Item 1. Business
Item 2.
Item 2. Properties.
The Company leases approximately 8,000 square feet of space in Reston, VA. for its corporate offices and the operations of some business units. The Company also leases office space in Edmond, Oklahoma. These leases expire on various dates from March 2003 to September 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.
Item 3.
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 Technology Development Systems, Inc. (“TDS”) and the Company, alleging copyright infringement and breach of the Company’s agreement. The Complaint also seeks damages against XcelleNet, Inc., which the Company has indemnified. The Complaint claimed damages in excess of $300,000 plus punitive damages.
In June of 2000, the Company, TDS and XcelleNet, Inc. filed a complex motion for summary judgment, asking the Court to dismiss the majority of DSA’s claims in the case. DSA also filed a motion for summary judgment asking the court to enter judgment in its favor on several of its claims. The district court judge held oral arguments on the counter-motions in January 2001.
In March 2001, the court denied the motion by TDS and XcelleNet in its entirety. It granted plaintiff’s motion for summary judgment on liability and directed that damages be tried to a jury on May 24, 2001.
Prior to the May 24, 2001 trial date and before any motions for reconsideration, the parties mutually agreed to enter into settlement negotiations.
On December 28, 2001 the Company and DSA entered into a settlement agreement for dismissal of the lawsuits, with prejudice whereby the Company agreed to pay DSA $1,400,000 plus transfer its 125,000 shares of Tavve Software Company stock it held for investment purposes. The Company agreed to pay (i) $900,000 on or before December 31, 2001 or $900,000 on or before March 31, 2002 plus interest (prime rate plus 3%) from January 1, 2002, and (ii) $250,000 on each of June 30, 2002 and December 31, 2002. The Company did not pay the amount due on December 31, 2001. Upon the closing of the Offering on or before March 31, 2002, in lieu of the payment terms above, the Company agreed to pay (i) 50% of the cash proceeds after the first $1,000,000 up to a maximum of $700,000 and the difference of such cash proceeds and $900,000 on March 31, 2002 and (ii) $250,000 on each of June 30, 2002 and December 31, 2002. The Company did not pay the amount due on December 31, 2001.
In May 2002, the Company restructured the $1.4 million litigation settlement debt, as follows:
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Payment of $505,000 cash in May 2002;
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Commitment to pay 20% of the proceeds, in excess of $2.0 million, from the sale of the Systems Integration Division of Netplex Systems, Inc. (included in discontinued operations)(the proceeds from the subsequent sale of the Systems Integration Division were less than $2.0 million, see Note 3 to the financial statements); and
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Commitment to pay an additional payment if on or before May 23, 2007, the proceeds received either from the sale of the Company, or the reported market capitalization of the Company for any consecutive five-day period, exceeds $20.0 million, then commensurate with such sale or within thirty days of attaining such market capitalization, as the case may be, Netplex shall pay an amount equal to the lesser of (i) such excess or (ii) $895,000. Since the restructuring, the Company continues to classify $895,000 as a long term debt.
In December 2000, TMP Interactive, Inc. (“Monster.com”) filed suit against the Company alleging that the Company failed to make a quarterly cash payment under its co-branding agreement with Monster.com. The complaint sought a judgment of approximately $464,000. The Company disputed the allegations, denying all
liability and asserted affirmative defenses, including that TMP did not perform the agreement as required. While initial discovery commenced, both parties agreed to stay all further discovery and enter into settlement discussions.
On August 7, 2001, the Company and Monster.com entered into a mutually agreeable settlement whereby the Company would pay Monster.com fees of $230,000 and grant a warrant to purchase 4,000,000 shares of the Company’s common stock at $0.47 per share which is fully exercisable at any time on or before August 7, 2004. In conjunction with this agreement, the Company recorded a selling and general and administrative charge in the three month period ended September 30, 2001 of $590,000. Of this amount, $360,000 was related to the valuation of the warrants granted to Monster.com.
In June 2002, the Company and TMP entered into a Release whereby the Company’s outstanding obligations, including the $110,000 unpaid settlement amount, were released and forever discharged in consideration for a cash payment of $25,000 which the Company paid.
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.
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, 2002.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters.
The Common Stock of the Company is traded on the NASD Over the Counter Bulletin Board (“OTCBB”)
Price Range of Common Stock
The quotations set forth in the table reflect inter-dealer prices from NASD, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions:
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 April 15, 2003 there were approximately 150 holders of record of the Company’s Common Stock. The Company believes that at such date there were in excess of 6,000 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 March 2000, the Company sold 10,000 shares of convertible Series D Preferred Stock that resulted in net proceeds to the Company of $9.4 million. The conversion ratio of the preferred to common was established based on 120% of the weighted average stock price during the thirty trading day period between April 3, 2000 and May 16, 2000, which was $5.87 per share. The Series D Preferred Stock securities purchase agreement’s call option provision, relating to the time the Company must obtain additional financing, was amended effective July 31, 2000. The amendment extended the call option trigger date to October 31, 2000 (previously August 1, 2000). The conversion price of the preferred stock and the exercise price of the related warrants was based upon 120% of the weighted average price of the Company’s Common Stock for 15 consecutive trading days beginning the first day after the holders are entitled to exercise the call option.
On November 10, 2000, the Company entered into an Exchange, Redemption and Conversion Agreement (the “Exchange Agreement”) with the holders of the Company’s Series D Preferred Stock that provided for the following:
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the exchange of $6,177,000 of the original face amount of the Series D Preferred Stock and warrants held by the holders of the Series D Preferred Stock in exchange for the Company’s issuance of $3,000,000 of its new Series E Preferred Stock;
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the waiver by the holders of the Series D Preferred Stock of their right to receive further dividends under the Series D Preferred Stock
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the waiver of certain other rights of the holders of the Series D Preferred Stock, including the right to acquire additional shares of Series D Preferred Stock, the right to require the Company to redeem the Series D Preferred Stock upon the occurrence of certain events beyond the Company’s control, and the waiver of certain anti- dilution rights.
Also, as part of the agreement, the Company redeemed 500 of the remaining 3,823 shares of Series D Preferred Stock at their original face value of $500,000, and sold to the holders of the Series D Preferred Stock 1,000 shares of the Company’s common stock at a price of $0.65625 per share. As a result of that sale, the remaining 3,323 shares of Series D Preferred Stock have an adjusted conversion price of $0.65625. Upon execution of the agreements, the Series D Preferred Stockholders converted 1,178 shares of Series D Preferred Stock into 1,808,473 shares of common stock. The difference between the original face value of the Series D Preferred Stock of $6,177,000 and the face value of the new Series E Preferred Stock of $3,000,000, equaling $3,177,000, was recorded as an addition to Additional Paid in Capital and has been added back in the loss applicable to common shareholders for computing earnings per share. In 2001, the holders converted and additional 821 shares into 1,251,047 shares of common stock. At December 31, 2002, 1,324 shares of Series D Preferred Stock remain outstanding and are convertible into 2,017,523 shares of common stock.
The Series E Preferred Stock has terms similar to the restructured Series D Preferred Stock, with the primary exceptions being that the Series E Preferred Stock was redeemable for $3,000,000 at the Company’s option on or before April 30, 2001, provided that the Company redeemed at least $1,500,000 of such stock on or before January 30, 2001 which the Company did not. The Series E Preferred Stock accrues dividends at the rate of 7% per year. The Series E Preferred Stock is convertible into shares of common stock at a conversion price of $0.47 per share equal to 6,382,979 shares. Pursuant to a related Registration Rights Agreement, the Company registered with the Securities and Exchange Commission the 1,000 additional shares of common stock sold as part of the transaction as well as the shares issuable to the holders of the Series E Preferred Stock upon conversion of that stock to common stock.
On March 29, 2000, the Company sold 1,500 units for $1,000 per unit in a private placement for $1.5 million ($1.3 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. Exemption from registration is claimed under Section 4(2) of the Securities Act because it did not involve a public offering.
During the year ended December 31, 2000, 29,364 shares of Class A Preferred Stock were converted into the same number of shares of Common Stock, respectively. During the years ended December 31, 2001 and 2000, 821 and 1,178 shares of Class D Preferred Stock were converted into 1,251,047 and 1,808,473 shares of Common Stock, respectively and during the year ended December 31, 2000, 6,177 shares of Class D Preferred Stock were converted into 3,000 shares of Class E Preferred Stock. See Note 11 to the financial statements.
On September 28, 2001, the Company entered into an agreement with Waterside whereby
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the Company paid $2,052,780 in the form of $1,000,000 cash and two secured commercial promissory notes in the original principal amounts of $900,000 and $152,780 for:
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Waterside’s surrender to the Company for cancellation 1,500,000 shares of its Class C Preferred Stock;
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Waterside’s guarantee of up to $400,000 of the Company’s subsidiary, Systems, revolving credit facility; and
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Waterside surrendered for cancellation its warrant exercisable for 300,000 shares of the Company’s Common Stock;
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the Company paid $50,000 of closing fees associated with the transaction; and
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Waterside purchased from the Company 1,000 shares of the Company’s subsidiary, Systems, preferred stock for $1,000,000 which is recorded as a minority interest in the balance sheet.
The difference between the original face value (net of transaction fees) of the Series C Preferred Stock of $2,139,000 and the aggregate of the principal value of the note of $900,000 and the $1,000,000 of cash, equaling $239,000, was recorded as an addition to Additional Paid in Capital and has been added back in the loss applicable to common shareholders for computing earnings per share.
The promissory notes bore interest of 10% per annum. The $900,000 note was payable in quarterly installments of $15,000 and the $152,780 note was payable at the earlier of the closing of the Offering or January 1, 2002.
In May 2001, the Company issued 50,000 shares of its common stock to Gruntal & Co. LLC for investment banking advisory services. These shares were valued at $14,500 based upon the current market price at issuance and the shares are unregistered.
In October, 2002, the Company issued 550,000 shares of its common stock to Malmgren & Associates, Ltd. for consulting services. In the three month period ended September 30, 2002, the Company accrued $13,750 of professional fee expense based upon the current market price at issuance and the shares are unregistered. Kurt L. Malmgren Jr., one of the Company’s directors, is the Managing Director and founding principal of Malmgren & Associates, Ltd.
Item 6.
Item 6. Selected Financial Data
(1)
Effective January 1, 1999, the Company’s Member Services segment revenues represent only the fees realized for services rendered to the independent contractor. Prior to that date, revenues included the gross fees charged to the third party customer being serviced by the independent contractor. The Company accounts for revenue generated by the Business Services segment on a gross basis due to the economic risks associated with the transactions.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, including our plans, objectives, expectations and intentions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Additional Factors That May Affect Future Results”, “Business” and elsewhere herein.
The Company has incurred significant losses from operations and has used cash in operations in each of the last five years. In addition, as of December 31, 2002, the Company has a stockholders’ deficit of approximately $4.7 million and a working capital deficit of approximately $4.2 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not contain any adjustments that might result from the outcome of this uncertainty.
Over the past three years, management has undertaken restructuring efforts aimed at, among other things, improving the productivity and billable utilization of its staff and reducing operating expenses. These restructuring efforts have included headcount reductions, consolidation of facilities and management of discretionary expenses. However, these actions were taken in a period where economic conditions in the United States and abroad created downward pressure on spending for information technology initiatives, including demand for the Company’s consulting services. In 2001 and 2002, the Company did experience lower operating losses than those reported in 2000 and a reduction in cash used in operations. However, given the Company’s current operating outlook and continuing economic uncertainty, the Company’s liquidity and financial position are such that additional capital may be needed in the future to sustain operations.
In late 2001, the Company began exploring alternatives to raising additional capital and restructuring its obligations and capital structure. Among the alternatives considered included a rights offering aimed at raising capital through the issuance of additional shares of its Netplex Systems subsidiary (“Offering”). Management chose to not pursue the Offering further, choosing instead to entertain offers for the operations comprising Netplex Systems (either as a whole or in parts). In March 2002, the Company entered into non-binding letter of intent to sell the assets of its retail consulting business. On May 15, 2002, the Company consummated the transaction pursuant to an Asset Purchase Agreement by and between the Company and CGI Information Systems & Management Consultants, Inc. (“CGI”). Under the terms of the Asset Purchase Agreement, CGI has acquired the net assets associated with the Retail Practice Division of Netplex Systems, Inc. as of April 26, 2002 from the Company for $4.3 million in cash. The Company recorded a gain from this sale in the second quarter of 2002 of approximately $1.6 million.
Concurrent with the sale of the net assets of the Retail Practices Division to CGI, the Company entered into a Workout and Collateral Release Agreement with Waterside whereby Waterside:
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agreed to release its security interest in the assets of the Retail Practices Division,
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agreed to exchange 500 shares of Netplex Systems, Inc. Series A Preferred Stock bearing an annual dividend rate of 10% for a Secured Commercial Note for $500,000 from The Netplex Group, Inc. bearing an annual interest rate of 9%,
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agreed to exchange 500 shares of Netplex Systems, Inc. Series A Preferred Stock bearing an annual dividend rate of 10% for 500 shares of The Netplex Group, Inc.’s Preferred Stock bearing an annual dividend rate of 9%, and
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received approximately $341,000 of the sales proceeds to be applied to dividends, principle and interest due associated with the Netplex Systems, Inc. Series A Preferred Stock and notes payable by both Netplex Systems, Inc. and The Netplex Group, Inc.
Upon finalization of the agreements above on September 28, 2002, the Company and Waterside also agreed to the following:
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Waterside’s release of its security interest in Netplex Systems in the event of sale of Netplex Systems or a division thereof,
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Waterside’s subordination of its $900,000 and $500,000 notes to the Company’s bank, and
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the Company’s agreement to pay Waterside $100,000 plus twenty percent (20%) of the cash proceeds from any sale of Netplex Systems or division thereof when received to be applied against the outstanding amounts owed to Waterside.
The Company restructured certain of its obligations and liabilities during the second quarter of 2002 which resulted in an $0.7 million extraordinary gain for the period, net of income taxes. The extraordinary items included the extinguishment of $0.3 million of rent liabilities related to excess office space and the reduction of $0.4 million of obligations associated with the acquisition of the PSS Group, Inc. in 1998. There was no income tax charges associated with these extraordinary gains as they were offset in their entirety by the Company’s net operating losses. Additionally, the Company restructured its $1.4 million litigation settlement debt, $1.1 million of which was currently due and $0.3 million which was payable December 31, 2002, as follows:
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Payment of $505,000 cash in May 2002;
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Commitment to pay 20% of the proceeds, in excess of $2.0 million, from the sale of the Systems Integration Division of Netplex Systems, Inc. (included in discontinued operations); and
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Commitment to pay an additional payment if on or before May 23, 2007, the proceeds received either from the sale of the Company, or the reported market capitalization of the Company for any consecutive five-day period, exceeds $20.0 million, then commensurate with such sale or within thirty days of attaining such market capitalization, as the case may be, Netplex shall pay an amount equal to the lesser of (i) such excess or (ii) $895,000. Since the restructuring, the Company continues to classify $895,000 as a long term debt.
On November 1, 2002, the Company consummated a transaction pursuant to an Asset Purchase Agreement by and between the Company and Waterside. Under the terms of the Asset Purchase Agreement, Waterside has acquired the net assets associated with the Systems Integration Division of Netplex Systems, Inc. as of October 25, 2002 from the Company for Waterside’s cancellation of all debt (inclusive of interest) owed by the Company to Waterside, and consideration for the redemption of all preferred stock (inclusive of dividends) to be issued by the Company to Waterside and waiver and release of any and all claims against the Company by Waterside. The total amount of debt to be cancelled and preferred stock redeemed is $1.7 million. The Company recorded a gain from this debt extinguishment in the fourth quarter of 2002 of approximately $0.5 million.
Management intends to focus on improving the operations by growing both its business to consumer service (“Member Services”) and its business to business service (“Business Services”) offerings. Critical to the success of these operations is the Company’s ability to continue to attract members to the Member Services segment and to grow the Business Services segment by obtaining contracts and master agreements with employers who contract with large numbers of independent consultants. No assurances can be given that the Company will be successful in these efforts.
While the proceeds from the sale of the net assets Retail Practice Division, the relief from the principle and interest payments in connection with the cancellation of debt owed by the Company to Waterside for the sale of the net assets of the Systems Integration Divisions and the restructure of certain of its obligations and liabilities will help to sustain operations, management believes that to sustain operations for the foreseeable future, additional obligations and liabilities will need to be restructured. While management has been involved in discussions relative to such obligations with each respective party, no definitive agreements have been reached at this time and no assurances can be given that these efforts will be successful.
Critical Accounting Policies
Revenue Recognition
The Company derives its revenue primarily from service contracts.
Revenue in the Company’s Member Services segment is recognized as the fees (net revenue) it charges to its members for providing its back office services as these services are provided. Gross billings generated by Member Services segment operations for the years ended December 31, 2002, 2001 and 2000 were $28.1 million, $37.0 million and $42.5 million, respectively.
The Company recognizes revenue in its Business Services segment based on the gross amount billed to the customer derived from the hours worked and the contractual rate applied to those hours. This policy is in accordance with the guidance provided by EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” considering
the Company has credit risk for the gross amounts of each transaction and can assert certain rights over the activities of each consultant.
The Company derived revenue from its discontinued operations from both services contracts and third party hardware and software resale contracts, exclusive of maintenance. Revenue from these operation’s time and materials contracts is recognized as services are performed and costs are incurred. Net revenues exclude reimbursable expenses charged to clients. Revenue for fixed-price contracts for these operations are recognized in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position (“SOP”) 81-1 “Accounting for Performance of Construction -Type and Certain Production-Type Contracts” using the percentage of completion method as costs are incurred and SAB 101, “Revenue Recognition” for all other transactions not covered by SOP 81-1. The Company records loss provisions for its contracts, if required, at the time such losses are identified. Revenue for maintenance contracts is recognized over the term of the arrangements. The Company recognizes software and hardware revenue, in accordance with SOP 97-1, “Software Revenue Recognition”, as products are shipped, provided that collection is determined to be probable and no significant obligations remain.
Management regularly reviews outstanding accounts receivable for collectability and provides for an allowance for doubtful accounts whenever necessary.
Goodwill and Other Intangible Assets
The Company amortized goodwill recognized prior to July 1, 2001, until January 1, 2002. Effective January 1, 2002, in accordance with SFAS 142, the Company discontinued amortization of its goodwill. Under SFAS 142, management is responsible for periodically assessing the carrying value of goodwill for possible impairment. This assessment involves significant judgment and estimates on the part of management about future cash flows which are expected to be generated by the associated reporting unit. The Company has assessed the continuing value of goodwill and determined that goodwill has not suffered any impairment.
Stock-Options
The Company accounts for activity under its stock option plans in accordance with the Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and related interpretations. As permitted by SFAS No. 123, the Company has elected to continue to apply the provisions of ABP Opinion 25 and the pro forma disclosure provisions of SFAS No. 123.
At December 31, 2002, the Company has four stock-based compensation plans which are described more fully in Note 13. The Company accounts for the options granted to consultants under its Consultants’ Plan based upon the provisions of SFAS No. 123. The Company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations, in accounting for its ISO, Directors’ and 2002 Stock Ownership Plans. Accordingly, no stock-based compensation expense has been reflected in net income for such stock option, as all options granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of the grant.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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.
2002 Compared to 2001
Revenue for the year ended December 31, 2002 decreased $0.6 million or 22.2% to $2.2 million, compared to $2.8 million for the same period in 2001. Approximately $0.3 million of the decrease in revenue was attributed to each the Business Services segment and the Member Services segment. This decrease is primarily due to the reduction in billing utilization and billing rates of members as a result of the weakened US economy.
Revenue from consulting service contracts in the Company’s Member Services segment is recognized as the fees (net revenue) the Company charges its members for providing its corporate and back office services as these services are provided. Gross billings, revenue and average fee percentage for the Company’s Member Services Segment for the years ended December 31, 2002 and 2001 is as follows:
The Company believes the weakened U.S. economic conditions commencing in the fourth quarter of 2001 caused many of its customers to reduce its contingent workforce in an effort to avoid or decrease the amount of internal downsizing required. This reduction caused numerous Member Services segment members to seek new assignments which inherently resulted in varying periods of down time and lower billing rates.
Gross profit for the year ended December 31, 2002 decreased $0.2 million or 14.5% to $1.1 million as compared to $1.3 million for the same period in 2001. This decline is primarily attributed to the lower volume of business in the Member Services segment due to a decrease in the number of members with billing activity. The gross profit and gross profit margins by segment were as follows:
Approximately 40% of the gross margin improvement was attributed to lower operating expenses and approximately 60% of the improvement was attributed to improved margins on Business Services segment contracts.
Selling, general and administrative expenses (“SG&A”) include sales and marketing, facility, administration, IT and financial services. SG&A decreased $4.3 million or 53.4% to $3.7 million from $8.0 million for the same period in 2001. Approximately, $0.8 million and $1.5 million of the decrease were attributed to the settlement costs associated with the Monster.com and DSA litigations, $0.3 million was attributable to a decrease in depreciation expense, $0.4 million was attributable to a decrease in professional fees and $1.2 million resulted from staff reductions (23 employees) implemented in 2001.
Interest expense increased $0.1 million to $0.1 million from the previous year. This increase is attributable to the interest on the notes payable to Waterside entered into in the fourth quarter of 2001 See Note 1 to the financial statements.
Income from discontinued operations for the year ended December 31, 2002 was $0.7 million compared to a loss from discontinued operations of $1.3 million for the same period in 2001. See Note 3 to the financial statements for a description of the discontinued operations.
The Company recorded a $2.0 million gain on the sale of the net assets of the discontinued operations of the Retail and Systems Integration Divisions of the Company’s subsidiary, Netplex Systems, Inc. The net assets associated with the Retail Practice Division were sold for $4.3 million in cash and the gain associated with the transaction was approximately $1.6 million. The net assets of the Systems Integration Division were sold in exchange for the cancellation of all debt (inclusive of interest) owed by the Company to Waterside, in consideration for the
redemption of all preferred stock (inclusive of dividends) to be issued by the Company to Waterside and waiver and release of any and all claims against the Company by Waterside. The total amount of debt to be cancelled and preferred stock redeemed is $1.7 million. The Company recorded a gain from this debt extinguishment in the fourth quarter of 2002 of approximately $0.5 million. There was no income tax charges associated with these gains as they were offset in their entirety by the Company’s net operating losses.
No provision for income taxes was required for the year ended December 31, 2002 due to utilization of net operating loss carry forwards generated in previous years. No provision for income taxes was required for the year ended December 31, 2001 due to the generation of net losses.
The Company restructured certain of its obligations and liabilities during the second quarter of 2002 which resulted in an $0.7 million extraordinary gain for the period, net of income taxes. The extraordinary items included the extinguishment of $0.3 million of rent liabilities related to excess office space and the reduction of $0.4 million of obligations associated with the acquisition of the PSS Group, Inc. in 1998. There was no income tax charges associated with these extraordinary gains as they were offset in their entirety by the Company’s net operating losses.
Net income for the year ended December 31, 2002 was $0.7 million compared to a net loss of $8.5 million in the same period of 2001. The components of this change are discussed above.
Preferred stock dividends decreased $0.4 million or 65.6% to $0.2 million, compared to $0.6 million for the same period in 2001. This decrease is attributed to the redemption of the Class C preferred stock. See Note 12 to the financial statements.
2001 Compared to 2000
Revenue for the year ended December 31, 2001 increased $1.3 million or 84.8% to $2.8 million, compared to $1.5 million for the same period in 2000. The Company recognized approximately $1.4 million of revenue in the year ended December 31, 2001 from its Business Services segment introduced in late 2000 which was partially offset by the $0.1 million decrease in its Member Services segment revenue.
Revenue from consulting service contracts in the Company’s Member Services segment is recognized as the fees (net revenue) the Company charges its members for providing its corporate and back office services as these services are provided. Gross billings, revenue and average fee percentage for the Company’s Member Services Segment for the years ended December 31, 2001 and 2000 is as follows:
Gross profit for the year ended December 31, 2001 increased $0.3 million or 31.2% to $1.3 million as compared to $1.0 million for the same period in 2000. This increase was primarily attributed to the $0.2 million gross profit attributed to the Business Services segment introduced in late 2000 The gross profit and gross profit margins by segment were as follows:
Selling, general and administrative expenses (“SG&A”) include sales and marketing, facility, administration, IT and financial services. SG&A decreased $7.0 million or 46.7% to $8.0 million from $15.0 million for the same period in 2000. Of this decrease, approximately, $1.8 million resulted from the reductions in staff (27 employees) primarily from the restructuring in 2000, $1.2 million resulted from the reductions in staff (23 employees) in 2001, $0.7 of rent expense reductions for terminated leases, $1.3 million reduction of marketing costs which includes the
$0.6 million reduction of fees paid to TMP Interactive (monster.com) and $0.9 million reduction in web development costs. These reductions were partially offset by the $0.8 million settlement costs associated with the Monster.com litigation and the $1.5 million settlement costs associated with the DSA litigation (see Note 15 to the financial statements.
Restructuring charges of $1.5 million for the year ended December 31, 2000 were the result of the closing of the Company’s Roseland, New Jersey and Tampa, Florida offices and related payroll, severance, legal expenses. The cost reduction plan was a decision made by management and approved by the board of directors due to insufficient revenue growth, low utilization of technical staff, as well as excess general and administration expenses given the drop in revenue. Under the restructuring plan, thirty-seven employees were terminated, four were from the technical staff, five were from Contractor Resources, and 28 were from sales and corporate administration.
In the year ended December 31, 2001, the Company incurred approximately $489,000 of legal, accounting and printing costs associated with the Offering which contemplated granting at no cost to its security holders, transferable rights to purchase shares of common stock of its wholly owned subsidiary, Systems. The Company expensed these Offering costs in 2001 based upon the Company’s decision to abandon the Offering and sell Systems in a private transaction.
Loss from discontinued operations increased $0.6 million or 83.3% to $1.3 million as compared to $0.7 million for the same period in 2000. See Note 3 to the financial statements for a description of the discontinued operations.
Gain on the disposal of discontinued operations for the year ended December 31, 2000 was $0.5 million. There was no comparable gain in the same period of 2001. See Note 3 to the financial statements for a description of the gain on the disposal of discontinued operations.
No provision for income taxes was required for the year ended December 31, 2001 and 2000 due to the generation of net losses.
Net loss for the year ended December 31, 2001 was $8.5 compared to $15.3 million in the same period of 2000, a decrease in net loss of $6.8 million or 44.6%. The components of this decrease are discussed above.
Preferred stock dividends decreased $0.4 million or 38.4% to $0.7 million, compared to $1.1 million for the same period in 2000. This decrease is attributed to the partial redemption of the Class D preferred stock. See Note 12 to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant losses from operations and has used cash in operations in each of the last five years. In addition, as of December 31, 2002, the Company has a stockholders’ deficit of approximately $4.7 million and a working capital deficit of approximately $4.2 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
At December 31, 2002, the Company had cash and cash equivalents of $1.2 million.
For the year ended December 31, 2002, the Company’s cash decreased by $0.1 million. The $2.8 million loss from continuing operations which was offset by a $1.5 million decrease in accounts payable and accrued expenses and the $4.3 million of cash proceeds from the sale of the net assets of the Retail division of Netplex Systems, Inc.
As of December 31, 2002, the Company does not have a line of credit facility.
The Company made no dividend payments on the Company’s Cumulative Preferred Stock during the year ended December 31, 2002. At December 31, 2002, accrued dividends on the Company’s Class A, Class D and Class E Preferred Stock were approximately $390,000.
On September 28, 2001, the Company entered into an agreement with Waterside whereby:
•
the Company paid $2,052,780 in the form of $1,000,000 cash and two secured commercial promissory notes in the original principal amounts of $900,000 and $152,780 for:
•
Waterside’s surrender to the Company for cancellation 1,500,000 shares of its Class C Preferred Stock;
•
Waterside’s guarantee of up to $400,000 of the Company’s subsidiary, Systems, revolving credit facility; and
•
Waterside surrendered for cancellation its warrant exercisable for 300,000 shares of the Company’s Common Stock;
•
the Company paid $50,000 of closing fees associated with the transaction; and
•
Waterside purchased from the Company 1,000 shares of the Company’s subsidiary, Systems, preferred stock for $1,000,000 which is recorded as a minority interest in the balance sheet.
The difference between the original face value (net of transaction fees) of the Series C Preferred Stock of $2,139,000 and the aggregate of the principal value of the note of $900,000 and the $1,000,000 of cash, equaling $239,000, was recorded as an addition to Additional Paid in Capital and has been added back in the loss applicable to common shareholders for computing earnings per share.
The promissory notes bore interest of 10% per annum. The $900,000 note as payable in quarterly installments of $15,000 and the $152,780 note was payable on January 1, 2002.
Since in the fall of 2000, management instituted several restructuring initiatives aimed at, among other things, improving the productivity and billable utilization of its staff and reducing operating expenses. These restructuring efforts included headcount reductions, consolidation of facilities and management of discretionary expenses. However, these actions were taken in a period where economic conditions in the United States and abroad created downward pressure on spending for information technology initiatives, including demand for the Company’s consulting services. In 2002, the Company did experience lower operating losses than those reported in 2001 and 2000 and a reduction in cash used in operations.
In late 2001, the Company began exploring alternatives to raising additional capital and restructuring its obligations and capital structure. The actions taken by the Company are more fully described in Part I, Company Background and Development, located previously in this document.
Item 7A.
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.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Consolidated Financial Statements listed in the accompanying index to Consolidated Financial Statements on Page herein.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.
The following table lists the names and ages of all of our executive officers and directors and the positions and offices held by each individual:
Gene Zaino has been a director of Netplex since August 1995 and became our Chief Executive Officer and Chairman upon completion of the merger with Netplex in June 1996. From November 1995 through the completion of the merger, Mr. Zaino functioned in the capacity of Chief Executive Officer. Mr. Zaino started his career at KPMG LLP in 1980. He was a founding principal of a subsidiary of Evernet Systems, Inc., which was acquired by Control Data Systems, Inc. in 1993. In January 1994, Mr. Zaino developed the business plan that led to the formation of Netplex. Mr. Zaino is a graduate of the University of Pennsylvania’s Wharton School of Business and is a Certified Public Accountant.
Peter Russo joined Netplex in January, 2000 as our Chief Accounting Officer and was promoted to Chief Financial Officer in October 2000. Mr. Russo was the Executive Vice President and Chief Financial Officer for Template Software, from May 1999 to January 2000, Senior Vice President and Chief Financial Officer at Computer People, Inc. from April 1997 to May 1999, Senior Vice President and Chief Financial and Administrative Officer at TRC Companies, Inc. from June 1993 to April 1997 and Treasurer and Controller at Gerber Scientific, Inc. from May 1990 to June 1993. Prior to that, Mr. Russo spent 11 years with a predecessor to PricewaterhouseCoopers, from 1969 to 1980, the last four years as Senior Audit Manager. Mr. Russo holds a bachelor’s degree in accounting from Niagara University and is a Certified Public Accountant.
Richard Goldstein has served as a director of Netplex since July 1996. Mr. Goldstein has been a Partner of Tardino Tocci Goldstein L.L.P., a New York City-based C.P.A. firm since 1992. Prior to 1992, Mr. Goldstein was a Tax Partner with KPMG LLP. Mr. Goldstein holds a Bachelor of Business Administration in Accounting and Master of Business Administration in Taxation from the City University of New York and is a Certified Public Accountant.
Steven Hanau became a director of Netplex in July 1998. Mr. Hanau became the President of DigitalNet, Inc. Government Services in September 2002. From February 2002 through September 2002, Mr. Hanau was a consultant to DigitalNet, Inc. Mr. Hanau served as Senior Vice-President, Marketplace Services for Commerce One from September 2000 to January 2002. Mr. Hanau served as Senior Vice-President of e-Business Outsourcing for AppNet from April 2000 to August 2000. Mr. Hanau served as President of Enterprise Services at Wang Global since August 1996. Prior to 1996, Mr. Hanau spent eight years at I-NET, becoming its President of Enterprise Services until Wang Global acquired I-NET. Mr. Hanau spent twenty two years in the U.S. Army, holding high level positions within the Army Chief of Staff and the Office of the Secretary of Defense. Mr. Hanau holds a degree from the United States Military Academy and earned advanced degrees in operations research from Stanford University and in business administration from Long Island University.
Kurt L. Malmgren became a director of Netplex in May 2002. He is a Certified Management Consultant. Kurt L. Malmgren Jr. has been Managing Director and founding principal of Malmgren & Associates, Ltd., a specialty corporate finance, consulting, and investment-banking firm serving the middle market since July 1996. Prior to 1996, Mr. Malmgren served eight years as Managing Director and principal of International Financial Resources, Ltd., a financial consultancy focused on operating, administering, and financing middle market businesses. Prior to 1988, Mr. Malmgren served in management and senior operational roles with Dictaphone Corporation, Figgie Acceptance, and James River Acceptance. Mr. Malmgren attended The American University in Washington, D.C. from 1978 to 1980 with a concentration in International Business and then attended the E. Claiborne Robins School
of Business at the University of Richmond where he received a Bachelor of Science degree in Business Administration with a concentration in Finance and Economics in 1982. Mr. Malmgren has postgraduate education in Real Estate, Tax, and Law.
Board Composition. Our amended Certificate of Incorporation currently authorizes six (6) directors. Our Board of Directors currently consists of five (5) members. Our amended Certificate of Incorporation provides that our board of directors will be divided into three classes, Class I, Class II, and Class III, with each class serving staggered three-year terms. The terms of all of the directors have expired and they are serving until they or their successors are elected. Each will be designated as the nominees for the directors to be elected at the next shareholder meeting of the Company. Kurt Malmgren and Richard Goldstein will be nominated as Class I directors, and if elected will hold office until the 2003 annual meeting of shareholders. Peter Russo and Steven Hanau will be nominated as Class II directors and if elected will hold office 2004. Gene Zaino will be nominated as a Class III director, and if elected, will hold office until 2005. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This staggered classification of the board of directors may have the effect of delaying or preventing changes in control or management.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities, file with the Securities and Exchange Commission (the “Commission”) initial reports of ownership and reports of change in ownership of Common Stock of the Company. The same persons are also required by Commission regulation to furnish the Company with copies of all Section 16(a) forms that they file.
To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, and written representations that no other reports were required during the fiscal year ended December 31, 2002, compliance was made with all Section 16(a) filing requirements applicable to the Company’s executive officers, directors and persons who own more than 10% of a registered class of the Company’s equity securities.
Item 11.
Item 11. Executive Compensation.
The following table sets forth, for the fiscal years indicated, all compensation the Company paid to Gene Zaino, Chief Executive Officer and Peter J. Russo, Chief Financial Officer. The Company had no other executive officers, whose salary and bonus exceeded $100,000 for the year ended December 31, 2002.
Summary Compensation Table
(1)
Mr. Zaino is employed under an employment agreement through May 2003 pursuant to which he is currently paid a base salary of $275,000 per annum. Effective August 6, 2001, Mr. Zaino elected to participate in The Netplex Group, Inc. Employee Deferred Compensation Plan (“Deferred Compensation Plan”), deferring annual compensation of $125,000. For the years ended December 31, 2002 and 2001, Mr. Zaino deferred $93,750 and $48,077, respectively, under this plan. In October 2002, the Company issued 2,764,423 shares of common stock to The Netplex Group, Inc. Employee Deferred Compensation Trust for Mr. Zaino’s deferred compensation from the inception of the plan through September 30, 2002. In response to the Company’s negative cash flow, as of October 1, 2002, Mr. Zaino ceased his participation in the Deferred Compensation
Plan and instead, took a salary reduction equal to his salary deferral. The amount of salary reduction in 2002 was $31,250. In 2002, the Compensation Committee granted Mr. Zaino 1,600,000 shares of Common Stock with a fair market value of $0.025 per share. Additionally, pursuant to his employment agreement, Mr. Zaino may also receive an annual bonus at the sole discretion of the Board, based upon the financial and operating performance of the Company. The Company did not accrue any incentive compensation in 2002 or 2001 on behalf of Mr. Zaino. In addition, pursuant to his employment agreement, Mr. Zaino is entitled to receive 12 months base pay upon change of control.
(2)
Mr. Russo is employed under an employment agreement through May 2003 pursuant to which he is currently paid a base salary of $200,000 per annum. Effective August 6, 2001, Mr. Russo elected to participate in The Netplex Group, Inc. Employee Deferred Compensation Plan, deferring annual compensation of $50,000. For the years ended December 31, 2002 and 2001, Mr. Russo deferred $37,500 and $19,231, respectively, under this plan. In response to the Company’s negative cash flow, as of October 1, 2002, Mr. Russo ceased his participation in the Deferred Compensation Plan and instead, took a salary reduction equal to his salary deferral. The amount of salary reduction in 2002 was $12,500. In October 2002, the Company issued 1,105,770 shares of common stock to The Netplex Group, Inc. Employee Deferred Compensation Trust for Mr. Russo’s deferred compensation from the inception of the plan through September 30, 2002. In 2002, the Compensation Committee granted Mr. Russo 900,000 shares of Common Stock with a fair market value of $0.025 per share. Mr. Russo is also entitled to receive an annual bonus based on the financial and operating performance of the Company. The Company did not accrue any incentive compensation in 2002 or 2001 on behalf of Mr. Russo. In addition, pursuant to his employment agreement, Mr. Russo is entitled to receive 12 months base pay upon change of control.
(3)
Aggregated Option Exercises and Fiscal Year-end Option Values. Mr. Zaino and Mr. Russo relinquished 1,222,500 and 200,000 stock options, respectively in September 2002, and have no outstanding, unexercised options as of December 31, 2002.
Compensation of Directors. Effective September 2002, the Board of Directors agreed to compensate each outside director at the rate of $1,000 per meeting attended. Historically; directors were not paid to attend meetings; however, each director receives options to purchase 15,000 shares of common stock when he or she is first elected to the Board and is eligible for further awards subject to the stock option plan established for the directors. To date, options to purchase 285,000 shares at exercise prices ranging from $0.47 to $3.56 per share have been granted to directors. In September 2002, the directors relinquished options to purchase 247,500 common shares to the Company. In February 2000, each outside director received a cash bonus of $10,000 and in September 2002, the outside directors were granted 700,000 shares of common stock in aggregate, at a fair market value of $0.025 per share.
Report Of The Compensation Committee
Overall Policy. The Board of Directors of the Company establishes the overall goals and objectives of the Company and the policies to be followed in pursuing those goals and objectives, including the selection of necessary key management personnel, and auditing the performance of those personnel. The major responsibility for assisting in satisfying the compensatory aspect of the overall supervisory duty of the Board rests with the Compensation Committee. The membership of the Compensation Committee (collectively the “Committee”) is composed of independent non-employee directors who do not participate in any executive compensation plan. In order to achieve the overall goals and objectives of the Company, and recognizing the interest of the shareholders in that achievement, the Committee has developed and maintains an executive compensation policy based on a philosophy that links executive compensation to individual and corporate performance, and return to shareholders. This policy enables the Company to attract and retain highly motivated executive personnel of outstanding ability and initiative, and creates an identity of interests between executives and the Company’s shareholders. The Company’s executive compensation plan consists of basic cash compensation, the opportunity for annual cash incentive compensation, based on individual and corporate performance, and continuing stock-based compensation, geared to corporate performance. The Committee administers the Company’s cash incentive compensation policy and also comprises the Company’s Stock Option Committee, which administers the provisions of the stock-based compensation plan. The Committee takes various factors into consideration when establishing and reviewing executive compensation. There follows an explanation of general principles governing basic cash compensation, annual cash incentive compensation, stock-based incentive compensation and the factors considered in establishing basic cash compensation for 2002.
Basic Cash Compensation. The Committee, in determining basic cash compensation of the executive officers of the Company, considers corporate profitability, financial condition and the planned compensation budget for the Company. The Committee also considers the performance and compensation levels of other companies as more fully set forth under the caption “2002 Compensation”. The Committee does not consider these factors by any formula and does not assign specific weight to any given factor. Instead, the Committee applies its collective business judgment to reach a consensus on compensation fair to the Company, its shareholders and its executive officers. Under an executive employment agreement, the basic cash compensation of Mr. Zaino and Mr. Russo is no less than $275,000 and $200,000 per year, respectively.
Annual Cash Incentive Compensation. In addition to basic cash compensation, the Committee, has developed an informal annual cash incentive compensation policy, which is based on corporate profitability, financial condition, the planned compensation budget for the Company and subjective appraisal by the Committee, with the advice of the President, of the executive officer’s performance. The Committee does not consider these factors by any formula and does not assign specific weight to any given factor. Instead, the Committee applies its collective business judgment to reach a consensus on incentive compensation that is fair to the Company, its shareholders and its executive officers. The two current executive officers of the Company are considered by the Committee to have responsibilities that directly affect corporate performance and profitability and, accordingly, are currently eligible to receive cash incentive compensation. Specific awards are chosen annually by the Committee. In the years ended December 31, 2001, 2000 and 1999, the Committee has not awarded cash incentive compensation. The Committee also evaluates the appropriateness of issuing common stock in lieu of cash incentive compensation. In the year ended December 31, 2002, the Committee awarded common stock to the executive officers, the fair market value of which will be reflected in the Table under the caption “All Other Compensation.”
Stock-Based Incentive Compensation. The 1992 Incentive and Nonqualified Stock Option Plan was designed to create a common interest between key employees, including executive officers, and shareholders on a long-term basis. Its purpose was to encourage participants to maintain and increase their proprietary interests as shareholders in the Company and to benefit from the long-term performance of the Company. The Committee believes that a close linking of shareholder and key employee interests through the grant of stock options is important to the continuing success of the Company because stock options have no realizable value unless the price of the Common Stock increases. The exercise price of the stock options equals the market price of the Common Stock on the date of grant and the options have a ten year life. The Plan is administered by the Committee. The Committee employs the same principles with respect to stock-based incentive compensation as it does with respect to grants of cash incentive compensation.
Deferred Compensation. The Netplex Group, Inc. Employee Deferred Compensation Plan (the “Plan”) was adopted by the Board of Directors on August 6, 2001. The Plan is designed to create a common interest between key employees, including executive officers, who have the capacity to make substantial contributions to the success of the Company. Its purpose is to encourage participants to maintain and increase their proprietary interests as shareholders in the Company and to benefit from the long-term performance of the Company by deferring a percentage of their compensation into their benefit accounts on a non-elective basis, periodically as earned. Each of the participants’ deferred compensation is converted to share units at a ratio determined by the plan administrator. In 2002, the Compensation Committee approved an amendment to the Plan to provide the Company the option to pay the deferred compensation earned by the participant prospectively in cash.
2002 Compensation. The Committee, in determining the 2002 basic cash compensation of the executive officers of the Company, considered the factors described in this Report. Gene Zaino is Chairman of the Board and Chief Executive Officer of the Company and Peter Russo is Chief Financial Officer and Executive Vice-President of the Company. As such, Mr. Zaino and Mr. Russo have the ultimate management responsibility for the strategic direction, performance, operating results and financial condition of the Company, and the execution of corporate policies and procedures. Pursuant to their respective employment agreements, Mr. Zaino and Mr. Russo receive a base salary of $275,000 and $200,000, respectively. The Committee awarded Mr. Zaino and Mr. Russo 1,600,000 and 900,000 shares of Common Stock at a fair market value of $0.025 as incentive compensation in 2002. Mr. Zaino and Mr. Russo deferred annual compensation of $125,000 and $50,000, respectively, on a non-elective basis.
/s/ THE COMPENSATION COMMITTEE
Steven Hanau
Richard Goldstein
Performance Graph
[GRAPHIC APPEARS HERE]
The above graph demonstrates a comparison of cumulative total returns based upon an initial investment of $100.00 in the Company’s Common Stock as compared with the Russell 2000 Index (with dividends reinvested) and the Nasdaq Stock Market-U.S. Index. The stock price performance shown on the graph is not necessarily indicative of future price performance and only reflects the Company’s relative stock price on December 31, 1997, December 31, 1998, December 31, 1999, December 31, 2000, December 29, 2001 and December 2002.
THE INFORMATION CONTAINED IN THE STOCK PERFORMANCE GRAPH SHALL NOT BE DEEMED TO BE ‘SOLICITING MATERIAL’ OR TO BE FILED WITH THE SEC, NOR SHALL SUCH INFORMATION BE INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER THE SECURITIES ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES IT BY REFERENCE INTO SUCH FILING.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information concerning ownership of the Company’s Common Stock, as of March 1, 2003, by each person known by the Company to be the beneficial owner of more than five percent of the Common Stock, each director, each nominee for Director, each executive officer, and by all directors and executive officers of the Company as a group.
*
Less than 1%.
**
Each of the executive officers and directors use 1800 Robert Fulton Drive, Second Floor, Reston, VA 20191 as their address for the purposes of this report.
(1)
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and, unless otherwise indicated, includes sole voting and investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for computing the percentage of the outstanding Common Stock beneficially owned by the person holding such options or warrants but are not deemed outstanding for computing the percentage beneficially owned by any other person. Based solely on a review of Schedules 13G and 13D that have been filed and
delivered to the Company, the Company is not aware of any 5% beneficial holders of its Common Stock, other than the persons specified in the table above.
(2)
Consists of 3,368,230 shares of Common Stock owned and 2,764,423 shares of Common Stock held in the Netplex Group, Inc. Employee Deferred Compensation Trust for the benefit of Mr. Zaino.
(3)
Consists of 1,359,655 shares of Common Stock owned and 1,105,770 shares of Common Stock held in the Netplex Group, Inc. Employee Deferred Compensation Trust for the benefit of Mr. Russo.
Item 13.
Item 13. Certain Relationships and Related Transactions.
In January 1997 the Company loaned $150,000 to Mr. Zaino, 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 from November 1998 until April 2002 was the President, Chief Executive Officer and Director of Waterside, the holder of the Company’s Class C preferred shares. The following were the transactions by and between the Company and Waterside during the director’s service on the Company’s Board of Directors:
On September 28, 2001, the Company entered into an agreement with Waterside whereby:
•
the Company paid $2,052,780 in the form of $1,000,000 cash and two secured commercial promissory notes in the original principal amounts of $900,000 and $152,780 for:
•
Waterside’s surrender to the Company for cancellation, 1,500,000 shares of its Class C Preferred Stock;
•
Waterside’s guarantee of up to $400,000 of the Company’s subsidiary, Systems, revolving credit facility; and
•
Waterside surrendered for cancellation, its warrant exercisable for 300,000 shares of the Company’s Common Stock;
•
the Company paid $50,000 of closing fees associated with the transaction; and
•
Waterside purchased from the Company 1,000 shares of the Company’s subsidiary, Systems, preferred stock for $1,000,000 which is recorded as a minority interest in the balance sheet.
The promissory notes bore interest of 10% per annum. The $900,000 note was payable in quarterly installments of $15,000 and the $152,780 note was payable at the earlier of the closing of the Offering or January 1, 2002.
The Director’s resignation was not the result of any disagreement related to the Company’s operations, policies or practices.
The Company paid approximately $15,000, $3,000 and $18,000 in 2002, 2001 and 2000, respectively for accounting, tax and consulting services to an accounting firm, in which Mr. Goldstein, a director of the Company, is a partner. The Company has a recorded liability for amounts owed to the accounting firm of $50,000.
The Company paid approximately $59,000 and $32,000 in 2002 and 2001, respectively for the professional services related to the restructuring of the Company’s debt to a management consulting firm in which the founding principal and managing director of the firm is a director of the Company. Included in the current year amount paid is the cost to issue 550,000 shares of the Company’s common stock to the management consulting firm for services performed. The Company recorded an expense of $13,750 related to this stock payment. The Company has a recorded liability for amounts owed the management consulting firm of $238,000.
Item 14.
Item 14. Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the rules of the SEC. Within 90 days prior to the filing of this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the design and operation of these disclosure controls and procedures pursuant to the Exchange Act Rule 13a-14. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting then in as timely manner to material information relating to the Company required to be included in our periodic SEC filings. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls after the date of our most recent evaluation.
PART IV
Item 15.
Item 15. Exhibits and Reports on Form 8-K.
(a)
1. Financial Statements and Schedules. The following financial statements are included herein:
Page
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
The following consolidated financial statement schedule of the Company for each of the years ended December 31, 2002, 2001 and 2000 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 I - 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./1/
2.2
Asset Purchase Agreement, by and between CGI Information Systems Management Consultants, Inc. and Netplex Systems, Inc., dated May 15, 2002./2/
2.3
Asset Purchase Agreement, by and between Waterside Capital Corporation, The Netplex Group, Inc. and Netplex Systems, Inc., dated November 1, 2002./3/
3.1
Bylaws./4/
3.2
Amended and Restated Certificate of Incorporation./4/
3.3
Amendment to the Amended and Restated Certificate of Incorporation./1/
3.4
Amendment to the Amended and Restated Certificate of Incorporation./5/
3.5
Amendment to the Amended and Restated Certificate of Incorporation./6/
3.6
Amendment to the Amended and Restated Certificate of Incorporation./7/
3.7
Certificate of Amendment of the Certificate of Incorporation of Netplex Systems, Inc./8/
4.1
Form of Prepaid Warrant issued to Purchasers in April 1998 Private Placement./9/
4.2
Form of Incentive Warrant issued to Purchasers in April 1998 Private Placement./9/
4.3
Placement Agency Agreement dated September 25, 1998./5/
4.4
Incentive Stock Purchase Warrant dated September 28, 1998./5/
4.5
Prepaid Common Stock Warrant dated September 28, 1998./5/
4.6
Registration Rights Agreement between Netplex and the Initial Investors dated September 28, 1998./5/
4.7
Securities Purchase Agreement dated September 25, 1998./5/
Exhibit
Number
Description of Document
4.8
Securities Purchase Agreement, dated as of March 28, 2000, by and among Netplex and the Buyers./6/
4.9
Form of Warrant Agreement, dated as of March , 2000, by and between Netplex and each of the Buyers./6/
4.10
Registration Rights Agreement, dated as of March 28, 2000, by and among Netplex and the Buyers./6/
4.11
Form of Prepaid Common Stock Purchase Warrant, dated March , 2000 by and between Netplex and each of the Holders./6/
4.12
Form of The Netplex Group, Inc. Incentive Stock Purchase Warrant, dated as of March , 2000, by and between Netplex and each of the Holders./6/
4.13
Amendment #1 to Securities Purchase Agreement Dated March 28, 2000 By and among The Netplex Group, Inc., HFTP Investment L.L.C., Wingate Capital Ltd., and Fisher Capital Ltd. dated and effective July 31, 2000./10
4.14
Warrant issued to Pennsylvania Merchants Group for the right to purchase 500,000 shares of common stock, dated December 12, 2000./11/
4.15
Registration Rights Agreement between Netplex Systems, Inc. and Waterside Capital Corporation dated September 28, 2001./8/
4.16
Investor Rights Agreement and Amended and Restated Investor Rights Agreement between Netplex Systems, Inc. and Waterside Capital Corporation dated September 30, 2001./8/
4.17
Workout and Collateral Release Agreement, by and among Netplex Systems, Inc, The Netplex Group, Inc. and Waterside Capital Corporation dated May 15, 2002./2/
4.18
Addendum to the Workout and Collateral Release Agreement, by and among Netplex Systems, Inc., The Netplex Group, Inc. and Waterside Capital Corporation dated September 23, 2002./12/
4.19
Stipulation of Settlement by and among TMP Interactive Inc. and The Netplex Group, Inc. dated August 7, 2001./13/
10.1
1992 Incentive and Non-Qualified Stock Option Plan./14/
10.2
Amendment to 1992 Incentive and Non-Qualified Stock Option Plan./15/
10.3
1995 Directors Stock Option Plan./14/
10.4
1995 Consultant’s Stock Option Plan./14/
10.5
The Netplex Group, Inc. 2002 Stock Ownership Plan./17/
10.6
Form of Indemnification Agreement between the Officers and Directors of Netplex and Netplex (with schedule attached)./16/
10.7
Employment Agreement between Netplex and Gene Zaino./17/
10.8
Employment Agreement between Netplex and Peter Russo./17/
10.9
Release of Guaranty, by and between American Commercial Finance Corporation and Waterside Capital Corporation, dated May 15, 2002./17/
10.10
Master Agreement between The Netplex Group, Inc., Netplex Systems, Inc. and Waterside Capital Corporation dated September 28, 2001./8/
10.12
Secured Commercial Note for $900,000 by and among The Netplex Group, Inc. and Waterside Capital Corporation dated September 28, 2001./8/
10.13
Secured Commercial Note for $154,697.45 by and among The Netplex Group, Inc. and Waterside Capital Corporation dated September 28, 2001./8/
10.14
Security Agreement (Preferred Stock and Credit Guaranty) between Netplex Systems, Inc. and Waterside Capital Corporation dated September 28, 2001./8/
10.15
Security Agreement ($900,000 and $154,697.45 Commercial Notes) between Netplex Systems, Inc. and Waterside Capital Corporation dated September 28, 2001./8/
10.16
First Amendment to Secured Commercial Note for $900,000, by and among The Netplex Group, Inc. and Waterside Capital Corporation dated May 15, 2002./12/
10.17
Secured Commercial Note for $500,000, by and among The Netplex Group, Inc. and Waterside Capital Corporation dated May 15, 2002./12/
10.18
Surrender and Acceptance Agreement, by and between The Netplex Group, Inc. and Roseland II LLC, dated May 15, 2002./17/
10.19
The Netplex Group, Inc. Employee Deferred Compensation Plan./13/
Exhibit Number
Description of Document
10.20
Amended and Restated The Netplex Group, Inc. Deferred Compensation Plan./12/
10.21
Settlement Agreement and Release by and among Data Systems Analysts, Inc. and The Netplex Group, Inc. and Technology Development Systems, Inc. dated December 28, 2001. /13/
10.22
Amendment to Settlement Agreement and Release, by and between Data Systems Analysts, Inc. and The Netplex Group, Inc. and Technology Developments Systems, Inc., dated May 23, 2002./17/
10.23
Settlement Agreement, by and between Robert J. Hisel, Jr., Preferred Systems Solutions, Inc. and The Netplex Group, Inc., dated May 22, 2002./17/
Subsidiaries of the Netplex Group, Inc.
Consent of Grant Thornton, LLP.
99.1
Written Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 filed on March 31, 1997 (Commission File No. 33-57546).
Incorporated by reference to the Company’s Current Report on Form 8- K filed on May 30, 2002 (Commission File No. 001-11784).
Incorporated by reference to the Company’s Current Report on Form 8- K filed on November 12, 2002 (Commission File No. 001-11784).
Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on January 29, 1993 (Commission File No. 33-57546).
Incorporated by reference to the Company’s Registration Statement on Form S-3 filed on November 13, 1998 (Commission File No. 333-67321).
Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 3, 2000 (Commission File No. 1-11784).
Incorporated by reference to the Company’s Current Report on Form 8- K filed on November 13, 2000 (Commission File No. 001-11784).
Incorporated by reference to the Company’s Quarterly Report on Form 10- Q for the quarterly period ended September 30, 2001 filed on November 14, 2001. (Commission File No. 001-11784)
Incorporated by reference to the Company’s Annual Report on Form 10- K for the year ended December 31, 1997 filed on April 15, 1998. (Commission File No. 001-11784).
Incorporated by reference to the Company’s Registration Statement on Form S-1 filed on August 8, 2000 (Commission File No. 333-36572).
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 filed on March 30, 2001 (Commission File No. 001-11784).
Incorporated by reference to the Company’s Quarterly Report on Form 10- Q for the quarterly period ended September 30, 2002 filed on November 14, 2002. (Commission File No. 001-11784).
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed on April 15, 2002. (Commission File No. 001-11784).
Incorporated by reference to the Company’s Registration Statement on Form S-8, filed on December 31, 1996 (Commission File No. 333-19115).
Incorporated by reference to the Company’s Definitive Proxy Statement Form DEF 14A filed on May 12, 1999. (Commission File No. 001-11784).
Incorporated by reference to the Company’s Registration Statement on Form S-1/A filed on June 29, 2000 (Commission File No. 333-36572)
Incorporated by reference to the Company’s Quarterly Report on Form 10- Q for the quarterly period ended June 30, 2002 filed on August 14, 2002. (Commission File No. 001-11784).
(b)
The Company filed on Form 8-K in the quarter ended December 31, 2002 the following:
On November 11, 2002, the Company filed a Form 8-K to announce that it consummated a transaction pursuant to an Asset Purchase Agreement by and between the Company and Waterside Capital Corporation whereby Waterside acquired the net assets associated with the Systems Integration Division of Netplex Systems, Inc. as of October 25, 2002 from the Company for Waterside’s cancellation of all debt ($1.2 million, inclusive of interest) owed by the Company to Waterside, and consideration for the redemption of all preferred stock (face amount of $0.5 million, inclusive of dividends) to be issued by the Company to Waterside and waiver and release of any and all claims against the Company by Waterside.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 11th day of April 2003.
Pursuant to the requirements of the Securities Exchange Act of 1934, 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
Gene Zaino
Chairman, Chief Executive Officer and Director [Principal Executive Officer]
April 11, 2003
/s/ PETER RUSSO
Peter Russo
Chief Financial Officer, Treasurer and Director [Principal Financial Officer]
April 11, 2003
/s/ RICHARD GOLDSTEIN
Richard Goldstein
Director
April 11, 2003
/s/ STEVEN HANAU
Steven Hanau
Director
April 11, 2003
/s/ KURT MALMGREN
Kurt Malmgren
Director
April 11, 2003
The Netplex Group, Inc. and Subsidiaries
Certifications
I, Gene Zaino, certify that:
1.
I have reviewed this annual report on Form 10-K of The Netplex Group, Inc.;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c.
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a.
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
DATE: April 11, 2003
/s/ GENE M. ZAINO
Gene M. Zaino
Chairman of the Board
(Principal Executive Officer)
The Netplex Group, Inc. and Subsidiaries
Certifications
I, Peter Russo, certify that:
1.
I have reviewed this annual report on Form 10-K of The Netplex Group, Inc.;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c.
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a.
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
DATE: April 11, 2003
/s/ PETER J. RUSSO
Peter J. Russo
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
SCHEDULE I
THE NETPLEX GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Index to Consolidated Financial Statements
Page
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
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, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for the each of the three years in the period ended December 31, 2002. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 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, 2002 and 2001, and the results of their operations and their cash flows for the each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been presented assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant losses from operations and has used cash in operations in four of the last five years. In addition, as of December 31, 2002, the Company has a stockholders’ deficit of approximately $4.7 million and a working capital deficit of approximately $4.2 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 1. The consolidated financial statements do not contain any adjustments that might result from the outcome of this uncertainty.
In connection with our audits of the consolidated financial statements referred to above, we have audited Schedule II-Valuation and Qualifying Accounts, for each of the three years in the period ended December 31, 2002. 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
February 13, 2003
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
See accompanying notes to consolidated financial statements.
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31,
See accompanying notes to consolidated financial statements.
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
See accompanying notes to consolidated financial statements.
THE NETPLEX GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(1)
The Business and Liquidity
In 1996, a merger was consummated between Complink, Inc., America’s Work Exchange and The Netplex Group, Inc. (collectively referred to as “Netplex” or “the Company”). The merger was accounted for under the purchase method of accounting as a reverse merger, since the shareholders of Netplex, which had common control, received the larger of the voting rights of the combined entity. As a result, Netplex was considered the acquirer for accounting purposes.
The Company provides certain business management and administrative services for independent consultants and organizations who have a contingent work force. In both respects, the contractors become the Company’s employees.
The Company’s continuing operations are principally conducted from Virginia and at customer locations throughout the United States.
The Company has incurred significant losses from operations and has used cash in operations in each of the last five years. In addition, as of December 31, 2002, the Company has a stockholders’ deficit of approximately $4.7 million and a working capital deficit of approximately $4.2 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not contain any adjustments that might result from the outcome of this uncertainty.
Over the past three years, management instituted several restructuring initiatives aimed at, among other things, improving the productivity and billable utilization of its staff and reducing operating expenses. These restructuring efforts included headcount reductions, consolidation of facilities and management of discretionary expenses. However, these actions were taken in a period where economic conditions in the United States and abroad created downward pressure on spending for information technology initiatives, including demand for the Company’s consulting services. In 2002, the Company did experience lower operating losses than those reported in 2001 and 2000 and a reduction in cash used in operations. However, given the Company’s current operating outlook and continuing economic uncertainty, the Company’s liquidity and financial position are such that additional capital may be needed in the future to sustain operations.
In late 2001, the Company began exploring alternatives to raising additional capital and restructuring its obligations and capital structure. Among the alternatives considered included a rights offering aimed at raising capital through the issuance of additional shares of its Netplex Systems subsidiary (“Offering”). Management chose to not pursue the Offering further, choosing instead to entertain offers for the operations comprising Netplex Systems (either as a whole or in parts), at which time the Netplex Systems subsidiary operations were classified as discontinued operations. In March 2002, the Company entered into non-binding letter of intent to sell the assets of its retail consulting business. On May 15, 2002, the Company consummated the transaction pursuant to an Asset Purchase Agreement by and between the Company and CGI Information Systems & Management Consultants, Inc. (“CGI”). Under the terms of the Asset Purchase Agreement, CGI has acquired the net assets associated with the Retail Practice Division of Netplex Systems, Inc. as of April 26, 2002 from the Company for $4.3 million in cash. The Company recorded a gain from this sale in the second quarter of 2002 of approximately $1.6 million, which is included in the gain on sale of discontinued operations line on the statement of operations.
Concurrent with the sale of the net assets of the Retail Practices Division to CGI, the Company entered into a Workout and Collateral Release Agreement with Waterside Capital Corporation (“Waterside”) whereby Waterside:
•
agreed to release its security interest in the assets of the Retail Practices Division,
•
agreed to exchange 500 shares of Netplex Systems, Inc. Series A Preferred Stock bearing an annual dividend rate of 10% for a Secured Commercial Note for $500,000 from The Netplex Group, Inc. bearing an annual interest rate of 9%,
•
agreed to exchange 500 shares of Netplex Systems, Inc. Series A Preferred Stock bearing an annual dividend rate of 10% for 500 shares of The Netplex Group, Inc.’s Preferred Stock bearing an annual dividend rate of 9%, and
•
received approximately $341,000 of the sales proceeds to be applied to dividends, principle and interest due associated with the Netplex Systems, Inc. Series A Preferred Stock and notes payable by both Netplex Systems, Inc. and The Netplex Group, Inc.
Upon finalization of the agreements above on September 28, 2002, the Company and Waterside also agreed to the following:
•
Waterside’s release of its security interest in Netplex Systems in the event of sale of Netplex Systems or a division thereof,
•
Waterside’s subordination of its $900,000 and $500,000 notes to the Company’s bank, and
•
the Company’s agreement to pay Waterside $100,000 plus twenty percent (20%) of the cash proceeds from any sale of Netplex Systems or division thereof when received to be applied against the outstanding amounts owed to Waterside.
The Company restructured certain of its obligations and liabilities during the second quarter of 2002 which resulted in an $0.7 million extraordinary gain for the period, net of income taxes. The extraordinary items included the extinguishment of $0.3 million of rent liabilities related to excess office space and the reduction of $0.4 million of obligations associated with the acquisition of the PSS Group, Inc. in 1998. There was no income tax charges associated with these extraordinary gains as they were offset in their entirety by the Company’s net operating losses. Additionally, the Company restructured its $1.4 million litigation settlement debt, $1.1 million of which was currently due and $0.3 million which was payable December 31, 2002, as follows:
•
Payment of $505,000 cash in May 2002;
•
Commitment to pay 20% of the proceeds, in excess of $2.0 million, from the sale of the Systems Integration Division of Netplex Systems, Inc. (included in discontinued operations)(the proceeds from the subsequent sale of the Systems Integration Division were less than $2.0 million, see Note 3 to the financial statements); and
•
Commitment to pay an additional payment if on or before May 23, 2007, the proceeds received either from the sale of the Company, or the reported market capitalization of the Company for any consecutive five-day period, exceeds $20.0 million, then commensurate with such sale or within thirty days of attaining such market capitalization, as the case may be, Netplex shall pay an amount equal to the lesser of (i) such excess or (ii) $895,000. Since the restructuring, the Company continues to classify $895,000 as a long term debt.
On November 1, 2002, the Company consummated a transaction pursuant to an Asset Purchase Agreement by and between the Company and Waterside. Under the terms of the Asset Purchase Agreement, Waterside has acquired the net assets associated with the Systems Integration Division of Netplex Systems, Inc. as of October 25, 2002 from the Company for Waterside’s cancellation of all debt (inclusive of interest) owed by the Company to Waterside, and consideration for the redemption of all preferred stock (inclusive of dividends) to be issued by the Company to Waterside and waiver and release of any and all claims against the Company by Waterside. The total amount of debt to be cancelled and preferred stock redeemed is $1.7 million. The Company recorded a gain from this debt extinguishment in the fourth quarter of 2002 of approximately $0.5 million, which is included in the gain on sale of discontinued operations line on the statement of operations.
While the proceeds from a Retail Division sale, the cancellation of the Waterside debt/equity and the restructuring of the liabilities will help to sustain operations, management believes that to sustain operations for the foreseeable future, additional obligations and liabilities will need to be restructured. While management has been involved in discussions relative to such obligations with each respective party, no definitive agreements have been reached at this time and no assurances can be given that these efforts will be successful. Additionally, given the Company’s current operating outlook and continuing economic uncertainty, the Company’s liquidity and financial position are such that additional capital may be needed in the future to sustain operations.
Management intends to focus on improving the operations of its its business to consumer service (“Member Services”) and its business to business service (“Business Services”) offerings. Critical to the success of these operations is the Company’s ability to continue to attract members to the Member Services segment and to grow the Business Services segment by obtaining contracts and master agreements with employers who contract with large numbers of independent consultants.
(2)
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of The Netplex Group, Inc. and its majority owned subsidiaries. Minority interest represents minority shareholders’ proportionate share of the equity in the Company’s Contractors Resources and Netplex Systems subsidiaries. All significant inter-company transactions have been eliminated in consolidation.
Revenue Recognition
The Company derives its revenue primarily from service contracts.
Revenue in the Company’s Member Services segment is recognized as the fees (net revenue) it charges to its members for providing its back office services as these services are provided. Gross billings generated by Member Services segment operations for the years ended December 31, 2002, 2001 and 2000 were $28.1 million, $37.0 million and $42.5 million, respectively.
The Company recognizes revenue in its Business Services segment based on the gross amount billed to the customer derived from the hours worked and the contractual rate applied to those hours. This policy is in accordance with the guidance provided by EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” considering the Company has credit risk for the gross amounts of each transaction and can assert certain rights over the activities of each consultant.
The Company derived revenue from its discontinued operations from both services contracts and third party hardware and software resale contracts, exclusive of maintenance. Revenue from these operation’s time and materials contracts is recognized as services are performed and costs are incurred. Net revenues exclude reimbursable expenses charged to clients. Revenue for fixed-price contracts for these operations are recognized in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position (“SOP”) 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” using the percentage of completion method as costs are incurred and SAB 101, “Revenue Recognition” for all other transactions not covered by SOP 81-1. The Company records loss provisions for its contracts, if required, at the time such losses are identified. Revenue for maintenance contracts is recognized over the term of the arrangements. The Company recognizes software and hardware revenue, in accordance with SOP 97-1, “Software Revenue Recognition”, as products are shipped, provided that collection is determined to be probable and no significant obligations remain.
Management regularly reviews outstanding accounts receivable for collectability and provides for an allowance for doubtful accounts whenever necessary. As of December 31, 2002 and 2001, the Company was owed approximately $80,000 and $60,000 by one customer at each date, respectively.
The Company recognized revenue from unaffiliated customers constituting 16.8%, 24.0% and 16.1% of total revenue in 2002, 2001 and 2000 from one customer, two customers and one customer, respectively.
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. The Company purchases computer software for internal use, which is recorded at cost accordance with Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” 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 3 years in accordance with SOP 98-1.
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.
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
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows:
•
all business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001.
•
intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability
•
goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization.
•
effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.
The Company amortized goodwill recognized prior to July 1, 2001, until January 1, 2002. Effective January 1, 2002, in accordance with SFAS 142, the Company discontinued amortization of its goodwill. The Company has assessed the continuing value of goodwill and determined that goodwill has not suffered any impairment.
Stock-Options
The Company accounts for activity under its stock option plans in accordance with the Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and related interpretations. As permitted by SFAS No. 123, the Company has elected to continue to apply the provisions of ABP Opinion 25 and the pro forma disclosure provisions of SFAS No. 123.
At December 31, 2002, the Company has four stock-based compensation plans which are described more fully in Note 13. The Company accounts for the options granted to consultants under its Consultants’ Plan based upon the provisions of SFAS No. 123. The Company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations, in accounting for its ISO, Directors’ and 2002 Stock Ownership Plans. Accordingly, no stock-based compensation expense has been reflected in net income for such stock option, as all options granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of the grant. 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:
Investment in Common Stock
The Company had an investment in common stock of a privately held company included in other assets valued at $375,000 which was accounted for using the cost method. This investment was disposed of in the DSA litigation settlement in 2001.
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 income (loss) per common share is calculated using the weighted average number of common shares outstanding during the periods. Diluted net income (loss) per common share is calculated using the weighted average number of common shares and dilutive potential common shares outstanding during the period.
Deferred Compensation.
The Company adopted a non-qualified, unfunded deferred compensation plan, The Netplex Group, Inc. Employee Deferred Compensation Plan, (the “Plan”), on August 6, 2001. Under the Plan, key employees deferred compensation on a non-elective and elective basis. Each participant’s deferred compensation converts into share units at a ratio determined by the Plan’s administrator. Such share units convert into the Company’s Common Stock on a one to one ratio at the earlier of the termination of the participant, change of control of the Company or the 24 month anniversary of the Plan.
In 2002, the Company amended the Plan to (i) provide a funding vehicle for the deferrals to be invested in Company Stock, The Netplex Group, Inc. Employee Deferred Compensation Trust, (ii) provide plan participants voting rights attributable to Company stock held in trust and (iii) include a provision to pay the deferred compensation to the participant in cash at the Company’s option.
The total of participant deferrals were approximately $90,000 and $221,000 for the years ended December 31, 2001 and 2002, respectively. In October 2002, the Company issued 4,777,404 shares of its common stock to The Netplex Group, Inc. Deferred Compensation Trust for approximately $249,000 of the deferred compensation for 5 employees. The shares are unregistered.
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 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 two segments as defined: Member Services and Business Services.
Reclassifications
Certain 2001 and 2000 amounts have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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.
New Accounting Pronouncements
In August 2001 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which among other things, establishes one accounting model for long-lived assets to be disposed of by sale. SFAS 144 is effective for financial statements issued for years beginning after December 15, 2001, and interim periods within those financial statements, early application is encouraged. The Company adopted SFAS 144 effective January 1, 2001, in accordance with early application of the standard, in recording the disposal Netplex Systems.
In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS 145 rescinds SFAS 4 and SFAS 64, which addressed the accounting for gains and losses from extinguishment of debt, rescinds SFAS 44 which set forth industry-specific transitional guidance that did not apply to the Company, amends SFAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions and makes technical corrections to certain existing pronouncements that are not substantive in nature. The Company adopted SFAS 145, except the provisions of the Statement that relate to the rescission of FASB Statement No. 4, in the second quarter of fiscal year 2002 which did not have a significant impact on the Company’s financial position or results of operations. The provisions of this Statement relating to the rescission of FASB Statement No. 4 shall be adopted by the Company on January 1, 2003. Upon such adoption, the Company will reclassify the extraordinary items reported in the quarter ended June 30, 2002.
In July 2002, the FASB issued SFAS 146, “Accounting for Exit or Disposal Activities.” SFAS 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance set forth in Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146 includes costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and certain termination benefits provided to employees who are involuntarily terminated. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company shall adopt SFAS 146 on January 1, 2003 and does not anticipate it will have a significant impact on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123, which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has complied with the new disclosure provisions of SFAS 148 in these financial statements.
The Company shall adopt the remaining provisions of SFAS 148 on January 1, 2003 and does not anticipate it will change its method of accounting for its stock-based employee compensation.
(3)
Discontinued Operations
On September 29, 2000, the Company announced its decision to sell various businesses within the e-Infrastructure segment and although it was difficult to predict, the Company expected to complete the sales within the 12 months subsequent to the above measurement date.
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On September 29, 2000, the Company sold its Onion Peel subsidiary (previously included as a part of the e-Infrastructure segment) for $949,000 ($574,000 of cash and $375,000 of stock) and recorded a gain of $513,000.
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On May 15, 2002, the Company consummated the transaction pursuant to an Asset Purchase Agreement by and between the Company and CGI Information Systems & Management Consultants, Inc. (“CGI”). Under the terms of the Asset Purchase Agreement, CGI acquired the net assets associated with the Retail Practice Division as of April 26, 2002 for $4.3 million in cash. The Company recorded a gain from this sale in 2002 of approximately $1.6 million.
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On November 1, 2002, the Company consummated a transaction pursuant to an Asset Purchase Agreement by and between the Company and Waterside. Under the terms of the Asset Purchase Agreement, Waterside acquired the net assets associated with the Systems Integration Division of Netplex Systems, Inc. as of October 25, 2002 from the Company for Waterside’s cancellation of all debt (inclusive of interest) owed by the Company to Waterside, and consideration for the redemption of all preferred stock (inclusive of dividends) to be issued by the Company to Waterside and waiver and release of any and all claims against the Company by Waterside. The total amount of debt cancelled and preferred stock redeemed was $1.7 million. The Company recorded a gain from this debt extinguishment in 2002 of approximately $0.5 million.
In accordance with the Statement of Financial Accounting Standard No, 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the results of operations and the net assets of Netplex Systems have been classified as discontinued operations. The major classes of assets and liabilities as of December 31, 2001 and amounts of revenue and pretax profit or loss for the years ended December 31, 2000, 2001 and 2002 reported in discontinued operations of Netplex Systems are as follows:
(4)
Restructure Charge
In the third quarter of 2000, the Company recorded a restructure charge of $1,512,000 primarily associated with the closing of the Company’s Roseland, New Jersey office and the related costs. Included in the total are the estimated costs for facility closures, the write-down of redundant and duplicative property, severance and other employee costs related to the facility closures and duplicative position eliminations. As a part of the restructuring, 37 employees were terminated. Of those terminated, 4 were from the technical staff and 33 were from sales and corporate administration. The accrual was fully utilized as of December 31, 2002.
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Earnings (Loss) Per Share
Basic net income (loss) per share is calculated using the weighted average number of common shares outstanding during the relevant periods. Diluted net income (loss) per common share is calculated using the
weighted average number of common shares and dilutive potential common shares outstanding during the relevant periods. For the years ended December 31, 2001 and 2000, the assumed exercise of the Company’s outstanding stock options and warrants, Convertible Preferred Stock and contingently issuable shares in connection with certain business combinations, would be anti-dilutive. The anti-dilutive outstanding stock options and warrants, Convertible Preferred Stock, and contingently issuable shares, combined with the weighted average number of outstanding common shares, total approximately 116,681,000 and 105,711,000 shares outstanding at December 31, 2001 and 2000, respectively.
The computation of the numerator and denominator in the basic and dilutive earnings per share calculation for the year ended December 31, 2002 is as follows:
The Company does not have enough shares of common stock authorized to be issued if all of the preferred shareholders and holders of prepaid warrants convert. Currently the Company is negotiating with certain of its holders to reduce the number of common shares to which these convert, however no assurances can be made that these negotiations will be successful.
(6)
Property and Equipment
Property and equipment consists of the following:
Computer software at December 31, 2002 and 2001 includes $799,000 of software that was developed for internal use. Accumulated depreciation related to this software was $775,000 and $509,000 at December 31, 2002 and 2001, respectively.
Accumulated depreciation and amortization includes $599,000 related to assets under capital leases at December 31, 2001.
(7)
Goodwill
Goodwill was $400,000 and accumulated amortization was $276,000 as of December 31, 2002 and 2001. The Company has assessed the continuing value of the goodwill and determined that the goodwill has not suffered any impairment.
(8)
Accrued Compensation and Other Accrued Expenses
Accrued compensation and other accrued expenses consist of the following:
(9)
Line of Credit
The Company’s subsidiary, Netplex Systems, Inc. (“Systems”) was a party to a Commercial Revolving Loan, Demand Loan and Security Agreement (“Revolving Loan”) with American Commercial Finance Corporation (“Lender”) which had an expiration date of March 31, 2003. Under the Revolving Loan, Systems could borrow an amount equal to 80% of eligible accounts receivable as defined in the agreement, up to $3.0 million. The Revolving Loan bore interest at the prime rate plus 1.75% and was secured by (i) System’s, the Company’s and each of the Company’s subsidiaries’ assets, (ii) a $400,000 guaranty from a shareholder, Waterside (the “Guaranty”) and (iii) fidelity guaranties from two of the Company’s officers. On May 15, 2002, the Lender released the Guaranty. On June 1, 2002, Systems and the Lender executed the First Amendment to the Commercial Revolving Loan and Security Agreement whereby the maximum principal amount was adjusted from $3.0 million to $1.0 million. In July, the Company paid off the balance of the Revolving Loan and the line of credit was closed.
Outstanding advances were $1,094,000 at December 31, 2001 of which $966,000 was allocated to discontinued operations based upon its relative contribution to the underlying borrowing base.
(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, 2002, 2001 and 2000 is as follows:
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2002, 2001 and 2000 are presented below:
The Company has provided a valuation allowance for all of its deferred tax assets at December 31, 2002, 2001 and 2000 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.
As of December 31, 2002 and 2001, the Company has NOL’s for Federal and state income tax purposes of approximately $43,310,000 and $42,178,000 which may be applied against future taxable income. Additionally, the Company has $187,000 of research and development tax credits (“Credits”) available to offset future Federal income taxes. The NOL’s and credits expire primarily in years 2003 through 2021. Certain of the NOL’s and credits are subject to annual limitations and other conditions as of December 31, 2002. Additionally, the NOL’s 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, or future changes in ownership which may occur.
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Commitments
Employment Agreements
The Company has employment agreements with the CEO and CFO. At December 31, 2002, the Company’s annual obligation under the agreements is approximately $475,000 for the next year.
Lease Obligations
The Company leases computer equipment and office facilities under long-term lease agreements. The following is a schedule of future minimum lease payments for non-cancelable operating leases (with initial terms in excess of one year) as of December 31, 2002:
Total rent expense under operating leases was approximately $220,000, $159,000 and $153,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
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Stockholders’ Equity
As of December 31, 2002, the Company’s authorized capital stock consisted of 100,000,000 shares of common stock, par value $0.001 per share, and 6,000,000 shares of preferred stock, par value $0.01 per share.
Preferred Stock
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 “Class A Preferred”) and one warrant to purchase one share of the Company’s Common Stock at $2.50 per share.
Each share of Class A Preferred is convertible into one share of Common Stock at any time, at the discretion of the holder. The Class A Preferred has a cumulative dividend of 10% per annum, payable in either cash or additional shares of Class A Preferred at the Company’s option. Subject to the conversion rights, the Class A Preferred has a redemption value equal to its stated value plus all accrued and unpaid dividends upon: (1) registration of the shares underlying the Class A Preferred, 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 Class A Preferred 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 expired on September 19, 2001.
Class C Cumulative Convertible
The Class C Cumulative Convertible Preferred Stock (“Class C Preferred”) had a liquidation preference of $3.99 per share and a dividend rate of 9.99% per annum that was set to increase to 15% per annum after the date that there was no Class A Preferred issued and outstanding. The Class C Preferred was 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 was redeemable solely at the option of the Company at any time within five years from the date of issuance. At December 31, 2000, the Class C Preferred was convertible into the number of shares equal to $2,300,000, plus accrued but unpaid dividends, divided by 25% of the 20 day average trading price of the Common Stock immediately prior to conversion. The Company measured the intrinsic value of the beneficial conversion feature of the Class C Preferred to be $2,300,000 at December 31, 2000. As a result, the Company began to accrete this discount as additional Preferred Stock dividends over the five years. During 2001 and 2000, the accretion of the discount of approximately $329,000 and $388,000 was included as additional Preferred Stock dividends in the Company’s EPS calculation.
On September 28, 2001, the Company entered into an agreement with the holder of the Class C Preferred, Waterside, whereby
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the Company paid $2,052,780 in the form of $1,000,000 cash and two secured commercial promissory notes in the original principal amounts of $900,000 and $152,780 for:
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Waterside’s surrender to the Company for cancellation 1,500,000 shares of its Class C Preferred Stock;
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Waterside’s guarantee of up to $400,000 of the Company’s subsidiary, Systems, revolving credit facility; and
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Waterside surrendered for cancellation its warrant exercisable for 300,000 shares of the Company’s Common Stock;
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the Company paid $50,000 of closing fees associated with the transaction; and
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Waterside purchased from the Company 1,000 shares of the Company’s subsidiary, Systems, preferred stock for $1,000,000 which is recorded as a minority interest in the balance sheet.
The difference between the original face value (net of transaction fees) of the Series C Preferred Stock of $2,139,000 and the aggregate of the principal value of the note of $900,000 and the $1,000,000 of cash, equaling $239,000, was recorded as an addition to Additional Paid in Capital and has been added back in the loss applicable to common shareholders for computing earnings per share.
The promissory notes bore interest of 10% per annum. The $900,000 note Was payable in quarterly installments of $15,000 and the $152,780 note was payable on January 1, 2002.
Concurrent with the sale of the net assets of the Retail Practices Division to CGI (See Note 1), the Company entered into a Workout and Collateral Release Agreement with Waterside whereby Waterside:
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agreed to release its security interest in the assets of the Retail Practices Division,
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agreed to exchange 500 shares of Netplex Systems, Inc. Series A Preferred Stock bearing an annual dividend rate of 10% for a Secured Commercial Note for $500,000 from The Netplex Group, Inc. bearing an annual interest rate of 9%,
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agreed to exchange 500 shares of Netplex Systems, Inc. Series A Preferred Stock bearing an annual dividend rate of 10% for 500 shares of The Netplex Group, Inc.’s Preferred Stock bearing an annual dividend rate of 9%, and
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received approximately $341,000 of the sales proceeds to be applied to dividends, principle and interest due associated with the Netplex Systems, Inc. Series A Preferred Stock and notes payable by both Netplex Systems, Inc. and The Netplex Group, Inc.
Upon finalization of the above on September 28, 2002, the Company and Waterside also agreed to the following:
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Waterside’s release of its security interest in Netplex Systems in the event of sale of Netplex Systems or a division thereof,
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Waterside’s subordination of its $900,000 and $500,000 notes to the Company’s bank, and
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the Company’s agreement to pay Waterside $100,000 plus twenty percent (20%) of the cash proceeds from any sale of Netplex Systems or division thereof when received to be applied against the outstanding amounts owed to Waterside.
Class D and E Convertible
On March 29, 2000, the Company received $10.0 million ($9.4 million net of expenses) for 10,000 shares of its Class D Preferred Stock. The conversion ratio of the preferred to common was established based on 120% of the weighted average stock price during the thirty trading day period between April 3, 2000 and May 16, 2000, which was $5.87 per share. The Series D Preferred Stock securities purchase agreement’s call option provision, relating to the time the Company must obtain additional financing, was amended effective July 31, 2000. The amendment extended the call option trigger date to October 31, 2000 (previously August 1, 2000). The conversion price of the preferred stock and the exercise price of the related warrants are based upon 120% of the weighted average price of the Company’s Common Stock for 15 consecutive trading days beginning the first day after the holders are entitled to exercise the call option.
On November 10, 2000, the Company entered into an Exchange, Redemption and Conversion Agreement (the “Exchange Agreement”) with the holders of the Company’s Series D Preferred Stock that provides for the following:
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the exchange of $6,177,000 of the original face amount of the Series D Preferred Stock and warrants held by the holders of the Series D Preferred Stock in exchange for the Company’s issuance of $3,000,000 of its new Series E Preferred Stock;
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the waiver by the holders of the Series D Preferred Stock of their right to receive further dividends under the Series D Preferred Stock
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the waiver of certain other rights of the holders of the Series D Preferred Stock, including the right to acquire additional shares of Series D Preferred Stock, the right to require the Company to redeem the Series D Preferred Stock upon the occurrence of certain events beyond the Company’s control, and the waiver of certain anti-dilution rights.
Also, as part of the agreement, the Company redeemed 500 of the remaining 3,823 shares of Series D Preferred Stock at their original face value of $500,000, and sold to the holders of the Series D Preferred Stock 1,000 shares of the Company’s common stock at a price of $0.65625 per share. The Company incurred approximately $79,000 of printing and legal fees resulting from the restructure that were charged against additional paid in capital. As a result of that sale, the remaining 3,323 shares of Series D Preferred Stock will have an adjusted conversion price of $0.65625. Upon execution of the agreements, the Series D Preferred Stockholders converted 1,178 shares of Series D Preferred Stock into 1,808,473 shares of common stock. The difference between the original face value of the Series D Preferred Stock of $6,177,000 and the face value of the new Series E Preferred Stock of $3,000,000, equaling $3,177,000, was recorded as an addition to Additional Paid in Capital and has been added back in the loss applicable to common shareholders for computing earnings per share. In 2001, the holders converted an additional 821 shares into 1,251,047 shares of common stock. At December 31, 2002, 1,324 shares of Series D Preferred Stock remain outstanding and are convertible into 2,017,523 shares of common stock.
The Series E Preferred Stock has terms similar to the restructured Series D Preferred Stock, with the primary exceptions being that the Series E Preferred Stock accrues dividends at the rate of 7% per year and the Series E Preferred Stock was redeemable for $3,000,000 at the Company’s option on or before April 30, 2001, provided that the Company redeemed at least $1,500,000 of such stock on or before January 30, 2001 which the Company did not. The Series E Preferred Stock becomes convertible into shares of common stock at a conversion price of $0.47 per share if it is not redeemed or upon the occurrence of certain other events. Pursuant to a related Registration Rights Agreement, the Company registered with the Securities and Exchange Commission the 1,000 additional shares of common stock sold as part of the transaction as well as the shares issuable to the holders of the Series E Preferred Stock upon conversion of that stock to common stock At December 31, 2002, 3,000 shares of Series E Preferred Stock remain outstanding and are convertible into 6,382,979 shares of common stock.
Warrants
On March 29, 2000, the Company sold 1,500 units in a private placement for $1.5 million ($1.3 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 of $0.013 which calculates to 115,384,615 shares as of December 31, 2002, 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 value of these warrants was equal to the proceeds received.
Monster Warrant. In connection with a co-branded services agreement entered into in May 2000 by one of our subsidiaries and TMP Interactive, Inc. (“TMP”), the Company issued warrants to purchase up to 3,000,000 shares of common stock. The warrants are exercisable for a period of three years after the date they were issued. The exercise price for the warrants to purchase up to 2,000,000 shares of common stock is $9.00 per share and these warrants vest over two years. As of December 31, 2000 the fair value was calculated at $0 using a risk free interest rate of 5.1%, volatility of 106%, and an expected term of three years. The exercise price for the
remaining warrants to purchase up to 1,000,000 shares of common stock is $6.00 per share and these warrants vested immediately. The fair value of these warrants of $2.9 million was calculated on the measurement date using a risk-free rate of 6.7%, volatility of 106%, and an expected term of three years. On August 7, 2001, the Company agreed to cancel the warrants to purchase up to 3,000,000 shares of common stock and grant warrants to purchase up to 4,000,000 shares of common stock in connection with the litigation settlement (see Note 14). The exercise price for these warrants is $0.47 per share and they are exercisable at any time on or before August 7, 2004. The Company recorded a selling and general and administrative charge in the three month period ended September 30, 2001 of $360,000 that was related to the value of the warrants derived using the Black-Scholes method. This calculation was made using a risk-free interest rate of 4.04%, volatility of 171%, and expected term of three years. In conjunction with the renegotiation of the Company’s obligations to TMP, the warrants were cancelled in 2002.
Roseland Warrant. The Company issued a warrant on May 22, 2000, to purchase up to 15,000 shares of common stock to Roseland II L.L.C. in connection with our leasing arrangements. The warrant is exercisable for a period of five years after the date the warrant was issued. The exercise price for the warrant is $7.72 per share. On the date issued the fair value calculated for this warrant was $17,550 to be amortized over sixty months, the life of the lease. This calculation was made using a risk-free interest rate of 6.1%, volatility of 59%, and expected term of five years. In conjunction with the renegotiation of the lease, the warrants were cancelled in 2002.
Silicon Valley Bank Warrant. The Company issued a warrant on July 31, 2000, to purchase up to 75,000 shares of common stock to Silicon Valley Bank in connection with our line of credit. The warrant is exercisable for a period of five years after the date it was issued. The exercise price for the warrant is $6.00 per share. On the date issued the fair value calculated for this warrant was $18,000 and has since been expensed due to the termination of the line of credit agreement. This calculation was made using a risk-free interest rate of 6.1%, volatility of 59%, and an expected term of five years. In conjunction with the closing of the line of credit, the warrants were cancelled in 2002.
Pennsylvania Merchants Group Warrant. The Company issued a warrant on December 12, 2000, to purchase up to 500,000 shares of common stock to Pennsylvania Merchants Group in connection with an investment banking arrangement we have with it and the cancellation of the warrant to purchase 250,000 shares of common stock issued in 1999. The warrant is exercisable for a period of five years after the date it was issued. The exercise price for the warrant is $0.50 per share. The fair value was calculated at $90,000 using a risk-free rate of 5.1%, volatility of 106%, and an expected term of five years. As this warrant was issued in connection with the issuance of capital securities, no expense was recognized.
The following table sets forth the prepaid warrants outstanding and their weighted average conversion rate:
The following table sets forth the warrants outstanding and their weighted-average exercise price:
As of December 31, 2002, 2001 and 2000 all of the warrants were exercisable and had an average remaining life of 2.4, 2.7 and 4.4 years, respectively.
(13)
Stock Options
The Company has four stock option plans.
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The ISO Plan includes both incentive and non-qualified stock options. The Board of Directors may grant stock options to employees to purchase shares of the Company’s Common Stock. In May 2002, the Board of Directors resolved to increase the shares available to this plan from 6,000,000 shares to 8,000,000 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 for 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. This ISO Plan expired December 22, 2002 with approximately 6,119,000 options available for grant.
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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. In May 2002, the Board of Directors resolved to increase the shares available to this plan from 300,000 shares to 1,500,000 shares of the Company’s Common Stock subject to the approval of the shareholders at the next shareholder meeting. 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 either vest immediately or contain vesting periods up to two years. At December 31, 2002, 1,462,500 options are available for grant under this Plan.
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The Consultant’s Plan authorizes the Board of Directors to grant organizations or individuals, who are not employees of the Company, options to purchase shares of the Company’s Common Stock. In May 2002, the Board of Directors resolved to increase the shares available to this plan from 800,000 shares to 1,500,000 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, 2002, approximately 721,500 options are available for grant under this Plan.
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The 2002 Stock Ownership Plan was adopted by the Board of Directors in May 2002, subject to ratification by shareholder vote at next shareholder meeting. The plan has a ten year term, allows for the award of Incentive and Non-Qualified Stock Options and Restricted Stock and initially has 6,000,000 shares available for awards. As of December 31, 2002, there were no grants made under this plan.
Stock option activity for the Plans during the periods indicated is as follows:
The Company had no outstanding stock options under its ISO, Directors’ and 2002 Stock Ownership Plans at December 31, 2002.
The per share weighted average fair value of the ISO and Director’s Plan options on the grant date in 2000 were $0.34 and $0.25, respectively, using the Black-Scholes option pricing model with the following weighted average assumptions:
There were no stock options granted during the years ended December 31, 2002 and 2001.
ISO Plan
At December 31, 2002, there were no outstanding, unexercised options granted under the ISO plan. At December 31, 2001 and 2000, the number of options exercisable under the ISO Plan was 1,750,250 and 1,286,186. The weighted-average exercise price of those options was $1.08 and $1.25, respectively.
Directors’ Plan
At December 31, 2002, there were no outstanding, unexercised options granted under the Directors’ Plan At December 31, 2001 and 2000, the number of options exercisable under the Directors’ Plan was 247,500 and 240,000, respectively. The weighted-average exercise price of those options was $0.99 and $0.93, respectively.
Consultants’ Plan
At December 31, 2002, the exercise price for all outstanding, unexercised options granted under the Consultants’ Plan was $0.47 to $2.41 and the weighted-average remaining contractual life of those options was 2.58 years. All options, granted under the Consultants’ Plan, are exercisable at the time of grant. The weighted-average exercise price of those options was $0.86, $1.38 and $1.51 at December 31, 2002, 2001 and 2000,
respectively. During 2000, in accordance with SFAS No. 123, the Company recorded compensation expense of $8,400 for options granted, based on the value of the services provided.
(14)
Related Party Transactions
The Company paid $15,000, $3,000 and $18,000 in 2002, 2001 and 2000, respectively for accounting, tax and consulting services to a CPA firm in which a partner of the firm is a director of the Company. The Company has a recorded liability for amounts owed to this related party of $50,000.
A director of the Company from November 1998 until April 2002 was the President, Chief Executive Officer and Director of Waterside, the holder of the Company’s Class C preferred shares. The following were the transactions by and between the Company and Waterside during the director’s service on the Company’s Board of Directors:
On September 28, 2001, the Company entered into an agreement with Waterside whereby:
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the Company paid $2,052,780 in the form of $1,000,000 cash and two secured commercial promissory notes in the original principal amounts of $900,000 and $152,780 for:
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Waterside’s surrender to the Company for cancellation, 1,500,000 shares of its Class C Preferred Stock;
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Waterside’s guarantee of up to $400,000 of the Company’s subsidiary, Systems, revolving credit facility; and
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Waterside surrendered for cancellation, its warrant exercisable for 300,000 shares of the Company’s Common Stock;
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the Company paid $50,000 of closing fees associated with the transaction; and
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Waterside purchased from the Company 1,000 shares of the Company’s subsidiary, Systems, preferred stock for $1,000,000 which is recorded as a minority interest in the balance sheet.
The promissory notes bore interest of 10% per annum. The $900,000 note was payable in quarterly installments of $15,000 and the $152,780 note was payable at the earlier of the closing of the Offering or January 1, 2002.
The Director’s resignation was not the result of any disagreement related to the Company’s operations, policies or practices.
The Company paid approximately $59,000 and $32,000 in 2002 and 2001, respectively for the professional services related to the restructuring of the Company’s debt to a management consulting firm in which the founding principal and managing director of the firm is a director of the Company. Included in the current year amount paid is the cost to issue 550,000 shares of the Company’s common stock to the management consulting firm for services performed. The Company record an expense of $13,750 related to this stock payment. The Company has a recorded liability for amounts owed to this related party of approximately $238,000.
(15)
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 Technology Development Systems, Inc. (“TDS”) and the Company, alleging copyright infringement and breach of the Company’s agreement. The Complaint also seeks damages against XcelleNet, Inc., which the Company has indemnified. The Complaint claimed damages in excess of $300,000 plus punitive damages.
In June of 2000, the Company, TDS and XcelleNet, Inc. filed a complex motion for summary judgment, asking the Court to dismiss the majority of DSA’s claims in the case. DSA also filed a motion for summary judgment asking the court to enter judgment in its favor on several of its claims. The district court judge held oral arguments on the counter-motions in January 2001.
In March 2001, the court denied the motion by TDS and XcelleNet in its entirety. It granted plaintiff’s motion for summary judgment on liability and directed that damages be tried to a jury on May 24, 2001.
Prior to the May 24, 2001 trial date and before any motions for reconsideration, the parties mutually agreed to enter into settlement negotiations.
On December 28, 2001 the Company and DSA entered into a settlement agreement for dismissal of the lawsuits, with prejudice whereby the Company agreed to pay DSA $1,400,000 plus transfer its 125,000 shares of TAVEE stock it held for investment purposes which had a carrying value of $375,000. The Company agreed to pay (i) $900,000 on or before December 31, 2001 or $900,000 on or before March 31, 2002 plus interest from January 1, 2002, and (ii) $250,000 on each of June 30, 2002 and December 31, 2002. The Company did not pay the amount due on December 31, 2001. On May 23, 2002 the Company restructured its $1.4 million litigation settlement debt, $1.1 million of which was currently due and $0.3 million which was payable December 31, 2002, as follows:
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Payment of $505,000 cash in May 2002;
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Commitment to pay 20% of the proceeds, in excess of $2.0 million, from the sale of the Systems Integration Division of Netplex Systems, Inc. (included in discontinued operations)(the proceeds from the subsequent sale of the Systems Integration Division were less than $2.0 million, see Note 3 to the financial statements); and
Commitment to pay an additional payment if on or before May 23, 2007, the proceeds received either from the sale of the Company, or the reported market capitalization of the Company for any consecutive five-day period, exceeds $20.0 million, then commensurate with such sale or within thirty days of attaining such market capitalization, as the case may be, Netplex shall pay an amount equal to the lesser of (i) such excess or (ii) $895,000. Since the restructuring, the Company continues to classify $895,000 as a long term debt.
In December 2000, TMP Interactive, Inc. (“Monster.com”) filed suit against the Company alleging that the Company failed to make a quarterly cash payment under its co-branding agreement with Monster.com. The complaint was seeking a judgment of approximately $464,000.
On August 7, 2001, the Company and Monster.com entered into a mutually agreeable settlement whereby the Company would pay Monster.com fees of $230,000 and grant a warrant to purchase 4,000,000 shares of the Company’s common stock at $0.47 per share which is fully exercisable at any time on or before August 7, 2004. In conjunction with this agreement, the Company recorded a selling and general and administrative charge in the three month period ended September 30, 2001 of $590,000. Of this amount, $360,000 was related to the value of the warrants granted to Monster.com derived using the Black-Scholes method. As of June 2002, the Company still owed Monster.com $110,000 which was past due per the originally agreed upon settlement terms. On June 27, 2002, the parties entered into a new settlement agreement in which Monster.com agreed to accept $25,000 as full satisfaction of this outstanding obligation.
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.
(16)
Employee Benefit Plans
The Company sponsors various defined contribution retirement plans covering substantially all employees of the Company and its subsidiaries. These plans provide employer contributions based primarily on employee participation. Amounts charged to operations under these plans were approximately $0, $224,000 and $456,000 during 2002, 2001 and 2000, respectively. The employer contributions for the administrative staff were suspended during 2001. The employer contributions for the employees in the Member Services segment were approximately $2.1 million, $2.7 million and $3.0 million during 2002, 2001 and 2000, respectively and were offset by the netting of revenue against expenses. See Note 1 - Revenue Recognition for Member Services segment.
The Company does not provide any post retirement or post employment benefits.
(17)
Segment Information
In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company’s reportable segments are strategic business units that offer different products and services to different industries throughout the United States.
The Company has two reportable segments after the reclassification of the Netplex Systems segment as a discontinued operation. All prior year’s revenue, cost of services and operating expenses have been restated to reflect this reclassification. The Company’s reportable segments are as follows:
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Member Services - For individuals (“members”) who can successfully market their own consulting expertise, Member Services provides a complete corporate infrastructure that makes it easier to enjoy the flexibility and financial benefits of building and operating a consulting practice. Member Services include: (1) contract negotiation and administration; (2) W-2 employment, payroll, and benefits services; (3) access to an online time recording, billing, and accounting system; (4) accounts receivable collection assistance; (5) dedicated business support staff services; and (6) career information and counseling.
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Business Services - Business Services provides a convenient, centralized solution that improves the quality and removes costs associated with clients’ use of contingent workers (“consultants”). Business Services include (1) providing the tools and processes that enable clients to efficiently align their talent requirements with qualified individuals; and (2) providing a convenient and cost-effective vehicle by which clients may use these consultants, as well as those provided by third-parties, on an as-needed basis.
The Company’s accounting policies for these segments are the same as those described in Note 2 - Summary of Significant Accounting Policies. Operating expenses, interest expense and income tax expense are not allocated to each segment. In addition, the Company evaluates the performance of its segments and allocates resources based on gross margin. Inter-segment revenues are immaterial.
The table below presents information about segments used by the chief operating decision-maker of Netplex as of and for the years ended December 31, 2002, 2001 and 2000.
(18) Quarterly Financial Data (unaudited)
In management’s opinion, the interim financial data below reflects all adjustments necessary to fairly state the results of the interim period presented. Quarterly data for year 2001 were restated to reflect the re-incorporation of discontinued operations (Note 3 to the financial statements). All other adjustments are of a normal recurring nature necessary for a fair presentation of the information for the periods presented. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 QUARTERS ENDED
QUARTERS ENDED