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, and Edmond, Oklahoma that serve as operating offices of its businesses. These leases expire on various dates from November 2002 to September 2004.
The Company believes that the space in its existing corporate and branch facilities are adequate for the foreseeable future to support the growth of its existing operations in the geographic areas in which it currently operates.
Item 3.
Item 3. Legal Proceedings.
From time to time, the Company is subject to litigation in the ordinary course of business.
On September 4, 1997, Data Systems Analysts, Inc. ("DSA"), a software design and consulting company, filed a complaint against Technology Development Systems, Inc. ("TDS") and the Company, alleging copyright infringement and breach of the Company's agreement. The Complaint also seeks damages against XcelleNet, Inc., which the Company has indemnified. The Complaint claims damages in excess of $300,000 plus punitive damages.
In June of 2000, the Company, TDS and XcelleNet, Inc. filed a complex motion for summary judgment, asking the Court to dismiss the majority of DSA's claims in the case. DSA also filed a motion for summary judgment asking the court to enter judgment in its favor on several of its claims. The district court judge held oral arguments on the counter-motions 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.
On March 20, 2001, the Company filed a motion for reconsideration of the granting of summary judgment on two portions of the order.
Prior to the May 24, 2001 trial date and before any motions for reconsideration, the parties mutually agreed to enter into settlement negotiations.
On December 28, 2001 the Company and DSA entered into a settlement agreement for dismissal of the lawsuits, with prejudice whereby the Company agreed to pay DSA $1,400,000 plus transfer its 125,000 shares of Tavve Software Company stock it held for investment purposes. The Company agreed to pay (i) $900,000 on or before December 31, 2001 or $900,000 on or before March 31, 2002 plus interest (prime rate plus 3%) from January 1, 2002, and (ii) $250,000 on each of June 30, 2002 and December 31, 2002. The Company did not pay the amount due on December 31, 2001. Upon the closing of the Offering on or before March 31, 2002, in lieu of the payment terms above, the Company agreed to pay (i) 50% of the cash proceeds after the first $1,000,000 up to a maximum of $700,000 and the difference of such cash proceeds and $900,000 on March 31, 2002 and (ii) $250,000 on each of June 30, 2002 and December 31, 2002.
In December 2000, TMP Interactive, Inc. ("Monster.com") 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 Monster.com. 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, Monster.com 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 and enter into settlement discussions.
On August 7, 2001, the Company and Monster.com entered into a mutually agreeable settlement whereby the Company would pay Monster.com fees of $230,000 and grant a warrant to purchase 4,000,000 shares of the Company's common stock at $0.47 per share which is fully exercisable at any time on or before August 7, 2004. As of December 31, 2001, the Company's remaining liability was $110,000. In conjunction with this agreement, the Company recorded a selling and general and administrative charge in the three month period ended September 30, 2001 of $590,000. Of this amount, $360,000 was related to the valuation of the warrants granted to Monster.com.
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, 2001.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters.
The Common Stock of the Company is traded on the NASD Over the Counter Bulletin Board ("OTCBB")
Price Range of Common Stock
The quotations set forth in the table reflect inter-dealer prices from NASD, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions:
2000 High Low - ---- ---- --- 1st Quarter $19.50 $9.13 2nd Quarter $12.44 $1.75 3rd Quarter $ 2.94 $0.72 4th Quarter $ 1.06 $0.06 - ---- 1st Quarter $ 0.69 $0.09 2nd Quarter $ 0.34 $0.08 3rd Quarter $ 0.19 $0.06 4th Quarter $ 0.12 $0.02
The Company has not paid any cash dividends on its Common Stock and does not intend to pay cash dividends on its Common Stock for the foreseeable future. The Company intends to retain future earnings, if any, to finance future development.
As of April 15, 2002 there were approximately 150 holders of record of the Company's Common Stock. The Company believes that at such date there were in excess of 6,000 beneficial owners of the Company's Common Stock.
Recent Sales of Unregistered Securities
The Company sold the following securities in the past three years that were not registered under the Securities Act of 1933, as amended.
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 was based upon 120% of the weighted average price of the Company's Common Stock for 15 consecutive trading days beginning the first day after the holders are entitled to exercise the call option.
On November 10, 2000, the Company entered into an Exchange, Redemption and Conversion Agreement (the "Exchange Agreement") with the holders of the Company's Series D Preferred Stock that provided for the following:
--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 difference between the original face value of the Series D Preferred Stock of $6,177,000 and the face value of the new Series E Preferred Stock of $3,000,000, equaling $3,177,000, was recorded as an addition to Additional Paid in Capital and has been added back in the loss applicable to common shareholders for computing earnings per share. In 2001, the holders converted and additional 821 shares into 1,251,047 shares of common stock. At December 31, 2001, 1,324 shares of Series D Preferred Stock remain outstanding and are convertible into 2,017,523 shares of common stock.
The Series E Preferred Stock has terms similar to the restructured Series D Preferred Stock, with the primary exceptions being that the Series E Preferred Stock was redeemable for $3,000,000 at the Company's option on or before April 30, 2001, provided that the Company 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 and 1999, 29,364 shares and 877,612 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. During the years ended December 31, 2001 and 2000, 821 and 1,178 shares of Class D Preferred Stock were converted into 1,251,047 and 1,808,473 shares of Common Stock, respectively and during the year ended December 31, 2000, 6,177 shares of Class D Preferred Stock were converted into 3,000 shares of Class E Preferred Stock. See Note 11 to the financial statements.
On September 28, 2001, the Company entered into an agreement with Waterside Capital Corporation ("Waterside") whereby
-- the Company paid $2,052,780 in the form of $1,000,000 cash and two secured commercial promissory notes in the original principal amounts of $900,000 and $152,780 for:
. Waterside's surrender to the Company for cancellation 1,500,000 shares of its Class C Preferred Stock;
. Waterside's guarantee of up to $400,000 of the Company's subsidiary, Systems, revolving credit facility; and
. Waterside surrendered for cancellation its warrant exercisable for 300,000 shares of the Company's Common Stock;
-- the Company paid $50,000 of closing fees associated with the transaction; and
-- Waterside purchased from the Company 1,000 shares of the Company's subsidiary, Systems, preferred stock for $1,000,000 which is recorded as a minority interest in the balance sheet.
The difference between the original face value (net of transaction fees) of the Series C Preferred Stock of $2,139,000 and the aggregate of the principal value of the note of $900,000 and the $1,000,000 of cash, equaling $239,000, was recorded as an addition to Additional Paid in Capital and has been added back in the loss applicable to common shareholders for computing earnings per share.
The promissory notes bear interest of 10% per annum. The $900,000 note is payable in quarterly installments of $15,000 and the $152,780 note is payable at the earlier of the closing of the Offering or January 1, 2002.
In May 2001, the Company issued 50,000 shares of its common stock to Gruntal & Co. LLC for investment banking advisory services. These shares were valued at $14,500 based upon the current market price at issuance and the shares are unregistered.
Item 6.
Item 6. Selected Financial Data
(1) Effective January 1, 1999, the Company's Contractors Resources - MyBizOffice segment revenues represent only the fees realized for services rendered to the independent contractor. Prior to that date, revenues included the gross fees charged to the third party customer being serviced by the independent contractor. The Company accounts for revenue generated by the Contractors Resources - Consultant Service Center segment on a gross basis due to the economic risks associated with the transactions.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, including our plans, objectives, expectations and intentions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Additional Factors That May Affect Future Results", "Business" and elsewhere herein.
The Company has incurred significant losses from operations and has used cash in operations in each of the last five years. In addition, as of December 31, 2001, the Company has a stockholders' deficit of approximately $6.0 million and a working capital deficit of approximately $8.7 million. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not contain any adjustments that might result from the outcome of this uncertainty.
Over the past two years, management has undertaken restructuring efforts aimed at, among other things, improving the productivity and billable utilization of its staff and reducing operating expenses. These restructuring efforts have included headcount reductions, consolidation of facilities and management of discretionary expenses. However, these actions were taken in a period where economic conditions in the United States and abroad created downward pressure on spending for information technology initiatives, including demand for the Company's consulting services. In 2001, the Company did experience lower operating losses than those reported in 2000 and a reduction in cash used in operations. However, given the Company's current operating outlook and continuing economic uncertainty, the Company's liquidity and financial position are such that additional capital will be needed in 2002 to sustain operations.
In late 2001, the Company began exploring alternatives to raising additional capital and restructuring its obligations and capital structure. Among the alternatives considered included a rights offering aimed at raising capital through the issuance of additional shares of its Netplex Systems subsidiary. At this time, management has chosen to not pursue the rights offering further, choosing instead to entertain offers for the operations comprising Netplex Systems (either as a whole or in parts). In March 2002, the Company entered into non-binding letter of intent to sell the assets of its retail consulting business for approximately $6.0 million in cash, subject to several conditions to closing, including due diligence and entering into purchase and sale agreements and employment agreements with key individuals in this business. While management is optimistic that this transaction will close by the end of May, no assurances can be given at this time that the Company will be able to close on this sale or one with other potential buyers. In addition, the Company continues to entertain offers for the remaining businesses within its Netplex Systems business.
If the above sale is successfully completed, management intends to focus on improving the operations of its Contractors Resources business by growing both its business to consumer service ("Mybizoffice") and its business to business service ("Consultant Service Center") offerings. Critical to the success of these operations is the Company's ability to continue to attract members to the Mybizoffice solution and to grow the Consultant Service Center business by obtaining contracts and master agreements with employers who contract with large numbers of independent consultants.
While the proceeds from a sale such as that above will help to sustain operations, management believes that to sustain operations for the foreseeable future, certain of its obligations and liabilities will need to be restructured. While management has been involved in discussions relative to such obligations with each respective party, no definitive agreements have been reached at this time and no assurances can be given that these efforts will be successful.
2001 Compared to 2000
Revenue for the year ended December 31, 2001 decreased $6.1 million or 22.2% to $21.3 million, compared to $27.4 million for the same period in 2000. Product revenue decreased $3.1 million or 11.3% resulting from a change in order size and the increased volume of orders that were recorded on a net basis. Product revenue is the result of multiple product orders ranging from a few thousand dollars to orders in excess of $1.0 million. In the year ended December 31, 2000, the Company had two product contracts that together amounted to approximately $2.0 million. In the year ended December 31 2001, the Company's products orders did not include contracts of a similar
magnitude largely due to the down-turned economy whereby companies are hesitating to embark on new systems-related projects. Additionally, the Company sold $1.7 million of product to clients through third party leasing companies in 2001 whereby the Company did not take the risk of loss and thereby recorded the transaction at its net margin on the sale. Service revenue decreased $3.0 million or 10.9%. The Company believes the weakened U.S. economic conditions in the fourth quarter caused many of its customers and potential customers to defer or cancel altogether expenditures on systems-related projects causing a decrease this service revenue. When these purchasing trends will reverse cannot be predicted at this time. The Company recognized $1.4 million of revenue in the year ended December 31, 2001 from its new Contractors Resources Customer Service Center "CR-CSC" business segment introduced in late 2000.
Gross profit for the year ended December 31, 2001 decreased $1.0 million or 9.5% to $9.5 million, compared to $10.5 million for the same period in 2000. This decrease was primarily associated with the decrease in revenue during the same period.
Gross profit margins increased to 44.3% for the year ended December 31, 2001 compared to 38.1% for the same period in 2000. This increase is primarily attributed to product gross margin increase attributed to the sales that were recorded on a net basis in 2001.
Selling, general and administrative expenses ("SG&A") include sales and marketing, facility, administration, IT and financial services. SG&A decreased $6.8 million or 28.2% to $17.4 million from $24.2 million for the same period in 2000. Of this decrease, approximately, $2.3 million resulted from the reductions in staff (41 employees) primarily from the restructuring in 2000, $1.3 million resulted from the reductions in staff (31 employees) in 2001, $0.7 of rent expense reductions for terminated leases, $1.3 million reduction of marketing costs which includes the $0.6 million reduction of fees paid to TMP Interactive (monster.com) and $0.9 million reduction in web development costs. These reductions were partially offset by the $0.8 million settlement costs associated with the Monster.com litigation and the $1.5 million settlement costs associated with the DSA litigation (see Note 13).
The Company incurred approximately $489,000 of legal, accounting and printing costs associated with its filing of a registration statement ("Offering") with the Securities and Exchange Commission which contemplated granting at no cost to its security holders, transferable rights to purchase shares of common stock of its wholly owned subsidiary, Systems. The Company expensed these Offering costs in 2002 based upon the Company's decision to abandon the offering and sell Systems in a private transaction as discussed above.
Income from discontinued operations for the year ended December 31, 2001 was $0.1 million compared to a loss from discontinued operations of $0.9 million for the same period in 2000. See Note 3 to the financial statements for a description of the discontinued operations.
No provision for income taxes was required for the year ended December 31, 2001 due to the generation of net losses. No provision for income taxes was required for the year ended December 31, 2000 due to utilization of net operating loss carry forwards generated in previous years.
Net loss for the year ended December 31, 2001 was $8.5 million compared to $15.3 million in the same period of 2000, a decrease in net loss of $6.8 million or 44.6%. The components of this decrease are discussed above.
2000 Compared to 1999
Revenue for the year ended December 31, 2000 decreased $4.0 million or 12.7% to $27.4 million, compared to $31.4 million for the same period in 1999. This decrease is primarily attributed to a decrease in product revenue of $4.2 million which was attributed to a large product sale of approximately $3.3 million in 1999. This single order size was not replicated in 2000.
Gross profit for the year ended December 31, 2000 decreased $0.7 million or 6.3% to $10.5 million, compared to $11.2 million for the same period in 1999. Product gross profit decreased by $0.4 million due to lower volume of product sales primarily attributable to the large product sale in 1999 that was not replicated in 2000. Service Gross Profit decreased $0.3 million. In the third quarter of 1999, the Company began to expand its technical staff to address anticipated growth in the service sector. The Company utilized the newly hired technical staff to support proposal production before their assignment to contracts.
Gross profit margins increased to 38.1% for the year ended December 31, 2000 from 35.5% for the same period in 1999. Services gross margins decreased by 2.5% from 49.7% in 1999 to 47.2% in 2000 which was due to lower technical staff utilization levels in the year ended December 31, 2000 compared to the same period in 1999. Product
gross profit margin increased 4.2% from 20.4% in 1999 to 24.6% in 2000. This increase was associated with the $0.6 million sale that was structured using a third party leasing company and recorded on a net basis.
Selling, general and administrative expenses include sales and marketing, facility, administration, IT and financial services. SG&A increased $8.2 million or 50.7% to $24.2 million from $16.1 million for the same period of 1999. This increase was primarily attributed to $2.6 million of increased marketing and sales expenditures, including approximately $1.0 million of co-branding fees paid to TMP Interactive (monster.com), $1.2 million of expenses associated with the development of the CR web site in 2000, $0.5 million of additional facility costs associated with the Roseland, NJ lease and $0.9 associated with the increase in administrative staff (11 employees).
Restructuring charges of $1.5 million for the year ended December 31, 2000 were the result of the closing of the Company's Roseland, New Jersey and Tampa, Florida offices and related payroll, severance, legal expenses. The cost reduction plan was a decision made by management and approved by the board of directors due to insufficient revenue growth, low utilization of technical staff, as well as excess general and administration expenses given the drop in revenue. As a result of this plan, management expects to raise the productivity and utilization of staff, and decrease overhead costs by consolidating offices. Under the restructuring plan, thirty-seven employees were terminated, four were from the technical staff, five were from Contractor Resources, and 28 were from sales and corporate administration. This decrease in employees and reduction in office space should result in a decrease of annual payroll and related expenses of $4.6 million and rent of $0.7 million. Management anticipates that this plan will result in a decrease of cost of revenues and selling and general administration of, $500,000 and $4,800,000, respectively. The realization of such decreases commenced in the last three months of calendar year 2000.
Loss from discontinued operations for the year ended December 31, 2000 was $0.9 million compared to $2.2 million for the same period in 1999, an decrease of $1.3 million or 57.5%. 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had cash and cash equivalents of $1.3 million.
The following decreased the Company's liquidity and capital resources:
For the year ended December 31, 2001, the Company's cash decreased by $2.6 million. This decrease resulted primarily from the $8.5 million operating loss which was partially offset by $2.5 million of depreciation and amortization, $1.8 million decrease in accounts receivable and $0.5 million increase in accounts payable and accrued expenses.
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 and was secured by the Company's assets. 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 did not need to comply with the tangible net worth covenant set forth in the loan agreement. Under the Forebearance Agreement the Company could 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%.
On May 4, 2001, the Company's subsidiary, Netplex Systems, Inc. ("Systems") entered into a Commercial Revolving Loan, Demand Loan and Security Agreement ("Revolving Loan") with American Commercial Finance Corporation ("Lender") which expires on March 31, 2003. This Revolving Loan replaced the pre-existing bank line of credit which was repaid on May 4, 2001. Under the Revolving Loan, Systems can borrow an amount equal to
80% of eligible accounts receivable as defined in the agreement, up to $3.0 million. The Revolving Loan bears interest at the prime rate plus 1.75% and is secured by (i) System's , the Company's and each of the Company's subsidiaries' assets, (ii) a $400,000 guaranty from a shareholder, Waterside Capital (the "Guaranty") and (iii) fidelity guaranties from two of the Company's officers. As of December 31, 2001, balance of the Revolving Loans was $1.1 million.
Capital expenditures for the year ended December 31, 2001, were $0.1 million.
Dividends of approximately $214,000 were paid on the Company's Class A, Class C and Class D Cumulative Preferred Stock during the year ended December 31, 2001. The Company issued 929,865 shares of Common Stock in lieu of approximately $105,000 of such dividends. At December 31, 2001, accrued dividends on the Company's Class A, Class D and Class E Preferred Stock were approximately $160,000.
On September 28, 2001, the Company entered into an agreement with Waterside Capital Corporation ("Waterside") whereby
. the Company paid $2,052,780 in the form of $1,000,000 cash and two secured commercial promissory notes in the original principal amounts of $900,000 and $152,780 for:
. Waterside's surrender to the Company for cancellation 1,500,000 shares of its Class C Preferred Stock;
. Waterside's guarantee of up to $400,000 of the Company's subsidiary, Systems, revolving credit facility; and
. Waterside surrendered for cancellation its warrant exercisable for 300,000 shares of the Company's Common Stock;
. the Company paid $50,000 of closing fees associated with the transaction; and
. Waterside purchased from the Company 1,000 shares of the Company's subsidiary, Systems, preferred stock for $1,000,000 which is recorded as a minority interest in the balance sheet.
The difference between the original face value (net of transaction fees) of the Series C Preferred Stock of $2,139,000 and the aggregate of the principal value of the note of $900,000 and the $1,000,000 of cash, equaling $239,000, was recorded as an addition to Additional Paid in Capital and has been added back in the loss applicable to common shareholders for computing earnings per share.
The promissory notes bear interest of 10% per annum. The $900,000 note is payable in quarterly installments of $15,000 and the $152,780 note is payable on January 1, 2002.
The Company has incurred significant losses from operations and has used cash in operations in each of the last five years. In addition, as of December 31, 2001, the Company has a stockholders' deficit of approximately $6.0 million and a working capital deficit of approximately $8.7 million. These factors raise substantial doubt about the Company's ability to continue as a going concern.
Over the past two years, management has undertaken restructuring efforts aimed at, among other things, improving the productivity and billable utilization of its staff and reducing operating expenses. These restructuring efforts have included headcount reductions, consolidation of facilities and management of discretionary expenses. However, these actions were taken in a period where economic conditions in the United States and abroad created downward pressure on spending for information technology initiatives, including demand for the Company's consulting services. In 2001, the Company did experience lower operating losses than those reported in 2000 and a reduction in cash used in operations. However, given the Company's current operating outlook and continuing economic uncertainty, the Company's liquidity and financial position are such that additional capital will be needed in 2002 to sustain operations.
In late 2001, the Company began exploring alternatives to raising additional capital and restructuring its obligations and capital structure. Among the alternatives considered included a rights offering aimed at raising capital through the issuance of additional shares of its Netplex Systems subsidiary. At this time, management has chosen to not pursue the rights offering further, choosing instead to entertain offers for the operations comprising Netplex Systems (either as a whole or in parts). In March 2002, the Company entered into non-binding letter of intent to sell the assets of its retail consulting business for approximately $6.0 million in cash, subject to several conditions to closing, including due diligence and entering into purchase and sale agreements and employment agreements with key
individuals in this business. While management is optimistic that this transaction will close by the end of May, no assurances can be given at this time that the Company will be able to close on this sale or one with other potential buyers. In addition, the Company continues to entertain offers for the remaining businesses within its Netplex Systems business.
While the proceeds from a sale such as that above will help to sustain operations, management believes that to sustain operations for the foreseeable future, certain of its obligations and liabilities will need to be restructured. While management has been involved in discussions relative to such obligations with each respective party, no definitive agreements have been reached at this time and no assurances can be given that these efforts will be successful.
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. Based upon the amount outstanding under the line of credit at December 31, 2001 of $1,094,000, one percent change in the applicable interest rate would increase or decrease the interest charge to the Company by approximately $11,000 annually.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Consolidated Financial Statements listed in the accompanying index to Consolidated Financial Statements on Page herein.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.
The following table lists the names and ages of all of our executive officers and directors and the positions and offices held by each individual:
-------------------------------------------------------------------- Name Age Title -------------------------------------------------------------------- Gene Zaino 44 Chief Executive Offices, Chairman, President and Director (Class III) -------------------------------------------------------------------- Peter Russo 55 Chief Financial Officer and Treasurer -------------------------------------------------------------------- Richard Goldstein 54 Director (Class III) -------------------------------------------------------------------- Steven L. Hanau 57 Director (Class II) -------------------------------------------------------------------- J. Alan Lindauer 62 Director (Class I) -------------------------------------------------------------------- - - 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 became the Chief Operating Officer of DigitalNet, Inc in February 2002. Mr. Hanau served as Senior Vice-President, Marketplace Services for Commerce One from September 2000 to January 2002. Mr. Hanau served as Senior Vice-President of e-Business Outsourcing for AppNet from April 2000 to August 2000. Mr. Hanau served as President of Enterprise Services at Wang Global since August 1996. Prior to 1996, Mr. Hanau spent eight years at I-NET, becoming its President of Enterprise Services until Wang Global acquired I-NET. Mr. Hanau spent twenty two years in the U.S. Army, holding high level positions within the Army Chief of Staff and the Office of the Secretary of Defense. Mr. Hanau holds a degree from the United States Military Academy and earned advanced degrees in operations research from Stanford University and in business administration from Long Island University.
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 will hold office until the 2003 annual meeting of shareholders. The initial Class II director, Steven L. Hanau will hold office until his successor is duly elected and qualify. 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
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, file with the Securities and Exchange Commission (the "Commission") initial reports of ownership and reports of change in ownership of Common Stock of the Company. The same persons are also required by Commission regulation to furnish the Company with copies of all Section 16(a) forms that they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company, and written representations that no other reports were required during the fiscal year ended December 31, 2001, compliance was made with all Section 16(a) filing requirements applicable to the Company's executive officers, directors and persons who own more than 10% of a registered class of the Company's equity securities.
Item 11.
Item 11. Executive Compensation.
The following table sets forth, for the fiscal years indicated, all compensation the Company paid to Gene Zaino, Chief Executive Officer and Peter J. Russo, Chief Financial Officer. The Company had no other executive officers, whose salary and bonus exceeded $100,000 for the year ended December 31, 2001.
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. Effective August 6, 2001, Mr. Zaino elected to participate in The Netplex Group, Inc. Employee Deferred Compensation Plan, deferring annual compensation of $125,000. For the year ended December 31, 2001, Mr. Zaino deferred $48,077 under this plan which equals 480,769 share units where one share unit is equal to the value of one share of The Netplex Group, Inc.'s common stock. Additionally, pursuant to his employment agreement, Mr. Zaino may also receive an annual bonus at the sole discretion of the Board, based upon the financial and operating performance of the Company, 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 2001 or 2000 on behalf of Mr. Zaino. The Company has, and is the beneficiary of, 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. Effective August 6, 2001, Mr. Russo elected to participate
in The Netplex Group, Inc. Employee Deferred Compensation Plan, deferring annual compensation of $50,000. For the year ended December 31, 2001, Mr. Russo deferred $19,231 under this plan which equals 192,308 share units where one share unit is equal to the value of one share of The Netplex Group, Inc.'s common stock. 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 2001 or 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, 2001 the closing price of the Company's Common Stock on the OTCBB was $0.04.
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 2001.
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 "2001 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.
Deferred Compensation. The Netplex Group, Inc. Employee Deferred Compensation Plan was adopted by the Board of Directors on August 6, 2001. The plan is designed to create a common interest between key employees, including executive officers, who have the capacity to make substantial contributions to the success of the Company. Its purpose is to encourage participants to maintain and increase their proprietary interests as shareholders in the Company and to benefit from the long-term performance of the Company by deferring a percentage of their compensation into their benefit accounts on a non-elective basis, periodically as earned. As with incentive stock options, the Committee believes that a close linking of shareholder and key employee interests through the deferred compensation is important to the continuing success of the Company because share units to which the deferred compensation is converted to have no realizable value unless the price of the Common Stock increases. Each participants deferred compensation is converted to share units at a ratio determined by the plan administrator.
2001 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. Mr. Zaino and Mr. Russo defer annual compensation of $125,000 and $50,000, respectively, on a non-elective basis.
/s/ THE COMPENSATION COMMITTEE
Richard Goldstein
Steven Hanau
Performance Graph
[PERFORMANCE GRAPH]
The above graph demonstrates a comparison of cumulative total returns based upon an initial investment of $100.00 in the Company's Common Stock as compared with the Russell 2000 Index (with dividends reinvested) and the Nasdaq Stock Market-U.S. Index. The stock price performance shown on the graph is not necessarily indicative of future price performance and only reflects the Company's relative stock price on December 31, 1996, December 31, 1997, December 31, 1998, December 31, 1999, December 29, 2000 and December 2001.
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, 2002, 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 822,500 shares of Common Stock subject to currently exercisable options and 1,819,150 shares of Common Stock owned. (3) Consists of 66,667 shares of Common Stock subject to currently exercisable options and 459,655 shares of Common Stock owned. (4) Consists of 82,500 shares of Common Stock subject to currently exercisable options and 27,500 shares of Common Stock owned. (5) Consists of 67,500 shares of Common Stock subject to currently exercisable options and 22,500 shares of Common Stock owned. (6) Consists of 75,000 shares of Common Stock subject to currently exercisable options and 5,000 shares of Common Stock owned. (7) Includes 1,114,167 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.
On September 28, 2001, the Company entered into an agreement with Waterside Capital Corporation ("Waterside") whereby
-- the Company paid $2,052,780 in the form of $1,000,000 cash and two secured commercial promissory notes in the original principal amounts of $900,000 and $152,780 for:
. Waterside's surrender to the Company for cancellation 1,500,000 shares of its Class C Preferred Stock;
. Waterside's guarantee of up to $400,000 of the Company's subsidiary, Systems, revolving credit facility; and
. Waterside surrendered for cancellation its warrant exercisable for 300,000 shares of the Company's Common Stock;
-- the Company paid $50,000 of closing fees associated with the transaction; and
-- Waterside purchased from the Company 1,000 shares of the Company's subsidiary, Systems, preferred stock for $1,000,000 which is recorded as a minority interest in the balance sheet.
The promissory notes bear interest of 10% per annum. The $900,000 note is payable in quarterly installments of $15,000 and the $152,780 note is payable at the earlier of the closing of the Offering or January 1, 2002.
The Company paid approximately $3,000, $18,000 and $45,000 in 2001, 2000 and 1999, 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, 2001, 2000 and 1999 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
Exhibit Description of Document Number
2 Agreement and Plan of Reorganization and Merger dated as of November 20, 1995, by and among The Netplex Group, Inc., America's Work Exchange, Inc. and the Company.** 3(a) Amended and Restated Certificate of Incorporation.* 3(b) Amendment to the Amended and Restated Certificate of Incorporation.** 3(c) Amendment to the Amended and Restated Certificate of Incorporation.*** 3(d) Bylaws.*** 3(e) Certificate of Amendment of the Certificate of Incorporation of Netplex Systems, Inc.++++ 4(a) Common Stock Purchase Warrant issued to the Pennsylvania Merchant Group, dated October 1, 1999.**** 4(b) Securities Purchase Agreement, dated as of March 28, 2000, by and among Netplex and the Buyers.*** 4(c) Form of Warrant Agreement, dated as of March __, 2000, by and between Netplex and each of the Buyers.***(A schedule of Buyers is filed as Exhibit 99(a)). 4(d) Registration Rights Agreement, dated as of March 28, 2000, by and among Netplex and the Buyers.*** 4(e) Investor Rights Agreement dated September 30, 1998.***** 4(f) Registration Rights Agreement between Netplex and Waterside Capital Corporation dated
Exhibit Description of Document Number
September 30, 1998.***** 4(g) Stock Purchase Warrant dated September 30, 1998.***** 4(h) Placement Agency Agreement dated September 25, 1998.***** 4(i) Incentive Stock Purchase Warrant dated September 28, 1998.***** 4(j) Prepaid Common Stock Warrant dated September 28, 1998.**** 4(k) Registration Rights Agreement between Netplex and the Initial Investors dated September 28, 1998.***** 4(l) Securities Purchase Agreement dated September 25, 1998.***** 4(m) Form of Prepaid Common Stock Purchase Warrant, dated March ___, 2000 by and between Netplex and each of the Holders.*** (A schedule of Holders is filed as Exhibit 99(b)). 4(n) Form of The Netplex Group, Inc. Incentive Stock Purchase Warrant, dated as of March ___, 2000, by and between Netplex and each of the Holders.*** (A schedule of Holders is filed as Exhibit 99(c)). 4(o) Form of Prepaid Warrant issued to Purchasers in April 1998 Private Placement.****** (A schedule of Purchasers is filed as Exhibit 99(d)). 4(p) Form of Incentive Warrant issued to Purchasers in April 1998 Private Placement.****** (A schedule of Purchasers is filed as Exhibit 99(e)). 4(q) Warrant issued to TMP Interactive, Inc. for the right to purchase 2,000,000 shares of common stock, dated May, 2, 2000.**** 4(r) Warrant issued to TMP Interactive, Inc. for the right to purchase 1,000,000 shares of common stock, dated May 2, 2000.**** 4(s) Warrant issued to Roseland II L.L.C. for the right to purchase 15,000 shares of common stock, dated May 15, 2000.#### 4(t) Warrant issued to Silicon Valley Bank for the right to purchase 75,000 shares of common stock, dated July 31, 2000. #### 4(u) Registration Rights Agreement between Netplex and Silicon Valley Bank dated July 31, 2000. #### 4(v) Anti-dilution Agreement between Netplex and Silicon Valley Bank dated July 31, 2000. #### 4(w) Amendment #1 to Securities Purchase Agreement Dated March 28, 2000 By and among The Netplex Group, Inc., HFTP Investment L.L.C., Wingate Capital Ltd., and Fisher Capital Ltd. dated and effective July 31, 2000.#### 4(x) Warrant issued to Pennsylvania Merchants Group for the right to purchase 500,000 shares of common stock, dated December 12, 2000.#### 4(y) Registration Rights Agreement between Netplex Systems, Inc. and Waterside Capital Corporation dated September 28, 2001.++++ 4(z) Investor Rights Agreement and Amended and Restated Investor Rights Agreement between Netplex Systems, Inc. and Waterside Capital Corporation dated September 30, 2001.++++ 4(aa) Stipulation of Settlement by and among TMP Interactive Inc. and The Netplex Group, Inc. dated August 7, 2001##### 10(a) 1992 Incentive and Non-Qualified Stock Option Plan.******* 10(b) Amendment to 1992 Incentive and Non-Qualified Stock Option Plan.******* 10(c) Form of Indemnification Agreement between the Officers and Directors of Netplex and Netplex (with schedule attached). #### 10(d) 1995 Directors Stock Option Plan.# 10(e) 1995 Consultant's Stock Option Plan.# 10(f) Employment Agreement between Netplex and Gene Zaino.** 10(g) Agreement by and among XcelleNet, Inc., the Netplex Group, Inc. and Technology Development Systems, Inc. dated November 5, 1996.## 10(h) Employment Agreement between Netplex and Peter Russo #### 10(i) Loan and Security Agreement between Netplex and Silicon Valley Bank, dated July 31, 2000. #### 10(j) Pledge Agreement between America's Work Exchange, Inc. and Silicon Valley Bank, dated July 31, 2000. #### 10(k) Continuing Guaranty by and among The Netplex Group, Inc., Netplex Systems, Inc.,
Exhibit Description of Document Number
America's Work Exchange, Inc., Contractors Resources, Inc., and Silicon Valley Bank, dated as of July 31, 2000. #### 10(l) Security Agreement by and among The Netplex Group, Inc. Contractors Resources, Inc. and Silicon Valley Bank, Commercial Finance Division, dated as of July 31, 2000.#### 10(m) Amendment to Loan Documents and Forebearance Agreement between Netplex and Silicon Valley Bank, dated January 10, 2001 #### 10(n) Commercial Revolving Loan, Demand Loan and Security Agreement dated as of April 30, 2001, by and between Netplex Systems, Inc. and American Commercial Finance Corporation.+++ 10(o) Master Agreement between The Netplex Group, Inc., Netplex Systems, Inc. and Waterside Capital Corporation dated September 28, 2001.++++ 10(p) Secured Commercial Note for $900,000 by and among The Netplex Group, Inc. and Waterside Capital Corporation dated September 28, 2001.++++ 10(q) Secured Commercial Note for $154,697.45 by and among The Netplex Group, Inc. and Waterside Capital Corporation dated September 28, 2001.++++ 10(r) Security Agreement (Preferred Stock and Credit Guaranty) between Netplex Systems, Inc. and Waterside Capital Corporation dated September 28, 2001.++++ 10(s) Security Agreement ($900,000 and $154,697.45 Commercial Notes) between Netplex Systems, Inc. and Waterside Capital Corporation dated September 28, 2001.++++ 10(t) The Netplex Group, Inc. Employee Deferred Compensation Plan##### 10(u) Settlement Agreement and Release by and among Data Systems Analysts, Inc. and The Netplex Group, Inc. and Technology Development Systems, Inc. dated December 28, 2001. ##### 16 Letter regarding change in certifying accountant.+ 21 Subsidiaries of the Netplex Group, Inc.## 23 Consent of Grant Thornton, LLP.##### 24 Power of Attorney.++
* 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).
+++ Previously filed on Form 10- Q for the three month period ended March 31, 2001 filed with the Securities and Exchange Commission on May 15, 2001. (Commission File No. 001-11784)
++++ Previously filed on Form 10- Q for the three month period ended September 30, 2001 filed with the Securities and Exchange Commission on November 14, 2001. (Commission File No. 001-11784)
# 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:
During the fiscal quarter ended December 31, 2001, the Company filed no reports on Form 8-K.
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the County of Fairfax, Commonwealth of Virginia on the 15th day of April 2002.
The Netplex Group, Inc. By: /s/ Gene Zaino ---------------------- Gene Zaino Chairman and C.E.O.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Gene Zaino Chairman, Chief Executive Officer April 15, 2002 - -------------- and Director [Principal Executive Gene Zaino Officer]
/s/ Peter Russo Chief Financial Officer and April 15, 2002 - --------------- Treasurer [Principal Financial Peter Russo Officer]
/s/ Richard Goldstein Director April 15, 2002 - --------------------- Richard Goldstein
/s/ Steven Hanau Director April 15, 2002 - ---------------- Steven Hanau
/s/ J. Alan Lindauer Director April 15, 2002 - -------------------- J. Alan Lindauer
SCHEDULE I
THE NETPLEX GROUP, INC. AND SUBSIDIARIES SCHEDULE I - QUARTERLY CONSOLIDATED FINANCIAL DATA (unaudited) (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 2000 were restated to reflect the re-incorporation of discontinued operations (Note 3 to the financial statements). All other adjustments are of a normal recurring nature necessary for a fair presentation of the information for the periods presented. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends.
2001 QUARTERS ENDED
2000 QUARTERS ENDED
SCHEDULE II
THE NETPLEX GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
* Amount includes allowance related to receivables in discontinued operations
Index to Consolidated Financial Statements
Page ----
Independent Auditors' Report Consolidated Balance Sheets as of December 31, 2001 and 2001 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Board of Directors and Stockholders The Netplex Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Netplex Group, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Netplex Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been presented assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant losses from operations and has used cash in operations in each of the last five years. In addition, as of December 31, 2001, the Company has a stockholders' deficit of approximately $6.0 million and a working capital deficit of approximately $8.7 million. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 1. The consolidated financial statements do not contain any adjustments that might result from the outcome of this uncertainty.
In connection with our audits of the consolidated financial statements referred to above, we have audited Schedule II - Valuation and Qualifying Accounts, for each of the three years in the period ended December 31, 2001. 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 15, 2002 (except for Note 3, as to which the date is March 26, 2002) _______________________
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, 2001, 2000 AND 1999
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, Virginia and at customer locations throughout the United States.
The Company has incurred significant losses from operations and has used cash in operations in each of the last five years. In addition, as of December 31, 2001, the Company has a stockholders' deficit of approximately $6.0 million and a working capital deficit of approximately $8.7 million. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not contain any adjustments that might result from the outcome of this uncertainty.
Over the past two years, management has undertaken restructuring efforts aimed at, among other things, improving the productivity and billable utilization of its staff and reducing operating expenses. These restructuring efforts have included headcount reductions, consolidation of facilities and management of discretionary expenses. However, these actions were taken in a period where economic conditions in the United States and abroad created downward pressure on spending for information technology initiatives, including demand for the Company's consulting services. In 2001, the Company did experience lower operating losses than those reported in 2000 and a reduction in cash used in operations. However, given the Company's current operating outlook and continuing economic uncertainty, the Company's liquidity and financial position are such that additional capital will be needed in 2002 to sustain operations.
In late 2001, the Company began exploring alternatives to raising additional capital and restructuring its obligations and capital structure. Among the alternatives considered included a rights offering aimed at raising capital through the issuance of additional shares of its Netplex Systems subsidiary. At this time, management has chosen to not pursue the rights offering further, choosing instead to entertain offers for the operations comprising Netplex Systems (either as a whole or in parts). In March 2002, the Company entered into non-binding letter of intent to sell the assets of its retail consulting business for approximately $6.0 million in cash, subject to several conditions to closing, including due diligence and entering into purchase and sale agreements and employment agreements with key individuals in this business. While management is optimistic that this transaction will close by the end of May, no assurances can be given at this time that the Company will be able to close on this sale or one with other potential buyers. In addition, the Company continues to entertain offers for the remaining businesses within its Netplex Systems business.
If the above sale is successfully completed, management intends to focus on improving the operations of its Contractors Resources business by growing both its business to consumer service ("Mybizoffice") and its business to business service ("Consultant Service Center") offerings. Critical to the success of these operations is the Company's ability to continue to attract members to the Mybizoffice solution and to grow the Consultant Service Center business by obtaining contracts and master agreements with employers who contract with large numbers of independent consultants. No assurances can be given that the Company will be successful in these efforts.
While the proceeds from a sale such as that above will help to sustain operations, management believes that to sustain operations for the foreseeable future, certain of its obligations and liabilities will need to be restructured. While management has been involved in discussions relative to such obligations with each respective party, no definitive agreements have been reached at this time and no assurances can be given that these efforts will be successful.
(2) Summary of Significant Accounting Policies
Principles of Consolidation --------------------------- The accompanying consolidated financial statements include the accounts of The Netplex Group, Inc. and its majority owned subsidiaries. Minority interest represents minority shareholders' proportionate share of the equity in the Company's Contractors Resources and Netplex Systems subsidiaries. All significant inter-company transactions have been eliminated in consolidation.
Revenue Recognition ------------------- The Company derives its revenue from service contracts and from third party software and hardware resale contracts. Such contracts are sold exclusive of maintenance which are provided under separate service agreements.
Revenue from time and materials contracts is recognized as services are performed and costs are incurred. Net revenues exclude reimbursable expenses charged to clients. Revenue for fixed-price contracts is recognized in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position ("SOP") 81-1 "Accounting for Performance of Construction -Type and Certain Production-Type Contracts" using the percentage of completion method as costs are incurred and SAB 101, "Revenue Recognition" for all other transactions not covered by SOP 81-1. The Company records loss provisions for its contracts, if required, at the time such losses are identified. Revenue for maintenance contracts is recognized over the term of the arrangements. 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.
Revenue from consulting service contracts in the Company's CR-MyBizOffice segment is recognized as the fees (net revenue) it charges to its members for providing its back office services as these services are provided. Gross billings generated by MyBizOffice segment operations for the years ended December 31, 2001, 2000 and 1999 were $37.0 million, $42.5 million and $38.6 million, respectively.
The Company recognizes revenue in its CR-CSC segment based on the gross amount billed to the customer derived from the hours worked and the contractual rate applied to those hours. This policy is consistent with the guidance provided by EITF 99-19 considering the Company has credit risk for the gross amounts of each transaction and can assert certain rights over the activities of each consultant.
The Company recognizes revenue on software sales in accordance with SOP 97-1, "Software Revenue Recognition". Accordingly, the Company recognizes software and hardware revenue as products are shipped, provided that collection is determined to be probable and no significant obligations remain. In 2001 and 2000, the Company reported approximately $1.7 million and $0.6 million, respectively, of sales associated with transactions structured using a third party leasing company on a "net" basis in accordance with EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as and Agent" and other guidance provided by the Securities and Exchange Commission. All other sales were recorded on a gross basis in accordance with this guidance.
Management regularly reviews outstanding accounts receivable for collectability and provides for an allowance for doubtful accounts whenever necessary. As of December 31, 2001 and 2000, the Company was owed $1.2 million by two customers at each date, respectively.
The Company recognized revenue from unaffiliated customers constituting 25.0% and 27.8% of total revenue in 2000 and 1999 from the combination of two customers in each year, respectively. No one customer constituted revenue greater than 10% of the total 2001 revenue.
Consistent with the Company's strategy, management targets vertical industry markets for its services. As of December 31, 2001, 2000 and 1999, 46.7%, 47.9% and 44.9%, respectively of the Company's revenue was
generated from customers in the retail and consumer products industry. As of December 31, 2001 and 2000, 37.6% and 49.5%, respectively of the Company's accounts receivables 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, 2001 and 2000.
Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments with maturity, at date of purchase, of three months or less to be cash equivalents. Cash equivalents are comprised of money market accounts, and are stated at cost, which approximates fair value.
Property and Equipment ---------------------- Property and equipment is recorded at cost. The Company purchases computer software for internal use, which is recorded at cost accordance with Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the assets, which range from 3 to 5 years. Computer software developed for internal use is amortized over 3 years in accordance with SOP 98-1.
Property and equipment under capital leases is amortized using the shorter of the lease term or the estimated useful life.
Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts and any gain or loss on such disposition is reflected in the statement of operations. Expenditures for repairs and maintenance are charged to operations as incurred.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of ----------------------------------------------------------------------- Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
Goodwill and Other Intangible Assets ------------------------------------ On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows:
. all business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001.
. intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability
. goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization.
. effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.
The Company will amortize goodwill, the cost in excess of the fair value of net assets acquired, and intangible assets resulting from the Company's acquisitions, consisting of a fulfillment database, acquired software, an assembled workforce, and a non-compete agreement, recognized prior to July 1, 2001, under its current method
until January 1, 2002 at which time annual and quarterly goodwill amortization of $1,294,000 and $323,500 will no longer be recognized. Goodwill and intangible assets are being amortized on a straight line basis for periods ranging from 5 to 7 years and 4 to 7 years, respectively. By December 31, 2002 the Company will have completed a transitional fair value based impairment test of goodwill as of January 1, 2002. Impairment losses, if any, resulting from the transitional testing will be recognized by the quarter ended June 30, 2002, as a cumulative effect of a change in accounting principle.
Investment in Common Stock -------------------------- The Company had an investment in common stock of a privately held company included in other assets valued at $375,000 which was accounted for using the cost method. This investment was disposed of in the DSA litigation settlement in 2001.
Income Taxes ------------ Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates, that are applicable to the future years in which the deferred tax assets or liabilities are expected to be settled or realized. Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the rate change is enacted.
Earnings (loss) per share ------------------------- The Company accounts for earnings (loss) per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" which requires companies to present basic earnings per share and diluted earnings per share (EPS). Basic net 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, 2001, 2000 and 1999, 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. These currently anti-dilutive outstanding stock options and warrants, Convertible Preferred Stock, and contingently issuable shares, combined, total 94,238,699 and 87,355,559 for the years ended December 31, 2001 and 2000, respectively.
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.
Deferred Compensation. ---------------------- The Company adopted a non-qualified, unfunded deferred compensation plan, The Netplex Group, Inc. Employee Deferred Compensation Plan, (the "Plan"), on August 6, 2001. Under the Plan, key employees defer compensation on a non-elective and elective basis. Each participant's deferred compensation is converted to share units at a ratio determined by the Plan's administrator. Such share units will be converted into the Company's Common Stock on a one to one ratio at the earlier of the termination of the participant, change of control of the Company or the 24 month anniversary of the Plan. The total of participant deferrals, which are reflected in additional paid in capital, are approximately $90,000 at December 31, 2001.
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 three segments as defined: Systems, Contractors Resources - mybizoffice and Contractors Resources - Consultant Service Center.
Reclassifications -----------------
Certain 2000 and 1999 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.
New Accounting Pronouncements ----------------------------- In August 2001 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which among other things, establishes one accounting model for long-lived assets to be disposed of by sale. SFAS 144 is effective for financial statements issued for years beginning after December 15, 2001, and interim periods within those financial statements, early application is encouraged. The Company adopted SFAS 144 effective January 1, 2001, in accordance with early application of the standard, in recording the disposal Netplex Systems.
(3) Discontinued Operations
On September 29, 2000, the Company announced its decision to sell its e-Infrastructure operations. The Company was seeking a buyer for various businesses within the e-Infrastructure segment and although it was difficult to predict, the Company expected to complete the sales within the 12 months subsequent to the above measurement date. 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 were classified as discontinued operations and prior periods have been restated. The results of the discontinued segment did 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 believed that the remaining businesses within this segment would not generate future operating losses prior to disposal and therefore no provision was recorded in the financial statements. The following is a summary of the results of operations of the discontinued operations:
Year ended December 31, -------------------------------- (amounts in thousands) 2001 2000 1999 -------- --------- --------- Revenues $ 1,114 $ 22,060 $ 34,634 ======== ========= ========= Gross margin $ 323 $ 5,248 $ 8,958 ======== ========= ========= Gain (loss) from operations $ 87 $ (850) $ (1,152) ======== ========= =========
During the fourth quarter of 2000 and the first quarter of 2001, the Company streamlined the operations of its discontinued systems integration business (previously included in the e-Infrastructure segment) and increased its service offerings to include data management and information security focusing on systems infrastructure reliability. As a result, the systems integration business became an integral component of Netplex Systems, enabling it to offer customers a more complete information systems solution. Therefore, effective April 1, 2001, the results of operations of the systems integration business and net assets have been reclassified as continuing operations within the Netplex operating segment and prior periods have been restated. The following is a summary of the systems integration operations that was previously reported as discontinued.
December 31, December 31, 2000 1999 --------------------------- (amounts in thousands) Total Assets $ 2,753 $ 4,516 Total Liabilities 89 552 Revenue 10,648 15,510 Operating Income $ 89 $ 1,057
In January 2002 management made the decision to not pursue the rights offering, issuing additional shares of Netplex Systems stock, choosing instead to entertain offers for the operations comprising Netplex Systems (either as a whole or in parts). On March 26, 2002, the Company entered into non-binding letter of intent to sell the assets of its retail consulting business for approximately $6.0 million in cash, subject to several conditions to closing, including due diligence and entering into purchase and sale agreements and employment agreements with key individuals in this business. The Company continues to pursue the sale of the remaining portions of Netplex System. In accordance Statement of Financial Accounting Standard No, 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the assets of Netplex Systems are classified as continuing operations as of December 31, 2001 as the decision to dispose of Netplex Systems was made subsequent to December 31, 2001 but prior to the issuance of the financials. The major classes of assets and liabilities Netplex Systems are as follows as of December 31:
2001 2000 -------------------------------- (amounts in thousands) Accounts receivable $ 2,175 $ 4,619 Fixed assets, net 495 952 Goodwill 2,358 3,002 Other Intangibles 789 1,379 Accrued compensation 1,069 1,144 Other liabilities $ 362 $ 868
(4) Restructure Charge
In the third quarter of 2000, the Company recorded a restructure charge of $1,512,000 primarily associated with the closing of the Company's Roseland, New Jersey office and the related costs. Included in the total are the estimated costs for facility closures, the write-down of redundant and duplicative property, severance and other
employee costs related to the facility closures and duplicative position eliminations. As a part of the restructuring, 37 employees were terminated. Of those terminated, 4 were from the technical staff, 5 from Contractors Resources, and 28 were from sales and corporate administration.
------------------------------------------------------------------------ Balance as of December (amounts in thousands) Accrual Utilized 31, 2001 ------------------------------------------------------------------------ Asset relocation costs $ 160 $ 147 $ 13 Employee severance and termination benefits 819 790 29 Excess facility costs 403 425 (22) Other 130 130 -- -------- --------- -------- $ 1,512 $ 1,492 $ 20 -------- --------- --------
Management expects that the remaining accruals will be utilized in 2002.
(5) Property and Equipment
Property and equipment consists of the following: December 31, ---------------------- (amounts in thousands) 2001 2000 ---------- ---------- Computer software $ 1,949 $ 1,910 Computer and office equipment 2,003 1,924 Furniture and fixtures 784 717 Equipment under capital leases 599 546 Leasehold improvements 79 111 ---------- ---------- 5,414 5,208 Accumulated depreciation and amortization (4,340) (3,157) ---------- ---------- Property and equipment, net $ 1,074 $ 2,051 ========== ==========
Computer software at December 31, 2001 and 2000 includes $799,000 of software that was developed for internal use. Accumulated depreciation related to this software was $509,000 and $219,000 at December 31, 2001 and 2000, respectively.
Accumulated depreciation and amortization includes $599,000 and $546,000 related to assets under capital leases at December 31, 2001 and 2000, respectively.
(6) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following:
December 31, ----------------------- (amounts in thousands) 2001 2000 ---------- ---------- Goodwill $ 4,466 $ 4,466 Acquired software 836 836 Assembled workforce 1,000 1,000 Non-Compete 900 900 ---------- ---------- 7,202 7,202 Accumulated amortization (3,930) (2,636) ---------- ---------- $ 3,272 $ 4,566 ========== ==========
(7) Accrued Compensation and Other Accrued Expenses
Accrued compensation and other accrued expenses consist of the following:
December 31, ----------------------- (amounts in thousands) 2001 2000 ---------- ---------- Accrued wages $ 3,255 $ 3,762 Accrued restructure costs 20 529 Accrued professional fees 346 572 Accrued vacation 250 341 Accrued commissions 883 727 Accrued payroll taxes 20 57 Accrued earn-out 52 -- Accrued preferred dividends 159 166 Accrued project expense 124 213 Other 534 789 ---------- ---------- $ 5,643 $ 7,156 ========== ==========
(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 occurred. The Company and the bank agreed the Company did not need to comply with the tangible net worth covenant set forth in the loan agreement. Under the Forebearance Agreement the Company could 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.
On May 4, 2001, the Company's subsidiary, Netplex Systems, Inc. ("Systems") entered into a Commercial Revolving Loan, Demand Loan and Security Agreement ("Revolving Loan") with American Commercial Finance Corporation ("Lender") which expires on March 31, 2003. This Revolving Loan replaced the pre-existing bank line of credit which was repaid on May 4, 2001. Under the Revolving Loan, Systems can borrow an amount equal to 80% of eligible accounts receivable as defined in the agreement, up to $3.0 million. The Revolving Loan bears interest at the prime rate plus 1.75% (6.75% at December 31, 2001) and is secured by (i) System's , the Company's and
each of the Company's subsidiaries' assets, (ii) a $400,000 guaranty from a shareholder, Waterside Capital (the "Guaranty") and (iii) fidelity guaranties from two of the Company's officers.
Outstanding advances were $1,094,000 and $2,003,000 at December 31, 2001 and 2000, respectively.
(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, 2001, 2000 and 1999 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, 2001, 2000 and 1999 are presented below:
The Company has provided a valuation allowance for all of its deferred tax assets at December 31, 2001, 2000, and 1999 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, 2001 and 2000, the Company has NOL's for Federal and state income tax purposes of approximately $42,178,000 and $33,534,000 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 2021. Certain of the NOL's and credits are subject to annual limitations and other conditions as of December 31, 2001. 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, 2001, the Company's annual obligation under the agreements is approximately $650,000 for the next year and $375,000 for each of the next two subsequent 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 and 1999 the Company paid in either cash or stock of $40,000 and $1,720,523, respectively in connection with these "earn-out" provisions,
respectively. As of December 31, 2000, the Company was no longer obligated to pay any material future earn-out amounts pursuant to the terms of these acquisitions.
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, 2001:
Capital Operating (amounts in thousands) Leases Leases ------ ------ 2002 $ 114 621 2003 2 297 2004 -- 182 2005 -- 18 Thereafter -- 10 ------ ------- Total minimum lease payments 116 $ 1,128 ======= Less: amount representing interest 6 ------ Present value of minimum lease payments 110 Less current portion 108 ------ $ 2 ======
Total rent expense under operating leases was approximately $584,000, $1,248,000 and $1,020,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
(11) Stockholders' Equity
As of December 31, 2001, 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 a cumulative dividend of 10% per annum, payable in either cash or additional shares of Class A Preferred at the Company's option. Subject to the conversion rights, the Class A Preferred has a redemption value equal to its stated value plus all accrued and unpaid dividends upon: (1) registration of the shares underlying the Class A Preferred, and (2) 30 days written notice given at any time upon attaining certain per share trading prices and sustaining such prices for a specified period. The Class A Preferred has a per share liquidation preference of the greater of: (i) $4 per share plus any accrued and unpaid dividends, or (ii) the amount that would have been received if such shares were converted to Common Stock on the business day immediately prior to liquidation.
Each warrant issued in connection with the private placement became exercisable on March 19, 1997, and expired on September 19, 2001.
Class C Cumulative Convertible ------------------------------ The Class C Cumulative Convertible Preferred Stock ("Class C Preferred") had a liquidation preference of $3.99 per share and a dividend rate of 9.99% per annum that was set to increase to 15% per annum after the date that there was no Class A Preferred issued and outstanding. The Class C Preferred was convertible at any time after the earlier of a change in control of the Company or five years from the date of issuance. The Class C Preferred was redeemable soley at the option of the Company at any time within five years from the date of issuance. At December 31, 2000, the Class C Preferred was convertible into the number of shares equal to $2,300,000, plus accrued but unpaid dividends, divided by 25% of the 20 day average trading price of the Common Stock immediately prior to conversion. The Company measured the intrinsic value of the beneficial conversion feature of the Class C Preferred to be $2,300,000 at December 31, 2000. As a result, the Company began to accrete this
discount as additional Preferred Stock dividends over the five years. During 2001 and 2000, the accretion of the discount of approximately $329,000 and $388,000 was included as additional Preferred Stock dividends in the Company's EPS calculation.
On September 28, 2001, the Company entered into an agreement with the holder of the Class C Preferred, Waterside Capital Corporation ("Waterside"), whereby
. the Company paid $2,052,780 in the form of $1,000,000 cash and two secured commercial promissory notes in the original principal amounts of $900,000 and $152,780 for:
. Waterside's surrender to the Company for cancellation 1,500,000 shares of its Class C Preferred Stock;
. Waterside's guarantee of up to $400,000 of the Company's subsidiary, Systems, revolving credit facility; and
. Waterside surrendered for cancellation its warrant exercisable for 300,000 shares of the Company's Common Stock;
. the Company paid $50,000 of closing fees associated with the transaction; and
. Waterside purchased from the Company 1,000 shares of the Company's subsidiary, Systems, preferred stock for $1,000,000 which is recorded as a minority interest in the balance sheet.
The difference between the original face value (net of transaction fees) of the Series C Preferred Stock of $2,139,000 and the aggregate of the principal value of the note of $900,000 and the $1,000,000 of cash, equaling $239,000, was recorded as an addition to Additional Paid in Capital and has been added back in the loss applicable to common shareholders for computing earnings per share.
The promissory notes bear interest of 10% per annum. The $900,000 note is payable in quarterly installments of $15,000 and the $152,780 note is payable on January 1, 2002.
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 difference between the original face value of the Series D Preferred Stock of $6,177,000 and the face value of the new Series E Preferred Stock of $3,000,000, equaling $3,177,000, was recorded as an addition to Additional Paid in Capital and has been added back in the loss applicable to common shareholders for computing earnings per share. In 2001, the holders converted and additional 821 shares into 1,251,047 shares of common stock. At December 31, 2001, 1,324 shares of Series D Preferred Stock remain outstanding and are convertible into 2,017,523 shares of common stock.
The Series E Preferred Stock has terms similar to the restructured Series D Preferred Stock, with the primary exceptions being that the Series E Preferred Stock accrues dividends at the rate of 7% per year and the Series E Preferred Stock was redeemable for $3,000,000 at the Company's option on or before April 30, 2001, provided that the Company redeemed at least $1,500,000 of such stock on or before January 30, 2001 which the Company did not. The Series E Preferred Stock becomes convertible into shares of common stock at a conversion price of $0.47 per share if it is not redeemed or upon the occurrence of certain other events. Pursuant to a related Registration Rights Agreement, the Company registered with the Securities and Exchange Commission the 1,000 additional shares of common stock sold as part of the transaction as well as the shares issuable to the holders of the Series E Preferred Stock upon conversion of that stock to common stock.
Warrants
On March 29, 2000, the Company sold 1,500 units in a private placement for $1.5 million ($1.3 million after fees and expenses). Each unit sold consisted of a prepaid Common Stock purchase warrant entitling the holder to acquire such number of shares of the Company's Common Stock as is equal to $1,000 divided by an adjustable exercise price of $0.0195 which calculates to 76,923,077 shares as of December 31, 2001, and an incentive warrant to acquire 78,000 shares of Common Stock. The Company also granted the placement agent a warrant to purchase 39,000 shares of Common Stock plus a placement fee and a non-accountable expense allowance equal to 12.53% of the proceeds of the offering. The value of these warrants was equal to the proceeds received.
Monster Warrant. In connection with a co-branded services agreement entered into in May 2000 by one of our subsidiaries and TMP Interactive, Inc. ("TMP"), the Company issued warrants to purchase up to 3,000,000 shares of common stock. The warrants are exercisable for a period of three years after the date they were issued. The exercise price for the warrants to purchase up to 2,000,000 shares of common stock is $9.00 per share and these warrants vest over two years. As of December 31, 2000 the fair value was calculated at $0 using a risk free interest rate of 5.1%, volatility of 106%, and an expected term of three years. The exercise price for the remaining warrants to purchase up to 1,000,000 shares of common stock is $6.00 per share and these warrants vested immediately. The fair value of these warrants of $2.9 million was calculated on the measurement date using a risk-free rate of 6.7%, volatility of 106%, and an expected term of three years. On August 7, 2001, the Company agreed to cancel the warrants to purchase up to 3,000,000 shares of common stock and grant warrants to purchase up to 4,000,000 shares of common stock in connection with the litigation settlement (see Note 14). The exercise price for these warrants is $0.47 per share and they are exercisable at any time on or before August 7, 2004. The Company recorded a selling and general and administrative charge in the three month period ended September 30, 2001 of $360,000 that was related to the value of the warrants derived using the Black-Scholes method. This calculation was made using a risk-free interest rate of 4.04%, volatility of 171%, and expected term of three years.
Roseland Warrant. The Company issued a warrant on May 22, 2000, to purchase up to 15,000 shares of common stock to Roseland II L.L.C. in connection with our leasing arrangements. The warrant is exercisable for a period of five years after the date the warrant was issued. The exercise price for the warrant is $7.72 per share. On the date issued the fair value calculated for this warrant was $17,550 to be amortized over sixty months, the life of the lease. This calculation was made using a risk-free interest rate of 6.1%, volatility of 59%, and expected term of five years.
Silicon Valley Bank Warrant. The Company issued a warrant on July 31, 2000, to purchase up to 75,000 shares of common stock to Silicon Valley Bank in connection with our line of credit. The warrant is exercisable for a period of five years after the date it was issued. The exercise price for the warrant is $6.00 per share. On the date issued the fair value calculated for this warrant was $18,000 and has since been expenses due to the
termination of the line of credit agreement. This calculation was made using a risk-free interest rate of 6.1%, volatility of 59%, and an expected term of five years.
Pennsylvania Merchants Group Warrant. The Company issued a warrant on December 12, 2000, to purchase up to 500,000 shares of common stock to Pennsylvania Merchants Group in connection with an investment banking arrangement we have with it and the cancellation of the warrant to purchase 250,000 shares of common stock issued in 1999. The warrant is exercisable for a period of five years after the date it was issued. The exercise price for the warrant is $0.50 per share. The fair value was calculated at $90,000 using a risk-free rate of 5.1%, volatility of 106%, and an expected term of five years. As this warrant was issued in connection with the issuance of capital securities, no expense was recognized.
The following table sets forth the warrants outstanding and their weighted-average exercise price:
Shares Price ----------- ------------ January 1, 1999 3,109,102 $ 2.30 Issued 225,000 3.00 Exercised (2,093,856) 2.52 Expired (45,000) 3.00 ----------- ------------ December 31, 1999 1,195,246 $ 2.15 Issued 4,257,000 6.62 Exercised (795,465) 2.16 Canceled (250,000) 3.00 Expired (2,854) 1.15 ----------- ------------ December 31, 2000 4,403,927 $ 6.42 Issued 4,000,000 0.47 Exercised -- -- Canceled (3,300,000) 7.64 Expired (250,000) 2.22 ----------- ------------ December 31, 2001 4,853,927 $ 0.41 =========== ============
As of December 31, 2001, 2000 and 1999 all of the warrants were exercisable and had an average remaining life of 2.7, 4.4 and 3.5 years, respectively.
(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 for holder's of more than 10% of the voting stock of the Company). Generally the options vest ratably and become fully exercisable after 3 years but not less than 6 months from the date of grant. At December 31, 2001, approximately 1,301,000 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, 2001, 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, 2001, 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, 2001, the exercise prices for options granted under the ISO plan were $0.47 to $3.00 and the weighted-average remaining contractual life of those options was 7.6 years. At December 31, 2001, 2000 and 1999, the number of options exercisable under the ISO Plan was 1,750,250, 1,286,186 and 1,175,898, respectively. The weighted-average exercise price of those options was $1.08, $1.25 and $1.04, respectively.
Directors' Plan - --------------- At December 31, 2001, 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 7.9 years. At December 31, 2001, 2000 and 1999, the number of options exercisable under the Directors' Plan was 247,500, 240,000 and 75,000, respectively. The weighted-average exercise price of those options was $0.99, $0.93 and $2.61, respectively.
Consultants' Plan - ----------------- At December 31, 2001, 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 7.76 years. All options, granted under the Consultants' Plan, are exercisable at the time of grant. The weighted-average exercise price of those options was $1.38, $1.51 and $1.25 at December 31, 2001, 2000 and 1999, 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 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 and 1999, was $0.34 and $2.29, respectively using the Black - Scholes option pricing model with the following weighted average assumptions:
2000 1999 -------- --------- Dividend yield 0.0% 0.0% ======== ========= Risk-free interest rate 5.79% 5.98% ======== ========= Expected volatility 141% 167% ======== ========= Expected life (years) 5.00 7.86 ======== =========
The per share weighted average fair value of the Directors' Plan options on the grant date in 2000 and 1999 was $0.25 and $2.85, respectively using the Black - Scholes option pricing model with the following weighted average assumptions:
2000 1999 -------- --------- Dividend yield 0.0% 0.0% ======== ========= Risk-free interest rate 5.79% 6.10% ======== ========= Expected volatility 141% 167% ======== ========= Expected life (years) 1.00 2.72 ======== =========
(13) Related Party Transactions
The Company paid $3,000 in 2001, $18,000 in 2000 and $45,000 in 1999 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 the company that owned all of the Company's Class C Convertible Preferred Stock which was converted to debt and to Class A Preferred Stock of the Company's subsidiary, Netplex Systems, Inc. (See 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.
Prior to the May 24, 2001 trial date and before any motions for reconsideration, the parties mutually agreed to enter into settlement negotiations.
On December 28, 2001 the Company and DSA entered into a settlement agreement for dismissal of the lawsuits, with prejudice whereby the Company agreed to pay DSA $1,400,000 plus transfer its 125,000 shares of TAVEE stock it held for investment purposes which had a carrying value of $375,000. The Company agreed to pay (i) $900,000 on or before December 31, 2001 or $900,000 on or before March 31, 2002 plus interest from January 1, 2002, and (ii) $250,000 on each of June 30, 2002 and December 31, 2002. The Company did not pay the amount due on December 31, 2001.
In December 2000, TMP Interactive, Inc. ("Monster.com") 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 Monster.com. 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, Monster.com 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 and enter into settlement discussions.
On August 7, 2001, the Company and Monster.com entered into a mutually agreeable settlement whereby the Company would pay Monster.com fees of $230,000 and grant a warrant to purchase 4,000,000 shares of the Company's common stock at $0.47 per share which is fully exercisable at any time on or before August 7, 2004. In conjunction with this agreement, the Company recorded a selling and general and administrative charge in the three month period ended September 30, 2001 of $590,000. Of this amount, $360,000 was related to the value of the warrants granted to Monster.com derived using the Black-Scholes method.
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 2001, 2000 and 1999 was approximately $224,000, $456,000 and $406,000, 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 2001, 2000 and 1999.
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.
In 2001, the Company had three reportable segments after it initiated a new segment, Consultant Service Center ("CSC"), which included the migration of the Company's staffing business, within the Contractors Resources subsidiary. The Company's reportable segments are as follows:
. Netplex Systems ("Systems") - technology consulting and information systems integration services that seek to help clients make efficient, cost-effective, and reliable use of their information technology systems. As discussed in Notes 1 and 3, management is entertaining offers for the operations of this segment (either in whole or in parts).
. Contractors Resources - mybizoffice ("CR-MBO") - 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.
. Contractors Resources - Consultant Service Center ("CR-CSC") - provides low-cost employment, payrolling, recruiting, and benefits provisioning for clients' contingent work force thereby enabling businesses to reduce consultant management costs and better position themselves to engage and work with their contingent work force.
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, 2001, 2000 and 1999.
Reconciliation of Segment EBITDA to Net Operating Loss: