Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended December 31, 2002

Or

For the transition period from             to             .

Commission file number 1-11784

THE NETPLEX GROUP, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (703) 716-4777

Securities registered under Section 12(b) of the Exchange Act:

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 31, 2003, was approximately $239,000.

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock as of March 31, 2003: 33,212,764 shares.

DOCUMENTS INCORPORATED BY REFERENCE

No documents are incorporated herein by reference into Part III.

Table of Contents

Index to Form 10-K

2

Table of Contents

PART I

1. Business.

Company Overview

Based in Reston, Virginia, The Netplex Group, Inc. (the Company) consists of two distinct operating segments after the sale of Netplex Systems, Inc.:

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 The Netplex Group, Inc., through a merger that was accounted for as a reverse merger, and changed its name to The Netplex Group, Inc.

The merger provided Netplex with additional capital and enabled expansion 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. Additionally, management instituted several restructuring initiatives aimed at, among other things, improving the productivity and billable utilization of its staff and reducing operating expenses. These restructuring efforts included headcount reductions, consolidation of facilities and management of discretionary expenses. However, these actions were taken in a period where economic conditions in the United States and abroad created downward pressure on spending for information technology initiatives, including demand for the Company’s consulting services. In 2002, the Company did experience lower operating losses than those reported in 2001 and 2000 and a reduction in cash used in operations. However, given the Company’s current operating outlook and continuing economic uncertainty, the Company’s liquidity and financial position are such that additional capital may be needed in the future to sustain operations.

In late 2001, the Company began exploring alternatives to raising additional capital and restructuring its obligations and capital structure. Among the alternatives considered included a rights offering aimed at raising capital through the issuance of additional shares of its Netplex Systems subsidiary (“Offering”). Management chose to not pursue the Offering further, choosing instead to entertain offers for the operations comprising Netplex Systems (either as a whole or in parts). In March 2002, the Company entered into non-binding letter of intent to sell the assets of its retail consulting business. On May 15, 2002, the Company consummated the transaction pursuant to an Asset Purchase Agreement by and between the Company and CGI Information Systems & Management Consultants, Inc. (“CGI”). Under the terms of the Asset Purchase Agreement, CGI has acquired the net assets associated with the Retail Practice Division of Netplex Systems, Inc. as of April 26, 2002 from the Company for $4.3 million in cash. The Company recorded a gain from this sale in the second quarter of 2002 of approximately $1.6 million.

Concurrent with the sale of the net assets of the Retail Practices Division to CGI, the Company entered into a Workout and Collateral Release Agreement with Waterside Capital Corporation (“Waterside”) whereby Waterside:

3

Table of Contents

Upon finalization of the agreements above on September 28, 2002, the Company and Waterside also agreed to the following:

The Company restructured certain of its obligations and liabilities during the second quarter of 2002 which resulted in an $0.7 million extraordinary gain for the period, net of income taxes. The extraordinary items included the extinguishment of $0.3 million of rent liabilities related to excess office space and the reduction of $0.4 million of obligations associated with the acquisition of the PSS Group, Inc. in 1998. There was no income tax charges associated with these extraordinary gains as they were offset in their entirety by the Company’s net operating losses. Additionally, the Company restructured its $1.4 million litigation settlement debt, $1.1 million of which was currently due and $0.3 million which was payable December 31, 2002, as follows:

On November 1, 2002, the Company consummated a transaction pursuant to an Asset Purchase Agreement by and between the Company and Waterside. Under the terms of the Asset Purchase Agreement, Waterside has acquired the net assets associated with the Systems Integration Division of Netplex Systems, Inc. as of October 25, 2002 from the Company for Waterside’s cancellation of all debt (inclusive of interest) owed by the Company to Waterside, and consideration for the redemption of all preferred stock (inclusive of dividends) to be issued by the Company to Waterside and waiver and release of any and all claims against the Company by Waterside. The total amount of debt to be cancelled and preferred stock redeemed is $1.7 million. The Company recorded a gain from this debt extinguishment in the fourth quarter of 2002 of approximately $0.5 million.

Management intends to focus on improving the operations of its business to consumer service (“Member Services”) and its business to business service (“Business Services”) offerings. Critical to the success of these operations is the Company’s ability to continue to attract members to the Member Services segment and to grow the Business Services segment by obtaining contracts and master agreements with employers who contract with large numbers of independent consultants. We believe these changes will streamline our operations and better enable clients, potential clients, analysts, investors, and the general public to understand the scope of our offerings.

4

Table of Contents

Market Opportunity

The Company serves a 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.

The Company originally served only IPs within the Information Technology industry. Recognizing an opportunity to expand our potential member base, we expanded during 2000 to serve IPs representing other industries. The Company’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 2001 Current Population Survey titled “Contingent and Alternative Employment Arrangements,” the BLS estimates an independent consultant work force of about 8.6 million.

There is 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 an 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

The Company 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 Member Services, a business-to-consumer service that targets individual IPs, and Business Services, a business-to-business service that targets organizations that use at least 100 IPs per year.

Service Overview: Member Services

Member Services 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 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.

When IPs join the Company (becoming “Members”), they generally become W-2 employees of the Company. As their employer of record, we provide Members the services and infrastructure normally associated with a traditional corporate environment. However, we do not put restrictions on their independent work style; 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:

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:

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

5

Table of Contents

provide their families with these necessary coverages. In addition, 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 Company’s web site, including up-to-date billing rate surveys and consulting industry news. The site also helps to keep Members 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.

The Company 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 the Company does not bundle “hidden” fees for finding or brokering the engagements. (Many “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: Business Services

The Company’s Business Services segment, targets major businesses and government agencies. It offers high-value employment, payrolling, and benefits provisioning for our clients’ contingent work force. The Company designed Business Services 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 Business Services in early 2001.

Business Services 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.

The Company gives businesses the opportunity to “unbundle” the traditional staffing company model. As such, business that find their own consultants can now turn to the Company for their employment services. Our fee for this service is between 50%-75% less than fees or mark-ups charged by most staffing companies. As a result, we believe that the Company provides significant value for organizations that use consultants—not by reducing costs through using inferior consultants, but by streamlining clients’ consultant supply chains.

The Company designed Business Services to offer its clients additional advantages such as easier consultant engagement, simplified invoice consolidation, and improved compliance with federal regulations. In addition, it better enables organizations to become “consultant-friendly”—i.e., more easily able to attract, work with, and maintain consulting talent.

In addition, the Business Services provides the Company with a marketing channel that supplements our Member Services in two ways. First, the Company markets the more encompassing Member Services to its Business Services members with the intention of converting and retaining them upon completion of their Business Services-contract. Second, we believe the Company’s corporate affiliations may influence Member prospects to join the Company because such relationships enable members to more easily work within affiliated organizations.

Competition

The Company represents one alternative for independent professionals (IPs) who choose to work outside of the “traditional” company-centric employment model. The Company is one of several options these professionals have for pursuing and building independent careers. These include:

6

Table of Contents

The first three of the above alternatives represent competitive forces to the Company’s 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 since 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.

The Company 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, the Company expects that additional companies will emerge in this market and that competition will therefore intensify. The Company 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

The Company has several differentiators that we believe will help us attain a leadership position in the Virtual Corporate Office market. They include:

7

Table of Contents

Clients

The client base for Member Services 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, The Company introduced the Business Services 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, the Company intends to devote the majority of its sales and marketing expenditures to the pursuit of organizations that use a significant number of contracted workers.

The Company believes that the addition of and attention to our Business Services sales and marketing efforts will not preclude marketing efforts directed specifically toward growing the Member Services membership. We are continuing to advertise 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 Member Services offering.

Seasonal Considerations

There is no material seasonal effect on our business.

Backlog

Due to the nature of its business, the Company does not have backlog.

Strategic Relationships

We are continually pursuing partnerships that will either augment the Company’s suite service offerings or better enable us to market these services to a greater number of potential members or clients.

In late 2002, the Company formed a partnership with BrassRing, a leader in e-recruiting technology and services. The partnership gives BrassRing customers the ability to use the Company’s service to engage non-employee contractors. The Company will provide BrassRing customers with a convenient consolidated bill for all contingent workers. In addition, BrassRing and the Company will cross-market each other’s products and services to all existing customers.

Financial Information About Segments

For financial information regarding our business segments (Member Services and Business Services) see Note 17 to the financial statements.

Geographic Positioning

The geographic scope of Netplex currently consists of two office locations, its headquarters in Reston, Va., which includes its executive offices, and its marketing, legal, financial services and human resources departments and an operations office in Edmond, OK. The Company does not have any locations or derive any revenue outside of the U.S.

Intellectual Property

Netplex does not hold any patents or registered trademarks. However, we consider our database of independent professionals to be highly proprietary.

Employees

As of March 1, 2003 we had approximately 230 full-time employees (including permanent and contract employees). We believe that our relations with our employees are good.

8

Table of Contents

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.

PROCEEDS FROM THE SALE OF THE NET ASSETS OF THE NETPLEX SYSTEMS SUBSIDIARY MAY NOT BE SUFFICIENT TO SUSTAIN OPERATIONS. The Company sold the net assets of its subsidiary, Netplex Systems, Inc. in 2002. The Company is a much smaller enterprise going forward, absent growth of its continuing business. No assurances can be given that the proceeds from the sale will be sufficient to sustain operations going forward. See Note 1 to the financial statements.

WE HAVE INCURRED OPERATING LOSSES AND MAY NEVER BECOME PROFITABLE. We incurred net losses of $8.5 and $15.3 million in the years ended December 31, 2001 and 2000, respectively, and a net income of $0.7 million in the year ended December 31, 2002 which included a $2.0 million gain of the sale of the net assets of Netplex Systems, Inc. and an extraordinary gain of $0.7 million from the extinguishment of obligations. There can be no assurance that we will be profitable on a quarterly or annual basis in the future.

WE MAY BE UNABLE TO OBTAIN THE NECESSARY FUNDING TO OPERATE, EXPAND AND IMPROVE OUR BUSINESS. As of December 31, 2002 and 2001, we had negative working capital of $4.2 million and $8.7 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.

FLUCTUATIONS IN THE GENERAL ECONOMY MAY HAVE AN ADVERSE EFFECT ON THE COMPANY. Demand for contingent workers is significantly affected by the general level of economic activity and unemployment in the United States. When economic activity increases, outside consultants are often added before full-time employees are hired. However, as economic activity slows, many companies reduce their use of outside consultants before laying off full-time employees. As a result, any significant or continued economic downturn could have a material adverse effect on the Company’s results of operations or financial condition.

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 CONTINGENT WORKERS. 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 automatically renews for one year periods on its anniversary date in May, unless either party gives the other party 60 days notice of non-renewal. Our success also depends in large part upon our ability to attract and retain contingent workers. The inability to attract new personnel could have a material adverse effect on our results of operations.

LIABILITIES FOR CLIENT AND EMPLOYEE ACTIONS. The Company’s employees generally perform their job in the workplace of other businesses. Attendant risks of such activities include possible claims of discrimination and harassment, violations of wage and hour requirements, errors and omissions in the work product and misuse of client proprietary information. The Company has policies and guidelines in place to help reduce its exposure to these risks and has purchased insurance policies against certain risks in amounts that it believes to be adequate. Although the Company historically has not had any material losses resulting from these risks, there can be no assurance that it

9

Table of Contents

will not experience such losses in the future or that its insurance will remain available on reasonable terms or be sufficient in amount or scope to cover any such liability.

OUR BUSINESS LINES ARE VERY COMPETITIVE AND SUBJECT TO RAPID CHANGES. The market for The Company’s services is competitive and changing rapidly. Independent professionals, who make up the target market for the Company’s 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 the Company’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 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 HAVE A SIGNIFICANT NUMBER OF PREPAID COMMON WARRANTS WITH EXERCISE PRICES THAT FLUCTUATE BASED ON THE MARKET PRICE OF OUR COMMON STOCK. THE CONVERSION OF THESE WARRANTS COULD RESULT IN THE DILUTION OF YOUR OWNERSHIP INTEREST AND ADVERSELY IMPACT THE PRICE OF OUR COMMON STOCK. In connection with a private placement, we issued 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 December 31, 2002 would have resulted in the issuance of 115,384,615 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 $0.013 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

10

Table of Contents

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 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 1, 2002 into approximately 2,017,524 shares of common stock, subject to the 4.99% limitation and 9.99% limitation described below, representing approximately 8.0% of the common stock that would be outstanding following the conversion, based upon the common shares outstanding on March 1, 2002. 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 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 December 31, 2002, we had outstanding: shares of Class A Preferred Stock that were immediately convertible into 80,597 shares of common stock; 1,324 shares of our Series D Preferred Stock outstanding that were convertible on December 31, 2002, into 2,017,524 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 128,126,488 shares of common stock; and other options and warrants to purchase an aggregate of 803,927 shares of our common stock at a weighted average exercise price of $2.46 per share. As of December 31, 2002, there were outstanding convertible preferred shares, warrants and options to acquire up to approximately 137,411,515 shares of common stock at prices ranging from $0.013 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 may 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

11

Table of Contents

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.

OUR COMMON STOCK WAS 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 YEARS FROM PATTERNS OF FRAUD AND ABUSE. We were notified by The Nasdaq Stock Market, Inc. that, because we failed to maintain a minimum bid price of $1.00 for Common Stock on the Nasdaq Small Cap, The Nasdaq Stock Market, Inc. delisted our stock from the Nasdaq Small Cap. This delisting occurred on April 12, 2001. Our Common Stock currently trades on the OTCBB maintained by The Nasdaq Stock Market, Inc and is 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. 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 are 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 AND GOING CONCERN OPINION. The Company has incurred significant losses from operations and has used cash in operations in each of the last five years. In addition, as of December 31, 2002, the Company has a stockholders’ deficit of approximately $4.7 million and a working capital deficit of approximately $4.2 million. Our independent accountants have rendered an opinion on our most recent financial statements indicating that these factors raise substantial doubt about the Company’s ability to continue as a going concern.

Over the past three years, management has undertaken restructuring efforts aimed at, among other things, improving the productivity and billable utilization of its staff and reducing operating expenses. These restructuring efforts have included headcount reductions, consolidation of facilities and management of discretionary expenses. However, these actions were taken in a period where economic conditions in the United States and abroad created downward pressure on spending for information technology initiatives, including demand for the Company’s consulting services. In 2002, the Company did experience lower operating losses than those reported in 2001 and 2000 and a

12

Table of Contents

reduction in cash used in operations. However, given the Company’s current operating outlook and continuing economic uncertainty, the Company’s liquidity and financial position are such that additional capital may be needed in the future to sustain operations.

Item 2. Properties.

The Company leases approximately 8,000 square feet of space in Reston, VA. for its corporate offices and the operations of some business units. The Company also leases office space in Edmond, Oklahoma. These leases expire on various dates from March 2003 to September 2004.

The Company believes that the space in its existing corporate and branch facilities are adequate for the foreseeable future to support the growth of its existing operations in the geographic areas in which it currently operates.

Item 3. Legal Proceedings.

From time to time, the Company is subject to litigation in the ordinary course of business.

On September 4, 1997, Data Systems Analysts, Inc. (“DSA”), a software design and consulting company, filed a complaint against Technology Development Systems, Inc. (“TDS”) and the Company, alleging copyright infringement and breach of the Company’s agreement. The Complaint also seeks damages against XcelleNet, Inc., which the Company has indemnified. The Complaint claimed damages in excess of $300,000 plus punitive damages.

In June of 2000, the Company, TDS and XcelleNet, Inc. filed a complex motion for summary judgment, asking the Court to dismiss the majority of DSA’s claims in the case. DSA also filed a motion for summary judgment asking the court to enter judgment in its favor on several of its claims. The district court judge held oral arguments on the counter-motions in January 2001.

In March 2001, the court denied the motion by TDS and XcelleNet in its entirety. It granted plaintiff’s motion for summary judgment on liability and directed that damages be tried to a jury on May 24, 2001.

Prior to the May 24, 2001 trial date and before any motions for reconsideration, the parties mutually agreed to enter into settlement negotiations.

On December 28, 2001 the Company and DSA entered into a settlement agreement for dismissal of the lawsuits, with prejudice whereby the Company agreed to pay DSA $1,400,000 plus transfer its 125,000 shares of Tavve Software Company stock it held for investment purposes. The Company agreed to pay (i) $900,000 on or before December 31, 2001 or $900,000 on or before March 31, 2002 plus interest (prime rate plus 3%) from January 1, 2002, and (ii) $250,000 on each of June 30, 2002 and December 31, 2002. The Company did not pay the amount due on December 31, 2001. Upon the closing of the Offering on or before March 31, 2002, in lieu of the payment terms above, the Company agreed to pay (i) 50% of the cash proceeds after the first $1,000,000 up to a maximum of $700,000 and the difference of such cash proceeds and $900,000 on March 31, 2002 and (ii) $250,000 on each of June 30, 2002 and December 31, 2002. The Company did not pay the amount due on December 31, 2001.

In May 2002, the Company restructured the $1.4 million litigation settlement debt, as follows:

In December 2000, TMP Interactive, Inc. (“Monster.com”) filed suit against the Company alleging that the Company failed to make a quarterly cash payment under its co-branding agreement with Monster.com. The complaint sought a judgment of approximately $464,000. The Company disputed the allegations, denying all

13

Table of Contents

liability and asserted affirmative defenses, including that TMP did not perform the agreement as required. While initial discovery commenced, both parties agreed to stay all further discovery and enter into settlement discussions.

On August 7, 2001, the Company and Monster.com entered into a mutually agreeable settlement whereby the Company would pay Monster.com fees of $230,000 and grant a warrant to purchase 4,000,000 shares of the Company’s common stock at $0.47 per share which is fully exercisable at any time on or before August 7, 2004. In conjunction with this agreement, the Company recorded a selling and general and administrative charge in the three month period ended September 30, 2001 of $590,000. Of this amount, $360,000 was related to the valuation of the warrants granted to Monster.com.

In June 2002, the Company and TMP entered into a Release whereby the Company’s outstanding obligations, including the $110,000 unpaid settlement amount, were released and forever discharged in consideration for a cash payment of $25,000 which the Company paid.

The principal risks that the Company insures against are workers’ compensation, personal injury, property damage, general liability, and fidelity losses. The Company maintains insurance in such amounts and with such coverages and deductibles as management believes are reasonable and prudent.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of the Company’s Common Stock holders during the Company’s fourth quarter ended December 31, 2002.

14

Table of Contents

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

The Common Stock of the Company is traded on the NASD Over the Counter Bulletin Board (“OTCBB”)

Price Range of Common Stock

The quotations set forth in the table reflect inter-dealer prices from NASD, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions: