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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to__________________
Commission file number 1-11784
THE NETPLEX GROUP, INC.
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(Name of small business issuer in its charter)
New York 11-2824578
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8260 Greensboro Drive, 5th Floor, McLean, VA 22102
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(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (703) 356-3001
Securities registered under Section 12(b) of the Exchange Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.001 par value NASDAQ SmallCap Stock Market
Boston Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act:
None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes / / No / /.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / X /
State issuer's revenue for its most recent fiscal year $40,468,134
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. The aggregate market value shall be computed by
reference to the price at which the stock as sold, or the average bid and asked
prices of such stock, as of March 20, 1998. (See definition of affiliate in Rule
12b-2 of the Exchange Act). $9,428,201
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by nonaffiliates on the basis of reasonable
assumptions, if the assumptions are stated.
As of March 20, 1998, there are 7,550,370 shares outstanding of the
Company' s Common Stock.
Transitional Small Business Disclosure Format (Check one):
Yes ______ No ______
This report consists of __ consecutively numbered pages (inclusive of
all exhibits and including this cover page). The Exhibit Index appears on page
__.
INDEX OF FORM 10-KSB
PART I ......................................................................2
ITEM 1. BUSINESS..............................................................2
ITEM 2. PROPERTIES............................................................9
ITEM 3. LEGAL PROCEEDINGS.....................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................10
PART II .....................................................................10
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.................................11
ITEM 7. FINANCIAL STATEMENTS.................................................15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................................16
PART III .....................................................................16
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.....................16
ITEM 10. EXECUTIVE COMPENSATION..............................................17
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......20
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................21
PART IV .....................................................................22
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K....................................22
SIGNATURES....................................................................23
i
PART I
ITEM 1. BUSINESS.
Corporate Profile
Based in McLean, Virginia with seven offices throughout the U.S., The Netplex
Group, Inc., together with its wholly owned subsidiaries ("the Company" or
"Netplex"), is an Information Technology (IT) company that provides the people,
technology, and processes to build, manage, and protect business information
systems. Through the strategic teaming of business consulting practice areas,
operating units, and wholly owned subsidiaries, Netplex believes that it is
positioned to deliver:
* IT Solutions - Design and implementation of systems solutions to
address IT related business needs;
* IT Staffing - Staff augmentation and flexible task outsourcing; and
* IT Contractor Resources - Business services for the independent IT
Consultant.
The following describes these three business areas and provides an at-a-glance
look at the industries served, strategic alliances, geographic positioning, and
engagement confidence that the Company believes makes Netplex a preeminent
supplier of information technology services and solutions.
The Company was incorporated in 1986. From 1986 to June 1996, the Company, under
the name CompLink, Ltd., developed and marketed a communications software
product.
On June 7, 1996, the Company (formerly known as CompLink, Ltd. or "CompLink")
acquired and merged with The Netplex Group, Inc. and America's Work Exchange,
Inc. (combined entities referred to as "Netplex" or "the Company") by issuing
approximately 3,245,000 shares of Common Stock. The agreement also provided for
CompLink to issue 1,691,000 options to purchase its Common Stock in exchange for
the 1,691,000 outstanding options to purchase the Common Stock of Netplex. The
mergers have been accounted for under the purchase method of accounting as a
reverse merger, since the shareholders of the acquirees, who have common
control, received the larger percentage of the voting rights of the combined
entity. The mergers resulted in a recapitalization of the Company, so that the
resulting capitalization after the mergers will be that of CompLink's, giving
effect to the new share issuance and the elimination of CompLink's accumulated
deficit. The acquisition of the assets and liabilities of CompLink has been
accounted for at book value, which approximates fair value.
* IT Solutions
Through a collection of specialized systems integration and IT consulting
practices, each capable of providing focused business solutions by combining
in-depth expertise, proven methods, and leading technologies, Netplex believes
it delivers superior quality and measurable results. The Netplex IT Solutions
practice areas are:
. Network Systems Integration (NSI): providing networked office
automation solutions;
. Enterprise Network Management (ENM): providing network management
solutions;
. Enterprise Systems Management (ESM): providing solutions to manage the
systems that run businesses; and
. Business Protection Services (BPS): providing solutions that keep
businesses in business.
These IT Solutions practice areas span several performance disciplines,
including:
* Strategic Planning * Custom Software Development
* Information Security * Technology Integration
* Hardware Product Fulfillment * Software Product Fulfillment
* Project Management * Systems Training
* Network Management * Systems Management
* Systems Integration * Business Resumption Planning
Each practice area employs a team of subject-matter experts to help businesses
develop, implement, and support their IT objectives. Adherence to comprehensive
management techniques helps ensure that every detail in a project plan is
subject to quality control and measures of technical excellence. This commences
with an evaluation of the current user environment and IT goals and ends with a
review process for determining the impact of value-added improvements.
1
Many hardware and software suppliers have engaged Netplex to manage the
implementation of their technologies (see "Strategic Alliances").
The IT Solutions Market
The IT solutions market is experiencing record growth in the commercial and
government sectors. The IT services industry is estimated at over $126 billion
in the U.S. and even larger internationally. It is growing at an estimated 18%
average annual rate. The demand for IT services is growing, driven by the Year
2000 problem, the Internet, short technology cycles, business process
reengineering, increasing global competition, and other factors. While
mainframes continue to be the largest area of demand for work assignments,
client/server and network technology demand is on the rise. The consulting
segment, which includes information systems integration services, feasibility
studies, business protection services, cost-effectiveness analysis, and
technical and management program assistance, continues to be the fastest growing
sector of the IT professional services industry. This segment is forecast to
grow at a rate of 21.1% to reach $18.3 billion in aggregate revenue by 2001.
* IT Staffing
Netplex recognizes the need for technical staff augmentation. IT Staffing
Services provides help to organizations confronted with technical staffing
needs. Clients gain access to the Netplex recruiting team, which maintains a
proprietary Database of a qualified pool of 40,000+ IT professionals with the
talent and flexibility to undertake virtually any technical task. The Company
believes that the ability of its consultants enables it to deliver qualified,
results-oriented technical staffing services.
Seasoned professionals with many years of business experience provide strategic
direction, planning, and input on complex technical issues. Consultants,
engineers, project managers, analysts, developers, technicians, and other IT
professionals provide additional capacity to solve technical staffing needs.
Whether a need for technical services arises during peak periods, systems
planning sessions, project roll-outs, or technology transitions, Netplex IT
Staffing believes it can apply a qualified, customized skill-set to quickly
fulfill a client engagement.
The Company, in business to serve as an extension of the client's IT
organization, believes it is capable of providing staff to manage any IT
operation. The Netplex technical staff accepts direction from the client in
fulfilling all project objectives; thus, allowing the client to maintain full
control over the timeline and project course. Netplex IT Staffing Services
provides the human and technical resources to keep its client's on-schedule,
technology-aware, and quality-fastened. The Company's staffing services are
located primarily in New York, New Jersey, and Washington, D.C., where The PSS
Group, Inc., a wholly-owned subsidiary of Netplex acquired in January, 1998, has
been providing technical personnel for engagements throughout the Washington,
D.C. metropolitan area since 1991.
The IT Staffing Market
The IT Staffing industry continues to grow. Recent Bureau of Labor statistics
indicate Personnel Supply Services added 43,000 jobs (seasonally adjusted) in
February of 1998. Compared to a year earlier, February's job growth was up 5.6%
in Personnel Supply, the highest year-to-year percentage growth since April and
March of 1997, respectively. Staffing growth is expected to remain strong
throughout 1998 with a growth rate of over 25% in information technology and
other professional specialties. INPUT, a market research firm, estimates the
total IT market in the U.S. at $231 billion in 1997. According to INPUT,
compound annual growth in the U.S. Information Technology Commercial
Professional Services Market will continue at a rate of 17.3% through 2001. In
1996, every segment of the IT professional services industry grew faster than
forecast by INPUT evidencing ongoing, rising demand for these services.
Organizations are increasingly turning to external IT services organizations to
develop, support and enhance their internal IT systems. By outsourcing IT
services, companies are able to (i) focus on their core business, (ii) access
specialized technical skills, (iii) implement IT solutions more rapidly, (iv)
benefit from flexible staffing, providing a variable cost solution to a fixed
cost issue, and (v) reduce the cost of recruiting, training, and adjusting the
number of employees as IT requirements change.
2
Netplex, through its wholly owned subsidiary Software Resources of New Jersey,
now known as Contractor's Resources ("CR"), believes it can offer a specially
tailored program to both IT consultants and business. This service arrangement
enables the independent contractor to escape the administrative burdens of
incorporation; thereby, focusing on providing the technical skills that
businesses seek.
Consultant Advantage - CR allows an independent contractor consultant to reap
the benefits of incorporation, without incorporating. These IT consultants
become CR employees set up with their own personal profit centers administered
by CR. This enables these professionals to pursue a vast array of assignments
that would otherwise be impractical or cost prohibitive.
The business services that CR provides IT consultants include:
* Contract Review and Administration * Financial Reporting
* Group Medical, Dental, etc. * 401K and Pension Administration
* Payroll Administration * Personal Account Management
Personal Account Management is coordinated through a designated Profit Center
Manager- a highly-trained service professional who helps consultants manage
their business from the review of a consultant's contract to the seamless
administration of benefits and financial planning.
Business Advantage - CR offers businesses a convenient solution for
consolidating the administration and delivery of employee services to their
existing independent contractor base. Because CR alleviates the administrative
burdens that independent contractors face, while offering a premier set of
benefits and "employment services" to help the independent contractor function
more seamlessly, businesses are able to reap the benefits of consolidated
billing, central administration processing, and focused application of a
consultant's technical skills.
CR attracts independently-minded IT consultants who want to take advantage of
today's favorable market for independent contractors and be free of the arduous
and time-consuming tasks associated with managing their own corporation.
Businesses want to keep the administrative burdens that contractors face to a
minimum allowing their consultants to concentrate on their assignments.
The IT Contractor Resources Market
The Department of Labor estimates that by the year 2000 at least 44% of all
workers will be in data services, gathering, processing, retrieving, or
analyzing information. Already an estimated two-thirds of U.S. employees work in
the services sector. This environment calls for different organizations and
different kinds of workers. As recently as the 1960's, almost one-half of all
workers in the industrialized countries were involved in making or helping to
make things. It is predicted that by the year 2000, however, no developed
country will have more than one-sixth or one-eighth of its workforce in the
traditional roles of making and moving goods. It is these trends that are
driving the contractor resources market as more and more people shift from
permanent to flexible and part-time employment, many as independent contractors.
It is estimated that less than half the workforce in the industrialized world
will be holding conventional full-time jobs in organizations by the year 2000.
Those full-timer or insiders will be the new minority. Every year more and more
people will be self-employed. The U.S. contingent workforce of temporaries,
self-employed, part-timers, or consultants grew by 57% during the decade of the
80's.
Industries Served by Netplex
Netplex has supplied services around the world within the public and private
sector, but has tailored its service offerings, primarily, to U.S.-based
commercial organizations. Presently, Netplex delivers information solutions,
technical staff augmentation, and IT contractor services to several well-known
organizations within many industries including Telecom/Communications, Retail,
Insurance, Legal & Professional Services, Pharmaceutical, Associations,
Utilities, Health Care, Distribution, Manufacturing, and Financial Services.
Although the in-roads
3
Netplex has made to these markets are expansive, the diverse picture it presents
is only a sample of the range of services and solutions that Netplex believes it
provides on a daily and on-going basis.
Strategic Alliances
Netplex has engaged in strategic partnerships (i.e., compliance with certified
training programs) with leading software and hardware producers to become a
full-service Information Solutions provider. Among the companies for which
Netplex is certified to re-sell and implement technologies are:
Compaq IBM Remedy
Envive Microsoft Tivoli
Hewlett-Packard Novell Unisys
In addition, Netplex has provided services to many other organizations over the
past three years, including:
Amdahl Charles Schwab New York Life
America Online Chase Manhattan SIAC
Arthur Andersen Hewlett-Packard U.S. West
AT&T Hoffman-LaRoche Union Camp
Bell Atlantic Mobile Lucent Technologies Unisys
BellSouth MCI United Nations
CNA Insurance World Bank
Geographic Positioning
Netplex is strategically positioned in the Northeast, Mid-West, and Mid-Atlantic
region of the U.S., and has offices in Chicago, Connecticut, New Jersey, New
York, North Carolina, and Washington, D.C. Netplex has assisted organizations
throughout the United States with their networked information systems goals and
internationally has served clients in such countries as Ireland and Turkey. The
Company intends to open new offices in other geographic markets. To date,
however, the Company has not entered into any leases with respect to such
offices and there can be no assurance that Netplex will in fact open such
offices.
Engagement Confidence
Netplex is aware of the threats posed to business from unreliable information
systems, insecure environments, lack of technical resources, and unnecessary
downtime. Netplex believes that experience enables it to provide the answers to
some common and not-so-common problems dealing with information systems. The
Company believes this knowledge, coupled with its technical resource base,
industry experience, and growth, reinforces the ability of Netplex to fulfill
virtually any technical request.
Growth Strategy
Expand Existing IT Staffing Locations and Open New Branches
The Company believes it can significantly increase revenue in its three existing
IT staffing locations in New York, New Jersey, and Washington, D.C. The Company
will attempt to achieve this growth by expanding the sales and recruiting
organization in each location and increase business to existing customers.
The Company will also open locations in cities that it believes to have high
growth and market potential. The Company intends to accomplish this goal in part
by recruiting a skilled Branch Manager for each new location. These managers
will be responsible for developing local accounts and building the branch by
hiring sales people, technical recruiters, administrators and replicating the
systems and procedures from the existing operations. The expansion of IT
Staffing also provides a greater supply of technical talent to the IT Solutions
practice.
4
Expand Existing IT Solutions Practices
The Company believes that it can significantly expand its present IT Solutions
practice by expanding its sales staff, encouraging practice area cross-selling,
and promoting lead generation from the IT staffing and IT contractor
organizations. The natural project oriented migration of personnel across
practice units, enhanced with business opportunity recognition training,
marketing skills development, and market lead generation incentives, will create
an effective low cost marketing force. The Company believes that effective
utilization of this force will give the IT Solutions Practice a competitive and
cost efficient advantage over marketing approaches of traditional IT solution
providers and will enable the Company as a whole to cross sell its varied
services between practice units IT staffing and IT contractor resources.
Expand Contractors Resources Business
The Company believes that the trend of predicted continued growth of the
free-lance worker in the market will naturally fuel the expansion of the IT
Contractors Resource business. The realization by these professional services
providers that their hours spent on clients are more profitable to them than
hours spent performing "back-office" administrative tasks should direct them to
an outsource solution. The Company intends to build upon this trend by education
and recruitment campaigns through first time marketing in publications and
participation in job fairs. The Company will also focus on encouraging large
organizations employing independent consultants to become advocates of the
"contractor employee" approach thus reducing their risk of tax audits and the
potential tax penalties of having "independent contractors" deemed employees by
the Internal Revenue Service. The expansion of the Contractors Resources
business also provides the Company with access to a unique reservoir of high
talent IT consultants.
Strategic Acquisitions
The Company believes that acquisitions are a valuable and important means of
achieving critical mass, enhancing market share, increasing capabilities to
deliver large, complex solutions, and supplementing internal growth. The Company
will seek to acquire companies in the IT Staffing industry to facilitate its
expansion into new territories or to acquire IT solutions businesses that offer
additional strength to existing practice areas. The Company currently expects
that acquisitions will be limited to profitable companies. The Company is not
currently negotiating to acquire any other business and has no commitments,
understandings or arrangements with respect to any such acquisition.
The Company's ability to expand successfully by acquisition depends on many
factors, including the successful identification and acquisition of businesses
and management's ability to integrate and operate the new businesses
effectively. The anticipated benefits from any acquisition may not be achieved
unless the operations of the acquired business are successfully combined with
those of the Company in a timely manner. The Company's senior management team is
experienced in identifying acquisition targets and has already successfully
integrated businesses into the Company's existing infrastructure.
Operations and Support Services
From its headquarters in McLean, Virginia, the Company provides its IT Staffing
branch locations, IT Solutions practices areas, and Contractor Resources
business with centralized support services, including marketing, finance and
accounting, information systems, legal support, human resources, and purchasing.
All of the Company's branch locations are linked by, and can communicate over a
Wide Area Network managed by a centralized Management Information Systems
department at the McLean headquarters. Branch locations rely on this network for
access to the Company's technical talent database and corporate Intranet.
The Company also uses numerous techniques to govern and guide sales, recruiting,
financial, and operating activities. The Company believes the investment made in
these processes will enhance its ability to grow and attract and retain superior
technical and managerial talent.
5
Customers
The Company strives to provide technical talent and services to help businesses
deliver reliable, timely, and secure information across networked systems. To
accomplish this, the Company places great emphasis in developing long-term
client relationships. Positioning itself as a specialist in strategically
selected "best-of-class" technology and talent, Netplex strives to reinforce its
clients' image of the Company as being uniquely qualified to provide the
knowledge, experience and capacity to deliver IT services and solutions. This is
increasingly important as clients seek to reduce the number of vendors with
which they do business. For this reason, the Company has begun to focus
significant efforts on qualifying for -- and remaining on -- multiple clients'
vendor lists. The Company is currently approved on several vendor lists of
Fortune 500 companies. The Company maintains a broad and well-balanced client
base. No single customer accounted for more than 10% of the Company's revenue
over the past year.
Competition
The IT services industry is fragmented and highly competitive at both the local
and national levels. Many participants in the information technology consulting
market have significantly greater financial, technical, and marketing resources
- -- and generate greater revenue -- than the Company. Many of these competitors
have a nationwide presence equivalent to, or greater than, that of the Company.
The information technology services market includes participants in a variety of
market segments, including systems consulting and integration firms,
professional services companies, application software firms, temporary
employment agencies, professional services groups of computer equipment and
software companies, accounting firms, and general consulting firms. Some of the
firms with which the Company competes in various geographic and service markets
are Andersen Consulting, Cap Gemini America, Computer Task Group, Inc.,
Alternative Resources, Inc, and The Registry.
The Company believes the principal competitive factors in the IT services
industry include responsiveness to fulfill client needs, speed of systems
integration, quality of service, technical expertise, project management
capabilities, and price.
In staffing for client projects, the Company competes for IT consultants with
many of those same companies as well as other local and regional technology or
staffing service providers. Several competitive factors affect a company's
success in recruiting and retaining such professionals including compensation,
availability of benefits, a continuous flow of quality assignments, and access
to advanced training and technical support. The Company believes it is well
positioned in all of these areas to attract the highest quality IT talent. IT
Staffing and CR offer the Company a competitive advantage to access a valuable
pool of high talent independent IT consultants.
Intellectual Property
The Company does not hold any patents or registered trademarks other than those
of Onion Peel. However, the Company considers the Netplex name and its Database
of independent consultants to be highly proprietary. Employees
As of March 20, 1998, the Company had approximately 417 full-time employees
(including permanent and contract employees).
The Company is responsible for, and pays the employer's share of, Social
Security taxes (FICA), federal and state unemployment taxes, worker's
compensation insurance, and other costs relating to all of its employees. The
Company offers a suite of benefits to its contract employees that is a different
selection than offered permanent employees. The Company believes that its
relations with its employees are good.
6
Acquisition or Disposition of Assets
Private Placement
On September 19, 1996, the Company raised approximately $3,000,000 through a
Private Placement offering of units of equity securities (the "1996 Private
Placement"). Each unit of equity securities consists of one share of $.01 par
value class A Convertible Preferred Stock (the "Preferred Stock") and one Common
Stock warrant to purchase one share of the Company's $0.001 par value Common
Stock ("Common Stock") at an exercise price of $2.50.
Each share of Preferred Stock is convertible into one share of Common Stock at
any time, at the discretion of the holder. The Preferred Stock earns cumulative
dividends at 10% per annum, payable in either cash or additional shares of
Preferred Stock at the Company's option. Subject to the conversion rights, the
Company may redeem the Preferred Stock at its stated value (which is $2 per
share) plus all accrued and unpaid dividends upon: (1) registration of the
shares underlying the Preferred Stock, and (2) 30 days written notice given at
any time upon the Common Stock attaining certain per share trading prices and
maintaining 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 (2) 30 days written notice
given at any time upon the Common Stock attaining trading prices of $5 per share
and sustaining such prices for twenty (20) trading days.
Onion Peel
The Company acquired Onion Peel Solutions L.L.C. ("Onion Peel"), a Raleigh, NC
based provider of network management solutions as of July 1, 1997. For
consideration, the Company issued 80,000 shares of its Common Stock to the
owners of Onion Peel. Additional shares may be issued contingent upon the
closing price of the Company's Common Stock on December 31, 1998. The cost of
the acquisition was determined to be $400,000. The acquisition was accounted for
using the purchase method of accounting.
PSS
On January 30, 1998, the Company completed the purchase of all of the stock of
The PSS Group, Inc. ("PSS"), the technical professional staff augmentation
operations and business of Preferred Systems Solutions, Inc. ("Preferred") and
formerly a wholly owned subsidiary of Preferred. In consideration for the
purchase, the Company paid $300,000 at closing and on or before January 15, 1999
will pay $300,000 in cash or 200,000 shares of its Common Stock or any
combination thereof, at Preferred's option. The Company used working capital to
finance the acquisition. The agreement also provides that Preferred will receive
additional consideration (the "Earn-out") if PSS meets certain operating
targets. Such Earn-out may be paid at the Company's option in cash or its Common
Stock, or any combination thereof. In connection with the acquisition, the
Company and PSS have entered into employment agreements with certain employees
of PSS. The acquisition was accounted for using the purchase method of
accounting.
7
In order to focus on the Company's core business and reduce corporate losses,
the Company completed the sale of its WorldLink technology product business
("WorldLink")to XcelleNet, Inc. in December 1996 for a sale price of $3 million
in cash.
As a result of this sale, the Company has redirected most of the technical
talent from the WorldLink team to its IT Solutions practice groups.
ITEM 2. PROPERTIES.
The Company leases approximately 10,000 square feet of space in McLean, Virginia
for its corporate offices and the operations of some of the IT Solutions
practice at a monthly rental rate of $15,754. The Company also leases office
space in New York City, Central and Western New Jersey, Raleigh, N.C. and the
Greater Chicago area to serve as operating offices of its businesses. These
leases expire on different dates from May 2000 to June 2001.
Prior to the Netplex/CompLink Merger of June 1996, the Company's primary
operating facility and corporate headquarters was located in Great Neck, NY. As
a result of the Merger the Company's corporate offices moved from these
facilities to its McLean, VA headquarters. The Company settled the remaining
obligation under the Great Neck office lease in March 1997 for approximately
$320,000.
The Company believes that the space in its existing corporate and branch
facilities should be adequate for the foreseeable future to support the growth
of its existing operations in the geographic areas in which it currently
operates. The Company expects to expand its operations into new geographic
regions in the future and will need to lease additional branch offices to
support operations in those regions.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, disagreements with individual employees and disagreements as
to the interpretation, effect or nature of the individual agreements arise in
the ordinary course of business and may result in legal proceedings being
commenced against the Company.
On December 31, 1996, ACS Ltd., a software distributor based in the United
Kingdom, filed a complaint against Technology Development Systems ("TDS") a
wholly owned subsidiary of the Company, in the Circuit Court of Cook County,
Illinois. ACS alleges that TDS breached its obligations under the Distributor
Agreement between the Plaintiff and TDS for the WorldLink product when the
Company directed TDS to sell the WorldLink product technology to a third party.
ACS is demanding a sum exceeding one million dollars for the breach of contract.
The case is currently in discovery. In the opinion of Management and the
Company's legal counsel, the lawsuit has little merit, and the outcome of the
pending lawsuit will not have a material adverse effect on the Company's
financial condition, liquidity or the results of operations. The Company intends
to vigorously defend against the lawsuit. The TDS subsidiary which was part of
CompLink is currently inactive with no assets.
On September 4, 1997, Data Systems Analysts, Inc. ("DSA"), a software design and
consulting company, filed a complaint against TDS and the Company in the United
States District Court -- District of New Jersey, alleging copyright infringement
and breach of the Company's agreement to pay certain royalties. The Complaint
claims damages in excess of $300,000 plus punitive damages. The case is
currently in discovery. In the opinion of Management, the lawsuit has little
merit, and the outcome of the pending lawsuit will not have a material adverse
effect on the Company's financial condition, liquidity or the results of
operations. The Company intends to vigorously defend against the lawsuit.
The Company is not currently involved in any litigation or proceedings which if
decided against the Company would have a material adverse affect, either
individually or in the aggregate. To the Company's knowledge, no
8
other legal proceedings, that if decided against the Company would have a
material adverse affect, are currently contemplated by any individuals, entities
or governmental authorities.
The principal risks that the Company insures against are workers' compensation,
personal injury, property damage, general liability, and fidelity losses. The
Company maintains insurance in such amounts and with such coverages and
deductibles as management believes are reasonable and prudent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the holders of the Company's Common Stock
during the fourth quarter of the Company's fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company is traded on the NASDAQ SmallCap market
("NASDAQ") and on the Boston Stock Exchange.
NASDAQ recently enacted new requirements for continued listing on NASDAQ. NASDAQ
has advised the Company that it believes that the Company fails to meet the
requirement that NASDAQ companies have net tangible assets of at least
$2,000,000. The Company believes that with the proceeds from two recently
completed Private Placements it is in compliance with NASDAQ's net tangible
assets requirement. However there can be no assurance that the Company will
continue to meet the applicable requirements for continued listing. In addition,
the Company has an oral hearing with NASDAQ scheduled for April 30, 1998 to
review whether the Company is in compliance with the new requirements and to
review the terms of one of the Private Placements.
The failure to meet the maintenance criteria in the future may result in the
Common Stock no longer being eligible for quotation on NASDAQ and trading, if
any, of the Common Stock would thereafter be conducted in the non-NASDAQ
over-the-counter market. As a result of such delisting of the Common Stock from
NASDAQ, it may be more difficult for investors to dispose of, or to obtain
accurate quotations as to the market value of, the Common Stock.
The regulations of the Securities and Exchange Commission ("Commission")
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), require additional disclosure relating to the market for penny stocks.
Commission regulations generally define a penny stock to be an equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. A disclosure schedule explaining the penny stock market and the
risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If the Company's securities become subject to the
regulations applicable to penny stocks (i.e., by NASDAQ delisting), the market
liquidity for the Company's securities could be severely affected. In such an
event, the regulations on penny stocks could limit the ability of broker-dealers
to sell the Company's securities and thus the ability of purchasers of the
Company's securities to sell their securities in the secondary market. In the
absence of an active trading market, holders of the Common Stock may experience
substantial difficulty in selling their securities.
9
PRICE RANGE OF COMMON STOCK
The quotations set forth in the table reflect inter-dealer prices, without
retail mark-up, markdown or commission, and may not necessarily represent actual
transactions:
Fiscal 1996 High Low
----------- ---- ---
1st Quarter.................................................... $3.50 $2.38
2nd Quarter (OTC Electronic Bulletin Board commencing June 20) 3.38 2.77
3rd Quarter.................................................... 3.38 2.31
4th Quarter.................................................... 4.00 3.25
Fiscal 1997
1st Quarter....................................................$3.25 $2.75
2nd Quarter (NASDAQ SmallCap Commencing April 20)... 3.25 1.88
3rd Quarter.................................................... 3.13 1.50
4th Quarter.................................................... 2.94 0.75
The Company has not paid any cash dividends on its Common Stock and does not
intend to pay cash dividends on its Common Stock for the foreseeable future. The
Company intends to retain future earnings, if any, to finance future
development.
As of March 20, 1998, there were approximately 77 holders of record of the
Company's Common Stock. The Company believes that at such date there were in
excess of 500 beneficial owners of the Company's Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
OVERVIEW
The Netplex Group, Inc. (the "Company") 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 is headquartered in McLean, Virginia and has branch offices in the
Reston, Virginia, New York City, Central New Jersey, Raleigh, North Carolina and
Chicago Metropolitan markets.
In June 1996, the Company (formerly known as CompLink, Ltd.) acquired and merged
(the "Merger") with America's Work Exchange, its wholly owned subsidiary
Software Resources of New Jersey, now known as Contractors Resources ("CR"), 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 then outstanding Common Stock after giving effect to the
Merger. The Merger agreement provided for the Company to issue options to
purchase 1,691,000 shares of the Company's Common Stock in exchange for options
to purchase 1,691,000 shares of Netplex's Common Stock. As a result, Netplex was
considered the acquirer for accounting purposes.
The assets and liabilities of CompLink and its wholly owned subsidiary,
Technology Development Systems ("TDS"), were recorded by the Company at merger
date at book value which approximated fair value. At merger, CompLink's
operations consisted primarily of the distribution of WorldLink remote and
mobile workforce automation software developed by TDS. The Company discontinued
the operations of its software development and distribution segment upon the
completion of the sale of its interest in the WorldLink product technology for
$3.0 million in December 1996.
The Company's operations have been concentrated on providing IT services and
solutions to U.S.-based commercial organizations since the beginning of 1997.
10
In July 1997, the Company acquired the net assets of Onion Peel Solutions, L.L.C
("Onion Peel") to broaden its customer base and expand the fulfillment capacity
of its Enterprise Systems Management service offerings in exchange for 80,000
shares of its Common Stock, subject to adjustment.
The statement of operations for the year ended December 31, 1997 reflects the
results of Onion Peel from July 1, 1997, the date of acquisition. The statement
of operations, for the year ended December 31, 1996, reflects the results of
Complink commencing on June 1, 1996. The operations of TDS are included in the
statement of operations for the year ended December 31, 1996, as discontinued
operations beginning on June 1, 1996.
The above acquisitions and disposition have resulted in the Company emerging in
1997 with three distinct areas of business operations: Design and implementation
of solutions for IT systems related business needs, IT Solutions; Staff
augmentation and flexible task outsourcing, IT Staffing, and: Business services
for the independent IT Consultant, IT Contractor Resources.
The following table sets forth the revenue and gross profit of each of the
business areas for 1997:
IT
Contractor
Resources IT Solutions IT Staffing Total
--------- ------------ ----------- -----
Revenues $32,048,350 100% $5,221,555 100% $3,198,229 100% $40,468,134 100%
% 79.2% 12.9% 7.9% 100%
Cost of Sales 30,952,246 96.6% 2,335,658 44.7% 2,127,740 66.5% 35,415,644 87.5%
% 87.4% 6.6% 6.0% 100%
Gross Profit 1,096,104 3.4% 2,885,897 55.3% 1,070,489 33.5% 5,052,490 12.5%
% 21.7% 57.1% 21.2% 100%
RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Revenue for the year ended December 31, 1997 increased approximately $6.9
million or 21% to approximately $40.5 million, as compared to $33.5 million for
the same period in 1996. This increase includes a $5.6 million or 21% increase
in IT Contractor Resources revenue, a $1.6 million or 100% increase in IT
Staffing revenue offset by a $300,000 or 5% net decrease in the IT Solutions
revenue. The IT Solutions decrease includes a $1.3 million decrease in IT
Solutions revenues driven principally from declines in computer product resales
and was partially offset by a $1.0 million revenue increase generated by Onion
Peel which was acquired in July 1997.
Gross Profit for the year ended December 31, 1997 increased approximately $2.4
million or 92% to approximately $5.1 million as compared to approximately $2.6
million for the same period of 1996. This increase includes a $325,000 increase
in IT Contractors Resources gross profit, an approximately $500,000 increase in
IT staffing gross profit and a $1.5 million increase in IT Solutions gross
profit. The increase in IT Contractors Resources and IT Staffing gross profit
are principally due to the increases in revenues. The increase in IT Solutions
gross profit is primarily due to a shift in the IT Solutions product mix to a
higher proportion of pure service revenues than in 1996 and the inclusion of the
Onion Peel business which was added to IT Solutions through a July 1, 1997
acquisition.
Gross Profit increased to approximately 12.5 % in 1997 from approximately 8.0%
in 1996, primarily due to the increased IT Solutions and IT Staffing services
revenues which generate higher gross profit margins.
Selling, general and administrative expenses for the year ended December 31,
1997 increased approximately $2.7 million or 51.9% to $7.9 million from $5.2
million for the same period of 1996. The primary reason for the increase in
selling, general and administrative expenses is the expansion of the sales and
recruiting forces, and the hiring and
11
training of technical staff to pursue and prepare for prospective client
engagements, all of which began in the third quarter of 1996 and continued
throughout 1997
Other income (expense) for the year ended December 31, 1997 decreased by $65,000
or 171% to approximately $26,000 of other expense in 1997 from approximately
$38,000 of other income in 1996. The primary reason for the decrease is the
reduction in cash balances from the Company's losses in 1997 coupled with
increased borrowings on its line of credit facility during 1997.
The loss from continuing operations before taxes increased by approximately
$352,000 or 14% to $2.9 million from $2.5 million. The components of this
increased loss are discussed above.
As a result of the net loss no provision or benefit for income taxes was
required in 1997. In 1996 the Company recorded a $34,000 benefit for income
taxes generated from a change in the Company's deferred tax asset valuation
allowance.
Income from discontinued operations of approximately $488,000 in 1996, resulted
from the Company's discontinuance of its software development and distribution
business. This income includes a gain from the disposal of the business of
approximately $1.8 million which resulted primarily from the sale of the
WorldLink product technology to XcelleNet, Inc. offset by losses of
approximately $1.3 million from the operations of this business from the date of
its acquisition in the merger with CompLink (June 1, 1996 for accounting
purposes) through the disposal date.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997 the Company had cash and cash equivalents of $353,005. The
Company had $1,316,300 outstanding on its line of credit facility and had long
term capital lease obligations of $109,096.
The Company's liquidity and capital resources were increased by the following:
On July 1, 1997, the credit line was expanded by the bank to the lesser of
$2,000,000 or 80% of eligible accounts receivable and the interest rate was
reduced to 0.75% over the bank's prime rate. The bank has waived certain
financial covenants contained in this line of credit agreement with which the
Company was not in compliance at December 31,1997. The Company is presently in
discussion with the bank to extend the credit line when it expires on July 1,
1998.
During the year ended December 31, 1997, the Company received $607,500 from the
exercise of outstanding options and warrants.
For the year ended December 31, 1997 the Company's operating activities used
approximately $4.3 million, investing activities used approximately $103,000 and
financing activities provided approximately $1.0 million of the Company's cash.
The primary uses of cash were the Company's net loss of $2.9 million, and
decreased accounts payable and accrued expenses of approximately $2.1 million.
These uses of cash were partially offset by cash provided from the exercise of
warrants and options of $607,500 and borrowings under the Company's line of
credit of $1,316,300. The Company will continue to make significant investments
in its technical staff, marketing, training and infrastructure to increase
productivity, build its technical staff database and foster growth of its
operations.
The Company is actively pursuing the acquisition of additional technical
consulting firms to broaden its customer base, expand its technical capacity and
enhance its fulfillment capability.
On January 30, 1998, the Company completed the purchase of all of the stock of
The PSS Group, Inc. ("PSS") the technical professional staff augmentation
operations and business of Preferred Systems Solutions, Inc. ("Preferred") and
formerly a wholly-owned subsidiary of Preferred. In consideration for the
purchase, the Company paid $300,000 at closing and on or before January 15, 1999
will pay $300,000 in cash or 200,000 shares of its Common Stock or any
combination thereof, at Preferred's option. The Company used working capital to
finance the acquisition. The agreement also provides that Preferred will receive
additional consideration (the "Earn-out") if PSS meets certain operating
targets. Such Earn-out may be made at the Company's option in cash or its Common
12
Stock, or any combination thereof. If the Company elects to pay the Earn-out in
Common Stock, the value of the Common Stock will be based on the average closing
price of the Company's Common Stock for the last quarter of the year in which
the payment was made.
Capital expenditures for the year ended December 31, 1997 were approximately
$105,000.
Between January 1, 1998 and April 14, 1998, the Company has raised additional
equity totaling $3,057,000.
In February 1998 the Company raised $100,000 through the sale of 80,000 shares
of nonregistered Common Stock plus a warrant to purchase an additional 100,000
warrants at $1.20.
In March, 1998 the Company raised $1,457,000 of financing in a Private Placement
raised primarily from accredited investors and employees of the Company. The
Company issued shares of non-registered Common Stock to purchasers who have
agreed not to sell or otherwise distribute their shares for a period of one
year. These restricted shares carry registration rights and were offered at
$1.00 per share. The funds will be used to finance operations and additional
acquisitions.
On April 7, 1998 Netplex completed the sale of 1,500 units of a Private
Placement, totaling $1.5 million, to various purchasers The Zanett Corporation
("Zanett") acted as placement agent for the Private Placement. The sale
represents the first half of a transaction that will include the sale of an
additional 1,500 units for $1.5 million at a future date. Zanett Lombardier
purchased 1,500 units at $1,000 per unit, with each unit consisting of a prepaid
Common Stock purchase warrant entitling the holder to acquire such number of
shares of the Company's Common Stock as is equal to $1,000 divided by an
adjustable exercise price and an additional incentive warrant to acquire 52
shares of Common Stock (or an aggregate of 78,000 shares of Common Stock). The
Company also granted Zanett a warrant to purchase 39,000 shares of Common Stock.
Zanett also received placement fees and a non-accountable expense allowance
equal to 12.53% of the proceeeds of the offering. The second half of the
transaction is for the sale to Zanett of an additional and committed 1,500
units, for $1,000 per unit, contingent on Netplex recording three consecutive
quarters of increased profits and revenues, excluding any extraordinary items.
With respect to the second half of the transaction, the exercise price of the
purchase warrants and the incentive warrants will be based on the bid price of
the Common Stock at the time of such closing. The funds from the Private
Placement will be used to fund operations and acquisitions. Under NASDAQ
regulations, certain aspects of the transaction must receive shareholder
approval. NASDAQ has also advised the Company that it will review the terms of
the Private Placement. Such shareholder approval is expected in the Company's
annual meeting. The Company believes that the proceeds should ensure that the
Company will exceed NASDAQ's published net tangible assets requirement of $2
million.
Based on its current operating plan, the Company believes that the net proceeds
from the Private Placement together with cash anticipated to be provided by
operating activities and amounts expected to be available under a renegotiated
line of credit will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's
liquidity requirements, the Company may seek to sell additional equity or
convertible debt securities or obtain additional credit facilities. However, no
assurance can be given that any such additional sources of financing will be
available on acceptable terms or at all. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. A portion of the Company's cash may be used for acquisitions or to
acquire or invest in complimentary businesses or products or to obtain the right
to use complementary technologies. The Company has no current plans, agreements
or commitments, and is not currently engaged in any negotiations with respect to
any such transaction.
The Company is expecting to incur operating losses until it achieves full
productivity of the majority of its sales force. While it cannot be certain as
to when such levels of productivity can be attained, the Company anticipates
that its sales force will operate at levels below full productivity through at
least the first quarter of 1998. 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
13
its operations. Despite the expectation of continued operating losses,
management believes that its current cash balance and credit facility will be
sufficient to meet operating requirements for at least the next twelve months.
Recent Accounting Pronouncements
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure" which is effective for the year ending December 31, 1998.
This statement continues the previous requirements to disclose certain
information about an entity's capital structure found in Accounting Principles
Board (APB) Opinion No. 10, "Omnibus Opinion -1966" and No. 15, "Earnings per
Share" and FASB Statement No. 47, "Disclosure of Long-Term Obligations." The
Company has been subject to the requirements of those standards and as a result
does not expect the adoption of SFAS No. 129 to have a material impact on the
Company's financial statements.
In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income", which
is effective for the year ending December 31, 1998. This statement establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. Earlier application of this standard is
permitted; however, upon adoption the Company will be required to reclassify
previously reported annual and interim financial statements. The Company
believes that the disclosure of comprehensive income in accordance with the
provisions of SFAS No. 130 will not impact the manner of presentation of its
financial statements as currently and previously reported.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for the year ending
December 31, 1998. This statement requires companies to present certain
information about operating segments and related information, including
geographic and major customer data, in its annual financial statements and in
condensed financial statements for interim periods. The Company believes that
the adoption of SFAS No. 131 will impact the manner of presentation of its
financial statements.
In October, 1997, the AICPA Accounting Standards Executive Committee issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which
supercedes Statement of Position 91-1 "Software Revenue Recognition. SOP 97-2
focuses on when and in what amounts revenue should be recognized for licensing,
selling, leasing, or otherwise marketing computer software, and is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company does not believe that the adoption of this new pronouncement will have a
material impact on its financial position and results of operations.
Inflation
The Company does not expect inflation to have a significant adverse impact on
its operations.
Forward-Looking Statements
This Form 10-KSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, (including with out
limitation, the growth of the Company, future financings, acquisitions and
expenses and general market conditions) though the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this Form 10-KSB
will prove accurate. In light of the significant uncertainties inherent in
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
Year 2000 Compliance
The Company has assessed and continues to assess the impact of the Year
2000 issue on its operations, including the development of cost estimates for,
and the extent of programming changes required to address, this issue. Although
final cost estimates have yet to be determined, the Company expects that these
Year 2000 costs will not be material to the Company's expenses during 1998 and
1999.
ITEM 7. FINANCIAL STATEMENTS.
See Consolidated Financial Statements listed in the accompanying index to
Consolidated Financial Statements on Page F-1 herein.
14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth the ages of the Executive Officers and the
members of the Board of Directors and the positions they hold with The Netplex
Group, Inc., a New York Corporation (the "Company"):
Name Age Position
Gene Zaino 40 President, Chief Executive Officer and
Chairman
Robert Skelton 36 Vice President - Human Resources,
General Counsel and Secretary
Matthew Jones 36 Chief Financial Officer and Treasurer
Richard Goldstein (1)(2) 51 Director
Frank Lagattuta (1) 54 Director
Neil Luden 42 Director
Deborah Novick (2) 33 Director
- ------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Gene Zaino has been a Director of the Company since August 1995 and became its
Chief Executive Officer and Chairman upon completion of the merger with Netplex
in June 1996. From November 1995 through the completion of the merger, Mr. Zaino
functioned in the capacity of Chief Executive Officer. Mr. Zaino started his
career at KPMG Peat Marwick L.L.P. in 1980. He was a founding principal of a
subsidiary of Evernet Systems, Inc. which was acquired by Control Data Systems,
Inc. in 1993. In January 1994, Mr. Zaino developed the business plan which lead
to the formation of Netplex. Mr. Zaino is a Graduate of the University of
Pennsylvania, Wharton School and is a Certified Public Accountant.
Robert Skelton joined the Company as its Vice President of Human Resources and
General Counsel in September 1996 and became its Secretary in November 1996.
From November 1990 to June 1996, Mr. Skelton served in similar capacities for
Central Atlantic Toyota Distributors, Inc., and Quality Port Processors, Inc.,
subsidiaries of Toyota Motor Sales, USA. From July 1986 through October 1990,
Mr. Skelton was an attorney with the law firm of Webster, Chamberlain & Bean in
Washington D.C. Mr. Skelton holds a Bachelors of Arts in Political Science and
Modern Language from Union College and a Juris Doctor from George Washington
University. Mr. Skelton is an Attorney and a member of the District of Columbia,
Maryland, and Virginia Bars.
Matthew Jones joined the Company as its Chief Financial Officer in September
1996 and became its Treasurer in November 1996. From August 1992 through August
1996, Mr. Jones served as the Director of Finance for Telos Corporation, a
Virginia based Systems integrator and Computer services provider. From July 1984
to August 1992, Mr. Jones was employed in various capacities with Price
Waterhouse - lastly as an Audit Manager. Mr. Jones holds a Bachelors of Science
in Business Administration - Accounting from California State University,
Northridge and is a Certified Public Accountant.
Richard Goldstein has served as a Director of the Company since July 1996. Mr.
Goldstein has been a Partner of Tocci, Goldstein and Company, L.L.P., a New York
City based C.P. A. firm since 1992. Prior thereto, Mr.
15
Goldstein was a Tax Partner with KPMG Peat Marwick 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.
Frank Lagattuta became a Director of the Company in September 1997. Mr.
Lagattuta has been serving since 1996 as the President and chief operating
officer of CompuLaw, Ltd. of Los Angeles, California. Prior thereto, he was the
Vice President of Sales and Marketing for Saft America, Inc. form 1993 to 1996.
Prior thereto, Mr. Lagattuta was the Vice President of Sales and Marketing for
BISS Sales, Inc. from 1991 to 1993. Prior thereto, he served as the Executive
Vice President of Sales and Marketing for Evernet Systems, Inc. from 1989 to
1991. Mr. Lagattuta also was employed in several management positions by Xerox
Corporation from 1973 to 1989 and served as the President of Xerox Computer
Services from 1987 to 1989. Mr. Lagattuta holds a Bachelor of Science degree in
Accounting from Canisius College and a Master of Business Administration in
Finance and Accounting from the University of Southern California.
Neil Luden has served in various capacities with the Company since June 1992.
Since June 1996, Mr. Luden has served as a Director. From June 1996 through
April 1997, he also served as Vice President. From December 1992 through the
Company's Merger with Netplex in June 1996, he served as President of the
Company and a Director. Prior thereto, from March 1990 to June 1992 he was
president and the sole stockholder of ALN Enterprises, Inc., a financial and
business consulting firm. From June 1983 to March 1990, Mr. Luden was employed
in various capacities with Prudential-Bache Securities, Inc., lastly as a Vice
President--Systems. Mr. Luden is a graduate of St. Johns University.
Deborah Novick has been a Director of the Company since August, 1995 and has
served in a variety of capacities at GKN Securities Corp., a New York based
investing banking company, since August 1992, including most recently Senior
Vice President -- Investment Banking. Prior thereto, Ms. Novick was a Senior
Analyst with Value Line, Inc. from August 1989 until August 1992. Ms. Novick
holds a Bachelor of Science degree from Cornell University.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth, for the fiscal years indicated, all compensation
awarded to, earned by or paid Gene Zaino, the President and Chief Executive
Officer of the Company, and all compensation paid to Robert Skelton, Vice
President - Human Resources, General Counsel and Secretary of the Company. In
June 1996, the Company merged with the Netplex and America's Work Exchange
("AWE"), compensation paid for periods prior to June 1996 constitutes
compensation paid by Netplex or AWE. The Company had no executive officer, other
than Mr. Zaino and Mr. Skelton, whose salary exceeded $100,000 for year ended
December 31, 1997. The total compensation paid to all executive officers of the
Company in the year ended December 31, 1997 was $330,273.
16
Summary Compensation Table
Long-Term
Annual Compensation(1) Compensation
Awards
-------------------------------------------------------------
Securities
Fiscal Other Annual Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($)
- --------------------------- ---- --------- -------- --------------- ---------- ---------------
Gene Zaino, President 1997 $130,000 - 0 - - 0 - 600,000 (3) $ 4,563
1996 $116,423 - 0 - - 0 - - 0 - $27,125 (2)
1995 $ 86,100 - 0 - - 0 - 615,000 (3) $ 5,425 (2)
Robert Skelton, Secretary 1997 $100,000 - 0 - - 0 - 70,000 (3) $ 2,903
1996 $ 32,731 - 0 - - 0 - 50,000 (3) $ 2,000
- -----------------------
(1) Mr. Zaino is employed under an employment agreement pursuant to which
he is paid a base salary of $130,000 per annum. See "Executive
Compensation -- Employment and Related Agreements."
(2) Mr. Zaino received $5,425 per month from December 1995 through May 1996
pursuant to a consulting agreement with the Company
(3) Options to purchase 600,000 shares issued to Mr. Zaino in 1995 under
the Employee Stock Option Plan were canceled in December 1997. Options
to purchase 600,000 shares were thereafter issued to Mr. Zaino at a
lower exercise price. None of Mr. Zaino's options have been exercised
and none are vested as of December 31, 1997. Options to purchase 70,000
shares granted to Mr. Skelton in 1996 and 1997 under the Employee Stock
Option Plan were canceled in December 1997 and options to purchase
70,000 shares were granted thereafter to Mr. Skelton at a lower
exercise price. None of Mr. Shelton's options have been exercised and
none are vested as of December 31, 1997. Mr. Skelton's employment with
the Company commenced in 1996..
Stock Option Grants
As part of a company-wide non-cash employee incentive granted by the Company's
Compensation Committee, Mr. Zaino agreed to cancel 600,000 options previously
issued to him. The Company granted 600,0000 options to Mr. Zaino in the fiscal
year ended December 31, 1997. As part of the merger, Mr. Zaino exchanged options
that he held in Netplex and AWE for options to purchase an aggregate of 600,000
shares at an exercise price ranging from $2.90 to $2.98 per share. These options
were canceled in 1997. Options on 70,000 shares granted to Mr. Skelton in 1996
and 1997 under the Employee Stock Option Plan were canceled in December 1997 and
options on 70,000 shares were granted to Mr. Skelton at a lower exercise price.
in the fiscal year ended December 31, 1997. The following table sets forth
further information with respect to options granted to Messrs. Zaino and
Skelton:
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Per Share Exercise
Name Granted Fiscsal Year Price Expiration Date
---- ------- ------------ ----- ---------------
Gene Zaino 600,000 25% $0.97 December 20, 2007
Robert Skelton 70,000 3% $0.97 December 20, 2007
Fiscal Year End Option Values
Mr. Zaino and Mr. Skelton exercised no options in the fiscal year ended December
31, 1997. The following table sets forth certain information regarding the
options held by Mr. Zaino and Mr. Skelton at December 31, 1997.
17
Aggregate Option Exercises and Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options at Options at
December 31, 1997(1) December 31, 1997($)(1)
--------------------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ----------- ------------- ----------- -------------
Gene Zaino -0- 600,000 -0- -0-
Robert Skelton -0- 70,000 -0- -0-
- --------------
(1) At December 31, 1997 the closing price of the Company's Common Stock as
reported by the NASDAQ was $0.875. The exercise price for the option
shares exceeded the fair market value on December 31, 1997.
Employment and Related Agreements
Mr. Zaino is employed under a three-year employment agreement, effective as of
June 7,1996, pursuant to which he is paid a base salary of $130,000 per annum,
subject to increase by the Company's Board. Mr. Zaino may also receive an annual
bonus at the sole discretion of the Company's Board, based upon the financial
and operating performance of the Company. Mr. Skelton is paid a base salary of
$100,000. Mr. Skelton may also receive an annual bonus at the sole discretion of
the Company's President.
The Company obtained key-person life insurance in the amount of $1 million on
the life of Mr. Zaino.
Directors' Compensation
Directors receive no fees or other compensation for attendance at meetings of
the Company's Board.
The Company has created the 1995 Directors' Stock Option Plan (the "Directors'
Plan") pursuant to which any Director of the Company who is not a full or
part-time employee of the Company may be eligible to participate in the
Directors' Plan. To date, options to purchase 60,000 shares at exercise prices
ranging from $2.50 to $3.56 per share have been granted to Directors.
Board of Directors Interlocks and Insider Participation
The Company's Board has a Compensation Committee consisting of Mr. Goldstein and
Mr. Lagattuta and an Audit Committee consisting of Mr. Goldstein and Ms. Novick
and, except as set forth in detail in Certain Relationships and Related
Transactions, there are no Board of Directors interlocks.
18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information concerning ownership of the Company's
Common Stock, as of April 8, 1998, by each person known by the Company to be the
beneficial owner of more than five percent of the Common Stock, each director,
each nominee for Director, each executive officer and by all directors and
executive officers of the Company as a group.
Name of Beneficial Owner Number of Shares of Common Stock Beneficially
Owned (1)
Number Percent
------ -------
Gene Zaino 1,329,850(2) 17.4%
Stan Fischer 448,420(3) 5.9%
Scott Pogoda 616,072 8.2%
PO Box 10229
Zephyr Cove, NV 89448
Deborah Novick 16,250(4) *
Richard Goldstein 16,000(5) *
Neil Luden 100,000(6) *
Frank Lagattuta 8,000 *
Matthew Jones 0 -
Robert Skelton 0 -
All directors and 1,464,300(7) 18.9%
Executive officers as a
Group(7 persons)
- ----------------
* Less than 1%.
(1)Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or 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 person holding such options or
warrants but are not deemed outstanding for computing the percentage of any
other person. Based on 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 73,420 shares of Common Stock, subject to options or warrants.
(3) Includes 19,809 shares of Common Stock subject to options or warrants. Mr.
Fischer is an employee and member of the senior management team of the Company
but is not an Executive Officer.
(4) Consists of 16,250 shares of Common Stock subject to options or warrants.
(5) Includes 7,500 shares of Common Stock subject to options.
(6) Consists of 100,000 shares of Common Stock subject to options.
(7) Includes 197,170 shares of Common Stock subject to options or warrants.
19
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company contracted with an entity owned by Scott Pogoda, a five-percent
shareholder for the development of the software to be used to maintain the
Company's Centralized National Technical Database. The Company paid Mr. Pogoda
$150,000 and has a remaining obligation of approximately $50,000 at December 31,
1997 related to the development of this software.
Ms. Novick is a Senior Vice President of GKN Securities Corp., Placement Agent
of the 1996 Private Placement. The Company paid GKN Securities Corp. $432,500 in
fees associated with the completion of this transaction.
20
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit
No.
2.1 Agreement and Plan of Reorganization and Merger dated as of
November 20, 1995, by and among The Netplex Group, Inc., America's
Work Exchange, Inc. and the Company.**
3.1 The Company's Amended and Restated Certificate of
Incorporation.***
3.2 The Company's By-laws.**
3.3 Amendment to the Company's Amended and Restated Certificate of
Incorporation.*
4.1 Form of Common Stock Certificate.***
4.5 Form of Warrant issued to investors in connection with 1992 bridge
financing.***
4.6 Form of Unit Purchase Option granted to the Underwriter of the
Company's initial public offering.**
4.7 Form of Purchase Option granted to Placement Agent in connection
with the 1996 Private Placement.*****
4.8 Form of Warrant issued in connection with the 1996 Private
Placement.****
4.9 Certificate of Designation for the Preferred Stock.****
4.10 Form of Prepaid Warrant issued to Purchasers in 1998 Private
Placement.******
4.11 Form of Incentive Warrant issued to Purchasers in 1998 Private
Placement.******
10.5 1992 Incentive and Non-Qualified Stock Option Plan.**
10.6 Amendment to 1992 Incentive and Non-Qualified Stock Option Plan.**
10.9 Form of Indemnification Agreement between the Officers and
Directors of the Company and the Company.**
10.10 1995 Directors' Stock Option Plan.*****
10.11 1995 Consultant's Stock Option Plan.*****
10.12 Employment Agreement between the Company and Gene Zaino.*
10.13 Agreement by and among XcelleNet, Inc., The Netplex Group, Inc.
and Technology Development Systems, Inc. dated November 5,
1996.******
10.14 Agreement dated as of January 23, 1998 between The Netplex Group,
Inc., Preferred Systems Solutions, Inc., The PSS Group, Inc. and
Robert Hisel, Jr.******
11 Computation Re: Per Share Earnings.******
23 Consent of KPMG Peat Marwick LLP.******
27 Financial Data Schedule.******
(b) The Company filed one report Form 8-K/A in the quarter ended December
31, 1996, under Item 2 Acquisition and Disposition of Assets.
- -----------------
* Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996.
** Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission (the "Commission") on
June 7, 1996, as amended.
*** Incorporated by reference to the Company's Registration Statement on
Form SB-2, filed with the Commission on January 29, 1993 (Commission
file No. 33-57546), as amended.
**** Incorporated by reference to the Company's Registration Statement on
Form S-3, filed with the Commission on November 19, 1996, as amended
(Commission File No. 333-16423).
***** Incorporated by reference to the Company's Registration Statement on
Form S-8, filed with the Commission on December 31, 1996, (Commission
File No. 333-19115).
****** Filed Herewith.
21
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized in the County of Fairfax, Commonwealth of Virginia on the 15th day of
April, 1998.
The Netplex Group, Inc.
By: /s/ Gene Zaino
-----------------
Gene Zaino
Chairman, President and C.E.O.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Gene Zaino Chairman, President and April 14, 1998
- ------------------------- Chief Executive Officer
Gene Zaino [Principal Executive Officer]
/s/ Matthew G. Jones Chief Financial Officer April 14, 1998
- ------------------------- and Treasurer [Principal
Matthew G. Jones Accounting Officer]
/s/ Neil Luden Vice President & Director April 14, 1998
- -------------------------
Neil Luden
/s/ Richard Goldstein Director April 14, 1998
- --------------------------
Richard Goldstein
/s/ Frank C. Lagattuta Director April 14, 1998
- ---------------------------
Frank C. Lagattuta
/s/ Deborah Schondorf-Novick Director April 14, 1998
- -------------------------------
Deborah Schondorf-Novick
22
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report......................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996......... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996........................................ F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997........................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996........................................ F-6
Notes to Consolidated Financial Statements......................... F-7
F-1
[Letterhead of KPMG Peat Marwick LLP]
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, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements 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, 1997 and 1996 and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
McLean, Virginia
April 10, 1998
F-2
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
Assets 1997 1996
---------- ----------
Current assets
Cash and cash equivalents $ 353,005 $3,691,099
Accounts receivable, net of allowance for doubtful accounts of
$133,000 and $177,000, respectively 4,133,148 4,304,662
Notes receivable 200,000 --
Prepaids and other current assets 232,842 350,074
---------- ----------
Total current assets 4,918,995 8,345,835
Property and equipment, net 952,546 1,090,617
Other assets 82,738 78,988
Employee notes receivable 193,464 --
Acquired software, net 418,225 --
Goodwill, net 346,529 373,180
---------- ----------
Total assets $6,912,497 $9,888,620
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 567,805 $ 936,865
Line of credit 1,316,300 --
Accrued expenses 3,383,024 5,166,184
Deferred revenue 109,497 329,267
Obligation under capital lease, current portion 96,073 106,347
---------- ----------
Total current liabilities 5,472,699 6,538,663
Obligation under capital lease, net of current portion 109,096 110,669
---------- ----------
Total liabilities 5,581,795 6,649,332
---------- ----------
Stockholders' equity
Class A Cumulative Convertible Preferred Stock; $.01 par value;
liquidation preference of the greater of (i) two times the stated
value of $2 per share plus all accrued and unpaid dividends, or (ii) the
amount that would have been received if such shares were converted
to Common Stock on the business day immediately prior to the
liquidation; 2,000,000 shares authorized, 1,062,500 and 1,750,000
shares outstanding in 1997 and 1996, respectively 10,625 17,500
Common stock, $.001 par value; 20,000,000 authorized,7,470,370 and
6,442,903 shares outstanding in 1997 and 1996, respectively 7,470 6,443
Additional paid in capital 6,272,407 5,301,542
Accumulated deficit (4,959,800) (2,086,197)
---------- ----------
Commitments and contingencies
Total stockholders' equity 1,330,702 3,239,288
---------- ----------
Total liabilities and stockholders' equity $6,912,497 $9,888,620
========== ==========
See accompanying notes to consolidated financial statements.
F-3
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
Revenue $40,468,134 $33,524,679
Cost of revenue 35,415,644 30,878,166
----------- -----------
Gross profit 5,052,490 2,646,513
Selling, general and administrative expense 7,899,756 5,205,906
----------- -------------
Operating loss (2,847,266) (2,559,393)
Other income/(expenses)
Interest income/(expense), net (26,337) 33,119
Other income -- 4,808
------------ -----------
(26,337) 37,927
Loss from continuing operations
before income taxes (2,873,603) (2,521,466)
Income tax (benefit) provision -- (34,000)
---------- ------------
Loss from continuing operations (2,873,603) (2,487,466)
Discontinued operations
Loss from operations of discontinued
Business -- (1,332,050)
Net gain from disposal -- 1,820,129
--------- -------------
Income from discontinued operations -- 488,079
Net loss $(2,873,603) $(1,999,387)
=========== ============
Basic and diluted earnings (loss) per common share
Continuing operations $ (0.46) $ (0.51)
Discontinued operations -- 0.09
----------- -------------
Total $ (0.46) $ (0.42)
=========== ============
Weighted average common shares outstanding, basic and diluted 6,820,863 5,026,306
=========== ============
See accompanying notes to consolidated financial statements.
F-4
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
Class A Cumulative
Convertible Preferred
Stock Common stock Additional
------------------------- ---------------------- paid in
Shares $ Shares $ capital
--------- ------------- --------- ----------- -----------
Balance at December 31, 1995 -- $ -- 3,197,608 $ 31,976 $ 579,124
Net loss
Reduction in par value resulting from the
merger of the Company with Netplex
from $0.01 per share to $0.001 per share -- -- -- (28,778) 28,778
Issuance of common shares in the merger of
the Company with Netplex -- -- 3,245,295 3,245 1,767,488
Private placement of Class A Cumulative,
Convertible Preferred Stock 1,750,000 17,500 -- -- 3,024,346
Preferred stock dividends -- -- -- -- (98,194)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 1,750,000 17,500 6,442,903 6,443 5,301,542
Net loss -- -- -- -- --
Conversions of Preferred Stock to Common Stock (687,500) (6,875) 687,500 687 6,188
Exercise of common stock warrants -- -- 225,000 225 537,275
Preferred stock dividends -- -- -- -- (82,500)
Issuance of Common Stock options -- -- -- -- 40,000
Issuance of Common Stock in connection with Onion
Peel Solutions, L.L.C. acquisition
-- -- 80,000 80 399,920
Exercise of Common Stock options -- -- 34,967 35 69,982
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 1,062,500 $ 10,625 7,470,370 $ 7,470 $ 6,272,407
=========== =========== =========== =========== ===========
Accumulated
deficit Total
------------ -----------
Balance at December 31, 1995 $ (86,810) $ 524,290
Net loss (1,999,387) (1,999,387)
Reduction in par value resulting from the
merger of the Company with Netplex
from $0.01 per share to $0.001 per share -- --
Issuance of common shares in the merger of
the Company with Netplex -- 1,770,733
Private placement of Class A Cumulative,
Convertible Preferred Stock -- 3,041,846
Preferred stock dividends -- (98,194)
----------- -----------
Balance at December 31, 1996 (2,086,197) 3,239,288
Net loss (2,873,603) (2,873,603)
Conversions of Preferred Stock to Common Stock -- --
Exercise of common stock warrants -- 537,500
Preferred stock dividends -- (82,500)
Issuance of Common Stock options -- 40,000
Issuance of Common Stock in connection with Onion
Peel Solutions, L.L.C. acquisition
-- 400,000
Exercise of Common Stock options -- 70,017
----------- -----------
Balance at December 31, 1997 $(4,959,800) $ 1,330,702
=========== ===========
See accompanying notes to consolidated financial statements.
F-5
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------------ -------------
Operating activities
Net loss $(2,873,603) $(1,999,387)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 464,213 587,902
Expense on options granted 40,000
Gain on sale of WorldLink product technology -- (1,820,129)
Deferred income taxes -- (34,000)
Change in assets and liabilities, net of effects of acquisition:
Accounts receivable 301,321 (789,955)
Prepaid expenses and other current assets 117,712 (117,496)
Other assets -- (9,404)
Accounts payable and accrued expenses (2,159,896) 1,190,669
Deferred revenue (219,770) (131,643)
---------- -----------
Net cash used in operating activities (4,330,023) (3,123,443)
---------- -----------
Investing activities
Capital expenditures (105,438) (631,983)
Net proceeds from the sale of WorldLink product technology -- 2,492,795
Cash acquired in business acquisition 2,149 1,245,062
---------- ----------
Net cash provided by/(used in) investing activities (103,289) 3,105,874
---------- ----------
Financing activities
Proceeds from the exercise of stock options and warrants 607,517 --
Note receivable (200,000)
Employee notes receivable (193,464)
Payment of dividends on Class A Preferred Stock (180,694) --
Principal payments on capital lease obligations (99,945) (14,019)
Line of credit advances 1,316,300 650,000
Line of credit repayments (95,000) (650,000)
Repayments of other notes payable (59,496) (159,870)
Proceeds from Private Placement -- 3,041,846
---------- ----------
Net cash provided by financing activities 1,095,218 2,867,957
---------- ----------
Increase (decrease) in cash and cash equivalents (3,338,094) 2,850,388
Cash and cash equivalents at beginning of period 3,691,099 840,711
---------- ----------
Cash and cash equivalents at end of period $ 353,005 $3,691,099
========== ==========
Supplemental information Cash paid during the period for:
Interest 61,366 24,247
========== ==========
Income taxes -- 12,985
========== ==========
Capital lease obligation 88,098 241,561
========== ==========
See accompanying notes to consolidated financial statements.
F-6
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) The Business and Basis of Presentation
The Business
The Netplex Group, Inc. ("the Company") was incorporated in 1986 to provide
IT services and solutions. Netplex is an Information Technology (IT)
company that provides the expertise and information systems to link
employees, customers, prospects, suppliers and manufacturers to help
"network-enable" organizations. The Company re-sells technology products
when necessary to deliver to customers fully integrated system solutions.
The Company also provides certain business services to independent
consultants who become the Company's employees.
Basis of presentation
Merger with Netplex On June 7, 1996, the Company (formerly known as
"CompLink, Ltd." or "CompLink") acquired and merged with America's Work
Exchange and The Netplex Group, Inc. (collectively referred to as
"Netplex") in a reverse merger transaction by issuing approximately
3,245,000 shares of Common Stock, or 50.4 % of the Company's outstanding
stock after giving effect for the merger. The merger agreement also
provided for the Company to assume 1,691,000 outstanding Common Stock
options of Netplex.
The merger has been accounted for under the purchase method of accounting
as a reverse merger, since the shareholders of Netplex, which have common
control, received the larger of the voting rights of the combined entity.
As a result, Netplex is considered the acquirer for accounting purposes.
The merger resulted in a re-capitalization of the acquirers, so that the
resulting capitalization of the Company after the merger is that of
CompLink's giving effect to the issuance of new shares and elimination of
CompLink's accumulated deficit. In addition, the par value of the Company's
Common Stock was decreased from $0.01 per share to $0.001 per share in
connection with the merger. The assets and liabilities of CompLink were
recorded by the Company at book value which approximates fair value.
The statement of operations for the year ended December 31, 1996 reflect
those of Netplex for the year and those of CompLink and its wholly-owned
subsidiary, Technology Development Systems ("TDS"), commencing on June 1,
1996. The merger has been accounted for assuming that it occurred on May
31, 1996. The operating results of CompLink and TDS from June 1, 1996 up to
June 7, 1996 (the merger date) have been included in the Company's 1996
consolidated statement of operations, as such amounts are not material.
Coincident with the merger the Company's name was changed from CompLink,
Ltd. to The Netplex Group, Inc. and the entity known as The Netplex Group,
Inc. prior to the merger changed its name to Netplex Systems, Inc. The
Company's fiscal year end was changed from July 31 to December 31. Upon
completion of the merger, the Company consisted of Netplex Systems, Inc.;
America's Work Exchange ("AWE") and its wholly- owned subsidiary, Software
Resources of New Jersey , now known as Contractors Resources ("CR"), and
The Netplex Group, Inc. (formerly known as CompLink Ltd.) and its
wholly-owned subsidiary, TDS.
Acquisition of Onion Peel Solutions L.L.C.
On July 1, 1997, the Company acquired all of the outstanding membership
interests of Onion Peel Solutions L.L.C. ("Onion Peel"), a Raleigh, NC
based provider of network management solutions, in exchange for 80,000
shares of its Common Stock, subject to the issuance of additional shares
based on the closing price of the Company's Common Stock on December 31,
1998. The acquisition was accounted for using the purchase method of
accounting, whereby the $400,000 purchase price was allocated to the fair
value of the assets acquired and the liabilities assumed.
The operating results of Onion Peel have been included in the Company's
consolidated results from July 1, 1997. The acquired intangible asset
recorded on the consolidated balance sheet represents the fair value of
F-7
Onion Peel's software license rights. This intangible asset is being
amortized on a straight - line basis over four years. Amortization of the
software license rights was $46,470 in 1997.
The following unaudited supplemental financial information presents the
consolidated results of the Company from continuing operations, on a pro
forma basis, as though the merger with CompLink and the acquisition of
Onion Peel were consummated on January 1, 1996 and reflect the historical
results of operations of the purchased business adjusted for goodwill
amortization and increased common shares outstanding from the merger. The
pro forma results do not include the operations of the discontinued
business.
Unaudited
Year Ended December 31
1997 1996
------------ ---------------
(in thousands except per share data)
Revenues $ 40,804 $ 34,666
============ ===========
Net loss from continuing operations $ (3,173) $ (2,865)
============ ===========
Net loss per share from continuing operations $ (0.46) $ (0.44)
============ ===========
Weighted average common shares outstanding 6,861 6,523
============ ===========
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchase been
made at the beginning of the period, or the results which may occur in the
future.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
The Netplex Group, Inc. and its wholly owned subsidiaries, Netplex Systems,
Inc., America's Work Exchange, Software Resources of New Jersey, now known
as Contractors Resources ("CR"), Technology Development Systems, and Onion
Peel Solutions, L.L.C. All significant intercompany transactions have been
eliminated during consolidation.
Revenue Recognition
The majority of the Company's revenue is from consulting services
contracts. This revenue is recognized when the services are performed and
the costs are incurred. The Company generally recognizes hardware and
software product revenue when the products are delivered to the customer
site. Fixed price contract revenue is recognized on the percentage of
completion basis based on costs incurred to estimated costs to complete.
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 customer
acceptance, 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.
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 7 years.
Property and equipment under capital leases are stated at the present value
of the minimum lease payments and are amortized using the shorter of the
lease term or the estimated useful life.
Upon sale or retirement of property and equipment, the costs and related
accumulated depreciation are eliminated from the accounts and any gain or
loss on such disposition is reflected in the statement of operations.
Expenditures for repairs and maintenance are charged to operations as
incurred.
F-8
Depreciation and amortization expense related to property and equipment was
$391,091 and $318,865 for the years ended December 31, 1997 and 1996.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed
the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less cost to sell. Adoption of
this Statement did not have a material impact on the Company's financial
position, results of operations, or liquidity.
Excess Costs Over Net Assets Acquired
Excess costs over net assets acquired (goodwill) resulting from AWE's
acquisition of CR is being amortized on a straight-line basis over a
recovery period of 15 years. The Company assesses the potential impairment
and recovery of goodwill on an annual basis and more frequently if factors
dictate. Management forecasts are used to evaluate the recovery of goodwill
through determining whether amortization of the goodwill can be recovered
through the undiscounted operating cash flow (cash flow excluding goodwill
amortization, non-recurring charges and interest expense). If an impairment
of goodwill appears to have occurred, impairment is measured based on
projected discounted operating cash flow (excluding goodwill amortization,
non recurring charges and interest expense) using a discount rate
reflecting the Company's cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved. The Company may assess the net carrying amount
of goodwill using internal and or independent valuations.
Accumulated amortization of goodwill related to the purchase of CR at
December 31, 1997 was $53,308 and at December 31, 1996 was $26,656.
Income Taxes
Income taxes are accounted for under the asset and liability method under
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("SFAS 109"). 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
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"), which requires companies to present basic earnings per share
and diluted earnings per share (EPS), instead of the primary and fully
diluted EPS that had previously been required. The Company adopted SFAS 128
in the fourth quarter of 1997. The impact to prior years' amounts was
immaterial. Basic net loss per common share is calculated using the
weighted average number of common shares outstanding during the periods.
Diluted net loss per common share is calculated using the weighted average
number of common shares and dilutive potential common shares outstanding
during the periods. For the years ended December 31, 1997 and 1996, the
assumed exercise of the company's outstanding stock options and warrants
and Convertible Preferred Stock has not been included in the calculation as
the effect would be anti-dilutive.
F-9
A reconciliation of the numerators and denominators of the basic and
diluted EPS for the years ended December 31, 1997 and 1996, is provided
below:
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
1997
Net Loss $ (2,873,603) - $ -
Preferred stock dividend 275,625 - -
Basic and diluted EPS
Income available to common shareholders $ (3,149,228) 6,820,863 $ (0.46)
============ ========= =========
1996
Net Loss $ (1,999,387) - $ -
Preferred stock dividend 98,194 - -
Basic and diluted EPS
Income available to common shareholders $ (2,097,581) 5,026,306 $ (0.42)
============ ========= =========
Stock Options
Prior to January 1, 1996, the Company accounted for its 1992 Incentive
Stock Option plan ("ISO Plan") and the 1995 Directors' Stock Option plan
(the "Director' Plan") in accordance with the provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. Pursuant to APB 25 compensation
expense is recorded on the date of grant only to the extent the current
market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
which permits entities to recognize, as expense over the vesting period,
the fair value of all stock-based awards on the grant date. Alternatively,
SFAS No.123 also allows entities to continue to apply the provisions of APB
25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and in future
years as if the fair-value-based method defined in SFAS 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion 25 and provide the pro forma disclosure provisions of SFAS 123 for
the ISO and Directors' Plans.
The Company's 1995 Consultant's plan (the "Consultant's Plan") allows for
the granting of options to both organizations and individuals who are not
employees of the Company. The Company accounts for the options granted to
non-employees based on the provisions of SFAS 123.
Use of Estimates
The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
(3) Liquidity
Based on its current operating plan, the Company believes that the net
proceeds from the Private Placement together with cash anticipated to be
provided by operating activities and amounts expected to be available under
a renegotiated line of credit will be sufficient to meet its anticipated
cash needs for working capital and capital expenditures for at least the
next 12 months. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company
may seek to sell additional equity or convertible debt securities or obtain
additional credit facilities. However, no assurance can be given that any
such additional sources of financing will be available on acceptable terms
or at all. The sale of additional equity or convertible debt securities
could result in additional dilution to the Company's stockholders. A
portion of the Company's cash may be used for acquisitions or to acquire or
invest in complimentary businesses or products or to obtain the right to
use complementary technologies. The Company has no current plans,
F-10
agreements or commitments, and is not currently engaged in any negotiations
with respect to any such transaction.
The Company is expecting to incur operating losses until it achieves full
productivity of the majority of its sales force. While it cannot be certain
as to when such levels of productivity can be attained, the Company
anticipates that its sales force will operate at levels below full
productivity through at least the first quarter of 1998. 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. Despite the expectation of continued operating
losses, management believes that its current cash balance and credit
facility will be sufficient to meet operating requirements for at least the
next twelve months.
(4) Discontinuance of Business
In December 1996, the Company made the decision to discontinue its software
development and distribution business, through the sale of TDS's interest
in its WorldLink product technology ("WorldLink"). WorldLink represented
the primary asset offering of the Company's software development and
distribution business. The operations of the software development and
distribution business have been treated as discontinued operations in
accordance with the provisions of Accounting Principles Board Opinion No.
30 (APB 30). Pursuant to APB 30, the revenue, costs and expenses have been
excluded from their respective captions in the Company's consolidated
statements of operations and the net results have been reported separately
as income from discontinued operations.
On December 31, 1996, the Company completed the sale of its interest in
WorldLink to Xcellenet, Inc. for an aggregate sale price of $2.5 million,
net of expenses paid of approximately $500,000 related to the sale. During
1996,the remaining net assets of TDS were written down to their net
realizable values and consisted primarily of accounts receivable and
furniture and equipment, which the Company is using in its continuing
operations.
(5) Property and Equipment
Property and equipment consists of the following:
December 31,
--------------------------------
1997 1996
----------------- --------------
Computer software $ 493,935 $ 464,318
Computer and office equipment 628,537 460,422
Furniture and fixtures 188,563 212,561
Equipment under capital leases 335,197 247,100
Leasehold Improvements 38,520 46,934
----------------- --------------
1,684,752 1,431,335
Accumulated depreciation and amortization (732,206) (340,718)
----------------- --------------
Property and equipment, net $ 952,546 $ 1,090,617
================= ==============
Computer software at December 31, 1997, includes $407,338 of software that
was developed for internal usage. Such software was placed in service in
January 1997 and is being amortized over a 4-year useful life. Amortization
expense related to this software was $67,890 for 1997. Accumulated
depreciation and amortization includes $119,925 related to assets under
capital leases at December 31, 1997 and $29,125 at December 31, 1996.
F-11
(6) Accrued Expenses
Accrued expenses consists of the following:
December 31,
-------------------------------
1997 1996
---------------- -------------
Payroll and employee benefits $ 2,954,522 $ 3,592,795
Other 428,502 402,067
Cost of discontinued business - 704,890
Merger costs - 466,432
---------------- -------------
$ 3,383,024 $ 5,166,184
================ =============
(7) Notes Payable to Bank
On July 2, 1997, the Company entered into a bank line of credit facility
agreement that expires on June 30, 1998. This line of credit facility
provides for advances of 80% of eligible accounts receivable (as defined in
the agreement) up to $2,000,000. Amounts borrowed bear interest at the
bank's reference rate of prime (8.5%) plus 3/4%. The Company had
outstanding advances of $1,316,300 on the line of credit at December 31,
1997.
At December 31, 1997, the Company was not in compliance with certain
financial covenants contained in its line of credit facility which requires
the Company to maintain minimum tangible net worth of a least $1.3 million
and a current ratio of at least 1.10 to 1.00. The bank has waived the
Company's non compliance of these covenants.
(8) 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, 1997 and
1996 is as follows:
1997 1996
---- ----
(in thousands)
Computed expected tax benefit on income from
continuing operations $(977) $(857)
Non-deductible expenses and other (484) (50)
Change in valuation allowance for deferred tax
assets allocated to income tax expense 493 873
----- -----
$ - $(34)
===== =====
F-12
The tax effects of temporary differences that give rise to significant
portions of deferred taxes assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:
As of December 31,
--------------------------
1997 1996
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $4,010 $ 3,000
Research and development credit carryforwards 187 187
Excess tax basis over book of net assets acquired 150 200
Inventory obsolescence reserve 56 59
Allowance for doubtful accounts receivable 48 74
Accrued liabilities, not presently deductible 8 496
Other 30 11
------ --------
Total gross deferred tax assets 4,489 4,028
Less valuation allowance (4,489) (3,996)
------- --------
Net deferred tax asset - 32
------- --------
Deferred tax liabilities:
Obligation under capital leases - (13)
Other - (19)
------- --------
Total deferred tax liabilities - (32)
------- --------
Net deferred tax asset (liability) $ - $ -
======= ========
The net change in the valuation allowance was an increase of approximately
$493,000 in 1997 and an increase of $3,911,000 in 1996. The Company has
provided a valuation allowance for the majority of its deferred tax assets
at December 31, 1997 and 1996 since the Company could not conclude that it
was more likely than not that it would realize these assets due principally
to the Company's history of losses.
As of December 31, 1997 the Company had net operating loss carry forwards
(NOL's) for Federal income tax purposes of approximately $13,500,000.
Additionally, the Company had $187,000 of research and development tax
credits available to offset future taxable income. The NOL's and credit
carryforwards expire primarily in 2007 through 2012. The future annual
usage of approximately $9,600,000 of these NOL's and credits for income tax
purposes is subject to annual limitations and other conditions and may not
be fully utilized for tax purposes due to the change in ownership resulting
from the Company's merger in 1996.
(9) Commitments
Employment agreements
On June 7, 1996, in connection with the closing of the merger, the Board of
Directors approved three-year employment agreements with the Chairman and
Chief Executive Officer and two executives of Netplex and AWE that provide
for aggregate base salaries ranging from $110,000 to $130,000 with annual
bonuses up to 60% of base salary based of the Company's financial and
operating performance, subject to Board approval. These agreements expire
on June 6, 1999.
F-13
Obligations Under Leases
The Company leases computer equipment, furniture, vehicles and office
facilities under long-term lease agreements. The following is a schedule of
future minimum lease payments for capital and non-cancelable operating
leases (with initial terms in excess of one year) as of December 31, 1997:
Capital Operating
Year ending December 31: Leases Leases
------ ------
1998 $ 120,082 $ 551,895
1999 100,544 560,419
2000 12,195 480,241
2001 - 203,087
2002 - 97,268
Thereafter - 48,634
--------- -----------
Total minimum lease payments 232,821 $1,941,544
===========
Less: amount representing interest 27,652
---------
Present value of minimum lease payments $ 205,169
=========
Total rent expense was approximately $647,000 and $577,000 for the years
ended December 31, 1997 and 1996.
(10) Class A Cumulative Convertible Preferred Stock
0n September 19, 1996, the Company raised approximately $3,000,000 through
the completion of a Private Placement offering of units of equity
securities. Each unit of equity securities consists of one share of $.01
par value Class A Cumulative Convertible Preferred Stock (the "Preferred
Stock") and one Common Stock warrant to purchase one share of the Company's
$0.001 par value Common Stock at an exercise price of $2.50.
Each share of Preferred Stock is convertible into one share of Common Stock
at any time, at the discretion of the holder. The Preferred Stock earns
cumulative dividends at 10% per annum, payable in either cash or additional
shares of Preferred Stock at the Company's option. Subject to the
conversion rights, the Company may redeem the Preferred Stock at its stated
value plus all accrued and unpaid dividends upon: (1) registration of the
shares underlying the Preferred Stock, and (2) 30 days written notice given
at any time upon attaining certain per share trading prices and sustaining
such prices for a specified period. The Preferred Stock has a per share
liquidation preference of the greater of: (i) two times the stated value of
the Preferred Stock (stated value is $2 per share) plus any accrued and
unpaid dividends, or (ii) the amount that would have been received if such
shares were converted to Common Stock on the business day immediately prior
to liquidation. During the year ended December 31, 1997, 687,500 preferred
shares were converted to Common Stock. No conversions occurred in 1996.
Each warrant issued in connection with the Private Placement became
exercisable on March 19, 1997 and expires on September 19, 2001. The
Company has the right to call the warrants at a redemption price of $.01
per share upon: (1) registration of the shares underlying the warrant, and
(2) 30 days written notice given at any time upon the Common Stock
attaining certain per share trading prices and maintaining such prices for
a specified period. During 1997, warrants to acquire 175,000 shares of
Common Stock were exercised.
On March 27, 1997, the Company declared a dividend in the amount of $0.05
per share ($82,500) payable in cash to the holders of record of the
Company's Class A Preferred Stock on March 28, 1997.
On November 14, 1997, the Company declared a dividend payable to the
holders of record of its Class A Preferred Stock on account of dividends in
arrears which were payable on June 30, 1997 and September 30,
F-14
1997, in the amount of 0.0582 shares of Class A Preferred Stock per share
of Class A Preferred Stock. The related shares were not issued by the
Company as of December 31, 1997.
On December 31, 1996, the Company declared a dividend payable of
approximately $0.056 per share to all holders of record of the Class A
Preferred Stock on January 15, 1997. Accordingly, the Company accrued a
dividend payable of $98,194 at December 31, 1996, which was paid during
1997.
(11) Common Stock and Warrants
Pursuant to an agreement dated March 25, 1992, the Company sold 100,000
units each consisting of one share of Common Stock and one warrant with an
aggregate purchase price of $250,000 and issued an additional 120,000
warrants. As of April 10, 1998, all warrants have expired except for
170,000 exercisable at $3.00 per share.
In connection with the Company's initial public offering (IPO), the Company
sold to the underwriters for $100 the right to purchase up to an aggregate
of 100,000 Units (Unit Purchase Option). The Unit Purchase Options is
exercisable initially at $6.00 per Unit through March 1998. The Units are
identical to those offered in the IPO, except the warrants may not be
redeemed by the Company. The Unit Purchase Option contains anti-dilution
provisions providing for adjustments to the exercise price upon the
occurrence of certain events. In connection with the merger, the Unit
exercise price was reduced from $6.00 to $2.40 per share from the effects
of this anti-dilution provision. The exercise price of the underlying
warrants remained at $5.25 per share. These warrants expired in March,
1998.
In connection with the merger of the Company with Netplex, effective April
11, 1996, the Company provided its underwriters with warrants to purchase
up to 125,000 shares of the Company's Common Stock. Each warrant entitles
the holder to purchase, through April 10, 2001, one share of Common Stock
at an exercise price of $3.50 per share. These warrants became exercisable
on October 11, 1996. The fair value of the warrants issued of approximately
$170,000 had no effect on the Company's equity as a result of the merger.
In connection with the merger of the Company with Netplex, effective June
7, 1996, the shareholders of Netplex were granted warrants to purchase up
to 150,000 shares of the Company's Common Stock. Each warrant entitles the
holder to purchase, through June 6, 2001, one share of Common Stock at an
exercise price of $2.50 per share. These warrants became exercisable on
October 7, 1996. The fair value of the warrants issued of approximately
$270,000 had no effect on the Company's equity as a result of the merger.
In connection with the Class A Convertible Preferred Stock Private
Placement, the Company provided the underwriters for the Private Placement
with the option to purchase up to 87,500 units, each consisting of one
share of $.01 par value Class A Convertible Preferred Stock and one Common
Stock purchase warrant. These units are exercisable at $2.00 per share and
are identical in all respects to the units sold in the Private Placement
transaction. During 1997, units to acquire 50,000 shares of the Company's
Common Stock were exercised. The 37,500 units are all exercisable at
December 31, 1997.
(12) Stock Options
As of December 31, 1997, the Company maintains three stock option plans;
the 1992 Incentive Stock Option Plan (ISO Plan), the 1995 Directors' Stock
Option Plan (Directors' Plan) and the 1995 Consultant's Stock Option Plan
(Consultant's Plan).
The ISO Plan includes both incentive and non-qualified stock options. The
Board of Directors may grant stock options to employees to purchase up to
3,000,000 shares of the Company's authorized but unissued Common Stock.
Stock options are granted with an exercise price equal to the market price
on the date of grant. All stock options expire 10 years from grant date (5
years in the case that the optionee is a holder of more than 10% of the
voting stock of the Company). Generally the options vest and become fully
exercisable after 3 years from the date of grant but never less than 6
months. At December 31, 1997, there were 475,033 shares available for grant
under this plan.
The Directors' Plan authorizes the Board of Directors to grant to each
director options to purchase up to 15,000 shares of the Company's
authorized but unissued Common Stock, upon election to the Board, and award
aggregate options to purchase up to 100,000 shares of the Company's
authorized but unissued Common Stock. The terms of option grants for the
Directors' Plan are identical to those of the ISO plan, except that the
vesting
F-15
period for the Directors' Plan is at the Board's discretion. Option grants
under this Plan from inception to date have contained three-year vesting
periods. At December 31,1997, there were 40,000 shares available for grant
under this Plan.
The Consultant's Plan authorizes the Board of Directors to grant
organizations or individuals who are not eligible for the ISO or Directors'
Plans stock options to purchase up to 800,000 shares of the Company's
authorized but unissued Common Stock. The exercise price, terms of the
option grant and vesting period for the Consultant's Plan stock options are
at the Board's discretion. At December 31,1997, there were 768,000 shares
available for grant under this Plan.
Stock option activity for the Plans during the periods indicated is as
follows:
ISO Plan Directors' Plan Consultants' Plan
-------- --------------- -----------------
Wt. Avg. Wt. Avg. Wt. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
--------- --------- ------ --------- ------ ---------
December 31,1995 724,500 $3.07 30,000 $3.56 -- $ --
Assumed in Merger 1,691,000 2.95 -- -- -- --
Granted 233,000 2.75 30,000 2.50 -- --
Exercised -- -- -- -- -- --
Forfeited/Canceled (236,000) 5.50 -- -- -- --
Expired -- -- -- -- -- --
---------- ------- ------ ----- ------ -----
December 31, 1996 2,412,500 $2.86 60,000 $3.03 -- $ --
Granted 2,363,500 1.29 15,000 2.97 32,000 2.50
Exercised (34,967) 2.00 -- -- -- --
Forfeited/Canceled (2,201,033) 2.78 (15,000) 2.50 -- --
Expired (50,000) 4.40 -- -- -- --
---------- ------- ------ ----- ------ -----
December 31, 1997 2,490,000 $1.45 60,000 $3.15 32,000 $2.50
========== ======= ====== ===== ====== =====
ISO Plan options
At December 31,1997, the range of exercise prices for the options granted
under the ISO plan was $0.97-$4.00 and the weighted average remaining
contractual life of those options was 8.8 years. At December 31, 1997 and
1996, the number of options exercisable under the ISO Plan totaled 545,834
and 867,167, respectively. The weighted average exercise price of those
options was $2.73 and $3.00, respectively.
Directors' Plan options
At December 31, 1997, the range of exercise prices for options granted
under the Directors' Plan was $2.50-$3.56 and the weighted-average
remaining contractual life of those options was 8.4 years. At December 31,
1997, and 1996 the number of options exercisable under the Directors' Plan
totaled 25,000 and 15,000, respectively. The weighted-average exercise
price of those options was $3.35.and $3.56, respectively.
Consultants' Plan options
At December 31, 1997, the exercise price for all options granted under the
Consultants' Plan was $2.50 and the weighted-average remaining contractual
life of those options was 4 years. At December 31, 1997 the number of
options exercisable under the Consultants' Plan totaled 32,000. No options
were granted prior to 1997. The weighted-average exercise price of those
options was $2.50.
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
F-16
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:
1997 1996
------------------------------------
(Thousands except per share amounts)
Net loss - As reported $ (2,874) $ (1,999)
============ ===============
Net loss - Pro forma $ (4,836) $ (3,462)
============ ===============
Net loss per share - As reported $ (0.46) $ (0.42)
============ ===============
Net loss per share - Pro forma $ (0.71) $ (0.71)
============ ===============
Weighted average shares outstanding 6,821 5,026
============ ===============
Pro forma net loss reflects only the option grants in 1997, 1996, and 1995.
Therefore, the full impact of calculating compensation costs for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
option's vesting periods and compensation cost for options granted prior to
January 1, 1995 is not considered.
The per share weighted average fair value of the ISO options granted in
1997 and 1996 was $1.20 and $1.83 on the grant date using the Black -
Scholes option pricing model with the following weighted average
assumptions for 1997: expected dividend yield 0.0%, risk free interest rate
of 6.24%, expected volatility of 103%, and an expected life of 10 years;
and 1996: expected dividend yield 0.0%, risk free interest rate of 6.70%,
expected volatility of 44%, and an expected life of 10 years.
The per share weighted average fair value of the Directors' Plan options
granted in 1997 and 1996 was $2.76 and $1.67 on the grant date using the
Black - Scholes option pricing model with the following weighted average
assumptions for 1997: expected dividend yield 0.0%, risk free interest rate
of 6.97%, expected volatility of 103%, and an expected life of 10 years;
and 1996: expected dividend yield 0.0%, risk free interest rate of 6.81%,
expected volatility of 44%, and an expected life of 10 years.
(13) Related Party Transactions
The Company paid $28,800 in 1997 and $17,900 in 1996 for accounting, tax
and consulting services to a CPA firm in which a partner of the firm has
been a director of the Company since July 1996.
In January, 1997, the Company issued a $150,000 loan to the chief executive
officer for relocation expenses. The loan bears interest at 8% per annum
and is due upon demand. The Company does not intend to demand payment of
the loan during 1998, and thus the amount is classified as long-term in the
accompanying consolidated balance sheet as of December 31, 1997. At
December 31, 1997, the outstanding amount due under the loan was
approximately $161,000, including approximately $11,000 in accrued
interest.
In June 1997, the Company issued options under the Consultants' Plan to
purchase up to 32,000 shares of the Company's Common Stock at an exercise
price of $2.50 per share. These options were granted to one of the
Company's legal counsel in exchange for legal services rendered in the
amount of $40,000. The fair value of the options issued of $40,000 has been
classified as additional paid in capital in the accompanying consolidated
financial statements for the year ended December 31, 1997. The options are
for a term of 4 years and are immediately exercisable.
A director of the Company, is a Vice President of the underwriter (the
"Underwriter") of the Private Placement completed by the Company on
September 19, 1996 (see note 9). The Company paid the Underwriter $432,500
for fees associated with the completion of this transaction.
The Company contracted with an entity owned by a shareholder of the
Company, for the development of certain software used in the Company's
technical staffing operations. The Company paid the shareholder $150,000 in
1996.
F-17
(14) Litigation
From time to time, disagreements with individual employees and
disagreements as to the interpretation, effect or nature of the individual
agreements arise in the ordinary course of business and may result in legal
proceedings being commenced against the Company.
On December 31, 1996, ACS Ltd., a software distributor based in the United
Kingdom, filed a complaint against Technology Development Systems ("TDS") a
wholly owned subsidiary of the Company, in the Circuit Court of Cook
County, Illinois. ACS alleges that TDS breached its obligations under the
Distributor Agreement between the Plaintiff and TDS for the WorldLink
product when the Company directed TDS to sell the WorldLink product
technology to a third party. ACS is demanding a sum exceeding one million
dollars for the breach of contract. The case is currently in discovery. In
the opinion of Management and the Company's legal counsel, the lawsuit has
little merit, and the outcome of the pending lawsuit will not have a
material adverse effect on the Company's financial condition, liquidity or
the results of operations. The Company intends to vigorously defend against
the lawsuit. The TDS subsidiary which was part of CompLink is currently
inactive with no assets.
On September 4, 1997, Data Systems Analysts, Inc. ("DSA"), a software
design and consulting company, filed a complaint against TDS and the
Company, alleging copyright infringement and breach of the Company's
agreement. The Complaint claims damages in excess of $300,000 plus punitive
damages. The case is currently in discovery. In the opinion of Management,
the lawsuit has little merit, and the outcome of the pending lawsuit will
not have a material adverse effect on the Company's financial condition,
liquidity or the results of operations. The Company intends to vigorously
defend against the lawsuit.
The Company is not currently involved in any litigation or proceedings
which if decided against the Company would have a material adverse affect,
either individually or in the aggregate. To the Company's knowledge, no
other legal proceedings, that if decided against the Company would have a
material adverse affect, are currently contemplated by any individuals,
entities or governmental authorities.
(15) Employee Benefit Plans
During 1996, the Company sponsored a 401(k) retirement plan ("the Plan")
under which substantially all full-time employees were eligible to
participate. The Company made no matching contributions to the Plan during
1996. In addition, the Company's CR subsidiary provided a separate 401(k)
plan for its employees during 1996. The Company's contribution to the
subsidiary's 401(k) plan during 1996 was $628,333.
On January 1, 1997, the Company and subsidiary 401(k) plans were merged.
Under the merged Plan, all full time employees with over 1000 hours of
service to the Company or its subsidiaries are eligible to participate. The
Company matches one-half of the employees' voluntary contributions up to a
maximum Company contribution of 5% of participants' salaries. The Company's
contribution to the Plan during 1997 was $647,418.
The Company's CR subsidiary provides a profit sharing plan for its
employees whereas up to 10% of the employees salary can be contributed to
the plan. The Company made no matching contributions to this plan during
1997 and 1996.
The Company does not provide any post retirement or any post employment
benefits.
(16) Recent Accounting Pronouncements
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure" which is effective for the year ending December
31, 1998. This statement continues the previous requirements to disclose
certain information about an entity's capital structure found in Accounting
Principles Board (APB) Opinion No. 10, "Omnibus Opinion -1966" and No. 15,
"Earnings per Share" and FASB Statement No. 47, "Disclosure of Long-Term
Obligations." The Company has been subject to the requirements of those
standards and as a result does not expect the adoption of SFAS No. 129 to
have a material impact on the Company's financial statements.
In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income",
which is effective for the year ending December 31, 1998. This statement
establishes standards for the reporting and display of comprehensive income
and its components in the financial statements. Earlier application of this
standard is
F-18
permitted; however, upon adoption the Company will be required to
reclassify previously reported annual and interim financial statements. The
Company believes that the disclosure of comprehensive income in accordance
with the provisions of SFAS No. 130 will not impact the manner of
presentation of its financial statements as currently and previously
reported.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for the year ending
December 31, 1998. This statement requires companies to present certain
information about operating segments and related information, including
geographic and major customer data, in its annual financial statements and
in condensed financial statements for interim periods. The Company believes
that the adoption of SFAS No. 131 will impact the manner of presentation of
its financial statements.
In October, 1997, the AICPA Accounting Standards Executive Committee issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"),
which supercedes Statement of Position 91-1 "Software Revenue Recognition.
SOP 97-2 focuses on when and in what amounts revenue should be recognized
for licensing, selling, leasing, or otherwise marketing computer software,
and is effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company does not believe that the adoption of
this new pronouncement will have a material impact on its financial
position and results of operations.
(17) Subsequent Events
On January 30, 1998, the Company completed the purchase of all of the stock
of The PSS Group, Inc. ("PSS"), the technical professional staff
augmentation operations and business of Preferred Systems Solutions, Inc.
("Preferred") and formerly a wholly owned subsidiary of Preferred. In
consideration for the purchase, the Company paid $300,000 at closing and on
or before January 15, 1999 will pay $300,000 in cash or 200,000 shares of
its Common Stock or any combination thereof, at Preferred's option. The
Company used working capital to finance the acquisition. The agreement also
provides that Preferred will receive additional consideration (the
"Earn-out") if PSS meets certain operating targets. Such Earn-out may be
paid at the Company's option in cash or its Common Stock, or any
combination thereof. In connection with the acquisition, the Company and
PSS has entered into employment agreements with certain employees of PSS.
The acquisition was recorded effective January 1, 1998 using the purchase
method of accounting. A $200,000 advance to the purchase price was made to
PSS as of December 31, 1997 and is included in notes receivable in the
accompany consolidated balance sheet.
Between January 1, 1998 and April 14, 1998, the Company has raised
additional equity totaling $3,057,000 as follows:
In February 1998 the Company raised $100,000 through the sale of 80,000
shares of nonregistered Common Stock plus a warrant to purchase an
additional 100,000 warrants at $1.20.
On March 17, 1998 the Company raised $1,457,000 of financing in a Private
Placement raised primarily from accredited investors and employees of the
Company. The Company issued shares of non-registered Common Stock to
purchasers who have agreed to a one-year lock-up provision. These
restricted shares carry registration rights and were offered at $1.00 per
share. The funds will be used to finance operations and additional
acquisitions.
On April 7, 1998 Netplex completed the sale of 1,500 units of a Private
Placement, totaling $1.5 million, to various purchasers The Zanett
Corporation acted as placement agent for the Private Placement. The sale
represents the first half of a transaction that will include the sale of an
additional 1,500 units for $1.5 million at a future date. Zanett Lombardier
purchased 1,500 units at $1,000 per unit, with each unit consisting of a
prepaid Common Stock purchase warrant entitling the holder to acquire such
number of shares of the Company's Common Stock as is equal to $1,000
divided by an adjustable exercise price and an additional incentive warrant
to acquire 52 shares of Common Stock (or an aggregate of 78,000 shares of
Common Stock). The Company also granted Zanett a warrant to purchase 39,000
shares of Common Stock. Zanett also received placement fees and a
non-accountable expense allowance equal to 12.53% of the proceeeds of the
offering. The second half of the transaction is for the sale to Zanett of
an additional and committed 1,500 units, for $1,000 per unit, contingent on
Netplex recording three consecutive quarters of increased profits and
revenues, excluding any extraordinary items. With respect to the second
half of the transaction, the exercise price of the purchase
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warrants and the incentive warrants will be based on the bid price of the
Common Stock at the time of such closing. The funds from the Private
Placement will be used to fund operations and acquisitions. Under NASDAQ
regulations, certain aspects of the transaction must receive shareholder
approval. Such shareholder approval is expected in the Company's annual
meeting. The Company believes that the proceeds should ensure that the
Company will exceed NASDAQ's published net tangible assets requirement of
$2 million.
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