======== ======= ========
</TABLE>
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and the related notes. This discussion contains forward-looking
statements based upon current expectations that involve risks and uncertainties,
including our plans, objectives, expectations and intentions. Our actual results
and the timing of certain events could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors," "Business" and elsewhere in this
prospectus. See "Forward-Looking Statements."
Overview
Together with our subsidiaries, we are an Internet services and electronic
business, or "e-business," solutions provider. Our operations have been
concentrated on providing information technology services and solutions to U.S.-
based commercial organizations since the beginning of 1994. We are based in
Reston, Virginia and have 11 other offices, including nine offices throughout
the eastern United States and three offices elsewhere.
Since 1997, we have made several acquisitions in order to improve our
service offerings and broaden our geographic scope and customer base.
. In July 1997, we acquired all membership interests of Onion Peel
Solutions, L.L.C. to broaden our customer base and expand the
fulfillment capacity of our Enterprise Systems Management service
offerings.
. In January 1998, we acquired all of the outstanding stock of The PSS
Group, Inc. to expand our marketing and recruiting organization in the
Washington, D.C. metropolitan area and to broaden our customer base.
. In June 1998, we acquired Automated Business Systems, which expanded
the geographic reach of our business to the Charlotte, North Carolina,
Spartanburg, South Carolina, and Atlanta, Georgia markets and
broadened our customer base.
. In September 1998, we acquired certain assets of the Applied
Intelligence Group, which forms our e-Information Services Group,
thereby adding information technology consulting expertise in the
retail and distribution industry and expanding our geographic reach
into the southwest.
. In April 1999, we purchased the assets of Dean Liles & Associates,
Inc., an information technology strategy consulting practice based in
Dallas, Texas and expanded our presence in the southwest.
The results of operations for The PSS Group, Automated Business Systems,
Applied Intelligence Group, and Dean Liles & Associates are included in the
statements of operations for the years ended December 31, 1998 and 1999
beginning on the effective date of their acquisitions: January 1, 1998; June 30,
1998; September 1, 1998; and April 1, 1999, respectively.
38
<PAGE>
In 1999, we restructured our segments by combining all operations not
related to Contractors Resources into a single profit and loss center, e-
Infrastructure Services, except for our operations related to the acquisition of
Applied Intelligence Group, which now form the e-Information Services segment.
We also changed our components of cost of services to include all labor related
to direct labor employees and their attendant fringe benefits. Prior to 1999,
non-billable direct labor related to idle time, training and other activities
was included in operating expense. These changes were made to permit a more
direct reflection upon gross profits of the impact of increasing or decreasing
labor utilization. All prior year's cost of services and operating expenses have
been restated to reflect these changes.
Results of Operations
Six Months Ended June 30, 2000 and 1999
The following table sets forth the revenue, gross profit, expenses, and
income of each of the business areas for the six months ended June 30, 2000 and
1999:
Consolidated Operating Results by Segment (amounts in thousands (except for
percentages))
<TABLE>
<CAPTION>
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Operating revenues
e-Information Services $ 5,322 $ 5,067
----------- -----------
e-Infrastructure Services 8,835 10,917
e-Infrastructure Product Resales 6,631 9,627
----------- -----------
e-Infrastructure 15,466 20,544
----------- -----------
e-Business Solutions 20,788 25,611
Contractors Resources 20,660 18,842
----------- -----------
Operating revenues 41,448 44,453
----------- -----------
Gross profit
e-Information Services 2,275 2,607
----------- -----------
e-Infrastructure Services 1,876 3,595
e-Infrastructure Product Resales 2,092 2,255
----------- -----------
e-Infrastructure 3,968 5,850
----------- -----------
e-Business Solutions 6,243 8,457
Contractors Resources 775 656
----------- -----------
Gross profit 7,018 9,113
----------- -----------
Gross profit percentage
e-Information Services 42.7% 23.9%
----------- -----------
e-Infrastructure Services 21.2% 32.9%
e-Infrastructure Product Resales 31.5% 23.4%
----------- -----------
e-Infrastructure 25.6% 28.4%
----------- -----------
e-Business Solutions 30.0% 33.0%
Contractors Resources 3.7% 3.5%
----------- -----------
Gross profit percentage 20.5% 20.5%
----------- -----------
Operating Expenses
e-Information Services 2,214 1,401
e-Infrastructure Services and Product Resales 3,925 3,808
----------- -----------
e-Business Solutions 6,139 5,209
Contractors Resources 3,413 540
----------- -----------
Operating expenses 9,552 5,749
----------- -----------
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C>
----------- -----------
Operating income (loss)
e-Information Services 61 1,206
e-Infrastructure Services and Product Resales 43 2,042
----------- -----------
e-Business Solutions 104 3,249
Contractors Resources (2,638) 116
----------- -----------
Operating income (loss) (2,534) 3,364
Corporate Expenses 4,184 1,987
----------- -----------
EBITDA1 (6,718) 1,377
Interest, taxes, depreciation,
amortization and minority interest 916 1,127
----------- -----------
Net operating income (loss) $ (7,634) $ 250
=========== ===========
</TABLE>
----------------------
/1/ See definition of EBITDA in note 18 of the notes to our consolidated
financial statements included elsewhere in this prospectus.
40
<PAGE>
Six months ended June 30, 2000 compared to the six months ended June 30, 1999
Revenue for the six months ended June 30, 2000 declined $3 million or
6.8% to $41.4 million, compared to $44.5 million for the same period in 1999.
This decline includes a $4.8 million or 18.8% decrease in e-Business Solutions
revenue made up primarily of a $2.1 million or 19.1% decrease in e-
Infrastructure Services and a related decrease in e-Infrastructure Product
Resales of $3 million or 31.1%, offset by a $255,000 or 5% increase in e-
Information Services revenue. The decrease in e-Infrastructure Services is due
to a transition of staffing services to Contractors Resources and a decreasing
emphasis on systems integration. This decrease also is reflective of abnormally
high product resales in 1999 coupled with the effect of our planned move of
product resales to third parties to decrease the cost of financing the sales and
to focus our efforts on services offerings. This overall decline in revenue was
offset by a $1.8 million or 9.6% increase in Contractors Resources revenue.
Gross profit for the six months ended June 30, 2000 declined $2.1
million or 23% to $7 million as compared to $9.1 million for the same period of
1999. This decline included an increase in Contractors Resources gross profit of
$119,000 or 18.1% offset by decreases in e-Information Services, e-
Infrastructure Services and e-Infrastructure Product Resales gross profits of
$332,000 or 12.7%, $1.7 million or 47.8% and $163,000 or 7.2%, respectively.
Gross profit margin remained constant at 20.5% for the six months ended
June 30, 2000 compared to the same period in 1999. e-Information Services gross
profit margin increased from 23.9% in 1999 to 42.7% in 2000. e-Infrastructure
gross profit margin decreased from 28.4% in 1999 to 25.6% in 2000. This decline
consisted of a decrease in e-Infrastructure Services gross profit margin from
32.9% in 1999 to 21.2% in 2000, offset by an increase in e-Infrastructure
Product Resales gross profit margin from 23.4% in 1999 to 31.5% in 2000.
Contractors Resources gross profit margin increased from 3.5% in 1999 to 3.7% in
2000.
Segment operating expenses for the six months ended June 30, 2000
increased $3.8 million or 66.2% to $9.6 million from $5.7 million for the same
period of 1999. This increase included increases in e-Information Services, e-
Infrastructure Services and Product Resales, and Contractor's Resources of
$813,000 or 58%, $117,000 or 3.1% and $2.9 million or 532%, respectively.
Segment loss for the six months ended June 30, 2000 was $2.5 million as
compared to segment income of $3.4 million for the same period of 1999, a
decline of $5.9 million. This decline included decreases in segment profits from
e-Information, e-Infrastructure, and Contractors Resources of $1.1 million or
94.9%, $2 million or 97.9%, and $2.8 million or 2,374%, respectively.
Corporate expenses for the six months ended June 30, 2000 increased
$2.2 million or 110.6% to $4.2 million from $2 million in the same period of
1999. This increase reflected an additional investment in corporate development
capability to support the growth of operations and the integration of
acquisitions.
Earnings before interest, income taxes, depreciation and amortization,
or "EBITDA," for the six months ended June 30, 2000 was a loss of $6.7 million
as compared to earnings of $1.4 million for the same period of 1999, a decline
in EBITDA of $8.1 million or 587%. The components of this decline are discussed
above.
Depreciation, amortization, interest expense and minority interest for
the six months ended June 30, 2000 decreased $212,000 to $916,000 from
$1.1 million for the same
41
<PAGE>
period of 1999. This decrease was principally due to decreased amortization
resulting from the write-off of goodwill and intangibles of the PSS Group, Inc.
in 1999.
No provision for income taxes was required for the six months ended
June 30, 2000 due to the generation of net losses. No provision for income taxes
was required for the six months ended June 30, 1999 due to utilization of net
operating loss carryforwards generated in previous years.
Net loss for the six months ended June 30, 2000 was $7.6 million
compared to net income of $250,000 in the same period of 1999, a decrease of
$7.9 million. The components of this decrease are discussed above.
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<PAGE>
Fiscal Years Ended December 31, 1999, 1998 and 1997
The following table sets forth the revenue, gross profit, expenses, and
income of each of the business areas for the years ended December 31, 1999, 1998
and 1997.
Consolidated Operating Results by Segment
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Operating revenues
e-Information Services $ 11,044,166 $ 3,533,025 $ -
------------ ------------ ------------
e-Infrastructure Services 20,437,959 17,459,183 6,346,530
e-Infrastructure Product Resales 17,679,075 5,406,410 2,073,254
------------ ------------ ------------
e-Infrastructure 38,117,034 22,865,593 8,419,784
------------ ------------ ------------
e-Business Solutions 49,161,200 26,398,618 8,419,784
Contractors Resources 38,624,064 34,880,542 32,048,350
------------ ------------ ------------
Operating revenues 87,785,264 61,279,160 40,468,134
------------ ------------ ------------
Gross profit
e-Information Services 5,442,115 1,690,505 -
------------ ------------ ------------
e-Infrastructure Services 5,915,833 5,468,254 2,337,358
e-Infrastructure Product Resales 4,184,097 1,511,650 949,518
------------ ------------ ------------
e-Infrastructure 10,099,930 6,979,904 3,286,876
------------ ------------ ------------
e-Business Solutions 15,542,045 8,670,409 3,286,876
Contractors Resources 1,373,887 1,324,682 1,096,104
------------ ------------ ------------
Gross profit 16,915,932 9,995,091 4,382,980
------------ ------------ ------------
Gross profit percentage
e-Information Services 49.3% 47.8% -
------------ ------------ ------------
e-Infrastructure Services 28.9% 31.3% 36.8%
e-Infrastructure Product Resales 23.7% 28.0% 45.8%
------------ ------------ ------------
e-Infrastructure 26.5% 30.5% 39.0%
------------ ------------ ------------
e-Business Solutions 31.6% 32.8% 39.0%
Contractors Resources 3.6% 3.8% 3.4%
------------ ------------ ------------
Gross profit percentage 19.3% 16.3% 10.8%
------------ ------------ ------------
Operating Expenses
e-Information Services 3,305,752 709,826 -
e-Infrastructure Services and Product Resales 7,784,245 6,715,607 4,116,010
------------ ------------ ------------
e-Business Solutions 11,089,997 7,425,433 4,116,010
Contractors Resources 3,086,904 1,144,143 1,169,120
------------ ------------ ------------
Operating expenses 14,176,901 8,569,576 5,285,130
------------ ------------ ------------
Operating income
e-Information Services 2,136,363 980,679 -
e-Infrastructure Services and Product Resales 2,315,685 264,297 (829,134)
------------ ------------ ------------
e-Business Solutions 4,452,048 1,244,976 (829,134)
Contractors Resources (1,713,017) 180,539 (73,016)
------------ ------------ ------------
Operating income 2,739,031 1,425,515 (902,150)
------------ ------------ ------------
Corporate Expenses 5,530,469 2,736,624 1,480,453
------------ ------------ ------------
EBITDA /1/ (2,791,438) (1,311,109) (2,382,603)
Interest, taxes, depreciation
_______________________________
</TABLE>
/1/ See definitions of EBITDA in note 18 of the notes to our consolidated
financial statements included elsewhere in this prospectus
43
<PAGE>
<TABLE>
<S> <C> <C> <C>
& amortization 4,632,385 1,237,615 491,000
------------ ------------ ------------
Net operating loss $ (7,423,823) $ (2,548,724) $ (2,873,603)
============ ============ ============
</TABLE>
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<PAGE>
Fiscal Year 1999 Compared to Fiscal Year 1998
Revenue for the year ended December 31, 1999, increased $26.5 million
or 43.3% to $87.8 million, compared to $61.3 million for the year ended December
31, 1998. This increase included a $7.5 million or 212.6% increase in e-
Information Services revenue, a $15.3 million or 66.7% increase in e-
Infrastructure Services revenue, and a $3.7 million or 10.7% increase in
Contractors Resources revenue.
The increase in 1999 revenue included $20.5 million of increased
revenue from a full year of operations of Automated Business Systems and Applied
Intelligence Group, which were acquired by the Company effective July 1, 1998,
and September 1, 1998, respectively. Additionally, there was a $6.0 million or
9.7% increase in revenue from businesses owned as of December 31, 1998. The
increase in revenue in 1999 from businesses owned as of December 31, 1998
included increases in e-Infrastructure Services of $4.3 million or 7.1% and $3.7
million or 11.2% in Contractors Resources. The increase in e-Infrastructure
Services was due primarily to increased sales volume in 1999 as compared to the
same period of 1998. The growth in Contractors Resources revenues was due to an
increase in the number of contractor members increasing sales volume.
Gross profit for the year ended December 31, 1999, increased $6.9
million or 69.2% to $16.9 million as compared to $10.0 million for 1998. This
increase included an increased gross profit in e-Information Services of $3.8
million or 221.9%, a $3.1 million or 44.7% increase in e-Infrastructure
Services, and a $49,000 or 3.7% increase in Contractors Resources gross profit.
The increase in gross profit included $5.9 million of increased gross
profit from a full year of operations of Automated Business Systems and Applied
Intelligence Group. Gross profit from businesses owned as of December 31, 1998,
increased $1.0 million. The increase in gross profit for the businesses owned as
of December 31, 1998, included a $1.0 million or 9.9% increase in e-
Infrastructure Services gross profit and a $49,000 increase in Contractors
Resources gross profits.
Gross profit margins increased to 19.3% for the year ended December 31,
1999, from 16.3% in the same period of 1998. e-Information Services gross profit
margins increased from 47.8% in 1998 to 49.3% in 1999. e-Infrastructure Services
gross profit margins decreased from 30.5% in 1998 to 26.5% in 1999. Contractors
Resources gross profit margins decreased from 3.8% in 1998 to 3.6% in 1999.
The increase in e-Information Services gross profit margins was
primarily due to better utilization in 1999 versus 1998 which was interrupted by
the acquisition of Applied Intelligence Group and Automated Business Systems.
The e-Infrastructure Services gross profit margin decrease was due to a decline
in the latter half of the year in Technical Consulting Services and
disproportionate growth in product revenue with lower margins than service
revenue in systems integration services. Contractors Resources had lower gross
profit margins primarily due to increased numbers of new members at lower
introductory fees to build membership base.
Operating expenses for the year ended December 31, 1999, increased $5.6
million or 65.4% to $14.2 million from $8.6 million for the same period in 1998.
This increase included increases in e-Information Services, e-Infrastructure
Services, and Contractors Resources operating expenses of approximately $2.6
million, $1.1 million and $1.9 million, respectively. The increase in operating
expenses was primarily due to the acquisitions of Automated Business Systems and
Applied Intelligence Group, which collectively increased operating expenses in
1999 by $5.9 million.
Operating income for 1999 was $2.7 million as compared to $1.4 million
for 1998, an increase of $1.3 million. This improvement included increases in
profits from e-Information Services and e-Infrastructure Services of $1.2
million and $2.1 million, respectively, and a loss for Contractors Resources of
$1.9 million.
Corporate expense for the year ended December 31, 1999, increased $2.8
million or 102.1% to $5.5 million from $2.7 million in the same period of 1998.
This increase reflected an additional investment in corporate development
capability and infrastructure to support the growth of operations.
EBITDA for the year ended December 31, 1999, was a loss of $2.8 million
as compared to a loss of $1.3 million for the same period of 1998, which
represented a decline in EBITDA of $1.5 million. The components of this $1.5
million decline are discussed above.
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Depreciation, amortization, and interest expense for the year ended
December 31, 1999, increased $3.4 million to $4.6 million from $1.2 million for
the same period of 1998. The increase was principally due to the write off of
intangibles from the acquisition of The PSS Group of $1.8 million that was
charged to selling, general and administrative expenses, additional amortization
and depreciation from the acquisitions of Automated Business Systems and Applied
Intelligence Group, and increased borrowings under the Company's line of credit
facility to support growth during the year ended December 31, 1999.
Due to the generation of net losses, no provision or benefit for income
taxes was recorded for either the year ended December 31, 1999 or 1998. Any tax
benefits associated with net operating losses have been fully reserved for by a
valuation allowance.
The net loss in 1999 increased $4.9 to $7.4 million from $2.5 million
in 1998. The components of this increase are discussed above.
Fiscal Year 1998 Compared to Fiscal Year 1997
Revenue for the year ended December 31, 1998 increased $20.8 million or
51.4% to $61.3 million, compared to $40.5 million for the same period in 1997.
This increase included a $3.5 million increase in e-Information Services
revenue, all of which resulted from the acquisition of Applied Intelligence
Group, a $14.4 million or 171.6% increase in e-Infrastructure Services revenue,
and a $2.8 million or 8.8% increase in Contractors Resources revenue.
The increase in revenue in 1998 included $13.5 million of revenue
contributed collectively by The PSS Group, Automated Business Systems, and
Applied Intelligence Group acquired by the Company effective January 1, 1998,
July 1, 1998, and September 1, 1998, respectively, and $7.3 million or 18% in
revenue growth of the businesses owned as of December 31, 1997. The increase in
revenue in 1998 from businesses owned as of December 31, 1997, included
increases in e-Infrastructure Services and Contractors Resources revenues of
$4.4 million and $2.8 million, respectively. The increase in revenue in e-
Infrastructure Services was due primarily to increased sales volume in 1998 as
compared to the same period of 1997. The growth in Contractors Resources
revenues was to due to an increase in the number of contractor members
increasing sales volume and increased rates for services.
Gross profit for the year ended December 31, 1998, increased $5.6
million or 128% to $10.0 million as compared to $4.4 million for the same period
of 1997. This increase included an increased gross profit in e-Information
Services of $1.6 million, all of which resulted from the acquisition of Applied
Intelligence Group, a $3.7 million or 112.4% increase in e-Infrastructure
Services gross profit and an increase of $ 229,000 or 20.9% in Contractors
Resources gross profit.
The gross profit growth included $5.2 million of gross profit
contributed collectively by The PSS Group, Automated Business Systems, and
Applied Intelligence Group acquired in January, 1998, June, 1998, and September,
1998, respectively, and a $1.7 million increase in gross profits from businesses
owned as of December 31, 1997. The growth in gross profit for the businesses
owned as of December 31, 1997, included a $1.5 million, or 37%, increase in e-
Infrastructure Services gross profit and a $229,000 increase in Contractors
Resources gross profit.
Gross profit margins increased to 16.3% for the year ended December 31,
1998, from 10.8% in the same period of 1997. e-Information services gross profit
margins were 47.8% in 1998, all of which resulted from the acquisition of
Applied Intelligence Group. e-Infrastructure Services gross profit margins
decreased from 39.0% in 1997 to 30.5% in 1998. Contractors Resources gross
profit margins increased from 3.4% in 1997 to 3.8% in 1998.
The decrease in e-Infrastructure Services gross profit margins was
primarily due to the higher product content in the 1998 revenues than in 1997
and increased systems implementation consulting revenue. Product revenue and
systems implementation consulting revenue commands a lower gross profit margin
than custom software development, high end consulting and system design work
revenue, which did not grow as rapidly as the product or systems implementation
consulting revenue in 1998. The e-Infrastructure Services gross profit margin
decrease was due to higher growth in Technical Consulting Services than in
systems integration. Technical Consulting Services command a lower gross profit
margin than systems integration work. The acquisition of The
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PSS Group in January, 1998, and the opening of a Tampa office in April, 1998,
fueled the Technical Consulting Services growth. Contractors Resources achieved
higher gross profit margins primarily through increased service fees to its
members.
Operating expenses for the year ended December 31, 1998, increased $3.3
million or 61.2% to $8.6 million from $5.3 million for the same period of 1997.
This increase included increases in e-Information Services operating expenses,
all of which resulted from the acquisition of Applied Intelligence Group, and in
e-Infrastructure Services operating expenses of $0.7 million and $2.6 million,
respectively. Contractors Resources operating expenses decreased by $25,000. The
increase in operating expenses was primarily due to the acquisitions of The PSS
Group, Automated Business Systems, and Applied Intelligence Group, which
collectively increased operating expenses in 1998 by $4.3 million.
Operating income for the year was $1.4 million as compared to a loss of
$0.9 million for the same period of 1997, an improvement of $2.3 million. This
improvement included increases in profits from e-Information Services, e-
Infrastructure Services, and Contractors Resources of $1.0 million, $1.1
million, and $254,000, respectively. Operating income for The PSS Group,
Automated Business Systems, and Applied Intelligence Group accounted for
$923,000 of this improvement.
Corporate expense for the year ended December 31, 1998, increased $1.3
million or 84.9% to $2.7 million from $1.5 million in the same period of 1997.
This increase reflected an additional investment in corporate development
capability to support the growth of operations and the integration of
acquisitions.
Restructuring costs of $160,000 were recorded in the year ended
December 31, 1998, related to the reduction of duplicate costs and consolidation
of facilities. Acquired in-process technology of $250,000 from the acquisition
of Applied Intelligence Group was written-off in the 1998. We also wrote off
$131,000 of software items in our inventory that became obsolete.
EBITDA for the year ended December 31, 1998, was a loss of $1.3 million
as compared to a loss of $2.4 million for the same period of 1997, an
improvement in EBITDA of $1.1 million. The components of this improvement are
discussed above.
Depreciation, amortization, and interest expense for the year ended
December 31, 1998, increased $747,000 to $1.2 million from $491,000 for the same
period of 1997. This increase was principally due to increased amortization and
depreciation from the acquisitions of The PSS Group, Automated Business Systems,
and Applied Intelligence Group and increased borrowings under our line of credit
facility to support growth for the year ended December 31, 1998.
Due to the generation of net losses, no provision or benefit for income
taxes was required for either the year ended December 31, 1998 or 1997.
The net loss decreased $325,000 to $2.5 million from $2.9 million in
the same period of 1997. The components of this improvement are discussed above.
Liquidity and Capital Resources
Effective May 30, 2000, we amended our line of credit with First Union
National Bank so that we can now borrow up to an amount equal to 80% of eligible
accounts receivable, as described in the line of credit, but not more than $3.0
million. Our line of credit with First Union National Bank expires on September
15, 2000. The terms of the line of credit require that we meet certain financial
and other covenants. Before we amended our line of credit on May 30, 2000, our
line of credit allowed us to borrow up to an amount equal to 80% of eligible
accounts receivable, as described in the line of credit, but not more than $6.0
million.
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Amounts borrowed under the amended line of credit bear interest at the bank's
prime rate plus 3/4%.
At June 30, 2000, we had cash and cash equivalents of $7.4 million. As
of August 23, 2000, we had $1.9 million outstanding on our line of credit with
First Union Bank.
On July 31, 2000, we received an additional line of credit with
Silicon Valley Bank. Under the Silicon Valley Bank line of credit we can borrow
up to an amount equal to 85% of our eligible accounts receivable, as described
in the line of credit, but not more than $6.0 million. Our line of credit with
Silicon Valley Bank expires on July 31, 2002. The terms of the line of credit
require that we meet certain financial and other covenants.
Future Plans.
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Based on our current operating plan, we believe that the cash generated
from operating activities, coupled with borrowings on our line of credit
facilities, will be sufficient to meet the anticipated needs for working capital
and capital expenditure for at least the next 12 months. Thereafter, if cash
generated from operations is insufficient to satisfy our liquidity needs, we may
seek to obtain additional capacity on our line of credit facilities, sell
convertible debt securities or sell additional equity securities. However, no
assurances can be given that any such additional 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 our
shareholders. Except as contemplated by the terms of the Series D Preferred
Stock, we have no current plans, agreements, commitments, and are not engaged in
any negotiations with respect to such transactions. If adequate funds are
unavailable, we may delay, curtail, reduce the scope of, or eliminate the
expansion of our operations and/or our marketing and sales efforts, and any of
these actions could have a material adverse effect on our financial condition
and business operations.
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CHANGES IN ACCOUNTANTS
For the year ending December 31, 1999, Grant Thornton LLP, independent
certified public accountants, examined our financial statements. The
shareholders have ratified the selection of Grant Thornton LLP as our auditors
for the year ending December 31, 1999 and have approved the appointment of Grant
Thornton LLP as our auditors for the year ending December 31, 2000.
During 1999, there were no "disagreements" between Grant Thornton LLP
and us on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures.
As reported on our Form 8-K filed May 21, 1999, on May 14, 1999, KPMG
LLP resigned as our independent accountants. As stated in our Form 8-K filed May
21, 1999, the reports of KPMG LLP on our financial statements for each of the
fiscal years ended December 31, 1998 and 1997 did not contain adverse opinions
or disclaimers of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. Additionally, as stated in the Form 8-K,
in connection with the audits of our consolidated financial statements for each
of the two fiscal years ended December 31, 1998 and 1997, and in the interim
period subsequent to December 31, 1998, preceding the date of KPMG's
resignation, there were no "disagreements" with KPMG on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which "disagreement" if not resolved to the satisfaction of KPMG would
have caused KPMG to make reference to the matter in their report.
As stated in our Form 8-K filed June 2, 1999 and in the exhibits
thereto, by letter purported to be dated May 13, 1999, delivered to our audit
committee by facsimile on May 21, 1999, KPMG advised us that KPMG believed that
there was a matter involving our internal control structure and its operation
that KPMG considered to be a "reportable condition" under standards established
by The American Institute of Certified Public Accountants. In the letter dated
May 13, 1999, and an ensuing letter addressed to the Securities and Exchange
Commission in response to the Item 4 disclosures set forth in our Form 8-K filed
May 21, 1999, which letters were filed as Exhibits 16.1 and 16.2, respectively,
to the Form 8-K filed June 2, 1999, KPMG stated that the matter referred to a
lack of an adequate system of financial reporting, and more specifically,
indicated that:
. during KPMG's audit of our 1998 financial statements, KPMG noted
that we had to seek extensions on several of our required filings
with the Securities and Exchange Commission and that we had to
amend our Forms 10-Q previously filed for the first three
quarters of 1998;
. KPMG believed that our system of financial reporting was not
adequate to enable us to report accurate and timely financial
information;
. KPMG believed that our process for accumulating financial data
neither provided management with sufficient time to evaluate the
data in an effort to ensure accurate financial reporting nor did
it enable us to meet financial reporting deadlines in a timely
manner; and
. KPMG believed that our system of financial reporting did not
include a periodic process of evaluating our financial reporting
policies in light of significant events or changes in
circumstances which might impact those policies.
As described in our Form 8-K filed June 2, 1999, we disagreed with
KPMG's assertion of a "reportable condition" and furthermore, we were of the
view that the "reportable condition" described in KPMG's letter did not rise to
the level of a "reportable event" as defined in Item 304 of Regulation S-K.
Because KPMG resigned before we received either letter, neither we nor our audit
committee had an opportunity to discuss the matters with KPMG.
The reports of our principal accountants on the financial statements
for the past two fiscal years contained no adverse opinion or disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope, or
accounting principles. In connection with the audits for the two most recent
fiscal years, there have been no disagreements with our principal accountants on
any matter of accounting principles or practices,
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financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of our principal accountants,
would have caused them to make reference thereto in their report on the
financial statements for these years.
We engaged the firm of Grant Thornton LLP, as of November 13, 1999, to
act as our independent accountants. Our audit committee and Board of Directors
approved the engagement of Grant Thornton LLP. We authorized KPMG LLP to respond
fully to any inquiries of Grant Thornton LLP. We have not consulted with Grant
Thornton LLP regarding the application of accounting principles as to a
specified transaction or the type of opinion that might be rendered on our
financial statements or any matter that was either the subject of a
"disagreement" or a "reportable event" prior to their engagement as our
independent accountants.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that there is any material market risk exposure with
respect to derivative or other financial instruments that would require
particular disclosure. Our obligations under our lines of credit are short-term
in nature with an interest rate that approximates the market rate.
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BUSINESS
Overview
We are an Internet services company that leverages industry-specific
knowledge, creative ideas, and technology expertise to create customized e-
solutions. We are based in Reston, Virginia and have offices in 11 other
locations in the U.S.
By thoroughly understanding the business dynamics and technology trends
of specific vertical markets, we seek to better understand the business problems
faced by companies within these industries. This allows us to develop and
deliver e-solutions that serve our customers' unique strategic, creative, and
technological business needs. As a result, our e-solutions seek to help
customers transition from their existing systems and processes to business
models that are aligned to the demands of the digital age.
The Netplex e-Solution
An e-solution is a customized combination of strategy, design,
development, and project management services that helps a customer solve a
business problem, improve a business process, or pursue a business opportunity
that has emerged from the e-business era.
Our e-solutions are divided into five categories:
. e-Strategy Consulting;
. Creative Design;
. e-Application Development, including Internet, intranet, and
extranet;
. e-Infrastructure Services; and
. Systems Integration.
With this portfolio of services, we guide customers' initiatives from
idea to implementation. Our services seek to provide customers with e-business
solutions that cover them "three-dimensionally"--from concept to implementation,
from interface to back-end systems, and from efficiency to value creation. We
believe that our services position customers to benefit from integrated and
streamlined interactive relationships with their customers, partners, and
stakeholders.
MyBizOffice
In addition to our e-solutions offerings, we have a subsidiary,
Contractors Resources, Inc., which we recently recast as the provider of an
integrated online service under the brand name MyBizOffice(TM). Targeting
professional consultants from all industries and professions, MyBizOffice is a
business-to-business, or "B2B," service designed to provide the financial
infrastructure, resources, and business services that help professionals build
careers as independent consultants. We believe that our transformation of the
traditional Contractors Resources business model into an integrated e-business
model has increased the business's flexibility, scalability, geographic scope,
and exposure.
MyBizOffice serves as a "virtual corporate office" for its member
consultants. It provides its members the services of a corporate administration
staff, including the following:
. contract review;
. time sheet administration;
. billing and collections;
. health benefits;
. retirement plans;
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. liability insurance;
. online account management;
. wealth-building financial strategies; and
. tax administration.
At the same time, MyBizOffice helps keep its members abreast of
developments that affect their independent life and work style. Through its
time-saving and wealth-building services, MyBizOffice is designed to permit its
members to focus on revenue-generating activities, thus maximizing their earning
power.
We are currently incubating the MyBizOffice brand and the "Business
Service Provider" model associated with MyBizOffice. In 2000, we intend to
invest in the incubation process through:
. increasing the marketing program,
. expanding core service offerings,
. expanding existing strategic relationships, and
. exploring additional strategic relationships.
Background and Development
We were incorporated in 1986 in New York under the name CompLink, Ltd.
In 1992, we effected an initial public offering to finance an effort to develop
a messaging software system. In 1996, we acquired, through a merger that was
accounted for as a reverse merger, The Netplex Group, Inc. and Contractors
Resources, and changed our name to The Netplex Group, Inc.
This merger provided us with new management and a revised corporate
mission. To better position ourselves to deliver the comprehensive services
required to compete in the e-solutions market, we have acquired several
companies during the last three years. In 1997, we acquired Raleigh, North
Carolina-based Onion Peel Solutions, LLC. In 1998, we acquired The PSS Group,
Inc., Automated Business Systems of North Carolina, Inc., Kellar Technology
Group, Inc., and the retail technical consulting business of Applied
Intelligence Group, Inc. In 1999, we purchased Dean Liles & Associates, Inc.
These businesses expanded our experience, technical staff, customer base, market
exposure, revenue, and industry-focused expertise.
Market Opportunity
Our e-Solutions Market Opportunity
According to Forrester Research estimates, the combined worldwide
Internet-based B2B and business-to-consumer, or "B2C," e-commerce transactions
are growing at about 95% annually, from $51.0 billion in 1998 to over $1.4
trillion by 2003. We believe that this statistic indicates a growing acceptance
of the Internet as a medium for B2B and B2C commerce. Our customers have become
participants in this growth by implementing business strategies that leverage
the Internet. In several cases, these "e-business" strategies include the
enhancement of static "brouchureware" Internet sites with Web-based applications
through which financial, or "e-commerce," transactions can be processed.
In our experience, we have found that businesses wishing to implement
Internet-based or Internet-integrated e-business strategies often require skill
sets and capacity that extend beyond their internal marketing and information
systems staff. As a result, several of our customers have selected us to provide
Internet-related consulting services intended to help them develop e-business
strategies and/or build the systems and applications intended to fulfill their
strategies.
According to International Data Corporation estimates, worldwide demand
for Internet-related consulting services is growing at about 60% per year, from
$7.8 billion in 1998 to over $78.0 billion in 2003. Through our service
offerings and experience, we seek to capitalize on the growth of this market
opportunity. As a result, we
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have sought to position ourselves as part of a relatively new category of
companies that focus on providing Internet-related consulting services. These
companies are commonly known as e-Solutions Providers, Internet Consulting
Companies, or e-Consultancies.
Internet Security Opportunity
Our Business Protection Services practice has provided high-level
information security and contingency planning services to some of the world's
most recognized companies and organizations. We expect the recent highly
publicized Internet security breaches to have a beneficial impact on growth
within this segment of our business.
Contractors Resources Market Opportunity
Through its MyBizOffice brand, our subsidiary, Contractors Resources,
serves the population of professionals who choose to work as independent
contractors. The Bureau of Labor and Statistics estimates that there are
approximately 9.0 million professional consultants in the United States and the
Gartner Group estimates that by 2002, 50% of information technology, or IT,
workers at companies with a market value over one billion dollars will be
independent consultants.
Overview of our e-Solutions Services
As noted above, we divide our e-solutions into five primary categories:
. e-Strategy Consulting;
. Creative Design;
. e-Application Development;
. e-Infrastructure Services; and
. Systems Integration.
Together, these service categories represent the end-to-end e-solutions that
enable customers to engage a single vendor to guide them through varying degrees
of e-business transition.
We believe that we have planned our services portfolio so that it will
consistently serve various vertical industries. We have already formalized a
retail industry-focused practice and, during 2000, we intend to leverage our
existing customer base to establish additional formalized vertical practices.
Industries in which we have multiple customers and in which we may establish
vertical practice areas include financial services, education, healthcare, and
entertainment/media.
e-Strategy Consulting
Our e-Strategy Consulting practice creates strategies that help our
clients leverage the Internet in order to sustain and advance their businesses.
Our e-Strategy experts work with our clients' executive-level managers to
understand their specific goals and objectives, which we believe better enables
us to help develop strategies for improving their operations. Typically, the
strategy phase concludes with the development of a technology plan to enable the
customer to implement its strategy.
Creative Design
We seek to leverage our Creative Design services to help customers
build and maintain interactive relationships with their customers and business
partners. Customers often look to our Creative Design services to create
customizable user interfaces that improve users' overall interactive experience.
In addition, our Creative Design services include interactive marketing
services, wherein we assess clients' customer definition,
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acquisition, and retention issues before creating appropriate solutions.
Specific Creative Design services that we provide include the following:
. branding;
. Web site design;
. interactive advertising; and
. program tracking.
e-Application Development
Our e-Application Development practice provides the following services:
. develops Internet-based applications;
. designs intranet/extranet business systems; and
. Web-enables existing systems and processes.
The group leverages its 15 years of experience implementing business
information solutions in its implementation of applications that seek to
integrate seamlessly with legacy systems.
e-Infrastructure Services
Our e-Infrastructure Services deliver solutions intended to improve the
security and performance of the information systems and processes upon which a
business operates. These services include the following:
. high-level information security strategy solutions, including
vulnerability analyses, penetration testing, architecture
development, and solution implementation;
. internetworking strategy and development;
. network and Web performance management and monitoring; and
. e-business contingency and continuity planning.
These services are designed to "keep businesses in business" by
optimizing performance and minimizing the risk of unwanted network intrusions.
Included as part of our e-Infrastructure Services division is our
Technical Consulting Services practice, which provides contract-based network
services, and our suite of products under the Onion Peel brand. These products
extend the capabilities of the HP OpenView(TM) network management platform and
are intended to enable network managers to better and more efficiently
administer their systems.
Systems Integration
We believe that "traditional" systems integration services continue to
play a significant role within even our most "leading-edge" e-business
customers. Our systems integration capabilities extend to providing integration
of multi-site enterprise applications, such as retail merchandising and
financial systems, and rapid integration of B2B and B2C applications. In
addition, we provide the following systems integration services that seek to
improve customers' business operations or better position them for upcoming e-
business ventures:
. technology configuration;
. deployment; and
. optimization services.
We also market a proprietary software solution called CHAINLINK(TM)
that is applicable to multi-site retail environments connected via the Internet.
CHAINLINK is an industry-focused data transfer tool that is designed
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to leverage Internet Protocol, or "IP," networks to improve store-to-store and
store-to-headquarters communications, regardless of the type or configuration of
each store's systems.
Overview of Contractors Resources Services
Contractors Resources, a Netplex subsidiary, gives professional
consultants the advantages of contract employment, self-employment, and
corporate employment in one program.
Through its MyBizOffice brand, Contractors Resources provides business
infrastructure and advisory services for its membership of professional
consultants. These services, which are listed below, are designed to permit
consultants to maximize the freedom and wealth potential of the independent
lifestyle while enjoying the benefits associated with full-time employment.
<TABLE>
<CAPTION>
<S> <C>
. Time sheet collection and billing . Profit sharing administration
. Expense reimbursement . 401(k) administration
. Accounts receivable management and . Benefits administration
customer collections . Contract review
. State/federal/local payroll tax filings . Billing rate advice
. Credit union membership
</TABLE>
As W-2 employees of Contractors Resources, MyBizOffice members have
access to a comprehensive suite of employee benefits. This benefits program,
which is customizable to the personal needs of the professional consultant,
includes
. group health;
. dental;
. disability; and
. professional liability.
In addition, Contractors Resources offers profit sharing and 401(k)
retirement plans that allow consultants to annually contribute as much as
$30,000 to the plans.
Members can also take advantage of several advisory services, including
up-to-date billing rates, industry news, and knowledge sharing programs. The
site also helps to keep consultants current on technology changes and provides
directories of training resources that can help keep members' skills in line
with the needs of their industries.
MyBizOffice is also an advocate for the independent worker. There is no
potential conflict among the consultant market and the organizations that may
engage them because MyBizOffice does not earn fees for finding or brokering the
engagements. Thousands of "e-talent marketplaces" already provide this service.
Keeping the contract worker as the primary focal-point of the business is
pivotal to our strategy.
Financial Information About Segments
For financial information regarding our business divisions, including
e-Information Services, e-Infrastructure Services, and Contractors Resources, as
well as a discussion of a change in our segments and a restatement of prior
periods, see note 18 of the notes to our consolidated financial statements
included elsewhere in this prospectus.
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Our e-Solutions Competition
The market for our e-Solutions is highly competitive. The rapid growth
of the Internet services market has fueled a significant influx of companies
that pose a competitive threat to our e-solutions business. Many of these
companies have greater resources, greater expertise, or better access to capital
than us.
In a broad sense, competition for Internet-related services can range
from local Web development companies to large traditional technology providers
such as IBM and Microsoft. However, because we target middle-market and larger
organizations with an approach that focuses on solving business problems within
vertical industries, our e-solutions competitors are generally companies that,
like us, deliver a wide variety of Internet-related services.
We compete with public and private companies. Companies with which we
most commonly compete include the following, among others:
. AnswerThink;
. AppNet;
. Cysive;
. iXL Enterprises;
. Predictive Systems;
. Proxicom;
. Sapient;
. US Interactive;
. USWeb/CKS; and
. Xceed.
Of the companies with which we most commonly compete, several have moved into
the full-service e-solutions market by expanding specific core disciplines, such
as network engineering or creative design, while others are start-ups that have
been built upon a full-service solutions delivery model.
Customers also often call upon us to perform individual specialized
services from our portfolio, such as information security, network performance
enhancements, and enterprise application integration. In these cases, we
frequently compete with the "Big 5" consulting firms, including Deloitte &
Touche and Andersen Consulting.
e-Solutions Differentiators
We believe that we have several competitive differentiators:
Three Dimensions of End-to-End e-Solutions. We attempt to compete with
other companies in our market by providing "end-to-end" solutions and
developing relationships with customers who seek a single-solution
provider for strategizing, developing, launching, and managing their e-
business initiatives. Our end-to-end e-solutions seek to cover
customers' business requirements "three dimensionally": from beginning
to end, from front to back, and from efficiency to value creation. We
provide beginning to end services that guide customers from the
strategic conception of their e-business initiatives through
application development and deployment. Simultaneously, we serve
customers' e-business initiatives from front to back--our services
connect front-end Web design with back-end databases and legacy
systems, while incorporating the appropriate security, networking, and
performance management elements. Finally, the scope of our services
ranges from relatively simple efficiency improvements to creating new
value for businesses with complex e-business transformations.
Industry Focus. We focus on understanding the business dynamics and
technology trends of specific vertical industries. We believe that this
focus permits us to better create repeatable solutions with
referenceability. As part of our fundamental business strategy, we
establish formal practice areas
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dedicated to serving the unique needs of specific industries. As of
June 2000, our largest vertical industry practice was in the retail
industry. We employ over 60 full-time billable professionals dedicated
to creating retail-specific solutions and our employees have amassed a
cumulative 1,000 person-years of retail technology and strategy
experience.
e-Infrastructure Services. A company's e-Infrastructure represents the
information systems and processes upon which its business operates. We
believe that the implementation of an application or the launch of a
Web site does not necessarily constitute a complete e-solution. Our e-
Infrastructure Services division provides services that seek to ensure
the ongoing security, performance, and efficiency of customers'
business applications, networked systems, and vital information assets.
We believe that our services minimize the risk of unwanted network
intrusions, Web site performance degradation, and data failure and
improve the security, usability, and scalability of their businesses.
e-Solutions Case Study: Retail Communications Application Developer
Working alongside the executives of one of our customers, a retail
communications applications developer, our business strategists and engineers
helped conceive a B2B "e-Catalog": an Internet-based service that would connect
retailers, distributors, and manufacturers to all partners through a single
interface. We then assisted in the design, development, and launch of the
resulting product, which allows retailers and suppliers to exchange product,
price, and promotion information electronically. This product's Internet-based
shared database synchronizes pricing, product, and promotional information
throughout the retail supply chain, which saves time otherwise spent correcting
delivery and receiving errors, researching disputed invoices, and tracking down
late or missing promotion information.
e-Solutions Case Study: Disease Management Services Provider
A provider of disease-management services specializing in urological
tumors and complex diseases had a critical need for a faster, more reliable
method for providing results to its customers--physicians and medical
organizations. In addition, it wanted to use Internet technology to gain a
competitive advantage in the industry and increase the understanding of
urological diseases and their clinical management. We conceptualized, designed,
and developed an Internet-based system that lets doctors access test results
through a secure area within the customer's Web site, thus minimizing diagnostic
errors due to poor dissemination of test results. The system not only allows
doctors access to test results instantly, it interfaces securely with
headquarters' live test-tracking database. This allows doctors to track the
status of tests, receive advance case reports on current diagnostic findings,
and quickly request consultations with pathologists. The new e-business solution
has helped the customer assist doctors in providing optimal patient care and
making economical decisions in a managed-care environment while allowing the
company to expand its client base to include patients and educators.
e-Solutions Case Study: Major U.S. Stock Market
Concerned about the possibility of being victimized by Internet-based
security breaches, the customer, a major U.S. stock exchange, realized it needed
to conduct proactive testing to ensure the security of its existing systems, as
well as systems it was planning to implement. The customer called on us to
assess their security status and perform appropriate security testing services.
Among the several tests we performed were a "DMZ Profile," in which we
identified vulnerabilities in their Internet-accessible systems such as their
mail gateway and Web server, and Modem Isolation Tests, which identified
unauthorized modem-based entry avenues. As a result of our security testing
services and ensuing recommendations, the customer has improved its security and
has minimized external and internal vulnerabilities.
Contractors Resources Competition
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The market for Contractors Resources MyBizOffice service offering is
competitive and changing quickly. We expect that additional companies will
emerge in this market and that competition will therefore intensify. Our
competitors vary in size and in scope of services.
We may experience lower margins and/or a reduction in the number of
members of the MyBizOffice service as a result of competitive forces. If we
cannot compete effectively within this market, we may be unable to sustain or
grow our business.
Contractors Resources Differentiators
Online Service Offering. Some competitors provide a subset of the full
range of services offered through MyBizOffice and do so through "paper-
based," rather than online, systems. We believe that the Web-based
MyBizOffice offering is more scalable and flexible than paper-based
systems, and research we conducted in 1999 indicated that an online
system is more appealing to our members and target market. Several
paper-based competitors have recently indicated that they will be
launching online service offerings.
Experience. Contractors Resources has been providing contractor-focused
back-office services since 1986. We believe that this represents a
longer period of time than other similar businesses, several of which
have emerged in the last two years. We believe that this experience has
helped us create formal business processes that are flexible and
scalable.
Community. We believe that an important advantage of the MyBizOffice
service is its community of professionals who can provide knowledge
sharing to other members. Through the MyBizOffice Web site, Contractors
Resources can address this community with specialized marketing
programs intended to generate new membership and advertise the sale of
products and services.
Seasonal Considerations
We are not affected by seasonal changes except that only a limited
amount of services are furnished to retail clients during the period from the
end of November to the end of January. There is no material seasonal effect on
our Contractors Resources business.
Backlog
The backlog of our e-Solutions project based business was approximately
$6,000,000 as of July 25, 2000. Due to the nature of its business, Contractors
Resources does not have backlog.
e-Solutions Strategic Relationships
We continue to develop strategic relationships with companies or
organizations whose services we believe complement ours. We believe that these
partnerships play an important role in our strategy of being a premium-level
end-to-end e-solutions provider. As technologies evolve, our ability to deliver
advanced e-solutions may depend on our ability to secure and maintain alliances
with leading technology manufacturers.
MyBizOffice Strategic Relationships
Contractors Resources pursues four categories of companies--contractor-
focused e-talent marketplaces, business-to-business e-procurement companies,
financial services companies, and e-commerce product and service providers--with
which it intends to form strategic partnerships. Contractors Resources expects
that partnering with the leading companies in these categories--such as
Monster.com, with which MyBizOffice formed an alliance in May 2000--will bring
significant exposure to MyBizOffice, increase membership, and add value to the
services it provides its associates.
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Customers
Our customer base includes Fortune 500, Fortune 1000, and middle-market
firms. In addition, our customers extend into the retail, healthcare, education,
financial services, and entertainment/media industries, among others. Some of
our major customers include:
. Amtrak
. America Online
. BTG
. Farm King Supplies
. Freddie Mac
. GTE
. Hancock Fabrics
. Lego Systems
. Sonic Industries
. Telecorp
. Trans World Entertainment
. Union Camp
. Unisys
. Virgin Entertainment
We derived, and believe that we will continue to derive, a significant portion
of our revenue from a large number of clients. In 1999, no single client
accounted for more than 10% of our revenues.
Geographic Positioning
Our geographic scope currently consists of 12 office locations. Of
these, nine are on the East Coast of the United States, and three are elsewhere
in the United States. We do not have any locations outside of the United States.
Revenue from sources outside of the United States is less than 1% of our total
revenue.
Expanding our geographic reach is a priority in 2000 and beyond. We are
continually assessing the most suitable areas for geographic expansion and will
seek to penetrate new markets when appropriate, either organically or through
acquisitions.
Growth Strategy
Sustain Rapid e-Solutions Growth
In 2000, we intend to undertake several initiatives that are designed
to bring exposure to our company and help us continue our growth. We intend to
make investments in publicizing our services, strengths, and position in the
market through coordinated advertising campaigns and public relations activity.
We are also planning to grow our sales staff and our team of billable
professionals to accommodate revenue growth. Between 1998 and 1999, our revenue
per billable employee changed by only 1%, indicating that our professional
recruitment efforts are virtually identically aligned with our growth.
New Vertical Practice Areas
We also intend to roll out new vertical practice areas in 2000. We
believe that the growth of our retail-focused practice group stems from our
knowledge and experience in the retail technology market. We believe that this
industry understanding better enables us to create e-solutions that are
optimally aligned to the demands of the retail industry. Consequently, we
believe that we must build a core industry competency, either organically or
through acquisition, before we formalize any new industry-focused practice.
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Acquisitions
We have made six acquisitions since 1986. We believe that additional
acquisitions could benefit our core service offerings and improve our growth. As
a result, we intend to consider further acquisitions if management deems them
appropriate to improving our market position and shareholder value. We expect to
consider acquisitions that are complementary to our existing capabilities or
geographical positioning, or ones that help us expand into additional vertical
markets. See "Risk Factors--We are subject to risks associated with our strategy
of acquiring other companies."
Contractors Resources Growth Strategy
By establishing the Contractors Resources business model on the
Internet as MyBizOffice, we believe that we have engineered the business's
infrastructure to accommodate a vast increase in membership. In addition to
increased marketing efforts, we also intend to increase the number of our
strategic partnerships. In 1999, we announced an initiative through which we
plan to forge strategic relationships with multiple leading online job and
project placement sites. Since this announcement, Contractors Resources has
formed alliances with SkillsVillage.com and Monster.com, currently the world's
leading online careers site.
Operations and Support
During 1999, we moved our headquarters from McLean, Virginia, to
Reston, Virginia. However, many of our internal operations and support services
are still located in our McLean office. The McLean office continues to house
most of our critical information systems, including the management
infrastructure for our wide area network, our Web site and intranet, and all
electronic mail gateways. A centralized management information systems
department located in the McLean office manages all of the systems.
Our marketing, legal, and human resources support services moved to the
Reston, Virginia, office. The President's office, along with the human
resources, legal operations, finance and accounting systems, purchasing systems,
and planned Systems Assurance, are based in northern New Jersey.
Intellectual Property
We do not hold any patents or registered trademarks other than those of
Onion Peel Solutions. However, we consider the Netplex name and our database of
independent consultants to be highly proprietary.
Employees
As of July 25, 2000, we had approximately 700 full-time employees,
including permanent and contract employees.
We believe that our relations with our employees are good.
Properties
We lease approximately 20,000 square feet of space in McLean and
Reston, Virginia for our corporate offices and the operations of some business
units. We also lease office space in 10 other locations, including Roseland, New
Jersey, southwestern Virginia, Raleigh and Charlotte, North Carolina, Atlanta,
Georgia, Tampa, and Edmond, Oklahoma. These locations serve as operating offices
of our businesses. These leases expire on various dates from December 2000 to
May 2005.
We believe that the space in our existing corporate and branch
facilities is adequate for the foreseeable future to support the growth of our
existing operations in the geographic areas in which we currently operate. We
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expect to expand our operations into new geographic regions in the future and
will need to lease additional branch offices to support operations in those
regions.
Legal Proceedings
From time to time, we are subject to litigation in the ordinary course
of business. On September 4, 1997, Data Systems Analysts, Inc., a software
design and consulting company, filed a complaint against us and Technology
Development Systems, Inc., a wholly owned subsidiary of us, alleging copyright
infringement and breach of our agreement with Data Systems Analysts. The
complaint also seeks damages against XcelleNet, Inc., which we have indemnified.
The complaint claims damages in excess of $300,000 plus punitive damages and
attorney fees. The case is currently in discovery. We are vigorously defending
against the action. The nature and amount of damages, if the allegations of Data
Systems Analysts are proved, are uncertain.
The principal risks that we insure against are workers' compensation,
personal injury, property damage, general liability, and fidelity losses. We
maintain insurance in amounts and with coverages and deductibles that management
believes are reasonable and prudent.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The following table lists the names and ages of all of our executive
officers, directors and key employees and the positions and offices held by each
individual:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Gene Zaino 42 Chief Executive Officer, Chairman
and Director (Class III)
Pamela Fredette 48 President and Director (Class I)
Richard Falcone 47 Chief Financial Officer and
Treasurer
Peter Russo 54 Chief Accounting Officer
Richard Goldstein 53 Director (Class III)
Steven L. Hanau 55 Director (Class II)
J. Alan Lindauer 60 Director (Class I)
</TABLE>
Gene Zaino has been a director of Netplex since August 1995 and became our Chief
Executive Officer and Chairman upon completion of the merger with Netplex in
June 1996. From November 1995 through the completion of the merger, Mr. Zaino
functioned in the capacity of Chief Executive Officer. Mr. Zaino started his
career at KPMG LLP in 1980. He was a founding principal of a subsidiary of
Evernet Systems, Inc., which was acquired by Control Data Systems, Inc. in 1993.
In January 1994, Mr. Zaino developed the business plan that led to the formation
of Netplex. Mr. Zaino is a graduate of the University of Pennsylvania's Wharton
School of Business and is a Certified Public Accountant.
Pamela Fredette is currently the President of Netplex and became a director in
1999. Ms. Fredette was the President of Computer Horizon's solutions group,
Horizon Consulting, Inc., from December 1995 through January 1999. Ms. Fredette
joined Horizon Consulting in 1993 as a practice director, and was soon promoted
to Vice President and then Senior Vice President of Solutions Operations. Prior
to 1993, Ms. Fredette was the founder and owner of two consulting companies, and
she has also held management positions for International Paper Company and
Prudential Insurance Company. Ms. Fredette received a bachelor's degree in
Liberal Arts from Rutgers University and a master's degree in Computer Science
from New Jersey Institute of Technology.
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Richard Falcone joined Netplex in August, 2000 as our Chief Financial Officer
and Treasurer. Mr. Falcone was the Chief Financial Officer of Acuent, Inc. from
February, 1999 to July, 2000, the Chief Financial and Operating Officer of
Internet start-up Netgrocer Inc. from January, 1997 to January, 1999, the Chief
Finance and Operating Officer of National Merchants Management Corporation from
September, 1994 to December, 1996, and the Chief Financial Officer of Bed Bath &
Beyond Inc., from March, 1990 to September, 1994. Beginning in 1983, Mr. Falcone
spent seven years with Tiffany & Co., initially as Director of Financial Control
and later as Director of International Finance and Operations. Prior to that Mr.
Falcone was a senior accountant with Price Waterhouse LLP for three years and
also served as a special projects manager for Grandmet USA for four years. Mr.
Falcone received a bachelor's degree in accounting from the University of
Vermont.
Peter Russo joined Netplex in January, 2000 as our Chief Accounting Officer.
Mr. Russo was the Executive Vice President and Chief Financial Officer for
Template Software, from May 1999 to January 2000, Senior Vice President and
Chief Financial Officer at Computer People, Inc. from April 1997 to May 1999,
Senior Vice President and Chief Financial and Administrative Officer at TRC
Companies, Inc. from June 1993 to April 1997 and Treasurer and Controller at
Gerber Scientific, Inc. from May 1990 to June 1993. Prior to that, Mr. Russo
spent 11 years with a predecessor to Pricewaterhouse Coopers, from 1969 to 1980,
the last four years as Senior Audit Manager. Mr. Russo holds a bachelor's degree
in accounting from Niagara University and is a Certified Public Accountant.
Richard Goldstein has served as a director of Netplex since July 1996.
Mr. Goldstein has been a Partner of Tocci, Goldstein and Company, L.L.P., a New
York City-based C.P.A. firm since 1992. Prior to 1992, Mr. Goldstein was a Tax
Partner with KPMG LLP. Mr. Goldstein holds a Bachelor of Business Administration
in Accounting and Master of Business Administration in Taxation from the City
University of New York and is a Certified Public Accountant.
Steven Hanau became a director of Netplex in July 1998. Mr. Hanau has served as
President of Enterprise Services at Wang Global since August 1996. Prior to
1996, Mr. Hanau spent eight years at I-NET, becoming its President of Enterprise
Services until Wang Global acquired I-NET. Mr. Hanau spent twenty two years in
the U.S. Army, holding high level positions with the Army Chief of Staff and the
Office of the Secretary of Defense. Mr. Hanau holds a degree from the United
States Military Academy and earned advanced degrees in operations research from
Stanford University and in business administration from Long Island
University.
J. Alan Lindauer became a director of Netplex in November 1998. Mr. Lindauer has
also been serving as a director of Waterside Capital Corporation since July 1993
and was named as its President and Chief Executive Officer in March 1994.
Mr. Lindauer has also served as President of JTL, Inc., since 1986. Also since
1986, Mr. Lindauer has served as a director of Commerce Bank of Virginia. In
1963, Mr. Lindauer started Minute-Man Fuels, which he managed until 1985.
Mr. Lindauer holds a Bachelor of Business Administration in Accounting and a
Master of Business Administration from Old Dominion University. He is a
Certified Management Consultant.
Board Composition
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Our amended Certificate of Incorporation currently authorizes six (6) directors.
Our Board of Directors currently consists of five (5) members. Our amended
Certificate of Incorporation provides that our board of directors will be
divided into three classes, Class I, Class II, and Class III, with each class
serving staggered three-year terms. The initial Class I directors, Pamela
Fredette and J. Alan Lindauer, were reelected to office at the 2000 annual
meeting of shareholders and will hold office until the 2003 annual meeting of
shareholders. The initial Class II director, Steven L. Hanau, will hold office
until the 2001 annual meeting of shareholders. The initial Class III directors,
Gene Zaino and Richard Goldstein, will hold office until the 2002 annual meeting
of shareholders. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the directors. This
staggered classification of the board of directors may have the effect of
delaying or preventing changes in control or management.
Compensation of Directors and Executive Officers
Our Board of Directors are not paid to attend meetings; however, each
member receives options to purchase 15,000 shares of common stock when he or she
is first elected to the Board. Options awarded to directors are granted under a
stock option plan established for the directors. Beginning in 1999, each member
who serves for more than two years will receive options to purchase an
additional 10,000 shares of common stock for each year of service beyond two
years. To date, options to purchase 120,000 shares at exercise prices ranging
from $1.06 to $3.56 per share have been granted to directors. In February 2000,
each outside director received a cash bonus of $10,000.
The following table lists, for the fiscal years indicated, all
compensation that we paid to Gene Zaino, Chief Executive Officer; Pamela
Fredette, President; Robert M. Skelton, Vice President - Corporate Development,
General Counsel and Secretary; and Walton Bell III, Chief Financial Officer. We
had no other executive officers, whose salary and bonus exceeded $100,000 for
the year ended December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Awards
Compensation ------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary ($) Options (#) Compensation ($)
--------------------------- --- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Gene Zaino, Chief Executive 1999 $744,537 7,500 $13,000
Officer (1)
1998 $140,747 $15,000
1997 $130,000 600,000 (4) $ 4,563
Pamela Fredette, President (2) 1999 $119,683 365,000 $ 704
Robert Skelton, Secretary (3) 1999 $119,990 $ 3,000
1998 $101,988 15,000 $11,000
1997 $100,000 70,000 (4) $ 2,903
Walton Bell III, Chief Financial 1999 $112,000 110,000 $ 0
Officer (5)
</TABLE>
________________________________
(1) Mr. Zaino is employed under an employment agreement under which as of
January 1, 2000, he is paid a base salary of $275,000. As of January
1, 1999, Mr. Zaino received a base salary of $163,000, and effective
upon signing of his employment agreement, as of June 7, 1999, he
received a base salary of $225,000. See "Management - Compensation of
Directors and Executive Officers - Employment and Related Agreements."
Mr. Zaino received a bonus approved by the Board in January 2000 of
$545,902,
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the net proceeds of which were used to repay the loan from the
Company. He accrued the bonus in 1999.
(2) Ms. Fredette is employed under an employment agreement under which she
is paid a base salary of $225,000. See "Management -Compensation of
Directors and Executive Officers - Employment and Related Agreements."
Ms. Fredette received a bonus of $50,000 in January 2000; she accrued
the bonus in 1999.
(3) Mr. Skelton resigned from his position as Secretary on July 28, 2000.
(4) Options to purchase 600,000 shares, issued to Mr. Zaino in 1995 under
the Company's 1992 Incentive and Nonqualified Stock Option Plan, were
canceled in December 1997 and replaced by options to purchase 600,000
shares at a lower exercise price. None of Mr. Zaino's options have
been exercised and 600,000 are vested as of December 31, 1999. Options
to purchase 70,000 shares granted to Mr. Skelton in 1996 and 1997
under the 1992 Incentive and Nonqualified Stock Option Plan were
canceled in December 1997 and replaced by options to purchase 70,000
shares at a lower exercise price. None of Mr. Skelton's options have
been exercised and 70,000 shares are vested as of December 31, 1999.
(5) Mr. Bell resigned from his positions as Chief Financial Officer and
Treasurer on August 15, 2000.
Aggregated Option Exercises and Fiscal Year-end Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised In-The-Money Options
Unexercised Options at at
December 31, 1999(1) December 31, 1999($)(1)
------------------- -----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gene Zaino 615,000 7,500 $ 6,209,550 $ 62,100
Pamela Fredette 25,000 340,000 $ 203,250 $ 3,138,350
Robert Skelton (2) 70,000 15,000 $ 711,200 $ 149,700
Walton E. Bell III (3) 33,333 76,667 $ 326,184 $ 752,178
</TABLE>
______________
(1) At December 31, 1999, the closing price of our common stock on the
Nasdaq SmallCap Market was $11.13 per share.
(2) On July 28, 2000, Mr. Skelton resigned from all positions as an
executive officer of the Company.
(3) On August 15, 2000, Mr. Bell resigned from all positions as an
executive officer of the Company.
We did not grant stock options or stock appreciation rights to our
chief executive officer or any of the named executive officers during the year
ended December 31, 1999.
Employment and Related Agreements
Mr. Zaino is employed under an employment agreement through June 2002,
under which he is currently paid an annual base salary of $275,000. Mr. Zaino is
also entitled to receive an annual bonus based on the financial and operating
performance of Netplex. The Board approved and determined to grant Mr. Zaino
additional compensation in the form of annual cash incentive compensation. In
January 2000, Mr. Zaino received annual cash incentive compensation of $545,902.
This bonus was accrued in 1999. In addition, under his employment agreement, Mr.
Zaino may also receive an annual bonus at the sole discretion of the Board,
based upon our financial and operating performance, which shall not exceed 60%
of base salary.
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We have and are the beneficiary under a key-person life insurance
policy for $2 million with respect to Mr. Zaino.
Ms. Fredette is employed under an employment agreement through May
2002, under which she is currently paid an annual base salary of $225,000. Ms.
Fredette is also entitled to receive an annual bonus based on the financial and
operating performance of Netplex. In addition, under her employment agreement,
Ms. Fredette may also receive an annual bonus at the sole discretion of the
Board.
We have and are the beneficiary under a key-person life insurance
policy for $1 million with respect to Ms. Fredette.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors currently consists
of Richard Goldstein and Steven Hanau. No interlocking relationship exists
between any member of our Board of Directors or our Compensation Committee and
any member of the board of directors or compensation committee of any other
company, and no interlocking relationship has existed in the past.
CERTAIN TRANSACTIONS
In January 1997, we loaned $150,000 to Mr. Zaino, our chief executive
officer, for relocation expenses. The loan accrued interest at a rate of 8% per
year. The note and accrued interest were paid in January 2000.
In April 2000, we loaned $120,000 to Mr. Skelton, our former Secretary
and General Counsel. The loan bore an interest rate of 6.6% per year. One-half
of the principal amount must be repaid by December 31, 2000, and the balance by
December 31, 2001.
Mr. Lindauer is one of our directors and the President, Chief Executive
Officer and Director of Waterside Capital Corporation, the holder of shares of
our Class C Preferred Stock. On January 28, 1999, Waterside lent us $800,000
under a subordinated note. On December 15, 1999, the subordinated note was
exchanged for an increase in the number of shares of our common stock that the
Class C Preferred Stock is convertible into.
We paid $45,064 in 1999, $23,756 in 1998 and $28,800 in 1997 for
accounting, tax and consulting services to an accounting firm in which Mr.
Goldstein, one of our directors, is a partner.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information concerning ownership of the
Company's common stock, as of August 28, 2000, by each person known by the
Company to be the beneficial owner of more than five percent of the common
stock, each director, each nominee for Director, each executive officer, and by
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares of Common Stock Beneficially Owned (1)
Number Percent
------ -------
<S> <C> <C>
Gene Zaino 1,938,350(2) 10.2%
The Netplex Group, Inc.
1800 Robert Fulton Drive, Second Floor
Reston, Virginia 20191
TMP Interactive, Inc. 1,000,000(3) 5.2%
5 Clock Tower Place, Suite 500
Maynard, MA 01754
Pamela Fredette 100,000(4) *
Robert Skelton (10) 77,047(5) *
Richard Goldstein 30,000(6) *
Steve Hanau 15,000(6) *
J. Alan Lindauer 12,500(7) *
Walton E. Bell, III (11) 110,000(8) *
All directors and 2,234,578(9) 11.6%
Executive officers as a
Group (7 persons)
</TABLE>
________________________
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and, unless otherwise indicated,
includes sole voting and investment power with respect to securities.
Shares of common stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for
computing the percentage of the outstanding common stock beneficially
owned by the person holding such options or warrants but are not deemed
outstanding for computing the percentage beneficially owned by any
other person. Based solely on a review of Schedules 13G and 13D that
have been filed and delivered to the Company, the Company is not aware
of any 5% beneficial holders of its common stock, other than the
persons specified in the table above.
(2) Includes 673,420 shares of common stock, subject to currently
exercisable options and warrants.
(3) Consists of 1,000,000 shares of common stock issuable upon the exercise
of a TMP warrant, at an exercise price of $6.00, subject to certain
adjustments as stated therein, which expires May 2, 2003 and is
currently exercisable.
(4) Holds options to purchase 365,000 shares of common stock, of which
100,000 are currently exercisable.
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(5) Includes 75,000 shares of common stock subject to currently exercisable
options.
(6) Consists of 15,000 shares of common stock subject to currently
exercisable options.
(7) Consists of 7,500 shares of common stock subject to currently
exercisable options and 5,000 shares of common stock owned.
(8) Holds options to purchase 110,000 shares of common stock of which
61,666 are currently exercisable and 48,334 are exercisable within
60 days.
(9) Includes 947,586 shares of common stock subject to currently
exercisable options and warrants.
(10) On July 28, 2000, Mr. Skelton resigned from all positions as an
executive officer of the Company.
(11) On August 15, 2000, Mr. Bell resigned from all positions as an
executive officer of the Company.
DESCRIPTION OF SECURITIES
As of August 28, 2000, our authorized capital stock consisted of:
. 100,000,000 shares of common stock, par value $.001 per
share, of which 18,238,700 shares were issued and
outstanding, 5,034,872 shares were reserved for issuance
pursuant to our stock option and purchase plans and
10,418,942 shares were issuable and reserved for issuance
pursuant to securities (other than shares reserved for
issuance pursuant to the Company's stock option and
purchase plans) exercisable or exchangeable for, or
convertible into, shares of common stock, and
. 6,000,000 shares of preferred stock, par value $.01 per
share, of which 1,904,438 shares have been designated as
Class A Preferred Stock of which 80,597 shares were issued
and outstanding; 1,500,000 shares have been designated
Class B Preferred Stock of which no shares were issued and
outstanding; 1,500,000 shares have been designated Class C
Preferred Stock of which 1,500,000 shares were issued and
outstanding; and 15,000 shares have been designated Series
D Preferred Stock of which 10,000 shares were issued and
outstanding.
The descriptions below of the terms of the common stock, preferred
stock and the related warrants are summaries of the material terms only and do
not purport to be complete. The descriptions below are subject to and qualified
by the detailed provisions of our amended Certificate of Incorporation and
Bylaws, all of which have been filed with the SEC and are incorporated into this
prospectus by reference and by applicable law.
Common Stock
The holders of our common stock are entitled to one vote per share on
all matters on which shareholders are entitled to vote. Subject to the rights of
holders of any class or series of shares, including preferred shares, having a
preference over the common stock as to dividends or upon liquidation, the
holders of our common stock are also entitled to dividends as may be declared by
our Board of Directors out of funds that are lawfully available, and are
entitled upon liquidation to receive pro rata the assets that are available for
distribution to holders of common stock. Holders of the common stock have no
preemptive, subscription or conversion rights. The common stock is not subject
to assessment and has no redemption provisions.
Preferred Stock
In addition to the Series D Preferred Stock, we have the authority to
issue 1,080,562 additional shares of preferred stock in one or more series and
to fix the designations, relative powers, preferences, and rights and the
qualifications, limitations or restrictions of all shares of each series,
including dividend rates, conversion rights, voting rights, redemption and
sinking fund provisions, liquidation preferences and the number of shares
constituting each series, without any further vote or action by the
shareholders.
The issuance of preferred stock could decrease the amount of earnings
and assets available for
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distribution to holders of common stock or adversely affect the rights and
powers, including voting rights, of the holders of common stock and could have
the effect of delaying, deferring or preventing a change in control of Netplex
without further action by the shareholders.
Class A Preferred Stock
General
We have designated 2,000,000 shares of our preferred stock as Class A
Preferred Stock. For each share of Class A Preferred Stock issued, the
shareholder also received a warrant to purchase one share of our common stock at
an exercise price of $2.50 per share. Each warrant became exercisable on March
19, 1997 and expires on September 19, 2001. We have the right to call the
warrants at a redemption price of $.01 per share upon:
. registration of the shares underlying the warrant, or
. 30 days written notice given at any time upon the common stock
attaining a trading price of at least $5.00 per share and
sustaining that price for 20 trading days.
Dividends
Each share of Class A Preferred Stock shall receive a cumulative
dividend of 10% per year, payable in cash or additional shares of Class A
Preferred Stock.
Liquidation Preference
The Class A Preferred Stock shall rank senior to all classes and series
of our capital stock now or hereafter authorized, issued, or outstanding. In the
event of any voluntary or involuntary liquidation, dissolution, winding up, or
change in control of Netplex, the holders of Class A Preferred Stock shall
receive the greater of:
. $4.00 per share of Class A Preferred Stock, plus any accrued but
unpaid dividends, or
. the amount the holders of Class A Preferred Stock would have
received if they had converted their preferred stock into common
stock, plus any accrued but unpaid dividends.
Voting Rights
The holders of Class A Preferred Stock are not entitled to vote on any
matter except as required by law.
Conversion
The holders of the Class A Preferred Stock have the right, at any time,
to convert each share of Class A Preferred Stock into one share of common
stock, plus any accrued but unpaid dividends payable in cash or the Class A
Preferred Stock.
Redemption
Upon the effectiveness of a registration statement that registers the
common stock underlying the Class A Preferred Stock, we may redeem the Class A
Preferred Stock for $2.00 plus any accrued but unpaid dividends. Additionally,
we may redeem the Class A Preferred Stock upon 30 days written notice at any
time after September 19, 2000 if:
. the last sale price of the common stock has been at least $5.00
per share on all 20 of the trading days ending on the third date
prior to the date on which written notice of redemption is given,
or
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. the last sale price of the common stock has been at least 20
percentage points higher than the prior year's price as the prior
year's price relates to $2.50 per share (i.e., 220% of $2.50 in
the fifth year, 240% of $2.50 in the sixth year, etc.) on all 20
of the trading days ending on the third date prior to the date on
which notice of redemption is given.
Class B Preferred Stock
In October 1998, we issued 643,770 shares of Class B Preferred Stock.
Each share of Class B Preferred Stock is immediately convertible into one share
of common stock. No dividends are payable on Class B Preferred Stock. There are
no shares of Class B Preferred Stock currently outstanding.
Class C Preferred Stock
General
We have designated 1,500,000 shares of preferred stock as Class C
Preferred Stock. The holders of the Class C Preferred Stock have received
warrants to purchase 150,000 shares of common stock at $1.375 per share. In
addition, we are required to issue warrants to purchase 100,000 additional
shares of common stock for each 18 month period the Class C Preferred Stock is
outstanding, up to a total of 400,000 additional shares of common stock. The
warrants have a 10-year term and are immediately exercisable.
Dividends
Each share of the Class C Preferred Stock earns cumulative dividends at
9.99% per year, payable in cash. The dividend rate increases to 15% per year
once the Class A Preferred Stock is no longer issued and outstanding.
Liquidation Preference
The Class C Preferred Stock shall rank senior to the common stock and
shall rank junior to the Class A Preferred Stock with respect to dividend rights
or rights on liquidation, winding up, dissolution, or change in control. In the
event of any voluntary or involuntary liquidation, dissolution, winding up, or
change in control, the holders of the Class C Preferred Stock shall receive,
before the holders of any securities junior to the Class C Preferred Stock, the
greater of:
. $3.99 per share of Class C Preferred Stock, plus any accrued but
unpaid dividends, or
. the amount the holders of Class C Preferred Stock would have
received if they had converted their preferred stock into common
stock, plus any accrued but unpaid dividends.
Voting Rights
The holders of the Class C Preferred Stock are not entitled to vote on
any matter except as required by law.
Conversion
The Class C Preferred Stock is convertible at any time after the
earlier of a change in control of Netplex or five years from the date of
issuance and is redeemable at our option at any time within the first five
years. The number of shares into which the Class C Preferred Stock is
convertible is equal to $2,300,000 plus accrued
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unpaid dividends divided by 25% of the 20 day average trading price of our
common stock immediately prior to conversion.
To the extent that our stock price decreases and we do not exercise our
right of redemption prior to conversion, the number of shares of our common
stock to be issued upon conversion of our Class C Preferred Stock could increase
significantly; the issuance of additional shares of common stock could
substantially dilute your ownership interest and depress the price of our common
stock. The conversion of the Class C Preferred Stock into common stock may
result in the sale of a significant number of shares of common stock into the
market; these sales could decrease the price of our common stock. Additionally,
the perceived risk of dilution from conversion of the Class C Preferred Stock
may cause other shareholders to sell their shares before conversion or encourage
short sales of our common stock; those sales could also place further downward
pressure on the price of our common stock.
The conversion of the outstanding Class C Preferred Stock on the basis
of the 20 day average trading price of our common stock would result in the
issuance of 7,731,092 shares of common stock if the average trading price had
been calculated as of August 28, 2000. If this 20 day average trading price
decreased by:
. 25%, then the conversion of the outstanding Class C Preferred
Stock would result in the issuance of 10,308,123 shares of
common stock;
. 50%, then the conversion of the outstanding Class C Preferred
Stock would result in the issuance of 15,462,185 shares of
common stock; and
. 75%, then the conversion of the outstanding Class C Preferred
Stock would result in the issuance of 30,924,370 shares of
common stock.
Redemption
We may redeem the Class C Preferred Stock at any time prior to or on
September 28, 2003 at an aggregate amount equal to $2,300,000 plus any accrued
but unpaid dividends.
Series D Preferred Stock
General
We have designated 15,000 shares of our preferred stock as Series D
Preferred Stock. To date, we have issued 10,000 shares of Series D Preferred
Stock. Additionally, the holders of the Series D Preferred Stock have received
warrants to purchase up to 1,165,644 shares of our common stock. These warrants
are discussed under "Selling Shareholders--Material Terms of Series D Preferred
Stock and Related Warrants."
Dividends
The Series D Preferred Stock shall bear cumulative dividends at a rate
of 7% per year and be payable quarterly, beginning on the first day of the
calendar quarter subsequent to the date of issuance. Subject to the terms of our
amended Certificate of Incorporation, we may pay the dividends in cash or shares
of our common stock. If we choose to pay dividends in shares of our common
stock, the number of shares to be issued in payment of the dividend on each
share of the Series D Preferred Stock will be equal to the accrued dividends
(plus any unpaid default interest) divided by the applicable conversion price.
The applicable conversion price will be equal to the average of the closing sale
prices for our common stock on the 10 consecutive trading days immediately
preceding the date of determination.
For example, on July 1, 2000, the first day of the calendar quarter
after the first full calendar quarter
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subsequent to the date of issuance, the total cash dividend that became due for
the prior quarter was $17.45 per share of Series D Preferred Stock, which we
calculated using an annual rate of 7%. Rather than paying this dividend in cash,
we could elect instead to issue common stock to the holders of the Series D
Preferred Stock. If we made such an election, the number of shares of common
stock we would have to issue would equal the amount of the cash dividend divided
by the average of the closing sale prices for our common stock on the 10
consecutive trading days immediately preceding July 1, 2000. Because the average
of the closing sale prices for our common stock on the 10 consecutive trading
days immediately preceding July 1, 2000, was $2.41 per share, we would be
required to issue 72,415 shares of common stock rather than paying the $174,500
cash dividend.
We will not have the right to pay dividends in shares of our common
stock if any of the trigger events identified below under "Description of
Securities--Series D Preferred Stock--Redemption--Redemption at option of
holders of Series D Preferred Stock" has occurred and is continuing.
Liquidation Preference
In the event of our liquidation, the holders of the Series D Preferred
Stock will be entitled to a liquidation preference before any amounts are paid
to the holders of any of our capital stock of any class junior in rank to the
Series D Preferred Stock. The liquidation preference is equal to the amount
originally paid for the shares of Series D Preferred Stock, or $1,000 per share,
plus an additional amount equal to a 7% annual return on the amount originally
paid for the shares of Series D Preferred Stock plus any unpaid dividends and
any unpaid default interest.
Voting Rights
The holders of the Series D Preferred Stock are not entitled to vote on
any matter except as required by law, except that the consent of holders of at
least two-thirds of the outstanding shares of Series D Preferred Stock will be
required to effect any change in our amended Certificate of Incorporation that
would change any of the rights of the shares of Series D Preferred Stock.
Conversion
The Series D Preferred Stock is convertible, in accordance with the
then applicable conversion rate, as detailed in our amended Certificate of
Incorporation, into shares of common stock at the option of the holder thereof
at any time from the date of issuance. We can require the holders to convert the
Series D Preferred Stock two years and forty-five days from the date of
issuance. The number of shares of common stock to be issued upon conversion of a
share of Series D Preferred Stock issued in March 2000 is determined by dividing
the sum of $1,000 (the amount paid for that share), plus an additional amount
equal to a 7% annual return on the amount originally paid for the shares of
Series D Preferred Stock plus unpaid default interest, by $5.87.
If we fail to deliver shares of common stock after being requested by a
holder of the Series D Preferred Stock to convert its shares to common stock,
then
. we will be subject to certain cash penalties after 5 business days
from our receipt of the request;
. after 12 business days from our receipt of the request,
. if the holder exercises its right to void the
conversion request, the conversion price will be
reduced to the lesser of the conversion price then in
effect or the lowest closing sale price of our common
stock during the period beginning on the date the
holder requested conversion and ending on the date 12
days after the date the request was made; and
. the holder that made the request will be entitled to
require us to redeem its shares of Series D Preferred
Stock.
In the event we are deemed to have issued common stock or securities
that can be exchanged or converted into common stock at a price less than the
conversion price then in effect for the Series D Preferred
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Stock, then the conversion price for the Series D Preferred Stock shall be
reduced to the purchase price per share of the additional common stock or
securities issued, subject to certain exceptions. Further, if we issue certain
options or convertible securities that are convertible into or exchangeable or
exercisable for common stock at a price that varies based on the market price of
our common stock, then the holders of the Series D Preferred Stock may elect to
substitute the variable price of these options or convertible securities for the
conversion price then in effect when they elect to convert their shares of
Series D Preferred Stock.
The conversion of the outstanding Series D Preferred Stock at the fixed
conversion price of $5.87 would result in the issuance of 1,742,130 shares of
common stock. If the conversion of the Series D Preferred Stock is effected
because of the occurrence of one of the events described in the preceding
paragraph, and the fixed conversion price had been reduced by:
. 25%, then the conversion of the outstanding Series D Preferred
Stock would have resulted in the issuance of 2,322,839 shares of
common stock;
. 50%, then the conversion of the outstanding Series D Preferred
Stock would have resulted in the issuance of 3,484,259 shares of
common stock; and
. 75%, then the conversion of the outstanding Series D Preferred
Stock would have resulted in the issuance of 6,956,667 shares of
common stock.
The exercise price of the warrants that we issued on March 29, 2000 in
connection with the issuance of the Series D Preferred Stock is $5.87. However,
the exercise price could be reduced to an amount equal to 120% of the market
price of our common stock on March 29, 2001 if this amount is less than the
exercise price in effect immediately prior to that date. Upon this reduction in
exercise price, the number of shares of common stock we must issue upon exercise
of the warrants will increase without a corresponding increase in the amount of
proceeds we will receive as a result of the exercise.
If all of these warrants were exercised on August 28, 2000, we would be
required to issue 1,165,644 shares of common stock. The closing price of our
common stock on August 28, 2000 was $1.31 per share. If as of March 29, 2001,
the price of our common stock remains at $1.31 per share, the exercise of these
warrants would result in the issuance of 4,352,627 shares of common stock. If
the price of our common stock were to decrease from this amount by:
. 25%, then the exercise of these warrants would result in the
issuance of 5,803,503 shares of common stock;
. 50%, then the exercise of these warrants would result in the
issuance of 8,705,254 shares of common stock; and
. 75%, then the exercise of these warrants would result in the
issuance of 17,410,509 shares of common stock.
If the market value of our common stock decreases and we pay the dividends on
the Series D Preferred Stock in shares of our common stock, or any of the events
described above resulting in the adjustment of the conversion price of the
Series D Preferred Stock on the basis of the market value of our common stock
occurs, or the exercise price of the warrants is adjusted based on the market
value of our common stock, the number of shares of common stock to be issued in
payment of the dividends, or upon conversion of the Series D Preferred Stock or
upon exercise of the warrants could increase significantly and result in
significant dilution in your ownership interest. Any of these events could also
result in the sale of a significant number of shares of common stock into the
market and could decrease the price of our common stock. Additionally, the
perceived risk of dilution from the occurrence of any of these events may cause
shareholders to sell their shares to avoid this dilution or
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encourage short sales of our common stock and could therefore place further
downward pressure on the price of our common stock.
No holder of shares of the Series D Preferred Stock may convert its
shares if the conversion would make the holder the beneficial owner of more than
4.99% of our then outstanding common stock, excluding shares deemed beneficially
owned through ownership of unconverted shares of the Series D Preferred Stock or
unexercised warrants. Although, we are not obligated to issue any shares of
common stock if as a result of the issuance the aggregate number of shares of
common stock issued upon conversion of the Series D Preferred Stock and exercise
of the related warrants would equal or exceed 20% of the amount of our common
stock outstanding on March 29, 2000, this limitation is inapplicable because we
obtained shareholder approval as required by the applicable rules of the Nasdaq
SmallCap Market for such an issuance. As a result of this approval, there is no
limit on the amount of shares that can be issued upon conversion or the payment
of dividends in lieu of cash on the Series D Preferred Stock.
Redemption
Redemption at our option. Beginning on March 29, 2002, subject to
extension in certain circumstances, we can redeem the outstanding Series D
Preferred Stock that we issued on March 29, 2000 for the price originally paid
for the shares plus an additional amount equal to a 7% annual return on the
amount originally paid for the shares of Series D Preferred Stock plus unpaid
default interest. If we do not redeem all of these shares of Series D Preferred
Stock by June 3, 2002, we will be required to convert the shares that we do not
redeem into the number of shares of common stock determined by dividing the sum
of $1,000 plus an additional amount equal to a 7% annual return on the amount
originally paid for the shares of Series D Preferred Stock plus unpaid default
interest by the applicable conversion price. The applicable conversion price at
the time of the conversion will be 95% of the dollar volume-weighted average
price of the common stock on June 3, 2002. During the period beginning on and
including April 2, 2002 and ending on and including June 3, 2002, the holders of
the shares of common stock issued upon the conversion of the Series D Preferred
Stock will be limited in the amount of the shares that they may sell.
Redemption at option of holders of Series D Preferred Stock. Upon the
occurrence of the trigger events listed below, the holders of Series D Preferred
Stock have the right to require us to redeem all or a portion of their Series D
Preferred Stock at a redemption price equal to the greater of:
. 125% of the price paid for the shares of Series D Preferred
Stock plus unpaid dividends and unpaid default interest or
. The relative percentage that the average closing sales price
of the common stock during the five trading days immediately
preceding the date the holders give notice of their election
to redeem upon a change of control bears to the applicable
conversion price in effect at such time the holders give
notice of their election to redeem upon a change of
control.
The events that will entitle the holders of the Series D Preferred Stock to
exercise these redemption rights are the failure by us to deliver shares of
common stock upon conversion of the Series D Preferred Stock and the occurrence
of any of the following trigger events:
- the SEC does not declare effective any registration
statement we are required to file under the terms of the
registration rights agreement we entered into with the holders of
the Series D Preferred Stock on or prior to the date required by
the terms of the registration rights agreement;
- the effectiveness of a registration statement we are
required to file under the terms of the registration rights
agreement lapses for any reason or is unavailable to the holders
of the Series D
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Preferred Stock and such lapse or unavailability continues for a
period of five consecutive trading days or for more than an
aggregate of 10 trading days in any 365-day period;
- our common stock is suspended or delisted from trading on
the Nasdaq SmallCap Market, the Nasdaq National Market, the
American Stock Exchange or the New York Stock Exchange for a
period of at least five consecutive trading days or for more than
10 trading days in any 365-day period;
- we give notice to any holder of Series D Preferred Stock of
our intent not to comply with a request for conversion tendered in
accordance with the terms of the Series D Preferred Stock;
- we fail to issue shares of common stock to any holder of the
Series D Preferred Stock prior to the 12th business day after the
holder requests such conversion;
- we do not issue shares of common stock to a holder of the
Series D Preferred Stock after proper request because such
issuance would cause us to exceed the limitation on the number of
shares that may be issued in accordance with the applicable rules
of the Nasdaq SmallCap Market; or
- we breach any representation, warranty, covenant or other
term or condition of the documents governing the issuance of the
Series D Preferred Stock and the breach would have a material
adverse effect on our business or is not cured within 20 days
after its occurrence.
Because the Series D Preferred Stock is redeemable upon the occurrence of some
of these events which are beyond our control, the Series D Preferred Stock has
been accounted for as temporary equity in our current consolidated balance
sheet.
In addition, holders also may redeem the Series D Preferred Stock upon
a change of control of Netplex at a redemption price equal to the greater of:
. 125% of the price paid for the shares of Series D Preferred
Stock plus unpaid dividends and unpaid default interest or
. The relative percentage that the average closing sales
price of the common stock during the five trading days
immediately preceding the date the holders give notice of
their election to redeem upon a change of control bears to
the applicable conversion price in effect at such time the
holders give notice of their election to redeem upon a
change of control.
Preemptive Rights
Until December 27, 2000, subject to the exceptions described in the
securities purchase agreement under which the Series D Preferred Stock was sold,
we may not negotiate or contract with any party for any equity financing or
issue any equity securities or securities convertible or exchangeable into or
for equity securities in any form unless we have first delivered to each holder
of Series D Preferred Stock a written notice describing the proposed
transaction. In addition, we must provide each holder an option to purchase a
certain participation percentage of the securities to be issued in the proposed
transaction equal to 75% of its pro rata portion of the Series D Preferred Stock
issued in March, 2000.
Registration Rights
We have granted to holders of our preferred stock and warrants
registration rights that may require us to file registration statements under
the Securities Act covering all or a portion of the common stock issued or
issuable upon conversion of the preferred stock or warrants or to include these
shares of common stock in a registration under the Securities Act that we
initiate. Certain registration rights agreements that we have entered
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into are discussed under "Selling Shareholders."
Anti-takeover Effects of Certain Provisions of New York Law and our Amended
Certificate of Incorporation and Bylaws
A number of provisions of New York law, our amended Certificate of
Incorporation, and our Bylaws could make any attempt to acquire us by means of a
tender offer, a proxy contest, or otherwise and the removal of incumbent
officers and directors more difficult. These provisions are intended to
discourage certain types of coercive takeover practices and inadequate takeover
bids even though these types of transactions may offer our shareholders the
opportunity to sell their stock at a price above the prevailing market price.
These provisions also encourage persons seeking to acquire control of us to
negotiate with us first.
We are subject to the "business combination" provisions of Section 912
of the New York Business Corporation Law and expect to continue to be so subject
if and for so long as we have a class of securities registered under Section 12
of the Exchange Act. Section 912 provides, with some exceptions, which include,
among others, transactions with shareholders who became interested prior to the
effective date of an amendment to our Certificate of Incorporation providing
that we would be subject to Section 912 if we did not then have a class of stock
registered pursuant to Section 12 of the Exchange Act, that a New York
corporation may not engage in a "business combination" (e.g., merger,
consolidation, recapitalization, or disposition of stock) with any "interested
shareholder" for a period of five years from the date that the person first
became an interested shareholder unless:
. the transaction resulting in a person becoming an interested
shareholder was approved by the board of directors of the
corporation prior to that person becoming an interested
shareholder; or
. the business combination is approved by the holders of a majority
of the outstanding voting stock not beneficially owned by the
interested shareholder or any affiliate or associate of the
interested shareholder at a meeting called no earlier than five
years after the interested shareholder's stock acquisition date;
or
. the business combination meets certain valuation requirements for
the stock of the New York corporation.
An "interested shareholder" is defined as any person that
. is the beneficial owner, directly or indirectly, of 20%
or more of the outstanding voting stock of a New York
corporation, or
. is an affiliate or associate of the corporation that at
any time during the prior five years was the beneficial
owner, directly or indirectly, of 20% or more of the
then outstanding voting stock.
A "business combination" includes mergers, asset sales, and other
transactions resulting in a financial benefit to the interested shareholder.
Subject to a number of exceptions, an "interested shareholder" is a person who,
together with affiliates and associates, owns, or within five years did own, 20%
or more of the corporation's outstanding voting stock. This statute could
prohibit or delay the accomplishment of mergers or other takeover or change in
control attempts with respect to us and, accordingly, may discourage attempts to
acquire us.
The "stock acquisition date," with respect to any person and any New
York corporation, means the date that the person first becomes an interested
shareholder of the corporation.
In addition, some provisions of our amended Certificate of
Incorporation and Bylaws summarized in the following paragraphs may be deemed to
have an anti-takeover effect and may delay, defer, or prevent a tender
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offer or takeover attempt that a shareholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by shareholders.
BOARD COMPOSITION. Our amended Certificate of Incorporation currently
authorizes six directors. The amended Certificate of Incorporation
provides that our board will be divided into three classes, with each
class serving staggered three-year terms. Any additional directorships
resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible,
each class will consist of one-third of the directors. This staggered
classification of the board of directors may have the effect of
delaying or preventing changes in control or management.
BOARD OF DIRECTORS VACANCIES. Our Bylaws and amended Certificate of
Incorporation authorize the board of directors to fill vacant
directorships or increase the size of the board of directors. This
authority may deter a shareholder from removing incumbent directors and
simultaneously gaining control of the Board of Directors by allowing
the board to fill the vacancies created by the removal with its own
nominees.
ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND NOMINEES. Rules promulgated
under the Exchange Act establish an advance notice procedure for
shareholders to make nominations of candidates for election as
directors or bring other business before any meeting of our
shareholders. The shareholder notice procedure provides that only
persons who are nominated by, or at the direction of, the board, or by
a shareholder who has given timely written notice prior to the meeting
at which directors are to be elected, will be eligible for election as
directors. In addition, the shareholder notice procedure provides that
at a shareholders' meeting, the only business that may be conducted is
business that has been brought before the meeting by, or at the
direction of, the board of directors or by a shareholder who has given
timely written notice of his or her intention to bring such business
before the meeting.
Under the shareholder notice procedure, for notice of
shareholder nominations or other business to be made at a shareholders'
meeting to be timely, the notice must be received by us not less than
120 calendar days prior to the anniversary of the date of the proxy
statement for last year's annual meeting.
A shareholder's notice to us proposing to nominate a person
for election as a director or proposing other business must contain
information specified in the rules promulgated under the Exchange Act
including a representation that the shareholder is a record holder of
our stock entitled to vote at the meeting and information regarding
each proposed nominee or each proposed matter of business that would be
required under the federal securities laws to be included in a proxy
statement soliciting proxies for the proposed nominee or the proposed
matter of business.
The shareholder notice procedure may have the effects of
precluding a contest for the election of directors or the consideration
of shareholder proposals if the proper procedures are not followed and
of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to
approve its own proposal without regard to whether consideration of the
nominees or proposals might be harmful or beneficial to us and our
shareholders.
SPECIAL MEETINGS OF SHAREHOLDERS. Our Bylaws provide that special
meetings of shareholders can be only called by the board of directors
or any officer instructed by the board to call a special meeting except
when the shareholders are expressly entitled by the New York Business
Corporation Law to demand the call of a meeting.
AMENDMENT OF OUR CERTIFICATE OF INCORPORATION. Our amended Certificate
of Incorporation may only be further amended by a majority vote of the
directors and the shareholders. By making it more difficult to alter
the provisions of the amended Certificate of Incorporation, the anti-
takeover provisions specified in this section will be more likely to
withstand attempts to minimize their anti-takeover intent.
78
<PAGE>
AUTHORIZED BUT UNISSUED SHARES. Our authorized but unissued shares of
common stock and preferred stock are available for future issuance
without shareholder approval, subject to the limitations imposed by the
Nasdaq SmallCap Market. These additional shares may be utilized for a
variety of corporate purposes, including future public offerings to
raise additional capital, corporate acquisitions, and employee benefit
plans. The existence of authorized but unissued and unreserved common
stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender
offer, merger, or otherwise.
Limitation of Liability and Indemnification Matters
Our amended Certificate of Incorporation limits the liability of
directors to the fullest extent permitted by New York law. Specifically, a
director will not be personally liable to us or our shareholders for damages for
any breach of duty in his or her capacity as a director unless a judgment or
other final adjudication adverse to the director establishes that:
. his or her acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law,
. he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled, or
. his or her acts violated Section 719 of the New York Business
Corporation Law, which relates to unlawful declarations of
dividends or other distributions of assets to shareholders or the
unlawful purchase of our shares.
This provision is intended to afford directors protection and limit
their potential liability from suits alleging a breach of the duty of care by a
director. We believe this provision will assist us in maintaining and securing
the services of directors who are not our employees. As a result of this
provision, shareholders may be unable to recover monetary damages against
directors for actions taken by them that constitute negligence or gross
negligence or that are in violation of their fiduciary duties although it may
still be possible to obtain injunctive or other equitable relief with respect to
those actions. If equitable remedies are found not to be available to
shareholders for any particular case, shareholders may not have any effective
remedy against the challenged conduct. This provision does not affect the
directors' responsibilities, under any other laws, such as the federal
securities laws or other state or federal laws.
Our Bylaws also provide that directors and officers shall be
indemnified against liabilities arising from their service as directors or
officers to the fullest extent permitted by law. To obtain this benefit, there
is generally a requirement that the individual acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to our best
interests. We may not indemnify any director or officer if a judgment or other
final adjudication adverse to him or her establishes that his or her acts were
committed in bad faith, were the result of active and deliberate dishonesty and
were material to the cause of action so adjudicated, or that he or she
personally gained in fact a financial profit or other advantage to which he or
she was not legally entitled.
In addition, New York law provides that the indemnification permitted
under New York law shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under our Bylaws, any agreement, a
vote of shareholders, or otherwise as long as those rights are not inconsistent
with New York law.
We have also entered into agreements to indemnify our directors and
executive officers in addition to the indemnification provided for in our
Bylaws. We believe that these provisions and agreements are necessary to attract
and retain qualified directors and executive officers. Additionally, as
permitted under New York law, we have obtained directors' and officers'
liability insurance for our officers and directors.
79
<PAGE>
At present, there is no pending litigation or proceeding involving any
director, officer, employee, or agent as to which indemnification will be
required or permitted under our amended Certificate of Incorporation, Bylaws, or
any indemnification agreement. We are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
As of August 28, 2000, 18,238,700 shares of our common stock were
outstanding. Of the shares outstanding as of August 28, 2000, 16,951,708 were
freely tradable without restriction. The remaining 1,286,992 shares of our
common stock outstanding as of August 28, 2000 are "restricted securities" as
that term is defined under Rule 144, and may not be sold unless registered under
the Securities Act or sold under an available exemption.
In general, under Rule 144, a person who has beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock outstanding
at that time, which equaled approximately 182,387 shares as of
August 28, 2000; or
. the average weekly trading volume of our common stock during the
four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell the
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Approximately 1,286,992 shares of restricted common stock were held by
affiliates as of August 28, 2000. So long as shares of the restricted common
stock remain in the hands of affiliates, unless sold pursuant to a registration
statement, it will be subject to all of the conditions of Rule 144 except for
the holding period. If these holders of our common stock cease to be affiliates
and, in the case of restricted stock, the two-year holding period of Rule 144(k)
has been met, these shares may become freely tradable without regard to most of
the Rule 144 restrictions, including the volume limitation.
In addition to the outstanding shares of our common stock, as of August
28, 2000, we had 5,034,872 shares of our common stock reserved for issuance
upon the exercise of outstanding options issued under our stock option plans of
which 1,014,731 were vested, issued and exercisable. All shares issuable upon
exercise of options granted under our stock option plans are generally available
for resale in the public market.
In addition, as of August 28, 2000, we had outstanding
. shares of our Series D Preferred Stock, including dividend
shares, and related warrants that are convertible into a total of
3,165,015 shares of common stock, assuming a conversion and
exercise price of $5.87 per share;
. prepaid warrants exercisable into 3,818,221 shares of common
stock; and
. options and warrants, other than options issued under our stock
option plans, to purchase an aggregate of 4,191,860 shares of our
common stock.
80
<PAGE>
We are registering for sale in the Registration Statement of which this
prospectus forms a part 15,498,907 shares of common stock on behalf of the
holders of our outstanding shares of Series D Preferred Stock and related
warrants, some of the prepaid warrants and some of the other options and
warrants. The remaining shares of common stock subject to the foregoing prepaid
warrants, options and warrants are available for resale in the public
market.
As of August 28, 2000, we also had outstanding:
. shares of our Class A Preferred Stock that are immediately
convertible into 80,597 shares of common stock; and
. shares of our Class C Preferred Stock that are convertible after
September 28, 2003 into the number of shares equal to $2,300,000
plus accrued but unpaid dividends, divided by 25% of the 20 day
average trading price of the common stock immediately prior to
conversion, which, if converted on the basis of the 20 day
average trading price calculated as of August 28, 2000, would
result in the issuance of 7,731,092 shares of common stock.
The 80,597 shares of common stock that are issuable upon conversion of
the Class A Preferred Stock are available for resale in the public market. Of
the 7,731,092 shares of common stock issuable upon conversion of the Class C
Preferred Stock as of August 28, 2000, 2,450,000 will be available for resale in
the public market upon issuance. The remaining 5,281,092 shares of common stock
issuable upon conversion of the Class C Preferred Stock are subject to
registration rights.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered
hereby and certain other matters will be passed upon for us by Venable, Baetjer
and Howard, LLP.
EXPERTS
The consolidated financial statements and schedule of The Netplex
Group, Inc. as of December 31, 1999, and for the year then ended, appearing in
the Registration Statement, of which this prospectus is a part, have been
audited by Grant Thornton LLP, independent certified public accountants, as
stated in their report herein, and has been so included in reliance upon such
report given upon the authority of said firm as experts as stated in their
report appearing in accounting and auditing.
The consolidated financial statements and schedule of The Netplex
Group, Inc. as of December 31, 1998, and for each of the years in the two-year
period ended December 31, 1998, have been included herein and in the
Registration Statement, in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act of 1933, as amended,
covering the shares offered by this prospectus. This prospectus does not contain
all of the information set forth in the Registration Statement and exhibits.
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any materials we file at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Regional Offices of the SEC at 7 World Trade Center, Suite
1300, New York, New York 10048, and at 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Please call
81
<PAGE>
the SEC at 1-800-SEC-0330 for further information on the SEC's public reference
rooms. Our SEC filings are also available to the public from the SEC's web site
at http://www.sec.gov.
------------------
82
<PAGE>
DISCLOSURE OF COMMISSION'S POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our amended Certificate of Incorporation allows us to indemnify to the
fullest extent permitted under the New York Business Corporation Law our
directors, officers, employees and agents. We may indemnify them only if we
determine that their conduct did not violate the law. In addition, our amended
Certificate of Incorporation eliminates the personal liability of directors to
Netplex and its shareholders for money damages if they breach their duty as
directors.
The New York Business Corporation Law also permits us to indemnify a
director or officer against judgments, fines, amounts paid in settlement and
reasonable expenses of litigation, except when we bring the case against such
director or officer, or if a case is brought by our shareholders against them on
our behalf. We can indemnify a director or officer if he acted in good faith and
for a purpose he reasonably believed to be in Netplex's best interests. However,
no indemnification is permitted in an action by Netplex, or its shareholders on
its behalf, in connection with the settlement or other disposition of a
threatened or pending action or in connection with any claim, issue or matter as
to which a director or officer is liable to Netplex, unless a court determines
Netplex should pay a portion. In addition, the New York Business Corporation Law
provides that a director or officer shall be indemnified if he is successful in
the litigation on the merits or otherwise.
Permitted indemnification as described above may only be made if it is
authorized by our board of directors, in each specific case, based upon a
determination that the applicable standard of conduct has been met or that
indemnification is proper under the New York Business Corporation Law. The board
of directors can authorize indemnification, either acting as a quorum of
disinterested directors or based upon an opinion by independent legal counsel,
or if the shareholders decide that indemnification is proper because the
applicable standard of conduct has been met. Upon application of the person
seeking indemnification, a court may also award indemnification upon a
determination that the standards outlined above have been met. We may also
authorize the advancement of litigation expenses to a director or officer upon
receipt of an undertaking by him to repay such expenses if it is ultimately
determined that he is not entitled to be indemnified by us.
We have also agreed to indemnify our directors and executive officers
pursuant to indemnification agreements. We will pay all expenses, losses,
claims, damages and liability incurred by our directors or executive officers
for or as a result of action taken or not taken while they were acting as
directors, officers, employees or agents.
Although the indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons as discussed above, we have been advised that in the opinion of the SEC
this indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by us of expenses incurred or
paid by one of our directors, officers or controlling persons in the successful
defense of any action, suit or proceeding, is asserted by that director, officer
or controlling person in connection with the securities being registered, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
83
<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports.................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998... F-4
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-8
Notes to Consolidated Financial Statements..................... F-9
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999..................................... F-26
Condensed Consolidated Statements of Operations for the Six
Months Ended June 30, 2000 and 1999....................... F-27
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999................... F-28
Notes to Condensed Consolidated Statements as of June 30, 2000
and December 31, 1999 and the Six Months Ended
June 30, 2000 and 1999.................................... F-29
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
The Netplex Group, Inc.:
We have audited the accompanying consolidated balance sheet of The Netplex
Group, Inc. and subsidiaries (the "Company") as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated balance sheet as
of December 31, 1998 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997, were audited by other auditors whose report dated April 19, 1999 expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Netplex Group,
Inc. and subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
In connection with our audit of the consolidated financial statements referred
to above, we have audited Schedule II - Valuation and Qualifying Accounts, as of
December 31, 1999. In our opinion this schedule presents fairly, in all material
respects, the information required to be set forth therein.
/s/ Grant Thornton LLP
Vienna, Virginia
March 1, 2000 (Except for Note 20, as to which the date is March 30, 2000)
F-2
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
The Netplex Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Netplex
Group, Inc. and subsidiaries (the "Company") as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement Schedule II - Valuation and
Qualifying Accounts, for each of the years in the two-year period ended December
31, 1998. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Netplex Group,
Inc. and subsidiaries as of December 31, 1998 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
McLean, Virginia
April 19, 1999
F-3
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
<TABLE>
<CAPTION>
Assets 1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,220,148 $ 870,465
Accounts receivable, net of allowance for doubtful
accounts of $342,000 and $589,000, respectively 12,513,823 11,654,743
Prepaid expenses and other current assets 923,762 772,242
----------- -----------
Total current assets 17,657,733 13,297,450
Property and equipment, net 1,891,084 1,704,975
Other assets 775,290 213,174
Goodwill and other intangible assets, net 6,092,610 5,435,024
----------- -----------
Total assets $ 26,416,717 $ 20,650,623
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,294,403 $ 2,545,730
Line of credit 5,126,245 4,041,000
Notes payable - 300,000
Accrued expenses and other current liabilities 9,305,229 6,418,326
Capital lease obligation, current portion 107,890 97,315
Deferred revenues 193,262 835,827
----------- -----------
Total current liabilities 18,027,029 14,238,198
Insurance premium obligation 850,000 -
Capital lease obligations long-term, net of current portion 195,504 57,901
----------- -----------
Total liabilities 19,072,533 14,296,099
Commitments and contingencies
Minority interest in subsidiary 481,877 -
Stockholders' equity:
Preferred Stock:
Class A Cumulative, $.01 par value, liquidation preference of $4.00
per share for 1999 and 1998; 2,000,000 shares authorized, 109,961
and 987,573 shares issued and outstanding at December 31, 1999
and 1998 respectively 1,099 9,875
Class B, $.01 par value; liquidation preference of $3.50 per share;
1,500,000 shares authorized, 643,770 shares issued and
outstanding at December 31, 1998 - 6,438
Class C Cumulative, $.01 par value; liquidation preference of $3.99
per share; 2,500,000 shares authorized; 1,500,000 share issued and
outstanding at December 31, 1999 and 1998, respectively 15,000 15,000
Common Stock: $.001 par value, 40,000,000 shares authorized,
16,137,250 and 10,204,735 shares issued and outstanding at
December 31, 1999 and 1998, respectively 16,137 10,204
Additional paid in capital 21,762,418 13,821,531
Accumulated deficit (14,932,347) (7,508,524)
----------- -----------
Total stockholders' equity 6,862,307 6,354,524
----------- -----------
Total liabilities and stockholders' equity $ 26,416,717 $ 20,650,623
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenues
Services $ 70,106,190 $ 55,872,750 $ 38,394,880
Product 17,679,074 5,406,410 2,073,254
----------- ----------- -----------
87,785,264 61,279,160 40,468,134
Cost of revenues
Services 57,374,354 47,389,309 34,961,418
Product 13,494,978 3,894,760 1,123,736
----------- ----------- -----------
70,869,332 51,284,069 36,085,154
----------- ----------- -----------
Gross profit 16,915,932 9,995,091 4,382,980
Operating expenses
Selling, general and administrative expenses 24,038,665 11,979,941 7,230,246
Restructuring costs - 160,000 -
Acquired in-process technology - 250,000 -
----------- ----------- -----------
Operating expenses 24,038,665 12,389,941 7,230,246
----------- ----------- -----------
Operating loss (7,122,733) (2,394,850) (2,847,266)
Interest expense, net (384,213) (153,874) (26,337)
----------- ----------- -----------
Loss before income taxes (7,506,946) (2,548,724) (2,873,603)
Provision for income taxes - - -
----------- ----------- -----------
Loss before minority interest (7,506,946) (2,548,724) (2,873,603)
Minority interest 83,123 - -
----------- ----------- -----------
Net loss (7,423,823) (2,548,724) (2,873,603)
Preferred Stock dividend (500,603) (315,778) (275,625)
----------- ----------- -----------
Loss applicable to common shareholders $ (7,924,426) $ (2,864,502) $ (3,149,228)
----------- ----------- -----------
Basic and diluted loss per common share $ (0.63) $ (0.31) $ (0.46)
===== ===== =====
Weighted average common shares outstanding
Basic and diluted 12,515,759 9,259,599 6,820,863
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Class A Cumulative Class B Class C Cumulative
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
-------------------- -------------------- --------------------
Share $ Shares $ Shares $
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 1,750,000 $ 17,500 $ - $ - - $ -
Net loss - - - - - -
Conversions of Class A Preferred to Common Stock (687,500) (6,875) - - - -
Exercise of Common Stock warrants - - - - - -
Preferred Stock dividends - - - - - -
Common Stock options granted for services - - - - - -
Common Stock issued for the acquisition of Onion
Peel Solutions, LLC - - - - - -
Exercise of Common Stock options - - - - - -
----------------------------------------------------------------------
Balance at December 31, 1997 1,062,500 10,625 - - - -
Net loss - - - - - -
Conversions of Class A Preferred to Common Stock (141,865) (1,419) - - - -
Dividends paid in kind 66,938 669 - - - -
Preferred Stock dividends - - - - - -
Private placements of Common Stock - - - - - -
<CAPTION>
Additional
Common Stock Paid In Accumulated
----------------------
Shares $ Capital Deficit Total
---------------------- ----------- --------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 6,442,903 $ 6,443 $ 5,301,542 $ (2,086,197) $ 3,239,288
Net loss - - - (2,873,603) (2,873,603)
Conversions of Class A Preferred to Common Stock 687,500 687 6,188 - -
Exercise of Common Stock warrants 225,000 225 537,275 - 537,500
Preferred Stock dividends - - (82,500) - (82,500)
Common Stock options granted for services - - 40,000 - 40,000
Common Stock issued for the acquisition of Onion
Peel Solutions, LLC 80,000 80 399,920 - 400,000
Exercise of Common Stock options 34,967 35 69,982 - 70,017
---------------------------------------------------------------------
Balance at December 31, 1997 7,470,370 7,470 6,272,407 (4,959,800) 1,330,702
Net loss - - - (2,548,724) (2,548,724)
Conversions of Class A Preferred to Common Stock 141,865 142 1,277 - -
Dividends paid in kind - - (669) - -
Preferred Stock dividends - - (304,504) - (304,504)
Private placements of Common Stock 2,123,000 2,123 2,343,440 - 2,345,563
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Class A Cumulative Class B Class C Cumulative
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
Share $ Shares $ Shares $
<S> <C> <C> <C> <C> <C> <C>
Private placement of Prepaid Common Stock
purchase warrants - - - - - -
Common Stock issued for the acquisition of ABS - - - - - -
Class B Preferred Stock issued for the
acquisition of AIG - - 643,770 6,438 - -
Private placement of Class C Preferred Stock - - - - 1,500,000 15,000
Exercise of Common Stock options - - - - - -
-------------------------------------------------------------------
Balance at December 31, 1998 987,573 9,875 643,770 6,438 1,500,000 15,000
Net loss - - - - - -
Conversions of Class A Preferred to Common
Stock (877,612) (8,776) - - - -
Preferred Stock dividends - - - - - -
Exercise of Prepaid Common Stock purchase
warrant - - - - - -
Conversion of subordinated debt to Class C
Preferred Stock - - - - - -
Common Stock issued for the acquisition of ABS - - - - - -
Common Stock issued for the acquisition of
Onion Peel Solutions, LLC - - - - - -
Conversion of Class B Preferred Stock to
Common Stock - - (643,770) (6,438) - -
Common Stock issued - - - - - -
Exercise of Common Stock warrants - - - - - -
Exercise of Common Stock options - - - - - -
-------------------------------------------------------------------
Balance December 31, 1999 109,961 $ 1,099 - $ - 1,500,000 $ 15,000
===================================================================
<CAPTION>
Additional
Common Stock Paid In Accumulated
Shares $ Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Private placement of Prepaid Common Stock
purchase warrants - - 2,582,490 - 2,582,490
Common Stock issued for the acquisition of ABS 450,000 450 590,175 - 590,625
Class B Preferred Stock issued for the
acquisition of AIG - - 993,562 - 1,000,000
Private placement of Class C Preferred Stock - - 1,324,457 - 1,339,457
Exercise of Common Stock options 19,500 19 18,896 - 18,915
------------------------------------------------------------------------------
Balance at December 31, 1998 10,204,735 10,204 13,821,531 (7,508,524) 6,354,524
Net loss - - - (7,423,823) (7,423,823)
Conversions of Class A Preferred to Common
Stock 877,612 873 7,903 - -
Preferred Stock dividends - - (241,478) - (241,478)
Exercise of Prepaid Common Stock purchase
warrant 554,421 555 (555) - -
Conversion of subordinated debt to Class C
Preferred Stock - - 800,000 - 800,000
Common Stock issued for the acquisition of ABS 114,756 115 566,715 - 566,830
Common Stock issued for the acquisition of
Onion Peel Solutions, LLC 297,396 297 (297) - -
Conversion of Class B Preferred Stock to
Common Stock 643,770 648 5,790 - -
Common Stock issued 55,000 55 (55) - -
Exercise of Common Stock warrants 2,093,856 2,094 5,258,008 - 5,260,102
Exercise of Common Stock options 1,295,704 1,296 1,544,856 - 1,546,152
------------------------------------------------------------------------------
Balance December 31, 1999 16,137,250 $ 16,137 $ 21,762,418 $ (14,932,347 $ 6,862,307
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Operating activities:
Net loss $ (7,423,823) $ (2,548,724) $ (2,873,603)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property and equipment 776,741 578,564 391,091
Amortization of goodwill and other intangibles 1,660,835 505,177 73,122
Write-off of intangibles 1,810,597 - -
Acquired in-process R&D write-off - 250,000 -
Common stock options granted for services - - 40,000
Change in assets and liabilities, net of
effects of acquisitions:
Accounts receivable (859,080) (5,985,628) 301,321
Prepaid expenses and other current assets (723,200) 32,656 117,712
Accounts payable and accrued expenses 3,548,287 1,441,526 (2,159,896)
Deferred revenue (642,565) 726,628 (219,770)
--------- --------- ---------
Net cash used in operating activities (1,852,208) (4,999,801) (4,330,023)
Investing activities:
Net cash (paid) acquired in acquisitions and earn-outs (2,404,926) (3,339,043) 2,149
Purchases of property and equipment (962,850) (382,779) (105,438)
--------- --------- ---------
Net cash used in investing activities (3,367,776) (3,721,822) (103,289)
Financing activities:
Sale of minority interest in subsidiary 565,000 - -
Issuance of note payable 800,000 - -
Net proceeds from sale of stock - 6,267,510 -
Line of credit advances, net 1,085,245 2,724,700 1,221,300
Proceeds from the exercise of stock options and warrants 6,806,254 18,915 607,517
Payment of Preferred Stock dividends (304,354) - (180,694)
Principal payments on capital lease obligations (92,040) (116,744) (99,945)
Proceeds from (repayment of) note payable (300,000) 300,000 (59,496)
Repayment (issuance) of note receivable - 100,000 (200,000)
Repayment (issuance) of employee notes receivable 9,562 (55,298) (193,464)
--------- --------- ---------
Net cash provided by financing activities 8,569,667 9,239,083 1,095,218
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 3,349,683 517,460 (3,338,094)
Cash and cash equivalents at beginning of year 870,465 353,005 3,691,099
--------- --------- ---------
Cash and cash equivalents at end of year $ 4,220,148 $ 870,465 $ 353,005
========= ========= =========
Supplemental information:
Cash paid during the year for:
Interest $ 601,370 $ 187,201 $ 61,366
Income taxes - - -
Non-cash financing activity:
Capital lease obligation 240,217 52,732 88,098
Conversion of debt to equity 800,000 - -
Insurance premium obligation for non-compete agreement 1,275,000 - -
Common stock issued for acquisitions and earn-outs $ 566,830 $ 1,591,000 $ 400,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) The Business And Basis Of Presentation
The Business
------------
The Netplex Group, Inc. ("the Company") was incorporated in 1986 to provide
IT services and solutions. Netplex is an Information Technology (IT)
company that provides the expertise and information systems to link
employees, customers, prospects, suppliers, and manufacturers to help
"network-enable" organizations. The Company re-sells technology products
when necessary to deliver to customers fully integrated system solutions.
The Company also provides certain business services to independent
consultants who become the Company's employees.
Basis of presentation
---------------------
Merger with Netplex
-------------------
On June 7, 1996, the Company (formerly known as "CompLink, Ltd." or
"CompLink") acquired and merged with America's Work Exchange and The
Netplex Group, Inc. (collectively referred to as "Netplex") in a reverse
merger transaction by issuing approximately 3,245,000 shares of Common
Stock, or 50.4 % of the Company's outstanding stock after giving effect for
the merger. The merger agreement also provided for the Company to assume
1,691,000 outstanding Common Stock options of Netplex.
The merger has been accounted for under the purchase method of accounting
as a reverse merger, since the shareholders of Netplex, which have common
control, received the larger of the voting rights of the combined entity.
As a result, Netplex is considered the acquirer for accounting purposes.
The merger resulted in a re-capitalization of the acquirers, so that the
resulting capitalization of the Company after the merger is that of
CompLink's giving effect to the issuance of new shares and elimination of
CompLink's accumulated deficit. In addition, the par value of the Company's
Common Stock was decreased from $0.01 per share to $0.001 per share in
connection with the merger. The assets and liabilities of CompLink were
recorded by the Company at book value, which approximates fair value.
Coincident with the merger the Company's name was changed from CompLink,
Ltd. to The Netplex Group, Inc. and the entity known as The Netplex Group,
Inc. prior to the merger changed its name to Netplex Systems, Inc. Upon
completion of the merger, the Company consisted of Netplex Systems, Inc.;
America's Work Exchange ("AWE"), and its wholly-owned subsidiary, Software
Resources of New Jersey, now known as Contractor's Resources (" CR"), and
The Netplex Group, Inc. (formerly known as CompLink Ltd.) and its wholly-
owned subsidiary, TDS.
(2) Acquisitions
All acquisitions by the Company have been accounted for as purchases. The
purchase prices assigned to the net assets acquired were based on the fair
value of such assets and liabilities at the acquisition dates.
Additionally, the operating results of all acquisitions have been included
in the consolidated financial statements from their effective dates of
acquisition.
Acquisition of Onion Peel Solutions L.L.C.:
------------------------------------------
On July 1, 1997, the Company acquired all of the outstanding membership
interests of Onion Peel Solutions L.L.C. ("Onion Peel"), a Raleigh, N.C.
based provider of network management solutions, for 80,000 shares of Common
Stock. Additionally, the Company was required to issue 297,396 additional
shares based on the closing price of the Company's Common Stock on December
31, 1998. The additional shares were issued to the seller in February,
1999. Including the value of the additional shares issued, the purchase
price for Onion Peel was $400,000.
F-9
<PAGE>
Acquisition of PSS Group, Inc.:
On January 30, 1998, effective January 1, 1998, the Company purchased all of the
stock of The PSS Group, Inc. ("PSS"), a wholly owned subsidiary of Preferred
Systems Solutions, Inc. ("Preferred") for $600,000; $300,000 was paid at closing
and $300,000 on January 15, 1999. The purchase included an earnout provision and
an employment agreement. PSS was the technical professional staff augmentation
operations and business of Preferred. In January, 1999, the purchase agreement
was amended to eliminate the Earn-out provision. Additionally, Preferred's
shareholder agreed not to compete with the Company for four years and the
Company purchased a split dollar life insurance policy on his life. The policy
is payable, in four equal annual payments of $425,000, beginning January 29,
1999. As of December 31, 1999, $1,275,000 remains due on the policy and is
reflected in accrued expenses and insurance premium obligation on the balance
sheet.
The purchase prices was allocated to the fair value of the assets and
liabilities acquired, as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Cash $ 148,000 $ 148,000
Accounts receivable 800,000 800,000
Fulfillment database 930,000 930,000
Other assets 122,000 122,000
Less liabilities assumed (1,400,000) (1,400,000)
---------- ----------
Net assets acquired $ 600,000 $ 600,000
========== ==========
</TABLE>
During the fourth quarter of 1999 the Company contemplated transitioning PSS's
staffing operation into Contractor's Resources and evaluated the future
operations of PSS. As a result of this evaluation the Company wrote off the
goodwill, fulfillment database and the cost of the non-compete agreement. The
total write-off was $1,810,597.
Acquisition of Automated Business Systems of North Carolina, Inc.:
On June 18, 1998, effective July 1, 1998, the Company purchased Automated
Business Systems of North Carolina, Inc. and Kellar Technology Group, Inc.
(Collectively "ABS") for $200,000 and 450,000 shares of Common Stock, valued at
$591,000. The agreement also provides that the former shareholders of ABS will
receive additional consideration, payable 50% in cash and 50% in stock, through
December 31, 2000, if ABS meets certain operating targets. In connection with
the acquisition, the Company has entered into employment agreements with certain
employees of ABS. In December 1999, the contingent earn-out was bought out by a
cash payment and issuance of additional shares.
As of December 31, 1999, the purchase price of ABS is $1,907,000 consisting of
the original consideration of $791,000 and subsequent earn-out payments
consisting of $549,000 and 114,756 shares of Common stock, valued at $567,000.
The purchase price has been allocated as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Cash $ 205,000 $ 205,000
Accounts receivable 736,000 736,000
Property and equipment 51,000 51,000
Other assets 33,000 33,000
Goodwill 1,794,000 678,000
Less liabilities assumed (912,000) (912,000)
---------- ---------
Net assets acquired $ 1,907,000 $ 791,000
========== =========
</TABLE>
F-10
<PAGE>
Acquisition of Applied Intelligence Group, Inc.
-----------------------------------------------
On October 16, 1998, effective September 1, 1998, the Company purchased the
information technology consulting business of Applied Intelligence Group, Inc.
of Oklahoma City ("AIG"), for $3,000,000 and 643,770 shares of Class B Preferred
Stock ("Preferred Stock") valued at $1,000,000. The Class B Preferred Stock is
convertible into the Company's Common Stock at anytime on a share for share
basis. No dividends are payable on the Preferred Stock. The holders of the
Preferred Stock agreed not to sell or otherwise distribute the Common Stock
underlying the Preferred Stock for one year. The agreement also provides that
AIG will receive additional consideration (the "AIG Earn-out") if AIG meets the
following targets: (i) up to $1.5 million of cash based on net profit, as
defined in the agreement, that AIG generates over the next six quarters and (ii)
up to 643,770 shares of Class B Preferred Stock if AIG achieves approximately $9
million net profits over the next 9 quarters. ViaLink coverted its Class B
Preferred Stock and sold it during 1999 thereby eliminating the additional
potential contingent earn-out shares. In connection with the acquisition, the
Company entered into employment agreements with certain employees of AIG.
As of December 31, 1999, the purchase price of AIG is $4,800,000 consisting of
the original consideration of $4,000,000 and subsequent earn-out payments of
$800,000. The total purchase price has been allocated as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Prepaid and other assets $ 52,000 $ 52,000
Property and equipment 450,000 450,000
Acquired software 850,000 850,000
Assembled workforce 1,000,000 1,000,000
viaLink non-compete agreement 900,000 900,000
Goodwill 1,636,000 836,000
Less: liabilities assumed (338,000) (338,000)
---------- ----------
Net assets acquired 4,550,000 3,750,000
Acquired in process technology 250,000 250,000
---------- ----------
Purchase price $ 4,800,000 $ 4,000,000
========== ==========
</TABLE>
The software, assembled workforce, viaLink non-compete agreement, and goodwill
are being amortized over estimated useful lives of 4, 5, 5, and 7 years,
respectively, using the straight-line method.
The Company has allocated $250,000 of the purchase price to certain in-process
Internet commerce technology that had not achieved technological feasibility as
of the acquisition date. Accordingly, such costs were written off and included
in the statement of operations for 1998.
Acquisition of Dean Liles & Associates, Inc.
--------------------------------------------
On April 23, 1999, effective April 1, 1999, the Company purchased the assets of
Dean Liles and Associates, Inc, ("DLA") a Dallas, Texas based information
technology strategy consulting practice for $600,000. The seller may be entitled
to additional cash consideration for each of the three years ended March 31
beginning in 2000 if certain performance goals are met. 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 5 years using the straight-line method.
Proforma Acquisition Data
-------------------------
The following supplemental financial information presents the consolidated
results of the Company on a pro forma basis, and the resulting increase in
common shares outstanding, as though the acquisitions of Onion Peel, PSS, ABS,
and AIG had taken place on January 1, 1997. The amounts for the DLA acquisition
were immaterial.
F-11
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31,
1998 1997
<S> <C> <C>
Revenue $ 71,424,000 $ 57,382,000
Net loss (817,000) (3,188,000)
Basic and diluted loss per share (0.08) (0.40)
Weighted Average shares outstanding 9,914,000 7,915,000
</TABLE>
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchase been
made at the beginning of the period, or the results, which may occur in the
future.
(3) Summary of Significant Accounting Policies
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
The Netplex Group, Inc. and its wholly owned subsidiaries. All significant
inter-company transactions have been eliminated in consolidation.
Revenue Recognition
-------------------
The majority of the Company's revenue is from consulting services
contracts. This revenue is recognized when the services are performed and
the costs are incurred. The Company generally recognizes hardware and
software product revenue, which does not involve significant integration
services, when the products are delivered to the customer site. Revenue on
fixed price contracts for services, or both hardware and significant
integration services is recognized on the percentage of completion basis,
based on the efforts expended method in accordance with SOP 81-1,
"Accounting for Performance of Construction Type and Certain Production
Type Contracts." During 1999 and 1998 the Company recognized $2,287,277 and
$814,841 of revenue under the percentage of completion method. The amount
of revenue that was recognized on the percentage of completion basis for
1997 was immaterial. The Company's systems integration contracts are
typically 3-6 months and are priced either on a time and material ("T&M")
or a fixed price basis. Substantially all of the Company's contracts
through 1997 were T&M. In 1998 the Company proposed more business on a
fixed price basis because it has found it is able to generate higher
margins than under the T&M proposal and pricing method. Revenue for
maintenance contracts is recognized ratably over the service period of the
underlying contract. Deferred revenue represents the unearned portion of
maintenance contracts and amounts billed in advance of work performed, in
accordance with the terms of the contract. The Company records loss
provisions if required for its contracts at the time that such losses are
identified.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with maturity, at date
of purchase, of three months or less to be cash equivalents. Cash
equivalents are comprised of money market accounts, and are stated at cost,
which approximates fair value.
Property and Equipment
----------------------
Property and equipment is recorded at cost. Depreciation and amortization
are provided for using the straight-line method over the estimated useful
lives of the assets, which range from 3 to 5 years. Computer software
developed for internal use is amortized over 4 years in accordance with SOP
98-1 "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use.".
Property and equipment under capital leases is amortized using the shorter
of the lease term or the estimated useful life.
Upon sale or retirement of property and equipment, the costs and related
accumulated depreciation are eliminated from the accounts and any gain or
loss on such disposition is reflected in the statement of operations.
Expenditures for repairs and maintenance are charged to operations as
incurred.
F-12
<PAGE>
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
-----------------------------------------------------------------------
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of " requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less cost to sell.
Goodwill and Other Intangible Assets
------------------------------------
Goodwill, the cost in excess of the fair value of net assets acquired, is
being amortized by the straight-line method, for periods ranging from 5 to
15 years. Management reviews the valuation and amortization period of
goodwill continually. As part of this review, the Company estimates the
value and future benefits of income generated, to determine whether
impairment has occurred.
Other intangible assets resulting from the Company's acquisitions consist
of a fulfillment database, acquired software, an assembled workforce, and a
non-compete agreement. Such assets are being amortized on the straight-line
basis over periods of 4 to 7 years.
Income Taxes
------------
Income taxes are accounted for using the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the
future tax consequences of differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured by applying enacted statutory tax
rates, that are applicable to the future years in which the deferred tax
assets or liabilities are expected to be settled or realized. Any change in
tax rates on deferred tax assets and liabilities is recognized in net
income in the period in which the rate change is enacted.
Earnings (loss) per share
-------------------------
The Company accounts for earnings (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
which requires companies to present basic earnings per share and diluted
earnings per share (EPS). Basic net loss per common share is calculated
using the weighted average number of common shares outstanding during the
periods. Diluted net loss per common share is calculated using the weighted
average number of common shares and dilutive potential common shares
outstanding during the period. For the years ended December 31, 1999, 1998
and 1997, the assumed exercise of the Company's outstanding stock options,
warrants and Convertible Preferred Stock are not included in the
calculation, as the effect would be anti-dilutive.
Stock Options
-------------
The Company accounts for its 1992 Incentive Stock Option plan ("ISO Plan")
and the 1995 Directors' Stock Option plan ("Directors' Plan") in accordance
with the Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), which permits entities to
recognize, as expense over the vesting period, the fair value of all
stock-based awards on the grant date. Alternatively, SFAS No.123 also
allows entities to continue to apply the provisions of APB 25 and provide
pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and in future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion 25
and provide the pro forma disclosure provisions of SFAS No. 123 for the ISO
and Directors' Plans.
The Company's 1995 Consultant's plan ("Consultant's Plan") allows for the
granting of options to organizations and individuals who are not employees
of the Company. The Company accounts for the options granted under this
plan based on the provisions of SFAS No. 123.
Segment Reporting
-----------------
The Company accounts for its segments pursuant to Statement of Financial
Accounting Standards (SFAS No. 131) "Disclosures about Segments of an
Enterprise and Related Information." 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
F-13
<PAGE>
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: e-Information Services,
e-Infrastructure Services, and Contractor's Resources.
Reclassifications
-----------------
Certain 1998 and 1997 amounts have been reclassified to conform to the
current year presentation. The Company also changed its components of cost
of services to include all labor related to direct labor employees and
their attendant fringe benefits. Prior to 1999, non-billable direct labor
related to idle time, training and other activities was included in
operating expense. These changes were made to permit a more direct
reflection upon gross profits of the impact of increasing or decreasing
labor productivity. All prior year's cost of services and operating
expenses have been restated to reflect these changes.
Use of Estimates
----------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
(4) Equity Financing
During 1999, the Company raised additional equity of $800,000 through the
sale of securities, excluding equity securities issued in acquisitions, as
follows:
. On January 28, 1999, the Company issued a subordinated note for
$800,000, at 14% annual interest, through a private placement to an
accredited investor. The note was subordinated to the Company's line of
credit with a bank. On December 15, 1999, the note was exchanged for an
increase in the number of shares that the Company's Class C Cumulative
Convertible Preferred Stock ("Class C Preferred") is convertible into.
See note 12.
During 1998, the Company raised additional equity of $6,267,510, excluding
equity securities issued in acquisitions, as follows:
. In February, 1998, the Company sold for $100,000, 80,000 shares of
unregistered Common Stock plus a warrant to purchase an additional
100,000 shares of Common Stock at $1.20.
. In March 1998 the Company raised $1,457,000 in a private placement
primarily from accredited investors and employees of the Company. The
Company issued 1,457,000 shares of unregistered Common Stock to
purchasers who agreed not to sell or otherwise distribute their shares
for a period of one year. These restricted shares carry registration
rights and were offered at $1.00 per share.
. On April 7, 1998, the Company sold 1,500 units in a private placement
for $1.5 million ($1.2 million after fees and expenses). Each unit sold
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
incentive warrant to acquire 78,000 shares of Common Stock. The Company
also granted the placement agent a warrant to purchase 39,000 shares of
Common Stock plus a placement fee and a non-accountable expense
allowance equal to 12.53% of the proceeds of the offering. The sale
represents the first half of a transaction that could include the sale
of an additional 1,500 units for $1.5 million at a future date, subject
to the satisfaction of certain conditions (see Note 20).
. In April, 1998, the Company raised $198,000 in two private placements
with accredited investors. The Company issued shares of unregistered
Common Stock to purchasers who agreed not to sell or otherwise
distribute their shares for a period of one year. These restricted
shares carry registration rights and were sold at $1.375 to $1.50 per
share.
. On August 28, 1998, the Company raised $592,000 in a private placement
to accredited investors. The Company issued unregistered shares of
Common Stock to purchasers who agreed not to sell or otherwise
distribute their shares for a period of one year. These restricted
shares carry registration rights and were sold at $1.3125 per share.
F-14
<PAGE>
. On September 28, 1998, the Company sold 1,700 units of prepaid Common
Stock purchase warrants in a private placement, totaling $1.5 million
($1.3 million net of expenses). The prepaid warrants are exercisable in
shares of Common Stock of the Company as is computed by dividing
$1,700,000 by 125% of the fixed exercise price of $1.3938, with respect
to any exercise within the first year, and the lower of the fixed
exercise price and a variable exercise price (subject to a floor price
of $1.00), with respect to any exercise after the first year. As part
of this transaction, the Company also issued to the holders, warrants
to purchase 141,667 shares of Common Stock at an exercise price of
$1.3938 per share. In connection with the issuance of these warrants,
the Company issued 50,000 shares of its Common Stock to the placement
agent.
. On September 30, 1998, the Company received $1.5 million ($1.3 million
net of expenses) for 1,500,000 shares of its Class C Preferred and a
warrant to purchase 150,000 shares of its Common Stock, at $1.375 per
share. Additionally, depending on the length of time the Class C
Preferred is outstanding the warrant holder may be entitled to purchase
up to an additional 450,000 shares of Common Stock at $1.375 per share.
In connection with this transaction the placement agent received a
warrant to purchase 250,000 shares of Common Stock at $1.59 per share.
(5) Liquidity
Under its bank line of credit the Company is required to meet certain
financial and other covenants. As of December 31, 1999, the Company was not
in compliance with the covenant that requires it to maintain tangible net
assets of $900,000 through March 30, 2000, and $1,200,000 thereafter. The
bank was notified but did not issue a notice of default. The default was
cured by the influx of cash in January and February 2000 from the exercise
of options and warrants and the Company's tangible net asset position was
further strengthened by two equity financings in March, 2000.
Based on its current operating plan, the Company believes that the net
proceeds from private placements together with cash anticipated to be
provided by operating activities and amounts expected to be available under
its line of credit will be sufficient to meet its anticipated cash needs
for working capital and capital expenditures for at least the next 24
months. If cash generated from operations is insufficient to satisfy the
Company's liquidity requirements, the Company may seek to sell additional
equity or convertible debt securities or obtain additional credit
facilities. However, no assurance can be given that any such additional
sources of financing will be available on acceptable terms or at all. The
sale of additional equity or convertible debt securities could result in
additional dilution to the Company's stockholders. A portion of the
Company's cash may be used for acquisitions or to acquire or invest in
complimentary businesses or products or to obtain the right to use
complementary technologies.
The Company will continue to make significant investments in its technical
workforce, marketing, training and infrastructure to increase productivity,
build its core competency practice unit skill base and product offerings
and foster growth of its operations.
(6) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Computer software $ 1,254,686 $ 896,134
Computer and office equipment 1,273,764 1,011,359
Furniture and fixtures 978,911 907,679
Equipment under capital leases 838,870 598,653
Leasehold improvements 132,126 101,682
---------- ----------
4,478,357 3,515,507
Accumulated depreciation and amortization (2,587,273) (1,810,532)
---------- ----------
Property and equipment, net $ 1,891,084 $ 1,704,975
========== ==========
</TABLE>
F-15
<PAGE>
Computer software at December 31, 1999 and 1998 includes $668,844 and
$407,338 of software that was developed for internal use. Accumulated
depreciation related to this software was $336,000 and $172,000 at December
31, 1999 and 1998, respectively.
Accumulated depreciation and amortization includes $638,639 and $445,344
related to assets under capital leases at December 31, 1999 and 1998,
respectively.
(7) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Goodwill $ 4,483,798 $ 1,925,917
Acquired database - 930,000
Acquired software 1,254,226 1,254,226
Assembled workforce 1,000,000 1,000,000
Non-Compete 900,000 900,000
7,638,024 6,010,143
---------- ----------
Accumulated amortization (1,545,414) (575,119)
---------- ----------
$ 6,092,610 $ 5,435,024
========== ==========
</TABLE>
(8) Accrued Expenses
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Accrued wages $ 6,009,320 $ 4,150,303
Accrued vacation 386,101 115,912
Accrued commission 599,733 365,958
Accrued payroll taxes 242,872 -
Accrued earn-out 390,042 -
Insurance premium obligation 425,000 -
Accrued project expense 191,310 22,511
Other 1,060,851 1,763,642
---------- ----------
$ 9,305,229 $ 6,418,326
========== ==========
</TABLE>
(9) Line of Credit
The Company has a line of credit agreement with a bank that expires on May
31, 2000. Under the agreement the Company may borrow 80% of eligible
accounts receivable (as defined in the agreement) up to $6,000,000. Amounts
borrowed bear interest at the bank's prime rate plus 3/4%. Outstanding
advances were $5,126,245 and $4,041,000 at December 31, 1999 and 1998,
respectively. The loan is secured by substantially all of the Company's
tangible and intangible assets. The Company is required to meet certain
financial and other covenants. As of December 31, 1999, the Company was not
in compliance with the covenant that requires it to maintain tangible net
assets of $900,000 through March 30, 2000, and $1,200,000 thereafter. The
bank was notified of the violation but did not issue a notice of default.
The default was cured by the influx of cash in January and February 2000
from the exercise of options and warrants and the Company's tangible net
asset position was further strengthened by two equity financings in March,
2000.
F-16
<PAGE>
(10) Income Taxes
The reconciliation between the actual income tax expense and income tax
computed by applying the statutory Federal income tax rate to earnings
before provision for income taxes for the year ended December 31, 1999 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Pretax loss $ (7,424,000) $ (2,549,000) $ (2,874,000)
Computed Federal income tax benefit at 34% (2,524,000) (867,000) (977,000)
Computed state income taxes, net of Federal benefits (408,000) - -
Permanent differences 1,033,000 291,000 278,000
Change in valuation allowance 1,899,000 576,000 699,000
---------- ---------- ---------
$ - $ - $ -
========== ========== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December
31, 1999, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
As of December 31,
1999 1998 1997
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 7,690,000 $ 4,272,000 $ 4,010,000
Research and development credit carryforwards 187,000 187,000 187,000
Depreciation and amortization 215,000 - -
Excess tax basis over book of net assets acquired - 302,000 180,000
Inventory obsolescence reserve 107,000 108,000 56,000
Allowance for doubtful accounts receivable 136,000 146,000 48,000
Accrued liabilities, not presently deductible - - 8,000
---------- --------- ----------
Total gross deferred tax assets 8,335,000 5,015,000 4,489,000
Less valuation allowance (8,335,000) (5,015,000) (4,489,000)
---------- --------- ----------
Net deferred tax asset - - -
========== ========= ==========
</TABLE>
The Company has provided a valuation allowance for all of its deferred tax
assets at December 31, 1999, 1998, and 1997 because the Company could not
conclude that it was more likely than not that it would realize these
assets due principally to the Company's history of losses.
The deferred tax asset related to net operating loss (NOL's) carryforwards
has increased because of the current year tax loss, an adjustment of prior
year NOL to the actual tax return amount, and an adjustment to reflect
Federal and state income tax rates expected to apply in future periods. The
valuation allowance related to the NOL's has also been adjusted
accordingly.
As of December 31, 1999 and 1998, the Company has NOL's for Federal and
state income tax purposes of approximately $19,469,000 and $12,563,000
which may be applied against future taxable income. Additionally, the
Company has $187,000 of research and development tax credits ("Credits")
available to offset future Federal income taxes. The NOL's and credits
expire primarily in years 2002 through 2019. Approximately $14,200,000 of
the NOL's and the credits are subject to annual limitations and other
conditions. Additionally, they may not be fully utilized for tax purposes
due to the change in ownership resulting from the Company's merger in 1996
and an additional change in ownership in 1998.
(11) Commitments
Employment Agreements
---------------------
The Company has employment agreements with several key employees. At
December 31, 1999, the Company's annual obligation under the agreements is
approximately $1,367,000 for each of the next three years.
F-17
<PAGE>
Lease Obligations
-----------------
The Company leases computer equipment, furniture, vehicles, and office
facilities under long-term lease agreements. The following is a schedule of
future minimum lease payments for capital and non-cancelable operating
leases (with initial terms in excess of one year) as of December 31, 1999:
<TABLE>
<CAPTION>
Capital Operating
Year ending December 31: Leases Leases
<S> <C> <C>
2000 $ 139,247 $ 1,142,387
2001 117,550 827,834
2002 100,370 710,943
2003 2,412 335,348
2004 - 162,146
Thereafter - -
-------- ----------
Total minimum lease payments 359,579 $ 3,178,658
Less: amount representing interest 56,185
--------
Present value of minimum lease payments 303,394
Less current portion 107,890
--------
$ 195,504
========
</TABLE>
Total rent expense under operating leases was approximately $1,020,000,
$900,000 and $647,000 for the years ended December 31, 1999, 1998, and
1997.
(12) Preferred Stock
On July 29, 1998, the Company increased the number of shares of its
Preferred Stock from 2,000,000 to 6,000,000.
Class A Cumulative Convertible
------------------------------
On September 19, 1996, the Company raised approximately $3,000,000 through
a private placement of units. Each unit consisted of one share of $.01 par
value Class A Cumulative Convertible Preferred Stock (the "Preferred
Stock") and one warrant to purchase one share of the Company's Common Stock
at $2.50 per share.
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 has
cumulative dividend of 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 ($91,479 and $267,004 at
December 31, 1999 and 1998, respectively) 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) $4 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.
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.
Class B Convertible
-------------------
During 1999 all shares of the Class B Preferred Stock were converted into
643,770 shares of Common Stock. The holders of the shares agreed not to
sell or otherwise distribute the Common Stock for one year.
F-18
<PAGE>
Class C Cumulative Convertible
------------------------------
The Class C Cumulative Convertible Preferred Stock ("Class C Preferred")
has a liquidation preference of $3.99 per share: a dividend rate of 9.99%
per annum that increases to 15% per annum after the date there are no Class
A Cumulative Convertible Preferred Stock issued and outstanding. The Class
C Preferred is convertible at any time, after the earlier of a change in
control of the Company, or five years from the date of issuance. The Class
C Preferred is redeemable at the option of the Company at any time within
five years from the date of issuance. At December 31, 1999 and 1998, the
Class C Preferred is convertible into the number of shares equal to
$2,300,000 and $1,500,000, respectively, plus accrued but unpaid dividends
($150,000 and $37,500 at December 31, 1999 and 1998, respectively), divided
by 25% of the 20 day average trading price of the Common Stock immediately
prior to conversion. The Company has measured the intrinsic value of the
beneficial conversion feature of the Class C Preferred to be $2,300,000 and
$1,500,000 at December 31, 1999 and 1998, respectively. As a result, the
Company will accrete this discount as additional Preferred Stock dividends
over the five years. During 1999 and 1998, the accretion of the discount of
approximately $259,000 and $53,000 was included as additional Preferred
Stock dividends in the Company's EPS calculation.
(13) Common Stock and Warrants
On July 29, 1998, the Company increased the number of shares of its Common
Stock from 20,000,000 to 40,000,000.
Effective April 11, 1996, in connection with the reverse merger of the
Company, it gave its underwriters warrants to purchase 125,000 shares of
the Company's Common Stock, at an exercise price of $3.50 per share,
through April 10, 2001. The fair value of the warrants issued, of
approximately $170,000, had no effect on the Company's equity as a result
of the merger. During 1997 50,000 warrants were exercised.
In connection with the reverse merger of the Company, effective June 7,
1996, the shareholders of Netplex were granted warrants to purchase 150,000
shares of the Company's Common Stock at an exercise price of $2.50 per
share, through June 6, 2001. The fair value of the warrants issued of
approximately $270,000 had no effect on the Company's equity as a result of
the merger.
In connection with the sale of the Class A Convertible Preferred Stock, the
Company gave the underwriters 87,500 units. Each unit consists of an option
to purchase one share of Class A Convertible Preferred Stock at $2.00 per
share and a Common Stock purchase warrant to purchase one share of common
stock at $2.50.
During 1998, the Company issued warrants in connection with several equity
issues. See Note 4, Equity Financing.
The following table sets forth the warrants outstanding and their
weighted-average exercise price:
<TABLE>
<CAPTION>
Shares Price
<S> <C> <C>
January 1, 1997 2,295,000 $ 2.66
Issued - -
Exercised - -
Expired - -
----------- -------
December 31, 1997 2,295,000 $ 2.66
Issued 814,102 1.29
Exercised - -
Expired - -
----------- -------
December 31, 1998 3,109,102 $ 2.30
Issued 225,000 3.00
Exercised (2,093,856) 2.52
Expired (45,000) 3.00
----------- -------
December 31, 1999 1,195,246 $ 2.15
=========== =======
</TABLE>
As of December 31, 1999, 1998 and 1997 all of the warrants were exercisable
and had an average remaining life of 3.5, 3 and 4 years, respectively.
F-19
<PAGE>
(14) Stock Options
The Company has three stock option plans.
. The ISO Plan includes both incentive and non-qualified stock options.
The Board of Directors may grant stock options to employees to
purchase up to 4,100,000 shares of the Company's Common Stock. Stock
options are granted with an exercise price equal to the market price
on the date of grant. All stock options expire 10 years from grant
date (5 years or holder's of more than 10% of the voting stock of the
Company). Generally the options vest ratably and become fully
exercisable after 3 years but not less than 6 months from the date of
grant. At December 31, 1999, approximately 117,000 options are
available for grant under this plan.
. The Directors' Plan authorizes the Board of Directors to grant each
director options to purchase up to 15,000 shares of the Company's
Common Stock, upon election to the Board. Under this plan 300,000
shares of the Company's Common Stock are available. The terms of
option grants for the Directors' Plan are identical to those of the
ISO plan, except that the vesting period for the Directors' Plan is at
the Board's discretion. All options granted under this Plan have
contained two-year vesting periods. At December 31, 1999, 180,000
options are available for grant under this Plan.
. The Consultant's Plan authorizes the Board of Directors to grant
organizations or individuals, who are not employees of the Company, to
purchase up to 800,000 shares of the Company's Common Stock. The
exercise price, terms of the option grant and vesting period for the
Consultant's Plan are at the Board's discretion. At December 31,1999,
approximately 61,000 options are available for grant under this Plan.
Stock option activity for the Plans during the periods indicated is as
follows:
<TABLE>
<CAPTION>
ISO Plan Directors' Plan Consultants' Plan
Wt. Avg. Wt. Avg. Wt. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
<S> <C> <C> <C> <C> <C> <C>
January 1, 1997 2,412,500 $ 2.86 60,000 $ 3.03 - $ -
Granted 2,363,500 1.29 15,000 2.97 32,000 2.50
Exercised (34,967) 2.00 - - - -
Forfeited/Canceled (2,201,033) 2.78 (15,000) 2.50 - -
Expired (50,000) 4.40 - - - -
----------- -------- ---------
December 31, 1997 2,490,000 $ 1.45 60,000 $ 3.15 32,000 $ 2.50
Granted 879,150 1.36 30,000 1.28 391,828 0.94
Exercised (19,500) 0.97 - - - -
Forfeited/Canceled (864,450) 2.04 - - - -
Expired - - - - - -
----------- -------- ---------
December 31, 1998 2,485,200 $ 1.13 90,000 $ 2.53 423,828 $ 1.49
Granted 1,517,750 2.28 37,500 2.85 315,000 1.07
Exercised (831,104) 1.11 - - (464,600) 1.34
Forfeited/Canceled (101,171) 1.89 (7,500) 2.85 - -
Expired - - - - - -
----------- -------- ---------
December 31, 1999 3,070,675 $ 1.67 120,000 $ 2.61 274,228 $ 1.26
=========== ======== =========
</TABLE>
ISO Plan
--------
At December 31, 1999, the exercise price for options granted under the ISO
plan was $.94 to $3.38 and the weighted-average remaining contractual life
of those options was 7.9 years. At December 31, 1999, 1998, and
F-20
<PAGE>
1997, the number of options exercisable under the ISO Plan was 1,175,898,
936,750 and 545,835, respectively. The weighted-average exercise price of
those options was $1.04, $1.08 and $2.73, respectively.
Directors' Plan
---------------
At December 31, 1999, the exercise price for options granted under the
Directors' Plan was $1.06 to $3.56 and the weighted-average remaining
contractual life of those options was 2.7 years. At December 31, 1999, 1998
and 1997, the number of options exercisable under the Directors' Plan was
75,000, 52,500 and 25,000, respectively. The weighted-average exercise
price of those options was $2.61, $3.17 and $3.55, respectively.
Consultants' Plan
-----------------
At December 31, 1999, the exercise price for all options granted under the
Consultants' Plan was $1.00 to $2.50 and the weighted-average remaining
contractual life of those options was 3.5 years. All options, granted under
the Consultants' Plan, are exercisable at the time of grant. No options
were granted prior to 1997. The weighted-average exercise price of those
options was $1.25, $1.49 and $2.50 at December 31, 1999, 1998 and 1997,
respectively. During 1997, in accordance with SFAS No. 123, the Company
recorded compensation expense of $40,000 for the 32,000 options granted,
based on the value of the services provided. The options granted during
1999 and 1998 were in connection with certain equity issues, and as a
result had no compensation expense.
The Company applies APB Opinion No. 25 in accounting for its ISO and
Directors' Plans and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net loss - As reported $ (7,424,000) $ (2,549,000) $ (2,874,000)
Net loss - Pro forma $ (10,806,000) $ (3,466,000) $ (4,836,000)
Net loss per share - As reported $ (0.63) $ (0.31) $ (0.46)
Net loss per share - Pro forma $ (0.86) $ (0.37) $ (0.71)
Weighted average shares outstanding 12,516,000 9,260,000 6,821,000
</TABLE>
The per share weighted average fair value of the ISO on the grant date in
1999, 1998, and 1997 was $2.29, $1.17 and $1.20, respectively using the
Black -Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 5.98% 5.36% 6.24%
Expected volatility 167% 106% 103%
Expected life (years) 7.86 6.75 10.00
</TABLE>
The per share weighted average fair value of the Directors' Plan options on
the grant date in 1999, 1998 and 1997 was $2.85, $1.02 and $2.76 and
respectively using the Black - Scholes option pricing model with the
following weighted average assumptions:
F-21
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 6.10% 5.27% 6.97%
Expected volatility 167% 106% 103%
Expected life (years) 2.72 5.00 10.00
</TABLE>
(15) Related Party Transactions
The Company paid $45,064 in 1999, $23,756 in 1998 and $28,800 in 1997 for
accounting, tax and consulting services to a CPA firm in which a partner of
the firm is a director of the Company.
In January, 1997, the Company loaned $150,000 to its chief executive
officer for relocation expenses. The loan bears interest at 8% per annum.
The note and accrued interest were paid in full in January 2000.
A Director of the Company is the President and Director of a company that
owns all of the Company's Class C Convertible Preferred Stock (Note 12).
(16) Litigation
From time to time, the Company is subject to litigation in the ordinary
course of business.
On September 4, 1997, Data Systems Analysts, Inc. ("DSA"), a software
design and consulting company, filed a complaint against the Company and
Technology Development Systems, Inc. (TDS), a wholly owned subsidiary of
the Company, alleging copyright infringement and breach of the Company's
agreement with DSA. The Complaint also seeks damages against XcelleNet,
Inc., which the Company has indemnified. The Complaint claims damages in
excess of $300,000 plus punitive damages and attorney fees. The case is
currently in discovery. The Company is vigorously defending against the
action. The nature and amount of damages, if DSA's allegations are proven,
appear uncertain.
The Company is not currently involved in any other litigation or
proceedings, which if decided against the Company would have a material
adverse affect, either individually or in the aggregate.
(17) Employee Benefit Plans
On January 1, 1997, the Company and its CR subsidiary merged their 401(k)
plans. Under the merged Plan, all full time employees with over 1000 hours
of service to the Company or its subsidiaries are eligible to participate.
The Company matches one-half of the employees' voluntary contributions up
to a maximum Company contribution of 5% of participants' salaries. The
Company's contribution to the Plan during 1999, 1998 and 1997 was $405,725,
$704,333 and $647,418, respectively.
The Company's CR subsidiary has a profit sharing plan for its employees
whereby up to 10% of the employees salary can be contributed to the plan.
The Company made no matching contributions to this plan during 1999 1998,
and 1997.
The Company does not provide any post retirement or post employment
benefits.
(18) Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company's reportable segments are
strategic business units that offer different products and services to
different industries through out the United States.
The Company's reportable segments are as follows:
-- e-Information Systems (e-Info)--provides professional services that
constitute the strategic and creative aspects of Netplex's e-solutions,
as well as complete Internet-based application development and Retail
Industry-focused consulting and integration services.
-- e-Infrastructure Services (e-Infra)--provides information security,
performance management, contingency planning, and network management
services that ensure the long-term viability of Netplex's e-solutions,
as well as other aspects of our customers' businesses.
F-22
<PAGE>
-- Contractor's Resources (CR)-- provides business infrastructure and
advisory services for its membership of independent contractors, which
allow members to maximize the freedom and wealth potential of the
independent lifestyle while enjoying the benefits associated with
full-time employment.
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 not significant.
In 1999, the Company restructured its segments by combining all operations
not related to Contractor's Resources into a single profit and loss center,
e-Infrastructure services, except for its operations related to the
acquisition of AIG that now form the e-Information Services segment. The
Company also changed its components of cost of services to include all
labor related to direct labor employees and their attendant fringe
benefits. Prior to 1999, non-billable direct labor related to idle time,
training and other activities was included in operating expense. These
changes were made to permit a more direct reflection upon gross profits of
the impact of increasing or decreasing labor productivity. All prior year's
cost of services and operating expenses have been restated to reflect these
changes.
The reportable segments are measured and resources are allocated both on
income before income taxes and EBITDA, which represents the sum of income
before taxes, depreciation, amortization, and interest. EBITDA is not a
measure of performance or financial condition under generally accepted
accounting principles, but is presented to provide additional information.
The Company considers EBITDA to be a useful measure of the Company's
performance, because EBITDA can be used to measure the Company's ability to
service debt, fund capital expenditures and expand business. EBITDA should
not be considered in isolation or as a substitute for other measures of
financial performance or liquidity under generally accepted accounting
principles. While EBITDA is frequently used as a measure of operations and
the ability to meet debt service requirements, it is not necessarily
comparable to other similarly titled captions of other companies due to the
potential inconsistencies in the method of calculation.
The table below presents information about segments used by the chief
operating decision-maker of Netplex as of and for the years ended December
31, 1999, 1998, and 1997:
F-23
<PAGE>
<TABLE>
<CAPTION>
Segment
e-Info e-Infra CR Total
<S> <C> <C> <C> <C>
1999:
Revenues $ 11,044,166 $ 38,117,034 $ 38,624,064 $ 87,785,264
Gross profit 5,442,115 10,099,030 1,373,887 16,915,932
EBITDA 2,136,363 2,315,685 (1,713,017) 2,739,031
Total assets 8,220,000 8,709,000 8,949,000 25,878,000
=========== ========== ========== ===========
1998:
Revenues $ 3,533,025 $ 22,865,593 $ 34,880,542 $ 61,279,160
Gross profit 1,690,505 6,979,904 1,324,682 9,995,091
EBITDA 980,679 264,297 180,539 1,425,515
Total assets 8,378,000 6,794,000 4,269,000 19,441,000
=========== ========== ========== ===========
1997:
Revenues $ - $ 8,419,784 $ 32,048,350 $ 40,468,134
Gross profit - 3,286,876 1,096,104 4,382,980
EBITDA - (829,134) (73,016) (902,150)
Total assets - 2,598,000 3,094,000 5,692,000
=========== ========== ========== ===========
</TABLE>
Reconciliation of Segment EBITDA to Net Loss
--------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Segment EBITDA $ 2,739,031 $ 1,425,515 $ (902,150)
Unallocated corporate expenses (5,530,469) (2,736,622) (1,480,453)
Depreciation & amortization (4,248,172) (1,083,741) (464,663)
Interest expense, net (384,213) (153,874) (26,337)
Tax expense - - -
----------- ----------- ----------
Net loss $ (7,423,823) $ (2,548,722) $ (2,873,603)
=========== =========== ==========
</TABLE>
(19) Restructuring Charge
The Company recorded a restructuring charge of $275,000 during the third
quarter of 1998, related to the reduction of duplicate costs and the
consolidation of facilities, including severance costs. The Company
recorded $115,000 during the forth quarter of 1998, as a reduction to the
restructuring charge, resulting from an update of the Company's estimated
restructuring costs.
(20) Subsequent Events
In March 2000, the Company closed two private placement equity financings.
The Company issued prepaid warrants that resulted in net proceeds to the
Company of $1.3 million, representing the second half of an equity raise on
April 7, 1998 discussed in Note 3. In addition, the Company closed the
private placement of convertible preferred stock that resulted in net
proceeds to the Company of $9.5 million.
The following unaudited pro forma consolidated balance sheet sets forth the
Company's financial position as if these two transactions had occurred as
of December 31, 1999:
F-24
<PAGE>
<TABLE>
<CAPTION>
December 31,
December 31, Pro Forma 1999
1999 Adjustments Pro Forma
Actual (Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
------
Cash $ 4,220,148 $ 10,800,000 $ 15,020,148
Other current assets 13,437,585 - 13,437,585
----------- ----------- ------------
Total current assets 17,657,733 10,800,000 28,457,733
Other assets 2,666,374 - 2,666,374
Goodwill and other intangibles, net 6,092,610 - 6,092,610
----------- ----------- ------------
Total Assets $ 26,416,717 $ 10,800,000 $ 37,216,717
=========== =========== ============
Liabilities & Stockholders' Equity
----------------------------------
Accounts payable $ 3,294,403 - $ 3,294,403
Line of credit 5,126,245 - 5,126,245
Accrued expenses 9,305,229 - 9,305,229
Other current liabilities 301,152 - 301,152
Other liabilities 1,045,504 - 1,045,504
----------- ----------- ------------
Total liabilities 19,072,533 - 19,072,533
Minority interest 481,877 - 481,877
Temporary Equity
Redeemable Preferred Series D - 9,500,000 9,500,000
Prepaid Warrants - 1,300,000 1,300,000
----------- ----------- ------------
Total Temporary Equity - 10,800,000 10,800,000
----------- ----------- ------------
Shareholders' Equity
Preferred stock
Class A 1,099 - 1,099
Class C 15,000 - 15,000
Common stock 16,137 - 16,137
Additional paid in capital 21,762,418 - 21,762,418
Accumulated deficit (14,932,347) - (14,932,347)
----------- ----------- ------------
Total shareholders' equity 6,862,307 - 6,862,307
----------- ----------- ------------
Total liabilities and stockholders' equity $ 26,416,717 $ 10,800,000 $ 37,216,717
=========== =========== ============
</TABLE>
F-25
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION> (Unaudited)
June 30, December 31,
Assets 2000 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,421,644 $ 4,220,148
Accounts receivable, net of allowance for doubtful
accounts of $358,000 and $342,000, respectively 9,877,628 12,513,823
Prepaid expenses and other current assets 688,806 923,762
----------- -----------
Total current assets 17,988,078 17,657,733
Property and equipment, net 1,643,415 1,891,084
Other assets 672,883 775,290
Goodwill and other intangible assets, net 6,142,227 6,092,610
----------- -----------
Total assets $ 26,446,603 $ 26,416,717
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,852,677 $ 3,294,403
Line of credit 1,379,000 5,126,245
Accrued expenses and other current liabilities 8,767,553 9,305,229
Capital lease obligation, current portion 46,563 107,890
Deferred revenues 212,682 193,262
----------- -----------
Total current liabilities 13,258,475 18,027,029
Insurance premium due 425,000 850,000
Capital lease obligations, net of current portion 195,504 195,504
----------- -----------
Total liabilities 13,878,979 19,072,533
Commitments and contingencies
Minority interest in subsidiary 230,339 481,877
Temporary Equity:
Redeemable Preferred Stock Class D Cumulative, $.01 par value;
15,000 shares authorized; 10,000 shares issued and
outstanding at June 30, 2000 9,500,000 -
Prepaid warrants 1,300,000 -
----------- -----------
Total temporary equity 10,800,000 -
Stockholders' equity:
Preferred Stock:
Class A Cumulative, $.01 par value, liquidation preference of $4.00 per
share; 2,000,000 shares authorized; 80,597 and 109,961 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively 805 1,099
Class C Cumulative, $.01 par value; liquidation preference of $3.50
per share; 2,500,000 shares authorized; 1,500,000 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively 15,000 15,000
Common Stock: $.001 par value, 40,000,000 shares authorized;
18,238,284 and 16,137,250 shares issued and outstanding at June 30,
2000, and December 31, 1999, respectively 18,238 16,137
Additional paid in capital 24,069,949 21,762,418
Accumulated deficit (22,566,707) (14,932,347)
----------- -----------
Total stockholders' equity 1,537,285 6,862,307
----------- -----------
Total liabilities and stockholders' equity $ 26,446,603 $ 26,416,717
=========== ===========
</TABLE>
See notes to condensed consolidated statements
F-26
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended
June 30
2000 1999
(Unaudited)
<S> <C> <C>
Revenues
Services $ 34,815,267 $ 34,825,035
Product 6,631,037 9,627,248
----------- -----------
41,446,304 44,453,283
----------- -----------
Cost of revenues
Services 29,890,629 31,602,804
Product 4,538,682 7,372,007
----------- -----------
34,429,311 35,339,811
----------- -----------
Gross profit 7,016,993 9,113,472
Selling, general and administrative expenses 14,865,521 8,663,595
----------- -----------
Operating income (loss) (7,848,528) 449,877
Interest expense, net (37,368) (199,600)
----------- -----------
Net Income(loss) before income taxes (7,885,896) 250,277
Provision for (benefit from) income taxes - -
----------- -----------
Income (loss) before minority interest (7,885,896) 250,277
Minority interest 251,538 -
----------- -----------
Net income (loss) (7,634,358) 250,277
Preferred Stock dividend (488,725) (236,355)
----------- -----------
Loss applicable to common shareholders $ (8,123,083) $ 13,922
=========== ===========
Basic and diluted loss per common share $ (0.46) $ 0.00
=========== ===========
Weighted average common shares outstanding:
Basic and diluted $ 17,653,125 $ 11,195,457
=========== ===========
</TABLE>
See notes to condensed consolidated statements
F-27
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
(Unaudited)
<S> <C> <C>
Net cash provided(used) by operating activities $ (4,700,124) $ 592,214
---------- ----------
Investing activities:
Net cash (paid) acquired in acquisitions (425,000) (1,650,450)
Purchases of property and equipment (974,146) (340,747)
---------- ----------
Net cash used in investing activities (1,399,146) (1,991,197)
---------- ----------
Financing activities:
Net proceeds from stock offerings 13,410,589 -
Net borrowings on line of credit (3,747,245) 342,000
Proceeds from borrowings of subordinated debt - 800,000
Proceeds from the exercise of stock options and warrants - 1,103,660
Payment of dividends on preferred stock (301,251) (371,313)
Principal payments on capital lease obligations (61,327) (56,390)
Payment of other notes payable - (300,000)
Employee receivables - (82,313)
---------- ----------
Net cash provided by financing activities 9,300,766 1,435,644
---------- ----------
Increase in cash and cash equivalents 3,201,496 37,361
Cash and cash equivalents at beginning of period 4,220,148 870,465
---------- ----------
Cash and cash equivalents at end of period $ 7,421,644 $ 907,826
========== ==========
Supplemental information:
Cash paid during the period for:
Interest $ 176,228 $ 292,081
Income taxes $ - $ -
</TABLE>
See notes to condensed consolidated statements
F-28
<PAGE>
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2000 and 1999
(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, 1999.
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 June 30, 2000 and December 31, 1999 and the results of its
operations and its cash flows for the six months ended June 30, 2000 and 1999.
Interim results are not necessarily indicative of the results that may be
expected for the full year.
Basis of Presentation
The accompanying financial statements include the accounts of The Netplex Group,
Inc. and its wholly owned subsidiaries. All acquisitions by the Company are
accounted for as purchases. Additionally, the operating results of all
acquisitions have been included in the consolidated financial statements from
their effective dates of acquisition. 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 relevant 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
relevant periods. For the six months ended June 30, 2000 and 1999, 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.
Sale of Equity Securities
In March 2000, the Company sold 10,000 shares of convertible Series D Preferred
Stock that resulted in net proceeds to the Company of $9.5 million and issued
prepaid warrants that resulted in net proceeds to the Company of $1.3 million.
The conversion ratio of the preferred to common was established based on 120% of
the weighted average stock price during the thirty trading day period between
April 3, 2000 and May 16, 2000, which was $5.87 per share. The Series D
Preferred Stock securities purchase agreement's call option provision, relating
to the time the Company must obtain additional financing, was amended effective
July 31, 2000. The amendment extends the call option trigger date to October
31, 2000 (previously August 1, 2000) and requires the following by such date:
(1) the Company's subsidiaries must complete the sale of common stock or
convertible securities which results in net proceeds of at least $7 million, and
(2) the Company and/or its subsidiaries must complete the sale of common stock
or convertible securities which results in net proceeds of at least $5 million.
The call option provides the holder an option to purchase an aggregate of 5,000
shares of Series D Preferred Stock and related warrants at an aggregate purchase
price of $5 million if the Company does not complete the sale of equity
securities described above. The conversion price of the preferred stock and the
exercise price of the related warrants are based upon 120% of the weighted
average price of the Company's Common Stock for 15 consecutive trading days
beginning the first day after the holders are entitled to exercise the call
option. Further information can be obtained by reading the Company's amended
Registration Statement on Form S-3 filed on Form S-1 as filed with the SEC on
August 8, 2000.
See notes to condensed consolidated statements
F-29
<PAGE>
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.
The Company's reportable segments are as follows:
-- e-Information Systems (e-Info)--provides professional services that
constitute the strategic and creative aspects of Netplex's e-solutions,
as well as complete Internet-based application development and Retail
Industry-focused consulting and integration services.
-- e-Infrastructure Services (e-Infra)--provides information security,
performance management, contingency planning, and network management
services that ensure the long-term viability of Netplex's e-solutions,
as well as other aspects of our customers' businesses.
-- Contractor's Resources (CR)-- provides business infrastructure and
advisory services for its membership of independent contractors, which
allow members to maximize the freedom and wealth potential of the
independent lifestyle while enjoying the benefits associated with
full-time employment.
In 1999, the Company restructured its segments by combining all operations not
related to Contractor's Resources into a single profit and loss center,
e-Infrastructure services, except for its operations related to the acquisition
of AIG that now form the e-Information Services segment. The Company also
changed its components of cost of services to include all labor related to
direct labor employees and their attendant fringe benefits. Prior to 1999,
non-billable direct labor related to idle time, training and other activities
was included in operating expenses. These changes were made to permit a more
direct reflection upon gross profits of the impact of increasing or decreasing
labor productivity. All prior year's cost of services and operating expenses
have been restated to reflect these changes.
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").
Inter-segment revenues are immaterial.
The table below presents information about segments used by the chief operating
decision-maker of Netplex as of and for the six months ended June 30, 2000 and
1999:
<TABLE>
<CAPTION>
Segment
e-Info e-Infra CR Total
<S> <C> <C> <C> <C>
2000:
Revenues $ 5,322 $ 15,466 $ 20,660 $ 41,448
Gross profit 2,275 3,968 775 7,018
EBITDA 61 43 (2,638) (2,534)
1999:
Revenues $ 5,067 $ 20,554 $ 18,842 $ 44,453
Gross profit 2,607 5,850 656 9,113
EBITDA 1,206 2,042 116 3,364
Total assets:
June 30, 2000: $ 7,360 $ 6,127 $ 7,140 $ 20,627
Unallocated 5,820
Total 26,447
=================================================================================
June 30, 1999: $ 7,377 $ 9,005 $ 6,962 $ 23,344
---------------------------------------------------------------------------------
Unallocated 278
Total 23,622
=================================================================================
</TABLE>
See notes to condensed consolidated statements
F-30
<PAGE>
Reconciliation of Segment Profit or (Loss) to Income (Loss) from Operations:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Segment EBITDA $ (2,534) $ 3,364
Unallocated corporate expenses (4,184) (1,987)
Depreciation and amortization (954) (927)
Interest expense, net (38) (200)
Tax expense - -
-------- -------
Income (Loss) from continuing operations $ (7,634) $ 250
======== =======
</TABLE>
New pronouncements
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation: an interpretation of APB Opinion No.
25" ("FIN 44"). FIN 44 provides guidance on how to account for stock-based
compensation, including stock option grants. FIN 44 is effective July 1, 2000.
The Company intends to adopt FIN 44 during the fiscal quarter ended September
30, 2000. The Company does not expect that the adoption of the Interpretation
will have a significant effect on the Company's results of operations or its
financial position.
See notes to condensed consolidated statements
F-31
<PAGE>
Part II. Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses expected to be
incurred in connection with the issuance and distribution, all of which will be
paid by Netplex:
<TABLE>
<S> <C>
Registration Fee-- Securities and Exchange Commission................................... $ 5,360
Listing Fee-- Nasdaq SmallCap Market.................................................... $ 7,500
Listing Fee - Boston Stock Exchange..................................................... $ 5,000
Legal Fees and Expenses................................................................. $ 100,000
Printing and Engraving Expenses......................................................... $ 1,000
Miscellaneous........................................................................... $ 15,000
---------
Total................................................................................... $ 133,860
</TABLE>
Except for the Securities and Exchange Commission Registration fee, the
Nasdaq SmallCap Market listing fee and the Boston Stock Exchange listing fee,
the costs and expenses are estimates.
Item 14. Indemnification of Directors and Officers.
Except as hereinafter set forth, there is no statute, charter provision,
by-law, contract or other arrangement under which any controlling person,
director or officer of Netplex is insured or indemnified in any manner against
liability that he may incur in his capacity as such.
Our authority to indemnify our directors and officers is governed by the
provisions of Article 7 of the New York Business Corporation Law (the "BCL").
Section 722 of the BCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against judgments,
fines, amounts paid in settlement, and reasonable expenses, including attorneys'
fees, in connection with actions or proceedings, whether civil or criminal
(other than an action by or in the right of the corporation--a "derivative
action"), if they acted in good faith and in a manner they reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful. A similar standard is applicable in the case of
derivative actions, except indemnification only extends to amounts paid in
settlement and reasonable expenses (including attorneys' fees) incurred in
connection with the defense or settlement of such actions, and the statute does
not apply in respect of a threatened action, or a pending action that is settled
or otherwise disposed of, and requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. Section 721 of the BCL provides that Article 7 of the BCL is
not exclusive of other indemnification that may be granted by a corporation's
certificate of incorporation, disinterested director vote, shareholder vote,
agreement or otherwise.
A more specific description of the relevant law is provided below.
Section 721. Nonexclusivity of Statutory Provisions for Indemnification of
Directors and Officers -- The indemnification and advancement of expenses
granted pursuant to, or provided by, this article shall not be deemed exclusive
of any other rights to which a director or officer seeking indemnification or
advancement of expenses may be entitled, whether contained in the certificate of
incorporation or the by-laws or, when authorized by such certificate of
incorporation or by-laws, (i) a resolution of shareholders, (ii) a resolution of
directors, or (iii) an agreement providing for such indemnification, provided
that no indemnification may be made to or on behalf of any director or officer
if a judgment or other final adjudication adverse to the director or officer
establishes that his acts were committed in bad faith or were the result of
active and deliberate dishonesty and were material to the
II-1
<PAGE>
cause of action so adjudicated, or that he personally gained in fact a financial
profit or other advantage to which he was not legally entitled. Nothing
contained in this article shall affect any rights to indemnification to which
corporate personnel other than directors and officers may be entitled by
contract or otherwise under law.
Section 722. Authorization for Indemnification of Directors and Officers --
(a) A corporation may indemnify any person made, or threatened to be made, a
party to an action or proceeding (other than one by or in the right of the
corporation to procure a judgment in its favor), whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which any director or officer of the
corporation served in any capacity at the request of the corporation, by reason
of the fact that he, his testator or intestate, was a director or officer of the
corporation, or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees actually and necessarily incurred as a result of such action or
proceeding, or any appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation and, in criminal actions or proceedings, in addition, had no
reasonable cause to believe that his conduct was unlawful.
(b) The termination of any such civil or criminal action or proceeding by
judgment, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not in itself create a presumption that any such director or
officer did not act, in good faith, for a purpose which he reasonably believed
to be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interests of the corporation or that he had reasonable
cause to believe that his conduct was unlawful.
(c) A corporation may indemnify any person made, or threatened to be made,
a party to an action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he, his testator or intestate, is or was
a director or officer of the corporation, or is or was serving at the request of
the corporation as a director or officer or any other corporation of any type or
kind, domestic or foreign, of any partnership, joint venture, trust, employee
benefit plan or other enterprise, against amounts paid in settlement and
reasonable expenses, including attorneys' fees, actually and necessarily
incurred by him in connection with the defense or settlement of such action, or
in connection with an appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation, except that no indemnification under this paragraph shall be
made in respect of (1) a threatened action, or a pending action which is settled
or otherwise disposed of, or (2) any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation, unless and only
to the extent that the court in which the action was brought, or, if no action
was brought, any court of competent jurisdiction, determines upon application
that, in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
(d) For the purpose of this section, a corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect to an
employee benefit plan pursuant to applicable law shall be considered fines; and
action taken or omitted by a person with respect to an employee benefit plan in
the performance of such person's duties for a purpose reasonably believed by
such person to be in the interest of the participants and beneficiaries of the
plan shall be deemed to be for a purpose which is not opposed to the best
interests of the corporation.
Section 723. Payment of Indemnification Other Than By Court Award --(a) A
person who has been successful, on the merits or otherwise, in the defense of a
civil or criminal action or proceeding of the character described in section 722
shall be entitled to indemnification as authorized in such section.
II-2
<PAGE>
(b) Except as provided in paragraph (a), any indemnification under section
722 or otherwise permitted by section 721, unless ordered by a court under
section 724 (Indemnification of directors and officers by a court), shall be
made by the corporation, only if authorized in the specific case:
(1) By the board acting by a quorum consisting of directors who are
not parties to such action or proceeding upon a finding that the
director or officer has met the standard of conduct set forth in
section 722 or established pursuant to section 721, as the case
may be, or,
(2) If a quorum under subparagraph (1) is not obtainable or,
even if obtainable, a quorum of disinterested directors so
directs;
(A) By the board upon the opinion in writing of independent
legal counsel that indemnification is proper in the
circumstances because the applicable standard of conduct
set forth in such sections has been met by such director or
officer, or
(B) By the shareholders upon a finding that the director or
officer has met the applicable standard of conduct set
forth in such sections.
(C) Expenses incurred in defending a civil or criminal action
or proceeding may be paid by the corporation in advance of
the final disposition of such action or proceeding upon
receipt of an undertaking by or on behalf of such director
or officer to repay such amount as, and to the extent,
required by paragraph (a) of section 725.
Section 724. Indemnification of Directors and Officers by a Court --(a)
Notwithstanding the failure of a corporation to provide indemnification, and
despite any contrary resolution of the board or of the shareholders in the
specific case under section 723 (Payment of indemnification other than by court
award), indemnification shall be awarded by a court to the extent authorized
under section 722 (Authorization for indemnification of directors and officers),
and paragraph (a) of section 723.
Application therefor may be made, in every case, either:
(1) In the civil action or proceeding in which the expenses were
incurred or other amounts were paid, or
(2) To the supreme court in a separate proceeding, in which case
the application shall set forth the disposition of any
previous application made to any court for the same or
similar relief and also reasonable cause for the failure to
make application for such relief in action or proceeding in
which the expenses were incurred or other amounts were paid.
(b) The application shall be made in such manner and form as may be
required by the applicable rules of court or, in the absence thereof, by
direction of a court to which it is made. Such application shall be upon notice
to the corporation. The court may also direct that notice be given at the
expense of the corporation to the shareholders and such other persons as it may
designate in such manner as it may require.
(c) Where indemnification is sought by judicial action, the court may
allow a person such reasonable expenses, including attorneys' fees, during the
pendency of the litigation as are necessary in connection with his defense
therein, if the court shall find that the defendant has by his pleadings or
during the course of the litigation raised genuine issues of fact or law.
Section 725. Other Provisions Affecting Indemnification of Directors
and Officers -- (a) All expenses incurred in defending a civil or criminal
action or proceeding which are advanced by the corporation under
II-3
<PAGE>
paragraph (c) of section 723 (Payment of indemnification other than by court
award) or allowed by a court under paragraph (c) of section 724 (Indemnification
of directors and officers by a court) shall be repaid in case the person
receiving such advancement or allowance is ultimately found, under the procedure
set forth in this article, not to be entitled to indemnification or, where
indemnification is granted, to the extent the expenses so advanced by the
corporation or allowed by the court exceed the indemnification to which he is
entitled:
(b) No indemnification, advancement or allowance shall be made under this
article in any circumstance where it appears:
(1) That the indemnification would be inconsistent with the law of the
jurisdiction of incorporation of a foreign corporation which
prohibits or otherwise limits such indemnification;
(2) That the indemnification would be inconsistent with a provision of
the certificate of incorporation, a by-law, a resolution of the
board or of the shareholders, an agreement or other proper
corporate action, in effect at the time of the accrual of the
alleged cause of action asserted in the threatened or pending
action or proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits
indemnification; or
(3) If there has been a settlement approved by the court, that the
indemnification would be inconsistent with any condition with
respect to indemnification expressly imposed by the court in
approving the settlement.
(c) If any expenses or other amounts are paid by way of indemnification,
otherwise than by court order or action by the shareholders, the corporation
shall, not later than the next annual meeting of shareholders unless such
meeting is held within three months from the date of such payment, and, in any
event, within fifteen months from the date of such payment, mail to its
shareholders of record at the time entitled to vote for the election of
directors a statement specifying the persons paid, the amounts paid, and the
nature and status at the time of such payment of the litigation or threatened
litigation.
(d) If any action with respect to indemnification of directors and officers
is taken by way of amendment of the by-laws, resolution of directors, or by
agreement, then the corporation shall, not later than the next annual meeting of
shareholders, unless such meeting is held within three months from the date of
such action, and, in any event, within fifteen months from the date of such
action, mail to its shareholders of record at the time entitled to vote for the
election of directors a statement specifying the action taken.
(e) Any notification required to be made pursuant to the foregoing
paragraph (c) or (d) of this section by any domestic mutual insurer shall be
satisfied by compliance with the corresponding provisions of section one
thousand two hundred sixteen of the insurance law.
(f) The provisions of this article relating to indemnification of directors
and officers and insurance therefor shall apply to domestic corporations and
foreign corporations doing business in this state, except as provided in section
1320 (Exemption from certain provisions).
Section 726. Insurance for Indemnification of Directors and Officers --(a)
Subject to paragraph (b), a corporation shall have power to purchase and
maintain insurance:
(1) To indemnify the corporation for any obligation which it incurs as a
result of the indemnification of directors and officers under the
provisions of this article, and
(2) To indemnify directors and officers in instances in which they may be
indemnified by the corporation under the provisions of this article,
and
II-4
<PAGE>
(3) To indemnify directors and officers in instances in which they may not
otherwise be indemnified by the corporation under the provisions of
this article provided the contract of insurance covering such
directors and officers provides, in a manner acceptable to the
superintendent of insurance, for a retention amount and for co-
insurance.
(b) No insurance under paragraph (a) may provide for any payment, other
than cost of defense, to or on behalf of any director or officer:
(1) if a judgment or other final adjudication adverse to the insured
director or officer establishes that his acts of active and deliberate
dishonesty were material to the cause of action so adjudicated, or
that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled, or
(2) in relation to any risk the insurance of which is prohibited under the
insurance law of this state.
(c) Insurance under any or all subparagraphs of paragraph (a) may be
included in a single contract or supplement thereto. Retrospective rated
contracts are prohibited.
(d) The corporation shall, within the time and to the persons provided in
paragraph (c) of section 725 (Other provisions affecting indemnification of
directors or officers), mail a statement in respect of any insurance it has
purchased or renewed under this section, specifying the insurance carrier, date
of the contract, cost of the insurance, corporate positions insured, and a
statement explaining all sums, not previously reported in a statement to
shareholders, paid under any indemnification insurance contract.
(e) This section is the public policy of this state to spread the risk of
corporate management, notwithstanding any other general or special law of this
state or of any other jurisdiction including the federal government.
Our amended Certificate of Incorporation provides that the personal
liability of our directors to Netplex or our shareholders for damages for any
breach of duty as directors, is eliminated, provided that nothing shall limit
the liability of any director if a judgment or other final adjudication adverse
to him establishes that his acts or omissions were in bad faith or involved
intentional misconduct.
We have also entered into indemnification agreements with each of our
officers and directors.
The holders of Series D Preferred Stock have agreed to indemnify Netplex
against liabilities concerning untrue statements or omissions that they make, or
violations of the securities laws that they commit, with respect to the
registration of the shares of common stock, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be given to directors, officers and controlling persons of the registrant or
others under the above provisions, or otherwise, the registrant has been
informed that in the opinion of the Commission, indemnification for liabilities
under the Securities Act is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against liabilities under the Securities Act, other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding, is asserted by a director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether that
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of the issue.
Item 15. Recent Sales of Unregistered Securities.
II-5
<PAGE>
We sold the following securities in the past three years that were not
registered under the Securities Act:
In July 1997, we issued 80,000 shares of common stock and the obligation to
issue additional shares of common stock based on the closing price of the common
stock on December 31, 1998, in exchange for the outstanding membership interests
of Onion Peel Solutions LLC. In February, 1999, we issued 297,396 additional
shares of common stock based on the December 31, 1998, closing price. This
transaction was completed without an underwriter and exemption from registration
is claimed under Section 4(2) of the Securities Act because it did not involve a
public offering.
In February 1998, we sold 80,000 shares of common stock and warrants to
purchase 100,000 shares of common stock at a price of $1.20 per share, for an
aggregate of $100,000. The warrants have a 5-year term and are immediately
exercisable. This transaction was completed without an underwriter and exemption
from registration is claimed under Section 4(2) of the Securities Act because it
did not involve a public offering.
In March 1998, we sold 1,457,000 shares of common stock at a price of $1.00
per share for an aggregate of $1,457,000 to accredited investors and several of
our employees. These shares carry registration rights. This transaction was
completed without an underwriter and exemption from registration is claimed
under Section 4(2) of the Securities Act because it did not involve a public
offering.
In April 1998, we sold 1,500 units at a price of $1,000 per unit for an
aggregate of $1.7 million to certain accredited investors (the "Zanett 1998
Private Placement"). Each unit consists of a warrant to purchase the number of
shares of common stock equal to $1,000 divided by an adjustable exercise price
and an additional warrant to acquire 52 shares of common stock at a price equal
to the adjustable exercise price. The warrants have a 5-year term and are
immediately exercisable. We paid an aggregate placement fee and non-accountable
expense allowance of $284,500 and also granted the placement agent a warrant to
purchase 39,000 shares of common stock at a price of $1.47. The placement agent
warrants have a 10-year term and are immediately exercisable. The placement
agent for this transaction was The Zanett Securities Corporation and exemption
from registration is claimed under Section 4(2) of the Securities Act because it
did not involve a public offering.
In April 1998, we sold 100,000 shares of common stock for $1.50 per share
for an aggregate of $150,000 to accredited investors. These shares carry
registration rights. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In April 1998, we sold 35,000 shares of common stock for $1.375 per share
for an aggregate of $48,125 to accredited investors. These shares carry
registration rights. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In June 1998, we, in addition to other consideration, issued 450,000 shares
of common stock in exchange for all of the outstanding equity securities of
Automated Business Systems of North Carolina, Inc. and Kellar Technology Group,
Inc. to the former shareholders of Automated and Kellar. We also agreed to issue
additional shares of common stock through December 31, 2000, if the acquired
company meets specified operating targets. This transaction was completed
without an underwriter and exemption from registration is claimed under Section
4(2) of the Securities Act because it did not involve a public offering.
In August 1998, we sold 451,000 shares of common stock for $1.3125 per
share for an aggregate of $592,000 to accredited investors. These shares carry
registration rights. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
II-6
<PAGE>
In September 1998, we sold 1,700 units for $1,000 per unit and warrants to
purchase 141,667 shares of common stock at an exercise price of $1.3938 per
share for an aggregate of $1.7 million to accredited investors. Each unit
consists of a warrant to purchase the number of shares of common stock computed
by dividing $1,700,000 by 125% of the fixed exercise price of $1.3938, with
respect to any exercise within the first year, and the lower of the fixed
exercise price and a variable exercise price (subject to a floor price of
$1.00), with respect to any exercise after the first year. The warrants have a
10-year term and are immediately exercisable. We paid a placement fee of
$175,000 and issued the placement agent 50,000 shares of common stock. The
placement agent for this transaction was Zanett Securities Corporation.
Exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In September 1998, we sold 1,500,000 shares of Class C Preferred Stock at a
price of $1.00 per share and warrants to purchase shares of common stock for
$1.375 per share for an aggregate of $1.5 million to Waterside Capital. The
Class C Preferred Stock bears a dividend rate of 9.99% that increases to 15% per
annum after the date there are no shares of Class A Preferred Stock issued and
outstanding. The preferred stock is convertible at any time after the earlier of
a change in control of Netplex or five years from the date of issuance and is
redeemable at our option at any time within the first five years. The number of
shares into which the preferred stock is convertible is equal to $1,500,000,
plus accrued but unpaid dividends, divided by 25% of the 20 day average trading
price of the common stock immediately prior to conversion. The warrants issued
entitle the holder to acquire 150,000 shares of common stock at $1.375 per
share. We may be required to issue up to 400,000 additional shares of common
stock under the warrants, depending upon the term in which the Class C Preferred
Stock is outstanding. The warrants have a 10-year term and are immediately
exercisable. We paid a placement fee of $175,000 and issued the placement agent
warrants to purchase 125,000 shares of common stock at $1.59 per share. The
warrants have a 5-year term and are immediately exercisable. The placement agent
for this transaction was Ferris Baker & Watts and exemption from registration is
claimed under Section 4(2) of the Securities Act because it did not involve a
public offering.
In October 1998, we issued 643,770 shares of Class B Preferred Stock to
Applied Intelligence Group, Inc. in connection with the purchase of its
information technology consulting business. Each share of Class B Preferred
Stock is immediately convertible into one share of common stock. No dividends
are payable on Class B Preferred Stock. We also agreed to pay Applied
Intelligence Group additional consideration if the information technology
consulting business meets specified operating targets. Such additional
consideration would include up to 643,770 shares of Class B Preferred Stock if
the information technology consulting business achieves approximately $9 million
in net profits over the subsequent nine (9) quarters. This transaction was
completed without an underwriter and exemption from registration is claimed
under Section 4(2) of the Securities Act because it did not involve a public
offering.
On January 28, 1999, we issued a note for $800,000, at 14% annual interest,
through a private placement to an accredited investor. On December 15, 1999, the
note was exchanged for an increase in the number of shares that our Class C
Preferred Stock is convertible into. See note 4, of the notes to the
consolidated financial statements.
On October 21, 1999, in connection with an investment banking arrangement,
we issued a warrant to Pennsylvania Merchant Group for the right to purchase
250,000 shares of our common stock, at an exercise price of $3.00 per share. The
warrant expires on October 21, 2004. Of the 250,000 shares subject to this
warrant, 175,000 vested as of October 21, 1999 and the remaining 75,000 vest
after one year if we extend the arrangement. Exemption from registration is
claimed under Section 4(2) of the Securities Act because it did not involve a
public offering.
During the year ended December 31, 1999, 877,612 shares of Class A
Preferred Stock and 643,770 shares of Class B Preferred Stock were converted
into 1,521,382 shares of our common stock. Shares of our Class C Preferred Stock
are not eligible for conversion to common stock until September, 2003.
II-7
<PAGE>
In March, 2000 and in connection with the second closing of the Zanett
1998 Private Placement, we sold an additional 1,500 units at a price of $1,000
per unit for an aggregate of $1.5 million to accredited investors. Each unit
consists of a prepaid common stock purchase warrant to purchase the number of
shares of common stock equal to $1,000 divided by the lower of (A) $10 and (B)
the amount obtained by multiplying a specified exercise percentage which
decreases over time and is more particularly described in the warrants by the
average of the 5 lowest closing bid prices for the common stock during the 20
consecutive trading day period ending on the trading day immediately preceding
the date of determination or exercise, and an incentive warrant to acquire 52
shares of common stock at an exercise price of $13.875 per share. The warrants
are immediately exercisable, and the incentive warrants have a 5-year term. We
paid an aggregate placement fee and non-accountable expense allowance of
$182,000 and also granted to certain principals of the placement agent warrants
to purchase an aggregate of 39,000 shares of common stock at a price of $10.00
per share. The warrants have a 5-year term and are immediately exercisable. The
placement agent for this transaction was The Zanett Securities Corporation and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
On March 28, 2000, we sold 10,000 shares of our Series D Preferred Stock
and related warrants to purchase up to 1,165,644 shares of our common stock to
HFTP Investment L.L.C., Fisher Capital Ltd. and Wingate Capital Ltd for an
aggregate purchase price of $10,000,000. The number of shares of common stock to
be issued upon conversion of a share of Series D Preferred Stock is determined
by dividing the sum of $1,000 (the amount paid for that share), plus an
additional amount equal to a 7% annual return on the amount originally paid for
the shares of Series D Preferred Stock plus unpaid default interest (as more
fully described in the purchase agreement relating to the Series D Preferred
Stock and the related warrants, as amended (the "Purchase Agreement")), by
$5.87. If we fail to deliver shares of common stock within 12 business days
after being requested by a holder of the Series D Preferred Stock to convert its
shares to common stock, then we will be subject to certain cash penalties, the
conversion price will be reduced (as more fully described in the Purchase
Agreement), and the holder that made the request will be entitled to require us
to redeem its shares of Series D Preferred Stock. The conversion price of the
Series D Preferred Stock is subject to adjustment downward, as described in the
Purchase Agreement. The exercise price of the warrants is $5.87 per share, which
represents 120% of the dollar volume-weighted average price for our common stock
on the Nasdaq SmallCap Market for the 30 consecutive trading days beginning on
and including April 3, 2000. These warrants expire on March 29, 2003. The
exercise price of the warrants is subject to adjustment downward, as described
in the Purchase Agreement. In addition, the Purchase Agreement provides the
holders of our Series D Preferred Stock with a call option to purchase an
aggregate of 5,000 additional shares of the Series D Preferred Stock and related
warrants at an aggregate purchase price of $5,000,000 if we do not obtain
additional financing on the terms described in the Purchase Agreement by October
31, 2000. This call option survives for a term of two years after the date on
which it is triggered under the terms of the Purchase Agreement. The Series D
Preferred Stock purchased in connection with the exercise of the call option
will have the same rights and preferences as the Series D Preferred Stock
currently outstanding, except as described in the Purchase Agreement. In
addition, any holder that exercises this call option to purchase additional
shares of Series D Preferred Stock will also receive, for each share of Series D
Preferred Stock purchased, warrants to purchase shares of common stock equal to
(a) $570, divided by (b) the average of the dollar volume-weighted average
prices of the common stock for the 15 consecutive trading days beginning on and
including the first trading day after the date the holder becomes entitled to
exercise the call option. These warrants will be exercisable for common stock at
an exercise price of 120% of the average of the dollar volume-weighted average
prices of the common stock for the 15 consecutive trading days beginning on and
including the first trading day after the date the call option is triggered and
will be exercisable for a period of three years. The placement agent for this
transaction was J.C. Bradford & Co., LLC. J.C. Bradford received a placement fee
equal to 5% of the funds raised, or $500,000. This transaction was completed
without an underwriter and exemption from registration is claimed under Section
4(2) of the Securities Act because it did not involve a public offering.
In May, 2000, in connection with a co-branded services arrangement we
entered into with one of our subsidiaries and TMP Interactive, Inc., we issued
warrants to TMP Interactive, Inc. for the right to purchase 3,000,000 shares of
Netplex common stock, consisting of (i) a warrant for the right to purchase
2,000,000 shares
11-8
<PAGE>
of common stock at an exercise price of $9.00, subject to certain adjustments as
stated therein, which expires May 2, 2003 and is not presently exercisable
(except under certain conditions as set forth in the warrant) and (ii) a warrant
for the right to purchase 1,000,000 shares of common stock at an exercise price
of $6.00, subject to certain adjustments as stated therein, which expires May 2,
2003 and is currently exercisable. Exemption from registration is claimed under
Section 4(2) of the Securities Act because it did not involve a public offering.
In May, 2000 in connection with a leasing arrangement, we issued a warrant
to Roseland II L.L.C. for the right to purchase 15,000 shares of our common
stock at an exercise price of $7.72 per share. The warrant expires on May 15,
2005. Exemption from registration is claimed under Section 4(2) of the
Securities Act because it did not involve a public offering.
In July, 2000 in connection with a line of credit arrangement, we issued a
warrant to Silicon Valley Bank for the right to purchase 75,000 shares of our
common stock at an exercise price of $6.00 per share. The warrant expires on
July 31, 2005. Exemption from registration is claimed under Section 4(2) of the
Securities Act because it did not involve a public offering.
11-9
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit Description
<S> <C>
3(a) -- Amended and Restated Certificate of Incorporation.*
3(b) -- Amendment to the Amended and Restated Certificate of Incorporation.**
3(c) -- Amendment to the Amended and Restated Certificate of Incorporation.***
3(d) -- Bylaws.***
4(a) -- Common Stock Purchase Warrant issued to the Pennsylvania Merchant Group, dated October 1, 1999.****
4(b) -- Securities Purchase Agreement, dated as of March 28, 2000, by and among Netplex and the Buyers.***
4(c) -- Form of Warrant Agreement, dated as of March __, 2000, by and between Netplex and each of the Buyers.***
(A schedule of Buyers is filed as Exhibit 99(a)).
4(d) -- Registration Rights Agreement, dated as of March 28, 2000, by and among Netplex and the Buyers.***
4(e) -- Investor Rights Agreement dated September 30, 1998.*****
4(f) -- Registration Rights Agreement between Netplex and Waterside Capital Corporation dated September 30,
1998.*****
4(g) -- Stock Purchase Warrant dated September 30, 1998.*****
4(h) -- Placement Agency Agreement dated September 25, 1998.*****
4(i) -- Incentive Stock Purchase Warrant dated September 28, 1998.*****
4(j) -- Prepaid Common Stock Warrant dated September 28, 1998.****
4(k) -- Registration Rights Agreement between Netplex and the Initial Investors dated September 28, 1998.*****
4(l) -- Securities Purchase Agreement dated September 25, 1998.*****
4(m) -- Form of Prepaid Common Stock Purchase Warrant, dated March ___, 2000 by and between Netplex and each of the
Holders.*** (A schedule of Holders is filed as Exhibit 99(b)).
4(n) -- Form of The Netplex Group, Inc. Incentive Stock Purchase Warrant, dated as of March ___, 2000, by and
between Netplex and each of the Holders.*** (A schedule of Holders is filed as Exhibit 99(c)).
4(o) -- Form of Prepaid Warrant issued to Purchasers in April 1998 Private Placement.****** (A schedule of
Purchasers is filed as Exhibit 99(d)).
4(p) -- Form of Incentive Warrant issued to Purchasers in April 1998 Private Placement.****** (A schedule of
Purchasers is filed as Exhibit 99(e)).
4(q) -- Warrant issued to TMP Interactive, Inc. for the right to purchase 2,000,000 shares of common stock, dated
May, 2, 2000.****
4(r) -- Warrant issued to TMP Interactive, Inc. for the right to purchase 1,000,000 shares of common stock, dated
May 2, 2000.****
4(s) -- Warrant issued to Roseland II L.L.C. for the right to purchase 15,000 shares of common stock, dated May 15,
2000.####
4(t) -- Warrant issued to Silicon Valley Bank for the right to purchase 75,000 shares of common stock, dated July
31, 2000. ####
4(u) -- Registration Rights Agreement between Netplex and Silicon Valley Bank dated July 31, 2000. ####
4(v) -- Antidilution Agreement between Netplex and Silicon Valley Bank dated July 31, 2000. ####
4(w) -- Amendment #1 to Securities Purchase Agreement Dated March 28, 2000 By and among The Netplex Group, Inc.
HFTP Investment L.L.C., Wingate Capital Ltd., and Fisher Capital Ltd. dated and effective July 31, 2000.####
5 -- Opinion of Venable, Baetjer and Howard, LLP.####
10(a) -- 1992 Incentive and Non-Qualified Stock Option Plan.*******
10(b) -- Amendment to 1992 Incentive and Non-Qualified Stock Option Plan.*******
10(c) -- Form of Indemnification Agreement between the Officers and Directors of Netplex and Netplex (with schedule
attached). ####
</TABLE>
II-10
<PAGE>
<TABLE>
<S> <C>
10(d) -- 1995 Directors Stock Option Plan.#
10(e) -- 1995 Consultant's Stock Option Plan.#
10(f) -- Employment Agreement between Netplex and Gene Zaino.**
10(g) -- Agreement by and among XcelleNet, Inc., the Netplex Group, Inc. and Technology Development Systems, Inc.
dated November 5, 1996.##
10(h) -- Revolving Line of Credit Loan Agreement and Security Agreement, by and among The Netplex Group, Inc., Netplex
Systems, Inc., America's Work Exchange, Inc., Software Resources of New Jersey, Inc., Onion Peel Solutions,
L.L.C., The PSS Group, Inc., and ABS Acquisition, Inc., and First Union National Bank dated September 29, 1998,
first amendment dated February 24, 1999, second amendment dated May 11, 1999.###
10(i) -- Third amendment to the Revolving Line of Credit Loan Agreement and Security Agreement, by and among The Netplex
Group, Inc., Netplex Systems, Inc., America's Work Exchange, Inc., Software Resources of New Jersey, Inc., Onion
Peel Solutions, L.L.C., The PSS Group, Inc., and ABS Acquisition, Inc., and First Union National Bank, dated May
30, 2000.####
10(j) -- Loan and Security Agreement between Netplex and Silicon Valley Bank, dated July 31, 2000. ####
10(k) -- Pledge Agreement between America's Work Exchange, Inc. and Silicon Valley Bank, dated July 31, 2000. ####
10(l) -- Continuing Guaranty by and among The NetPlex Group, Inc., NetPlex Systems, Inc., America's Work Exchange,
Inc., Contractors Resources, Inc., and Silicon Valley Bank, dated as of July 31, 2000. ####
10(m) -- Security Agreement by and among The Netplex Group, Inc. Contractors Resources, Inc. and Silicon Valley
Bank, Commercial Finance Division, dated as of July 31, 2000.####
16 -- Letter regarding change in certifying accountant.+
21 -- Subsidiaries of the Netplex Group, Inc.##
23(a) -- Consent of Grant Thornton, LLP.#####
23(b) -- Consent of KPMG LLP.#####
23(c) -- Consent of Venable, Baetjer and Howard, LLP (contained in their opinion included under Exhibit 5).####
24 -- Power of Attorney.++
27 -- Financial Data Schedule. #####
99(a) -- Schedule of Buyers pursuant to Exhibit 4(c)--Form of Warrant Agreement, dated as of March __, 2000, by and
between Netplex and each of the Buyers.####
99(b) -- Schedule of Holders pursuant to Exhibit 4(m)--Form of Prepaid Common Stock Purchase Warrant, dated March
___, 2000 by and between Netplex and each of the Holders.####
99(c) -- Schedule of Holders pursuant to Exhibit 4(n)--Form of The Netplex Group, Inc. Incentive Stock Purchase
Warrant, dated as of March ___, 2000, by and between NetPlex each of the Holders.####
99(d) -- Schedule of Purchasers pursuant to Exhibit 4(o)--Form of Prepaid Warrant issued to Purchasers in April 1998
Private Placement.####
99(e) -- Schedule of Purchasers pursuant to Exhibit 4(p)--Form of Incentive Warrant issued to Purchasers in April
1998 Private Placement.####
</TABLE>
----------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 filed with the Securities and Exchange Commission January 29,
1993 (Commission File No. 33-57546).
** Incorporated by reference to the Registrant's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1996 filed with the Securities
and Exchange Commission March 31, 1997 (Commission File No. 33-57546).
*** Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission April 3, 2000
(Commission File No. 1-11784).
II-11
<PAGE>
**** Previously filed in connection with this offering pursuant to the
Registrant's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission May 9, 2000 (Commission File No.
333- 36572).
***** Incorporated by reference to the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission November 13,
1998 (Commission File No. 333-67321).
****** Incorporated by reference to the Registrant's Annual Report on Form 10-
K for the year ended December 31, 1997 filed with the Securities and
Exchange Commission on April 15, 1998.
******* Incorporated by reference to the Registrant's Current Report on Form 8-
K, filed with the Securities and Exchange Commission June 7, 1996, as
amended.
+ Incorporated by reference to the Registrant's Current Report on Form 8-
K filed with the Securities and Exchange Commission on June 2, 1999
(Commission File No. 001-11784).
II-12
<PAGE>
++ Previously filed in connection with this offering pursuant to the
Registrant's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission May 9, 2000 (Commission File No.
333-36572) and pursuant to the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission May 22, 2000
(Commission File No. 333-37594).
# Incorporated by reference to the Registrant's Registration Statement on
Form S-8, filed with the Securities and Exchange Commission on December
31, 1996 (Commission File No. 333-19115).
## Incorporated by reference to the Registrant's Annual Report on Form 10-
K for the fiscal year ended December 31, 1999 filed with the Securities
and Exchange Commission April 3, 2000 (Commission File No. 001-11784).
### Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q/A, filed with the Securities and Exchange Commission on May 16,
2000 (Commission File No. 001-11784).
#### Previously filed.
##### Filed herewith.
II-13
<PAGE>
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To file a post-effective amendment and to remove from registration
any of the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-14
<PAGE>
SIGNATURES
Under the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in McLean, Virginia, on the 1st day of September, 2000.
THE NETPLEX GROUP, INC.
By: /s/ Gene Zaino
------------------------------------
Gene Zaino
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ Gene Zaino Chief Executive Officer September 1, 2000
-------------------------------------- and Chairman (Principal
Gene Zaino Executive Officer)
* President and Director September 1, 2000
--------------------------------------
Pamela Fredette
* Chief Financial Officer and September 1, 2000
-------------------------------------- Treasurer (Principal Financial
Richard Falcone Officer)
* Chief Accounting Officer (Principal September 1, 2000
-------------------------------------- Accounting Officer)
Peter Russo
* Director September 1, 2000
--------------------------------------
Richard Goldstein
* Director September 1, 2000
--------------------------------------
J. Alan Lindauer
* Director September 1, 2000
--------------------------------------
Steven Hanau
*By: /s/ Gene Zaino
---------------------------------
Gene Zaino
Attorney-in-fact
</TABLE>
II-15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
<S> <C> <C>
3(a) -- Amended and Restated Certificate of Incorporation.*
3(b) -- Amendment to the Amended and Restated Certificate of
Incorporation.**
3(c) -- Amendment to the Amended and Restated Certificate of
Incorporation.***
3(d) -- Bylaws.***
4(a) -- Common Stock Purchase Warrant issued to the Pennsylvania
Merchant Group, dated October 1, 1999.****
4(b) -- Securities Purchase Agreement, dated as of March 28, 2000, by
and among Netplex and the Buyers.***
4(c) -- Form of Warrant Agreement, dated as of March __, 2000, by
and between Netplex and each of the Buyers.*** (A schedule of
Buyers is filed as Exhibit 99(a)).
4(d) -- Registration Rights Agreement, dated as of March 28, 2000, by
and among Netplex and the Buyers.***
4(e) -- Investor Rights Agreement dated September 30, 1998.*****
4(f) -- Registration Rights Agreement between Netplex and Waterside
Capital Corporation dated September 30, 1998.*****
4(g) -- Stock Purchase Warrant dated September 30, 1998.*****
4(h) -- Placement Agency Agreement dated September 25, 1998.*****
4(i) -- Incentive Stock Purchase Warrant dated September 28, 1998.*****
4(j) -- Prepaid Common Stock Warrant dated September 28, 1998.****
4(k) -- Registration Rights Agreement between Netplex and the Initial
Investors dated September 28, 1998.*****
4(l) -- Securities Purchase Agreement dated September 25, 1998.*****
4(m) -- Form of Prepaid Common Stock Purchase Warrant, dated March ___, 2000
by and between Netplex and each of the Holders.*** (A schedule of
Holders is filed as Exhibit 99(b)).
4(n) -- Form of The Netplex Group, Inc. Incentive Stock Purchase Warrant,
dated as of March ___, 2000, by and between NetPlex each of the Holders.***
(A schedule of Holders is filed as Exhibit 99(c)).
4(o) -- Form of Prepaid Warrant issued to Purchasers in April 1998 Private Placement.******
(A schedule of Purchasers is filed as Exhibit 99(d)).
4(p) -- Form of Incentive Warrant issued to Purchasers in April 1998 Private Placement.******
(A schedule of Purchasers is filed as Exhibit 99(e)).
4(q) -- Warrant issued to TMP Interactive, Inc. for the right to purchase 2,000,000 shares
of common stock, dated May, 2, 2000.****
4(r) -- Warrant issued to TMP Interactive, Inc. for the right to purchase 1,000,000 shares of
common stock, dated May 2, 2000.****
4(s) -- Warrant issued to Roseland II L.L.C. for the right to purchase 15,000 shares of common stock, dated May 15,
2000.####
4(t) -- Warrant issued to Silicon Valley Bank for the right to purchase 75,000 shares of common stock, dated July 31,
2000.####
4(u) -- Registration Rights Agreement between Netplex and Silicon Valley Bank dated July 31, 2000.####
4(v) -- Antidilution Agreement between Netplex and Silicon Valley Bank dated July 31, 2000.####
4(w) -- Amendment #1 to Securities Purchase Agreement dated March 28,
2000 by and among The Netplex Group, Inc., HFTP Investment
L.L.C., Wingate Capital Ltd., and Fisher Capital Ltd. dated
and effective July 31, 2000. ####
5 -- Opinion of Venable, Baetjer and Howard, LLP.####
10(a) -- 1992 Incentive and Non-Qualified Stock Option Plan.*******
10(b) -- Amendment to 1992 Incentive and Non-Qualified Stock Option Plan.*******
10(c) -- Form of Indemnification Agreement between the Officers and Directors of Netplex
and Netplex (with schedule attached). ####
10(d) -- 1995 Directors Stock Option Plan.#
10(e) -- 1995 Consultant's Stock Option Plan.#
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10(f) -- Employment Agreement between Netplex and Gene Zaino.**
10(g) -- Agreement by and among XcelleNet, Inc., the NetPlex Group, Inc. and Technology
Development Systems, Inc. dated November 5, 1996.##
10(h) -- Revolving Line of Credit Loan Agreement and Security Agreement, by and among The
Netplex Group, Inc., Netplex Systems, Inc., America's Work Exchange, Inc.,
Software Resources of New Jersey, Inc., Onion Peel Solutions, L.L.C., The PSS Group,
Inc., and ABS Acquisition, Inc., and First Union National Bank dated September 29, 1998,
first amendment dated February 24, 1999, second amendment dated May 11, 1999.###
10(i) -- Third amendment to the Revolving Line of Credit Loan Agreement and Security Agreement,
by and among The Netplex Group, Inc., Netplex Systems, Inc., America's Work Exchange,
Inc., Software Resources of New Jersey, Inc., Onion Peel Solutions, L.L.C., The PSS
Group, Inc., and ABS Acquisition, Inc., and First Union National Bank, dated
May 30, 2000.####
10(j) -- Loan and Security Agreement between Netplex and Silicon Valley Bank, dated July 31, 2000.####
10(k) -- Pledge Agreement between America's Work Exchange, Inc. and Silicon Valley Bank, dated July 31, 2000.####
10(l) -- Continuing Guaranty by and among The NetPlex Group, Inc., NetPlex Systems, Inc., America's Work Exchange, Inc.,
Contractors Resources, Inc., and Silicon Valley Bank, dated as of July 31, 2000.####
10(m) -- Security Agreement by and among The NetPlex Group, Inc, Contractors Resources, Inc. and Silicon Valley Bank,
Commercial Finance Division, dated as of July 31, 2000.####
16 -- Letter regarding change in certifying accountant.+
21 -- Subsidiaries of the Netplex Group, Inc.##
23(a) -- Consent of Grant Thornton, LLP.#####
23(b) -- Consent of KPMG LLP.#####
23(c) -- Consent of Venable, Baetjer and Howard, LLP (contained in their opinion included under
Exhibit 5).####
24 -- Power of Attorney.++
27 -- Financial Data Schedule #####
99(a) -- Schedule of Buyers pursuant to Exhibit 4(c)--Form of Warrant Agreement, dated as of
March __, 2000, by and between Netplex and each of the Buyers.####
99(b) -- Schedule of Holders pursuant to Exhibit 4(m)--Form of Prepaid Common Stock Purchase
Warrant, dated March ___, 2000 by and between Netplex and each of the Holders.####
99(c) -- Schedule of Holders pursuant to Exhibit 4(n)--Form of The Netplex Group, Inc. Incentive
Stock Purchase Warrant, dated as of March ___, 2000, by and between NetPlex each of the
Holders.####
99(d) -- Schedule of Purchasers pursuant to Exhibit 4(o)--Form of Prepaid Warrant issued to
Purchasers in April 1998 Private Placement.####
99(e) -- Schedule of Purchasers pursuant to Exhibit 4(p)--Form of Incentive Warrant issued to
Purchasers in April 1998 Private Placement.####
----------------------
</TABLE>
* Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 filed with the Securities and Exchange Commission January 29,
1993 (Commission File No. 33-57546).
** Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996 filed with the
Securities and Exchange Commission March 31, 1997 (Commission File No.
33-57546).
*** Incorporated by reference to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission April 3, 2000
(Commission File No. 1-11784).
**** Previously filed in connection with this offering pursuant to the
Registrant's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission May 9, 2000 (Commission File No. 333-
36572).
***** Incorporated by reference to the Registrant's Registration Statement
on Form S-3 filed with the Securities and Exchange Commission November
13, 1998 (Commission File No. 333-67321).
****** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997 filed with the Securities and
Exchange Commission on April 15, 1998.
******* Incorporated by reference to the Registrant's Current Report on
Form 8-K, filed with the Securities and Exchange Commission June 7,
1996, as amended.
+ Incorporated by reference to the Registrant's Current Report on
Form 8-K filed with the Securities and Exchange Commission on June 2,
1999 (Commission File No. 001-11784).
<PAGE>
++ Previously filed in connection with this offering pursuant to the
Registrant's Registration Statement on Form S-3 filed with the Securities
and Exchange Commission May 9, 2000 (Commission File No. 333-36572) and
pursuant to the Registrant's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission May 22, 2000 (Commission File No.
333-37594).
# Incorporated by reference to the Registrant's Registration Statement on
Form S-8, filed with the Securities and Exchange Commission on
December 31, 1996 (Commission File No. 333-19115).
## Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999 filed with the Securities and
Exchange Commission April 3, 2000 (Commission File No. 001-11784).
### Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q/A, filed with the Securities and Exchange Commission on May 16,
2000 (Commission File No. 001-11784).
#### Previously filed.
##### Filed herewith.
