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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2000
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Or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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.
Commission file number 1-11784
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THE NETPLEX GROUP, INC.
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(Exact name of registrant as specified in its charter)
New York 11-2824578
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1800 Robert Fulton Drive, Ste. 250, Reston, VA 20191-4346
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (703) 716-4777
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Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.001 par value NASDAQ SmallCap Stock Market
Boston Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting and non-voting common
stock held by non-affiliates of the registrant as of March 19, 2001, was
approximately $2,760,118.
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock as of March 19, 2001: 22,080,946 shares.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated herein by reference into Part III.
Index to Form 10-K
PART I..................................................................... 3
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 19
Item 3. Legal Proceedings................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders.............. 20
PART II.................................................................... 21
Item 5. Market for Common Equity and Related Stockholder Matters......... 21
Item 6. Selected Financial Data.......................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 28
Item 8. Financial Statements and Supplementary Data...................... 28
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 28
PART III................................................................... 30
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act................ 30
Item 11. Executive Compensation........................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and Management... 33
Item 13. Certain Relationships and Related Transactions................... 34
PART IV.................................................................... 35
Item 14. Exhibits and Reports on Form 8-K................................. 35
Signatures................................................................ 38
2
PART I
1. Business.
Company Overview
Based in Reston, Virginia, The Netplex Group, Inc. (the Company) consists of two
distinct operating units:
- - Netplex Systems, Inc. ("Netplex"), a professional services provider that
combines industry-specific knowledge, emerging technologies, and proven
strategies to deliver superior business systems solutions; and
- - Contractors Resources, Inc., which delivers time- and money-saving services
for independent professionals and the organizations that use them.
The following sections describe each of these operating units through an
overview, a market opportunity description, a description of services, a
breakdown of competition and differentiators, a partial client list, our
strategy for growth, seasonal considerations, backlog, strategic acquisition
status, and contact information.
Netplex
Overview
Netplex provides collaborative business solutions that concentrate within
selected industries. Netplex seeks to build ongoing business value by
continually redefining the most effective balance of traditional and emerging
business strategies, technologies, creative customer experiences, and
information security practices. By leveraging our in-depth industry
specializations, our services help clients strengthen customer loyalty, enhance
operations, and achieve a sustainable competitive advantage.
By understanding the business dynamics and technology trends of specific
industries, we seek to understand the business problems faced by companies
within these industries. This allows Netplex to develop and deliver business
solutions that serve our clients' unique strategic, technological, interactive,
and information security needs.
Netplex's primary vertical specialization is the Retail and Consumer Products
industry, where we specialize in end-to-end supply chain solutions. We have 16
years of experience delivering strategic, interactive, technology, and security
solutions to businesses throughout the retail market. Generally, our clients
comprise regional or national chains of 100 or more stores and with revenues
between $300 million and $2 billion. Netplex believes that it has achieved a
noteworthy and respected reputation in the Retail and Consumer Products industry
and that our history of successful projects helps gives us a competitive
advantage over many larger national consulting companies. While our Retail and
Consumer Products industry specialization remains our most prominent, we believe
that, as we choose to expand, we have planned our services portfolio so that it
will effectively serve other vertical industries.
Netplex's individual service disciplines are discussed in the "Description of
Netplex Services" section later in this document.
Market Opportunity
Netplex's market opportunity originates from the rapidly growing need for
business strategies and solutions that help organizations most efficiently
improve their internal operations and/or competitive advantage. Commonly, these
solutions necessitate the development of Web-based systems, the Web-enabling of
existing systems, and the determination of the most effective balance between
traditional and evolving technologies and methods.
Business solutions are commonly divided into two categories: business-to-
business ("B-to-B") and business-to-consumer ("B-to-C"). According to Gartner
Group estimates, the market for Internet-based B-to-B services is expected to
grow to approximately $7.29 trillion in 2004, from approximately $145 billion in
1999. Dataquest anticipates significant growth in the B-to-C market as well,
estimating that the market for Internet-based business-to-retail services will
grow from $31.2 billion in 1999 to $380.5 billion in 2003. Other recent
statistics indicate growth in the technology consulting services market.
International Data Corporation estimates that the market for IT consulting
services will grow from over $34 billion in 1999 to nearly $64 billion in 2003
worldwide. IDC goes on to
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predict that the market for Internet services spending/1/ will grow from
approximately $16 billion in 1999 to over $84 billion by 2003.
Netplex believes that these statistics indicate a growing need for professional
services designed to build or enhance business systems. Many Netplex customers
have become participants in this growth by implementing business strategies that
balance traditional technologies and practices with those introduced by the
ubiquitous nature of the Internet. We believe that the vast majority of our
business systems services in 2001 and beyond will include a combination of
traditional and Web-based systems.
In our experience, we have found that businesses wishing to implement Internet-
integrated business systems strategies often require skill sets and capacity
that extend beyond their internal marketing and Information Systems (IS) staff.
As a result, several of our customers have selected us to provide business
systems consulting services intended to help them develop business strategies
and/or build the systems that most efficiently balance traditional processes
with emerging technologies and processes.
Description of Services
As mentioned in the Netplex Overview, our business solutions capabilities fall
into four primary disciplines. These are:
- - Strategy, which seeks to leverage broad industry knowledge to guide clients
toward the most effective use of business practices and systems;
- - Technology, which seeks to develop, integrate, and implement sophisticated
information systems;
- - Experience, which seeks to help clients create ongoing interactive
relationships with their customers through creative, marketing, and brand-
building services; and
- - Security, which seeks to maximize the overall integrity and minimize the
potential threats to clients' information systems.
We believe that our solutions disciplines (described in more detail below)
together provide the appropriate breadth and quality of services that will
accommodate, on a single-source basis, the vast majority technology-related
project within our targeted industries.
Service Discipline: Strategy. Businesses wishing to use technology to maximize
their long-term business viability and competitive advantage often rely on our
Strategy experts to help determine the best ways to reach their goals. Working
collaboratively with our clients' executive-level managers, Netplex leverages
its industry and technology experience to help evaluate new or modified
opportunities for building revenues or improving operational efficiencies. Our
Strategy discipline also helps clients define or revise business models designed
to take advantage of these opportunities. This discipline is also charged with
developing the execution plan for bringing the new business models to reality.
Service Discipline: Technology. Our Technology discipline consists of
experienced developers, integrators, application experts, and project managers.
Clients rely on our Technology discipline to design and develop powerful and
secure business systems based either on the plans defined by our Strategy
discipline or requirements established elsewhere. This group is also responsible
for integrating newly developed systems with legacy systems to ensure economical
and reliable business systems, as well as creating and/or integrating e-commerce
capabilities to clients' Web applications. The Technology discipline also
includes a formal Customer Support Network, through which we closely monitor
clients' systems and react quickly to system failures.
Service Discipline: Experience. Our Experience discipline focuses on creative
services intended to create the best possible experience for our clients'
customers or Web visitors. The services often include defining of the
interactive relationship our clients wish to establish with their customers,
employees, investors, and partners. Once defined, our Experience discipline
develops creative multimedia, design, and digital marketing solutions that
become the springboard for our clients' interactive relationships. In 2000,
Netplex added kiosk design and development to its list of offerings and our
kiosk solutions have been deployed within several prominent retailers.
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/1/ Internet services spending is defined as the consulting, implementation, and
operational services necessary to develop, deploy, and manage Internet sites.
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Service Discipline: Security. Our Security discipline is responsible for
ensuring the integrity of clients' information systems and minimizing the threat
of losing information due to "hacking," theft, or natural disasters. Our
Security services include high-level information security strategy solutions,
through which we will often perform vulnerability analyses, test systems'
penetrability, and develop sound security architectures. In addition, we provide
business contingency and continuity planning services, which clients' rely on to
ensure the fastest-possible recovery from unexpected catastrophic events. We
have sold these services both as stand-alone services and as part of projects
originating from other Netplex disciplines. In 2000, our Security discipline
expanded its leadership presence in the healthcare industry by working with
hospitals and other health-related organizations to bring them into compliance
with the upcoming "Health Insurance Portability and Accessibility Act" (HIPAA)
security standards.
Competition
Despite the significant difficulties many technology services companies
experienced during 2000, Netplex remains in a very competitive market.
Successful participants in this market are no longer relying on serving "dot-
com" companies to attain revenue growth. Instead, most have realigned their
marketing direction toward Fortune 1000 companies or established players within
specific vertical markets. Netplex, in fact, established a industry-centric
marketing strategy in 1999 and our revenue from dot-com companies represented
less than 10% of our 2000 revenue.
Netplex's competition falls into three general categories, described below. In
all cases, many of our competitors have greater resources, greater expertise, or
have better access to capital than Netplex. Competitive categories include:
- - e-Solutions and Interactive Development Companies. These are companies that
specialize in planning, designing, developing, and deploying interactive
online systems and/or integrating these systems with clients' existing
infrastructure. Competitors in this category include AnswerThink, AppNet,
Cysive, Proxicom, Razorfish, Sapient, and several others, both public and
private. Of these, several have moved into the full-service e-solutions
market by expanding specific core disciplines, while others are start-ups
that have been built upon a full-service solutions delivery model.
- - Industry-Specific Solutions Integrators. These companies have expertise in
and build solutions exclusively for specific vertical industries. Like
Netplex, these companies often attempt to distinguish themselves by
concentrating on a single or relatively few markets, thereby better enabling
themselves to compete with larger and more well-funded consulting companies.
Industry-specific solutions integrators include: Carreker Corporation, First
Consulting Group, LakeWest Group, and several smaller companies.
- - "Big 5" Consulting Firms. Many of the "Big 5" consulting firms (such as
Deloitte & Touche, KPMG, and Accenture) feature industry-concentrated
practices and offer strategic and technological solutions similar to ours. As
a result, Netplex frequently competes against these firms when bidding on
projects, especially when the project in question deals with individual
services from within our disciplines.
Differentiators
Netplex believes that it has several competitive differentiators:
End-to-End e-Solutions: Netplex attempts to compete with other companies in our
market by providing "end-to-end" solutions and developing relationships with
clients who seek a provider that can efficiently balance multiple strategic and
technical disciplines in developing or enhancing business systems. Netplex's
end-to-end solutions seek to cover clients' business requirements "three
dimensionally": from beginning to end, from front to back, and from efficiency
to new value. We provide beginning to end services that guide clients from the
strategic conception of their business initiatives through application
development and deployment. Simultaneously, Netplex serves clients' systems
initiatives from front to back--our services connect front-end on- and off-line
application design with back-end databases and legacy systems, while
incorporating the appropriate security elements. In addition, Netplex's services
are designed to help clients achieve a variety of different goals with their
systems, from saving costs through increased efficiency to taking advantage of
ways to build new value or revenue streams through their systems.
Industry Focus: As previously mentioned, Netplex focuses on understanding the
business dynamics and technology trends of specific vertical industries. As part
of our fundamental business strategy, Netplex establishes formal practice areas
dedicated to serving the unique needs of specific industries. As of today, our
largest vertical industry practice is in the Retail industry. Netplex employs
over 80 full-time billable professionals dedicated to creating
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retail-specific solutions and our employees have amassed a cumulative 1,000
person-years of retail technology and strategy experience.
Clients
Netplex's client base includes Fortune 1000 and middle-market firms from various
industries. Because we concentrate on and market our services primarily to
specific industries, the vast majority of our clients fall within the
Retail/Consumer Products and Healthcare industries.
Our major Retail/Consumer Products clients include:
- American Eagle Outfitters - Hoover
- Academy Sports and Outdoors - King Pharmaceuticals
- ALDI - Liverpool Group
- Bakers Shoes - The Museum Company
- Brinker International - The Nature Company
- Cabela's - Neiman Marcus
- Chanel - Phillips-Van Heusen
- The Christmas Tree Shops - SAKS
- Dick's Sporting Goods - Sport Chalet
- Duckwall-ALCO - Trans World Entertainment
- Gart Bros. Sporting Goods - Value City Dept. Stores
- Hancock Fabrics - Virgin Entertainment Group
Our major Healthcare clients include:
- Alegent Health - Fauquier Hospital
- American Health Corp. - Innovex
- Baystate Health - INOVA
- Blue Cross/Blue Shield of Florida - Quintiles
Major clients from within other
industries include:
- America Online - Oregon State Lottery
- King Pharmaceuticals - Securities and Exchange Commission
- Major U.S. Stock Exchange - TeleCorp
- Oklahoma Christian Univ. - TRW
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Netplex derived, and believes that it will continue to derive, a significant
portion of its revenue from a large number of clients. The Company recognized
revenue from unaffiliated customers constituting 25.0% and 27.8% in 2000 and
1999, respectively from two customers in each year.
Growth Strategy
Each of the following initiatives requires ample working capital. No assurance
can be given that the Company's strategy will be successful.
- - Sustain Growth in Systems Solutions Business. In 2001, Netplex intends to
undertake several initiatives that are designed to bring exposure to our
company and help us continue our growth. We intend to make investments in
publicizing our services, strengths, and position in the market through
coordinated advertising campaigns and public relations activity. We are also
planning to grow our sales staff and our team of billable professionals to
accommodate revenue growth. Between 1999 and 2000, Netplex's revenue per
billable employee changed by only 2 percent, indicating that our professional
recruitment efforts are virtually identically aligned with our growth.
- - Develop New Vertical Practice Areas. Netplex also intends to roll out new
vertical practice areas. We believe that the growth of our retail
specialization stems from our knowledge and experience in the retail
technology market. We believe that this industry understanding will enable us
to create customer solutions that are aligned to the demands of the retail
industry. Consequently, we believe that we must build a core industry
competency, either organically or through acquisition, before we formalize
any new industry-focused practice.
- - Pursue Acquisitions. Netplex has made six acquisitions in its history. We
believe that additional acquisitions may benefit our core service offerings
and improve our growth. As a result, we intend to consider further
acquisitions if management deems them appropriate to improving our market
position and shareholder value. We expect to consider acquisitions that are
complementary to our existing capabilities or geographical positioning, or
ones that help us expand into additional vertical markets.
Seasonal Considerations
The company is generally not affected by seasonal changes except that only a
limited amount of services are furnished to retail clients during the period
from the end of November to the end of January.
Backlog
The backlog of Netplex's project-based business was approximately $3,500,000 as
of March 1, 2001.
Strategic Relationships
Netplex continues to develop strategic relationships with companies or
organizations whose services we believe complement ours. We believe that such
partnerships play an important role in our strategy of being a premium-level
end-to-end business systems provider. As technologies evolve, our ability to
deliver advanced business systems solutions may depend on our ability to secure
and maintain alliances with leading technology manufacturers.
Contact Information
The Netplex Group's principal executive offices and headquarters are located at
1800 Robert Fulton Drive, Second Floor, Reston, Va., 20191. This location serves
as the headquarters for the Netplex and Contractors Resources businesses.
Please direct all inquiries related to Netplex to:
Tel: (703) 716-4777
Fax: (703) 716-1110
Email: info@netplexgroup.com
Web: www.netplexgroup.com
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Contractors Resources
Overview
The second of The Netplex Group's operating units is our Contractors Resources
(CR) subsidiary. CR itself comprises two distinct business functions:
- - A business-to-consumer service, MyBizOffice(TM). Designed to help independent
professionals (IPs) more easily manage their careers, MyBizOffice serves as a
corporate infrastructure for independent professionals who would otherwise
have to perform their own business management and administrative tasks.
MyBizOffice's services include contract review, invoicing, collections, tax
administration, employee benefits, pre-tax retirement programs, marketing
services, financial services, and expense management.
- - A business-to-business service, the Consultant Service Center (CSC). By
offering low-cost employment, payrolling, and benefits provisioning for
clients' contingent work force, the CSC is designed to enable businesses to
reduce consultant management costs and better position themselves to
efficiently engage and work with their contingent work force. Clients may
also extend the scope of the CSC's services to include our Consultant
Recruitment Network (CRN) capability, which locates and assesses candidates
for clients' open contract positions. In addition, the Consultant Service
Center, which CR launched in early 2001, also serves as a marketing channel
for MyBizOffice.
MyBizOffice and the Consultant Service Center are discussed in more detail in
"Description of Contractors Resources Services" later in this document.
Market Opportunity
Through its MyBizOffice brand, CR serves the population of individuals who have
chosen to pursue careers as independent professionals (IPs). These professionals
are commonly referred to as contractors, consultants, independents, free agents,
freelancers, and several other terms.
We originally designed MyBizOffice to serve only IPs within the Information
Technology industry. Recognizing an opportunity to expand our potential member
base, we expanded MyBizOffice during 2000 to serve IPs representing other
industries. MyBizOffice's audience now consists of IPs from a wide variety of
industries, including management consultants, marketers, artists and designers,
writers, business process specialists, and others.
Estimates compiled by the U.S. Bureau of Labor Statistics (BLS) indicate that
the IP market represents a significant population. In its February 1999 Current
Population Survey titled "Contingent and Alternative Employment Arrangements,"
the BLS estimates an independent consultant work force of about 9 million. The
BLS will publish an updated report on this population later in 2001.
Within the independent consultant community, the Information Technology
industry--which still makes up the most significant portion of MyBizOffice's
members and prospects--has seen significant growth. "The Information Elite," a
1997 report by Dominique Black, projected that there would be about 2 million IT
consultants in the U.S. by 2000, representing an annual growth rate of
approximately 17%.
There is also evidence that the population of IPs will continue to grow despite
a down-turning economy and the recent significant number of layoffs within
companies across the country. In a recent article in The Washington Post,
journalist Carrie Johnson writes, "As layoffs continue to shake up the dot-com
sector, some jittery employees wonder where they can find shelter from the
aftershocks. For more and more, the answer is renouncing the traditional
employment relationship by doing contract work."
Description of Services
Contractors Resources, Inc. (CR) provides cost- and time-saving business
management and administrative services for independent consultants and the
organizations that use them. It's two service categories include MyBizOffice, a
business-to-consumer service that targets individual IPs, and the Consultant
Service Center, a business-to-business service that targets organizations that
use at least 100 IPs per year.
Service Overview: MyBizOffice
The MyBizOffice service is designed to support the business management,
administrative, and advisory needs of independent professionals (IPs) working
within the United States. IPs are professional or skilled non-permanent members
of the corporate work force. This includes free-lance, project-based, hourly,
and per diem individuals, whether incorporated, sole proprietors (classified as
1099 recipients), or W-2 employees engaged in the staffing or contractor
business.
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When IPs join MyBizOffice (becoming "members"), they generally become W-2
employees of Contractors Resources/2/. As their employer of record, we provide
MyBizOffice members the services and infrastructure normally associated with a
traditional corporate environment. However, we do not put restrictions on their
independent work style; MyBizOffice members find their own projects, negotiate
their own hourly billing rates, and are free to work wherever and whenever they
choose.
The services we provide our members are as follows:
- Billing rate advice - Expense reimbursement
- Time sheet collection - Access to projects within larger
- Client invoicing and payment corporations
collections - Marketing and career development
- State/federal/local payroll tax advice
filings - Financial services
- Payrolling (providing a consistent - Contract administration
tax-adjusted paycheck)
- Accounts receivable management
- Online banking and loan services
In addition, we provide a competitive benefits package that is usually more
comprehensive and less expensive than that which IPs would be able to assemble
on their own. Benefits include:
- 401(k) program - Disability insurance
- Profit sharing - Professional liability insurance
- Health insurance - Deferred compensation plan
- Dental insurance
This benefits program is customizable to the personal needs of the member. We
offer our health, dental, disability, and professional liability insurances at
traditional corporate (group) rates, enabling our members to inexpensively
provide their families with these necessary coverages. In addition, CR's profit
sharing and 401(k) retirement plans allow members to put aside a significant
portion of their pre-tax income.
Members can also take advantage of several advisory services through the
MyBizOffice Web site, including up-to-date billing rate surveys and consulting
industry news. The site also helps to keep contractors current on technology
changes and provides directories of training resources that can help keep
members' skills in line with the needs of the technology industry.
MyBizOffice is also an advocate for the independent worker. There is no
potential conflict among the consulting market and the organizations that may
engage them, because MyBizOffice does not bundle "hidden" fees for finding or
brokering the engagements. (Thousands of "e-talent marketplaces" already provide
this service.) Keeping the contract worker as the primary focal-point of the
business is pivotal to our strategy.
Service Overview: The Consultant Service Center
CR's business-to-business service, the "Consultant Service Center (CSC),"
targets major businesses and government agencies. It offers high-value
employment, payrolling, and benefits provisioning for our clients' contingent
work force. CR designed the CSC to enable businesses to reduce consultant
management costs and better position themselves to efficiently engage and work
with their contingent workers. We officially launched the CSC service in early
2001.
The Consultant Service Center relies on the Internet's expanded talent-finding
capabilities to introduce a low-cost alternative to the traditional
relationships between corporations and staffing companies. Traditionally,
businesses have used staffing companies for two purposes: locating qualified
consultants and providing these consultants' employment services (payrolling,
tax administration, benefits, etc.). With the growth of online talent location
and acquisition services, many businesses are now finding consultants without
the assistance of staffing companies. However, they often have little choice but
to turn to staffing companies to employ the consultant and provide the necessary
employment services. In this scenario, many staffing companies will often still
charge their full mark-up (generally between 25% and 50% of a consultant's
hourly rate), even though they did not locate the individual.
- ----------
/2/ In addition to its standard W-2 membership, Contractors Resources also
provides services for several single-person corporations.
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The CSC gives businesses the opportunity to "unbundle" the traditional staffing
company model. As such, business that find their own consultants can now turn to
the CSC for their employment services. Our fee for this service is under 5% of
the consultant's rate, which is significantly lower than fees or mark-ups
charged by most staffing companies. As a result, we believe that the CSC
provides significant value for organizations that use consultants--not by
reducing costs through using inferior consultants, but by streamlining clients'
consultant supply chains.
CR designed the CSC to offer its clients additional advantages such as easier
consultant engagement, simplified invoice consolidation, and improved compliance
with federal regulations. In addition, the CSC better enables organizations to
become "consultant-friendly"--i.e., more easily able to attract, work with, and
maintain consulting talent.
In addition, the Consultant Service Center provides CR with a marketing channel
that supplements our MyBizOffice service in two ways. First, CR markets the more
encompassing MyBizOffice service to its CSC members with the intention of
converting them to MyBizOffice upon completion of their CSC-related contract.
Second, we believe CR's corporate affiliations may influence MyBizOffice
prospects to join MyBizOffice because such relationships enable members to more
easily work within affiliated organizations.
Competition
Contractors Resources represents one alternative for independent professionals
(IPs) who choose to work outside of the "traditional" company-centric employment
model. Contractors Resources is one of several options these professionals have
for pursuing and building independent careers. These include:
- - Working with a staffing company. Many IPs associate themselves with a
staffing or professional services company/3/. These companies provide
employment services (i.e., benefits, insurances, payrolling, tax
administration, etc.) and actively attempt to match independent individuals
with appropriate project positions. These companies typically charge a 25% to
50% mark-up on their consultants' hourly rate. There are presently thousands
of staffing companies in the U.S. and around the world and their IP bases
range from under 10 to several thousand.
- - Working as a "1099" independent. IPs who prefer to find their own project
positions often work as a sole proprietor or "1099" (so named because of the
IRS form 1099 they are required to complete). These IPs are generally more
experienced and are able to command higher billing rates than those who work
with staffing companies, as their clients are not required to pay any mark-
ups on their rate. However, 1099s are responsible for handling their own
insurance, retirement programs, liability, and self-employment taxes. In
addition, some businesses will not work with 1099s due to the administration
associated with engaging individual contractors as well as the possibility of
infringement on federal regulations concerning the classification of their
work force.
- - Self-incorporating. Like 1099s, individuals who choose to incorporate
themselves have the flexibility to find their own projects and can generally
charge higher rates than those working with staffing companies. Self-
incorporating also gives IPs a more professional appearance and enables them
to work with some clients who would be unwilling to work with them as 1099s.
Single-person corporations, though, must take on additional administrative
tasks associated with running their business and are required to pay
unemployment insurance and Workmen's Compensation insurance.
- - Using a "Virtual Corporate Office" or "back-office." A relatively new
alternative, "back office" services provide a company-like infrastructure for
IPs who prefer to find projects on their own. With the advent of the
Internet, back-office services have been called Virtual Corporate Offices, as
their services and financial tracking mechanisms are Internet-accessible.
Like a staffing company, a Virtual Corporate Office serves as its IPs'
employer of record and therefore provides services such as benefits,
insurances, payrolling, tax administration, etc. Virtual Corporate Offices,
however, do not charge to find projects for its IPs and are generally able to
charge lower fees or mark-ups than staffing companies. Virtual Corporate
Offices generally do not impede their IPs' freedom to choose their own
clients, rates, and schedule. CR's MyBizOffice service falls into this
category of services.
- ----------
/3/Staffing companies are organizations that provide skilled human resources on
a non-permanent basis, meeting requirements specified by a client
organization.
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The first three of the above alternatives represent competitive forces to the
Contractors Resources employment model, as most IPs choose to participate in one
and only one of these models at a time. Currently, we estimate that fewer IPs
opt for the Virtual Corporate Office alternative than any of the others. We
believe this is primarily due to the fact that this is a relatively new concept
and that many IPs are either unaware of this alternative or comfortable with
their existing employment arrangements.
Competition within the Virtual Corporate Office market grew in 2000 as new
companies began providing these types of services and others refined offerings
to better align with this category. Most of the companies in this space are
currently private.
CR believes that the Virtual Corporate Office employment model alternative will
grow in popularity as more IPs recognize it as a viable option. As a result, CR
expects that additional companies will emerge in this market and that
competition will therefore intensify. CR may experience lower margins and/or a
reduction in the number of members as a result of competitive forces. If we
cannot compete effectively within this market, we may be unable to sustain or
grow our business.
Differentiators
Contractors Resources has several differentiators that we believe will help us
attain a leadership position in the Virtual Corporate Office market. They
include:
- - Experience. Contractors Resources has been providing contractor-focused back-
office services since 1986. We believe that this represents more experience
than many similar businesses, some of which have emerged in the last three
years. We believe that this experience is integral to several critical
business processes that are flexible, scalable, and more advanced than our
current competition.
- - Services for individuals and organizations. Contractors Resources believes it
improved its competitive positioning in early 2001 by adding the Consultant
Service Center, a suite of services that are marketed exclusively to
businesses and government agencies that use IPs. This offering works in
concert with, but is distinct from, our MyBizOffice service that targets
individual IPs. We designed the Consultant Service Center offering to expand
our overall revenue base and serve as a marketing channel to potential
MyBizOffice members.
- - Fully integrated online service offering. During 2000, CR completed the
integrated Web-enablement of all our key business processes and financial
systems. We believe that completing this conversion enables us to serve our
members more efficiently and, as a result, the same number of CR support
staff can administer a greater number of members. In addition, research we
conducted in 1999 indicated that an online system is more appealing to our
members and target market. We believe that our ability to serve greater
numbers of members gives CR a critical competitive advantage.
Clients
The client base for Contractors Resources' MyBizOffice service comprises
individuals. The corporate clients with which we have Master Services Agreements
include many Fortune 1000 companies throughout the U.S.
Growth Strategy
As mentioned earlier, CR introduced the business-to-business Consultant Service
Center offering in early 2001. We believe that the most effective way to market
our services to the independent workforce is to pursue the organizations that
use contract talent. As a result, CR intends to devote the majority of its sales
and marketing expenditures to the pursuit of organizations that use a
significant number of contracted workers.
Contractors Resources believes that the addition of and attention to our
Consultant Service Center sales and marketing efforts will not preclude
marketing efforts directed specifically toward growing the MyBizOffice
membership. We are continuing to advertise MyBizOffice in several publications
and on various Web sites. In addition, we are continuing to pursue partnerships
that we believe will bring more exposure or add more services to the MyBizOffice
offering.
Seasonal Considerations
There is no material seasonal effect on our Contractors Resources business.
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Backlog
Due to the nature of its business, Contractors Resources does not have backlog.
Strategic Relationships
We are continually pursuing partnerships that will either augment CR's suite
service offerings or better enable us to market these services to a greater
number of potential members or clients.
The most prominent partnerships CR established during 2000 and the early part of
2001 include:
- - Monster Talent Market. In May, 2000, CR established a two-year partnership
with Monster Talent MarketSM (MTM). MTM is an area within TMP Worldwide's
Monster.com online job market service that specifically targets IPs and
individuals who are considering working on their own. As a result of the
partnership, the MyBizOffice service has been incorporated into the MTM site
as a co-branded component.
- - TheBancorp.com. In October, 2000, CR established a partnership with
TheBancorp.com, a provider of online banking services that are marketed
through online establishments that serve as affiliates. Through this
relationship, we have extended MyBizOffice's service offering to include
TheBancorp.com's full suite of services, including checking and savings
accounts, loans and mortgages, auto leases, an online brokerage services.
Contact Information
The Netplex Group's principal executive offices and headquarters are located at
1800 Robert Fulton Drive, Second Floor, Reston, Va., 20191. This location serves
as the headquarters for the Netplex and Contractors Resources businesses.
Please direct all inquiries related to Contractors Resources to:
Tel: (703) 262-6858
Fax: (703) 506-2039
Email: info@contractorsresources.com
Web: www.contractorsresources.com and www.mybizoffice.com
Corporate Information
The following sections apply to The Netplex Group, Inc., not specifically to
either of our two operating units.
Financial Information About Segments
For financial information regarding our business divisions (Netplex and
Contractors Resources) see Note 16 to the financial statements.
Company Background and Development
The Company was incorporated in 1986 in New York under the name CompLink, Ltd.
In 1992, CompLink completed an initial public offering to finance an effort to
develop a messaging software system (which the Company no longer supports). In
1996, CompLink acquired, through a merger that was accounted for as a reverse
merger, The Netplex Group, Inc. and Contractors Resources, and changed its name
to The Netplex Group, Inc.
This merger provided Netplex with additional capital and enabled us to expand
through acquisitions. Since 1997, Netplex acquired several companies with the
intention of building our experience, technical staff, customer base, market
exposure, revenue, and industry-focused expertise.
In 2000, we sold a division of a previously acquired entity, Onion Peel
Solutions, and announced our intention to sell or discontinue certain
operational disciplines. We believe these changes streamline our operations and
better enable clients, potential clients, analysts, investors, and the general
public to understand the scope of our offerings.
Geographic Positioning
The geographic scope of Netplex currently consists of five office locations. Of
these, three are on the East Coast of the U.S. two are in Midwest. The Company
does not have any locations outside the U.S. Revenue from sources outside the
U.S. is less than 1 percent of total revenue.
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Netplex is continually assessing the most suitable areas for geographic
expansion and will seek to penetrate new markets when appropriate, either
organically or through acquisitions.
Operations and Support
During 2000 Netplex moved its headquarters from McLean, Va., to Reston, Va.,
which includes its executive offices, and its marketing, legal, financial
services and human resources departments.
Intellectual Property
Netplex does not hold any patents or registered trademarks. However, we consider
the Netplex, Contractors Resources, and MyBizOffice names and our database of
independent professionals to be highly proprietary.
Employees
As of March 1, 2001 we had approximately 525 full-time employees (including
permanent and contract employees). We believe that our relations with our
employees are good.
Additional Factors That May Affect Future Results
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that the factors set forth in the sections entitled
"Competition" above, the factors set forth below, as well as other factors,
could in the future affect, and in the past have affected, the Company's actual
results and could cause the Company's results for future years or quarters to
differ materially from those expressed in any forward looking statements made by
or on behalf of the Company, including without limitation those contained in
this 10-K report. Forward looking statements can be identified by forward
looking words, such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words.
The risks and uncertainties described below are not the only ones potentially
affecting us. Additional risks and uncertainties that we are unaware of or that
we currently deem immaterial also may become important factors that affect us.
If any of the following risks occur, our business, results of operations, or
financial condition could be harmed. As a result, the trading price of our
common stock could decline, and you may lose all or part of your investment.
WE HAVE INCURRED OPERATING LOSSES AND MAY NEVER BECOME PROFITABLE. We incurred
net losses of $15.3, $7.4 and $2.5 million in the years ended December 31, 2000,
1999 and 1998, respectively. There can be no assurance that we will be
profitable on a quarterly or annual basis in the future. Our quarterly operating
results in the past have fluctuated and may fluctuate significantly in the
future depending on factors such as the timing and delivery of significant
orders and contracts, new product introductions, and changes in our pricing
policies.
WE MAY BE UNABLE TO OBTAIN THE NECESSARY FUNDING TO OPERATE, EXPAND AND IMPROVE
OUR BUSINESS. As of December 31, 2000 and 1999, we had negative working capital
of $2.9million and $4.6 million, respectively. We may need to raise substantial
additional capital to fund our operations. We are uncertain whether additional
financing will be available on acceptable terms or at all. If we raise
additional funds by issuing equity securities, our shareholders will be diluted.
If adequate funds are unavailable, we may delay, curtail, reduce the scope of,
or eliminate the expansion of our operations and/or our marketing and sales
efforts, and any of these actions could have a material adverse effect on our
financial condition and business operations.
THE TIMING OF OUR REVENUES AND THE INTRODUCTION AND MARKET ACCEPTANCE OF OUR
PRODUCTS MAY VARY RESULTING IN SIGNIFICANT VARIATIONS IN OUR OPERATING RESULTS.
Our revenues may vary due to the number and dollar value of client engagements
commenced and completed during a quarter; the number of working days in a
quarter; and employee hiring and utilization rates. The timing of revenues is
difficult to forecast because our sales cycle for new clients is relatively long
and may depend on the size and scope of assignments and general economic
conditions. Because a high percentage of our expenses are relatively fixed, a
change in the timing of the beginning or end of client assignments, particularly
at or near the end of any quarter, could cause operating results to
significantly vary from quarter to quarter and result in reported losses for
that quarter. In addition, clients can terminate our engagement at will, and we
would then have a higher than expected number of unassigned persons or higher
severance expenses. While we adjust professional staffs to reflect active
projects, we must maintain a sufficient number of senior professionals to
oversee existing client projects and help our sales force secure new client
assignments. Because we perform some work on a fixed-price basis, we also
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bear the risk of cost overruns and inflation. New product introductions and
market acceptance of new and enhanced versions of our products or the products
of third parties may also significantly affect our operating results.
THE FUTURE SUCCESS OF OUR BUSINESS DEPENDS ON THE CONTINUED SERVICES OF GENE
ZAINO, OUR CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AND OUR ABILITY TO
ATTRACT AND RETAIN TECHNICAL, MARKETING, SALES, AND MANAGEMENT PERSONNEL. Our
future success depends in large part on the continued services of Gene Zaino,
our Chairman, President and Chief Executive Officer. We have an employment
agreement with Mr. Zaino that expires in June 2002. Our success also depends in
large part upon our ability to attract and retain qualified technical project
managers and information technology personnel. We believe we need to hire
additional technical personnel to improve existing products and services and to
develop new products and services. In addition, we believe we need to hire new
sales personnel to sell our products and services. The inability to attract new
personnel could have a material adverse effect on our results of operations and
research and development efforts. It is difficult to locate technical,
marketing, sales, and management personnel with the combination of skills and
attributes required to execute our strategy. Although we have attracted and
retained qualified employees, qualified project managers are in particularly
great demand and will remain a limited resource for the foreseeable future. Our
employees can terminate their employment at any time. Accordingly, we may be
unable to continue to retain and attract qualified project managers.
BOTH OF OUR BUSINESS LINES ARE VERY COMPETITIVE AND SUBJECT TO RAPID CHANGES.
The market for our business systems solutions is highly competitive. Many
competitive companies have greater resources, greater expertise, or better
access to capital than we do. Because we target middle-market and larger
organizations with an approach that focuses on solving business problems within
vertical industries, our solutions competitors fall into three categories:
- - companies that focus on the development of Web-based solutions ("e-Solutions
Providers"), including AnswerThink, AppNet, Cysive, Proxicom, Razorfish, and
Sapient;
- - companies that develop and integrate solutions for specific industries,
including Carreker Corporation, First Consulting Group, LakeWest Group; and
- - "Big 5" consulting companies with industry-concentrated practices, including
Deloitte & Touche, KPMG, and Accenture
We believe that the principal competitive factors in the information technology
services industry include responsiveness to client needs, speed of project
implementation, quality of service, price, project management capability and
technical expertise. The market for Contractors Resources is also competitive
and changing quickly. Independent professionals, who make up the target market
for CR's MyBizOffice service, have several alternatives for managing their
careers that represent competitive forces. There are also a growing number of
companies that provide services similar to CR's and we expect additional ones
will emerge and that competition will therefore intensify. Our competitors in
this regard vary in size and in scope of services.
WE MUST RESPOND QUICKLY TO TECHNOLOGICAL DEVELOPMENTS, INTRODUCTIONS OF NEW
COMPETITIVE PRODUCTS AND SERVICES, AND EVOLVING INDUSTRY STANDARDS TO REMAIN
COMPETITIVE. The information technology services industry is characterized by
rapid technological developments, frequent introductions of new products and
services, and evolving industry standards. In order to remain competitive in
this rapidly evolving industry, we must continually improve the performance,
features, and reliability of our services. We cannot assure you that we will be
able to respond quickly, cost effectively, or sufficiently to any of these
developments. Our inability to respond quickly to any such developments could
cause us to lose substantial market share and could have a material adverse
effect on our business, operating results, and financial condition.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH EFFECTIVELY. Although we have
streamlined our operations, our long-term success will depend in part on our
ability to manage growth. If we are unable to hire a sufficient number of
employees with the appropriate levels of experience to effectively manage our
growth, our business, financial condition, and results of operations could be
materially and adversely affected.
OUR STOCK PRICE MAY BE SUBJECT TO SIGNIFICANT VOLATILITY. Our stock price may be
subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenue or earnings from levels expected by securities analysts or
others could have an immediate and significant adverse effect on the trading
price of our common stock in any given period. Additionally, we may not learn
of, or be able to confirm, revenue or earnings
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shortfalls until late in the fiscal quarter or following the end of the quarter;
learning of these shortfalls late could result in an even more immediate and
adverse effect on the trading of our common stock.
WE MAY BE LIABLE FOR LEGAL VIOLATIONS COMMITTED BY CONSULTANTS WE EMPLOY.
Technical services firms face legal uncertainties, including the extent of
liability for violations of employment and discrimination laws. Our liability
can include violations of employment and discrimination laws committed by
consultants we provide to our customers. We believe we comply in all material
respects with all applicable rules, regulations, and licensing requirements.
WE MAY BE UNABLE TO SATISFY GUARANTEES THAT WE MAKE TO OUR CUSTOMERS DUE TO
RAPID CHANGES IN OUR BUSINESS. Occasionally, we must guarantee to our customers
that the integrated system that we are consulting on will operate properly when
completed. Due to rapid changes in technology or other unforeseen developments,
we may be unable to comply with our guarantees.
WE HAVE A SIGNIFICANT NUMBER OF OUTSTANDING SHARES OF CONVERTIBLE PREFERRED
STOCK AND WARRANTS WITH CONVERSION OR EXERCISE PRICES THAT FLUCTUATE BASED ON
THE MARKET PRICE OF OUR COMMON STOCK. THE CONVERSION OF THESE PREFERRED SHARES
AND WARRANTS COULD RESULT IN THE DILUTION OF YOUR OWNERSHIP INTEREST AND
ADVERSELY IMPACT THE PRICE OF OUR COMMON STOCK. Class C Preferred Stock. To the
extent that our stock price decreases and we do not exercise our right of
redemption (which calls for a cash payment of $2.3 million on or before
September 28, 2003) prior to conversion, the number of shares of our common
stock to be issued upon conversion of our Class C Preferred Stock could increase
significantly; the issuance of additional shares of common stock could
substantially dilute your ownership interest and depress the price of our common
stock. Additionally, the perceived risk of dilution from conversion of the Class
C Preferred Stock may cause other shareholders to sell their shares before
conversion or encourage short sales of our common stock; those sales could also
place further downward pressure on the price of our common stock. The Class C
Preferred Stock is convertible after September 28, 2003 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 our common stock immediately prior to
conversion. The conversion of the outstanding Class C Preferred Stock on the
basis of the 20 day average trading price of our common stock would result in
the issuance of 58,524,173 shares of common stock if the average trading price
had been calculated as of March 19, 2001. The conversion of the Class C
Preferred Stock into common stock may result in the sale of a significant number
of shares of common stock into the market; these sales could decrease the price
of our common stock. The rights and preferences of Class C Preferred Stock are
discussed in Note 11 to the financial statements.
Zanett Prepaid Warrants. In connection with a private placement, we issued to
Zanett Lombardier, Ltd. and/or its affiliates or designees prepaid common stock
purchase warrants to purchase an aggregate number of shares of common stock
equal to $1,500,000 divided by the lower of $10 or the amount obtained by
multiplying the average of the 5 lowest closing bid prices for the common stock
during the 20 consecutive trading day period ending on the trading day
immediately preceding the date of determination or exercise by 0.65. If the
market value of our common stock decreases, the number of shares of common stock
to be issued upon exercise of these prepaid warrants could increase
significantly and result in significant dilution in your ownership interest. For
example, the exercise of these prepaid warrants on March 20, 2001 would have
resulted in the issuance of 20,491,803 shares of common stock, based on the
average of the 5 lowest closing bid prices for the common stock during the 20
consecutive trading day period immediately preceding that date, or $0.1126 per
share.
THE EXERCISE OF CERTAIN RIGHTS BY THE HOLDERS OF OUR PREFERRED STOCK COULD
RESULT IN SUBSTANTIAL DILUTION OF YOUR OWNERSHIP INTEREST AND ADVERSELY IMPACT
THE PRICE OF OUR COMMON STOCK. The conversion of Series D Preferred Stock and
Series E Preferred Stock and subsequent sales of common stock by the selling
shareholders may depress the price of our common stock and substantially dilute
your ownership interest. To the extent the Series D Preferred Stock is converted
into shares of common stock and to the extent the Series E Preferred Stock is
converted into shares of common stock rather than redeemed by us or dividends on
the Series E Preferred Stock are paid in shares of common stock rather than
cash, a significant number of additional shares of common stock may be sold into
the market and could decrease the price of our common stock due to the
additional supply of shares relative to demand in the market. In anticipation of
the sale of a large amount of shares of our common stock upon conversion of the
Series D Preferred Stock or the Series E Preferred Stock, or the payment of
dividends in lieu of cash on the Series E Preferred Stock, market participants
may engage in short sales of our common stock. Short sales could place further
downward pressure on the price of our common stock. Additionally, the perceived
risk of dilution from the occurrence of any of these events may cause
15
shareholders to sell their shares to avoid this dilution and could therefore
place further downward pressure on the price of our common stock. Under the
terms of the restructuring contemplated by the Exchange, Redemption and
Conversion Agreement, the remaining Series D Preferred Stock, will be
convertible as of March 19, 2001 into approximately 2,107,524 shares of common
stock, subject to the 4.99% limitation and 9.99% limitation described below,
representing approximately 8.7% of the common stock that would be outstanding
following the conversion, based upon the common shares outstanding on March 19,
2001. The conversion of, and the payment of dividends in shares of common stock
in lieu of cash on, the Series D Preferred Stock may result in substantial
dilution to the interests of other holders of our common stock or, when added to
the number of shares acquired or held during the prior 60 days, would exceed
9.99% of our outstanding common stock. Even though no selling shareholder may
convert its Series D Preferred Stock if the conversion would make the selling
shareholder the beneficial owner of more than 4.99% of our then outstanding
common stock, this restriction does not prevent a selling shareholder from
selling a substantial number of shares in the market. By periodically selling
shares into the market, the individual selling shareholders intend to sell all
of their shares of common stock while never holding more than 4.99% at any
specific time or exceeding 9.99% during any 60 day period. A conversion of all
the Series E Preferred Stock at the fixed conversion price of $0.47 would result
in the issuance of 6,382,979 shares of common stock, excluding accrued
dividends. Also, dividends on the Series E Preferred Stock may be paid in shares
of common stock rather than cash, which would increase this number of shares
over time. We may be required to delist our shares from the Nasdaq Small Cap
Market as described below, in which event trading volume of our shares and the
price of our common stock might decrease substantially. The National Association
of Securities Dealers, Inc. imposes certain requirements on the issuance of
securities of a company listed on the Nasdaq Stock Market. For instance, any
company, including our company, is required to obtain shareholder approval (or
receive a waiver from the NASD) for an issuance of securities if the number of
securities to be issued could equal or exceed 20% of the issuer's outstanding
listed securities (immediately or by conversion). Also, the voting rights of
holders of securities that are convertible into common stock based on the future
stock price of the issuer cannot be disproportionate to their investment in the
issuer. We believe that the issuances of our Series D Preferred Stock and the
Series E Preferred Stock comply with the NASD rules. For instance, our Preferred
Stock does not have voting rights, except as required by law. Both the Series D
Preferred Stock and the Series E Preferred Stock limit our obligation to issue
our common stock upon the conversion of the Series D Preferred Stock and the
Series E Preferred Stock that exceeds 19.99% of the outstanding common stock on
the respective date of issuances of the Preferred Stock unless shareholder
approval or a waiver from the NASD is obtained. In order to avoid any penalty
which could include the delisting of our common stock, we obtained shareholder
approval for the issuance of shares of our common stock upon conversion of, or
the payment of dividends on (if any), the Series D Preferred Stock in excess of
19.99% of the number of outstanding shares of common stock on March 29, 2000,
the date of issuance of the Series D Preferred Stock. Similarly, we were
obligated to call a meeting for stockholder approval (or obtain a waiver of the
approval requirement from the NASD) with respect to the issuance of the shares
of common stock issuable upon conversion of the Series E Preferred Stock. We did
not however obtain this approval or waiver. Accordingly, the holders of the
Series E Preferred Stock can require us to delist our stock from trading on the
Nasdaq SmallCap Market, which can be expected to reduce liquidity for our stock
and place downward pressure on the stock price. There is no similar limitation
on our obligation to issue shares of common stock upon conversion of the Class C
Preferred Stock. Consequently, the issuance of our Class C Preferred Stock may
not have complied with the NASD rules. We have not sought an interpretation or
waiver from the NASD with respect to the compliance with the NASD rules of the
issuance of the Class C Preferred Stock. If the NASD found that we are in
violation of its requirements the NASD could among other penalties possible
delist our shares of common stock from the Nasdaq Stock Market in which event
trading in our shares and the price of our common stock would likely decrease
substantially.
WE HAVE A SIGNIFICANT NUMBER OF OUTSTANDING WARRANTS, OPTIONS AND SHARES OF
PREFERRED STOCK THAT COULD ADVERSELY IMPACT THE PRICE OF OUR COMMON STOCK AND
OUR ABILITY TO OBTAIN ADDITIONAL FUNDING As of March 19, 2001, we had
outstanding: shares of Class A Preferred Stock that were immediately convertible
into 80,597 shares of common stock; shares of our Class C Preferred Stock that
are convertible after September 28, 2003 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, which
if converted, would result in the issuance of 58,524,173 shares of common stock;
1,324 shares of our Series D Preferred Stock outstanding that were convertible
on March 19, 2001, together with unpaid dividends, into a total of 2,107,524
shares of common stock, at a conversion and exercise price of $0.65625 per
share; 3,000 shares of our Series E Preferred Stock that are convertible into a
total of 6,382,989 shares of our common stock at a fixed price of $0.47 per
share; prepaid warrants exercisable into 23,428,085 shares of common
16
stock; and other options and warrants to purchase an aggregate of 8,264,846
shares of our common stock at a weighted average exercise price of $3.86 per
share. As of March 19, 2001, there were outstanding convertible preferred
shares, warrants and options to acquire up to approximately 98,788,214 shares of
common stock at prices ranging from $0.0393 to $13.875 per share. The exercise
of all of the outstanding warrants, including the prepaid warrants, options
and/or conversion of the outstanding convertible preferred stock, would dilute
the then-existing shareholders' percentage ownership of our common stock, and
any sales in the public market could adversely affect prevailing market prices
for our common stock. Moreover, because the holders of outstanding warrants,
options and preferred stock will likely exercise or convert these securities,
our ability to obtain additional equity capital could be adversely affected
because we probably could obtain any needed capital on terms more favorable than
those provided by the conversion of these securities. We lack control over the
timing of any exercise or the number of shares issued or sold if exercises or
conversions occur.
WE WILL BE PENALIZED IF WE FAIL TO MAINTAIN THE REGISTRATION OF THE SHARES
UNDERLYING OUR SERIES D PREFERRED STOCK AND OUR SERIES E PREFERRED STOCK, AND
THE PREPAID WARRANTS, INCENTIVE WARRANTS AND PLACEMENT AGENT WARRANTS If we fail
to maintain the effectiveness of our Registration Statement for the public sale
of our common shares acquired upon conversion of the Series D Preferred Stock
(for any reason other than the issuance of a stop order by SEC), the holders of
the Series D Preferred Stock will be entitled to demand that we redeem their
remaining shares of Series D Preferred Stock at a 25% premium. If we fail to
maintain the timely effectiveness of our SEC Registration Statement for the
public sale of our common shares acquired upon conversion of the Series E
Preferred Stock, we will be subject to a penalty, required to be paid in cash
(if the Company can do so) equal to 1% of the principal (plus interest) amount
of the Series E Preferred Stock then outstanding, per day (up to 15 days during
any 365 day period) that such effectiveness if not obtained or maintained.
FUTURE SALES OF RESTRICTED SHARES COULD DECREASE THE MARKET PRICE OF OUR COMMON
STOCK AND IMPAIR OUR ABILITY TO RAISE CAPITAL. Future sales of common stock by
our existing shareholders under exemptions from registration or through the
exercise of outstanding registration rights could have a material adverse affect
on the market price of our common stock and could materially impair our future
ability to raise capital through an offering of equity securities. A substantial
number of shares of common stock are, or will be in the near future, available
for sale under exemptions from registration or have been, or are being
registered pursuant to registration rights and we are unable to predict the
effect, if any, that market sales of these shares or the availability of these
shares for future sale will have on the market price of the common stock
prevailing from time to time.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR STRATEGY OF ACQUIRING OTHER
COMPANIES. We intend to look for complementary businesses to acquire so that we
can strengthen and expand our core business. However, we may not be able to find
any attractive candidates, or we may find that the acquisition terms proposed by
potential acquisition candidates are not favorable to us. In addition, we may
compete with other companies for these acquisition candidates, and that
competition may make an acquisition more expensive for us. Similarly,
instability in the U.S. securities markets and volatility in our stock price may
make acquisitions with our stock more expensive. Accordingly, our acquisition
strategy may not improve our overall business, financial condition, and results
of operations and could weaken them. If we are able to identify and acquire one
or more businesses, the integration of the acquired business or businesses may
be costly and may result in a decrease in our revenues or a decrease in the
value of our common stock for the following reasons, among others: we may not
adequately assess the risks inherent in a particular acquisition candidate or
correctly assess the candidate's potential contribution to our financial
performance; we may need to divert more management resources to integration than
we planned, and this diversion may adversely affect our ability to pursue other
more profitable activities; the difficulties of integration may be increased by
the necessity of coordinating geographically separated organizations,
integrating personnel with disparate business backgrounds and combining
different corporate cultures; we may not eliminate as many redundant costs as we
anticipated in selecting our acquisition candidates; and an acquisition
candidate may have liabilities or adverse operating issues that we failed to
discover through our diligence prior to the acquisition. Consequently, any
acquisition by us may not improve our business, financial condition, and results
of operations in either the short-term or long-term.
WE HAVE RECEIVED NOTICE FROM THE NASDAQ STOCK MARKET, INC. THAT OUR COMMON STOCK
WILL BE DELISTED FROM THE NASDAQ SMALL CAP. ACCORDINGLY, OUR STOCKHOLDERS
ABILITY TO SELL OUR COMMON STOCK MAY BE ADVERSELY EFFECTED. ADDITIONALLY, THE
MARKET FOR SO-CALLED "PENNY STOCKS" HAS SUFFERED IN RECENT
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YEARS FROM PATTERNS OF FRAUD AND ABUSE. We have been notified by The Nasdaq
Stock Market, Inc. that, because we have failed to maintain a minimum bid price
of $1.00 for Common Stock on the Nasdaq Small Cap, The Nasdaq Stock Market, Inc.
intends to delist our stock from the Nasdaq Small Cap. This delisting may occur
as soon as March 22, 2001. In the event we are delisted, our Common Stock will
likely trade on the OTCBB maintained by The Nasdaq Stock Market, Inc. Our Common
Stock, when available for trading on the OTCBB, will be subject to a Securities
and Exchange Commission rule that imposes special sales practice requirements
upon broker-dealers who sell such OTCBB securities to persons other than
established customers or accredited investors. For purposes of the rule, the
phrase "accredited investors" means, in general terms, institutions with assets
in excess of $5,000,000, or individuals having a net worth in excess of
$1,000,000 or having an annual income that exceeds $200,000 (or that, when
combined with a spouse's income, exceeds $300,000). For transactions covered by
the rule, the broker-dealer must make a special suitability determination for
the purchaser and receive the purchaser's written agreement to the transaction
prior to the sale. Consequently, the rule may affect the ability of broker-
dealers to sell our Common Stock and also may affect the ability of our current
stockholders to sell their securities in any market that might develop
therefore. In addition, the Securities and Exchange Commission has adopted a
number of rules to regulate "penny stocks." Such rules include Rules 3a51-1,
15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities
Exchange Act of 1934, as amended. Upon delisting from the Nasdaq Small Cap, our
Common Stock may constitute "penny stocks" within the meaning of the rules, the
rules would apply to Netplex and to its securities. The rules may further affect
the ability of owners of Common Stock to sell our securities in any market that
might develop for them.
Shareholders should also be aware that, according to Securities and Exchange
Commission, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the security by one or a few broker-dealers that are often related to the
promoter or issuer; (ii) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases.; (iii) "boiler
room" practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed bid-
ask differentials and markups by selling broker-dealers; and (v) the wholesale
dumping of the same securities by promoters and broker-dealers after prices have
been manipulated to a desired level, along with the resulting inevitable
collapse of those prices and with consequent investor losses. We is aware of the
abuses that have occurred historically in the penny stock market. Although we do
not expect to be in a position to dictate the behavior of the market or of
broker-dealers who participate in the market, management will strive within the
confines of practical limitations to prevent the described patterns from being
established with respect to the Company's securities.
WE HAVE NEVER PAID AND DO NOT CURRENTLY INTEND TO PAY DIVIDENDS. We have never
paid dividends on our common stock. We intend to retain any future earnings to
finance our growth. In addition, dividends on common stock are subject to the
preferences for dividends on the preferred stock. Any future dividends will
depend upon our earnings, if any, our financial requirements, and other factors.
LIQUIDITY. On July 31, 2000, the Company entered into a loan agreement with a
bank that was set to expire on July 31, 2002. Under the agreement the Company
could borrow up to an amount equal to 85% of its eligible accounts receivable,
as described in the line of credit, but not more than $6.0 million. The line of
credit is secured by the Company's assets and bore interest at the bank's prime
rate plus 1.75%. The terms of the line of credit required that the Company meet
certain financial and other covenants, including maintaining minimum tangible
net worth of $4.0 million. The Company has also agreed to maintain an interest-
bearing deposit account of $2.0 million with the bank.
As of September 30, 2000, the Company was not in compliance with the tangible
net worth covenant. On January 10, 2001, the Company and the bank entered into
an Loan Amendment and Forebearance Agreement ("Forebearance Agreement") whereby
the bank agreed to forebear from exercising its rights and remedies under the
loan document due to the existing event of default until March 31, 2001;
provided no additional default occurs. The tangible net worth covenant was
waived for the Forbearance Period. Under the Forebearance Agreement the Company
may borrow 40% of eligible accounts receivable (as defined in the loan
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. The Company had
borrowed $2,003,000 under the line of credit as of December 31, 2000.
On March 22, 2001, the Company signed a commitment letter with a finance company
which will, upon closing, provide the Company with a line of credit facility
which will replace its current bank line of credit. The
18
commitment is subject to closing on formal legal documents which management
expects to occur in April 2001. Upon closing, the facility will permit
borrowings against eligible accounts receivable up to $4,000,000, collateralized
by substantially all of the Company's assets and repayable upon demand. Subject
to certain other restrictions, the borrowing base of accounts receivable will be
based on 80% of outstanding accounts receivable. Interest will be payable at
prime plus 1.75% (currently 9.75%). As a result of this commitment letter and
discussions with its current lender, management expects the Forebearance
Agreement described above to be extended to accommodate closing on this
replacement facility.
If cash generated from operations is insufficient to satisfy the Company's
liquidity requirements, the Company may seek to sell additional equity or
convertible debt securities or obtain additional credit facilities. However, no
assurance can be given that any such additional sources of financing will be
available on acceptable terms or at all. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders.
Item 2. Properties.
The Company leases approximately 8,000 square feet of space in Reston, VA. for
its corporate offices and the operations of some business units. The Company
also leases office space in other cities including, Charlotte, North Carolina,
Bedford, Virginia, and Edmond, Oklahoma that serve as operating offices of its
businesses. These leases expire on various dates from July 2001 to January 2004.
The Company believes that the space in its existing corporate and branch
facilities are adequate for the foreseeable future to support the growth of its
existing operations in the geographic areas in which it currently operates.
Item 3. Legal Proceedings.
From time to time, the Company is subject to litigation in the ordinary course
of business.
On September 4, 1997, Data Systems Analysts, Inc. ("DSA"), a software design and
consulting company, filed a complaint against Technology Development Systems,
Inc. ("TDS") and the Company, alleging copyright infringement and breach of the
Company's agreement. The Complaint also seeks damages against XcelleNet, Inc.,
which the Company has indemnified. The Complaint claims damages in excess of
$300,000 plus punitive damages. The Company is vigorously defending against the
action although an unsuccessful mediation session and settlement conference were
held in an attempt to resolve the dispute. The nature and amount of damages, if
DSA's allegations are proven, appear uncertain.
In June of 2000, the Company, TDS and XcelleNet, Inc. filed a complex motion for
summary judgment, asking the Court to dismiss the majority of DSA's claims in
the case. DSA also filed a motion for summary judgment asking the court to
enter judgment in its favor on several of its claims. The district court judge
held oral arguments on the counter-motions on Friday, January 19, 2001.
On March 6, 2001, the court denied the motion by TDS and XcelleNet in its
entirety. It granted plaintiff's motion for summary judgment on liability and
directed that damages be tried to a jury on May 24, 2001. The provisions of the
agreement that the opinion finds the Company violated could lead to substantial
damages being awarded against the Company. While part of the theory for
copyright damages was dismissed, another part was left to be tried. It, too,
could result in substantial damages.
On March 20, 2001, the Company filed a motion for reconsideration of the
granting of summary judgment on two portions of the order. There can be no
assurance that reconsideration will be granted.
XcelleNet has reached an agreement in principle to settle that portion of the
case against it in the amount of damages proven at trial on the claims against
XcelleNet, and has reserved its indemnity claim against the Company.
In December 2000, TMP filed suit against the Company and its Contractors
Resources subsidiary alleging that the Company failed to make a quarterly cash
payment under its co-branding agreement with TMP. The complaint seeks a judgment
of approximately $464,000. The Company has disputed the allegations, denying
all liability and has asserted affirmative defenses, including that TMP did not
perform the agreement as required. Since filing the suit, TMP has also notified
the Company that it has failed to make another payment under the agreement but
this alleged default has not yet become part of the litigation. While initial
discovery had commenced, both parties have agreed to stay all further discovery
pending a conference with the Court. Management believes it has meritorious
defenses in this matter and the outcome will not have a material adverse impact
on its financial condition or results of operations.
19
The principal risks that the Company insures against are workers' compensation,
personal injury, property damage, general liability, and fidelity losses. The
Company maintains insurance in such amounts and with such coverages and
deductibles as management believes are reasonable and prudent.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's Common Stock holders during
the Company's fourth quarter ended December 31, 2000.
20
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Common Stock of the Company is traded on the NASDAQ SmallCap market
("NASDAQ") and on the Boston Stock Exchange.
Price Range of Common Stock
The quotations set forth in the table reflect inter-dealer prices from NASDAQ,
without retail mark-up, markdown or commission, and may not necessarily
represent actual transactions:
1999 High Low
- ---- ------ -----
1st Quarter.................... $ 3.50 $0.97
2nd Quarter.................... $ 3.44 $2.44
3rd Quarter.................... $ 3.38 $2.25
4th Quarter.................... $11.62 $1.66
2000
- ----
1st Quarter.................... $19.50 $9.13
2nd Quarter.................... $12.44 $1.75
3rd Quarter.................... $ 2.94 $0.72
4th Quarter.................... $ 1.06 $0.06
The Company has not paid any cash dividends on its Common Stock and does not
intend to pay cash dividends on its Common Stock for the foreseeable future. The
Company intends to retain future earnings, if any, to finance future
development.
As of March 1, 2001 there were approximately 150 holders of record of the
Company's Common Stock. The Company believes that at such date there were in
excess of 6,767 beneficial owners of the Company's Common Stock.
Recent Sales of Unregistered Securities
The Company sold the following securities in the past three years that were not
registered under the Securities Act of 1933, as amended.
In February, 1998, the Company sold 80,000 shares of Common Stock and warrants
to purchase 100,000 shares of Common Stock at a price of $1.80 per share, for an
aggregate of $100,000. The warrants have a 5-year term and are immediately
exercisable. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In March, 1998, the Company sold 1,457,000 shares of Common Stock at a price of
$1.00 per share for an aggregate of $1,457,000 to certain accredited investors
and employees of the Company. These shares carry registration rights. This
transaction was completed without an underwriter and exemption from registration
is claimed under Section 4(2) of the Securities Act because it did not involve a
public offering.
In April, 1998, the Company sold 1,500 units at a price of $1,000 per unit for
an aggregate of $1.5 million to certain accredited investors. Each unit
consists of a warrant to purchase the number of shares of Common Stock equal to
$1,000 divided by an adjustable exercise price and an additional warrant to
acquire 52 shares of Common Stock at a price equal to the adjustable exercise
price. The warrants have a 5-year term and are immediately exercisable. The
Company paid an aggregate placement fee and non-accountable expense allowance of
$284,500 and also granted the placement agent a warrant to purchase 39,000
shares of Common Stock at a price of $1.47. The warrants have a 10-year term
and are immediately exercisable. The placement agent for this transaction was
The Zanett Corporation and exemption from registration is claimed under Section
4(2) of the Securities Act because it did not involve a public offering.
In April, 1998, the Company sold 100,000 shares of Common Stock for $1.50 per
share for an aggregate of $150,000 to accredited investors. These shares carry
registration rights. This transaction was completed without an
21
underwriter and exemption from registration is claimed under Section 4(2) of the
Securities Act because it did not involve a public offering.
In April, 1998, the Company sold 35,000 shares of Common Stock for $1.375 per
share for an aggregate of $48,125 to accredited investors. These shares carry
registration rights. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In June, 1998, the Company, in addition to other consideration, issued 450,000
shares of Common Stock in exchange for all of the outstanding equity securities
of Automated Business Systems of North Carolina, Inc. and Kellar Technology
Group, Inc. (collectively "ABS") to the former shareholders of ABS. The Company
also agreed to issue additional shares of Common Stock through December 31,
2000, if ABS meets certain operating targets. This transaction was completed
without an underwriter and exemption from registration is claimed under Section
4(2) of the Securities Act because it did not involve a public offering.
In August, 1998, the Company sold 451,000 shares of Common Stock for $1.3125 per
share for an aggregate of $592,000 to accredited investors. These shares carry
registration rights. This transaction was completed without an underwriter and
exemption from registration is claimed under Section 4(2) of the Securities Act
because it did not involve a public offering.
In September, 1998, the Company sold 1,700 units for $1,000 per unit and
warrants to purchase 141,667 shares of Common Stock at an exercise price of
$1.3938 per share for an aggregate of $1.7 million to accredited investors.
Each unit consists of a warrant to purchase the number of shares of Common Stock
computed by dividing $1,700,000 by 1,019,000. The warrants have a 10-year term
and are immediately exercisable. The Company paid a placement fee of $175,000
and issued the placement agent 50,000 shares of Common Stock. The placement
agent for this transaction was Zanett Securities Corporation. Exemption from
registration is claimed under Section 4(2) of the Securities Act because it did
not involve a public offering.
In September, 1998, the Company sold 1,500,000 shares of Class C, Convertible
Preferred Stock at a price of $1.00 per share and warrants to purchase shares of
Common Stock for $1.375 per share for an aggregate of $1.5 million to Waterside
Capital. The Class C Preferred Stock bears a dividend rate of 9.99% that
increases to 15% per annum after the date there are no Class A Cumulative
Convertible Preferred Stock issued and outstanding. The Preferred Stock is
convertible at any time after the earlier of a change in control of the Company
or five years from the date of issuance and is redeemable at the option of the
Company at any time within the first five years. The number of shares into which
the Preferred Stock is convertible is equal to $1,500,000 (plus accrued but
unpaid dividends) divided by 25% of the 20 day average trading price of the
Common Stock immediately prior to conversion. The warrants issued entitle the
holder to acquire 150,000 shares of Common Stock at $1.375 per share. The
Company may be required to issue up to 400,000 additional shares of Common Stock
under the warrants, depending upon the term in which the Class C Preferred Stock
is outstanding. The warrants have a 10-year term and are immediately
exercisable. The Company paid a placement fee of $175,000 and issued the
placement agent warrants to purchase 125,000 shares of Common Stock at $1.59 per
share. The warrants have a 5-year term and are immediately exercisable. The
placement agent for this transaction was Ferris Baker & Watts and exemption from
registration is claimed under Section 4(2) of the Securities Act because it did
not involve a public offering.
In October, 1998, the Company issued 643,770 shares of Class B Preferred Stock
to Applied Intelligence Group, Inc. in connection with the purchase of such
company's information technology consulting business. Each share of Class B
Preferred Stock was immediately convertible into one share of Common Stock. No
dividends were payable on Class B Preferred Stock.
On January 28, 1999, the Company issued a note for $800,000, at 14% annual
interest, through a private placement to an accredited investor. On December
15, 1999, the note was exchanged for an increase in the number of shares that
the Company's Class C Convertible Preferred Stock is convertible into. Class C
shares are not eligible for conversion to Common Stock until September 30, 2003
and are redeemable by the Company for a cash payment of $2.3 million on or
before September 28, 2003.
In March 2000, the Company sold 10,000 shares of convertible Series D Preferred
Stock that resulted in net proceeds to the Company of $9.4 million. The
conversion ratio of the preferred to common was established based on 120% of the
weighted average stock price during the thirty trading day period between April
3, 2000 and May 16, 2000, which was $5.87 per share. The Series D Preferred
Stock securities purchase agreement's call option provision, relating to the
time the Company must obtain additional financing, was amended effective July
31, 2000.
22
The amendment extended the call option trigger date to October 31, 2000
(previously August 1, 2000). The conversion price of the preferred stock and the
exercise price of the related warrants are based upon 120% of the weighted
average price of the Company's Common Stock for 15 consecutive trading days
beginning the first day after the holders are entitled to exercise the call
option.
On November 10, 2000, the Company entered into an Exchange, Redemption and
Conversion Agreement (the "Exchange Agreement") with the holders of the
Company's Series D Preferred Stock that provided for the following:
- the exchange of $6,177,000 of the original face amount of the Series D
Preferred Stock and warrants held by the holders of the Series D Preferred
Stock in exchange for the Company's issuance of $3,000,000 of its new
Series E Preferred Stock;
- the waiver by the holders of the Series D Preferred Stock of their right to
receive further dividends under the Series D Preferred Stock
- the waiver of certain other rights of the holders of the Series D Preferred
Stock, including the right to acquire additional shares of Series D
Preferred Stock, the right to require the Company to redeem the Series D
Preferred Stock upon the occurrence of certain events beyond the Company's
control, and the waiver of certain anti- dilution rights.
Also, as part of the agreement, the Company redeemed 500 of the remaining 3,823
shares of Series D Preferred Stock at their original face value of $500,000, and
sold to the holders of the Series D Preferred Stock 1,000 shares of the
Company's common stock at a price of $0.65625 per share. As a result of that
sale, the remaining 3,323 shares of Series D Preferred Stock have an adjusted
conversion price of $.65625. Upon execution of the agreements, the Series D
Preferred Stockholders converted 1,178 shares of Series D Preferred Stock into
1,808,473 shares of common stock. The remaining 2,145 shares of Series D
Preferred Stock that they hold were convertible into 3,293,020 shares of common
stock. As of March 19, 2001, there was 1,324 shares of Series D Preferred Stock
which are convertible into 2,017,524 shares of common stock.
The Series E Preferred Stock has terms similar to the restructured Series D
Preferred Stock, with the primary exceptions being that the Series E Preferred
Stock was redeemable for $3,000,000 at the Company's option on or before April
30, 2001, provided that the Company redeems at least $1,500,000 of such stock on
or before January 30, 2001 which the Company did not redeem. The Series E
Preferred Stock accrues dividends at the rate of 7% per year. The Series E
Preferred Stock is convertible into shares of common stock at a conversion price
of $0.47 per share equal to 6,382,979 shares. Pursuant to a related
Registration Rights Agreement, the Company registered with the Securities and
Exchange Commission the 1,000 additional shares of common stock sold as part of
the transaction as well as the shares issuable to the holders of the Series E
Preferred Stock upon conversion of that stock to common stock.
On March 29, 2000, the Company sold 1,500 units for $1,000 per unit in a private
placement for $1.5 million ($1.3 million after fees and expenses). Each unit
sold consisted of a prepaid Common Stock purchase warrant entitling the holder
to acquire such number of shares of the Company's Common Stock as is equal to
$1,000 divided by an adjustable exercise price and an incentive warrant to
acquire 78,000 shares of Common Stock. The Company also granted the placement
agent a warrant to purchase 39,000 shares of Common Stock plus a placement fee
and a non-accountable expense allowance equal to 12.53% of the proceeds of the
offering. The placement agent for this transaction was Zanett Securities
Corporation. Exemption from registration is claimed under Section 4(2) of the
Securities Act because it did not involve a public offering.
During the years ended December 31, 2000, 1999 and 1998, 29,364, 877,612 and
141,865 shares of Class A Preferred Stock were converted into the same number of
shares of Common Stock, respectively. During the year ended December 31, 1999,
the 643,770 shares of Class B Preferred Stock were converted into the same
number of shares of Common Stock. The Class C Preferred Stock is not eligible
for conversion to Common Stock until September, 2003. On November 10, 2000 the
Company converted 1,178 and 6,177 shares of Class D Preferred Stock into
1,808,473 shares of Common Stock and 3,000 shares of Class E Preferred Stock,
respectively. See Note 11 to the financial statements.
23
Item 6. Selected Financial Data
Year ended December 31
2000 1999 1998 1997 1996
--------- -------- -------- ---------- --------
(amounts in thousands, except per share data)
Revenues (1) $ 16,780 $ 15,901 $ 39,135 $ 40,468 $ 33,525
Cost of revenues 9,404 8,341 36,660 36,085 31,314
--------- -------- -------- ---------- --------
Gross profit 7,374 7,560 2,475 4,383 2,211
Expenses:
Selling, general and administrative 21,228 13,530 5,555 7,230 4,770
Restructuring costs 1,512 -- -- -- --
Acquired in-process technology -- -- 250 -- --
--------- -------- -------- ---------- --------
Operating loss (15,364) (5,970) (3,330) (2,847) (2,559)
Interest expense and (other income), net 41 384 154 (26) 38
--------- -------- -------- ---------- --------
Loss from continuing operations before
income taxes (15,405) (6,354) (3,484) (2,873) (2,521)
Income tax (benefit) provision -- -- -- -- (34)
--------- -------- -------- ---------- --------
Loss from continuing operations before
minority interest (15,405) (6,354) (3,484) (2,873) (2,487)
Minority interest 482 83 -- -- --
--------- -------- -------- ---------- --------
Loss from continuing operations (14,923) (6,271) (3,484) (2,873) (2,487)
Discontinued operations:
Income (loss) from discontinued
operations (net of income taxes) (850) (1,152) 935 -- (1,332)
Gain on sale of discontinued operations
(net of income taxes) 513 -- -- -- 1,820
--------- -------- -------- ---------- --------
Net loss (15,260) (7,424) (2,549) (2,873)- (1,999)
Preferred Stock dividend (1,076) (500) (316) -- --
--------- -------- -------- ---------- --------
Loss applicable to common shareholder $ (16,336) $ (7,924) $ (2,865) $ (2,873) $ (1,999)
========= ======== ======== ========== ========
Basic and diluted earnings (loss) per
common share
Continuing operations $ (0.87) $ (0.54) $ (0.41) $ (0.46) $ (0.51)
Discontinued operations (0.02) (0.09) 0.10 -- 0.09
--------- -------- -------- ---------- --------
Total $ (0.89) $ (0.63) $ (0.31) $ (0.46) $ (0.42)
========= ======== ======== ========== ========
Weighted average common shares
outstanding, basic and diluted 18,356 12,516 9,260 6,821 5,026
========= ======== ======== ========== ========
At year-end
Total assets $ 17,690 $ 22,662 $ 20,651 $ 6,912 $ 9,889
========= ======== ======== ========== ========
Stockholders' equity $ 4,179 $ 6,862 $ 6,355 $ 1,331 $ 3,239
========= ======== ======== ========== ========
- ------------
(1) Effective January 1, 1999, Contractors Resources revenues represent only the
fees realized for services rendered to the independent contractor. Prior to
that date, revenues included the gross fees charged to the third party
customer being serviced by the independent contractor.
24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The following table sets forth the revenue, gross profit, expenses, and income
of each of the business areas for the years ended December 31, 2000, 1999, and
1998.
Consolidated Operating Results by Segment
Year Ended December 31,
(amounts in thousands) 2000 1999 1998
-------------- -------------- --------------
Operating revenues
Netplex $ 15,241 $ 14,527 $ 3,954
Contractors Resources 1,539 1,374 35,181
-------------- -------------- --------------
Operating revenues 16,780 15,901 39,135
-------------- -------------- --------------
Gross profit
Netplex 6,365 6,584 1,150
Contractors Resources 1,011 976 1,325
-------------- -------------- --------------
Gross profit 7,376 7,560 2,475
-------------- -------------- --------------
Gross profit percentage
Netplex 41.8% 45.3% 29.1%
Contractors Resources 65.7% 71.0% 3.8%
-------------- -------------- --------------
Gross profit percentage 44.0% 47.5% 6.3%
-------------- -------------- --------------
Operating expenses
Netplex 5,895 3,823 1,209
Contractors Resources 4,964 2,533 1,144
-------------- -------------- --------------
Operating Expenses 10,859 6,356 2,353
-------------- -------------- --------------
Segment EBITDA
Netplex 470 2,761 (59)
Contractors Resources (3,953) (1,557) 181
-------------- -------------- --------------
Segment EBITDA (3,483) 1,204 122
-------------- -------------- --------------
Corporate expenses 7,811 5,542 2,210
-------------- -------------- --------------
EBITDA (11,294) (4,338) (2,088)
Restructuring charges 1,512 -- --
Interest, taxes, depreciation & amortization 2,117 1,934 1,396
-------------- -------------- --------------
Loss from continuing operations (14,923) (6,272) (3,484)
Income (loss) from discontinued operations net
of income tax (850) (1,152) 935
Gain on sale of discontinued operations net of
tax 513 -- --
-------------- -------------- --------------
Net loss $ (15,260) $ (7,424) $ (2,549)
============== ============== ==============
RESULTS OF OPERATIONS
2000 Compared to 1999
Revenue for the year ended December 31, 2000 increased $0.9 million or 5.5% to
$16.8 million, compared to $15.9 million for the same period in 1999. This
increase includes a $0.7 million or 4.9% increase in Netplex revenue and a $0.2
million or 12.0% increase in Contractors Resources revenue.
Gross profit for the year ended December 31, 2000 decreased $0.2 million or 2.4%
to $7.4 million, compared to $7.6 million for the same period in 1999.
Contractors Resources gross profit for the year ended December 31, 2000 remained
relatively unchanged from the same period in 1999 while Netplex gross profit for
the year ended December 31, 2000 decreased $0.2 million or 3.3% to $6.4 million,
compared to $6.6 million for the same period in 1999.
Gross profit margins decreased to 44.0% for the year ended December 31, 2000
compared to 47.5% for the same period in 1999. Netplex gross profit margins
decreased from 45.3% in 1999 to 41.8% in 2000. This decrease in
25
Netplex gross margin was primarily due to lower technical staff utilization
levels in the year ended December 31, 2000 compared to the same period in 1999.
Contractors Resources gross profit margin decreased from 71.0% in 1999 to 65.7%
in 2000.
Segment operating expenses for the year ended December 31, 2000 increased $4.5
million or 70.8% to $10.9 million from $6.4 million for the same period of 1999.
This increase included increases in Netplex and Contractors Resources of $2.1
million or 54.2% and $2.4 million or 96.0%, respectively. The increase in
Netplex operating expenses was primarily attributable to increased expenditures
in marketing and sales. The increase in the Contractors Resources' operating
expenses was due primarily to the fees paid to TMP Interactive, Inc. under the
co-branding services arrangement of approximately $1.0 million and expenses
associated with the development of the web site in 2000.
Segment loss for the year ended December 31, 2000 was $3.5 million as compared
to a segment income of $1.2 million for the same period of 1999, a decline of
$4.7 million or 389.3%. This decline includes decreases in segment profits from
Netplex and Contractors Resources of $2.3 million or 83.0% and $2.4 million or
153.9%, respectively.
Corporate expense for the year ended December 31, 2000 increased $1.8 million or
30.1% to $7.8 million from $6.0 million in the same period of 1999. This
increase reflects additional expenditures required to support the growth of
operations and the integration of acquisitions. Subsequently, as a result of the
restructuring and discontinued operations, corporate expenses are expected to
decrease.
Restructuring charges of $1.5 million for the year ended December 31, 2000 were
the result of the closing of the Company's Roseland, New Jersey office,
including related workforce reductions. There was no comparable charge in the
same period of 1999.
Earnings (from continuing operations) before interest, income taxes,
depreciation and amortization ("EBITDA") for the year ended December 31, 2000
was a loss of $11.3 million as compared to a loss of $4.3 million for the same
period of 1999, a decline in EBITDA of $7.0 million or 162.8%. The components of
this decrease are discussed above.
Depreciation, amortization, interest expense and minority interest for the year
ended December 31, 2000 increased $0.2 million to $2.1 million from $1.9 million
for the same period in 1999. This increase is principally due to the
amortization of the internally developed web application software for the
Contractors Resources operation.
Loss from discontinued operations for the year ended December 31, 2000 was $0.9
million compared to $1.2 million for the same period in 1999, an decrease of
$0.3 million or 26.2%. See Note 3 to the financial statements for a description
of the discontinued operations.
Gain on the disposal of discontinued operations for the nine month period ended
December 31, 2000 was $0.5 million. There was no comparable gain in the same
period of 1999. See Note 3 to the financial statements for a description of the
gain on the disposal of discontinued operations.
No provision for income taxes was required for the year ended December 31, 2000
due to the generation of net losses. No provision for income taxes was required
for the year ended December 31, 1999 due to utilization of net operating loss
carryforwards generated in previous years.
Net loss for the year ended December 31, 2000 was $15.3 million compared to $7.4
million in the same period of 1999, a decrease of $7.8 million or 105.5%. The
components of this decrease are discussed above.
1999 Compared to 1998
Revenue for the year ended December 31, 1999 was $53.1 million (recognizing CR
revenue on a gross basis, see Note 2 to the financial statements), an increase
of $14.0 million or 35.1% from $39.1 million for the year ended December 31,
1998. This increase includes a $10.6 million or 267.4% increase in Netplex
revenue and a $3.4 million or 9.8% increase in Contractors Resources revenue
recognized on the gross basis. The growth in Contractors Resources revenues is
to due to an increase in the number of contractor members. The growth in
Netplex revenue was primarily attributable to the increased revenue from a full
years revenue of AIG which was acquired by the Company September 1, 1998.
Gross Profit for the year ended December 31, 1999, increased $5.1 million or
205.5% to $7.6 million as compared to $2.5 million for 1998. This increase
includes an increased gross profit in Netplex $5.4 million or 472.5%, offset by
a
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decrease in gross profit for Contractors Resources of $0.3 million or 26.3%.
The increase in the gross profit for Netplex resulted from a full year of
operations of AIG.
Segment operating expenses for the year ended December 31, 1999, increased $4.0
million or 170.1% to $6.4 million from $2.4 million for the same period in 1998.
This increase includes increases in Netplex and Contractors Resources operating
expenses of approximately $2.6 million or 216.2% and $1.4 million or 121.4%,
respectively. The increase in operating expenses for Netplex are primarily due
to the acquisition of AIG. The increase in Contractors Resources is primarily
due to increases in sales and marketing costs.
Segment income for 1999 was $1.2 million, increased $1.1 million or 886.9% from
$0.1million in 1998. This was primarily due to an increase in segment income
from Netplex of $2.8 million, or 216.2% offset by the segment loss from
Contractors Resources of $1.7 million or 960.2%.
Corporate expense for the year ended December 31, 1999, increased $3.3 million
or 150.8% to $5.5 million from $2.2 million in the same period of 1998. This
increase reflects an additional investment in corporate development capability
and infrastructure to support the growth of operations.
Earnings before interest, income taxes, depreciation, and amortization
("EBITDA") for the year ended December 31, 1999, was a loss of $4.3 million as
compared to a loss of $2.1 million for the same period of 1998 a decline in
EBITDA of $2.2 million. The components of this $2.2 million are discussed above.
Depreciation, amortization, and interest expense for the year ended December 31,
1999, increased $0.5 million to $1.9 million from $1.4 million for the same
period of 1998. This increase is principally due to additional amortization and
depreciation from acquisitions and increased borrowings under the Company's line
of credit facility to support growth during the year ended December 31, 1999.
Due to the generation of net losses, no provision or benefit for income taxes
was recorded for either the year ended December 31, 1999 or 1998. Any tax
benefits associated with net operating losses have been fully reserved for by a
valuation allowance.
The net loss in 1999 increased $4.9 to $7.4 million from $2.5 million in 1998.
The components of this increase are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had cash and cash equivalents of $3.8 million.
The following increased the Company's liquidity and capital resources:
For the year ended December 31, 2000, the Company's cash decreased by $0.5
million. This decrease resulted primarily from the $15.2 million operating loss
which was partially offset by $10.7 million of proceeds from the sale of stock
and prepaid warrants and $2.9 million of proceeds from the exercise of stock
options and warrants.
On July 31, 2000, the Company entered into a loan agreement with a bank that was
set to expire on July 31, 2002. Under the agreement the Company could borrow up
to an amount equal to 85% of its eligible accounts receivable, as described in
the line of credit, but not more than $6.0 million. The line of credit is
secured by the Company's assets and bears interest at the bank's prime rate plus
1.75%. The terms of the line of credit required that the Company meet certain
financial and other covenants, including maintaining minimum tangible net worth
of $4.0 million. The Company has also agreed to maintain an interest-bearing
deposit account of $2.0 million with the bank.
As of September 30, 2000, the Company was not in compliance with the tangible
net worth covenant. On January 10, 2001, the Company and the bank entered into
an Loan Amendment and Forebearance Agreement ("Forebearance Agreement") whereby
the bank agreed to forebear from exercising its rights and remedies under the
loan document due to the existing event of default until March 31, 2001;
provided no additional default occurs. The Company and the bank agreed the
Company does not need to comply with the tangible net worth covenant set forth
in the loan agreement. Under the Forebearance Agreement the Company may borrow
40% of eligible accounts receivable (as defined in the agreement) up to $5.0
million bearing interest at the bank's prime rate plus 2.5%. In the fourth
quarter of 2000, the Company applied the $2.0 million interest bearing deposit
against its outstanding advance. Outstanding advances were $2.0 million and
$5.1million at December 31, 2000 and 1999, respectively.
On March 22, 2001, the Company signed a commitment letter with a finance company
which will, upon closing, provide the Company with a line of credit facility
which will replace its current bank line of credit. The commitment
27
is subject to closing on formal legal documents which management expects to
occur in April 2001. Upon closing, the facility will permit borrowings against
eligible accounts receivable up to $4,000,000, collateralized by substantially
all of the Company's assets and repayable upon demand. Subject to certain other
restrictions, the borrowing base of accounts receivable will be based on 80% of
outstanding accounts receivable. Interest will be payable at prime plus 1.75%
(currently 9.75%). As a result of this commitment letter and discussions with
its current lender, management expects the Forebearance Agreement described
above to be extended to accommodate closing on this replacement facility.
Capital expenditures for the year ended December 31, 2000, were $1.3 million.
Dividends of approximately $367,000 were paid on the Company's Class A, Class C
and Class D Cumulative Preferred Stock during the year ended December 31, 2000.
The Company issued 190,608 shares of Common Stock in lieu of approximately
$125,000 of such dividends. At December 31, 2000, accrued dividends on the
Company's Class C, Class D and Class E Preferred Stock were approximately
$166,000.
During the year ended December 31, 2000, 29,364 shares of Class A Preferred
Stock were converted into the same number of shares of Common Stock. The Class C
shares are not eligible for conversion to Common Stock until September, 2003.
The conversions of the Class A Cumulative Preferred Stock during the year ended
December 31, 2000 will reduce the Company's obligation for dividend payments by
approximately $6,000 annually.
Stock options and warrants to purchase 2,093,005 shares of the Company's Common
Stock were exercised during the year ended December 31, 2000, generating cash
proceeds to the Company of $2.9 million.
In March 2000, the Company raised an additional $9.4 million for 10,000 shares
of its Class D Preferred Stock and $1.3 million in the sa