<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from __________ to __________
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
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(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 [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share, 3,752,500 shares outstanding as of
November 14, 1997.
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2CONNECT EXPRESS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed balance sheets-
September 30, 1997 and December 31, 1996 1
Condensed statements of operations-
three months ended September 30, 1997 and 1996, nine months ended
September 30, 1997 and period from April 19, 1996 (date of
inception) to September 30, 1996 2
Condensed statements of cash flows-
nine months ended September 30, 1997 and period from April 19,
1996 (date of inception) to September 30, 1996 3
Notes to condensed financial statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-8
PART II OTHER INFORMATION
Item 6, Exhibits and Reports on Form 8-K 9
Signatures 9
</TABLE>
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PART 1- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2CONNECT EXPRESS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash $ 2,085,278 $ 1,939,985
Accounts receivable 424,953 34,909
Inventories 1,939,756 196,998
Prepaid expenses and other current assets 268,117 68,121
----------- -----------
Total current assets 4,718,104 2,240,013
Property and equipment, net 1,857,434 401,170
Deferred financing costs 0 220,065
Preopening costs 205,089
Other assets 78,285 13,616
----------- -----------
Total assets $ 6,858,912 $ 2,874,864
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,196,275 $ 586,969
Current maturities of capital leases 2,967 0
Accrued expenses & other current liabilities 260,895 33,320
----------- -----------
Total current liabilities 1,460,137 620,289
Long-term debt and capital leases 9,845 0
----------- -----------
Total liabilities 1,469,982 620,289
Shareholders' equity:
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued and
outstanding 3,752,500 shares 37,525 27,100
Paid-in capital 8,667,001 3,284,420
Accumulated deficit (3,315,596) (1,056,945)
----------- -----------
Total shareholders' equity 5,388,930 2,254,575
----------- -----------
Total liabilities and shareholders' equity $ 6,858,912 $ 2,874,864
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
1
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2CONNECT EXPRESS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996,
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND PERIOD FROM APRIL 19,
1996 (DATE OF INCEPTION) TO SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Nine Months Period from April 19,
Three Months Ended Ended 1996 (date of inception)
September 30, September 30, To September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 1,059,967 $0 $ 2,090,815 $ 0
Cost of sales 782,886 0 1,583,923 0
------------ ----------- ------------ -----------
Gross profit 277,081 0 506,892 0
Selling, general and administrative expenses 1,262,139 335,069 2,692,978 386,481
Depreciation and amortization 81,986 0 143,255 0
Preopening amortization 42,996 0 51,340 0
------------ ----------- ------------ -----------
Loss from operations $ (1,110,040) $ (335,069) $ (2,380,681) $ (386,481)
Other income (expense)
Interest expense (238) 0 (238) 0
Interest income 67,560 11,344 119,352 11,344
Other, net $ 2,916 0 2,917 0
------------ ----------- ------------ -----------
Net loss $ (1,039,802) $ (323,725) $ (2,258,650) $ (375,137)
============ =========== ============ ===========
Net loss per share $ (.28) $ (.15) $ (.70) $ (.19)
======== ======= ======= ========
Number of shares used in calculating net loss per 3,752,500 2,215,495 3,242,950 1,938,506
share
</TABLE>
See accompanying notes to condensed financial statements.
2
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2CONNECT EXPRESS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
PERIOD FROM APRIL 19, 1996 (DATE OF INCEPTION) TO SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Period from April 19, 1996
Nine months ended (date of inception) to
September 30, 1997 September 30, 1996
------------------ --------------------------
<S> <C> <C>
Net loss $ (2,258,650) $ (375,137)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 143,255 890
Preopening amortization 51,340
Share options issued to nonemployees 33,438
Changes in assets and liabilities:
Accounts receivable (390,044)
Inventories (1,742,758)
Prepaid expenses and other assets (521,094) (16,777)
Accounts Payable 609,306 21,592
Accrued expenses 227,574 16,588
------------ ------------
Net cash used in operating activities (3,847,633) (352,844)
Cash flows from investing activities:
Capital Expenditures (1,599,519) (30,382)
------------ ------------
Net cash used in investing activities (1,599,519) (30,382)
Cash flows from financing activities:
Net proceeds from issuance of common stock 5,579,633 3,237,350
Increase in capital lease obligation 12,812 0
------------ ------------
Net cash provided by financing activities 5,592,445 3,237,350
------------ ------------
Net increase in cash and cash equivalents 145,293 2,854,124
Cash, beginning of period 1,939,985 0
------------ ------------
Cash, end of period $ 2,085,278 $ 2,854,124
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
3
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2CONNECT EXPRESS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The unaudited condensed 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 for fair presentation. The results of
operations for the three and nine months ended September 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) 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.
4) 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 consists of two 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 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 under
the symbol CNTCU. 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 approximately $530,00 and $611,000, respectively.
5) LEASE OBLIGATIONS
(a) Operating Leases:
The Company has entered into eleven (11) noncancelable operating leases
for store locations, corporate office, and security equipment as of November 14,
1997.
4
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Minimum future rental payments for all noncancelable operating leases
consist of the following:
Year Ending
DECEMBER 31
-----------
1997........................$ 297,194
1998........................ 809,439
1999........................ 799,366
2000........................ 755,666
2001........................ 740,811
Thereafter.................. 747,711
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$4,150,187
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5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
- ---------------------
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company participates in a highly competitive industry that is
characterized by aggressive pricing strategies in an attempt to gain market
share. In developing strategies to achieve continued increases in sales and
operating profits, the Company projects customer demand in the management of
product transitions, inventory levels and distribution cycles. Due to rapid
technological advances affecting consumer electronic product cycles, the
Company's operating results could be adversely affected should the Company be
unable to anticipate product cycle and/or customer demand accurately and, if
customer demand is below certain levels the Company may be unable to reduce
operating costs commensurate with lower sales levels. The Company's ability to
achieve targeted sales and earnings levels depends upon a number of competitive
and market factors and, accordingly, are subject to risk.
THREE MONTHS ENDED SEPTEMBER 30, 1997
The Company's net sales for the third quarter ended September 30, 1997
were $1,060,000. The Company had no net sales for the third quarter ended
September 30, 1996. The Company commenced operation of its' first store on
December 6, 1996. Two stores opened in April, 1997, three stores opened in
August, 1997 and two stores opened in September, 1997.
The Company's net sales for the third quarter ended September 30, 1997
increased by $286,000 or 37.0% to $1,060,000 compared to $774,000 in the prior
quarter. The increase is primarily attributable to the Company opening
additional retail stores, as detailed above. The Company does not have
sufficient operating history to determine sales seasonality, and the revenues
generated for the quarter ended September 30, 1997 are not necessarily
indicative of results to be generated for the fiscal year ended December 31,
1997.
Gross profit for the third quarter ended September 30, 1997 was
$277,000. The Company had no gross margin for the third quarter ended September
30, 1996. As stated above, the Company did not commence operation of any stores
until December 6, 1996.
Gross profit for the third quarter ended September 30, 1997 increased
by $119,000 or 75.4% to $277,000 compared to $158,000 in the prior quarter. The
increase is primarily attributable to the Company opening additional retail
stores, as detailed above. Gross profit as a percentage of sales was 26.2% for
the third quarter ended September 30, 1997 as compared to 20.5% in the second
quarter. The increase in gross profit as a percentage of sales is directly
related to the reclassification of co-op advertising from revenues to
advertising expense credits in the second quarter of 1997. In order to maintain
or increase its market share, and as new stores are opened, the Company has
priced its products at or below its competition and has used customer incentives
to increase sales. This pricing strategy has and may in the future lower the
average selling price per unit and gross margin below the most recent
performance. The Company does not yet have sufficient operating history to
determine if gross margins generated for the quarter ended September 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 third quarter ended September 30, 1997
increased by $1,052,000 to $1,387,000 over the corresponding period in the prior
fiscal year. The increase of SG&A incurred for the third quarter ended September
30, 1997 was for salaries, occupancy costs, professional fees, advertising and
other expenses related to the operation and development of 2Connect stores. The
Company's SG&A expense of $335,000 for the third quarter ended September 30,
1996 consisted of corporate wages, preopening design fees and professional
services related to the Company's initial financing activities.
SG&A, including depreciation and amortization, for the third quarter
ended September 30, 1997 increased by $397,000 or 40.1% to $1,387,000, versus
$990,000 in the prior quarter. The majority of SG&A incurred for the three
months ended September 30, 1997 was for salaries, occupancy costs, professional
fees, advertising and other expenses
6
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related to the operation and development of new 2Connect stores. The Company
anticipates that it will incur significant costs and expenses and will continue
to incur significant 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 any continuing expansion. SG&A as a percent of sales
increased by 3.0% to 130.9% as compared to 127.9% in the prior period. This
increase is due to the opening of five stores in third quarter, offset by the
increased revenue from store openings.
Net interest income for the third quarter ended September 30, 1997
increased by $56,000 or 509.1% to $67,000 compared to $11,000 over the
corresponding period in the prior fiscal year. The increase is attributable to
the investment of funds received on May 14, 1997 from the initial public
offering.
Net interest income for the third quarter ended September 30, 1997
increased by $39,000 or 139.3% to $67,000 as compared to $28,000 in the second
quarter. Interest income was derived from investment of excess cash balances in
short term money market accounts.
Net loss for the third quarter ended September 30, 1997 was $1,040,000
or $(.28) per share compared to the corresponding period in the prior fiscal
year of $324,000 or $(.15) per share. The increase in net loss for the three
months ended September 30, 1997 is primarily due to the increase in SG&A
expenses for salaries, occupancy costs, professional fees, advertising and other
expenses related to the operation and development of new 2Connect stores, as
well as lower than anticipated revenues at certain retail store locations. The
Company's net loss of $324,000 for the third quarter ended September 30, 1996
consisted of preopening design and legal fees relating to the Company's initial
financing activities.
Net loss for the third quarter ended September 30, 1997 was $1,040,000
or $(.28) per share compared to the net loss of $804,000 or $(.27) per share in
the second quarter. The net loss is primarily due to the increase in SG&A
expenses for salaries, occupancy costs, professional fees, advertising and other
expenses related to the operation and development of new 2Connect stores, as
well as lower than anticipated revenues at certain retail store locations. The
Company anticipates that it will incur significant costs and expenses and will
continue to incur significant 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 any continuing expansion.
NINE MONTHS ENDED SEPTEMBER 30, 1997
The Company's activity for the period from April 19, 1996 (date of
inception) to September 30, 1996 consisted of interest income and selling,
general and administrative expenses for approximately $11,000 and $386,000,
respectively. 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 period
from April 19, 1996 (date of inception) to September 30, 1996.
Selling, general and administrative expenses ("SG&A"), including depreciation
and amortization, for the nine months ended September 30, 1997 increased by
$2,502,000 to $2,888,000 over the corresponding period in the prior fiscal year.
The increase of SG&A incurred for the nine months ended September 30, 1997 was
for salaries, occupancy costs, professional fees, advertising and other expenses
related to the operation and development of 2Connect stores. The Company's SG&A
expense of $386,000 for the period April 19, 1996 (date of inception) to
September 30, 1996 consisted of corporate wages, preopening design fees and
professional services related to the Company's initial financing activities.
Net loss for the nine months ended September 30, 1997 was $2,259,000 or
$(.70) per share compared to the corresponding period in the prior fiscal year
of $375,000 or $(.19) per share. The increase in net loss for the nine months
ended September 30, 1997 is primarily due to the increase in SG&A expenses
related to the Company's expansion activities and lower than anticipated
revenues at certain retail store locations.
7
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FINANCIAL CONDITION
Net cash used by operating activities was approximately $3,848,000 for
the nine months ended September 30, 1997. The Company had working capital of
approximately $3,258,000 at September 30, 1997, as compared to the approximately
$1,620,000 in working capital at December 31, 1996, overall increase of
$1,638,000. The increase in current assets of $2,478,000 during the nine-month
period was primarily related to increases in accounts receivable and inventory
of $390,000 and $1,743,000, respectively. The net increase in current assets was
offset by an increase in current liabilities of $840,000 primarily resulting
from an increase in accounts payable of $609,000 and other current liabilities
of $231,000. The increase in current liabilities was primarily due to an
increase in expenses attributed to the opening of new stores including inventory
and accrued wages.
Net cash used by investing activities for the nine month period ended
September 30, 1997 was approximately $1,600,000 which included property and
equipment additions for stores that opened in second and third quarter and
equipment for the Company's corporate office.
Net cash received by financing activities for the nine month period
ended September 30, 1997 was approximately $5,592,000 which was primarily
related to the net proceeds from the IPO and deferred financing costs of
$5,359,000 and $220,000, respectively.
The Company's current cash resources are extremely limited, and the
Company will require additional financing to sustain its current operations and
to implement its growth strategy. Accordingly, the Company is actively seeking
additional financing. The Company is currently in discussion with several
sources of equity and asset based debt. There can be no assurance that the
Company will obtain such additional financing upon commercially reasonable terms
or at all.
The Company has also commenced a significant review and re-structuring
of its operations with a goal of improving store performance. These activities
include an evaluation of existing and planned store locations, marketing and
sales promotion, merchandise assortments, store and corporate SG&A expenses.
There can be no assurance that this review or such re-structuring activities
will result in improved performance.
8
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K. No reports on Form 8-K have been filed during
the quarter ended September 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.
<TABLE>
<CAPTION>
<S> <C>
2CONNECT EXPRESS, INC.
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(Registrant)
Date NOVEMBER 14, 1997 /s/ MARC D. FISHMAN
- ------------------------- ---------------------------------------------------
Marc D. Fishman, Chairman of the Board, President and
Chief Executive Officer
Date NOVEMBER 14, 1997 /s/ THOMAS H. HICKS
- ------------------------- ---------------------------------------------------
Thomas H. Hicks, Chief Operating and Financial Officer
Date NOVEMBER 14, 1997 /s/ PAUL E. SIMONSON
- ------------------------- ---------------------------------------------------
Paul E. Simonson, Chief Accounting Officer
</TABLE>
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,085,278
<SECURITIES> 0
<RECEIVABLES> 424,953
<ALLOWANCES> 0
<INVENTORY> 1,939,756
<CURRENT-ASSETS> 4,718,104
<PP&E> 1,857,434
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,858,912
<CURRENT-LIABILITIES> 1,460,137
<BONDS> 0
0
0
<COMMON> 37,525
<OTHER-SE> 5,351,405
<TOTAL-LIABILITY-AND-EQUITY> 6,858,912
<SALES> 2,090,815
<TOTAL-REVENUES> 2,090,815
<CGS> 1,583,923
<TOTAL-COSTS> 2,887,573
<OTHER-EXPENSES> (122,269)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 238
<INCOME-PRETAX> (2,258,650)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,258,650)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,258,650)
<EPS-PRIMARY> (.70)
<EPS-DILUTED> 0
</TABLE>
