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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
___________________
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1999
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Or
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from___________________ to ______________.
Commission file number 1-11784
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THE NETPLEX GROUP, INC.
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(Exact name of registrant as specified in its charter)
New York 11-2824578
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
1800 Robert Fulton Drive, Ste. 250, Reston, VA 20191-4346
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (703) 716-4777
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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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the registrant's voting and non-voting common
stock held by non-affiliates of the registrant as of March 15, 2000, was
approximately $231,551,000.
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock as of March 15, 2000: 17,505,927 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's Proxy Statement pertaining to the
2000 Annual Meeting of Stockholders currently expected to be held in June 2000
are incorporated herein by reference into Part III.
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Index to Form 10-K
PART I....................................................................................................................... 3
Item 1. Business............................................................................................................ 3
Item 2. Properties.......................................................................................................... 12
Item 3. Legal Proceedings................................................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders................................................................. 12
PART II...................................................................................................................... 13
Item 5. Market for Common Equity and Related Stockholder Matters............................................................ 13
Item 6. Selected Financial Data............................................................................................. 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................................................... 21
Item 8. Financial Statements and Supplementary Data......................................................................... 21
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure................................ 21
PART III..................................................................................................................... 22
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act... 22
Item 11. Executive Compensation............................................................................................ 22
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................... 22
Item 13. Certain Relationships and Related Transactions.................................................................... 22
PART IV...................................................................................................................... 23
Item 14. Exhibits and Reports on Form 8-K.................................................................................. 23
Signatures.................................................................................................................. 25
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PART I
1. Business.
Company Overview
Based in Reston, Virginia, and with 16 U.S. operating locations, The
Netplex Group, Inc. (the Company) is an Internet services company that
leverages industry-specific knowledge, creative ideas, and technology
expertise to create customized e-solutions.
By thoroughly understanding the business dynamics and technology trends of
specific vertical markets, we seek to better understand the business
problems faced by companies within these industries. This allows Netplex to
develop and deliver e-solutions that serve our customers' unique strategic,
creative, and technological business needs. As a result, our e-solutions
seek to help customers transition from their existing systems and processes
to business models that are aligned to the demands of the digital age.
What is a Netplex e-Solution?
An e-solution is a customized combination of strategy, design, development,
and project management services that helps a customer solve a business
problem, improve a business process, or pursue a business opportunity that
has emerged from the e-business era.
Netplex's e-solutions divide into five categories: e-Strategy Consulting,
Creative Design, e-Application Development (Internet, intranet, and
extranet), e-Infrastructure Services, and Systems Integration. With this
portfolio of services, Netplex guides customers' initiatives from idea to
implementation. Our services seek to help customers with multiple levels of
e-business transition--from process improvements to enterprise-wide
transformations. We believe that our services position customers to benefit
from integrated and streamlined interactive relationships with their
customers, partners, and stakeholders.
Subsidiary: Contractor's Resources
In addition to its e-solutions offerings, Netplex has a subsidiary,
Contractor's Resources ("CR"), which we recast in 1999 as an integrated
online service under the brand name Techcellence. Targeting independent
Information Technology (IT) professionals, Techcellence is a business-to-
business (B2B) service designed to provide the financial infrastructure,
resources, and business services that help professionals build careers as
independent contractors. Netplex believes that its transformation of the
traditional CR business model into an integrated e-business model has
increased the business's flexibility, scalability, geographic scope, and
exposure.
Techcellence serves as a "virtual corporate office" for its member
contractors. It provides its members the services of a corporate
administration staff--such as contract review, time sheet administration,
billing and collections, health benefits, retirement plans, wealth-building
financial strategies, and tax administration--while helping them keep
abreast of developments that affect their independent life and work style.
Through its time-saving and wealth-building services, Techcellence is
designed to permit its members to focus on revenue-generating activities,
thus maximizing their earning power.
Netplex is currently incubating the Techcellence brand and "Business
Service Provider" (BSP) model. In 2000, we intend to invest in the
incubation process through increasing the marketing program, expanding core
service offerings, expanding existing strategic relationships, and
exploring additional strategic relationships.
Company Background and Development
Netplex was incorporated in 1986 in New York under the name CompLink, Ltd.
In 1992, CompLink performed an initial public offering to finance an effort
to develop a messaging software system. In 1996, CompLink acquired, through
a merger that was accounted for as a reverse merger, The Netplex Group,
Inc. and Contractor's Resources, and changed its name to The Netplex Group,
Inc. See Note 1 to financial statements for a further discussion of this
merger.
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This merger provided Netplex with new management and a revised corporate
mission. To better position ourselves to deliver the comprehensive services
required to compete in the e-solutions market, Netplex has acquired
several companies during the last three years. In 1997, we acquired
Raleigh, North Carolina-based Onion Peel Solutions, LLC. In 1998, we
acquired The PSS Group, Inc., Automated Business Systems of North Carolina,
Inc., Kellar Technology Group, Inc., and the retail technical consulting
business of Applied Intelligence Group, Inc. In 1999, we purchased Dean
Liles & Associates, Inc. These businesses expanded our experience,
technical staff, customer base, market exposure, revenue, and industry-
focused expertise.
How To Contact Us
Our principal executive offices and headquarters are located at 1800 Robert
Fulton Drive, Second Floor, Reston, Va., 20191. To reach these offices,
contact us at (703) 716-4777 (tel.) and (703) 716-1110 (fax). Please direct
all Netplex-related emails to info@netplexgroup.com or visit our Web site
at www.netplexgroup.com.
Market Opportunity
This section separately depicts the distinct market opportunities of
Netplex's e-solutions business and our Contractor's Resources subsidiary.
e-Solutions Market Opportunity
According to Forrester Research estimates, the combined worldwide Internet-
based business-to-business (B2B) and business-to-consumer (B2C) e-commerce
transactions are growing at about 95 percent annually, from $51 billion in
1998 to over $1.4 trillion by 2003. Netplex believes this statistic
indicates a growing acceptance of the Internet as a medium for B2B and B2C
commerce. Netplex customers have become participants in this growth by
implementing business strategies that leverage the Internet. In several
cases, these "e-business" strategies include the enhancement of static
"brouchureware" Internet sites with Web-based applications through which
financial (e-commerce) transactions can be processed.
In our experience, we have found that businesses wishing to implement
Internet-based or Internet-integrated e-business strategies often require
skill sets and capacity that extend beyond their internal marketing and
Information Systems (IS) staff. As a result, several of our customers have
selected us to provide Internet-related consulting services intended to
help them develop e-business strategies and/or build the systems and
applications intended to fulfill their strategies.
According to International Data Corporation estimates, worldwide demand for
Internet-related consulting services is growing at about 60 percent per
year, from $7.8 billion in 1998 to over $78 billion in 2003. Netplex seeks,
through our service offerings and experience, to capitalize on the growth
of this market opportunity. As a result, we have sought to position
ourselves as part of a relatively new category of companies that focus on
providing Internet-related consulting services. These companies are
commonly known as e-Solutions Providers, Internet Consulting Companies, or
e-Consultancies.
Internet Security Opportunity
Netplex's Business Protection Services practice has provided high-level
information security and contingency planning services to some of the
world's most recognized companies and organizations. Netplex expects the
recent highly publicized Internet security breaches to have a beneficial
impact on growth within this segment of our business.
Contractor's Resources Market Opportunity
Through its Techcellence brand, Netplex's CR subsidiary serves the
population of professionals who choose to work as independent contractors.
CR's services are focused entirely on contractors within the Information
Technology (IT) area. The Bureau of Labor and Statistics estimates that
there are approximately 2 million independent IT contractors in the U.S. (a
figure which it estimates to be growing at 17 percent per year) and the
Gartner Group estimates that, by 2002, 50 percent of IT workers at $1+
billion companies will be independent contractors.
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Overview of e-Solutions Services
As mentioned in the Company Overview, Netplex divides its e-solutions into
five primary categories: e-Strategy Consulting, Creative Design, e-
Application Development, e-Infrastructure Services, and Systems
Integration. Together, these service categories represent the end-to-end e-
solutions that enable customers to engage a single vendor to guide them
through varying degrees of e-business transition.
We believe that we have planned our services portfolio so that it will
consistently serve various vertical industries. Netplex has already
formalized a Retail industry-focused practice and, during 2000, we seek to
leverage our existing customer base to establish additional formalized
vertical practices. Industries in which we have multiple customers and in
which we may establish vertical practice areas include Financial Services,
Education, Healthcare, and Entertainment/Media.
Our e-Solutions and Contractor's Resources service categories are described
below.
e-Strategy Consulting
Our e-Strategy Consulting practice creates strategies that help our clients
leverage the Internet in order to sustain and advance their businesses. Our
e-Strategy experts work with our clients' executive-level managers to
understand their specific goals and objectives, which we believe better
enables us to help develop strategies for improving their operations.
Typically the strategy phase concludes with the development of a technology
plan to enable the customer to implement its strategy.
Creative Design
Netplex seeks to leverage its Creative Design services to help customers
build and maintain interactive relationships with their customers and
business partners. Customers often look to our Creative Design services to
create customizable user interfaces that improve users' overall interactive
experience. In addition, our Creative Design services include interactive
marketing services, wherein we assess clients' customer definition,
acquisition, and retention issues before creating appropriate solutions.
Specific services include branding, Web site design, interactive
advertising, and program tracking.
e-Application Development
Our e-Application Development practice develops Internet-based
applications, designs intranet/extranet business systems, and Web-enables
existing systems and processes. The group leverages its 15 years of
experience implementing business information solutions in its
implementation of applications that seek to integrate seamlessly with
legacy systems.
e-Infrastructure Services
Our e-Infrastructure Services deliver solutions intended to improve the
security and performance of business systems and processes. These services
include high-level information security strategy solutions (vulnerability
analyses, penetration testing, architecture development, and solution
implementation), internetworking strategy and development, network and Web
performance management and monitoring, and e-business contingency and
continuity planning. These services are designed to "keep businesses in
business" by optimizing performance and minimizing the risk of unwanted
network intrusions.
Included as part of our e-Infrastructure Services division are our
Technical Consulting Services practice, which provides contract-based
network services, and our suite of products under the Onion Peel brand.
These products extend the capabilities of the HP OpenView network
management platform and are intended to enable network managers to better
and more efficiently administer their systems.
Systems Integration
Netplex believes that "traditional" systems integration services continue
to play a significant role within even our most "leading-edge" e-business
customers. Netplex's systems integration capabilities extend to providing
integration of multi-site enterprise applications (such as retail
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merchandising and financial systems) and rapid integration of B2B and B2C
applications. In addition, we provide technology configuration, deployment,
and optimization services that seek to improve customers' business
operations or better position them for upcoming e-business ventures.
Netplex also markets a proprietary software solution called CHAINLINK(TM)
that is applicable to multi-site retail environments connected via the
Internet. CHAINLINK is an industry-focused data transfer tool that is
designed to leverage Internet Protocol (IP) networks to improve store-to-
store and store-to-headquarters communications, regardless of the type or
configuration of each store's systems.
Overview of Contractor's Resources Services
Contractor's Resources, a Netplex subsidiary, gives independent contractors
the advantages of contract employment, self-employment, and corporate
employment in one program.
Through its Techcellence brand, Contractor's Resources provides business
infrastructure and advisory services for its membership of independent
contractors. These services, listed below, are designed to permit
contractors to maximize the freedom and wealth potential of the independent
lifestyle while enjoying the benefits associated with full-time employment.
. Time sheet collection and billing . Profit sharing administration
. Expense reimbursement . 401(k) administration
. Accounts receivable management and . Benefits administration
customer collections . Deferred compensation plan
. State/federal/local payroll tax filings . Contract review
. Credit union membership . Billing rate advice
As W-2 employees of Contractor's Resources, Techcellence members have
access to a comprehensive suite of employee benefits. This benefits
program, which is customizable to the personal needs of the independent
contractor, includes group health, dental, disability, and professional
liability. In addition, Contractor's Resources offers profit sharing and
401(k) retirement plans that allow contractors to put aside as much as
$30,000 or 25 percent of their pre-tax income.
Members can also take advantage of several advisory services, including up-
to-date billing rates, contractor industry news, and knowledge sharing
programs. The site also helps to keep contractors current on technology
changes and provides directories of training resources that can help keep
members' skills in line with the needs of the technology industry.
Techcellence is also an advocate for the independent worker. There is no
potential conflict among the contractor market and the organizations that
may engage them, because Techcellence does not earn fees for finding or
brokering the engagements. (Thousands of "e-talent marketplaces" already
provide this service.) Keeping the contract worker as the primary focal-
point of the business is pivotal to our strategy.
Financial Information About Segments
For financial information regarding our business divisions (e-Information
Services, e-Infrastructure Services, and Contractor's Resources) see note
18 of the notes to the Company's consolidated financial statements that
also discusses a change in our segments and a restatement of prior periods.
e-Solutions Competition
The market for Netplex's e-Solutions is highly competitive. The rapid
growth of the Internet services market has fueled a significant influx of
companies that pose a competitive threat to Netplex's e-solutions business.
Many of these companies have greater resources, greater expertise, or have
better access to capital than Netplex.
In a broad sense, competition for Internet-related services can range from
local Web development companies to large traditional technology providers
like IBM and Microsoft. However, because Netplex targets middle-market and
larger organizations with an approach that focuses on solving
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business problems within vertical industries, our e-solutions competitors
are generally companies that, like Netplex, deliver a wide variety of
Internet-related services.
Companies with which Netplex most commonly competes include AnswerThink,
AppNet, Cysive, iXL Enterprises, Predictive Systems, Proxicom, Sapient, US
Interactive, USWeb/CKS, Xceed, and several others, both public and private.
Of these, several have moved into the full-service e-solutions market by
expanding specific core disciplines (such as network engineering or
creative design), while others are start-ups that have been built upon a
full-service solutions delivery model.
Customers also often call upon Netplex to perform individual specialized
services from its portfolio, such as information security, network
performance enhancements, and enterprise application integration. In these
cases, Netplex frequently competes with the "Big 5" consulting firms (such
as Deloitte & Touche and Andersen Consulting).
e-Solutions Differentiators
Netplex believes that it has several competitive differentiators:
End-to-End e-Solutions: Netplex attempts to compete with other companies in
our market by providing "end-to-end" solutions and developing relationships
with customers who seek a single solution provider for strategizing,
developing, launching, and managing their e-business initiatives. Netplex's
end-to-end e-solutions seek to cover customers' business requirements "two
dimensionally": from beginning to end and from front to back. We provide
beginning to end services that guide customers from the strategic
conception of their e-business initiatives through application development
and deployment. Simultaneously, Netplex serves customers' e-business
initiatives from front to back--our services connect front-end Web design
with back-end databases and legacy systems, while incorporating the
appropriate security, networking, and performance management elements.
Industry Focus: As previously mentioned, Netplex focuses on understanding
the business dynamics and technology trends of specific vertical
industries. We believe that this focus permits us to better create
repeatable solutions with referenceability. As part of our fundamental
business strategy, Netplex establishes formal practice areas dedicated to
serving the unique needs of specific industries. As of 1999, our largest
vertical industry practice was in the Retail industry. Netplex employs over
60 full-time billable professionals dedicated to creating retail-specific
solutions and our employees have amassed a cumulative 1,000 person-years of
retail technology and strategy experience.
e-Infrastructure Services: A company's e-Infrastructure represents the
information systems and processes upon which its business operates. Netplex
believes that the implementation of an application or the launch of a Web
site does not necessarily constitute a complete e-solution. Our e-
Infrastructure Services division provides services that seek to ensure the
ongoing security, performance, and efficiency of customers' business
applications, networked systems, and vital information assets. We believe
that our services minimize the risk of unwanted network intrusions, Web
site performance degradation, and data failure, which improves the
security, usability, and scalability of their businesses.
e-Solutions Case Study: Retail Communications Application Developer
Alongside the customer's executives, Netplex business strategists and
engineers helped conceive a B2B "e-Catalog": an Internet-based service that
would connect retailers, distributors, and manufacturers to all partners
through a single interface. Netplex then assisted in the design,
development, and launch of the resulting product, which allows retailers
and suppliers to exchange product, price, and promotion information
electronically. This product's Internet-based shared database synchronizes
pricing, product, and promotional information throughout the retail supply
chain, which saves time otherwise spent correcting delivery and receiving
errors, researching disputed invoices, and tracking down late or missing
promotion information.
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e-Solutions Case Study: Disease Management Services Provider
A provider of disease-management services specializing in urological tumors
and complex diseases had a critical need for a faster, more reliable method
for providing results to its customers--physicians and medical
organizations. In addition, it wanted to use Internet technology to gain a
competitive advantage in the industry and increase the understanding of
urological diseases and their clinical management. Netplex conceptualized,
designed, and developed an Internet-based system that lets doctors access
test results through a secure area within the customer's Web site, thus
minimizing diagnostic errors due to poor dissemination of test results. The
system not only allows doctors access to test results instantly, it
interfaces securely with headquarters' live test-tracking database. This
allows doctors to track the status of tests, receive advance case reports
on current diagnostic findings, and quickly request consultations with
pathologists. The new e-business solution has helped the customer assist
doctors in providing optimal patient care and making economical decisions
in a managed-care environment while allowing the company to expand its
client base to include patients and educators.
e-Solutions Case Study: Major U.S. Stock Exchange
Concerned about the possibility of being victimized by Internet-based
security breaches, the customer, a major U.S. stock exchange, realized it
needed to conduct proactive testing to ensure the security of its existing
systems, as well as systems it was planning to implement. The customer
called on Netplex to assess their security status and perform appropriate
security testing services. Among the several tests Netplex performed were a
"DMZ Profile" (in which we identified vulnerabilities in their Internet-
accessible systems such as their mail gateway and Web server) and Modem
Isolation Tests (which identified unauthorized modem-based entry avenues).
As a result of Netplex's security testing services and ensuing
recommendations, the customer has improved its security and has minimized
external and internal vulnerabilities.
Contractor's Resources Competition
The market for CR's Techcellence service offering is competitive and
changing quickly. We expect that additional companies will emerge in this
market and that competition will therefore intensify. Our competitors vary
in size and in scope of services.
Netplex may experience lower margins and/or a reduction in the number of
members as a result of competitive forces. If we cannot compete effectively
within this market, we may be unable to sustain or grow our business.
Contractor's Resources Differentiators
Online Service Offering. Some competitors provide a subset of the full
range of services offered through Techcellence and do so through "paper-
based" (not online) systems. Netplex believes that the Web-based
Techcellence offering is more scalable and flexible than paper-based
systems, and research we conducted in 1999 indicated that an online system
is more appealing to our members and target market. Several paper-based
competitors have recently indicated that they will be launching online
service offerings.
Experience. Contractor's Resources has been providing contractor-focused
back-office services since 1986. We believe that this represents a longer
period of time than other similar businesses, several of which have emerged
in the last two years. We believe that this experience has helped us create
formal business processes that are flexible and scalable.
Community. Netplex believes that an important advantage of the Techcellence
service is its community of professionals who can provide knowledge sharing
to other members. Through the Techcellence Web site, CR can address this
community with specialized marketing programs intended to generate new
membership and advertise the sale of products and services.
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Seasonal Considerations
The company is not affected by seasonal changes except that only a limited
amount of services are furnished to retail clients during the period from
the end of November to the end of January. There is no material seasonal
effect on our Contractor's Resources business.
Backlog
Due to the nature of its business, Contractor's Resources does not have
backlog. The backlog of e-Solutions project based business was $5,500,000
as of March 24, 2000.
Strategic Relationships
Netplex continues to develop strategic relationships with companies or
organizations whose services we believe complement ours. We believe that
such partnerships play an important role in our strategy of being a
premium-level end-to-end e-solutions provider. As technologies evolve,
Netplex's ability to deliver advanced e-solutions may depend on our ability
to secure and maintain alliances with leading technology manufacturers.
Customers
Netplex's customer base includes Fortune 500, Fortune 1000, and middle-
market firms. In addition, our customers extend into the Retail,
Healthcare, Education, Financial Services, and Entertainment/Media
industries, among others. Some of our major customers include:
. Amtrak . Lego Systems
. America Online . Sonic Industries
. BTG . Telecorp
. Farm King Supplies . Trans World Entertainment
. Freddie Mac . Union Camp
. GTE . Unisys
. Hancock Fabrics . Virgin Entertainment
The Company derived, and believes that it will continue to derive a
significant portion of its revenue from a large number of clients. In 1999
no single client accounted for more than 10% of revenues.
Geographic Positioning
The geographic scope of Netplex currently consists of 13 office locations.
Of these, 10 are on the East Coast of the U.S. (from Connecticut to
Florida) and 2 are in Midwest. The Company does not have any locations
outside the U.S. Revenue from sources outside the U.S. is less than 1
percent of total revenue.
Expanding our geographic reach is a Netplex priority in 2000 and beyond. We
are continually assessing the most suitable areas for geographic expansion
and will seek to penetrate new markets when appropriate, either organically
or through acquisitions.
Growth Strategy
Sustain Rapid e-Solutions Growth
In 2000, Netplex intends to undertake several initiatives that are designed
to bring exposure to our company and help us continue our growth. We intend
to make investments in publicizing our services, strengths, and position in
the market through coordinated advertising campaigns and public relations
activity. We are also planning to grow our sales staff and our team of
billable professionals to accommodate revenue growth. Between 1998 and
1999, Netplex's revenue per billable employee changed by only 1 percent,
indicating that our professional recruitment efforts are virtually
identically aligned with our growth.
New Vertical Practice Areas
Netplex also intends to roll out new vertical practice areas in the coming
year. We believe that the growth of our retail-focused practice group stems
from our knowledge and experience in the retail technology market. We
believe that this industry understanding better enables us to create e-
solutions that are optimally aligned to the demands of the retail industry.
Consequently, we believe that we must build a core
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industry competency, either organically or through acquisition, before we
formalize any new industry-focused practice.
Acquisitions
Netplex has made six acquisitions since 1986. We believe that additional
acquisitions could benefit our core service offerings and improve our
growth. As a result, we intend to consider further acquisitions if
management deems them appropriate to improving our market position and
shareholder value. We expect to consider acquisitions that are
complementary to our existing capabilities or geographical positioning, or
ones that help us expand into additional vertical markets.
Contractor's Resources Growth Strategy
By Internet-enabling the Contractor's Resources business model as
Techcellence, Netplex believes that it has engineered the business's
infrastructure to accommodate a vast increase in membership. In addition to
increased marketing efforts, Netplex also intends to increase its number of
strategic partnerships. In 1999, we announced an initiative through which
we plan to forge strategic relationships with multiple leading online job
and project placement sites.
Operations and Support
During 1999 Netplex moved its headquarters from McLean, Va., to Reston, Va.
However, many of our internal operations and support services are still
located in our McLean office. The McLean office continues to house most of
Netplex's critical information systems, including the management
infrastructure for our wide area network (WAN), the Netplex Web site and
intranet, all electronic mail gateways, finance and accounting systems, and
purchasing systems. A centralized management information systems (MIS)
department located in the McLean office manages all of the systems.
Our marketing, legal, and human resources support services moved to the
Reston, Va., office. The President's Office, along with the Human
Resources, Legal Operations, and planned Systems Assurance are based in
Northern N.J.
Intellectual Property
Netplex does not hold any patents or registered trademarks other than those of
Onion Peel Solutions. However, we consider the Netplex name and our database of
independent consultants to be highly proprietary.
Employees
As of March 23, 2000 we had approximately 700 full-time employees (including
permanent and contract employees).
Our Contractor's Resource's subsidiary tailors its benefits to its members,
representing a third suite of benefits offered by Netplex. We believe that our
relations with our employees are good.
Additional Factors That May Affect Future Results
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that the factors set forth in the sections entitled
"Competition" above, the factors set forth below, as well as other factors,
could in the future affect, and in the past have affected, the Company's actual
results and could cause the Company's results for future years or quarters to
differ materially from those expressed in any forward looking statements made by
or on behalf of the Company, including without limitation those contained in
this 10-K report. Forward looking statements can be identified by forward
looking words, such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words.
Failure to Successfully Integrate Newly Acquired Business. During 1998 the
Company acquired substantially all of the assets of The PSS Group, Inc.,
Automated Business Systems of North Carolina, Inc., Keller Technology Group,
Inc. and the consulting division of Applied Intelligence Group, Inc. In 1999 the
Company acquired Dean Liles & Associates, Inc. The Company entered into the
acquisitions with the expectation that the acquisitions would result in certain
benefits for the combined businesses. Achieving the anticipated benefits of the
acquisitions will depend in part upon whether certain of the other companies'
business operations and their product offerings can be integrated in an
efficient and effective manner. This will require the dedication of management
resources that may temporarily
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distract attention from the day-to-day business of the Company. As of March
2000, integration of facilities as well as the various functional departments
has been partially accomplished. The full extent of the cost savings in
operations is not known. If the integration does not result in the anticipated
cost savings in operations, there may be an adverse effect on the Company's
results of operations and financial condition. A change in the anticipated
integration of The PSS Group, Inc. resulted in the write-off of the intangibles
associated with its acquisition (see Note 2).
History of Losses. The Company incurred net losses of $7.4, $2.5 and $2.9
million in the years ended December 31, 1999, 1998 and 1997 respectively. There
can be no assurance that the Company will be profitable on a quarterly or annual
basis in the future. The Company's quarterly operating results in the past have
fluctuated and may fluctuate significantly in the future depending on such
factors as the timing and delivery of significant orders and contracts, new
product introductions and changes in pricing policies by the Company.
The Company's expense levels are based, in part, on its expectations of future
revenues. Many of the Company's expenses are relatively fixed and cannot be
changed in short periods of time. If revenue levels are below expectations, net
income will be disproportionately affected because only a portion of the
Company's expenses varies with its revenue during any particular quarter. In
addition, the Company typically does not have a significant backlog to support
more than two quarters of revenue at any particular date.
As a result of the foregoing factors and potential fluctuations in operating
results, the Company believes that its results of operations in any particular
quarter should not be relied upon as an indicator of future performance. In
addition, in some future quarter the Company's operating results may be below
the expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock would likely be materially and adversely
affected.
Dependence on Key Personnel. The Company's success depends in large part on the
continued service of its key technical and senior management personnel and on
its ability to attract, motivate and retain highly qualified employees.
Competition for highly qualified employees is intense, and the process of
identifying and successfully recruiting personnel with the combination of skills
and attributes required to execute the Company's strategies is often lengthy.
Accordingly, the loss of the services of key personnel could have a material
adverse effect upon the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be successful in
retaining its key technical and management personnel and in attracting and
retaining the personnel it requires for continued growth.
Management of Growth. Although the Company has streamlined its operations, the
Company's long-term success will depend in part on its ability to manage growth.
If the Company is unable to hire a sufficient number of employees with the
appropriate levels of experience to effectively manage its growth, the Company's
business, financial condition and results of operations could be materially and
adversely affected.
Possible Volatility of Stock Price; Decreased Liquidity. The Company's stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by securities
analysts or others could have an immediate and significant adverse effect on the
trading price of the Company's Common Stock in any given period. Additionally,
the Company may not learn of, or be able to confirm, revenue or earnings
shortfalls until late in the fiscal quarter or following the end of the quarter,
which could result in an even more immediate and adverse effect on the trading
of the Company's Common Stock.
Liquidity. Currently, the Company has a line of credit with a bank whereby the
Company can borrow the lesser of $6 million or 80% of eligible accounts
receivable. Additionally, the Company is required to meet certain financial and
other covenants. The Company had borrowed $5,126,000 under the line of credit as
of December 31, 1999. As of December 31, 1999, the Company was not in compliance
with the covenant that requires it to maintain tangible net assets of $900,000
through March 30, 2000, and $1,200,000 thereafter. The bank was notified but did
not issue a notice of default. The default was cured by the influx of cash in
January and February from the exercise of options and warrants and the Company's
tangible net asset position was further strengthened by two equity financings in
March, 2000. If cash generated from operations is insufficient to satisfy the
Company's liquidity requirements, the Company may seek to sell additional equity
or convertible debt securities or obtain additional credit facilities. However,
no assurance can be given that any such additional sources of financing will be
available on acceptable terms or at all. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders.
11
Item 2. Properties.
The Company leases approximately 20,000 square feet of space in McLean and
Reston, VA. for its corporate offices and the operations of some business units.
The Company also leases office space in 9 other cities including, Central and
Western New Jersey, Raleigh and Charlotte, North Carolina, Atlanta, Georgia,
Tampa, Florida, Southwestern Virginia, and Edmond, Oklahoma that serve as
operating offices of its businesses. These leases expire on various dates from
May 2000 to January 2004
The Company believes that the space in its existing corporate and branch
facilities are adequate for the foreseeable future to support the growth of its
existing operations in the geographic areas in which it currently operates. The
Company expects to expand its operations into new geographic regions in the
future and will need to lease additional branch offices to support operations in
those regions.
Item 3. Legal Proceedings.
From time to time, the Company is subject to litigation in the ordinary course
of business.
On September 4, 1997, Data Systems Analysts, Inc. ("DSA"), a software design and
consulting company, filed a complaint against the Company and Technology
Development Systems, Inc. (TDS), a wholly owned subsidiary of the Company,
alleging copyright infringement and breach of the Company's agreement with DSA.
The Complaint also seeks damages against XcelleNet, Inc., which the Company has
indemnified. The Complaint claims damages in excess of $300,000 plus punitive
damages and attorney fees. The case is currently in discovery. The Company is
vigorously defending against the action. The nature and amount of damages, if
DSA's allegations are proven, appear uncertain.
The 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 Company's Common Stock holders during
the Company's fourth quarter ended December 31, 1999.
12
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.
Price Range of Common Stock
The quotations set forth in the table reflect inter-dealer prices from NASDAQ,
without retail mark-up, markdown or commission, and may not necessarily
represent actual transactions:
1998............................................ High Low
- ----............................................ ---- ---
1st Quarter..................................... $ 1.72 $0.81
2nd Quarter..................................... 1.81 1.25
3rd Quarter..................................... 1.81 1.09
4th Quarter..................................... 1.44 0.88
1999
- ----
1/st/ Quarter................................... $ 3.50 $0.97
2nd Quarter..................................... $ 3.44 $2.44
3rd Quarter..................................... $ 3.38 $2.25
4th Quarter..................................... $11.62 $1.66
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 15, 2000, there were approximately 153 holders of record of the
Company's Common Stock. The Company believes that at such date there were in
excess of 5,500 beneficial owners of the Company's Common Stock.
Recent Sales of Unregistered Securities
The Company sold the following securities in the past three years that were not
registered under the Securities Act of 1933, as amended:
In July, 1997, the Company issued 80,000 shares of Common Stock and the
obligation to issue additional shares of Common Stock based on the closing price
of the Common Stock on December 31, 1998, in exchange for the outstanding
membership interests of Onion Peel Solutions LLC. In February, 1999, the
Company issued 297,396 additional shares of Common Stock based on the December
31, 1998, closing price. This transaction was completed without an underwriter
and exemption from registration is claimed under Section 4(2) of the Securities
Act because it did not involve a public offering.
In February, 1998, the Company sold 80,000 shares of Common Stock and warrants
to purchase 100,000 shares of Common Stock at a price of $1.20 per share, for an
aggregate of $100,000. The warrants have a 5-year term and are immediately
exercisable. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In March, 1998, the Company sold 1,457,000 shares of Common Stock at a price of
$1.00 per share for an aggregate of $1,457,000 to certain accredited investors
and employees of the Company. These shares carry registration rights. This
transaction was completed without an underwriter and exemption from registration
is claimed under Section 4(2) of the Securities Act because it did not involve a
public offering.
In April, 1998, the Company sold 1,500 units at a price of $1,000 per unit for
an aggregate of $1.5 million to certain accredited investors. Each unit
consists of a warrant to purchase the number of shares of Common Stock equal to
$1,000 divided by an adjustable exercise price and an additional warrant to
acquire 52 shares of Common Stock at a price equal to the adjustable exercise
price. The warrants have a 5-year term and are immediately exercisable. The
13
Company paid an aggregate placement fee and non-accountable expense allowance of
$284,500 and also granted the placement agent a warrant to purchase 39,000
shares of Common Stock at a price of $1.47. The warrants have a 10-year term
and are immediately exercisable. The placement agent for this transaction was
The Zanett Corporation and exemption from registration is claimed under Section
4(2) of the Securities Act because it did not involve a public offering.
In April, 1998, the Company sold 100,000 shares of Common Stock for $1.50 per
share for an aggregate of $150,000 to accredited investors. These shares carry
registration rights. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In April, 1998, the Company sold 35,000 shares of Common Stock for $1.375 per
share for an aggregate of $48,125 to accredited investors. These shares carry
registration rights. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In June, 1998, the Company, in addition to other consideration, issued 450,000
shares of Common Stock in exchange for all of the outstanding equity securities
of Automated Business Systems of North Carolina, Inc. and Kellar Technology
Group, Inc. (collectively "ABS") to the former shareholders of ABS. The Company
also agreed to issue additional shares of Common Stock through December 31,
2000, if ABS meets certain operating targets. This transaction was completed
without an underwriter and exemption from registration is claimed under Section
4(2) of the Securities Act because it did not involve a public offering.
In August, 1998, the Company sold 451,000 shares of Common Stock for $1.3125 per
share for an aggregate of $592,000 to accredited investors. These shares carry
registration rights. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In September, 1998, the Company sold 1,700 units for $1,000 per unit and
warrants to purchase 141,667 shares of Common Stock at an exercise price of
$1.3938 per share for an aggregate of $1.5 million to accredited investors.
Each unit consists of a warrant to purchase the number of shares of Common Stock
computed by dividing $1,700,000 by 125% of the fixed exercise price of $1.3938,
with respect to any exercise within the first year, and the lower of the fixed
exercise price and a variable exercise price (subject to a floor price of
$1.00), with respect to any exercise after the first year. The warrants have a
10-year term and are immediately exercisable. The Company paid a placement fee
of $175,000 and issued the placement agent 50,000 shares of Common Stock. The
placement agent for this transaction was Zanett Securities Corporation.
Exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In September, 1998, the Company sold 1,500,000 shares of Class C, Convertible
Preferred Stock at a price of $1.00 per share and warrants to purchase shares of
Common Stock for $1.375 per share for an aggregate of $1.5 million to Waterside
Capital. The Class C Preferred Stock bears a dividend rate of 9.99% that
increases to 15% per annum after the date there are no Class A Cumulative
Convertible Preferred Stock issued and outstanding. The Preferred Stock is
convertible at any time after the earlier of a change in control of the Company
or five years from the date of issuance and is redeemable at the option of the
Company at any time within the first five years. The number of shares into which
the Preferred Stock is convertible is equal to $1,500,000 (plus accrued but
unpaid dividends) divided by 25% of the 20 day average trading price of the
Common Stock immediately prior to conversion. The warrants issued entitle the
holder to acquire 150,000 shares of Common Stock at $1.375 per share. The
Company may be required to issue up to 400,000 additional shares of Common Stock
under the warrants, depending upon the term in which the Class C Preferred Stock
is outstanding. The warrants have a 10-year term and are immediately
exercisable. The Company paid a placement fee of $175,000 and issued the
placement agent warrants to purchase 125,000 shares of Common Stock at $1.59 per
share. The warrants have a 5-year term and are immediately exercisable. The
placement agent for this transaction was Ferris Baker & Watts and exemption from
registration is claimed under Section 4(2) of the Securities Act because it did
not involve a public offering.
In October, 1998, the Company issued 643,770 shares of Class B Preferred Stock
to Applied Intelligence Group, Inc. in connection with the purchase of such
company's information technology consulting business. Each share of Class B
Preferred Stock is immediately convertible into one share of Common Stock. No
dividends are payable on Class B Preferred Stock. The Company also agreed to
pay AIG additional consideration if the information technology consulting
business meets certain operating targets. Such additional consideration would
include up to
14
643,770 shares of Class B Preferred Stock if the information technology
consulting business achieves approximately $9 million in net profits over the
next 9 quarters. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
On January 28, 1999, the Company issued a note for $800,000, at 14% annual
interest, through a private placement to an accredited investor. On December 15,
1999, the note was exchanged for an increase in the number of shares that the
Company's Class C Convertible Preferred Stock is convertible into. See note 12,
of the note to the consolidated financial statements.
During the year ended December 31, 1999, 877,612 shares of Class A Preferred
Stock and 643,770 shares of Class B Preferred Stock were converted into
1,521,382 shares of Common Stock. The Class C shares are not eligible for
conversion to Common Stock until September, 2003.
Item 6. Selected Financial Data
Year ended December 31
1999 1998 1997 1996 1995
--------- -------- -------- -------- ---------
(amounts in thousands, except per share data)
Revenues $ 87,785 $ 61,279 $ 40,468 $ 33,525 $ 26,782
Cost of revenues 70,869 51,284 36,085 31,314 24,051
--------- -------- -------- -------- ---------
Gross profit 16,916 9,995 4,383 2,211 2,731
Expenses:
Selling, general and administrative 24,039 11,980 7,230 4,770 2,928
Restructuring costs - 160 - - -
Acquired in-process technology - 250 - - -
--------- -------- -------- -------- ---------
Operating loss (7,123) (2,395) (2,847) (2,559) (197)
Interest expense and other income, net (384) (154) (26) 38 28
--------- -------- -------- -------- ---------
Loss from continuing operations before income (7,507) (2,549) (2,873) (2,521) (169)
taxes
Income tax (benefit) provision - - - (34) (4)
--------- -------- -------- -------- ---------
Loss from continuing operations (7,507) (2,549) (2,873) (2,487) (165)
Discontinued operations:
Loss from operations of discontinued business - - - (1,332) -
Net gain from disposal - - - 1,820 -
--------- -------- -------- -------- ---------
Income from discontinued operations - - - 488 -
Loss before minority interest (7,507) (2,549) (2,873) (1,999) (165)
Minority interest (83) - - - -
--------- -------- -------- -------- ---------
Net loss $ (7,424) $ (2,549) $ (2,873) $ (1,999) $ (165)
========= ======== ======== ======== =========
Basic and diluted earnings (loss) per common
share
Continuing operations $ (0.63) $ (0.31) $ (0.46) $ (0.51) $ (0.05)
Discontinued operations - - - 0.09 -
--------- -------- -------- -------- ---------
Total $ (0.63) $ (0.31) $ (0.46) $ (0.42) $ (0.05)
--------- -------- -------- -------- ---------
Weighted average common shares outstanding,
basic and diluted 12,516 9,260 6,821 5,026 3,246
======== ======== ======== ======== ========
At year-end
Total assets $ 26,417 $ 20,651 $ 6,912 $ 9,889 $ 7,799
======== ======== ======== ======== ========
Stockholders' equity $ 6,862 $ 6,355 $ 1,331 $ 3,239 $ 409
======== ======== ======== ======== ========
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Based in Reston, Va. and with twelve offices, ten offices throughout the eastern
U.S and two office in Oklahoma City, Ok., The Netplex Group, Inc., together with
its wholly owned subsidiaries ("the Company" or "Netplex"), is an Internet
services and electronic business ("e-business") solutions provider.
The Company's operations have been concentrated on providing IT services and
solutions to U.S.-based commercial organizations since the beginning of 1994.
In July, 1997, the Company acquired all membership interests of Onion Peel
Solutions, L.L.C. ("Onion Peel") to broaden its customer base and expand the
fulfillment capacity of its Enterprise Systems Management service offerings.
In January, 1998, the Company acquired all outstanding stock of The PSS Group,
Inc. ("PSS") to expand its marketing and recruiting organization in the
Washington, DC metropolitan area and to broaden its customer base.
In June, 1998, the Company acquired Automated Business Systems ("ABS") which
expands the geographic reach of the Company's business to the Charlotte, N.C.;
Spartanburg, S.C.; and Atlanta, Ga. markets and broadens its customer base.
In September, 1998, the Company acquired certain assets of the Applied
Intelligence Group ("AIG") which forms the e-Information Services Group by
adding information technology consulting expertise in the retail and
distribution industry and expands the Company's geographic reach into the
southwest.
In April, 1999, the Company purchased the assets of Dean Liles & Associates,
Inc, ("DLA") a Dallas, Texas based information technology strategy consulting
practice. The acquisition expands the Company's presence in the southwest.
The results of operations for PSS, ABS, AIG, and DLA are included in the
statements of operations for the year ended December 31, 1998 and 1999 beginning
on the effective date of their acquisitions January 1, 1998; June 30, 1998;
September 1, 1998; and April 1, 1999, respectively.
In 1999, the Company restructured its segments by combining all operations not
related to Contractor's Resources into a single profit and loss center, e-
Infrastructure services, except for its operations related to the acquisition of
AIG that now form the e-Information Services segment. The Company also changed
its components of cost of services to include all labor related to direct labor
employees and their attendant fringe benefits. Prior to 1999, non-billable
direct labor related to idle time, training and other activities was included in
operating expense. These changes were made to permit a more direct reflection
upon gross profits of the impact of increasing or decreasing labor utilization.
All prior year's cost of services and operating expenses have been restated to
reflect these changes.
The following table sets forth the revenue, gross profit, expenses, and income
of each of the business areas for the years ended December 31, 1999, 1998 and
1997.
16
Consolidated Operating Results by Segment
Year Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Operating revenues
e-Information Services $ 11,044,166 $ 3,533,025 $ -
------------ ------------ ------------
e-Infrastructure Services 20,437,959 17,459,183 6,346,530
e-Infrastructure Product Resales 17,679,075 5,406,410 2,073,254
------------ ------------ ------------
e-infrastructure 38,117,034 22,865,593 8,419,784
------------ ------------ ------------
e-Business Solutions 49,161,200 26,398,618 8,419,784
Contractor's Resources 38,624,064 34,880,542 32,048,350
------------ ------------ ------------
Operating revenues 87,785,264 61,279,160 40,468,134
------------ ------------ ------------
Gross profit
e-Information Services 5,442,115 1,690,505 -
------------ ------------ ------------
e-Infrastructure Services 5,915,833 5,468,254 2,337,358
e-Infrastructure Product Resales 4,184,097 1,511,650 949,518
------------ ------------ ------------
e-infrastructure 10,099,930 6,979,904 3,286,876
------------ ------------ ------------
e-Business Solutions 15,542,045 8,670,409 3,286,876
Contractor's Resources 1,373,887 1,324,682 1,096,104
------------ ------------ ------------
Gross profit 16,915,932 9,995,091 4,382,980
------------ ------------ ------------
Gross profit percentage
e-Information Services 49.3% 47.8% -
------------ ------------ ------------
e-Infrastructure Services 28.9% 31.3% 36.8%
e-Infrastructure Product Resales 23.7% 28.0% 45.8%
------------ ------------ ------------
e-infrastructure 26.5% 30.5% 39.0%
------------ ------------ ------------
e-Business Solutions 31.6% 32.8% 39.0%
Contractor's Resources 3.6% 3.8% 3.4%
------------ ------------ ------------
Gross profit percentage 19.3% 16.3% 10.8%
------------ ------------ ------------
Operating Expenses
e-Information Services 3,305,752 709,826 -
e-Infrastructure Services and Product Resales 7,784,245 6,715,607 4,116,010
------------ ------------ ------------
e-Business Solutions 11,089,997 7,425,433 4,116,010
Contractor's Resources 3,086,904 1,144,143 1,169,120
------------ ------------ ------------
Operating expenses 14,176,901 8,569,576 5,285,130
------------ ------------ ------------
Operating income
e-Information Services 2,136,363 980,679 -
e-Infrastructure Services and Product Resales 2,315,685 264,297 (829,134)
------------ ------------ ------------
e-Business Solutions 4,452,048 1,244,976 (829,134)
Contractor's Resources (1,713,017) 180,539 (73,016)
------------ ------------ ------------
Operating income 2,739,031 1,425,515 (902,150)
------------ ------------ ------------
Corporate Expenses 5,530,469 2,736,624 1,480,453
------------ ------------ ------------
EBITDA (2,791,438) (1,311,109) (2,382,603)
Interest, taxes, depreciation
& amortization 4,632,385 1,237,615 491,000
------------ ------------ ------------
Net operating loss $ (7,423,823) $ (2,548,724) $ (2,873,603)
============ ============ ============
17
RESULTS OF OPERATIONS
1999 Compared to 1998
Revenue for the year ended December 31, 1999, increased $26.5 million or 43.3%
to $87.8 million, compared to $61.3 million for the year ended December 31,
1998. This increase includes a $7.5 million or 212.6% increase in e-Information
Services revenue, a $15.3 million or 66.7% increase in e-Infrastructure Services
revenue, and a $3.7 million or 10.7% increase in Contractor's Resources revenue.
The increase in 1999 revenue includes $20.5 million of increased revenue from a
full year of operations of ABS and AIG which were acquired by the Company
effective July 1, 1998, and September 1, 1998, respectively. Additionally, there
was a $6.0 million or 9.7% increase in revenue from businesses owned as of
December 31, 1998 ("organic growth"). The organic revenue growth in 1999
includes increases in e-Infrastructure Services of $4.3 million or 7.1% and $3.7
million or 11.2% in Contractor's Resources. The organic revenue growth in
e-Infrastructure Services is due primarily to increased sales volume in 1999 as
compared to the same period of 1998. The growth in Contractor's Resources
revenues is to due to an increase in the number of contractor members increasing
sales volume.
Gross Profit for the year ended December 31, 1999, increased $6.9 million or
69.2% to $16.9 million as compared to $10.0 million for 1998. This increase
includes an increased gross profit in e-Information Services of $3.8 million or
221.9%, a $3.1 million or 44.7% increase in e-Infrastructure Services and a
$49,000 or 3.7% increase in Contractor's Resources gross profit.
The increase in gross profit includes $5.9 million of increased gross profit
from a full year of operations of ABS and AIG. Gross profit from businesses
owned as of December 31, 1998, increased $1.0 million. The increase in gross
profit for the businesses owned as of December 31, 1998, includes a $1.0 million
or 9.9% increase in e-Infrastructure Services gross profit and a $49,000
increase in Contractor's Resources gross profits.
Gross profit margins increased to 19.3% for the year ended December 31, 1999,
from 16.3% in the same period of 1998. e-Information Services gross profit
margins increased from 47.8% in 1998 to 49.3% in 1999. e-Infrastructure Services
gross profit margins decreased from 30.5% in 1998 to 26.5% in 1999. Contractor's
Resources gross profit margins decreased from 3.8% in 1998 to 3.6% in 1999.
The increase in e-Information Services gross profit margins is primarily due to
better utilization in 1999 versus 1998 which was interrupted by the acquisition
of AIG and ABS. The e-Infrastructure Services gross profit margin decrease is
due to a decline in the latter half of the year in Technical Consulting Services
and disproportionate growth in product revenue with lower margins than service
revenue in systems integration services. Contractor's Resources had lower gross
profit margins primarily due to increased numbers of new members at lower
introductory fees to build membership base.
Operating expenses for the year ended December 31, 1999, increased $5.6 million
or 65.4% to $14.2 million from $8.6 million for the same period in 1998. This
increase includes increases in e-Information Services, e-Infrastructure
Services, and Contractor's Resources operating expenses of approximately $2.6
million, $1.1 million and $1.9 million, respectively. The increase in operating
expenses was primarily due to the acquisitions of ABS and AIG that collectively
increased operating expenses in 1999 by $5.9 million.
Operating income for 1999 was $2.7 million as compared to $1.4 million for 1998,
an increase of $1.3 million. This improvement includes increases in profits from
e-Information Services and e-Infrastructure Services of $1.2 million and $2.1,
respectively, and a loss for Contractor's Resources of $1.9 million.
Corporate expense for the year ended December 31, 1999, increased $2.8 million
or 102.1% to $5.5 million from $2.7 million in the same period of 1998. This
increase reflects an additional investment in corporate development capability
and infrastructure to support the growth of operations.
Earnings before interest, income taxes, depreciation, and amortization
("EBITDA") for the year ended December 31, 1999, was a loss of $2.8 million as
compared to a loss of $1.3 million for the same period of 1998 a decline in
EBITDA of $1.5 million. The components of this $1.5 million are discussed above.
Depreciation, amortization, and interest expense for the year ended December 31,
1999, increased $3.4 to $4.6 million from $1.2 million for the same period of
1998. The increase is principally due to the write off of intangibles from the
acquisition of PSS of $1.8 million that was charged to selling, general and
administrative expenses,
18
additional amortization and depreciation from the acquisitions of ABS and AIG
and increased borrowings under the Company's line of credit facility to support
growth during the year ended December 31, 1999.
Due to the generation of net losses, no provision or benefit for income taxes
was recorded for either the year ended December 31, 1999 or 1998. Any tax
benefits associated with net operating losses have been fully reserved for by a
valuation allowance.
The net loss in 1999 increased $4.9 to $7.4 million from $2.5 million in 1998.
The components of this increase are discussed above.
1998 Compared to 1997
Revenue for the year ended December 31, 1998 increased $20.8 million or 51.4% to
$61.3 million, compared to $40.5 million for the same period in 1997. This
increase includes a $3.5 million increase in e-Information Services revenue
(100% from the acquisition of AIG), a $14.4 million or 171.6% increase in
e-Infrastructure Services revenue, and a $2.8 million or 8.8% increase in
Contractor's Resources revenue.
The increase in revenue in 1998 includes $13.5 million of revenue contributed
collectively by PSS, ABS, and AIG acquired by the Company effective January 1,
1998; July 1, 1998; and September 1, 1998, respectively, and. $7.3 million or
18% in revenue growth of the businesses owned as of December 31, 1997 ("organic
growth"). The organic revenue growth in 1998 includes increases in
e-Infrastructure Services and Contractor's Resources revenues of $4.4 million
and $2.8 million, respectively. The organic revenue growth in e-Infrastructure
Services is due primarily to increased sales volume in 1998 as compared to the
same period of 1997. The growth in Contractor's Resources revenues is to due to
an increase in the number of contractor members increasing sales volume and
increased rates for services.
Gross Profit for the year ended December 31, 1998, increased $5.6 million or
128% to $10.0 million as compared to $4.4 million for the same period of 1997.
This increase includes an increased gross profit in e-Information Services of
$1.6 million (100% from the acquisition of AIG), a $3.7 million or 112.4%
increase in e-Infrastructure Services and an increase of $ 229,000 or 20.9% in
Contractor's Resources.
The gross profit growth includes $5.2 million of gross profit contributed
collectively by PSS, ABS, and AIG acquired in January, 1998; June, 1998; and
September, 1998, respectively, and a $1.7 million increase in gross profits from
businesses owned as of December 31, 1997. The growth in gross profit for the
businesses owned as of December 31, 1997, includes a $1.5 million increase or
37% in e-Infrastructure Services gross profit and a $229,000 increase in
Contractor's Resources gross profits.
Gross profit margins increased to 16.3% for the year ended December 31, 1998,
from 10.8% in the same period of 1997. e-Information services gross profit
margins were 47.8% in 1998 (100% from the acquisition of AIG). e-Infrastructure
Services gross profit margins decreased from 39.0% in 1997 to 30.5% in 1998.
Contractor's Resources gross profit margins increased from 3.4% in 1997 to 3.8%
in 1998.
The decrease in e-Infrastructure Services gross profit margins is primarily due
to the higher product content in the 1998 revenues than in 1997 and increased
systems implementation consulting revenue. Product revenue and systems
implementation consulting revenue commands a lower gross profit margin than
custom software development, high end consulting and system design work revenue,
which did not grow as rapidly as the product or systems implementation
consulting revenue in 1998. The e-Infrastructure Services gross profit margin
decrease is due to higher growth in Technical Consulting Services than in
systems integration. Technical Consulting Services command a lower gross profit
margin than systems integration work. The acquisition of PSS in January, 1998,
and the opening of a Tampa office in April, 1998, fueled the Technical
Consulting Services growth. Contractor's Resources achieved higher gross profit
margins primarily through increased service fees to its members.
Operating expenses for the year ended December 31, 1998, increased $3.3 million
or 61.2% to $8.6 million from $5.3 million for the same period of 1997. This
increase includes increases in e-Information Services (100% from the acquisition
of AIG) and e-Infrastructure Services operating expenses of $0.7 million and
$2.6 million, respectively. Contractor's Resources operating expenses decreased
by $25,000. The increase in operating expenses was primarily due to the
acquisitions of PSS, ABS, and AIG that collectively increased operating expenses
in 1998 by $4.3 million.
Operating income for the year was $1.4 million as compared to a loss of $0.9
million for the same period of 1997, an improvement of $2.3 million. This
improvement includes increases in profits from e-Information Services,
19
e-Infrastructure Services, and Contractor's Resources of $1.0 million, $1.1
million, and $254,000, respectively. Operating income for PSS, ABS, and AIG
accounted for $923,000 of this improvement.
Corporate expense for the year ended December 31, 1998, increased $1.3 million
or 84.9% to $2.7 million from $1.5 million in the same period of 1997. This
increase reflects an additional investment in corporate development capability
to support the growth of operations and the integration of acquisitions.
Restructuring costs of $160,000 were recorded in the year ended December 31,
1998, related to the reduction of duplicate costs and consolidation of
facilities. Acquired in-process technology of $250,000 from the Company's
acquisition of AIG was written-off in the 1998. The Company also wrote off
$131,000 of certain software items in its inventory that became obsolete.
Earnings before interest, income taxes, depreciation, and amortization
("EBITDA") for the year ended December 31, 1998, was a loss of $1.3 million as
compared to a loss of $2.4 million for the same period of 1997, an improvement
in EBITDA of $1.1 million. The components of this improvement are discussed
above.
Depreciation, amortization, and interest expense for the year ended December 31,
1998, increased $747,000 to $1.2 million from $491,000 for the same period of
1997. This increase is principally due to increased amortization and
depreciation from the acquisitions of PSS, ABS, and AIG and increased borrowings
under the Company's line of credit facility to support growth for the year ended
December 31, 1998.
Due to the generation of net losses, no provision or benefit for income taxes
was required for either the year ended December 31, 1998 or 1997.
The net loss decreased $325,000 to $2.5 million from $2.9 million in the same
period of 1997. The components of this improvement are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of $4,220,148.
The following increased the Company's liquidity and capital resources:
For the year ended December 31, 1999, the Company's cash increased by
$3,350,000. This increase resulted from cash provided by financing activities,
comprised primarily of proceeds from the exercise of stock options and warrants,
of $8,570,000 offset by cash used in operating activities of $1,852,000 and
investing activities of $3,368,000.
As of December 31, 1999, the Company has a line of credit with a bank that
expires on May 31, 2000, whereby the Company can borrow the lesser of $6 million
or 80% of eligible accounts receivable. Advances against this line of credit
bear interest at 0.75% over the bank's prime rate. Additionally, the Company is
required to meet certain financial and other covenants. As of December 31, 1999,
the Company was not in compliance with the covenant that requires it to maintain
tangible net assets of $900,000 through March 30, 2000, and $1,200,000
thereafter. The bank was notified but did not issue a notice of default. The
default was cured by the influx of cash in January and February from the
exercise of options and warrants and the Company's tangible net asset position
was further strengthened by two equity financings in March 2000. The Company had
borrowed $5,126,000 under the line of credit as of December 31, 1999, and had
$287,000 available under the line at March 24, 2000.
Capital expenditures for the year ended December 31, 1999, were $962,000.
Additionally, the Company paid $600,000 for the acquisition of the assets Dean
Liles & Associates, Inc. ("DLA").
Dividends of $304,354 were paid on the Company's Class A and Class C Cumulative
Preferred Stock during the year ended December 31, 1999. The Company's Class B
Preferred Stock does not pay a dividend. At December 31, 1999, accrued dividends
on the Company's Class A and Class C Preferred Stock was $241,479.
During the year ended December 31, 1999, 877,612 shares of Class A Preferred
Stock and 643,770 shares of Class B Preferred Stock were converted into
1,521,382 shares of Common Stock. The Class C shares are not eligible for
conversion to Common Stock until September, 2003. The conversions of the Class A
Cumulative Preferred Stock during the year ended December 31, 1999 will reduce
the Company's obligation for dividend payments by $110,493 annually.
20
Stock options and warrants to purchase 3,299,560 shares of the Company's Common
Stock were exercised during the year ended December 31, 1999, generating cash
proceeds to the Company of $6,806,254. In addition, the Company received
$565,000 for the sale of a minority interest in a subsidiary.
On January 28, 1999, the Company borrowed $800,000 of subordinated debt, with
interest at 14%, from Waterside Capital Corporation. In December 1999 the debt
was converted to equity. See notes 3 and 12 of the notes to the consolidated
financial statements.
In March 2000, the Company raised an additional $10.8 million in equity in two
financing transactions (see Note 20).
Future Plans.
The Company believes that based on its current operating plan, that cash
generated from operating activities, borrowings on its line of credit facility
coupled with its recent equity infusions will be sufficient to meet its
anticipated working capital and capital expenditure requirements for at least
the next 12 months. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's liquidity needs, the Company may seek to
increase its line of credit, sell convertible debt or equity securities.
However, no assurances can be given that any such addition financing sources
will be available on acceptable terms or at all. The sale of additional
convertible debt or equity securities could result in dilution to the Company's
stockholders. The Company has no current plans, agreements, and commitments and
is not engaged in any negotiations with respect to such transactions.
The proceeds of these equity sales have been used to finance acquisitions and to
provide additional working capital.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments that would require
disclosure under this item. The Company's obligations under its line of credit
are short-term in nature with an interest rate that approximates the market
rate.
Item 8. Financial Statements and Supplementary Data
See Consolidated Financial Statements listed in the accompanying index to
Consolidated Financial Statements on Page F-1 herein.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
(a) Previous independent accountants
(i) Effective May 14, 1999, KPMG LLP resigned as The Netplex Group, Inc.'s
independent accountants.
(ii) The reports of KPMG LLP on the financial statements for the past two
fiscal years contained no adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope, or accounting principles.
(iii) In connection with its audits for the two most recent fiscal years and
through May 14, 1999, there have been no disagreements with KPMG LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of KPMG LLP would have caused them to make reference thereto in
their report on the financial statements for such years.
(b) New independent accountants
(i) The Company engaged Grant Thornton LLP as its new independent
accountants as of November 13, 1999.
(ii) The Company has not consulted with Grant Thornton LLP regarding the
application of accounting principles as to a specified transaction or the type
of opinion that might be rendered on the Company's financial statements or any
matter that was either the subject of a disagreement or a reportable event prior
to their engagement as the Company's independent accountants.
The Company's Board of Directors participated in and approved the decision to
engage Grant Thornton LLP as the Company's new independent accountants.
21
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The information regarding directors and executive officers required by Item
10 is incorporated by reference from the information set forth under the heading
"Proposal 1--Election of Directors--Directors and Executive Officers" and "--
Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for its annual meeting of stockholders currently
expected to be held in June 2000.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference from the
information set forth under the heading "Executive Compensation" in the
Company's definitive proxy statement for its annual meeting of stockholders
currently expected to be held in June 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference from the
information set forth under the heading "Principal Stockholders" in the
Company's definitive proxy statement for its annual meeting of stockholders
currently expected to be held in June 2000.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference from the
information set forth under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its annual meeting
of stockholders currently expected to be held in June 2000.
22
PART IV
Item 14. Exhibits and Reports on Form 8-K.
(a) 1. Financial Statements and Schedules. The following financial statements
are included herein:
Page
----
Independent Auditors' Reports................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.... F-4
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.............................. F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997........................ F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.............................. F-8
Notes to Consolidated Financial Statements...................... F-9
2. Consolidated Financial Statement Schedules
The following consolidated financial statement schedule of the Company for each
of the years ended December 31, 1999, 1998, and 1997 is filed as part of this
Form 10-K, and should be read in conjunction with the Consolidated Financial
Statements, and the related notes thereto of the Company.
Schedule II -- Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or the Notes thereto.
3. Exhibits
Exhibit
Number Description of Document
2.1 Agreement and Plan of Reorganization and Merger dated as of
November 20, 1995, by and among The Netplex Group, Inc.,
America's Work Exchange, Inc. and the Company.**
3.1 Composite Certificate of Incorporation, as amended.******
3.2 The Company's By-laws.**
4.1 Form of Common Stock Certificate.***
4.5 Form of Warrant issued to investors in connection with 1992
bridge financing.***
4.6 Form of Unit Purchase Option granted to the Underwriter of the
Company's initial public offering.**
4.7 Form of Purchase Option granted to Placement Agent in
connection with the 1996 Private Placement.*****
4.8 Form of Warrant issued in connection with the 1996 Private
Placement.****
4.9 Certificate of Designation for the Preferred Stock.****
4.10 Form of Prepaid Warrant issued to Purchasers in Private 1998
Placement******
4.11 Form of Incentive Warrant issued to Purchasers in 1998 Private
Placement******
10.5 1992 Incentive and Non-Qualified Stock Option Plan.**
10.6 Amendment to 1992 Incentive and Non-Qualified Stock Option
Plan.**
23
Exhibit
Number Description of Document
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******
21 Subsidiaries of The Netplex Group, Inc.******
23 Consent of KPMG LLP.******
24 Consent of Grant Thornton LLP******
27 Financial Data Schedule.******
(b) The Company filed one report Form 8-K/A in the quarter ended December
30, 1998, under Item 2 Acquisition and Disposition of Assets.
* Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996.
** Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission (the
"Commission") on June 7, 1996, as amended.
*** Incorporated by reference to the Company's Registration Statement on
Form SB-2, filed with the Commission on January 29, 1993
(Commission file No. 33-57546), as amended.
**** Incorporated by reference to the Company's Registration Statement on
Form S-3, filed with the Commission on November 19, 1996, as
amended (Commission File No. 333-16423).
***** Incorporated by reference to the Company's Registration Statement on
Form S-8, filed with the Commission on December 31, 1996,
(Commission File No. 333-19115).
****** Filed Herewith.
24
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 3rd day
of April 2000.
The Netplex Group, Inc.
By: /s/ Gene Zaino
------------------------
Gene Zaino
Chairman 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, Chief Executive April 3, 2000
- ------------------------------ Officer and Director
Gene Zaino [Principal Executive Officer]
/s/ Pamela Fredette President and Director April 3, 2000
- ------------------------------
Pamela Fredette
/s/ Walton E. Bell, III Chief Financial Officer April 3, 2000
- ------------------------------ and Treasurer [Principal
Walton E. Bell, III Financial Officer]
/s/ Peter Russo Chief Accounting Officer April 3, 2000
- ------------------------------ [Principal Accounting Officer]
Peter Russo
/s/ Richard Goldstein Director April 3, 2000
- ------------------------------
Richard Goldstein
/s/ Steven Hanau Director April 3, 2000
- ------------------------------
Steven Hanau
/s/ J. Alan Lindauer Director April 3, 2000
- ------------------------------
J. Alan Lindauer
25
SCHEDULE II
THE NETPLEX GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance at Additions
beginning of charged to Balance at end
period operations Write-offs Other* of period
------------ ---------- ------------ ---------- --------------
Allowance for doubtful accounts
Year Ended:
December 31, 1997 $ 177 $ (26) $ (18) $ - $ 133
============ ========== ============ ========== ==============
December 31, 1998 $ 133 $ 200 $ - $ 256 $ 589
============ ========== ============ ========== ==============
December 31, 1999 $ 589 $ 501 $ (748) $ - $ 342
============ ========== ============ ========== ==============
* Amount represents allowance for bad debts of acquired accounts receivable.
26
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Reports.......................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998........... F-4
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997..................................... F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997............................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997..................................... F-8
Notes to Consolidated Financial Statements............................. F-9
F-1
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
The Netplex Group, Inc.:
We have audited the accompanying consolidated balance sheet of The Netplex
Group, Inc. and subsidiaries (the "Company") as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated balance sheet as
of December 31, 1998 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997, were audited by other auditors whose report dated April 19, 1999 expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Netplex Group,
Inc. and subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
In connection with our audit of the consolidated financial statements referred
to above, we have audited Schedule II - Valuation and Qualifying Accounts, as of
December 31, 1999. In our opinion this schedule presents fairly, in all material
respects, the information required to be set forth therein.
/s/ Grant Thornton LLP
Vienna, Virginia
March 1, 2000 (Except for Note 20, as to which the date is March 30, 2000)
F-2
Independent Auditors' Report
Board of Directors and Stockholders
The Netplex Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Netplex
Group, Inc. and subsidiaries (the "Company") as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement Schedule II - Valuation and
Qualifying Accounts, for each of the years in the two-year period ended December
31, 1998. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Netplex Group,
Inc. and subsidiaries as of December 31, 1998 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
McLean, Virginia
April 19, 1999
F-3
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
Assets 1999 1998
-------------- -------------
Current assets:
Cash and cash equivalents $ 4,220,148 $ 870,465
Accounts receivable, net of allowance for doubtful
accounts of $342,000 and $589,000, respectively 12,513,823 11,654,743
Prepaid expenses and other current assets 923,762 772,242
------------ -----------
Total current assets 17,657,733 13,297,450
Property and equipment, net 1,891,084 1,704,975
Other assets 775,290 213,174
Goodwill and other intangible assets, net 6,092,610 5,435,024
------------ -----------
Total assets $ 26,416,717 $ 20,650,623
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,294,403 $ 2,545,730
Line of credit 5,126,245 4,041,000
Notes payable - 300,000
Accrued expenses and other current liabilities 9,305,229 6,418,326
Capital lease obligation, current portion 107,890 97,315
Deferred revenues 193,262 835,827
------------ -----------
Total current liabilities 18,027,029 14,238,198
Insurance premium obligation 850,000 -
Capital lease obligations long-term, net of current portion 195,504 57,901
------------ -----------
Total liabilities 19,072,533 14,296,099
------------ -----------
Commitments and contingencies
Minority interest in subsidiary 481,877 -
------------ -----------
Stockholders' equity:
Preferred Stock:
Class A Cumulative, $.01 par value, liquidation preference
of $4.00 per share for 1999 and 1998; 2,000,000 shares
authorized, 109,961 and 987,573 shares issued and outstanding
at December 31, 1999 and 1998 respectively 1,099 9,875
Class B, $.01 par value; liquidation preference of $3.50 per share;
1,500,000 shares authorized, 643,770 shares issued and
outstanding at December 31, 1998 - 6,438
Class C Cumulative, $.01 par value; liquidation preference of $3.99
per share; 2,500,000 shares authorized; 1,500,000 share issued and
outstanding at December 31, 1999 and 1998, respectively 15,000 15,000
Common Stock: $.001 par value, 40,000,000 shares authorized,
16,137,250 and 10,204,735 shares issued and outstanding at December
31, 1999 and 1998, respectively 16,137 10,204
Additional paid in capital 21,762,418 13,821,531
Accumulated deficit (14,932,347) (7,508,524)
------------ -----------
Total stockholders' equity 6,862,307 6,354,524
------------ -----------
Total liabilities and stockholders' equity $ 26,416,717 $ 20,650,623
============ ===========
See accompanying notes to consolidated financial statements.
F-4
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Consolidated Statements Of Operations
Years Ended December 31,
1999 1998 1997
------------ ------------ --------------
Revenues
Services $ 70,106,190 $ 55,872,750 $38,394,880
Product 17,679,074 5,406,410 2,073,254
------------ ------------ -----------
87,785,264 61,279,160 40,468,134
Cost of revenues
Services 57,374,354 47,389,309 34,961,418
Product 13,494,978 3,894,760 1,123,736
------------ ------------ -----------
70,869,332 51,284,069 36,085,154
------------ ------------ -----------
Gross profit 16,915,932 9,995,091 4,382,980
Operating expenses
Selling, general and administrative expenses 24,038,665 11,979,941 7,230,246
Restructuring costs - 160,000 -
Acquired in-process technology - 250,000 -
------------ ------------ -----------
Operating expenses 24,038,665 12,389,941 7,230,246
Operating loss (7,122,733) (2,394,850) (2,847,266)
Interest expense, net (384,213) (153,874) (26,337)
------------ ------------ -----------
Loss before income taxes (7,506,946) (2,548,724) (2,873,603)
Provision for income taxes - - -
------------ ------------ -----------
Loss before minority interest (7,506,946) (2,548,724) (2,873,603)
Minority interest 83,123 - -
------------ ------------ -----------
Net loss (7,423,823) (2,548,724) (2,873,603)
Preferred Stock Dividend (500,603) (315,778) (275,625)
------------ ------------ -----------
Loss applicable to common shareholders $ (7,924,426) $ (2,864,502) $(3,149,228)
============ ============ ===========
Basic and diluted loss per common share $ (0.63) $ (0.31) $ (0.46)
============ ============ ===========
Weighted average common shares outstanding
Basic and diluted 12,515,759 9,259,599 6,820,863
============ ============ ===========
See accompanying notes to consolidated financial statements.
F-5
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Class A Cumulative Class B Class C Cumulative
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
------------------- ------------------ ------------------
Shares $ Shares $ Shares $
--------- -------- ---------- ------ ---------- ------
Balance at January 1, 1997 1,750,000 $ 17,500 - $ - - $ -
Net loss - - - - - -
Conversions of Class A Preferred to Common
Stock (687,500) (6,875) - - - -
Exercise of Common Stock warrants - - - - - -
Preferred Stock dividends - - - - - -
Common Stock options granted for services - - - - - -
Common Stock issued for the acquisition of
Onion Peel Solutions, LLC - - - - - -
Exercise of Common Stock options - - - - - -
--------- -------- ---------- ------ -------------------
Balance at December 31, 1997 1,062,500 10,625 - - - -
Net loss - - - - - -
Conversions of Class A Preferred to Common
Stock (141,865) (1,419) - - - -
Dividends paid in kind 66,938 669 - - - -
Preferred Stock dividends - - - - - -
Private placements of Common Stock - - - - - -
Common Stock Additional
------------------ Paid In Accumulated
Shares $ Capital Deficit Total
--------- ------- ---------- ----------- -----------
Balance at January 1, 1997 6,442,903 $ 6,443 $5,301,542 $(2,086,197) $ 3,239,288
Net loss - - - (2,873,603) (2,873,603)
Conversions of Class A Preferred to Common
Stock 687,500 687 6,188 - -
Exercise of Common Stock warrants 225,000 225 537,275 - 537,500
Preferred Stock dividends - - (82,500) - (82,500)
Common Stock options granted for services - - 40,000 - 40,000
Common Stock issued for the acquisition of
Onion Peel Solutions, LLC 80,000 80 399,920 - 400,000
Exercise of Common Stock options 34,967 35 69,982 - 70,017
--------- ------- ---------- ----------- -----------
Balance at December 31, 1997 7,470,370 7,470 6,272,407 (4,959,800) 1,330,702
Net loss - - - (2,548,724) (2,548,724)
Conversions of Class A Preferred to Common
Stock 141,865 142 1,277 - -
Dividends paid in kind - - (669) - -
Preferred Stock dividends - - (304,504) - (304,504)
Private placements of Common Stock 2,123,000 2,123 2,343,440 - 2,345,563
F-6
Class A Cumulative Class B Class C Cumulative
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
--------------------- ------------------- ----------------------
Share $ Shares $ Shares $
---------- --------- --------- --------- ---------- -----------
Private placement of Prepaid Common Stock
purchase warrants - - - - - -
Common Stock issued for the acquisition of ABS - - - - - -
Class B Preferred Stock issued for the
acquisition of AIG - - 643,770 6,438 - -
Private placement of Class C Preferred Stock - - - - 1,500,000 15,000
Exercise of Common Stock options - - - - - -
-------- --------- --------- ------- ---------- --------
Balance at December 31, 1998 987,573 9,875 643,770 6,438 1,500,000 15,000
Net loss - - - - - -
Conversions of Class A Preferred to
Common Stock (877,612) (8,776) - - - -
Preferred Stock dividends - - - - - -
Exercise of Prepaid Common Stock
purchase warrant - - - - - -
Conversion of subordinated debt to Class C
Preferred Stock - - - - - -
Common Stock issued for the acquisition of ABS - - - - - -
Common Stock issued for the acquisition of
Onion Peel Solutions, LLC - - - - - -
Conversion of Class B Preferred Stock to
Common Stock - - (643,770) (6,438) - -
Common Stock issued - - - - - -
Exercise of Common Stock warrants - - - - - -
Exercise of Common Stock options - - - - - -
-------- --------- --------- ------- ---------- --------
Balance December 31, 1999 109,961 $ 1,099 - $ - 1,500,000 $ 15,000
======== ========= ========= ======= ========== ========
Common Stock Additional
-------------------------- Paid In Accumulated
Shares $ Capital Deficit Total
------------ --------- ----------- ------------- ------------
Private placement of Prepaid Common Stock
purchase warrants - - 2,582,490 - 2,582,490
Common Stock issued for the acquisition of ABS 450,000 450 590,175 - 590,625
B Preferred Stock issued for the
acquisition of AIG - - 993,562 - 1,000,000
Private placement of Class C Preferred Stock - - 1,324,457 - 1,339,457
Exercise of Common Stock options 19,500 19 18,896 - 18,915
----------- ------- ----------- ----------- -------------
Balance at December 31, 1998 10,204,735 10,204 13,821,531 (7,508,524) 6,354,524
Net loss - - - (7,423,823) (7,423,823)
Conversions of Class A Preferred to
Common Stock 877,612 873 7,903 - -
Preferred Stock dividends - - (241,478) - (241,478)
Exercise of Prepaid Common Stock
purchase warrant 554,421 555 (555) - -
Conversion of subordinated debt to Class C
Preferred Stock - - 800,000 - 800,000
Common Stock issued for the acquisition of ABS 114,756 115 566,715 - 566,830
Common Stock issued for the acquisition of
Onion Peel Solutions, LLC 297,396 297 (297) - -
Conversion of Class B Preferred Stock to
Common Stock 643,770 648 5,790 - -
Common Stock issued 55,000 55 (55) - -
Exercise of Common Stock warrants 2,093,856 2,094 5,258,008 - 5,260,102
Exercise of Common Stock options 1,295,704 1,296 1,544,856 - 1,546,152
----------- -------- ------------ ------------- -----------
Balance December 31, 1999 16,137,250 $ 16,137 $ 21,762,418 $ (14,932,347) $ 6,862,307
=========== ======== ============ ============= ===========
See accompanying notes to consolidated financial statements.
F-7
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
Years Ended December 31,
1999 1998 1997
--------------- ----------- -------------
Operating activities:
Net loss $ (7,423,823) $ (2,548,724) $ (2,873,603)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment 776,741 578,564 391,091
Amortization of goodwill and other intangibles 1,660,835 505,177 73,122
Write-off of intangibles 1,810,597 - -
Acquired in-process R&D write-off - 250,000 -
Common stock options granted for services - - 40,000
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable (859,080) (5,985,628) 301,321
Prepaid expenses and other current assets (723,200) 32,656 117,712
Accounts payable and accrued expenses 3,548,287 1,441,526 (2,159,896)
Deferred revenue (642,565) 726,628 (219,770)
------------- ------------ -------------
Net cash used in operating activities (1,852,208) (4,999,801) (4,330,023)
------------- ------------ -------------
Investing activities:
Net cash (paid) acquired in acquisitions and earn-outs (2,404,926) (3,339,043) 2,149
Purchases of property and equipment (962,850) (382,779) (105,438)
------------- ------------ -------------
Net cash used in investing activities (3,367,776) (3,721,822) (103,289)
------------- ------------ -------------
Financing activities:
Sale of minority interest in subsidiary 565,000 - -
Issuance of note payable 800,000 - -
Net proceeds from sale of stock - 6,267,510 -
Line of credit advances, net 1,085,245 2,724,700 1,221,300
Proceeds from the exercise of stock options and warrants 6,806,254 18,915 607,517
Payment of Preferred Stock dividends (304,354) - (180,694)
Principal payments on capital lease obligations (92,040) (116,744) (99,945)
Proceeds from (repayment of) note payable (300,000) 300,000 (59,496)
Repayment (issuance) of note receivable - 100,000 (200,000)
Repayment (issuance) of employee notes receivable 9,562 (55,298) (193,464)
------------- ------------ ------------
Net cash provided by financing activities 8,569,667 9,239,083 1,095,218
------------- ------------ ------------
Increase (decrease) in cash and cash equivalents 3,349,683 517,460 (3,338,094)
Cash and cash equivalents at beginning of year 870,465 353,005 3,691,099
------------- ------------ ------------
Cash and cash equivalents at end of year $ 4,220,148 $ 870,465 $ 353,005
============= ============ ============
Supplemental information:
Cash paid during the year for:
Interest $ 601,370 $ 187,201 $ 61,366
============ ============ ============
Income taxes - - -
============ ============ ============
Non-cash financing activity:
Capital lease obligation 240,217 52,732 88,098
============ ============ ============
Conversion of debt to equity 800,000 - -
============ ============ ============
Insurance premium obligation for non-compete agreement 1,275,000 - -
============ ============ ============
Common stock issued for acquisitions and earn-outs $ 566,830 $ 1,591,000 $ 400,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-8
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) The Business And Basis Of Presentation
The Business
------------
The Netplex Group, Inc. ("the Company") was incorporated in 1986 to provide
IT services and solutions. Netplex is an Information Technology (IT)
company that provides the expertise and information systems to link
employees, customers, prospects, suppliers, and manufacturers to help
"network-enable" organizations. The Company re-sells technology products
when necessary to deliver to customers fully integrated system solutions.
The Company also provides certain business services to independent
consultants who become the Company's employees.
Basis of presentation
---------------------
Merger with Netplex
-------------------
On June 7, 1996, the Company (formerly known as "CompLink, Ltd." or
"CompLink") acquired and merged with America's Work Exchange and The
Netplex Group, Inc. (collectively referred to as "Netplex") in a reverse
merger transaction by issuing approximately 3,245,000 shares of Common
Stock, or 50.4 % of the Company's outstanding stock after giving effect for
the merger. The merger agreement also provided for the Company to assume
1,691,000 outstanding Common Stock options of Netplex.
The merger has been accounted for under the purchase method of accounting
as a reverse merger, since the shareholders of Netplex, which have common
control, received the larger of the voting rights of the combined entity.
As a result, Netplex is considered the acquirer for accounting purposes.
The merger resulted in a re-capitalization of the acquirers, so that the
resulting capitalization of the Company after the merger is that of
CompLink's giving effect to the issuance of new shares and elimination of
CompLink's accumulated deficit. In addition, the par value of the Company's
Common Stock was decreased from $0.01 per share to $0.001 per share in
connection with the merger. The assets and liabilities of CompLink were
recorded by the Company at book value, which approximates fair value.
Coincident with the merger the Company's name was changed from CompLink,
Ltd. to The Netplex Group, Inc. and the entity known as The Netplex Group,
Inc. prior to the merger changed its name to Netplex Systems, Inc. Upon
completion of the merger, the Company consisted of Netplex Systems, Inc.;
America's Work Exchange ("AWE"), and its wholly-owned subsidiary, Software
Resources of New Jersey, now known as Contractor's Resources (" CR"), and
The Netplex Group, Inc. (formerly known as CompLink Ltd.) and its wholly-
owned subsidiary, TDS.
(2) Acquisitions
All acquisitions by the Company have been accounted for as purchases. The
purchase prices assigned to the net assets acquired were based on the fair
value of such assets and liabilities at the acquisition dates.
Additionally, the operating results of all acquisitions have been included
in the consolidated financial statements from their effective dates of
acquisition.
Acquisition of Onion Peel Solutions L.L.C.:
-------------------------------------------
On July 1, 1997, the Company acquired all of the outstanding membership
interests of Onion Peel Solutions L.L.C. ("Onion Peel"), a Raleigh, N.C.
based provider of network management solutions, for 80,000 shares of Common
Stock. Additionally, the Company was required to issue 297,396 additional
shares based on the closing price of the Company's Common Stock on December
31, 1998. The additional shares were issued to the seller in February,
1999. Including the value of the additional shares issued, the purchase
price for Onion Peel was $400,000.
F-9
Acquisition of PSS Group, Inc.:
On January 30, 1998, effective January 1, 1998, the Company purchased all of the
stock of The PSS Group, Inc. ("PSS"), a wholly owned subsidiary of Preferred
Systems Solutions, Inc. ("Preferred") for $600,000; $300,000 was paid at closing
and $300,000 on January 15, 1999. The purchase included an earn-out provision
and an employment agreement. PSS was the technical professional staff
augmentation operations and business of Preferred. In January, 1999, the
purchase agreement was amended to eliminate the earn-out provision.
Additionally, Preferred's shareholder agreed not to compete with the Company for
four years and the Company purchased a split dollar life insurance policy on his
life. The policy is payable, in four equal annual payments of $425,000,
beginning January 29, 1999. As of December 31, 1999, $1,275,000 remains due on
the policy and is reflected in accrued expenses and insurance premium obligation
on the balance sheet.
The purchase prices was allocated to the fair value of the assets and
liabilities acquired, as follows:
December 31,
-----------------------------
1999 1998
------------ ------------
Cash $ 148,000 $ 148,000
Accounts receivable 800,000 800,000
Fulfillment database 930,000 930,000
Other assets 122,000 122,000
Less liabilities assumed (1,400,000) (1,400,000)
------------ ------------
Net assets acquired $ 600,000 $ 600,000
============ ============
During the fourth quarter of 1999 the Company contemplated transitioning PSS's
staffing operation into Contractor's Resources and evaluated the future
operations of PSS. As a result of this evaluation the Company wrote off the
goodwill, fulfillment database and the cost of the non-compete agreement. The
total write-off was $1,810,597.
Acquisition of Automated Business Systems of North Carolina, Inc.:
On June 18, 1998, effective July 1, 1998, the Company purchased Automated
Business Systems of North Carolina, Inc. and Kellar Technology Group, Inc.
(Collectively "ABS") for $200,000 and 450,000 shares of Common Stock, valued at
$591,000. The agreement also provides that the former shareholders of ABS will
receive additional consideration, payable 50% in cash and 50% in stock, through
December 31, 2000, if ABS meets certain operating targets. In connection with
the acquisition, the Company has entered into employment agreements with certain
employees of ABS. In December 1999, the contingent earn-out was bought out by a
cash payment and issuance of additional shares.
As of December 31, 1999, the purchase price of ABS is $1,907,000 consisting of
the original consideration of $791,000 and subsequent earn-out payments
consisting of $549,000 and 114,756 shares of Common stock, valued at $567,000.
The purchase price has been allocated as follows:
December 31,
-----------------------------
1999 1998
----------- ----------
Cash $ 205,000 $ 205,000
Accounts receivable 736,000 736,000
Property and equipment 51,000 51,000
Other assets 33,000 33,000
Goodwill 1,794,000 678,000
Less liabilities assumed (912,000) (912,000)
----------- ---------
Net assets acquired $ 1,907,000 $ 791,000
=========== =========
F-10
Acquisition of Applied Intelligence Group, Inc.
- -----------------------------------------------
On October 16, 1998, effective September 1, 1998, the Company purchased the
information technology consulting business of Applied Intelligence Group, Inc.
of Oklahoma City ("AIG"), for $3,000,000 and 643,770 shares of Class B Preferred
Stock ("Preferred Stock") valued at $1,000,000. The Class B Preferred Stock is
convertible into the Company's Common Stock at anytime on a share for share
basis. No dividends are payable on the Preferred Stock. The holders of the
Preferred Stock agreed not to sell or otherwise distribute the Common Stock
underlying the Preferred Stock for one year. The agreement also provides that
AIG will receive additional consideration (the "AIG Earn-out") if AIG meets the
following targets: (i) up to $1.5 million of cash based on net profit, as
defined in the agreement, that AIG generates over the next six quarters and (ii)
up to 643,770 shares of Class B Preferred Stock if AIG achieves approximately $9
million net profits over the next 9 quarters. ViaLink coverted its Class B
Preferred Stock and sold it during 1999 thereby eliminating the additional
potential contingent earn-out shares. In connection with the acquisition, the
Company entered into employment agreements with certain employees of AIG.
As of December 31, 1999, the purchase price of AIG is $4,800,000 consisting of
the original consideration of $4,000,000 and subsequent earn-out payments of
$800,000. The total purchase price has been allocated as follows:
December 31,
------------------------------
1999 1998
----------- -------------
Prepaid and other assets $ 52,000 $ 52,000
Property and equipment 450,000 450,000
Acquired software 850,000 850,000
Assembled workforce 1,000,000 1,000,000
viaLink non-compete agreement 900,000 900,000
Goodwill 1,636,000 836,000
Less: liabilities assumed (338,000) (338,000)
---------- -----------
Net assets acquired 4,550,000 3,750,000
Acquired in process technology 250,000 250,000
----------- -----------
Purchase price $ 4,800,000 $ 4,000,000
=========== ===========
The software, assembled workforce, viaLink non-compete agreement, and goodwill
are being amortized over estimated useful lives of 4, 5, 5, and 7 years,
respectively, using the straight-line method.
The Company has allocated $250,000 of the purchase price to certain in-process
Internet commerce technology that had not achieved technological feasibility as
of the acquisition date. Accordingly, such costs were written off and included
in the statement of operations for 1998.
Acquisition of Dean Liles & Associates, Inc.
- --------------------------------------------
On April 23, 1999, effective April 1, 1999, the Company purchased the assets of
Dean Liles and Associates, Inc, ("DLA") a Dallas, Texas based information
technology strategy consulting practice for $600,000. The seller may be entitled
to additional cash consideration for each of the three years ended March 31
beginning in 2000 if certain performance goals are met. In connection with the
acquisition, the Company has entered into employment agreements with certain
employees of DLA. The acquisition price of $600,000 has been allocated $595,000
to goodwill and $5,000 to Property and Equipment.
The goodwill is being amortized over 5 years using the straight-line method.
Proforma Acquisition Data
- -------------------------
The following supplemental financial information presents the consolidated
results of the Company on a pro forma basis, and the resulting increase in
common shares outstanding, as though the acquisitions of Onion Peel, PSS, ABS,
and AIG had taken place on January 1, 1997. The amounts for the DLA acquisition
were immaterial.
F-11
(Unaudited)
Year Ended December 31,
1998 1997
------------- -------------
Revenue $ 71,424,000 $ 57,382,000
Net loss (817,000) (3,188,000)
Basic and diluted loss per share (0.08) (0.40)
Weighted Average shares outstanding 9,914,000 7,915,000
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchase been
made at the beginning of the period, or the results, which may occur in the
future.
(3) Summary of Significant Accounting Policies
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
The Netplex Group, Inc. and its wholly owned subsidiaries. All significant
inter-company transactions have been eliminated in consolidation.
Revenue Recognition
-------------------
The majority of the Company's revenue is from consulting services
contracts. This revenue is recognized when the services are performed and
the costs are incurred. The Company generally recognizes hardware and
software product revenue, which does not involve significant integration
services, when the products are delivered to the customer site. Revenue on
fixed price contracts for services, or both hardware and significant
integration services is recognized on the percentage of completion basis,
based on the efforts expended method in accordance with SOP 81-1,
"Accounting for Performance of Construction Type and Certain Production
Type Contracts." During 1999 and 1998 the Company recognized $2,287,277 and
$814,841 of revenue under the percentage of completion method. The amount
of revenue that was recognized on the percentage of completion basis for
1997 was immaterial. The Company's systems integration contracts are
typically 3-6 months and are priced either on a time and material ("T&M")
or a fixed price basis. Substantially all of the Company's contracts
through 1997 were T&M. In 1998 the Company proposed more business on a
fixed price basis because it has found it is able to generate higher
margins than under the T&M proposal and pricing method. Revenue for
maintenance contracts is recognized ratably over the service period of the
underlying contract. Deferred revenue represents the unearned portion of
maintenance contracts and amounts billed in advance of work performed, in
accordance with the terms of the contract. The Company records loss
provisions if required for its contracts at the time that such losses are
identified.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with maturity, at date
of purchase, of three months or less to be cash equivalents. Cash
equivalents are comprised of money market accounts, and are stated at cost,
which approximates fair value.
Property and Equipment
----------------------
Property and equipment is recorded at cost. Depreciation and amortization
are provided for using the straight-line method over the estimated useful
lives of the assets, which range from 3 to 5 years. Computer software
developed for internal use is amortized over 4 years in accordance with SOP
98-1 "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use."
Property and equipment under capital leases is amortized using the shorter
of the lease term or the estimated useful life.
Upon sale or retirement of property and equipment, the costs and related
accumulated depreciation are eliminated from the accounts and any gain or
loss on such disposition is reflected in the statement of operations.
Expenditures for repairs and maintenance are charged to operations as
incurred.
F-12
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
-----------------------------------------------------------------------
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less cost to sell.
Goodwill and Other Intangible Assets
------------------------------------
Goodwill, the cost in excess of the fair value of net assets acquired, is
being amortized by the straight-line method, for periods ranging from 5 to
15 years. Management reviews the valuation and amortization period of
goodwill continually. As part of this review, the Company estimates the
value and future benefits of income generated, to determine whether
impairment has occurred.
Other intangible assets resulting from the Company's acquisitions consist
of a fulfillment database, acquired software, an assembled workforce, and a
non-compete agreement. Such assets are being amortized on the straight-line
basis over periods of 4 to 7 years.
Income Taxes
------------
Income taxes are accounted for using the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the
future tax consequences of differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured by applying enacted statutory tax
rates, that are applicable to the future years in which the deferred tax
assets or liabilities are expected to be settled or realized. Any change in
tax rates on deferred tax assets and liabilities is recognized in net
income in the period in which the rate change is enacted.
Earnings (loss) per share
-------------------------
The Company accounts for earnings (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
which requires companies to present basic earnings per share and diluted
earnings per share (EPS). Basic net loss per common share is calculated
using the weighted average number of common shares outstanding during the
periods. Diluted net loss per common share is calculated using the weighted
average number of common shares and dilutive potential common shares
outstanding during the period. For the years ended December 31, 1999, 1998
and 1997, the assumed exercise of the Company's outstanding stock options,
warrants and Convertible Preferred Stock are not included in the
calculation, as the effect would be anti-dilutive.
Stock Options
-------------
The Company accounts for its 1992 Incentive Stock Option plan ("ISO Plan")
and the 1995 Directors' Stock Option plan ("Directors' Plan") in accordance
with the Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), which permits entities to
recognize, as expense over the vesting period, the fair value of all
stock-based awards on the grant date. Alternatively, SFAS No.123 also
allows entities to continue to apply the provisions of APB 25 and provide
pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and in future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion 25
and provide the pro forma disclosure provisions of SFAS No. 123 for the ISO
and Directors' Plans.
The Company's 1995 Consultant's plan ("Consultant's Plan") allows for the
granting of options to organizations and individuals who are not employees
of the Company. The Company accounts for the options granted under this
plan based on the provisions of SFAS No. 123.
Segment Reporting
-----------------
The Company accounts for its segments pursuant to Statement of Financial
Accounting Standards (SFAS No. 131) "Disclosures about Segments of an
Enterprise and Related Information." Operating segments, as defined in SFAS
No. 131, are components of an enterprise for which separate financial
information is available and is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance. The
F-13
financial information is required to be reported on the basis that it is
used internally for evaluating the segment performance. The Company
believes it operates in three segments as defined: e-Information Services,
e-Infrastructure Services, and Contractor's Resources.
Reclassifications
-----------------
Certain 1998 and 1997 amounts have been reclassified to conform to the
current year presentation. The Company also changed its components of cost
of services to include all labor related to direct labor employees and
their attendant fringe benefits. Prior to 1999, non-billable direct labor
related to idle time, training and other activities was included in
operating expense. These changes were made to permit a more direct
reflection upon gross profits of the impact of increasing or decreasing
labor productivity. All prior year's cost of services and operating
expenses have been restated to reflect these changes.
Use of Estimates
----------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
(4) Equity Financing
During 1999, the Company raised additional equity of $800,000 through the
sale of securities, excluding equity securities issued in acquisitions, as
follows:
. On January 28, 1999, the Company issued a subordinated note for
$800,000, at 14% annual interest, through a private placement to an
accredited investor. The note was subordinated to the Company's line of
credit with a bank. On December 15, 1999, the note was exchanged for an
increase in the number of shares that the Company's Class C Cumulative
Convertible Preferred Stock ("Class C Preferred") is convertible into.
See note 12.
During 1998, the Company raised additional equity of $6,267,510, excluding
equity securities issued in acquisitions, as follows:
. In February, 1998, the Company sold for $100,000, 80,000 shares of
unregistered Common Stock plus a warrant to purchase an additional
100,000 shares of Common Stock at $1.20.
. In March 1998 the Company raised $1,457,000 in a private placement
primarily from accredited investors and employees of the Company. The
Company issued 1,457,000 shares of unregistered Common Stock to
purchasers who agreed not to sell or otherwise distribute their shares
for a period of one year. These restricted shares carry registration
rights and were offered at $1.00 per share.
. On April 7, 1998, the Company sold 1,500 units in a private placement
for $1.5 million ($1.2 million after fees and expenses). Each unit sold
consisted of a prepaid Common Stock purchase warrant entitling the
holder to acquire such number of shares of the Company's Common Stock
as is equal to $1,000 divided by an adjustable exercise price and an
incentive warrant to acquire 78,000 shares of Common Stock. The Company
also granted the placement agent a warrant to purchase 39,000 shares of
Common Stock plus a placement fee and a non-accountable expense
allowance equal to 12.53% of the proceeds of the offering. The sale
represents the first half of a transaction that could include the sale
of an additional 1,500 units for $1.5 million at a future date, subject
to the satisfaction of certain conditions (see Note 20).
. In April, 1998, the Company raised $198,000 in two private placements
with accredited investors. The Company issued shares of unregistered
Common Stock to purchasers who agreed not to sell or otherwise
distribute their shares for a period of one year. These restricted
shares carry registration rights and were sold at $1.375 to $1.50 per
share.
. On August 28, 1998, the Company raised $592,000 in a private placement
to accredited investors. The Company issued unregistered shares of
Common Stock to purchasers who agreed not to sell or otherwise
distribute their shares for a period of one year. These restricted
shares carry registration rights and were sold at $1.3125 per share.
F-14
. On September 28, 1998, the Company sold 1,700 units of prepaid Common
Stock purchase warrants in a private placement, totaling $1.5 million
($1.3 million net of expenses). The prepaid warrants are exercisable in
shares of Common Stock of the Company as is computed by dividing
$1,700,000 by 125% of the fixed exercise price of $1.3938, with respect
to any exercise within the first year, and the lower of the fixed
exercise price and a variable exercise price (subject to a floor price
of $1.00), with respect to any exercise after the first year. As part
of this transaction, the Company also issued to the holders, warrants
to purchase 141,667 shares of Common Stock at an exercise price of
$1.3938 per share. In connection with the issuance of these warrants,
the Company issued 50,000 shares of its Common Stock to the placement
agent.
. On September 30, 1998, the Company received $1.5 million ($1.3 million
net of expenses) for 1,500,000 shares of its Class C Preferred and a
warrant to purchase 150,000 shares of its Common Stock, at $1.375 per
share. Additionally, depending on the length of time the Class C
Preferred is outstanding the warrant holder may be entitled to purchase
up to an additional 450,000 shares of Common Stock at $1.375 per share.
In connection with this transaction the placement agent received a
warrant to purchase 250,000 shares of Common Stock at $1.59 per share.
(5) Liquidity
Under its bank line of credit the Company is required to meet certain
financial and other covenants. As of December 31, 1999, the Company was not
in compliance with the covenant that requires it to maintain tangible net
assets of $900,000 through March 30, 2000, and $1,200,000 thereafter. The
bank was notified but did not issue a notice of default. The default was
cured by the influx of cash in January and February 2000 from the exercise
of options and warrants and the Company's tangible net asset position was
further strengthened by two equity financings in March, 2000.
Based on its current operating plan, the Company believes that the net
proceeds from private placements together with cash anticipated to be
provided by operating activities and amounts expected to be available under
its line of credit will be sufficient to meet its anticipated cash needs
for working capital and capital expenditures for at least the next 24
months. If cash generated from operations is insufficient to satisfy the
Company's liquidity requirements, the Company may seek to sell additional
equity or convertible debt securities or obtain additional credit
facilities. However, no assurance can be given that any such additional
sources of financing will be available on acceptable terms or at all. The
sale of additional equity or convertible debt securities could result in
additional dilution to the Company's stockholders. A portion of the
Company's cash may be used for acquisitions or to acquire or invest in
complimentary businesses or products or to obtain the right to use
complementary technologies.
The Company will continue to make significant investments in its technical
workforce, marketing, training and infrastructure to increase productivity,
build its core competency practice unit skill base and product offerings
and foster growth of its operations.
(6) Property and Equipment
Property and equipment consists of the following:
December 31,
---------------------------
1999 1998
----------- -------------
Computer software $ 1,254,686 $ 896,134
Computer and office equipment 1,273,764 1,011,359
Furniture and fixtures 978,911 907,679
Equipment under capital leases 838,870 598,653
Leasehold improvements 132,126 101,682
----------- ------------
4,478,357 3,515,507
Accumulated depreciation and amortization (2,587,273) (1,810,532)
----------- ------------
Property and equipment, net $ 1,891,084 $ 1,704,975
=========== ============
F-15
Computer software at December 31, 1999 and 1998 includes $668,844 and
$407,338 of software that was developed for internal use. Accumulated
depreciation related to this software was $336,000 and $172,000 at December
31, 1999 and 1998, respectively.
Accumulated depreciation and amortization includes $638,639 and $445,344
related to assets under capital leases at December 31, 1999 and 1998,
respectively.
(7) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following:
December 31,
-----------------------------
1999 1998
------------ ------------
Goodwill $ 4,483,798 $ 1,925,917
Acquired database - 930,000
Acquired software 1,254,226 1,254,226
Assembled workforce 1,000,000 1,000,000
Non-Compete 900,000 900,000
------------ -----------
7,638,024 6,010,143
Accumulated amortization (1,545,414) (575,119)
------------ -----------
$ 6,092,610 $ 5,435,024
============ ===========
(8) Accrued Expenses
Accrued expenses consists of the following:
December 31,
-------------------------
1999 1998
----------- -----------
Accrued wages $ 6,009,320 $ 4,150,303
Accrued vacation 386,101 115,912
Accrued commission 599,733 365,958
Accrued payroll taxes 242,872 -
Accrued earn-out 390,042 -
Insurance premium obligation 425,000 -
Accrued project expense 191,310 22,511
Other 1,060,851 1,763,642
----------- -----------
$ 9,305,229 $ 6,418,326
=========== ===========
(9) Line of Credit
The Company has a line of credit agreement with a bank that expires on May
31, 2000. Under the agreement the Company may borrow 80% of eligible
accounts receivable (as defined in the agreement) up to $6,000,000. Amounts
borrowed bear interest at the bank's prime rate plus 3/4%. Outstanding
advances were $5,126,245 and $4,041,000 at December 31, 1999 and 1998,
respectively. The loan is secured by substantially all of the Company's
tangible and intangible assets. The Company is required to meet certain
financial and other covenants. As of December 31, 1999, the Company was not
in compliance with the covenant that requires it to maintain tangible net
assets of $900,000 through March 30, 2000, and $1,200,000 thereafter. The
bank was notified of the violation but did not issue a notice of default.
The default was cured by the influx of cash in January and February 2000
from the exercise of options and warrants and the Company's tangible net
asset position was further strengthened by two equity financings in March,
2000.
F-16
(10) Income Taxes
The reconciliation between the actual income tax expense and income tax
computed by applying the statutory Federal income tax rate to earnings
before provision for income taxes for the year ended December 31, 1999 1998
and 1997 is as follows:
1999 1998 1997
------------- ------------- -------------
Pretax loss $ (7,424,000) $ (2,549,000) $ (2,874,000)
------------- ------------- -------------
Computed Federal income tax benefit at 34% (2,524,000) (867,000) (977,000)
Computed state income taxes, net of Federal benefits (408,000) - -
Permanent differences 1,033,000 291,000 278,000
Change in valuation allowance 1,899,000 576,000 699,000
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December
31, 1999, 1998 and 1997 are presented below:
As of December 31,
----------------------------------------------
1999 1998 1997
------------- ------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 7,690,000 $ 4,272,000 $ 4,010,000
Research and development credit carryforwards 187,000 187,000 187,000
Depreciation and amortization 215,000 - -
Excess tax basis over book of net assets
acquired - 302,000 180,000
Inventory obsolescence reserve 107,000 108,000 56,000
Allowance for doubtful accounts receivable 136,000 146,000 48,000
Accrued liabilities, not presently deductible - - 8,000
------------ ------------ ------------
Total gross deferred tax assets 8,335,000 5,015,000 4,489,000
Less valuation allowance (8,335,000) (5,015,000) (4,489,000)
------------ ------------ ------------
Net deferred tax asset $ - $ - $ -
============ ============ ============
The Company has provided a valuation allowance for all of its deferred tax
assets at December 31, 1999, 1998, and 1997 because the Company could not
conclude that it was more likely than not that it would realize these
assets due principally to the Company's history of losses.
The deferred tax asset related to net operating loss (NOL's) carryforwards
has increased because of the current year tax loss, an adjustment of prior
year NOL to the actual tax return amount, and an adjustment to reflect
Federal and state income tax rates expected to apply in future periods. The
valuation allowance related to the NOL's has also been adjusted
accordingly.
As of December 31, 1999 and 1998, the Company has NOL's for Federal and
state income tax purposes of approximately $19,469,000 and $12,563,000,
respectively which may be applied against future taxable income.
Additionally, the Company has $187,000 of research and development tax
credits ("Credits") available to offset future Federal income taxes. The
NOL's and credits expire primarily in years 2002 through 2019.
Approximately $14,200,000 of the NOL's and the credits are subject to
annual limitations and other conditions. Additionally, they may not be
fully utilized for tax purposes due to the change in ownership resulting
from the Company's merger in 1996 and an additional change in ownership in
1998.
(11) Commitments
Employment Agreements
---------------------
The Company has employment agreements with several key employees. At
December 31, 1999, the Company's annual obligation under the agreements is
approximately $1,367,000 for each of the next three years.
F-17
Lease Obligations
-----------------
The Company leases computer equipment, furniture, vehicles, and office
facilities under long-term lease agreements. The following is a schedule of
future minimum lease payments for capital and non-cancelable operating
leases (with initial terms in excess of one year) as of December 31, 1999:
Capital Operating
Year ending December 31: Leases Leases
------ ------
2000 $ 139,247 $ 1,142,387
2001 117,550 827,834
2002 100,370 710,943
2003 2,412 335,348
2004 - 162,146
Thereafter - -
--------- -----------
Total minimum lease payments 359,579 $ 3,178,658
===========
Less: amount representing interest 56,185
---------
Present value of minimum lease payments 303,394
Less current portion 107,890
---------
$ 195,504
=========
Total rent expense under operating leases was approximately $1,020,000,
$900,000 and $647,000 for the years ended December 31, 1999, 1998, and
1997.
(12) Preferred Stock
On July 29, 1998, the Company increased the number of shares of its
Preferred Stock from 2,000,000 to 6,000,000.
Class A Cumulative Convertible
------------------------------
On September 19, 1996, the Company raised approximately $3,000,000 through
a private placement of units. Each unit consisted of one share of $.01 par
value Class A Cumulative Convertible Preferred Stock (the "Preferred
Stock") and one warrant to purchase one share of the Company's Common Stock
at $2.50 per share.
Each share of Preferred Stock is convertible into one share of Common Stock
at any time, at the discretion of the holder. The Preferred Stock has
cumulative dividend of 10% per annum, payable in either cash or additional
shares of Preferred Stock at the Company's option. Subject to the
conversion rights, the Company may redeem the Preferred Stock at its stated
value plus all accrued and unpaid dividends ($91,479 and $267,004 at
December 31, 1999 and 1998, respectively) upon: (1) registration of the
shares underlying the Preferred Stock, and (2) 30 days written notice given
at any time upon attaining certain per share trading prices and sustaining
such prices for a specified period. The Preferred Stock has a per share
liquidation preference of the greater of: (i) $4 per share plus any accrued
and unpaid dividends, or (ii) the amount that would have been received if
such shares were converted to Common Stock on the business day immediately
prior to liquidation.
Each warrant issued in connection with the private placement became
exercisable on March 19, 1997, and expires on September 19, 2001. The
Company has the right to call the warrants at a redemption price of $.01
per share upon: (1) registration of the shares underlying the warrant, and
(2) 30 days written notice given at any time upon the Common Stock
attaining certain per share trading prices and maintaining such prices for
a specified period.
Class B Convertible
-------------------
During 1999 all shares of the Class B Preferred Stock were converted into
643,770 shares of Common Stock.
F-18
Class C Cumulative Convertible
------------------------------
The Class C Cumulative Convertible Preferred Stock ("Class C Preferred")
has a liquidation preference of $3.99 per share: a dividend rate of 9.99%
per annum that increases to 15% per annum after the date there are no Class
A Cumulative Convertible Preferred Stock issued and outstanding. The Class
C Preferred is convertible at any time, after the earlier of a change in
control of the Company, or five years from the date of issuance. The Class
C Preferred is redeemable at the option of the Company at any time within
five years from the date of issuance. At December 31, 1999 and 1998, the
Class C Preferred is convertible into the number of shares equal to
$2,300,000 and $1,500,000, respectively, plus accrued but unpaid dividends
($150,000 and $37,500 at December 31, 1999 and 1998, respectively), divided
by 25% of the 20 day average trading price of the Common Stock immediately
prior to conversion. The Company has measured the intrinsic value of the
beneficial conversion feature of the Class C Preferred to be $2,300,000 and
$1,500,000 at December 31, 1999 and 1998, respectively. As a result, the
Company will accrete this discount as additional Preferred Stock dividends
over the five years. During 1999 and 1998, the accretion of the discount of
approximately $259,000 and $53,000 was included as additional Preferred
Stock dividends in the Company's EPS calculation.
(13) Common Stock and Warrants
On July 29, 1998, the Company increased the number of shares of its Common
Stock from 20,000,000 to 40,000,000.
Effective April 11, 1996, in connection with the reverse merger of the
Company, it gave its underwriters warrants to purchase 125,000 shares of
the Company's Common Stock, at an exercise price of $3.50 per share,
through April 10, 2001. The fair value of the warrants issued, of
approximately $170,000, had no effect on the Company's equity as a result
of the merger. During 1997 50,000 warrants were exercised.
In connection with the reverse merger of the Company, effective June 7,
1996, the shareholders of Netplex were granted warrants to purchase 150,000
shares of the Company's Common Stock at an exercise price of $2.50 per
share, through June 6, 2001. The fair value of the warrants issued of
approximately $270,000 had no effect on the Company's equity as a result of
the merger.
In connection with the sale of the Class A Convertible Preferred Stock, the
Company gave the underwriters 87,500 units. Each unit consists of an option
to purchase one share of Class A Convertible Preferred Stock at $2.00 per
share and a Common Stock purchase warrant to purchase one share of common
stock at $2.50.
During 1998, the Company issued warrants in connection with several equity
issues. See Note 4, Equity Financing.
The following table sets forth the warrants outstanding and their
weighted-average exercise price:
Shares Price
---------- -------
January 1, 1997 2,295,000 $ 2.66
Issued - -
Exercised - -
Expired - -
---------- -------
December 31, 1997 2,295,000 $ 2.66
Issued 814,102 1.29
Exercised - -
Expired - -
---------- -------
December 31, 1998 3,109,102 $ 2.30
Issued 225,000 3.00
Exercised (2,093,856) 2.52
Expired (45,000) 3.00
---------- -------
December 31, 1999 1,195,246 $ 2.15
========== =======
As of December 31, 1999, 1998 and 1997 all of the warrants were exercisable
and had an average remaining life of 3.5, 3 and 4 years, respectively.
F-19
(14) Stock Options
The Company has three stock option plans.
. The ISO Plan includes both incentive and non-qualified stock options.
The Board of Directors may grant stock options to employees to purchase
up to 4,100,000 shares of the Company's Common Stock. Stock options are
granted with an exercise price equal to the market price on the date of
grant. All stock options expire 10 years from grant date (5 years or
holder's of more than 10% of the voting stock of the Company).
Generally the options vest ratably and become fully exercisable after 3
years but not less than 6 months from the date of grant. At December
31, 1999, approximately 117,000 options are available for grant under
this plan.
. The Directors' Plan authorizes the Board of Directors to grant each
director options to purchase up to 15,000 shares of the Company's
Common Stock, upon election to the Board. Under this plan 300,000
shares of the Company's Common Stock are available. The terms of option
grants for the Directors' Plan are identical to those of the ISO plan,
except that the vesting period for the Directors' Plan is at the
Board's discretion. All options granted under this Plan have contained
two-year vesting periods. At December 31, 1999, 180,000 options are
available for grant under this Plan.
. The Consultant's Plan authorizes the Board of Directors to grant
organizations or individuals, who are not employees of the Company, to
purchase up to 800,000 shares of the Company's Common Stock. The
exercise price, terms of the option grant and vesting period for the
Consultant's Plan are at the Board's discretion. At December 31,1999,
approximately 61,000 options are available for grant under this Plan.
Stock option activity for the Plans during the periods indicated is as
follows:
ISO Plan Directors' Plan Consultants' Plan
------------------------ ---------------------- ------------------------
Wt. Avg. Wt. Avg. Wt. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
----------- --------- ------- ---------- -------- ----------
January 1, 1997 2,412,500 $ 2.86 60,000 $ 3.03 - $ -
Granted 2,363,500 1.29 15,000 2.97 32,000 2.50
Exercised (34,967) 2.00 - - - -
Forfeited/Canceled (2,201,033) 2.78 (15,000) 2.50 - -
Expired (50,000) 4.40 - - - -
----------- --------- ------- ---------- -------- ----------
December 31, 1997 2,490,000 $ 1.45 60,000 $ 3.15 32,000 $ 2.50
Granted 879,150 1.36 30,000 1.28 391,828 0.94
Exercised (19,500) 0.97 - - - -
Forfeited/Canceled (864,450) 2.04 - - - -
Expired - - - - - -
----------- --------- ------- ---------- -------- ----------
December 31, 1998 2,485,200 $ 1.13 90,000 $ 2.53 423,828 $ 1.49
Granted 1,517,750 2.28 37,500 2.85 315,000 1.07
Exercised (831,104) 1.11 - - (464,600) 1.34
Forfeited/Canceled (101,171) 1.89 (7,500) 2.85 - -
Expired - - - - - -
----------- --------- ------- ---------- -------- ----------
December 31, 1999 3,070,675 $ 1.67 120,000 $ 2.61 274,228 $ 1.26
----------- --------- ------- ---------- -------- ----------
ISO Plan
--------
At December 31, 1999, the exercise price for options granted under the ISO
plan was $.94 to $3.38 and the weighted-average remaining contractual life
of those options was 7.9 years. At December 31, 1999, 1998, and
F-20
1997, the number of options exercisable under the ISO Plan was 1,175,898,
936,750 and 545,835, respectively. The weighted-average exercise price of
those options was $1.04, $1.08 and $2.73, respectively.
Directors' Plan
---------------
At December 31, 1999, the exercise price for options granted under the
Directors' Plan was $1.06 to $3.56 and the weighted-average remaining
contractual life of those options was 2.7 years. At December 31, 1999, 1998
and 1997, the number of options exercisable under the Directors' Plan was
75,000, 52,500 and 25,000, respectively. The weighted-average exercise
price of those options was $2.61, $3.17 and $3.55, respectively.
Consultants' Plan
-----------------
At December 31, 1999, the exercise price for all options granted under the
Consultants' Plan was $1.00 to $2.50 and the weighted-average remaining
contractual life of those options was 3.5 years. All options, granted under
the Consultants' Plan, are exercisable at the time of grant. No options
were granted prior to 1997. The weighted-average exercise price of those
options was $1.25, $1.49 and $2.50 at December 31, 1999, 1998 and 1997,
respectively. During 1997, in accordance with SFAS No. 123, the Company
recorded compensation expense of $40,000 for the 32,000 options granted,
based on the value of the services provided. The options granted during
1999 and 1998 were in connection with certain equity issues, and as a
result had no compensation expense.
The Company applies APB Opinion No. 25 in accounting for its ISO and
Directors' Plans and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
1999 1998 1997
-------------- -------------- --------------
Net loss - As reported $ (7,424,000)$ (2,549,000)$ (2,874,000)
============== ============== =============
Net loss - Pro forma $ (10,806,000)$ (3,466,000)$ (4,836,000)
============== ============== =============
Net loss per share - As reported $ (0.63)$ (0.31)$ (0.46)
============== ============== =============
Net loss per share - Pro forma $ (0.86)$ (0.37)$ (0.71)
============== ============== =============
12,516,000 9,260,000 6,821,000
Weighted average shares outstanding ============== ============== =============
The per share weighted average fair value of the ISO on the grant date in
1999, 1998, and 1997 was $2.29, $1.17 and $1.20, respectively using the
Black - Scholes option pricing model with the following weighted average
assumptions:
1999 1998 1997
------------ ------------ ------------
Dividend yield 0.0% 0.0% 0.0%
============ =========== ============
Risk-free interest rate 5.98% 5.36% 6.24%
============ =========== ===========
Expected volatility 167% 106% 103%
=========== =========== ===========
Expected life (years) 7.86 6.75 10.00
============ ============ ============
The per share weighted average fair value of the Directors' Plan options on
the grant date in 1999, 1998 and 1997 was $2.85, $1.02 and $2.76 and
respectively using the Black - Scholes option pricing model with the
following weighted average assumptions:
F-21
1999 1998 1997
------------ ------------ ------------
Dividend yield 0.0% 0.0% 0.0%
============ ============ ============
Risk-free interest rate 6.10% 5.27% 6.97%
============ ============ ============
Expected volatility 167% 106% 103%
============ ============ ============
Expected life (years) 2.72 5.00 10.00
============ ============ ============
(15) Related Party Transactions
The Company paid $45,064 in 1999, $23,756 in 1998 and $28,800 in 1997 for
accounting, tax and consulting services to a CPA firm in which a partner of
the firm is a director of the Company.
In January, 1997, the Company loaned $150,000 to its chief executive
officer for relocation expenses. The loan bears interest at 8% per annum.
The note and accrued interest were paid in full in January 2000.
A Director of the Company is the President and Director of a company that
owns all of the Company's Class C Convertible Preferred Stock (Note 12).
(16) Litigation
From time to time, the Company is subject to litigation in the ordinary
course of business.
On September 4, 1997, Data Systems Analysts, Inc. ("DSA"), a software
design and consulting company, filed a complaint against the Company and
Technology Development Systems, Inc. (TDS), a wholly owned subsidiary of
the Company, alleging copyright infringement and breach of the Company's
agreement with DSA. The Complaint also seeks damages against XcelleNet,
Inc., which the Company has indemnified. The Complaint claims damages in
excess of $300,000 plus punitive damages and attorney fees. The case is
currently in discovery. The Company is vigorously defending against the
action. The nature and amount of damages, if DSA's allegations are proven,
appear uncertain.
The Company is not currently involved in any other litigation or
proceedings, which if decided against the Company would have a material
adverse affect, either individually or in the aggregate.
(17) Employee Benefit Plans
On January 1, 1997, the Company and its CR subsidiary merged their 401(k)
plans. Under the merged Plan, all full time employees with over 1000 hours
of service to the Company or its subsidiaries are eligible to participate.
The Company matches one-half of the employees' voluntary contributions up
to a maximum Company contribution of 5% of participants' salaries. The
Company's contribution to the Plan during 1999, 1998 and 1997 was $405,725,
$704,333 and $647,418, respectively.
The Company's CR subsidiary has a profit sharing plan for its employees
whereby up to 10% of the employees salary can be contributed to the plan.
The Company made no matching contributions to this plan during 1999 1998,
and 1997.
The Company does not provide any post retirement or post employment
benefits.
(18) Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company's reportable segments are
strategic business units that offer different products and services to
different industries through out the United States.
The Company's reportable segments are as follows:
-- e-Information Systems (e-Info)--provides professional services that
constitute the strategic and creative aspects of Netplex's e-solutions,
as well as complete Internet-based application development and Retail
Industry-focused consulting and integration services.
-- e-Infrastructure Services (e-Infra)--provides information security,
performance management, contingency planning, and network management
services that ensure the long-term viability of Netplex's e-solutions,
as well as other aspects of our customers' businesses.
F-22
-- Contractor's Resources (CR)-- provides business infrastructure and
advisory services for its membership of independent contractors, which
allow members to maximize the freedom and wealth potential of the
independent lifestyle while enjoying the benefits associated with full-
time employment.
The Company's accounting policies for these segments are the same as those
described in the summary of Significant Accounting Policies, except that
income tax expense is not allocated to each segment. In addition, the
Company evaluates the performance of its segments and allocates resources
based on gross margin, and earnings before interest, taxes, depreciation
and amortization ("EBITDA"). Intersegment revenues are not significant.
In 1999, the Company restructured its segments by combining all operations
not related to Contractor's Resources into a single profit and loss center,
e-Infrastructure services, except for its operations related to the
acquisition of AIG that now form the e-Information Services segment. The
Company also changed its components of cost of services to include all
labor related to direct labor employees and their attendant fringe
benefits. Prior to 1999, non-billable direct labor related to idle time,
training and other activities was included in operating expense. These
changes were made to permit a more direct reflection upon gross profits of
the impact of increasing or decreasing labor productivity. All prior year's
cost of services and operating expenses have been restated to reflect these
changes.
The reportable segments are measured and resources are allocated both on
income before income taxes and EBITDA, which represents the sum of income
before taxes, depreciation, amortization, and interest. EBITDA is not a
measure of performance or financial condition under generally accepted
accounting principles, but is presented to provide additional information.
The Company considers EBITDA to be a useful measure of the Company's
performance, because EBITDA can be used to measure the Company's ability to
service debt, fund capital expenditures and expand business. EBITDA should
not be considered in isolation or as a substitute for other measures of
financial performance or liquidity under generally accepted accounting
principles. While EBITDA is frequently used as a measure of operations and
the ability to meet debt service requirements, it is not necessarily
comparable to other similarly titled captions of other companies due to the
potential inconsistencies in the method of calculation.
The table below presents information about segments used by the chief
operating decision-maker of Netplex as of and for the years ended December
31, 1999, 1998, and 1997:
F-23
Segment
e-Info e-Infra CR Total
------------- ------------- ------------- -------------
1999:
Revenues $ 11,044,166 $ 38,117,034 $ 38,624,064 $ 87,785,264
Gross profit 5,442,115 10,099,030 1,373,887 16,915,932
EBITDA 2,136,363 2,315,685 (1,713,017) 2,739,031
Total assets 8,220,000 8,709,000 8,949,000 25,878,000
==================================================================================
1998:
Revenues $ 3,533,025 $ 22,865,593 $ 34,880,542 $ 61,279,160
Gross profit 1,690,505 6,979,904 1,324,682 9,995,091
EBITDA 980,679 264,297 180,539 1,425,515
Total assets 8,378,000 6,794,000 4,269,000 19,441,000
==================================================================================
1997:
Revenues $ - $ 8,419,784 $ 32,048,350 $ 40,468,134
Gross profit - 3,286,876 1,096,104 4,382,980
EBITDA - (829,134) (73,016) (902,150)
Total assets - 2,598,000 3,094,000 5,692,000
==================================================================================
Reconciliation of Segment EBITDA to Net Loss
- --------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Segment EBITDA $ 2,739,031 $ 1,425,515 $ (902,150)
Unallocated corporate expenses (5,530,469) (2,736,622) (1,480,453)
Depreciation & amortization (4,248,172) (1,083,741) (464,663)
Interest expense, net (384,213) (153,874) (26,337)
Tax expense - - -
------------- ------------- -------------
Net loss $ (7,423,823) $ (2,548,722) $ (2,873,603)
============= ============= =============
(19) Restructuring Charge
The Company recorded a restructuring charge of $275,000 during the third
quarter of 1998, related to the reduction of duplicate costs and the
consolidation of facilities, including severance costs. The Company
recorded $115,000 during the forth quarter of 1998, as a reduction to the
restructuring charge, resulting from an update of the Company's estimated
restructuring costs.
(20) Subsequent Events
In March 2000, the Company closed two private placement equity financings.
The Company issued prepaid warrants that resulted in net proceeds to the
Company of $1.3 million, representing the second half of an equity raise on
April 7, 1998 discussed in Note 3. In addition, the Company closed the
private placement of Class D convertible preferred stock that resulted in
net proceeds to the Company of $9.5 million.
The following unaudited pro forma consolidated balance sheet sets forth the
Company's financial position as if these two transactions had occurred as
of December 31, 1999:
F-24
December 31,
December 31, Pro Forma 1999
1999 Adjustments Pro Forma
Actual (Unaudited) (Unaudited)
--------------- --------------- ---------------
Assets
------
Cash $ 4,220,148 $ 10,800,000 $ 15,020,148
Other current assets 13,437,585 - 13,437,585
-------------- ------------- -------------
Total current assets 17,657,733 10,800,000 28,457,733
Other assets 2,666,374 - 2,666,374
Goodwill and other intangibles, net 6,092,610 - 6,092,610
-------------- ------------- -------------
Total Assets $ 26,416,717 $ 10,800,000 $ 37,216,717
============= ============= =============
Liabilities & Stockholders' Equity
----------------------------------
Accounts payable $ 3,294,403 - $ 3,294,403
Line of credit 5,126,245 - 5,126,245
Accrued expenses 9,305,229 - 9,305,229
Other current liabilities 301,152 - 301,152
Other liabilities 1,045,504 - 1,045,504
-------------- ------------- -------------
Total liabilities 19,072,533 - 19,072,533
-------------- ------------- -------------
Minority interest 481,877 - 481,877
------------- ------------- -------------
Shareholders' Equity
Preferred stock
Class A 1,099 - 1,099
Class C 15,000 - 15,000
Class D - 100 100
Common stock 16,137 - 16,137
Additional paid in capital 21,762,418 10,799,900 32,562,318
Accumulated deficit (14,932,347) - (14,932,347)
-------------- ------------- -------------
Total shareholders' equity 6,862,307 10,800,000 17,662,307
-------------- ------------- -------------
Total liabilities and stockholders' equity $ 26,416,717 $ 10,800,000 $ 37,216,717
============= ============= =============
F-25