Item 1. Business......................................................... 3 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 other cities including, Charlotte, North Carolina, Bedford, Virginia, and Edmond, Oklahoma that serve as operating offices of its businesses. These leases expire on various dates from July 2001 to January 2004.
The Company believes that the space in its existing corporate and branch facilities are adequate for the foreseeable future to support the growth of its existing operations in the geographic areas in which it currently operates.
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 claims damages in excess of $300,000 plus punitive damages. The Company is vigorously defending against the action although an unsuccessful mediation session and settlement conference were held in an attempt to resolve the dispute. The nature and amount of damages, if DSA's allegations are proven, appear uncertain.
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 on Friday, January 19, 2001.
On March 6, 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. The provisions of the agreement that the opinion finds the Company violated could lead to substantial damages being awarded against the Company. While part of the theory for copyright damages was dismissed, another part was left to be tried. It, too, could result in substantial damages.
On March 20, 2001, the Company filed a motion for reconsideration of the granting of summary judgment on two portions of the order. There can be no assurance that reconsideration will be granted.
XcelleNet has reached an agreement in principle to settle that portion of the case against it in the amount of damages proven at trial on the claims against XcelleNet, and has reserved its indemnity claim against the Company.
In December 2000, TMP filed suit against the Company and its Contractors Resources subsidiary alleging that the Company failed to make a quarterly cash payment under its co-branding agreement with TMP. The complaint seeks a judgment of approximately $464,000. The Company has disputed the allegations, denying all liability and has asserted affirmative defenses, including that TMP did not perform the agreement as required. Since filing the suit, TMP has also notified the Company that it has failed to make another payment under the agreement but this alleged default has not yet become part of the litigation. While initial discovery had commenced, both parties have agreed to stay all further discovery pending a conference with the Court. Management believes it has meritorious defenses in this matter and the outcome will not have a material adverse impact on its financial condition or results of operations.
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, 2000.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters.
The Common Stock of the Company is traded on the NASDAQ SmallCap market ("NASDAQ") and on the Boston Stock Exchange.
Price Range of Common Stock
The quotations set forth in the table reflect inter-dealer prices from NASDAQ, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions:
The Company has not paid any cash dividends on its Common Stock and does not intend to pay cash dividends on its Common Stock for the foreseeable future. The Company intends to retain future earnings, if any, to finance future development.
As of March 1, 2001 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 6,767 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 February, 1998, the Company sold 80,000 shares of Common Stock and warrants to purchase 100,000 shares of Common Stock at a price of $1.80 per share, for an aggregate of $100,000. The warrants have a 5-year term and are immediately exercisable. This transaction was completed without an underwriter and exemption from registration is claimed under Section 4(2) of the Securities Act because it did not involve a public offering.
In March, 1998, the Company sold 1,457,000 shares of Common Stock at a price of $1.00 per share for an aggregate of $1,457,000 to certain accredited investors and employees of the Company. These shares carry registration rights. This transaction was completed without an underwriter and exemption from registration is claimed under Section 4(2) of the Securities Act because it did not involve a public offering.
In April, 1998, the Company sold 1,500 units at a price of $1,000 per unit for an aggregate of $1.5 million to certain accredited investors. Each unit consists of a warrant to purchase the number of shares of Common Stock equal to $1,000 divided by an adjustable exercise price and an additional warrant to acquire 52 shares of Common Stock at a price equal to the adjustable exercise price. The warrants have a 5-year term and are immediately exercisable. The Company paid an aggregate placement fee and non-accountable expense allowance of $284,500 and also granted the placement agent a warrant to purchase 39,000 shares of Common Stock at a price of $1.47. The warrants have a 10-year term and are immediately exercisable. The placement agent for this transaction was The Zanett Corporation and exemption from registration is claimed under Section 4(2) of the Securities Act because it did not involve a public offering.
In April, 1998, the Company sold 100,000 shares of Common Stock for $1.50 per share for an aggregate of $150,000 to accredited investors. These shares carry registration rights. This transaction was completed without an
underwriter and exemption from registration is claimed under Section 4(2) of the Securities Act because it did not involve a public offering.
In April, 1998, the Company sold 35,000 shares of Common Stock for $1.375 per share for an aggregate of $48,125 to accredited investors. These shares carry registration rights. This transaction was completed without an underwriter and exemption from registration is claimed under Section 4(2) of the Securities Act because it did not involve a public offering.
In June, 1998, the Company, in addition to other consideration, issued 450,000 shares of Common Stock in exchange for all of the outstanding equity securities of Automated Business Systems of North Carolina, Inc. and Kellar Technology Group, Inc. (collectively "ABS") to the former shareholders of ABS. The Company also agreed to issue additional shares of Common Stock through December 31, 2000, if ABS meets certain operating targets. This transaction was completed without an underwriter and exemption from registration is claimed under Section 4(2) of the Securities Act because it did not involve a public offering.
In August, 1998, the Company sold 451,000 shares of Common Stock for $1.3125 per share for an aggregate of $592,000 to accredited investors. These shares carry registration rights. This transaction was completed without an underwriter and exemption from registration is claimed under Section 4(2) of the Securities Act because it did not involve a public offering.
In September, 1998, the Company sold 1,700 units for $1,000 per unit and warrants to purchase 141,667 shares of Common Stock at an exercise price of $1.3938 per share for an aggregate of $1.7 million to accredited investors. Each unit consists of a warrant to purchase the number of shares of Common Stock computed by dividing $1,700,000 by 1,019,000. The warrants have a 10-year term and are immediately exercisable. The Company paid a placement fee of $175,000 and issued the placement agent 50,000 shares of Common Stock. The placement agent for this transaction was Zanett Securities Corporation. Exemption from registration is claimed under Section 4(2) of the Securities Act because it did not involve a public offering.
In September, 1998, the Company sold 1,500,000 shares of Class C, Convertible Preferred Stock at a price of $1.00 per share and warrants to purchase shares of Common Stock for $1.375 per share for an aggregate of $1.5 million to Waterside Capital. The Class C Preferred Stock bears a dividend rate of 9.99% that increases to 15% per annum after the date there are no Class A Cumulative Convertible Preferred Stock issued and outstanding. The Preferred Stock is convertible at any time after the earlier of a change in control of the Company or five years from the date of issuance and is redeemable at the option of the Company at any time within the first five years. The number of shares into which the Preferred Stock is convertible is equal to $1,500,000 (plus accrued but unpaid dividends) divided by 25% of the 20 day average trading price of the Common Stock immediately prior to conversion. The warrants issued entitle the holder to acquire 150,000 shares of Common Stock at $1.375 per share. The Company may be required to issue up to 400,000 additional shares of Common Stock under the warrants, depending upon the term in which the Class C Preferred Stock is outstanding. The warrants have a 10-year term and are immediately exercisable. The Company paid a placement fee of $175,000 and issued the placement agent warrants to purchase 125,000 shares of Common Stock at $1.59 per share. The warrants have a 5-year term and are immediately exercisable. The placement agent for this transaction was Ferris Baker & Watts and exemption from registration is claimed under Section 4(2) of the Securities Act because it did not involve a public offering.
In October, 1998, the Company issued 643,770 shares of Class B Preferred Stock to Applied Intelligence Group, Inc. in connection with the purchase of such company's information technology consulting business. Each share of Class B Preferred Stock was immediately convertible into one share of Common Stock. No dividends were payable on Class B Preferred Stock.
On January 28, 1999, the Company issued a note for $800,000, at 14% annual interest, through a private placement to an accredited investor. On December 15, 1999, the note was exchanged for an increase in the number of shares that the Company's Class C Convertible Preferred Stock is convertible into. Class C shares are not eligible for conversion to Common Stock until September 30, 2003 and are redeemable by the Company for a cash payment of $2.3 million on or before September 28, 2003.
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 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 provided for the following:
- 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;
- the waiver by the holders of the Series D Preferred Stock of their right to receive further dividends under the Series D Preferred Stock
- 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 $.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 remaining 2,145 shares of Series D Preferred Stock that they hold were convertible into 3,293,020 shares of common stock. As of March 19, 2001, there was 1,324 shares of Series D Preferred Stock which are convertible into 2,017,524 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 redeems at least $1,500,000 of such stock on or before January 30, 2001 which the Company did not redeem. 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. The placement agent for this transaction was Zanett Securities Corporation. Exemption from registration is claimed under Section 4(2) of the Securities Act because it did not involve a public offering.
During the years ended December 31, 2000, 1999 and 1998, 29,364, 877,612 and 141,865 shares of Class A Preferred Stock were converted into the same number of shares of Common Stock, respectively. During the year ended December 31, 1999, the 643,770 shares of Class B Preferred Stock were converted into the same number of shares of Common Stock. The Class C Preferred Stock is not eligible for conversion to Common Stock until September, 2003. On November 10, 2000 the Company converted 1,178 and 6,177 shares of Class D Preferred Stock into 1,808,473 shares of Common Stock and 3,000 shares of Class E Preferred Stock, respectively. See Note 11 to the financial statements.
Item 6.
Item 6. Selected Financial Data
- ------------ (1) Effective January 1, 1999, Contractors Resources 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.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The following table sets forth the revenue, gross profit, expenses, and income of each of the business areas for the years ended December 31, 2000, 1999, and 1998.
Consolidated Operating Results by Segment
RESULTS OF OPERATIONS
2000 Compared to 1999
Revenue for the year ended December 31, 2000 increased $0.9 million or 5.5% to $16.8 million, compared to $15.9 million for the same period in 1999. This increase includes a $0.7 million or 4.9% increase in Netplex revenue and a $0.2 million or 12.0% increase in Contractors Resources revenue.
Gross profit for the year ended December 31, 2000 decreased $0.2 million or 2.4% to $7.4 million, compared to $7.6 million for the same period in 1999. Contractors Resources gross profit for the year ended December 31, 2000 remained relatively unchanged from the same period in 1999 while Netplex gross profit for the year ended December 31, 2000 decreased $0.2 million or 3.3% to $6.4 million, compared to $6.6 million for the same period in 1999.
Gross profit margins decreased to 44.0% for the year ended December 31, 2000 compared to 47.5% for the same period in 1999. Netplex gross profit margins decreased from 45.3% in 1999 to 41.8% in 2000. This decrease in
Netplex gross margin was primarily due to lower technical staff utilization levels in the year ended December 31, 2000 compared to the same period in 1999. Contractors Resources gross profit margin decreased from 71.0% in 1999 to 65.7% in 2000.
Segment operating expenses for the year ended December 31, 2000 increased $4.5 million or 70.8% to $10.9 million from $6.4 million for the same period of 1999. This increase included increases in Netplex and Contractors Resources of $2.1 million or 54.2% and $2.4 million or 96.0%, respectively. The increase in Netplex operating expenses was primarily attributable to increased expenditures in marketing and sales. The increase in the Contractors Resources' operating expenses was due primarily to the fees paid to TMP Interactive, Inc. under the co-branding services arrangement of approximately $1.0 million and expenses associated with the development of the web site in 2000.
Segment loss for the year ended December 31, 2000 was $3.5 million as compared to a segment income of $1.2 million for the same period of 1999, a decline of $4.7 million or 389.3%. This decline includes decreases in segment profits from Netplex and Contractors Resources of $2.3 million or 83.0% and $2.4 million or 153.9%, respectively.
Corporate expense for the year ended December 31, 2000 increased $1.8 million or 30.1% to $7.8 million from $6.0 million in the same period of 1999. This increase reflects additional expenditures required to support the growth of operations and the integration of acquisitions. Subsequently, as a result of the restructuring and discontinued operations, corporate expenses are expected to decrease.
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 office, including related workforce reductions. There was no comparable charge in the same period of 1999.
Earnings (from continuing operations) before interest, income taxes, depreciation and amortization ("EBITDA") for the year ended December 31, 2000 was a loss of $11.3 million as compared to a loss of $4.3 million for the same period of 1999, a decline in EBITDA of $7.0 million or 162.8%. The components of this decrease are discussed above.
Depreciation, amortization, interest expense and minority interest for the year ended December 31, 2000 increased $0.2 million to $2.1 million from $1.9 million for the same period in 1999. This increase is principally due to the amortization of the internally developed web application software for the Contractors Resources operation.
Loss from discontinued operations for the year ended December 31, 2000 was $0.9 million compared to $1.2 million for the same period in 1999, an decrease of $0.3 million or 26.2%. See Note 3 to the financial statements for a description of the discontinued operations.
Gain on the disposal of discontinued operations for the nine month period ended December 31, 2000 was $0.5 million. There was no comparable gain in the same period of 1999. 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, 2000 due to the generation of net losses. No provision for income taxes was required for the year ended December 31, 1999 due to utilization of net operating loss carryforwards generated in previous years.
Net loss for the year ended December 31, 2000 was $15.3 million compared to $7.4 million in the same period of 1999, a decrease of $7.8 million or 105.5%. The components of this decrease are discussed above.
1999 Compared to 1998
Revenue for the year ended December 31, 1999 was $53.1 million (recognizing CR revenue on a gross basis, see Note 2 to the financial statements), an increase of $14.0 million or 35.1% from $39.1 million for the year ended December 31, 1998. This increase includes a $10.6 million or 267.4% increase in Netplex revenue and a $3.4 million or 9.8% increase in Contractors Resources revenue recognized on the gross basis. The growth in Contractors Resources revenues is to due to an increase in the number of contractor members. The growth in Netplex revenue was primarily attributable to the increased revenue from a full years revenue of AIG which was acquired by the Company September 1, 1998.
Gross Profit for the year ended December 31, 1999, increased $5.1 million or 205.5% to $7.6 million as compared to $2.5 million for 1998. This increase includes an increased gross profit in Netplex $5.4 million or 472.5%, offset by a
decrease in gross profit for Contractors Resources of $0.3 million or 26.3%. The increase in the gross profit for Netplex resulted from a full year of operations of AIG.
Segment operating expenses for the year ended December 31, 1999, increased $4.0 million or 170.1% to $6.4 million from $2.4 million for the same period in 1998. This increase includes increases in Netplex and Contractors Resources operating expenses of approximately $2.6 million or 216.2% and $1.4 million or 121.4%, respectively. The increase in operating expenses for Netplex are primarily due to the acquisition of AIG. The increase in Contractors Resources is primarily due to increases in sales and marketing costs.
Segment income for 1999 was $1.2 million, increased $1.1 million or 886.9% from $0.1million in 1998. This was primarily due to an increase in segment income from Netplex of $2.8 million, or 216.2% offset by the segment loss from Contractors Resources of $1.7 million or 960.2%.
Corporate expense for the year ended December 31, 1999, increased $3.3 million or 150.8% to $5.5 million from $2.2 million in the same period of 1998. This increase reflects an additional investment in corporate development capability and infrastructure to support the growth of operations.
Earnings before interest, income taxes, depreciation, and amortization ("EBITDA") for the year ended December 31, 1999, was a loss of $4.3 million as compared to a loss of $2.1 million for the same period of 1998 a decline in EBITDA of $2.2 million. The components of this $2.2 million are discussed above.
Depreciation, amortization, and interest expense for the year ended December 31, 1999, increased $0.5 million to $1.9 million from $1.4 million for the same period of 1998. This increase is principally due to additional amortization and depreciation from acquisitions and increased borrowings under the Company's line of credit facility to support growth during the year ended December 31, 1999.
Due to the generation of net losses, no provision or benefit for income taxes was recorded for either the year ended December 31, 1999 or 1998. Any tax benefits associated with net operating losses have been fully reserved for by a valuation allowance.
The net loss in 1999 increased $4.9 to $7.4 million from $2.5 million in 1998. The components of this increase are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had cash and cash equivalents of $3.8 million.
The following increased the Company's liquidity and capital resources:
For the year ended December 31, 2000, the Company's cash decreased by $0.5 million. This decrease resulted primarily from the $15.2 million operating loss which was partially offset by $10.7 million of proceeds from the sale of stock and prepaid warrants and $2.9 million of proceeds from the exercise of stock options and warrants.
On July 31, 2000, the Company entered into a loan agreement with a bank that was set to expire on July 31, 2002. Under the agreement the Company could borrow up to an amount equal to 85% of its eligible accounts receivable, as described in the line of credit, but not more than $6.0 million. The line of credit is secured by the Company's assets and bears interest at the bank's prime rate plus 1.75%. The terms of the line of credit required that the Company meet certain financial and other covenants, including maintaining minimum tangible net worth of $4.0 million. The Company has also agreed to maintain an interest-bearing deposit account of $2.0 million with the bank.
As of September 30, 2000, the Company was not in compliance with the tangible net worth covenant. On January 10, 2001, the Company and the bank entered into an Loan Amendment and Forebearance Agreement ("Forebearance Agreement") whereby the bank agreed to forebear from exercising its rights and remedies under the loan document due to the existing event of default until March 31, 2001; provided no additional default occurs. The Company and the bank agreed the Company does not need to comply with the tangible net worth covenant set forth in the loan agreement. Under the Forebearance Agreement the Company may borrow 40% of eligible accounts receivable (as defined in the agreement) up to $5.0 million bearing interest at the bank's prime rate plus 2.5%. In the fourth quarter of 2000, the Company applied the $2.0 million interest bearing deposit against its outstanding advance. Outstanding advances were $2.0 million and $5.1million at December 31, 2000 and 1999, respectively.
On March 22, 2001, the Company signed a commitment letter with a finance company which will, upon closing, provide the Company with a line of credit facility which will replace its current bank line of credit. The commitment
is subject to closing on formal legal documents which management expects to occur in April 2001. Upon closing, the facility will permit borrowings against eligible accounts receivable up to $4,000,000, collateralized by substantially all of the Company's assets and repayable upon demand. Subject to certain other restrictions, the borrowing base of accounts receivable will be based on 80% of outstanding accounts receivable. Interest will be payable at prime plus 1.75% (currently 9.75%). As a result of this commitment letter and discussions with its current lender, management expects the Forebearance Agreement described above to be extended to accommodate closing on this replacement facility.
Capital expenditures for the year ended December 31, 2000, were $1.3 million.
Dividends of approximately $367,000 were paid on the Company's Class A, Class C and Class D Cumulative Preferred Stock during the year ended December 31, 2000. The Company issued 190,608 shares of Common Stock in lieu of approximately $125,000 of such dividends. At December 31, 2000, accrued dividends on the Company's Class C, Class D and Class E Preferred Stock were approximately $166,000.
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. The Class C shares are not eligible for conversion to Common Stock until September, 2003. The conversions of the Class A Cumulative Preferred Stock during the year ended December 31, 2000 will reduce the Company's obligation for dividend payments by approximately $6,000 annually.
Stock options and warrants to purchase 2,093,005 shares of the Company's Common Stock were exercised during the year ended December 31, 2000, generating cash proceeds to the Company of $2.9 million.
In March 2000, the Company raised an additional $9.4 million for 10,000 shares of its Class D Preferred Stock and $1.3 million in the sale of 1,500 units in a private placement whereby each unit 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 proceeds of these equity sales have been used to provide additional working capital. In November 2000, the Company redeemed 500 shares of Preferred Class D shares for $500,000 in connection with the restructuring of the Class D Preferred Stock (see Note 11 to the financial statements).
Future Plans. - -------------
The Company believes that based on its current operating plan, that cash generated from operating activities, borrowings on its line of credit facility coupled with its recent equity infusions will be sufficient to meet its anticipated working capital and capital expenditure requirements for at least the next 12 months. Beginning in the third quarter of 2000 and continuing into early 2001, management has taken a number of steps to reduce its operating cash flow requirements, including closing certain facilities and combining others, reducing administrative staff, disposing of non-strategic business units and implementing other cost containment initiatives. If cash generated from operations is insufficient to satisfy the Company's liquidity needs, the Company may seek to increase its line of credit, sell convertible debt or equity securities. However, no assurances can be given that any such addition financing sources will be available on acceptable terms or at all. The sale of additional convertible debt or equity securities could result in dilution to the Company's stockholders. The Company has no current plans, agreements, and commitments and is not engaged in any negotiations with respect to such transactions.
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. The Company's carries variable rate debt under its line of credit with an interest rate that approximates the market rate.
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.
For the years ending December 31, 2000 and 1999, Grant Thornton LLP, independent certified public accountants, examined our financial statements. The shareholders have ratified the selection of Grant Thornton LLP as our auditors for the year ending December 31, 1999 and have approved the appointment of Grant Thornton LLP as our auditors for the year ending December 31, 2000.
During 1999 and 2000, there were no "disagreements" between Grant Thornton LLP and us on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures.
As reported on our Form 8-K filed May 21, 1999, on May 14, 1999, KPMG LLP resigned as our independent accountants. As stated in our Form 8-K filed May 21, 1999, the report of KPMG LLP on our financial statements for the fiscal year ended December 31, 1998 did not contain adverse opinions or disclaimers of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. Additionally, as stated in the Form 8-K, in connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 1998, and in the interim period subsequent to December 31, 1998, preceding the date of KPMG's resignation, there were no "disagreements" with KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which "disagreement" if not resolved to the satisfaction of KPMG would have caused KPMG to make reference to the matter in their report.
As stated in our Form 8-K filed June 2, 1999 and in the exhibits thereto, by letter purported to be dated May 13, 1999, delivered to our audit committee by facsimile on May 21, 1999, KPMG advised us that KPMG believed that there was a matter involving our internal control structure and its operation that KPMG considered to be a "reportable condition" under standards established by The American Institute of Certified Public Accountants. In the letter dated May 13, 1999, and an ensuing letter addressed to the Securities and Exchange Commission in response to the Item 4 disclosures set forth in our Form 8-K filed May 21, 1999, which letters were filed as Exhibits 16.1 and 16.2, respectively, to the Form 8-K filed June 2, 1999, KPMG stated that the matter referred to a lack of an adequate system of financial reporting, and more specifically, indicated that:
- during KPMG's audit of our 1998 financial statements, KPMG noted that we had to seek extensions on several of our required filings with the Securities and Exchange Commission and that we had to amend our Forms 10-Q previously filed for the first three quarters of 1998;
- KPMG believed that our system of financial reporting was not adequate to enable us to report accurate and timely financial information;
- KPMG believed that our process for accumulating financial data neither provided management with sufficient time to evaluate the data in an effort to ensure accurate financial reporting nor did it enable us to meet financial reporting deadlines in a timely manner; and
- KPMG believed that our system of financial reporting did not include a periodic process of evaluating our financial reporting policies in light of significant events or changes in circumstances which might impact those policies.
As described in our Form 8-K filed June 2, 1999, we disagreed with KPMG's assertion of a "reportable condition" and furthermore, we were of the view that the "reportable condition" described in KPMG's letter did not rise to the level of a "reportable event" as defined in Item 304 of Regulation S-K. Because KPMG resigned before we received either letter, neither we nor our audit committee had an opportunity to discuss the matters with KPMG.
The reports of our principal accountants on the financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits for the two most recent fiscal years, there have been no disagreements with our principal accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of our principal accountants, would have caused them to make reference thereto in their report on the financial statements for these years.
We engaged the firm of Grant Thornton LLP, as of November 13, 1999, to act as our independent accountants. Our audit committee and Board of Directors approved the engagement of Grant Thornton LLP. We authorized KPMG LLP to respond fully to any inquiries of Grant Thornton LLP. We have not consulted with Grant Thornton LLP regarding the application of accounting principles as to a specified transaction or the type of opinion that might be rendered on our financial statements or any matter that was either the subject of a "disagreement" or a "reportable event" prior to their engagement as our independent accountants.
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 Pricewaterhouse Coopers, from 1969 to 1980, the last four years as Senior Audit Manager. Mr. Russo holds a bachelor's degree in accounting from Niagara University and is a Certified Public Accountant.
Richard Goldstein has served as a director of Netplex since July 1996. Mr. Goldstein has been a Partner of Tocci, Goldstein and Company, L.L.P., a New York City-based C.P.A. firm since 1992. Prior to 1992, Mr. Goldstein was a Tax Partner with KPMG LLP. Mr. Goldstein holds a Bachelor of Business Administration in Accounting and Master of Business Administration in Taxation from the City University of New York and is a Certified Public Accountant.
Steven Hanau became a director of Netplex in July 1998. Mr. Hanau has served as President of Enterprise Services at Wang Global since August 1996. Prior to 1996, Mr. Hanau spent eight years at I-NET, becoming its President of Enterprise Services until Wang Global acquired I-NET. Mr. Hanau spent twenty two years in the U.S. Army, holding high level positions with the Army Chief of Staff and the Office of the Secretary of Defense. Mr. Hanau holds a degree from the United States Military Academy and earned advanced degrees in operations research from Stanford University and in business administration from Long Island University.
J. Alan Lindauer became a director of Netplex in November 1998. Mr. Lindauer has also been serving as a director of Waterside Capital Corporation since July 1993 and was named as its President and Chief Executive Officer in March 1994. Mr. Lindauer has also served as President of JTL, Inc., since 1986. Also since 1986, Mr. Lindauer has served as a director of Commerce Bank of Virginia. In 1963, Mr. Lindauer started Minute-Man Fuels, which he managed until 1985. Mr. Lindauer holds a Bachelor of Business Administration in Accounting and a Master of Business Administration from Old Dominion University. He is a Certified Management Consultant.
Board Composition. Our amended Certificate of Incorporation currently authorizes six (6) directors. Our Board of Directors currently consists of four (4) members. Our amended Certificate of Incorporation provides that our board of directors will be divided into three classes, Class I, Class II, and Class III, with each class serving staggered three-year terms. The initial Class I director, J. Alan Lindauer, was reelected to office at the 2000 annual meeting of shareholders and will hold office until the 2003 annual meeting of shareholders. The initial Class II director, Steven
L. Hanau, will hold office until the 2001 annual meeting of shareholders. The initial Class III directors, Gene Zaino and Richard Goldstein, will hold office until the 2002 annual meeting of shareholders. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This staggered classification of the board of directors may have the effect of delaying or preventing changes in control or management.
Section 16(a) Beneficial Ownership Reporting Compliance
Richard Goldstein filed four late Form 4's representing 5 transactions. Additionally Mr. Goldstein failed to file the Form 4 for those transactions but rectified the situation by filing a Form 5 on February 5, 2001.
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, 2000.
Summary Compensation Table
(1) Mr. Zaino is employed under an employment agreement through June 2002 pursuant to which he is currently paid a base salary of $275,000 per annum. In addition, 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, which shall not exceed 60% of base salary. The Board approved additional compensation in the form of an annual cash incentive for the year ended December 31, 1999 for Mr. Zaino in the amount of $545,902. The net proceeds of this cash incentive were used to repay a 1997 loan from the Company in January 2000. The Company did not accrue any incentive compensation in 2000 on behalf of Mr. Zaino. The Company has and is the beneficiary under a key-person life insurance policy for $2 million on Mr. Zaino.
(2) Mr. Russo is employed under an employment agreement through January 3, 2002 pursuant to which he is currently paid a base salary of $200,000 per annum. 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 2000 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.
Aggregated Option Exercises and Fiscal Year-end Option Values
(1) At December 31, 2000 the closing price of the Company's Common Stock on the Nasdaq SmallCap Market was $0.094.
Compensation of Directors. Our Board of Directors are not paid to attend meetings; however, each member receives options to purchase 15,000 shares of common stock when he or she is first elected to the Board. Options awarded to
directors are granted under a stock option plan established for the directors. 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 February 2000, each outside director received a cash bonus of $10,000.
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 2000.
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 "2000 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. To date, the Committee has not awarded cash incentive compensation, except as set forth above. Cash incentive compensation paid to those executive officers named in the Summary Compensation Table wills be reflected in the Table under the caption "Salary."
Stock-Based Incentive Compensation. The 1992 Incentive and Nonqualified Stock Option Plan is designed to create a common interest between key employees, including executive officers, and shareholders on a long-term basis. 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. 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, which comprises the Company's Stock Option 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.
2000 Compensation. The Committee, in determining the 2000 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, as such, has 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 did not award cash or stock-based incentive compensation to such executive officers for the year ended December 31, 2000.
/s/ THE COMPENSATION COMMITTEE
Richard Goldstein
Steven Hanau
Performance Graph
[PERFORMANCE CHART 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 29, 1995, December 31, 1996, December 31, 1997, December 31, 1998, December 31, 1999 and December 29, 2000.
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, 2001, 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 622,500 shares of Common Stock subject to currently exercisable options and 1,413,930 shares of Common Stock owned. (3) Consists of 82,500 shares of Common Stock subject to currently exercisable options. (4) Consists of 67,500 shares of Common Stock subject to currently exercisable options and 22,500 shares of Common Stock owned. (5) Consists of 75,000 shares of Common Stock subject to currently exercisable options and 5,000 shares of Common Stock owned. (6) Includes 847,500 shares of Common Stock subject to currently exercisable options and warrants.
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.
Mr. Lindauer, is a director of the Company and the President, Chief Executive Officer and Director of Waterside Capital Corporation ("WTC"), the holder of the Company's Class C preferred shares. On January 28, 1999, WTC lent the Company $800,000 under a subordinated note. On December 15, 1999 the subordinated note was exchanged for an increase in the number of shares that the Company's Class C Convertible Preferred Stock is convertible into.
The Company paid approximately $18,000, $45,000 and $24,000 in 2000, 1999 and 1998, respectively for accounting, tax and consulting services to an accounting firm, in which Mr. Goldstein, a director of the Company, is a partner.
PART IV
Item 14.
Item 14. Exhibits and Reports on Form 8-K.
(a) 1. Financial Statements and Schedules. The following financial statements are included herein:
2. Consolidated Financial Statement Schedules
The following consolidated financial statement schedule of the Company for each of the years ended December 31, 2000, 1999, and 1998 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 - Quarterly Consolidated Financial Data
Schedule II -- Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto.
3. Exhibits
* Incorporated by reference to the Registrant's Registration Statement on Form SB-2 filed with the Securities and Exchange Commission January 29, 1993 (Commission File No. 33-57546).
** Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission March 31, 1997 (Commission File No. 33-57546).
*** Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission April 3, 2000 (Commission File No. 1-11784).
**** Previously filed in connection with this offering pursuant to the Registrant's Registration Statement on Form S-3 filed with the Securities and Exchange Commission May 9, 2000 (Commission File No. 333- 36572).
***** Incorporated by reference to the Registrant's Registration Statement on Form S-3 filed with the Securities and Exchange Commission November 13, 1998 (Commission File No. 333-67321).
****** Incorporated by reference to the Registrant's Annual Report on Form 10- K for the year ended December 31, 1997 filed with the Securities and Exchange Commission on April 15, 1998.
******* Incorporated by reference to the Registrant's Current Report on Form 8- K, filed with the Securities and Exchange Commission June 7, 1996, as amended.
+ Incorporated by reference to the Registrant's Current Report on Form 8- K filed with the Securities and Exchange Commission on June 2, 1999 (Commission File No. 001-11784).
++ Previously filed in connection with this offering pursuant to the Registrant's Registration Statement on Form S-3 filed with the Securities and Exchange Commission May 9, 2000 (Commission File No. 333-36572) and pursuant to the Registrant's Registration Statement on Form S-3 filed with the Securities and Exchange Commission May 22, 2000 (Commission File No. 333-37594).
# Incorporated by reference to the Registrant's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on December 31, 1996 (Commission File No. 333-19115).
## Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 filed with the Securities and Exchange Commission April 3, 2000 (Commission File No. 001-11784).
### Incorporated by reference to the Registrant's Quarterly Report on Form 10- Q/A, filed with the Securities and Exchange Commission on May 16, 2000 (Commission File No. 001-11784).
#### Previously filed.
##### Filed herewith
(b) The Company filed on Form 8-K in the quarter ended December 31, 2000 the following:
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the County of Fairfax, Commonwealth of Virginia on the 30th day of March 2001.
The Netplex Group, Inc.
By: /s/ Gene Zaino ---------------- Gene Zaino Chairman and C.E.O.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SCHEDULE I
THE NETPLEX GROUP, INC. AND SUBSIDIARIES SCHEDULE I - QUARTERLY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 1999 and the first half of 2000 were restated to reflect discontinued operations (Note 3 to the financial statements) and the change in the manner the Company recognizes revenue in its Contractors Resources segment (Note 2 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.
SCHEDULE II
THE NETPLEX GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
* Amount represents allowance for bad debts of acquired accounts receivable.
** Amount includes allowance related to receivables in discontinued operations.
Index to Consolidated Financial Statements
Page ------
Independent Auditors' Reports......................................
Consolidated Balance Sheets as of December 31, 2000 and 1999.......
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998..................................
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998............................
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998..................................
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 sheet of The Netplex Group, Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the each of the years in the two year period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing standards. 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, 2000 and 1999 and the results of their operations and their cash flows for the each of the years in the two year period ended December 31, 2000 in conformity with generally accepted accounting principles.
We also audited the adjustments described in Note 3 to the financial statements that were applied to restate 1998 financial statements. In our opinion, such adjustments are appropriate and have been properly applied.
In connection with our audits of the consolidated financial statements referred to above, we have audited Schedule II - Valuation and Qualifying Accounts, as of December 31, 2000 and 1999. In our opinion this schedule presents fairly, in all material respects, the information required to be set forth therein.
/s/ Grant Thornton LLP
Vienna, Virginia February 23, 2001 (except for Note 1, as to which the date is March 22, 2001)
Independent Auditors' Report
Board of Directors and Stockholders The Netplex Group, Inc.:
We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of The Netplex Group, Inc. and subsidiaries (the "Company") for the year ended December 31, 1998, before the reclassification to reflect the e-Infrastructure segment as a discontinued operation as described in Note 3 to the consolidated financial statements. In connection with our audit of the consolidated financial statements, we also have audited the accompanying financial statement Schedule II - Valuation and Qualifying Accounts, for the year ended December 31, 1998. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements (before reclassification) referred to above present fairly, in all material respects, the results of operations and cash flows of The Netplex Group, Inc. and subsidiaries for the year ended December 31, 1998 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
McLean, Virginia April 19, 1999
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, 2000, 1999 and 1998
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 strategic, interactive, technology, and security solutions primarily in the Retail and Consumer Products industry. Netplex is an Information Technology (IT) company that provides the expertise and information systems to link employees, customers, prospects, suppliers, and manufacturers to help "network-enable" organizations. The Company re- sells technology products when necessary to deliver to customers fully integrated system solutions. The Company also provides certain business 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 locations in Oklahoma, New Jersey, Virginia and at customer locations throughout the United States.
The Company has negative working capital at December 31, 2000 of approximately $2.9 million and has incurred significant losses from operations in each of the last three years. In addition, the Company is operating under a forebearance agreement with its principal lender that, among other things, reduced the borrowing base percentage applied to eligible accounts receivable. Management believes that cash on hand as of December 31, 2000 together with cash flows from operations in 2001 will be sufficient to meet its working capital requirement in 2001. In the third quarter of 2000, the Company began a restructuring of the Company which included closing and combining certain facilities, reduction of administrative staff, and disposing of non-strategic business units. In addition, recent business development efforts and refinements to the Company's staff compensation programs have improved utilization of billable, technical staff which should improve the profitability of the Company's continuing operations going forward.
On March 22, 2001, the Company signed a commitment letter with a finance company which will, upon closing, provide the Company with a line of credit facility which will replace its current bank line of credit. The commitment is subject to closing on formal legal documents which management expects to occur in April 2001. Upon closing, the facility will permit borrowings against eligible accounts receivable up to $4,000,000, collateralized by substantially all of the Company's assets and repayable upon demand. Subject to certain other restrictions, the borrowing base of accounts receivable will be based on 80% of outstanding accounts receivable. Interest will be payable at prime plus 1.75% (currently 9.75%). As a result of this commitment letter and discussions with its current lender, management expects the Forebearance Agreement described in Note 8 to be extended to accommodate closing on this replacement facility.
In addition, the Company continues to explore opportunities in the capital markets to raise additional funds from third party investments in the Company. While management believes these efforts to increase borrowing capacity and generate funds from additional outside investments will be successful, no assurances can be given that the Company will be successful in obtaining additional working capital from these sources.
(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 subsidiary. All significant inter-company transactions have been eliminated in consolidation.
Revenue Recognition ------------------- The majority of the Company's revenue is from consulting services contracts. This revenue is recognized when the services are performed and the costs are incurred. The Company generally recognizes hardware and software product revenue, which does not involve significant integration services, when the products are delivered to the customer site. Revenue on fixed price contracts for services, or both hardware and significant integration services is recognized on the percentage of completion basis, based on the efforts expended method in accordance with SOP 81-1, "Accounting for Performance of Construction Type and Certain Production Type Contracts." During 2000, 1999 and 1998 the Company recognized $1,675,000, $2,287,000 and $815,000 of revenue under the percentage of completion method. The Company's systems integration contracts are typically 3-6 months and are priced either on a time and material ("T&M") or a fixed price basis. Revenue for maintenance contracts is recognized ratably over the service period of the underlying contract. Deferred revenue represents the unearned portion of maintenance contracts and amounts billed in advance of work performed, in accordance with the terms of the contract. The Company records loss provisions if required for its contracts at the time that such losses are identified.
The accompanying consolidated financial statements reflect a change in the manner the Company recognizes revenue in its Contractors Resources segment consistent with certain modifications made to CR's contractual arrangements during 1999 and in compliance with EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" and the Securities and Exchange Commission's view on revenue recognition issued in Staff Accounting Bulletin No. 101. As a result of the adoption of this new guidance, the results of operations for 1999 have been restated. Effective January 1, 1999, CR recognizes as revenue the fees (net revenue) it charges to its members for providing its back office services as these services are provided. Adoption of this guidance did not effect the presentation of results of operations for 1998 and prior periods. This change has no effect on the net income or loss reported from these operations. Gross service volume generated by CR's operations for the years ended December 31, 2000, 1999 and 1998 were $42,470,000 $38,624,000 and $35,181,000.
Management regularly reviews outstanding accounts receivable for collectability and provides for an allowance for doubtful accounts whenever necessary. As of December 31, 2000 and 1999, the Company was owed $1,242,000 and $1,059,000 by two customers at each date.
The Company recognized revenue from unaffiliated customers constituting 25.0% and 27.8% in 2000 and 1999, respectively from two customers in each year.
Consistent with the Company's strategy, management targets vertical industry markets for its services. As of December 31, 2000 and 1999, 70.6% and 79.3%, respectively of the Company's accounts receivable were due from customers in the retail and consumer products industry. The Company had no concentrations of accounts receivable from any other industry group at December 31, 2000 and 1999.
Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments with maturity, at date of purchase, of three months or less to be cash equivalents. Cash equivalents are comprised of money market accounts, and are stated at cost, which approximates fair value.
Property and Equipment ---------------------- Property and equipment is recorded at cost. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the assets, which range from 3 to 5 years. Computer software developed for internal use is amortized over 3 years in accordance with SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use."
Property and equipment under capital leases is amortized using the shorter of the lease term or the estimated useful life.
Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts and any gain or loss on such disposition is reflected in the statement of operations. Expenditures for repairs and maintenance are charged to operations as incurred.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of ----------------------------------------------------------------------- Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
Goodwill and Other Intangible Assets ------------------------------------- Goodwill, the cost in excess of the fair value of net assets acquired, is being amortized by the straight-line method, for periods ranging from 7 to 15 years. Management reviews the valuation and amortization period of goodwill continually. As part of this review, the Company estimates the value and future benefits of income generated, to determine whether impairment has occurred.
Other intangible assets resulting from the Company's acquisitions consist of a fulfillment database, acquired software, an assembled workforce, and a non-compete agreement. Such assets are being amortized on the straight- line basis over periods of 4 to 7 years.
Investment in Common Stock -------------------------- The Company has an investment in common stock of a privately held company included in other assets valued at $375,000 which is accounted for using the cost method.
Income Taxes ------------ Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates, that are applicable to the future years in which the deferred tax assets or liabilities are expected to be settled or realized. Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the rate change is enacted.
Earnings (loss) per share ------------------------- The Company accounts for earnings (loss) per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" which requires companies to present basic earnings per share and diluted earnings per share (EPS). Basic net loss per common share is calculated using the weighted average number of common shares outstanding during the periods. Diluted net loss per common share is calculated using the weighted average number of common shares and dilutive potential common shares outstanding during the period. For the years ended December 31, 2000, 1999 and 1998, the assumed exercise of the Company's outstanding stock options, warrants and Convertible Preferred Stock are not included in the calculation, as the effect would be anti-dilutive.
Stock Options ------------- The Company accounts for 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 APB Opinion 25 and provide the pro forma disclosure provisions of SFAS No. 123.
The Company accounts for the options granted to consultants based on the provisions of SFAS No. 123.
Segment Reporting ----------------- The Company accounts for its segments pursuant to Statement of Financial Accounting Standards (SFAS No. 131) "Disclosures about Segments of an Enterprise and Related Information." Operating segments, as defined in SFAS No. 131, are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance. The 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: Netplex and Contractors Resources.
Reclassifications ----------------- Certain 1999 and 1998 amounts have been reclassified to conform to the current year presentation.
Use of Estimates ---------------- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
(3) Discontinued Operations
On September 29, 2000, the Company announced its decision to sell its e- Infrastructure operations. The Company is seeking a buyer for various businesses within the e-Infrastructure segment and although it is difficult to predict, the Company expects to complete the sales within the 12 months subsequent to the above measurement date. Accordingly, effective with the issuance of the third quarter 2000 financial statements, the results of operations and the net assets of the Company's e-Infrastructure segment have been classified as discontinued operations and prior periods have been restated. The results of the discontinued segment do not reflect any interest or management fees allocated by the Company. 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. The Company believes that the remaining businesses within this segment will not generate future operating losses prior to disposal and therefore no provision has been recorded in the financial statements.
The following is a summary of the results of operations of the discontinued operations:
The following is a summary of adjustments made to the Statement of Operations to reflect discontinued operations:
(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.
Management expects that the remaining accruals will be utilized in 2001.
(5) Property and Equipment
Property and equipment consists of the following:
Computer software at December 31, 2000 and 1999 includes $799,000 and $261,000 of software that was developed for internal use. Accumulated depreciation related to this software was $219,000 and $0 at December 31, 2000 and 1999, respectively.
Accumulated depreciation and amortization includes $545,000 and $526,000 related to assets under capital leases at December 31, 2000 and 1999, respectively.
(6) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following:
(7) Accrued Expenses
Accrued expenses consist of the following:
(8) Line of Credit
On July 31, 2000, the Company entered into a line of credit agreement with a bank that was set to expire on July 31, 2002. Under the line of credit the Company could borrow up to an amount equal to 85% of its eligible accounts receivable, as described in the line of credit, but not more than $6.0 million. The line of credit is
secured by the Company's assets and bears interest at the bank's prime rate plus 1.75%. The terms of the line of credit required that the Company meet certain financial and other covenants, including maintaining minimum tangible net worth of $4.0 million. The Company has also agreed to maintain an interest-bearing deposit account of $2.0 million with the bank.
As of September 30, 2000, the Company was not in compliance with the tangible net worth covenant. On January 10, 2001, the Company and the bank entered into an Loan Amendment and Forebearance Agreement ("Forebearance Agreement") whereby the bank agreed to forebear from exercising its rights and remedies under the loan document due to the existing event of default until March 31, 2001; provided no additional default occurs. The Company and the bank agreed the Company does not need to comply with the tangible net worth covenant set forth in the loan agreement. Under the Forebearance Agreement the Company may borrow 40% of eligible accounts receivable (as defined in the agreement) up to $5.0 million bearing interest at the bank's prime rate plus 2.5%. In the fourth quarter of 2000, the Company applied the $2.0 million interest bearing deposit against its outstanding advance. Outstanding advances were $2,003,000 and $5,126,000 at December 31, 2000 and 1999, respectively.
The Company expects to enter into a replacement line of credit facility in April 2001 as discussed in Note 1 which will result in the repayment of all amounts outstanding under the above facility.
(9) 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, 2000 1999 and 1998 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, 2000, 1999 and 1998 are presented below:
The Company has provided a valuation allowance for all of its deferred tax assets at December 31, 2000, 1999, and 1998 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, 2000 and 1999, the Company has NOL's for Federal and state income tax purposes of approximately $33,534,000 and $19,469,000 which may be applied against future taxable income. Additionally, the Company has $187,000 of research and development tax credits ("Credits") available to offset future Federal income taxes. The NOL's and credits expire primarily in years 2002 through 2020. Approximately $12,100,000 of the NOL's and the credits are subject to annual limitations and other conditions
as of December 31, 2000. Additionally, they may not be fully utilized for tax purposes due to the change in ownership resulting from the Company's merger in 1996 and an additional change in ownership in 1998.
(10) Commitments
Employment Agreements --------------------- The Company has employment agreements with several key employees. At December 31, 2000, the Company's annual obligation under the agreements is approximately $685,000 for each of the next three years.
Acquisitions ------------ In 1997, 1998 and 1999, the Company consummated five acquisitions accounted for as purchases. Certain of these acquisitions contained contingent consideration payable in cash or stock, dependent upon operational performance of the acquired businesses. During the years ended December 31, 2000, 1999 and 1998 the Company paid in either cash or stock $40,000, $1,720,523 and $438,666 in connection with these "earn-out" provisions, respectively. As of December 31, 2000, the Company is no longer obligated to pay any material future earn-out amounts pursuant to the terms of these acquisitions.
Co-Branding Agreement --------------------- In May 2000, the Company, through its Contractors Resources subsidiary, entered into a two year co-branding agreement with TMP Interactive, Inc. (TMP) that among other things called for the Company to make cash payments totaling $5.0 million over the period of the agreement in quarterly installments of approximately $464,000. In connection with the agreement, as described in Note 11, the Company granted TMP warrants to purchase 3,000,000 shares of the Company's common stock, of which 1,000,000 warrants vested immediately and 2,000,000 warrants vested over the two year period of the co-branding agreement. The Company has recorded expense associated with this agreement by applying the provisions of Emerging Issues Task Force Bulletin 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in conjunction with Selling, Goods or Services" (EITF 96-18). Under EITF 96-18, the value of the warrants that vested immediately was determined at the issuance date and is being amortized over the two year period of the agreement. In addition, the value of the warrants which vest over the life of the agreement is periodically estimated at the end of each quarter to determine the ratable amount of expense associated with these warrants. The expense charge to operations in connection with the co-branding agreement for the year ended December 31, 2001 was approximately $1,260,000.
The co-branding agreement is the subject to litigation described in Note 14.
Lease Obligations ------------------ The Company leases computer equipment, furniture, vehicles, and office facilities under long-term lease agreements. The following is a schedule of future minimum lease payments for capital and non-cancelable operating leases (with initial terms in excess of one year) as of December 31, 2000:
Total rent expense under operating leases was approximately $1,248,000, $1,020,000 and $900,000 for the years ended December 31, 2000, 1999 and 1998.
(11) Stockholders' Equity
As of December 31, 2000, the Company's authorized capital stock consisted of 100,000,000 shares of common stock, par value $.001 per share, and 6,000,000 shares of preferred stock, par value $.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 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 expires on September 19, 2001. The Company has the right to call the warrants at a redemption price of $.01 per share upon registration of the shares underlying the warrant, and 30 days written notice given at any time upon the Common Stock attaining certain per share trading prices and maintaining such prices for a specified period.
Class B Convertible ------------------- During 1999 all shares of the Class B Preferred Stock were converted into 643,770 shares of Common Stock. The holders of the shares agreed not to sell or otherwise distribute the Common Stock for one year.
Class C Cumulative Convertible ------------------------------ The Class C Cumulative Convertible Preferred Stock ("Class C Preferred") has a liquidation preference of $3.99 per share and a dividend rate of 9.99% per annum that increases to 15% per annum after the date that there is no Class A Preferred issued and outstanding. The Class C Preferred is convertible at any time after the earlier of a change in control of the Company or five years from the date of issuance. The Class C Preferred is redeemable at the option of the Company at any time within five years from the date of issuance. At December 31, 2000 and 1999, the Class C Preferred is 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 has measured the intrinsic value of the beneficial conversion feature of the Class C Preferred to be $2,300,000 at December 31, 2000 and 1999, respectively. As a result, the Company will accrete this discount as additional Preferred Stock dividends over the five years. During 2000 and 1999, the accretion of the discount of approximately $388,000 and $259,000 was included as additional Preferred Stock dividends in the Company's EPS calculation.
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:
. 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;
. the waiver by the holders of the Series D Preferred Stock of their right to receive further dividends under the Series D Preferred Stock
. 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 $.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 remaining 2,145 shares of Series D Preferred Stock that they hold will be convertible into 3,293,020 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. If 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.
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 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.
Monster Warrant. In connection with a co-branded services agreement, described in note 14 to the financial statements, 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. 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.
Roseland Warrant. The Company issued a warrant 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.
Silicon Valley Bank Warrant. The Company issued a warrant 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.
Pennsylvania Merchants Group Warrant. The Company issued a warrant 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 following table sets forth the warrants outstanding and their weighted-average exercise price:
As of December 31, 2000, 1999 and 1998 all of the warrants were exercisable and had an average remaining life of 4.4, 3.5 and 3 years, respectively.
Convertible Subordinated Note ----------------------------- On January 28, 1999, the Company issued a subordinated note for $800,000, at 14% annual interest, through a private placement to an accredited investor. The note was subordinated to the Company's line of credit with a bank. On December 15, 1999, the note was exchanged for an increase in the number of shares that the Company's Class C Cumulative Convertible Preferred Stock ("Class C Preferred") is convertible into.
(12) Stock Options
The Company has three stock option plans.
. The ISO Plan includes both incentive and non-qualified stock options. The Board of Directors may grant stock options to employees to purchase up to 6,000,000 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 or holder's of more than 10% of the voting stock of the Company). Generally the options vest ratably and become fully exercisable after 3 years but not less than 6 months from the date of grant. At December 31, 2000, approximately 481,000 options are available for grant under this plan.
. The Directors' Plan authorizes the Board of Directors to grant each director options to purchase up to 15,000 shares of the Company's Common Stock, upon election to the Board. Under this plan 300,000 shares of the Company's Common Stock are available. The terms of option grants for the Directors' Plan are identical to those of the ISO plan, except that the vesting period for the Directors' Plan is at the Board's discretion. All options granted under this Plan either vest immediately or contain vesting periods up to two years. At December 31, 2000, 15,000 options are available for grant under this Plan.
. The Consultant's Plan authorizes the Board of Directors to grant organizations or individuals, who are not employees of the Company, options to purchase up to 800,000 shares of the Company's Common Stock. The exercise price, terms of the option grant and vesting period for the Consultant's Plan are at the Board's discretion. At December 31, 2000, approximately 5,000 options are available for grant under this Plan.
Stock option activity for the Plans during the periods indicated is as follows:
ISO Plan -------- At December 31, 2000, the exercise prices for options granted under the ISO plan were $0.47 to $3.94 and the weighted-average remaining contractual life of those options was 8.7 years. At December 31, 2000, 1999 and 1998, the number of options exercisable under the ISO Plan was 1,286,186, 1,175,898 and 936,750, respectively. The weighted-average exercise price of those options was $1.25, $1.04 and $1.08, respectively.
Directors' Plan ----------------
At December 31, 2000, the exercise prices for options granted under the Directors' Plan were $0.47 to $3.56 and the weighted-average remaining contractual life of those options was 8.9 years. At December 31, 2000, 1999 and 1998, the number of options exercisable under the Directors' Plan was 240,000, 75,000 and 52,500, respectively. The weighted-average exercise price of those options was $0.93, $2.61and $3.17, respectively.
Consultants' Plan ------------------ At December 31, 2000, the exercise price for all options granted under the Consultants' Plan was $0.47 to $3.00 and the weighted-average remaining contractual life of those options was 8.76 years. All options, granted under the Consultants' Plan, are exercisable at the time of grant. The weighted-average exercise price of those options was $1.51, $1.25 and $1.49 at December 31, 2000, 1999 and 1998, 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. The options granted during 1999 and 1998 were in connection with certain equity issues, and as a result had no compensation expense.
The Company applies APB Opinion No. 25 in accounting for its ISO and Directors' Plans and, accordingly, no compensation expense has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below:
The per share weighted average fair value of the ISO on the grant date in 2000, 1999 and 1998, was $0.34, $2.29 and $1.17, respectively using the Black- Scholes option pricing model with the following weighted average assumptions:
The per share weighted average fair value of the Directors' Plan options on the grant date in 2000, 1999 and 1998 was $0.25, $2.85 and $1.02, respectively using the Black - Scholes option pricing model with the following weighted average assumptions:
(13) Related Party Transactions
The Company paid $18,000 in 2000, $45,000 in 1999 and $24,000 in 1998 for accounting, tax and consulting services to a CPA firm in which a partner of the firm is a director of the Company.
A Director of the Company is the President and Director of a company that owns all of the Company's Class C Convertible Preferred Stock (Note 11).
(14) 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 claims damages in excess of $300,000 plus punitive damages. The Company is vigorously defending against the action although an unsuccessful mediation session and settlement conference were held in an attempt to resolve the dispute. The nature and amount of damages, if DSA's allegations are proven, appear uncertain.
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 on Friday, January 19, 2001.
On March 6, 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. The provisions of the agreement that the opinion finds the Company violated could lead to substantial damages being awarded against the Company. While part of the theory for copyright damages was dismissed, another part was left to be tried. It, too, could result in substantial damages.
On March 20, 2001, the Company filed a motion for reconsideration of the granting of summary judgment on two portions of the order. There can be no assurance that reconsideration will be granted.
XcelleNet has reached an agreement in principle to settle that portion of the case against it in the amount of damages proven at trial on the claims against XcelleNet, and has reserved its indemnity claim against the Company.
In December 2000, TMP filed suit against the Company and its Contractors Resources subsidiary alleging that the Company failed to make a quarterly cash payment under its co-branding agreement with TMP. The complaint seeks a judgment of approximately $464,000. The Company has disputed the allegations, denying all liability and has asserted affirmative defenses, including that TMP did not perform the agreement as required. Since filing the suit, TMP has also notified the Company that it has failed to make another payment under the agreement but this alleged default has not yet become part of the litigation. While initial discovery had commenced, both parties have agreed to stay all further discovery pending a conference with the Court. Management believes it has meritorious defenses in this matter and the outcome will not have a material adverse impact on its financial condition or results of operations.
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.
(15) Employee Benefit Plans
The Company has a 401(k) plan where all full time employees with over 1000 hours of service to the Company or its subsidiaries are eligible to participate. The Company matches one-half of the employees' voluntary contributions up to a maximum Company contribution of 5% of participants' salaries. The Company's contribution to the Plan during 2000, 1999 and 1998 was approximately $456,000, $406,000 and $706,000, respectively.
The Company's CR subsidiary has a profit sharing plan for its employees whereby up to 10% of the employees salary can be contributed to the plan. The Company made no matching contributions to this plan during 2000, 1999 and 1998.
The Company does not provide any post retirement or post employment benefits.
(16) 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 had two reportable segments after the reclassification of the e-Infrastructure segment as a discontinued operation in the third quarter of 2000. 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:
. Netplex - provides professional services that constitute the strategic and creative aspects of Netplex's Netplex, as well as complete Internet-based application development, business security and protection consulting services and Retail Industry-focused consulting and integration services.
. Contractors Resources (CR) - provides business infrastructure and advisory services for its membership of independent contractors, which allow members to maximize the freedom and wealth potential of the independent lifestyle while enjoying the benefits associated with full-time employment.
The Company's accounting policies for these segments are the same as those described in the summary of Significant Accounting Policies, except that income tax expense is not allocated to each segment. In addition, the Company evaluates the performance of its segments and allocates resources based on gross margin, and earnings before interest, taxes, depreciation and amortization ("EBITDA"). Inter-segment revenues are immaterial.
The reportable segments are measured and resources are allocated both on income before income taxes and EBITDA, which represents the sum of income before taxes, depreciation, amortization, and interest. EBITDA is not a measure of performance or financial condition under generally accepted accounting principles, but is presented to provide additional information. The Company considers EBITDA to be a useful measure of the
Company's performance, because EBITDA can be used to measure the Company's ability to service debt, fund capital expenditures and expand business. EBITDA should not be considered in isolation or as a substitute for other measures of financial performance or liquidity under generally accepted accounting principles. While EBITDA is frequently used as a measure of operations and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.
The table below presents information about segments used by the chief operating decision-maker of Netplex as of and for the years ended December 31, 2000, 1999 and 1998. As discussed in Note 2, effective in 1999, the Company changed its method of recognizing revenue for CR to present its revenues on a net basis.
Reconciliation of Segment EBITDA to Net Operating Loss: