<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended JUNE 30, 1997
-------------
2CONNECT EXPRESS, INC
(exact name of registrant as specified in its charter)
FLORIDA 65-0674664
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 NW 65TH AVE., SUITE 4, PLANTATION, FL 33313
- ------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (954)797-7960
-------------
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 proceeding 12 months (or for 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
--- ---
The number of shares outstanding of the issuers Common Stock, $.01 par value, on
June 30, 1997, was 3,752,500.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I Financial information
Condensed balance sheets--
June 30, 1997 and December 31, 1996 1
Condensed statements of operations--
three months and six months ended
June 30, 1997 and period from April 19, 1996
(date of inception) to June 30, 1996 2
Condensed statements of cash flows--
six months ended June 30, 1997 and period from
April 19, 1996 (date of inception) to June 30, 1996 3
Notes to condensed financial statements 4-5
Management's Discussion and Analysis of Financial
Condition and results of operations 6-7
Part II Other information
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
</TABLE>
<PAGE> 3
PART 1- FINANCIAL INFORMATION
2CONNECT EXPRESS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Current assets:
Cash $ 4,980,536 $ 1,939,985
Accounts receivable 199,648 34,909
Inventories 783,537 196,998
Prepaid expenses and other current assets 132,910 68,121
----------- -----------
Total current assets 6,096,631 2,240,013
Property and equipment, net 1,053,541 401,170
Deferred financing costs 0 220,065
Other assets 167,295 13,616
----------- -----------
Total assets $ 7,317,467 $ 2,874,864
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 680,705 $ 586,969
Current maturities of capital leases 2,966 0
Accrued expenses & other current liabilities 169,793 33,320
----------- -----------
Total current liabilities 853,464 620,289
Long-term debt and capital leases 11,236 0
----------- -----------
Total liabilities 864,700 620,289
Shareholders' equity:
Common stock, $0.01 par value
Authorized 25,000,000 shares; issued and 37,525 27,100
outstanding 3,752,500 shares
Paid-in capital 8,691,035 3,284,420
Accumulated deficit (2,275,793) (1,056,945)
----------- -----------
Total shareholders' equity 6,452,767 2,254,575
----------- -----------
Total liabilities and shareholders' equity $ 7,317,467 $ 2,874,864
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 4
2CONNECT EXPRESS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997
AND PERIOD FROM APRIL 19, 1996 (DATE OF INCEPTION) TO JUNE 30, 1996
<TABLE>
<CAPTION>
PERIOD FROM APRIL 19, 1996
THREE MONTHS ENDED SIX MONTHS ENDED (DATE OF INCEPTION) TO
JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1996
------------------ ---------------- --------------------------
<S> <C> <C> <C>
Net sales $ 773,758 $ 1,030,848 $ 0
Cost of sales 616,068 801,037 0
----------- ----------- -----------
Gross profit 157,690 229,811 0
Selling, general and administrative expenses 942,576 1,430,839 51,412
Depreciation and amortization 39,172 61,269 0
Preopening amortization 8,344 8,344 0
----------- ----------- -----------
Loss from operations $ (832,402) $(1,270,641) $ (51,412)
Interest income 28,395 51,793 0
----------- ----------- -----------
Net loss $ (804,007) $(1,218,848) $ (51,412)
=========== =========== ===========
Net loss per share $ (.27) $ (.41) $ (.03)
=========== =========== ===========
Number of shares used in calculating net loss per 2,980,704 2,980,704 1,955,000
share
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 5
2CONNECT EXPRESS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
PERIOD FROM APRIL 19, 1996 (DATE OF INCEPTION) TO JUNE 30, 1996
<TABLE>
<CAPTION>
PERIOD FROM APRIL 19, 1996
SIX MONTHS ENDED (DATE OF INCEPTION) TO
JUNE 30, 1997 JUNE 30, 1996
---------------- --------------------------
<S> <C> <C>
Net loss $(1,218,848) $ (51,412)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 61,269
Preopening amortization 8,344
Share options issued to nonemployees 33,438
Changes in assets and liabilities:
Accounts receivable (164,739)
Inventories (586,539)
Prepaid expenses and other assets (226,812) (300)
Accounts Payable 93,736
Accrued expenses 136,473
----------- ---------
Net cash used in operating activities (1,863,678) (51,712)
Cash flows from investing activities:
Capital Expenditures (713,640) (392)
----------- ---------
Net cash used in investing activities (713,640) (392)
Cash flows from financing activities:
Net proceeds from issuance of common stock 5,603,667 383,000
Increase in capital lease obligation 14,202
Net cash provided by financing activities 5,617,869 383,000
----------- ---------
Net increase in cash and cash equivalents 3,040,551 330,896
Cash, beginning of period 1,939,985 0
----------- ---------
Cash, end of period $ 4,980,536 $ 330,896
=========== =========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 6
2CONNECT EXPRESS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements have been prepared in
conformity with instructions to Form 10-QSB, and therefore, do not include all
the information and footnotes required by generally accepted accounting
principals for complete financial statements. Certain items included in these
statements are based upon management estimates. In the opinion of management,
the accompanying financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial positions
of the Company at December 31, 1996 and June 30, 1997, the statements of
operations for the three and six month periods ended June 30, 1997 and the
period from April 19, 1996 (date of inception) to June 30, 1996 and the
statements of cash flows for the six month period ended June 30, 1997 and the
period from April 19, 1996 (date of inception) to June 30, 1996. The results of
operations for the three and six months ended June 30, 1997 are not necessarily
indicative of the operating results expected for the fiscal year ending December
31, 1997. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
December 31,1996.
2) NET LOSS PER COMMON SHARE
-------------------------
Net loss per common share has been determined by dividing net loss by
the weighted average number of shares of common stock outstanding during the
respective periods. Common stock equivalents were not included due to their
antidilutive effect.
3) PROPERTY AND EQUIPMENT, NET
---------------------------
Property and equipment, net, consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Computers and equipment 460,189 216,657
Furniture and fixture 176,939 23,116
Leasehold improvement 485,837 169,552
----------- ---------
1,122,965 409,325
Less accumulated depreciation & amortization (69,424) (8,155)
----------- ---------
Property and equipment, net $ 1,053,541 $ 401,170
----------- ---------
</TABLE>
4) STORE PROPERTY AND DEVELOPMENT COSTS
------------------------------------
Costs incurred prior to the opening of a store and certain costs
related to the implementation of corporate sales programs are capitalized and
amortized over a period of twelve months starting with the month of commencement
of such programs and new stores.
5) STOCK OFFERING
--------------
On May 2, 1997, the Company's Board of Directors declared a one-for-two
reverse split of the Company's issued and outstanding shares of common stock
effective May 6, 1997. The par value of each common share remained $0.01 and a
total of $27,100 was reclassified from common stock to paid-in capital.
On May 9,1997, the Company completed an initial public offering (the
"IPO") of 520,000 units of its Common Stock. Each unit consist of two shares of
shares of Common Stock, par value $.01 per share (the "Common Stock"), and one
Common Stock Purchase Warrant (a "Warrant") of the Company. Each Warrant
entitles the holder to purchase
<PAGE> 7
one share of common stock at a purchase price of $6.00 per share for a period of
sixty days commencing one year from the date of the final prospectus, May 9,
1997. Neither the share of Common Stock nor the Warrant contained in the units
are detachable or separately transferable from the units until May 9, 1998, at
which time the units will automatically terminate. The units are listed for
quotation on the OTC Bulletin Board and the National Quotation Bureau, Inc.'s
pink sheets under the symbol CNCTU. The price to the public was $12.50 per unit
and the Company received gross proceeds of $6,500,000 before underwriting
discounts and offering expenses of $520,00 and approximately $602,000,
respectively.
6) SUBSEQUENT EVENTS
-----------------
(a) Operating Leases:
The Company has entered into ten (10) noncancelable operating leases
for store locations, corporate office, and security equipment as of August 5,
1997.
Minimum future rental payments for all noncancelable operating leases
consist of the following:
YEAR ENDING
DECEMBER 31
-----------
1997............................................ $ 256,533
1998 ........................................... 580,013
1999 ........................................... 584,859
2000 ........................................... 599,696
2001 ........................................... 600,881
Thereafter ..................................... 617,771
----------
$3,239,753
==========
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
- ---------------------
The Company's activity for the period from April 19, 1996 (date of
inception) to June 30, 1996 consists only of selling, general and administrative
expenses for approximately $51,000. The Company had no sales or gross margin for
the period stated above. The Company was in a stage of development and
organization for the short period from April 19, 1996 (date of inception) to
June 30, 1996.
The Company's net sales for the quarter ended June 30, 1997 increased from zero
to $774,000 over the corresponding period in the prior fiscal year. The increase
is attributable to the Company's retail store expansions. The Company commenced
operation of the first store on December 6, 1996. The second and third stores
commenced operations on April 4, 1997 and April 26, 1997, respectively. The
Company had no net sales for the period from April 19, 1996 (date of inception)
to June 30, 1996. The Company was in a stage of development and organization for
the short period stated above.
The Company's net sales for the quarter ended June 30, 1997 increased
by $517,000 or 201.2% to $774,000 compared to $257,000 in the prior quarter. The
increase is primarily attributable to the Company's retail store expansions. The
Company commenced operation of the first store on December 6, 1996. The second
and third stores commenced operations on April 4, 1997 and April 26, 1997,
respectively. The Company does not have sufficient operating history to
determine sales seasonally and the revenues generated for the quarter ended June
30, 1997 are not necessarily indicative of results to be generated for the
fiscal year ended December 31, 1997.
Gross profit for the quarter ended June 30, 1997 increased from zero to $158,000
over the corresponding period in the prior fiscal year. As stated above, the
increase is attributable to the Company's retail store expansions. The Company
had no gross profit for the short period from April 19, 1996 (date of inception)
to June 30, 1996. The Company was in a stage of development and organization for
the short period stated above.
Gross profit for the quarter ended June 30, 1997 increased by $86,000
or 119.5% to $158,000 compared to $72,000 in the prior quarter. As stated above,
the increase is attributable to the Company's retail store expansions. Gross
profit as a percentage of sales was 20.5% for the quarter ended June 30, 1997 as
compared to 28.1% in the prior quarter. The decrease in gross profit as a
percentage of sales is directly related to the reclassification of prior and
current quarter revenues for approximately $52,000 to advertising expense. In
order to maintain or increase its market share and as new stores are opened, the
Company anticipates that it will price its products competitively and from time
to time may use certain incentives to increase sales. This pricing strategy has
the potential to lower the average selling price per unit and may cause declines
in gross margin beyond the most recent performance. The Company does not yet
have sufficient operating history to determine if gross margins generated for
the quarter ended June 30, 1997 are indicative of results to be generated for
the fiscal year ended December 31, 1997.
Selling, general and administrative expenses ("SG&A"), including
depreciation and amortization, for the quarter ended June 30, 1997 increased by
$939,000 to $990,000 over the corresponding period in the prior fiscal year. The
increase of SG&A incurred for the quarter ended June 30, 1997 was for salaries,
occupancy costs, professional fees related to the Company's IPO, advertising and
other expenses related to the operation and development of 2Connect stores. The
Company's SG&A expense of $51,000 for the short period from April 19, 1996 (date
of inception) to June 30, 1996 consisted of preopening design and legal fees
related to the Company's initial financing activities. The Company was in a
stage of development and organization for the short period stated above.
SG&A, including depreciation and amortization, for the quarter ended
June 30, 1997 increased by $480,000 or 94.2% to $990,000 as compared to $510,000
in the prior quarter. The majority of SG&A incurred for the three months ended
June 30, 1997 was for salaries, occupancy costs, professional fees related to
the Company's IPO, advertising and other expenses related to the operation and
development of 2Connect stores. The Company anticipates that it will incur
significant costs and expenses and will continue to incur losses until, at the
earliest, the Company establishes a number
<PAGE> 9
of 2Connect stores generating sufficient revenue to offset its operating costs
and the costs of its proposed continuing expansion. SG&A as a percent of sales
decreased by 70.6% to 127.9% as compared to 198.5% in the prior period. This
decrease is due to the rising revenue stream from store openings.
Interest income for the quarter ended June 30, 1997 increased by $5,000
or 21.8% to $28,000 as compared to $23,000 in the prior quarter. Interest income
was derived from investment of excess cash balances in short term money market
accounts.
Net loss for the second quarter ended June 30, 1997 was $804,000 or $(.27) per
share compared to the corresponding period in the prior fiscal year of $51,000
or $(.03) per share. The increase in net loss for the three months ended June
30, 1997 is primarily due to the increase in SG&A expenses for salaries,
occupancy costs, professional fees relating to the Company's IPO, advertising
and other expenses related to the operation and development of 2Connect stores.
The Company's net loss of $51,000 for the short period from April 19, 1996 (date
of inception) to June 30, 1996 consisted of preopening design and legal fees
relating to the Company's initial financing activities. The Company was in a
stage of development and organization for the short period stated above.
Net loss for the second quarter ended June 30, 1997 was $804,000 or
$(.27) per share compared to the net loss of $415,000 or $(.15) per share in
the prior quarter. Net loss for the six months ended June 30, 1997 was
$1,219,000 or ($.41) per share. The net loss is primarily due to the increase in
SG&A expenses for salaries, occupancy costs, professional fees relating to the
Company's IPO, advertising and other expenses related to the operation and
development of 2Connect stores. The Company anticipates that it will incur
significant costs and expenses and will continue to incur losses until, at the
earliest, the Company establishes a number of 2Connect stores generating
sufficient revenue to offset its operating costs and the costs of its proposed
continuing expansion.
FINANCIAL CONDITION
- -------------------
Net cash used by operating activities was approximately $1,864,000 for
the six months ended June 30, 1997. The Company had working capital of
approximately $5,243,000 at June 30, 1997, as compared to the approximately
$1,620,000 in working capital at December 31, 1996 for an overall increase of
$3,623,000. The increase in current assets of $3,857,000 during the six month
period was primarily related to the increase in cash from the IPO and inventory
of $3,041,000 and $587,000, respectively. The net increase in current assets was
offset by an overall increase in current liabilities of $233,000 primarily
resulting from an increase in accounts payable of $94,000 and other current
liabilities of $139,000. The latter was primarily due to accrued wages and
directors and officers liability insurance note payable.
Net cash used by investing activities for the six month period ended
June 30, 1997 was approximately $714,000 which included property and equipment
additions for stores that opened in second quarter, will open in third quarter
and equipment for the Company's corporate office.
Net cash received by financing activities for the six month period
ended June 30, 1997 was approximately $5,618,000 which was primarily related to
the net proceeds from the IPO of $5,604,000.
The Company currently believes that funds from the Company's operations
combined with funds available from the recent stock issuance and vendor credit
programs will be sufficient to satisfy its currently projected operating cash
requirements for fiscal 1997.
<PAGE> 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
27..........Financial Data Schedule (for S.E.C. use only)
(a) Exhibits. No exhibits on Form 8-K have been filed during the
quarter ended June 30, 1997.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed
during the quarter ended June 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
2CONNECT EXPRESS, INC.
---------------------------------------
(Registrant)
Date AUGUST 8, 1997 /s/ MARC D. FISHMAN
---------------------------------------
Marc D. Fishman, Chairman of the Board,
President and Chief Executive Officer
Date AUGUST 8, 1997 /s/ PAUL E. SIMONSON
---------------------------------------
Paul E. Simonson, Chief Accounting
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,980,536
<SECURITIES> 0
<RECEIVABLES> 199,648
<ALLOWANCES> 0
<INVENTORY> 783,537
<CURRENT-ASSETS> 6,096,631
<PP&E> 1,053,541
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,317,467<F1>
<CURRENT-LIABILITIES> 853,464
<BONDS> 11,236
0
0
<COMMON> 37,525
<OTHER-SE> 6,415,242
<TOTAL-LIABILITY-AND-EQUITY> 7,317,467
<SALES> 1,030,848
<TOTAL-REVENUES> 1,082,641
<CGS> 801,037
<TOTAL-COSTS> 1,430,839
<OTHER-EXPENSES> 69,613
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,218,848)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,218,848)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,218,848)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> 0
<FN>
<F1>ASSETS VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
