10-Q 1 d10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------------- FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ----------------------------------------- ~~For the quarterly period ended June 30, 2001 Commission file number 001-11784~~

THE NETPLEX GROUP, INC. ----------------------------------------- (Exact name of registrant as specified in its charter) NEW YORK 11-2824578 ------------------------------ ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1800 Robert Fulton Drive, Suite 250, Reston, Virginia 20191-4346 ---------------------------------------------------------------- (Address of principal executive offices and zip code) (703) 716-4777 ----------------------------------------------------- (Registrant's telephone number, including area code) ----------------------------------------------------- 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 [ ] As of August 14, 2001, 23,050,360 shares of the issuer's Common Stock were outstanding. 1 THE NETPLEX GROUP, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001 INDEX Part I. Financial information Item 1. Financial statements and supplementary data a) Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 3 b) Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2001 and 2000 4 c) Condensed Consolidated Statements of Cash Flows for the Three and Six Months ended June 30, 2001 and 2000 5 d) Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Part II Other Information 15 Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16

2 Part I Financial Information THE NETPLEX GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

See accompanying notes to consolidated financial statements. 3 THE NETPLEX GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands)

See accompanying notes to consolidated financial statements. 4 THE NETPLEX GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)

See accompanying notes to consolidated financial statements. 5 THE NETPLEX GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Six Months Ended June 30, 2001 and 2000 (Unaudited) The accompanying unaudited condensed consolidated financial statements of The Netplex Group, Inc. and Subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The Company believes the disclosures made are adequate to make the information presented consistent with past practices. However, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2000. In the opinion of the Company, the accompanying condensed consolidated financial statements reflect all adjustments and reclassifications (which include only normal recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 2001 and December 31, 2000 and the results of its operations and its cash flows for the three and six months ended June 30, 2001 and 2000. Interim results are not necessarily indicative of the results that may be expected for the full year. Note A -- Basis of Presentation The accompanying financial statements include the accounts of The Netplex Group, Inc. and its subsidiaries. All acquisitions by the Company are accounted for as purchases. Additionally, the operating results of all acquisitions have been included in the consolidated financial statements from their effective dates of acquisition. All material intercompany transactions were eliminated in consolidation. The accompanying consolidated financial statements reflect a change in the manner the Company recognizes revenue in its Contractors Resources mybizoffice segment consistent with industry practice and in compliance with EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" and the Securities and Exchange Commission's view on revenue recognition issued in Staff Accounting Bulletin No. 101. Contractors Resources currently recognizes as revenue the fees (net revenue) it charges in its mybizoffice segment to its members for providing its back office services as these services are provided. Prior to the third quarter of 2000, Contractors Resources recorded as revenue, the gross billings from services in its mybizoffice segment provided by its members to customers with whom it contracts, invoices and collects on behalf of its members. This change has no effect on the net income or loss reported from these operations. Accordingly, effective with the issuance of the third quarter 2000 financial statements, the results of operations for all periods presented have been restated for comparability purposes to reflect this revenue recognition policy.

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Note B - Re-incorporation of Netplex Systems; Rights Offering On June 29, 2001, the Company merged its wholly owned subsidiary, Netplex Systems, Inc., a Virginia corporation, into Netplex Systems, Inc., a Delaware corporation. In July, 2001, Netplex Systems, Inc. issued the Company 1,000 shares of Class A preferred stock and 3,750 shares of Class B preferred stock. As the result of such merger and stock issuance, the Company continues to owns 100% of Netplex systems outstanding capital stock which includes 1,100,000 shares of common stock, 1,000 shares of Class A preferred stock and 3,750 shares of Class B preferred stock. 6 On July 2, 2001 (amended July 23, 2001), the Company filed a registration statement ("Offering") with the Securities and Exchange Commission which contemplates granting at no cost to its security holders, transferable rights to purchase shares of common stock of its wholly owned subsidiary, Netplex Systems. The Company's security holders will receive one right for every one share of the Company's common stock that they own (or would be entitled to own upon conversion of shares of preferred stock) as of July 16, 2001. Each right will entitle the holder to purchase one share of Netplex Systems' common stock at the offering price. Up to 1,300,000 shares of Netplex Systems common stock are being offered in this Offering, 1,100,000 sold by the Company and 200,000 sold by Netplex Systems. Netplex Systems is discussed below in Note H as the Netplex segment. The Company's accounting for the investment in Netplex Systems will depend on our ownership and control of Netplex Systems following the Offering. In addition, if successful, the estimated net proceeds of approximately $4.6 million will flow to the Company. In contemplation of the completion of the Offering, the Company established option plans for Netplex Systems which provide for the granting of both incentive and nonqualified stock options exercisable into Netplex Systems stock. In 2001, Netplex Systems' board of directors approved the grant of 1,201,000 options under these plans to employees with an exercise price of $5.00. The Company is currently negotiating a new structure related to its obligations with Waterside Capital Corporation including the consideration for the $400,000 guaranty. Note C -- Discontinued Operations On September 29, 2000, the measurement date, the Company announced its decision to sell its e-Infrastructure operations. The Company sought a buyer for various businesses within the e-Infrastructure segment and the Company expected to complete the sales within the 12 months subsequent to the measurement date. Accordingly, effective with the issuance of the third quarter 2000 financial statements, the results of operations and the net assets of the Company's e-Infrastructure segment were classified as discontinued operations and prior periods were restated. The results of the discontinued segment did not reflect any interest or management fees allocated by the Company. Additionally, the Company projected that the remaining businesses within the segment would not generate future operating losses prior to disposal and therefore did not record any provision in the financial statements. On September 29, 2000, the Company signed an agreement to sell its Onion Peel subsidiary (previously included as a part of the e-Infrastructure segment) for $949,000 ($574,000 of cash and $375,000 of stock) and recorded a gain of $513,000. During the fourth quarter of 2000 and the first quarter of 2001, the Company streamlined the operations of its discontinued systems integration business (previously included in the e-Infrastructure segment) and increased its service offerings to include data management and information security focusing on systems infrastructure reliability. As a result, the systems integration business has become an integral component of Netplex Systems, enabling it to offer customers a more complete information systems solution. Therefore, effective April 1, 2001, the results of operations of the systems integration business and net assets have been reclassified as continuing operations within the Netplex operating segment and prior periods have been restated. Note D -- Restructure Charge In the third quarter of 2000, the Company recorded a restructure charge of $1,512,000 primarily associated with the closing of the Company's Roseland, New Jersey office and the related costs. Included in the total are the estimated costs for facility closures, the write-down of redundant and duplicative property, severance and other employee costs related to the facility closures and duplicative position eliminations. Management expects that the remaining accrual will be utilized in the current year.

Note E -- Financing On May 4, 2001, the Company's subsidiary, Netplex Systems, Inc. ("Systems") entered into a Commercial Revolving Loan, Demand Loan and Security Agreement ("Revolving Loan") with American Commercial Finance Corporation ("Lender") which expires on March 31, 2003. This Revolving Loan replaced the pre-existing bank line of credit which was repaid on May 4, 2001. Under the Revolving Loan, Systems can borrow an amount equal to 80% of eligible accounts receivable as defined in the agreement, up to $3.0 million. The Revolving Loan bears interest at the prime rate plus 1.75% and is secured by (i) System's, the Company's and each of the Company's subsidiaries' assets, (ii) a $400,000 guaranty from a shareholder, Waterside Capital (the "Guaranty") and (iii) fidelity guaranties from two of the Company's officers. The Company is currently negotiating a new structure related to its obligations with Waterside Capital Corporation including the consideration for the $400,000 guaranty. 7 Note E -- Earnings (Loss) Per Share Basic net income (loss) per share is calculated using the weighted average number of common shares outstanding during the relevant periods. Diluted net income (loss) per common share is calculated using the weighted average number of common shares and dilutive potential common shares outstanding during the relevant periods. For the three months ended June 30, 2001 and 2000, the assumed exercise of the Company's outstanding stock options and warrants, Convertible Preferred Stock and contingently issuable shares in connection with certain business combinations would be anti-dilutive. Note F -- Sale of Equity Securities In May 2001, the Company issued 50,000 shares of its common stock to Gruntal & Co. LLC for investment banking advisory services. These shares were valued at $14,500 based upon the current market price at issuance and the shares are unregistered. Note G -- Recent Accounting Pronouncements On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) 141, "Business Combinations", and SFAS 142, "Goodwill and Intangible Assets". SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective fate of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows: o all business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001; o intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; o goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization; o effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator; and o all goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. The Company will continue to amortize goodwill and intangible assets recognized prior to July 1, 2001, under its current method until January 1, 2002, at which time annual and quarterly goodwill amortization of $1,295,000 and $324,000 will no longer be recognized, without effect of the Offering discussed in Note C, if any. By December 31, 2002, the Company will have completed a transitional fair value based impairment test of goodwill as of January 1, 2002. Impairment losses, if any, resulting from the transitional testing will be recognized in the quarter ended March 31, 2002, as a cumulative effect of a change in accounting principle. Note H-- Segment Information In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company's reportable segments are strategic business units that offer different products and services to different industries throughout the United States. In the second quarter of 2001, the Company had three reportable segments after it initiated an new segment, Consultant Service Center ("CSC"), within the Contractors Resources subsidiary. The Company's reportable segments are as follows: o Netplex - technology consulting and information systems integration services that seek to help clients make efficient, cost-effective, and reliable use of their information technology systems. As discussed in Note B, this segment is the subject of a rights offering, if successful, will result in this business being spun off into a separate reporting entity. o Contractors Resources - mybizoffice ("CR-MBO") - provides business infrastructure and advisory services for its membership of independent contractors, which allow members to maximize the freedom and wealth potential of the independent lifestyle while enjoying the benefits associated with full-time employment. o Contractors Resources - Consultant Service Center ("CR-CSC") - provides low-cost employment, payrolling, and benefits provisioning for clients' contingent work force thereby enabling businesses 8 to reduce consultant management costs and better position themselves to engage and work with their contingent work force. The Company's accounting policies for these segments are the same as those described in the summary of Significant Accounting Policies, except that income tax expense or benefit is not allocated to each segment. In addition, the Company evaluates the performance of its segments and allocates resources based on gross margin, and earnings before interest, taxes, depreciation and amortization ("EBITDA"). Inter-segment revenues are immaterial. The table below presents information about segments used by the chief operating decision-maker of the Company as of and for the three and six months ended June 30, 2001 and 2000:

Reconciliation of Segment EBITDA to Net Operating Loss:

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Note Regarding Forward-Looking Information Certain statements under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this quarterly report constitute "forward-looking statements" including statements concerning the Company's expectation that the cash generated from operating activities, combined with borrowings 9 on its line of credit facilities, will be adequate to satisfy its working capital and capital expenditure requirements for at least the next 12 months. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the Company's recent operating losses, uncertainty concerning its ability to obtain funding to expand and improve its business, the variance in the timing of the Company's revenues and the introduction and market acceptance of its products, the Company's dependence on the continued services of its Chairman and Chief Executive Officer and its President as well as its ability to attract and retain quality technical and management personnel, the competitive and rapidly changing nature of the Company's business, the Company's ability to remain competitive and respond to changes in the industry as well as manage its growth, the significant volatility of the Company's stock price, uncertainty regarding the Company's liability for violations committed by the consultants it employs, the Company's ability to satisfy guarantees made to its customers, uncertainty regarding the dilutive impact of conversion and exercise of the Company's outstanding preferred stock and warrants on its shareholders and the impact on its stock price, the risks set forth in the Company's amended Registration Statement on Form S-3 filed on Form S-1 as filed with the Securities and Exchange Commission on August 8, 2000 and risk factors listed from time to time in subsequent filings. Forward-looking statements are intended to apply only at the time they are made. Moreover, whether or not stated in connection with a forward-looking statement, the Company undertakes no obligation to correct or update a forward-looking statement. Therefore, the actual experience of the Company and the results achieved during the period covered by any particular forward-looking statement should not be regarded as a representation by the Company or any other person that these estimates will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. If the Company were to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. The following table sets forth the revenue, gross profit, expenses, and income of each of the business areas for the three and six months ended June 30, 2001 and 2000. Consolidated Operating Results by Segment (amounts in 000's)

10 Interest, taxes, depreciation & amortization (610) (366) (1,259) (850) ---------- --------- -------- ------------ Loss from continuing operations (2,191) (3,329) (3,705) (6,844) Income (loss) from discontinued operations, net of tax -- (515) 87 (790) ---------- --------- --------- ------------ Net loss $ (2,191) $ (3,844) $ (3,618) $ (7,634) ========== ========= ======== ============

Results of Operations: Three months ended June 30, 2001 compared to the three months ended June 30, 2000: Revenue for the three months ended June 30, 2001 decreased $2.1 million or 28.9% to $5.2 million as compared to $7.3 million for the same period in 2000. Revenue for Netplex decreased $2.6 million or 38.0% to $4.3 million as compared to $6.9 million for the same period in 2000. CR - MBO revenue for the three month period ended June 30, 2001 was $0.4 million, unchanged from the same period in 2000. Revenue for the CR-CSC, the new business segment formed this quarter, for the three months ended June 30, 2001 was $0.6 million. Revenue for CR - MBO reflects a change in the manner the Company recognizes revenue consistent with certain modifications made to CR's contractual arrangements during 1999 and in compliance with EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" and the Securities and Exchange Commission's view on revenue recognition issued in Staff Accounting Bulletin No. 101. CR - MBO's revenues represent only the fees realized for services rendered to the independent contractor. Prior to the change, revenues included the gross fees charged to the third party customer being serviced by the independent contractor. This change has no effect on the net income or loss reported from these operations. Accordingly, effective with the issuance of the third quarter 2000 financial statements, the results of operations for all periods presented have been restated for comparability purposes to reflect this revenue recognition policy. Gross profit generated by Netplex for the three months ended June 30, 2001 decreased $0.8 million or 30.3% to $1.8 million as compared to $2.6 million for the same period of 2000. The Netplex gross profit margins increased from 37.9% in 2000 to 42.6% in 2001. These increases resulted primarily from the restructuring effort commenced in the third quarter of 2000 combined with improvements in the utilization of the technical staff. The gross profit generated by CR - MBO for the three month period ended June 30, 2001 was $0.3 million, unchanged from the same period in 2000. CR - MBO's gross profit margins increased from 64.6% in 2000 to 76.0% in 2001. These increases are the result of efficiencies that arose from the implementation of the web-based business processes for managing the independent contractor work force. Gross profit generated by CR-CSC for the three months ended June 30, 2001 was $0.1 million, or 12.0%. Netplex's segment operating expenses for the three months ended June 30, 2001 decreased $0.5 million or 20.6% to $1.8 million from $2.3 million for the same period of 2000. This decrease resulted primarily from reduction of sales, marketing and administrative personnel. Contractors Resources segment operating expenses decreased $0.6 million or 48.2% to $0.7 million from $1.3 million in the same period of 2000. The decrease is attributed to reduced marketing expenses, web development expenses and administrative personnel costs. Netplex's EBITDA for the three months ended June 30, 2001 decreased $0.3 million or 89.4% as compared to the same period of 2000. This decrease in EBITDA resulted primarily from the $0.8 million gross profit decrease being was only partially offset by the $0.5 million decrease in operating expenses. At the end of June, 2001, the Company made staff reductions of an additional 22 employees which will equate to approximately $0.5 million savings on a quarterly basis. Contractors Resources' EBITDA loss for the three months ended June 30, 2001 decreased $0.7 million or 70.0% as compared to the same period in 2000 as the result of efficiencies enjoyed from the implementation of web-based business processes in the Contractors Resources segment. Corporate expense for the three months ended June 30, 2001 decreased $1.0 million or 42.7% to $1.3 million from $2.3 million in the same period of 2000. This decrease is primarily the result of the restructuring and cost saving measures implemented in the third quarter of 2000. Earnings (from continuing operations) before interest, income taxes, depreciation and amortization ("EBITDA") for the three months ended June 30, 2001 was a loss of $1.6 million as compared to a loss of $3.0 million for the same period of 2000, a decline in the loss before interest, taxes, depreciation and amortization of $1.4 million or 46.6%. The components of this decline are discussed above. Depreciation, amortization and interest expense, net for the three months ended June 30, 2001 increased $0.2 million to $0.6 million from $0.4 million for the same period of 2000. This increase is principally due to the amortization of the developed business software used internally in the operations of the Contractors Resources segment. 11 Discontinued operations were fully disposed of or retained by the end of the three month period ended June 30, 2001. The Company sold the Onion Peel business in the third quarter of 2000 and retained the systems integration business in the Netplex operations for all periods presented. The discontinued operations, the Onion Peel and staffing businesses, generated a loss of $0.5 million in the three months ended June 30, 2000. See Note C to the financial statements for a description of the discontinued operations. No provision for income taxes was required for the three months ended June 30, 2001 or 2000 due to the generation of net losses. Net loss for the three months ended June 30, 2001 was $2.2 million compared to a net loss of $3.8 million in the same period of 2000, an decrease in net loss of $1.6 million or 43.0%. The components of this increase are discussed above. Six months ended June 30, 2001 compared to the six months ended June 30, 2000: Revenue for the six months ended June 30, 2001 decreased $1.4 million or 10.0% to $12.8 million as compared to $14.2 million for the same period in 2000. Revenue for Netplex decreased $2.0 million or 7.7% to $11.5 million as compared to $13.5 million for the same period in 2000. CR - MBO revenue for the six month period ended June 30, 2001 was $0.8 million, unchanged from the same period in 2000. Revenue for the CR-CSC, the new business segment formed this quarter, for the six months ended June 30, 2001 was $0.6 million. Gross profit generated by Netplex for the six months ended June 30, 2001 decreased $0.3 million or 6.1% to $4.6 million as compared to $4.9 million for the same period of 2000. The Netplex gross profit margins increased from 36.2% in 2000 to 39.9% in 2001. These increases resulted primarily from the restructuring effort commenced in the third quarter of 2000 combined with improvements in the utilization of the technical staff. The gross profit generated by CR - MBO for the three month period ended June 30, 2001 increased $0.1 million or 25.1% to $0.6 million from $0.5 million in the same period in 2000. CR - MBO's gross profit margins increased from 64.5% in 2000 to 78.8% in 2001. These increases are the result of efficiencies that arose from the implementation of the web-based business processes for managing the independent contractor work force. Gross profit generated by CR-CSC for the six months ended June 30, 2001 was $0.1 million. Netplex's segment operating expenses for the six months ended June 30, 2001 decreased $0.9 million or 10.0% to $3.7 million from $4.6 million for the same period of 2000. This decrease resulted primarily from reduction of sales, marketing and administrative personnel. Contractors Resources segment operating expenses decreased $1.1 million or 22.5% to $1.4 million from $2.5 million in the same period of 2000. The decrease is attributed to reduced marketing expenses, web development and administrative personnel costs. Netplex's EBITDA for the six months ended June 30, 2001 increased $0.6 million or 223.4% as compared to the same period of 2000. This increase in EBITDA resulted primarily from the cost saving measures implemented in 2000 coupled with technical personnel productivity increases. Contractors Resources' EBITDA loss for the six months ended June 30, 2001 decreased $1.3 million or 64.6% as compared to the same period in 2000 as the result of efficiencies enjoyed from the implementation of web-based business processes in the Contractors Resources segment. Corporate expense for the six months ended June 30, 2001 decreased $1.7 million or 39.2% to $2.5 million from $4.2 million in the same period of 2000. This decrease is primarily the result of the restructuring and cost saving measures implemented in the third quarter of 2000. Earnings (from continuing operations) before interest, income taxes, depreciation and amortization ("EBITDA") for the six months ended June 30, 2001 was a loss of $2.4 million as compared to a loss of $6.0 million for the same period of 2000, a decline in the loss before interest, taxes, depreciation and amortization of $3.6 million or 59.2%. The components of this decline are discussed above. Depreciation, amortization and interest expense for the six months ended June 30, 2001 increased $0.4 million to $1.3 million from $0.9 million for the same period of 2000. This increase is principally due to the amortization of the developed business software used internally in the operations of the Contractors Resources segment. Discontinued operations were fully disposed of or retained by the end of the six month period ended June 30, 2001. The discontinued operations, the Onion Peel and staffing businesses, generated a loss of $0.8 million in the six months ended June 30, 2000. See Note C to the financial statements for a description of the discontinued operations. No provision for income taxes was required for the six months ended June 30, 2001 or 2000 due to the generation of net losses. 12 Net loss for the six months ended June 30, 2001 was $3.6 million compared to a net loss of $7.6 million in the same period of 2000, an decrease in net loss of $4.0 million or 52.6%. The components of this increase are discussed above. Liquidity and Capital Resources: At June 30, 2001, the Company had cash and cash equivalents of $1.7 million and $1.2 million outstanding on its line of credit facilities. In the six months ended June 30, 2001 the Company's cash and cash equivalents decreased by $2.1 million which was primarily attributed to the $1.7 million cash used in operations for the period. The Company has negative working capital at December 31, 2000 of approximately $5.4 million and has incurred significant losses from operations in each of the last three years. In addition, the Company is operating under a agreement with its principal lender that, among other things, imposed limits on eligible accounts receivable. Management believes that cash on hand as of June 30, 2001 together with cash flows from operations in the remainder of 2001 will be sufficient to meet its working capital requirements in 2001. In the third quarter of 2000, the Company began a restructuring of the Company which included closing and combining certain facilities, reduction of administrative staff, and disposing of non-strategic business units. In addition, recent business development efforts and refinements to the Company's staff compensation programs have improved utilization of billable, technical staff which should improve the profitability of the Company's continuing operations going forward. On July 2, 2001 (amended July 23, 2001), the Company filed a registration statement ("Offering") with the Securities and Exchange Commission which contemplates granting at no cost to its security holders, transferable rights to purchase shares of common stock of its wholly owned subsidiary, Netplex Systems. The Company's security holders will receive one right for every one share of the Company's common stock that they own (or would be entitled to own upon conversion of shares of preferred stock) as of July 16, 2001. Each right will entitle the holder to purchase one share of Netplex Systems' common stock at the offering price. Up to 1,300,000 shares of Netplex Systems common stock are being offered in this Offering, 1,100,000 sold by the Company and 200,000 sold by Netplex Systems. On July 31, 2000, the Company entered into a line of credit agreement with a bank that was set to expire on July 31, 2002 and was secured by the Company's assets. As of September 30, 2000, the Company was not in compliance with the tangible net worth covenant. On January 10, 2001, the Company and the bank entered into an Loan Amendment and Forebearance Agreement ("Forebearance Agreement") whereby the bank agreed to forebear from exercising its rights and remedies under the loan document due to the existing event of default until March 31, 2001; provided no additional default occurs. The Company and the bank agreed the Company did not need to comply with the tangible net worth covenant set forth in the loan agreement. Under the Forebearance Agreement the Company could borrow 40% of eligible accounts receivable (as defined in the agreement) up to $5.0 million bearing interest at the bank's prime rate plus 2.5%. On May 4, 2001, the Company's subsidiary, Netplex Systems, Inc. ("Systems") entered into a Commercial Revolving Loan, Demand Loan and Security Agreement ("Revolving Loan") with American Commercial Finance Corporation ("Lender") which expires on March 31, 2003. This Revolving Loan replaced the pre-existing bank line of credit which was repaid on May 4, 2001. Under the Revolving Loan, Systems can borrow an amount equal to 80% of eligible accounts receivable as defined in the agreement, up to $3.0 million. The Revolving Loan bears interest at the prime rate plus 1.75% and is secured by (i) System's, the Company's and each of the Company's subsidiaries' assets, (ii) a $400,000 guaranty from a shareholder, Waterside Capital (the "Guaranty") and (iii) fidelity guaranties from two of the Company's officers. The Company is currently negotiating a new structure related to its obligations with Waterside Capital Corporation including the consideration for the $400,000 guaranty. At June 30, 2001, there were approximately $249,000 of accrued dividends on the Company's Class A, C and E Preferred Stock. Acquisitions and future plans. Based on the Company's current operating plan, the Company believes that the cash generated from operating activities, coupled with borrowings on its line of credit facility and additional cost reductions, where necessary, will be sufficient to meet the anticipated needs for working capital and capital expenditure for at least the next 12 months. Thereafter, if cash generated from operations is insufficient to satisfy the Company's liquidity needs, the Company may seek to obtain additional capacity on its line of credit, sell convertible debt securities or sell additional equity securities. However, no assurances can be given that any such addition financing sources will be 13 available on acceptable terms or at all. The sale of convertible debt securities or additional equity securities could result in additional dilution to the Company's stockholders. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. The Company's obligations under its line of credit are short-term in nature with an interest rate that approximates the market rate. Part II Other Information Item 1. Legal Proceedings On September 4, 1997, Data Systems Analysts, Inc. ("DSA"), a software design and consulting company, filed a complaint against Technology Development Systems, Inc. ("TDS") and the Company, alleging copyright infringement and breach of the Company's agreement. The Complaint also seeks damages against XcelleNet, Inc., which the Company has indemnified. The Complaint claims damages in excess of $300,000 plus punitive damages. In June of 2000, the Company, TDS and XcelleNet, Inc. filed a complex motion for summary judgment, asking the Court to dismiss the majority of DSA's claims in the case. DSA also filed a motion for summary judgment asking the court to enter judgment in its favor on several of its claims. The district court judge held oral arguments on the counter-motions on Friday, January 19, 2001. On March 6, 2001, the court denied the motion by TDS and XcelleNet in its entirety. It granted plaintiff's motion for summary judgment on liability and directed that damages be tried to a jury on May 24, 2001. On March 20, 2001, the Company filed a motion for reconsideration of the granting of summary judgment on two portions of the order. Prior to the May 24, 2001 trial date and before any motions for reconsideration, the parties mutually agreed to enter into settlement discussions. The details of a settlement are currently being negotiated. 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 and enter into settlement discussions. The details of a settlement are currently being negotiated. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10 Commercial Revolving Loan, Demand Loan and Security Agreement dated as of April 30, 2001, by and between Netplex Systems, Inc. and American Commercial Finance Corporation.* (b) Reports on Form 8-K During the fiscal quarter ended June 30, 2001, the Company filed no reports on Form 8-K. * - Previously filed on Form 10- Q for the three month period ended March 31, 2001 filed with the Securities and Exchange Commission on May 15, 2001. (Commission File No. 001-11784) 14 SIGNATURE --------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE NETPLEX GROUP, INC. (Registrant) DATE: August 14, 2001 /s/ Gene M. Zaino ------------------------------------ Gene M. Zaino Chairman of the Board (Principal Executive Officer) DATE: August 14, 2001 /s/ Peter J. Russo ------------------------------------ Peter J. Russo Executive Vice President and Chief Financial Officer (Principal Financial Officer) 15

NETPLEX GROUP INC 10-Q